As tax day approached last Friday, there were a number of events in Washington, DC, dedicated to the issue of tax evasion and compliance. There is great concern in Congress and also among tax experts around the country about the detrimental effect the lack of tax compliance has on individual Americans and the broader U.S. economy. The most significant meeting held last week was a Senate Finance Committee hearing on the U.S. tax gap. The tax gap is the difference between the amount of money the government is supposed to receive in taxes and the amount it actually does. Currently, the U.S. has a tax gap of approximately $353 billion per year. The hearing explored reasons why the tax gap exists and what steps the government and the IRS can take to work to close the gap. Members of the committee expressed serious anxiety over the growth of the gap over the past few years. Expert testimony cited underfiling, underpaying, the vast exploitation of tax loopholes, and outright fraud among the many causes of the gap. There was also consensus at the hearing among witnesses and senators that the continuing complexity of the tax code has exacerbated the tax gap because it has become increasingly difficult for the average individual to accurately calculate their taxes. Witnesses at the hearing included David Walker, Comptroller General of the Government Accountability Office (GAO), Mark Everson, Commissioner of the IRS, Eileen O'Connor, Assistant Attorney General of the Department of Justice, Nina Olson, the National Taxpayer Advocate for the IRS, and other tax compliance experts. The presence of a large tax gap is detrimental to the U.S. because it represents revenues the government should be receiving from taxpayers to help pay for national priorities. As ranking Minority Chairman Max Baucus (D-MT) stated at the hearing, the tax gap can also be thought of as roughly $1 billion per day the government should be accruing that it is not. Baucus went on to state concerns that the gap is contributing to economic instability and a devalued dollar. He said, "The value of a dollar in your pocket is actually less, because our nation has been piling up debts and owes more money to foreign governments." Baucus concluded if the tax gap were brought down to zero, the revenues could pay for roughly three-fourths of the current federal deficit, a large portion of our Social Security liabilities each year, or even all of the annual Medicare outlays. Members of the committee as well as witnesses seemed to struggle with whether the more viable solution for dealing with the tax gap would be to increase services to taxpayers to help them better understand the filing process or to increase enforcement to ensure more compliance with the tax laws. IRS Commissioner Everson stressed that over the past four years the IRS has increased total individual audits (and more than doubled its high-income audits), increased the number of criminal prosecutions it recommends to the Justice Department, and increased its enforcement revenues from $33.8 billion in fiscal year 2001 to $43.1 billion in FY 2004. Everson's testimony should not be taken at face value as many independent investigations have shown the information provided to the public by the Internal Revenue Service about the agency's criminal enforcement activities to be substantially inaccurate. According to the Transactional Records Access Clearinghouse (TRAC) run by Syracuse University, "IRS criminal enforcement data cannot be relied upon and if anything they appear to have grown worse over time." (More information from TRAC about accuracy of IRS data) The money the IRS does not collect due to "tax cheats," non-compliance, loophole exploitation, or underpayments has a negative effect on the federal budget as well as the government's abilities to fund programs and services. As Comptroller General Walker mentioned in his testimony, paying taxes is a moral obligation people have as members of a society to provide funding for government services. He pointed out to members of the committee that people who do not pay taxes today are setting up their children and grandchildren for higher taxes in the future, because everybody ends up paying a small share for those who do not comply. Besides increased efforts on tax compliance at IRS, there was a general consensus among those testifying at the hearing that the tax code is in desperate need of simplification and responsible reforms would help with compliance. While there continues to be a sense of urgency among many to simplify the code, it is unclear at this time whether the President's Advisory Panel on Tax Reform will be able to recommend substantial changes to the tax code that will survive politically. The tax panel released a statement last week on Wednesday summarizing some of their initial work and findings. The panel has also requested the submission of specific proposals for reforming the tax code for the panel's consideration as its work moves forward. The panel held their most recent public meeting in Washington, DC, on April 18. The meeting focused on how state tax systems interact with the federal system and how the tax system affects businesses looking to invest in technological innovations. More information on the meeting can be found here.