Closing tax gap; investing in residential rental properties

Practice Pointers. By Cathy B. Goldsticker, AMNews contributor. Aug. 20, 2007.

PRACTICE POINTERS

Answers to questions about the business side of your practice

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Question: Why is the Internal Revenue Service investing so much of the taxpayers' resources in their pursuit of the so-called tax gap? Does the agency think it can significantly increase tax revenues?

Answer: The IRS created "A Comprehensive Strategy for Reducing the Tax Gap" report in September 2006. This document outlined the strategy and related supporting principles for the planned activities of the IRS to improve compliance with the tax laws.

The IRS intends to improve the compliance rate (estimated in 2001 to be 86%) and collect the $290-plus billion that is left on the table, as determined by the IRS' 2001 National Research Program.

The attraction for working on the tax gap as the means to increase revenue is that it avoids the delays from Congress and complications associated with getting tax law changes passed. A high return is expected from the estimated necessary invested resources in the project.

The IRS' plan is to concentrate in the areas that predominantly contribute to lost tax revenues. The IRS found that uncollected individual income tax makes up more than 70% of the tax gap. The IRS has also determined that more than 80% of the deficiency is from underreported income or overreported deductions, mostly from individual businesses, and the lost revenue is predominantly due to taxpayers whose income is not reported by third parties.

As a response to these problem areas, the IRS created its multiyear strategy with seven components: