[Congressional Record Volume 153, Number 43 (Tuesday, March 13, 2007)]
[Senate]
[Pages S3018-S3019]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                                TAX GAP

  Mr. GRASSLEY. Mr. President, the subject today is the tax gap. The 
tax gap is the difference between what is paid voluntarily in taxes by 
85 percent of the American people and what is actually owed by people 
who do not pay all of the taxes that are legally owed.
  The tax gap does not include things that are in the underground 
economy, nor does it include illegal earnings. The tax gap is certainly 
not a new issue. We have discussed it on the floor of the Senate many 
times. It has been an issue for previous administrations as well as 
this administration. In fact, I suspect the tax gap has been an issue 
for as long as there has been taxes. However, I would say in recent 
years the Finance Committee, on which I serve, has certainly brought a 
new focus to the issue of the tax gap. This has been very much a 
bipartisan effort. I believe the level of attention given to the tax 
gap certainly reflects the energy and focus of the new chairman of the 
committee, Senator Max Baucus from Montana. Chairman Baucus should be 
commended for his work in this area.
  I also want to praise the chairman of the Budget Committee, Senator 
Conrad of North Dakota, for putting an additional spotlight on the tax 
gap topic. The Finance Committee has been doing the hard work in this 
area, encouraging greater research by the Internal Revenue Service, 
asking for detailed reports and recommendations from the Treasury 
Department as well as the Congressional Joint Committee on Taxation, 
investigating specific aspects of the tax gap, holding hearings to 
explore the details of the tax gap.
  Finally, the Finance Committee has been doing the most difficult work 
of all, actually passing significant legislation that would reduce the 
money that is not coming in because of the tax gap. This has not been 
easy. I find the tax gap is one of those issues here in Congress that 
is a little bit like the weather: Everyone talks about it but no one is 
doing as much as should be done about it. But the way people talk 
around here, they view the tax gap as somehow a cure-all for all budget 
problems. The tax gap can be used to pay for the alternative minimum 
tax problem; if we want to expand spending on health care, tap into the 
tax gap; if we want to balance the budget, tap into the tax gap.
  Given the amount of faith people have put into it, the tax gap has 
suddenly become one of those magic elixirs the peddlers used to sell in 
the Old West. You know how they said it will cure all that ails you. 
That was the slogan used by those slick salesmen 100 years ago. So the 
tax gap has become the elixir for all fiscal problems. I am surprised 
folks do not think the tax gap would cure baldness, as an example. So 
let's get behind the dreams and get to the real story of the tax gap.
  I want to talk about three issues dealing with the tax gap. First, 
what is the estimate of the tax gap? Second, what are the elements of 
the tax gap? Finally, what do we actually do in addition to all of 
those things we have been doing to reduce the tax gap; in other words, 
to go after that final dollar we know is legally owed but not 
collected.
  First, how is it the tax gap is estimated, and what is it? The Senate 
Finance Committee's Subcommittee on Taxation and Internal Revenue 
Service Oversight held a hearing 9 months ago, July 2006. It was 
chaired by the then-chairman of that subcommittee, Senator Kyl. We 
heard extensive testimony from senior IRS officials about how the tax 
gap is estimated. The tax gap has been based on reporting compliance 
efforts known as the Taxpayer Compliance Measurement Program.
  As many colleague will recall, these efforts were viewed as too 
intrusive into the lives of the taxpayers. So the last taxpayer 
compliance measurement program that was done was back in 1988. Senator 
Baucus and I recognized the need for the updated research and 
encouraged the Internal Revenue Service to look at research that could 
provide useful data, useful information, without unduly burdening the 
honest taxpayer.
  The Internal Revenue Service then responded with a national research 
program. It is important to realize that the national research program 
only dealt with a portion of the entire tax gap, primarily focusing on 
individual income taxes and not dealing with corporate tax. There are 
still significant portions of the tax gap that are then based on that 
very old material going

[[Page S3019]]

back to some studies 20 years ago, particularly in the area of 
passthrough entities.
  I have a chart here that will make reference to some of these 
portions, significant portions of the tax gap. This is easily brought 
to focus on the Internal Revenue chart we have here. Remember, this is 
for tax year 2001, the latest available information. You can see it is 
only those items in bold that have been updated from the recent 
national research program, primarily in the area of individual income 
taxes and self-employment taxes; these areas right here.
  It would be nice to have an update on all of this. But in order to 
get on top of it and get it done quickly, we asked the IRS to focus on 
these areas. With the colors, you can see it is only the green--
underpayment of taxes--that we have high confidence in. The light blue 
has been recently updated. We have some better sense of what the costs 
are.
  Unfortunately, it is the yellow--the bigger parts of the chart--that 
is dependent upon the older numbers sometimes going back years and 
years. That is the yellow portion I have already referred to.
  In terms many can better understand, think of the yellow estimates as 
being the broad side of the barn in terms of accuracy. So there we have 
it. At the end of the day the tax gap, based on many old estimates, is 
thought to be $345 billion for tax year 2001. That reflects a 
noncompliance rate of 16 percent. So basically, 84 percent of the tax 
dollars are coming in as required by law. We have a tax gap then of a 
remaining 16 percent.
  Now I will turn to what are the elements of the tax gap. Again the 
chart from the Internal Revenue Service provides a useful blueprint. 
Nonfiling is about $27 billion. These are the people who do not even 
file their taxes. Then there is the underreporting of $285 billion. The 
Internal Revenue Service divides that into four categories: individual 
taxes at $197 billion; employment taxes, $54 billion; corporate income 
taxes at $30 billion; and estate tax and excise taxes of $4 billion.
  Underpayment of taxes, which is the amount people admit they owe on 
their tax returns but do not pay on time, happens to be $33 billion.
  Clearly individuals make up the biggest part, with individuals 
underreporting nonbusiness income and business income, and overstating 
adjustments, deductions, and exemptions being the elements of the tax 
gap for individuals. A good deal of this is concentrated in the areas 
of self-employment and schedule C of the tax return.
  Now that we have gone through how we measure the tax gap and what 
makes up the tax gap, the most important thing people want to know is--
they do not want a definition of the problem--what can be done to close 
it? That is what my constituents ask me.
  I believe the real question is one I would state this way: What steps 
can be taken that are effective and will not unduly burden taxpayers? 
We have to bear in mind most taxpayers do comply, and a significant 
amount of noncompliance is unintentional. I think all Members recognize 
that in the zeal to get at the tax gap, we cannot wreck the lives of 
the honest taxpayers. Most of the taxpayers, 85 percent, are not a 
problem. We cannot be like the fellow who tears down his house to get 
at the mouse. Members on the other side should be particularly 
sensitive to the mindset of not taking on the honest taxpayer when 
trying to take care of the problem of the 15 percent, given this was 
effectively what was being promoted in 1994 with the wholesale reform 
of health care. Proponents in 1994 wanted to change the health care 
system for 85 percent of the people for whom the system worked to help 
the 15 percent of the people who did not have health insurance. The 
voters were right in telling political leaders at that time in 1994 
that this did not make any sense. First we need to recognize that the 
Internal Revenue Service is already, through enforcement, doing quite a 
bit to deal with the tax gap.
  This chart reflects the Internal Revenue Service's testimony before 
the Budget Committee and estimates the IRS activities will reduce the 
tax gap, the $345 billion total, by nearly $70 billion by the year 
2007. This reflects $17 billion in direct enforcement revenue and the 
rest in direct compliance effects. So we start with that as the base, 
the work of the Internal Revenue Service, which is already reducing 
approximately 20 percent of the tax gap, with Commissioner Everson's 
statements last year that the Internal Revenue Service could bring in 
somewhere between $50 billion and $100 billion a year without 
dramatically changing the relationship between the IRS and 
taxpayers; in other words, not being more egregious against the honest 
taxpayer. Well, the IRS is already doing that, according to its 
Commissioner.

  The ACTING PRESIDENT pro tempore. The Senator's time has expired.
  Mr. GRASSLEY. Mr. President, I have to have 10 more minutes, maybe 
less than that.
  The ACTING PRESIDENT pro tempore. The Senator will have to propound a 
unanimous-consent request to that effect.
  Ms. COLLINS. Mr. President, I think we have votes that are scheduled 
at 11:45.
  The ACTING PRESIDENT pro tempore. That is correct.
  Ms. COLLINS. Perhaps the Presiding Officer could review----
  Mr. GRASSLEY. Mr. President, I will complete my statement later, but 
I wish people would get it straight. If I were told I could come over 
here and finish my statement, and do it in morning business, I would 
like to be able to do it; otherwise, I would have waited to do it 
tonight.

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