IRS AND THE TAX GAP HEARING BEFORE THE COMMITTEE ON THE BUDGET HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS FIRST SESSION HEARING HELD IN WASHINGTON, DC, FEBRUARY 16, 2007 Serial No. 110–9 Printed for the use of the Committee on the Budget ( Available on the Internet: http://www.gpoaccess.gov/congress/house/budget/index.html U.S. GOVERNMENT PRINTING OFFICE 33–390 PDF WASHINGTON : 2007 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate 0ct 09 2002 19:28 Nov 06, 2007 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 J:\DOCS\HEARINGS\110TH\110-9\33390.TXT HBUD1 PsN: DICK COMMITTEE ON THE BUDGET JOHN M. SPRATT, JR., South Carolina, Chairman ROSA L. DELAURO, Connecticut, PAUL RYAN, Wisconsin, CHET EDWARDS, Texas Ranking Minority Member JIM COOPER, Tennessee J. GRESHAM BARRETT, South Carolina THOMAS H. ALLEN, Maine JO BONNER, Alabama ALLYSON Y. SCHWARTZ, Pennsylvania SCOTT GARRETT, New Jersey MARCY KAPTUR, Ohio THADDEUS G. MCCOTTER, Michigan XAVIER BECERRA, California MARIO DIAZ–BALART, Florida LLOYD DOGGETT, Texas JEB HENSARLING, Texas EARL BLUMENAUER, Oregon DANIEL E. LUNGREN, California MARION BERRY, Arkansas MICHAEL K. SIMPSON, Idaho ALLEN BOYD, Florida PATRICK T. MCHENRY, North Carolina JAMES P. MCGOVERN, Massachusetts CONNIE MACK, Florida BETTY SUTTON, Ohio K. MICHAEL CONAWAY, Texas ROBERT E. ANDREWS, New Jersey JOHN CAMPBELL, California ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia PATRICK J. TIBERI, Ohio BOB ETHERIDGE, North Carolina JON C. PORTER, Nevada DARLENE HOOLEY, Oregon RODNEY ALEXANDER, Louisiana BRIAN BAIRD, Washington ADRIAN SMITH, Nebraska DENNIS MOORE, Kansas TIMOTHY H. BISHOP, New York [Vacancy] PROFESSIONAL STAFF THOMAS S. KAHN, Staff Director and Chief Counsel JAMES T. BATES, Minority Chief of Staff (II) VerDate 0ct 09 2002 19:28 Nov 06, 2007 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 J:\DOCS\HEARINGS\110TH\110-9\33390.TXT HBUD1 PsN: DICK C O N T E N T S Page Hearing held in Washington, DC, February 16, 2007 .......................................... 1 Statement of: Hon. John M. Spratt, Jr., Chairman, House Committee on the Budget ..... 1 Hon. Paul Ryan, a Representative in Congress from the State of Wis- consin ............................................................................................................. 2 Mark Everson, Commissioner, Internal Revenue Service ............................. 4 Prepared statement of ............................................................................... 5 Response to question posed by Mr. Ryan ................................................ 23 Response to question posed by Mr. Andrews .......................................... 40 Hon. J. Russell George, Inspector General for Tax Administration, U.S. Department of the Treasury ........................................................................ 49 Prepared statement of ............................................................................... 51 Nina E. Olson, National Taxpayer Advocate, Internal Revenue Service ..... 65 Prepared statement of ............................................................................... 66 Michael Brostek, Director, Tax Issues, Strategic Issues Team, U.S. Gov- ernment Accountability Office ..................................................................... 83 Prepared statement of ............................................................................... 85 Chris Edwards, director of tax policy studies, Cato Institute ....................... 109 Prepared statement of ............................................................................... 111 (III) VerDate 0ct 09 2002 19:28 Nov 06, 2007 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 J:\DOCS\HEARINGS\110TH\110-9\33390.TXT HBUD1 PsN: DICK VerDate 0ct 09 2002 19:28 Nov 06, 2007 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 J:\DOCS\HEARINGS\110TH\110-9\33390.TXT HBUD1 PsN: DICK IRS AND THE TAX GAP FRIDAY, FEBRUARY 16, 2007 HOUSE OF REPRESENTATIVES, COMMITTEE ON THE BUDGET, Washington, DC. The committee met, pursuant to call, at 10:05 a.m. in room 210, Cannon House Office Building, Hon. John Spratt [chairman of the committee] presiding. Present: Representatives Spratt, Cooper, Schwartz, Kaptur, Becerra, Doggett, Blumenauer, Berry, Boyd, McGovern, Sutton, An- drews, Scott, Etheridge, Hooley, Moore, Bishop, Ryan, Barrett, Garrett, Hensarling, Conaway, Campbell, Tiberi, Porter, Alexander, and Smith. Chairman SPRATT. Good morning. I will call this hearing to order. I am pleased to open today’s hearing on the IRS and tax gap. I welcome our panel of witnesses: Mark Everson, Commissioner of the Internal Revenue Service; Treasury Inspector General for the Tax Administration, Russell George; GAO’s Director for Tax Issues, Michael Brostek; the National Taxpayer Advocate, Nina Olson; and the Director of Tax Policy Studies at the Cato Institute, Chris Ed- wards. We will first hear from the Commissioner of the Internal Rev- enue Service Mr. Everson, and then we will turn to the other wit- nesses for a second panel after questions of Mr. Everson. Given our committee’s jurisdiction and our commitment to get- ting the country’s fiscal house back in order, our focus today will be on the so-called ‘‘tax gap.’’ the tax gap is the difference between taxes legally owed and taxes actually collected. The Internal Rev- enue Service has developed a recent estimate of the size of our tax gap, the most recent being 2001, which was $345 billion, a sizable sum, and that was 6 years ago. The gap has, in all likelihood, grown even larger by now, but even that tax gap from 6 years ago is $1 billion more than last year’s unified budget deficit, which was $248 billion. This suggests that, if we can only do a better job of collecting taxes that are already current policy, already in the current Tax Code, our fiscal situation could be substantially better. The persist- ence of the tax gap means that we have larger deficits than we would otherwise rack up and a growing legacy of debt for our chil- dren and grandchildren. Saddling future generations with this huge mountain of debt is not just a budgetary problem, but it raises fundamental issues of moral fairness. There is another issue of fairness at work here as well. The tax gap is unfair to the scrupulous taxpayers, the vast majority who (1) VerDate 0ct 09 2002 19:28 Nov 06, 2007 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 J:\DOCS\HEARINGS\110TH\110-9\33390.TXT HBUD1 PsN: DICK 2 end up having to pay more in taxes because of those who do not pay what they obviously owe in taxes. So, as we try to get the budget back on the right track, for the sake of both fairness and practicality, a good place to look and look carefully is the tax gap and what we can do to collect better what is already owed the United States Government. That is why we have assembled this group of witnesses today to help us understand more about how we can narrow this tax gap and reap the benefits. I look forward to the witnesses’ testimony. As I said, we will first hear from IRS Commissioner Everson and then entertain questions for him, and once those questions are completed, we will call up our second panel. But before turning to the Commissioner, let me turn to our Ranking Member Mr. Ryan for his opening statement. Mr. RYAN. I thank the Chairman, and I am excited that we are having this hearing today because this is an issue that we are going to be talking about quite a bit in the days to come as we as- semble our budget. We are talking about this over on the Ways and Means Committee as well, and as you can see, Commissioner, there is a lot of Member interest here. First, I think it is important to note that the pro-growth tax pol- icy and the tax relief that we have passed have helped to signifi- cantly increase the revenues that are now coming into the Federal Government. In fact, we have seen double-digit revenue growth for 2 consecutive years, the first time that this has happened since the 1980s, and again, through the first 4 months of fiscal year 2007, revenues are coming in at a rate of 9.8 percent over last year. So right along with our economy, revenues are continuing to grow at a robust rate. Clearly our budget challenges are on the spending side rather than on the revenue side, but I understand that we are here to talk today about how we might close the so-called ‘‘tax gap’’ or the dif- ference between the amount of taxes owed and the amount actually collected to get even more revenue. This tax gap has proven ex- tremely difficult to define. I have spent the last 6 years on the Ways and Means Committee looking at this issue, and it is tougher than it first seems. We are never really sure how big it is, and we really do not know whether closing it would actually bring in much additional revenue, but beyond that, we have got to ask ourselves whether or not it is worth it to significantly increase enforcement and to try and get after what we are calling the ‘‘tax gap’’ because this could come with considerable costs. Back in the mid-1990s, you remember the hearings that were oc- curring here at the time. Congress saw a parade of taxpayers com- plaining about how IRS enforcement tactics were violating their rights. To relieve this, Congress passed the IRS Restructuring and Reform Act. The IRS has come a long way since that time, and IRS Commissioner Everson is really to be commended for that progress. They have