IRS eyes $345B tax gap Snowe urges better collection efforts

AUGUSTA – Both the federal and state governments are taking a look at bolstering tax enforcement efforts after an Internal Revenue Service report to Congress indicates tax compliance is slipping. State officials say with the state income tax based on the federal, state compliance likely has slipped as well.

“It’s astonishing to think that the nation’s tax gap is approximately $345 billion,” said Sen. Olympia Snowe, a member of the Senate Finance Committee. “It is an imperative to close that gap, and it has become a top priority for both the Congress and the administration.”

The IRS told the Senate Finance Committee earlier this month that based on its study of tax returns and a review of a sample of 46,000 returns, underreported income was the biggest part of the gap between what should be collected in taxes and what was collected. The study estimated $30 billion was not reported by corporations, $54 billion from employers and $197 billion from individual taxpayers.

“Those that are not paying their taxes in full are shifting taxes to the rest of us,” Snowe said last week in an interview. “This has to be a top priority.”

Snowe said the Finance Committee is pushing to collect at least $60 billion in the next year by increasing staff for the IRS as well as exploring new collection methods such as requiring tax withholding in industries that traditionally use independent contractors.

Most of Maine’s income tax is based on the individual’s federal tax return, said Finance Commissioner Rebecca Wyke last week. She said it is “certainly good news” that Congress plans to bolster enforcement because Maine will benefit from that effort.

The state gap, Wyke said, has not been formally estimated by Maine Revenue Services, but she said that, based on the federal compliance estimate, Maine could have a gap of $400 million to $450 million.

The only “solid” estimate the state has is for actual taxes assessed but uncollected. Including all taxes, from income and sales taxes to tobacco taxes and every other tax imposed by the state, the total was $219 million March 31, 2007, the most recent data available.

“We have increased enforcement in a number of areas,” Wyke said. “But there will always be some taxes that are simply uncollectable. Businesses go bankrupt. Individuals leave the state and become difficult to find, and people pass away.”

But despite the increased efforts such as collecting tobacco and sales taxes from Internet sales of cigarettes, total delinquent taxes have grown significantly in the last five years from $160 million to $219 million last month.

“I think we have been aggressive in collecting what is owed in taxes,” Gov. John Baldacci said in an interview last week, “We have added additional enforcement staff and they have met their goals. But I think we should do more, because that dollar that is not collected is a dollar that comes from someone else.”

He said if Congress does bolster collection efforts, he will make sure Maine Revenue Services has the staff and tools to follow up on any leads it gets from the IRS. The two tax agencies cooperate and exchange information based on audits either agency conducts and find income that was not reported.

“Now that they are getting to be more aggressive, that should be a benefit to the state,” Baldacci said.

But Sen. Joe Perry, D-Bangor, co-chair of the Legislature’s Taxation Committee, said increased enforcement could trigger a backlash from voters. He said everyone remembers the “audits from hell” that the IRS did until the mid-1990s when a public outcry led to discontinuation of the widespread use of the random audits.

“Consumption taxes will get a piece of that underground economy,” Perry said. “That’s’ why as part of overall tax reform we are looking at putting more on the sales tax and reducing the income tax.”

Sen. Richard Nass, R-Acton, the ranking GOP member of the Tax Committee, said there is no doubt the goal should be to collect all the taxes that are due, but he said that is easier said than done.

“You have to measure how much effort it will take to collect it,” he said, “and whether that cost is worth it. I think we have a pretty good effort under way, and I would say sometimes our tax collections people are, let me say, assertive.”

It is not only the tax committee that is interested in improved tax collections. Members of the Legislature’s Appropriations Committee are faced with the biennial budget problem of far more budget needs than available revenue.

“It’s dishonest for people to be free riders,” said Rep. Jeremy Fischer, D-Presque Isle, co-chair of the Appropriations Committee. “We have had trouble finding consensus on adding the number of employees needed to go and collect that tax.”

Rep. Sawin Millett, R-Waterford, the lead GOP member of the committee and a former state finance commissioner, said it has always been difficult to convince lawmakers to add more people to the state payroll, even when it is clear they will bring in more revenue than they cost.

“If that federal effort does materialize,” he said, “that could be significant for the state.”