Lawmakers see pot of gold in tax gap

WASHINGTON — For members of Congress, thinking up bright ideas for spending tax dollars comes as naturally as breathing. But, constrained by big deficits and a pledge not to make them any bigger, lawmakers find themselves in an uncomfortable bind.

That’s why Washington has suddenly discovered a new buzzword — the “tax gap” — and the roughly $300-billion pot of untouched gold that it promises. That’s how much the Internal Revenue Service says taxpayers owe the government annually but, for various reasons, never pay.

The chances of significantly narrowing that gap appear slim. But as Congress gets ready to receive President Bush’s 2008 budget Monday, Democrats and Republicans alike are talking it up as a way to fund politically appealing initiatives — and bring down the deficit to boot.

“Closing the tax gap has got to be one of our top priorities,” said Senate Budget Committee Chairman Kent Conrad (D-N.D.).

The IRS is probably low-balling its estimate of the tax gap, he said, and there should be more than $300 billion available.

To boost efforts to harvest it, the chairman and the top Republican member of the Senate’s tax-writing finance committee, Sens. Max Baucus of Montana and Chuck Grassley of Iowa, took the unusual step last week of visiting the IRS and asking some of its top bureaucrats about the tax gap — and presumably ways it might be closed.

Though the existence of the tax gap is real enough, the likelihood that any substantial part of it can be collected is more hope than fact. The gap has been around as long as there have been taxes, and past efforts to close it have yielded meager results.

“If the tax gap was easy to close, the IRS would already have done it,” said Mark Zandi, chief economist at Moody’s

For one thing, the IRS would have to use tougher tactics to get more revenue — and that would make taxpayers squawk. The last time Congress addressed the subject of tax collection methods, in 1998, it reined in overzealous IRS agents.

“The 1998 act tilted the table in tax disputes in favor of taxpayers suspected of noncompliance,” wrote Max B. Sawicky, an economist at the Economic Policy Institute, in his book “Bridging the Tax Gap.”

Collecting more would also require spending more for audits and investigations. In fact, the IRS last year had a smaller enforcement staff, and it conducted fewer audits — fewer than one individual return in 100 — than a decade earlier.

“You can ask for more audits, income-tax withholding and reporting of income to the IRS,” said Mel Schwarz, a partner in the Washington office of the accounting firm Grant Thornton. “All of this would be invasive on a lot of taxpayers, many of whom already pay their taxes.”

And as Robert D. Reischauer, president of the Urban Institute, pointed out, a lot of the money is owed by people who have gone bankrupt or moved overseas to escape the IRS’ reach.

Also largely beyond the tax collectors’ grasp is the huge underground cash economy, whose transactions go unreported to any financial authorities. It would take an American equivalent of the KGB to bring that into compliance with the U.S. tax code.

Measuring the tax gap is as much art as science. To find out what taxpayers should have paid on their 2001 income, the IRS conducted reviews of a random sample of 46,000 individual returns.