Richard Malamud: Minding the Tax Gap
Professor of accounting and finance Richard Malamud had his article, “It’s Time to Do Something About the Tax Gap,” recently published in the most recent issue of the Houston Business and Tax Law Journal. The article, which he co-wrote with colleague Richard Parry of California State University, Fullerton, outlines the history of the tax gap and some of the reasons why people do not pay their taxes.
Malamud, who has been a tax accountant for 28 years, specializes in tax compliance in corporate, individual and partnership taxation and estate planning. He says that although the problem of the tax gap is widely recognized, the efforts to solve it are not aggressive enough. The article lists many reports by the Internal Revenue Service, Congress, the Government Accountability Office (GAO) and others that explain how to reduce the tax gap. It then shows how most cases are not even pursued, how many of the attempts to close the tax gap have been underfunded or abandoned, and how many leads are simply not followed.
“With an audit rate for individual returns of about one percent, it is not surprising that some taxpayers feel they won’t be audited and that even if they are audited, the IRS won’t find all of their unreported income,” says Malamud. “As the article points out, the IRS doesn’t do a very good job of making taxpayers afraid of being caught or prosecuted.
There are only about 1,000 criminal tax cases or less a year out of more than 100,000,000 tax returns. We either have a very large percentage of honest taxpayers - and we know that isn’t the case - or the IRS simply doesn’t think that failing to pay one’s taxes is a criminal offense.”
While the IRS is has leads on at least 10 million taxpayers who potentially owe billions of dollars, Malamud and Parry say that the agency does not have the resources to review this high volume of tax returns. The authors hope that the article makes it clear that there have been enough reports made. They feel that it is time for the IRS to start following many of the suggestions from those reports and to move their resources from research and report writing to greater taxpayer audits and other methods of closing the tax gap that will lead taxpayers to more complete and honest reporting of income.
“Only with voluntary compliance by the American taxpayer can we close the tax gap,” Malamud and Parry write in the article. “This will never be 100 percent effective, but talking about the problem has had little effect... Until the punishment fits the crime, the crime will persist.”
- Joanie Harmon