Treasury Nominee Assures Senate Over 'Tax Gap'

by Mike Godfrey, Tax-News.com, Washington

10 November 2009

A key Treasury Department nominee has told the Senate Finance Committee that the introduction of more information reporting obligations for taxpayers would go a long way towards closing the so-called 'tax gap' between taxes legally owed and those actually paid to the government.

In a Committee hearing on November 4, Michael Mundaca, President Obama's nominee for the post of Assistant Secretary for Tax Policy in the Treasury Department, highlighted that the recent proposal to clamp down on offshore tax evasion would be a "strong first step" toward increasing compliance. However, he also emphasized the need for stronger compliance measures to be balanced against efforts to reduce complexity in the US tax system.

"Tax policy will play an important role as we move ahead. We need a tax system that is simple, fair, and promotes growth, while providing necessary revenue. Our current system falls short," Mundaca noted in his testimony.

"In addition to changing our current system, however, we must also work together to improve compliance with our current rules. Non-compliance undermines confidence in the fairness of our tax system and fosters further non-compliance. It also results in a de facto tax increase on compliant taxpayers, who must pay more because others fail to pay what they owe," he added.

Mundaca pointed to Internal Revenue Service (IRS) research showing that increased information reporting could result in a compliance rate of nearly 90% of taxpayers as evidence that heavier reporting burdens are justified. With this in mind, he informed the Committee that the Treasury Department is currently moving to implement recently-passed laws to increase reporting with respect to credit card and securities transactions.

President Obama's 2010 budget includes a number of proposals to increase both domestic and cross-border compliance. In addition, legislation has been introduced in Congress that would give the IRS new tools to "detect, deter and discourage" the use of foreign bank accounts for the purposes of avoiding US taxes.

The US government has also entered into a number of agreements to exchange tax information, including with Switzerland, Luxembourg, Monaco, and Gibraltar.

Finance Committee Chairman Max Baucus (D - Mont) stated that Mundaca will play a "key role" in achieving the objectives of tax reform, closing the estimated USD345bn annual 'tax gap' and administering the tax elements of the health care reform package. However, noting his own "repeated attempts to spur Treasury officials to rigorously pursue the absent tax revenues" Baucus told Mundaca that he would be asking for "specific, realistic targets for reducing the tax gap."

“You are going to hear from us,” Baucus warned. “And soon.”

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