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Closing The Tax Gap


As a percentage of US gross domestic product (GDP), income tax receipts have been dropping since the early 1950s. Many in government have lamented that there is a "tax gap" created by non-compliant taxpayers, including corporations, who contribute to the reduction in corporate income tax collections by the US Treasury. For its part, the Internal Revenue Service (IRS) has taken various administrative steps to require corporate taxpayers to be more transparent in reporting the tax effects of their transactions.

Taxand US discusses what can be done to reduce the "tax gap" and the government's attitude to it.

The amendment of penalty provisions has led to more disclosure requirements for corporate taxpayers. Recent moves by the IRS, Congress and the courts have arguably delayed attempts to curb perceived abuses by corporate taxpayers and their advisors to circumvent the Code. Indeed, the Commissioner of the IRS stated last year during discussions about Form UTP that one of the form's purposes was to reduce the tax gap. A more pessimistic view of these developments is that the government perceives corporate taxpayers and their tax advisors as the real cause of the tax gap.

In his State of the Union address on 25 January 2011, President Obama called on Congress to simplify the tax system, get rid of the loopholes and lower the corporate tax rate to bring it more in line with corporate tax rates around the globe.

The Fiscal Reform Commission, the President and various lawmakers on both sides of the argument agree that the U.S. corporate tax rate must be reduced to make it more competitive in the global economy. The debate about how to change the system of international taxation continues. There seems to be a recognition that corporate tax reform, including international taxation, must include a simplification of the Code, a broadening of the tax base (i.e., an elimination of deductions, credits and incentives) and a lowering of the rate. These actions are seen as necessary to close the tax gap and, ultimately, to reduce the budget deficit.

Taxand's Take

Generally, transparency in corporate tax reporting is a commendable goal. There seems to be an air of hostility in government toward corporate tax directors and their advisors, seen as major contributors to shrinking corporate tax revenues. Closing the tax gap, however, must be accomplished through legislative changes to the tax system. Recent activity in Washington suggests that corporate tax reform is an integral part of addressing the country's deepening budget deficit. Any legislative changes that include a corporate tax rate reduction will have immediate impacts for corporate taxpayers, both in computing their cash tax liability and in their financial statements. The time to act to mitigate the impacts of the corporate tax reform proposals is now.

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Greg Gunderson
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