Business Lobbying Blocks Laws to Help IRS Collect Taxes Owed

Congressional efforts to crack down on tax evasion by imposing withholding and reporting rules are faltering as businesses complain of compliance costs.

The U.S. Senate is moving this week to repeal a 2006 rule that requires governments to withhold 3 percent of payments to contractors. In April, President Barack Obama signed a law scrapping a provision of the 2010 health-care measure that sought to curb underreporting of income by compelling businesses to report more transactions to the Internal Revenue Service.

Also, the IRS has agreed to delay implementing a law mandating overseas banks to withhold from some U.S. customers and a separate law requiring companies that process and settle credit-card transactions to report payment amounts to the U.S.

“This has absolutely been difficult to put together,” said Elizabeth Dold, a principal at Groom Law Group Chartered in Washington and chairwoman of the IRS’s information-reporting advisory committee. “Withholding is a powerful tool to close the tax gap, but it comes with a price, and that price is paid by the reporting community, which has to come up with the systems to do this.”

Each of these measures addresses the so-called tax gap, which is the difference between U.S. taxes owed and those collected. That gap is estimated to be as much as $537 billion a year, according to soon-to-be-released research by Jacksonville University finance professor Richard Cebula and Edgar Feige of the University of Wisconsin.

When he chaired the Senate Finance Committee between 2003 and 2007, Charles Grassley, an Iowa Republican, led efforts to close the tax gap through laws such as the 3 percent contractor withholding requirement. Photo: Brendan Hoffman/Bloomberg Close

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When he chaired the Senate Finance Committee between 2003 and 2007, Charles Grassley, an Iowa Republican, led efforts to close the tax gap through laws such as the 3 percent contractor withholding requirement. Photo: Brendan Hoffman/Bloomberg

‘Least Afford It’

The contractor withholding requirement was enacted when Republicans controlled Congress and the White House. The party is now the loudest voice in opposing the rule, calling it a costly and burdensome intrusion for businesses.

“All the mandate will do is take more money out of our economy at a time when, quite frankly, we can least afford it,” Republican Senator Scott Brown of Massachusetts said in his party’s weekly radio address on Nov. 5. “As a result, businesses will have less money to hire and pay new workers.”

The Senate voted 94-1 yesterday to advance a bill repealing the contractor withholding requirement. Democrats in the chamber plan to add a provision to the legislation that would give companies tax credits to encourage hiring unemployed veterans.

A final Senate vote on the repeal measure hasn’t been scheduled. The House of Representatives passed the repeal measure, without the veterans amendment, on Oct. 27. It would have to vote again on the legislation if the Senate changes it.

Leading the Fight

The U.S. Chamber of Commerce has led the business lobbying fight against the government contractor and health-care rules. The Electronic Transactions Association has warned of the complexities of the credit card measure, including the difficulty of verifying and matching identification numbers.

When he headed the Senate Finance Committee between 2003 and 2007, Charles Grassley, an Iowa Republican, led efforts to close the tax gap through laws such as the 3 percent contractor withholding requirement. Dean Zerbe, his former tax counsel, said making the withholding requirements work has been more difficult than he anticipated.

“It was oversold what we could accomplish,” said Zerbe, now the national managing director in Washington for AlliantGroup, a tax consulting firm.

Barely a Dent

Representative Richard Neal, a Massachusetts Democrat who sits on the House Ways and Means Committee, said these measures haven’t worked because they barely make a dent in the tax gap.

“The problem is none of them really raise a lot of revenue,” he said.

The overseas bank rule, known as the Foreign Account Tax Compliance Act, would generate $8.7 billion over 10 years, according to the congressional Joint Committee on Taxation. The credit-card reporting rule would lead to $9.5 billion in federal revenue over a decade.

Withholding and reporting rules are seen as the most direct way to improve compliance with tax laws, said Feige, the University of Wisconsin professor. If the IRS has more information about businesses or individual taxpayers, it can do a better job of tracking down tax evaders.

“The two things that do seem to have a major impact on proper reporting are direct withholdings -- wages and salaries - - and information reporting,” Feige said. “It’s in the categories where you have neither withholding nor information reporting that you have major sources of unreported income.”

Possible Policies

As Congress backs away from withholding requirements to attack the tax gap, lawmakers haven’t decided what policies should take their place. Neal said the U.S. should be more aggressive toward offshore tax havens such as Bermuda. Grassley said lawmakers should focus more on lowering tax rates.

“The higher the marginal tax rate, the more cheating you get and the more legal loopholes you have,” he said.

Cebula, the Jacksonville University professor, said lawmakers must regain the public’s trust in the tax system before the gap can be narrowed.

“If people feel there’s fairness in the tax system, they’re more willing to be honest,” he said.

To contact the reporter on this story: Steven Sloan in Washington at ssloan7@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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