The Internal Revenue Service is worried: Too many Americans are underreporting their income, either deliberately or by making mistakes on their tax returns.

The net result, the IRS reports, is that there is a “tax gap” between what’s owed and what’s actually paid that amounts to as much as 16 percent of federal taxes going uncollected.

The last survey of the problem is a full decade old, and estimates from 2001 say $345 billion was going uncollected then. Today, the amount could be between $410 billion and $500 billion, and the IRS is planning another study within a year or so.

Naturally, the agency wants more money for “compliance,” a word that means hiring more agents and auditors to crack down on scofflaws who may be inadvertently underreporting income or deliberately keeping it under the table or in offshore accounts.

But IRS requests for another $240 million for “tax enforcement initiatives” that could raise five times that amount in revenue encounter resistance in Congress, where efforts to trim federal spending, even if it yields a gain to government, remain popular.

The IRS says that the real problem isn’t in the returns filed by normal wage earners, who typically get paid by their employers and have most of their income listed on W-2 forms.

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Instead, it is the self-employed and those who get paid in cash who are the most likely to conceal income, paying only 54 percent of the taxes they owe overall, the IRS says. But while fraud is a crime that should be pursued, the other part of the problem – perhaps the largest part – is the incredible complexity of the U.S. tax code.

Very few ordinary Americans do their own taxes anymore, instead hiring professionals for the burdensome duty. And with thousands of pages of rules and laws, the code itself – expanded yearly by politicians offering exemptions and subsidies for favored groups – is nearly incomprehensible.

The obvious conclusion is that compliance – and revenues – would be boosted significantly if the code were simplified and made more comprehensible. A tax code in plain English may seem impossible, but we won’t know it can’t be done unless we try.

 


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