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US Congress Attempts To Narrow Capital Gains Tax Gap

by Mike Godfrey,, Washington

19 February 2007

Bipartisan legislation has been reintroduced into Congress that aims to close the supposed $17 billion capital gains tax gap by making the tax code fairer and simpler for taxpayers, but placing more reporting requirements on brokers and mutual funds.

The Simplification Through Additional Reporting Tax (START) Act, first introduced in March 2006, is being sponsored by Senators Evan Bayh (D-IN) and Tom Coburn (R-OK) and Congressmen Rahm Emanuel (D-IL) and Walter Jones (R-NC).

The legislation will require brokerage houses and mutual fund companies to track and report to taxpayers and the Internal Revenue Service investment information related to capital gains taxes. The lawmakers say that this will make it easier for taxpayers to file their tax returns and help the IRS tackle would-be cheaters who intentionally under-report capital gains, as well as taxpayers who make innocent mistakes on their tax returns.

The most common error, deliberate or otherwise, made by taxpayers when calculating gains from the sale of securities is mis-stating the original purchase price. The new legislation, which is supported by President Bush, would take the reporting out of the taxpayers' hands and require brokers to track the purchase price and report the adjusted-cost basis to the IRS.

In 2005, 32 million taxpayers reported a capital gain or loss.

The lawmakers are forecasting that the legislation would bring in $7 billion in tax revenues over ten years.

"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," Bayh observed.

Bayh has said 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 concluded.

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