Senator Introduces Bill To Close $17 Billion Capital Gains 'Tax Gap'

by Leroy Baker, Tax-News.com, New York

21 March 2006

US Senator Evan Bayh (D-Ind) has introduced legislation to help close the $17 billion so-called capital gains 'tax gap' by making the tax code fairer and simpler for American taxpayers.

Senator Bayh's legislation, the Simplification Through Additional Reporting Tax (START) Act of 2006, will require brokerage houses and mutual fund companies to track and report to taxpayers and the IRS investment information related to capital gains taxes, making it easier for taxpayers to file their tax returns and helping the IRS crack down on would-be cheaters.

Senators Barack Obama (D-IL), Tom Carper (D-DE), and John Kerry (D-MA) are original co-sponsors of the START Act.

"No business would succeed if it failed to collect $17 billion in sales every year, and the United States government can't afford to operate that way either," Senator Bayh argued in a statement published last week.

"My legislation will help reduce the deficit by billions, while making our tax code simpler and fairer. Our current deficit is a threat to our economy, our security and our future -- we need to do something to make sure that our children will inherit more from us than our unpaid bills," he added.

According to Bayh, much of the $17 billion in capital gains taxes that go unpaid every year stem from taxpayers not understanding how to compute their capital gains. However, he claims that a larger source of the problem is taxpayers who intentionally inflate the original value of their investments, thereby hiding gains or manufacturing losses.

Bayh's START Act will require that brokerage houses and mutual fund companies report to taxpayers and the IRS the "adjusted cost basis," or purchase price plus any necessary adjustments, when they sell a stock, bond, or mutual fund. This will help individuals file accurate tax returns without having to do confusing and time-consuming calculations.

Last year, 32 million taxpayers reported a capital gain or loss.

Bayh says that the START Act makes the tax code fairer by ensuring that the IRS receives an independent verification of individuals' investment value, as currently occurs with wages. Americans cannot underpay their taxes related to wages because their employers submit wage information reports, W-2 forms, to the IRS. No comparable reporting occurs with stocks and capital gains income.

"Reducing the deficit and simplifying the tax code is a win-win for the 130 million taxpayers who are confused by a tax code that becomes more complex and burdensome every year," Bayh stated.

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