Income Tax GapIncome Tax Gap Overview Overview
FTB/CSEA Liaison MeetingFTB/CSEA Liaison MeetingSeptember 17, 2004September 17, 2004
What’s the Problem?What’s the Problem?• One in five taxpayers think it’s OK to
cheat on their taxes.
• Over the last four years, those saying it’s OK to cheat rose from 11 to 17 percent.
• 60 percent of Americans believe that people are likely to cheat and take a chance on being audited.
TY2001*
Total Tax Liability (Legal Sector) $2,078 billion
— Tax Paid Voluntarily & Timely - 1,767 billion
Gross Tax Gap $ 311 billion
— Late & Enforced Payments - 56 billion
Net Tax Gap$255 billion
Federal Tax Gap Federal Tax Gap
* IRS Office of Research estimates for all tax types
CA CA NetNet Tax Gap Estimates Tax Gap Estimates
1985 estimate $2.0 billion
mid-1990 estimate $4ish ?
2004 estimate $6.5 billion
Nonfilers10%
Underpayment 10%
Underreporting or
Overdeducting80%
Tax Gap SegmentsTax Gap Segments
Focus: Nonfiling Gap Focus: Nonfiling Gap
• Individuals– 14 million individuals file voluntarily each year– 700 – 800,000 nonfilers contacted each year– $350 - 450 million in revenue
• Corporations– 500k corporations file voluntarily each year– 30,000 nonfilers contacted each year– $30 million in revenue
• 43% Wage earners• 39% Self-employed• 10% Filed federal return • 4% Mortgage interest• 3% Real estate sales• 1% Partnership income
PIT Nonfiler Sub-GroupsPIT Nonfiler Sub-Groups
Business NonfilersBusiness Nonfilers
Top 5 Industries for Nonfilers % of Nonfilers
Health Services 10.4% Business Services 9.6% Personal Services 9.6% Real Estate 7.6% Engineering/Accounting 7.4%
Focus: Nonpayment GapFocus: Nonpayment Gap
• A/R revenue = $1.6 billion FY 02/03 * The 10% of the pie chart shown for underpayment is based on the
federal percentage and may not accurately reflect California’s
underpayment gap.
Underreporting or
Overdeducting80%
Underpayment10%
Nonfilers10%
• Many taxpayers involved
• Not like abusive tax shelters (few taxpayers with much revenue)
• Some practitioners involved
Underreporting / overdeducting:Underreporting / overdeducting:The 80% challenge The 80% challenge
Call to Action Call to Action
• “Structural” budget deficits aren’t going away
• Entitlement programs aren’t going away
• Income tax gap is growing over time
• Economic conditions and societal behavior are changing
FY 04-05 Tax Gap InitiativesFY 04-05 Tax Gap Initiatives
• Amnesty– $10.2 million included in FTB’s budget – 72 temporary positions – Estimated $200M in new net revenue
($555M gross revenue - $355M in “normal” collections)
• Abusive Tax Shelter Task Force– $4.3 million included in FTB’s budget– 42 positions – $28 million estimated revenue
FY 05/06 ProposalsFY 05/06 Proposals
1. Enhanced detection of tax preparers - Assess preparer penalties $250 - $1,000 per return
2. Additional audit staff augmentation
3. New information sources to identify nonfilers:- Department of Social Services- Motor fuel information- Alcohol Beverage Control information- Check cashing transaction reports- 1099 information reports on real estate commissions- City business tax information
05/06 Proposals, continued05/06 Proposals, continued
4. Informant reward program - Tips regarding tax issues that are relevant to California
law only or high dollar.
5. Questionable wage withholding detection
6. Underground economy criminal investigations
7. Misdemeanor Prosecution Program- Targets nonfilers, underreporters, and business entities.
• Independent contractor withholding study• Practitioner suggestions
• Focused enforcement (occupations, industries)
• Make better use of information on hand
• Better information return enforcement
• Increased publicity and education
Other proposals in playOther proposals in play::
Effective Compliance MethodsEffective Compliance MethodsObservations based on “real world” FTBObservations based on “real world” FTB operationsoperations
• Withholding – Voluntary compliance rate of 95-99%
• Estimate Payments – Voluntary compliance rate of 95-98%
• Third party information reporting –Voluntary compliance rate of 90-94%
• Combination of customer service and enforcement measures works best
Tax Gap Education Plan:Tax Gap Education Plan:A Balanced ApproachA Balanced Approach
Messages will:
• Show consequences of noncompliance
• Reinforce the civic duty message of paying your taxes for the services we all enjoy.
EndEnd