11 December 2007

The Tax Fraud Lobby

Who would favor laws that facilitate tax fraud? Lots of people, it turns out.

[T]he National Federation of Independent Business, the U.S. Chamber of Commerce, the Small Business Council, and numerous other groups have created the Coalition for Fairness in Tax Compliance, which plans to block proposals . . . to close the [tax] gap . . . [with] a major expansion of reporting requirements for third party “middlemen.” For instance, stock brokers would be required to report not only what a customer sold his stock for but also what he paid for it, i.e., his or her taxable income, and auction sites such as eBay would have to report sellers who conduct more than 100 transactions per year. Finally, one of the proposals most vehemently opposed by the Coalition is a proposal that would require businesses that pay other businesses more than $600 a year to report the payment on a 1099, thus adding to the already current requirement that businesses report payments of more than $600 a year to unincorporated sole proprietors.

A large share of the $345 billion of taxes owed and not paid involve income not subject to third party reporting requirements, and the biggest offenders are small business people. About half of that comes from unreported business income and self-employment income.

Small business tax fraud is epidemic and largely attributable to a lack of third party reporting.

“Where taxable payments are reported to the IRS by third parties, the IRS generally collects well over 90 percent of the tax due. Where taxable payments are not reported to the IRS by third parties, compliance drops precipitously to a range from about 20 percent to about 68 percent, depending on the type of transaction.” In particular, the noncompliance rate ranges from 1 percent for wages, salaries and tips to 57 percent for small business income and 72 percent for farm income.

Most small businesses, and almost three out of four farmers, cheat on their tax returns.

While big business often engages in complex schemes that try to twist the tax laws on the books to legally reduce tax burdens, big businesses rarely outright lie about how much they received in revenues. The need of these businesses to maintain internal controls overwhelms their ability to do so.

Previous initiatives to improve reporting verification, such as the requirement to include social security numbers of dependents and the creation of the 1099 and the W-2 information reporting returns have dramatically increased tax collections with relatively modest compliance costs.

No well run business should have any difficulty running a Quickbooks report of the vendors to whom they have paid more than $600 in a year. The costs associated with this initiative are modest.

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