Unpaid U.S. taxes hits $2,680 per household

The Bush administration, in its budget proposal for next year, provided $410 million for programs to reduce the tax gap and outlined 16 legislative changes it said would raise about $29 billion over 10 years.

The Senate Finance Committee chairman said he was "very, very disappointed" by the proposals. "We're not asking for the moon. We're asking for more than one cent on the dollar," said Sen. Max Baucus, D-Mont.

But Chris Edwards, director of tax policy studies at the libertarian Cato Institute, said the taxpayer compliance rate is one of the highest in the West, well above some European countries with thriving underground economies. The U.S. rate has held steady in the mid-80 percent level the past three decades.

He compared it to seat belt use, about 81 percent despite years of efforts to educate drivers.

Edwards, in an interview, predicted there would not be any real inroads in shrinking the gap until the tax laws were simpler; that is not expected to happen soon.

"Every new loophole adds additional incentives and ability for people to cheat," he said.

Everson agreed. "We will never be able to audit our way out of the tax gap," he said. Simplification would help, he said, but reducing the gap dramatically "will take some draconian steps" that "risk imposing unacceptable burdens on compliant taxpayers."

Nonetheless, small steps are under way. The IRS hopes to garner $2 billion over 10 years from a program begun in 2006 whereby private collection agencies help pursue delinquent taxpayers.

The tax agency for the past decade has fostered voluntary tip reporting programs in the food and beverage industries, persistent sources of underreporting.

The Treasury Department's inspector general for tax administration has estimated the IRS could pick up an additional $342 million over five years by seeking out tip agreements in the cosmetology and taxi-limousine industries.

In Congress, a bipartisan group of lawmakers is pushing one of the administration's proposals: requiring brokers and mutual fund companies to track and report to taxpayers and the IRS investment information related to capital gains taxes. That would make it easier for taxpayers fill out their returns and help close an annual gap in capital gains taxes estimated at $17 billion.

Olson, the taxpayer advocate, said the IRS must expand third-party information reporting. There is little cheating when a person's company reports wages to the IRS, but compliance is less than 50 percent for income not subject to third-party reporting.

One example might be more reporting on gross proceeds from Internet auction and sales sites, she said, noting that 700,000 people regard eBay sales as their primary or secondary source of income.

Cracking down on tax avoiders also will keep honest taxpayers honest, she said.

"If compliant taxpayers believe that everyone else is paying his or her fair share, they are likely to remain compliant," she said. "But no one wants to feel like a 'tax chump.'"

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