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