Identifying three big drivers of the tax gap: Expert

Caroline Bruckner, American University Kogod School of Business Tax Professor & Kogod Tax Policy Center Managing Director, joins Yahoo Finance’s Kristin Myers and Alexis Christoforous to discuss tackling the tax gap.

Video transcript

ALEXIS CHRISTOFOROUS: In case you're counting, it is one week to go to this year's tax deadline. Joining us now is Caroline Bruckner, Tax Professor at American University's Kogod School of Business and Managing Director of the Kogod Tax Policy Center. Professor, good to have you here. You mentioned something called a tax gap that we need to be aware of this tax season. Can you explain what that tax gap is? And who is it impacting?

CAROLINE BRUCKNER: Well, it's certainly making headlines. And Congress is definitely paying attention. The tax gap is the difference between the amount of taxes that people actually owe and what's actually collected. And at a Senate Finance Committee hearing last month, the IRS commissioner Rettig indicated that the difference between what people are actually paying and what's owed could be as high as $1 trillion. Congress has taken note of this and is having more hearings on it and considering legislation and ways to close the tax gap.

KRISTIN MYERS: OK, so then is that tax gap increasing or growing throughout the years? What is really behind it? Is it just a bunch of folks out there that are lying to the government about what they actually owe, and are trying to get something over in terms of paying their taxes?

CAROLINE BRUCKNER: So I think there are three really big drivers of the tax gap that experts are identifying. The first one is cryptocurrency. And in recent years, we've seen the tax gap surge. And some of that might be attributable to the rise in cryptocurrency.

The IRS and Treasury Department don't really have a good handle on how to deal with information reporting related to that-- also, individuals with foreign bank accounts and moving money out of the United States elsewhere. And then just overall, there is an understanding that individuals with business income, particularly high wealth individuals, might not be doing the best job of properly reporting their income. And so Congress is looking at a way to get more information about individuals'-- high net wealth individuals with business income to make sure that they're paying their fair share.

ALEXIS CHRISTOFOROUS: So what might some red flags be to the IRS? And what should folks know about as they prepare their taxes with regards to this gap?

CAROLINE BRUCKNER: So first things first, if you get an IRS Form 1099, that means that whoever had sent you that form, they sent it to the IRS too. And that is one way that prompts taxpayers to properly report their income. However, the form 1099 rules that haven't really been updated as much as they could be. And so Congress is having a hearing tomorrow to figure out ways that would prompt taxpayers to better self report their income once they get a form 1099.

KRISTIN MYERS: So I'm curious to know if there might be some other changes, not just necessarily for individuals, but for corporations, because I don't think there's too much sympathy that's out there right now for the United States government that, perhaps, they're not getting as much money from folks as necessary or as required every tax season, especially as we see so many corporations essentially paying nothing. Going forward, what is being looked at to make the tax system or tax policy a little bit more fair and equitable, but also to address that tax gap?

CAROLINE BRUCKNER: So one of the things that Congress really pays close attention as to who is going to bear the administrative burden of these increased reporting requirements that come with new information reporting requirements that would go to taxpayers in the IRS-- who has to actually file the forms? And right now, Congress has financial service providers, peer to peer platforms like Venmo and banks really set in their sights.

There are a couple of different proposals that have been bandied about, one of which was included by the Biden administration as part of the Americas Families Plan, which would task banks and other financial service providers with reporting to the IRS and taxpayers aggregate inflow and outflow of business accounts of taxpayers. And then another proposal, which is going to be discussed at tomorrow's Senate Finance Committee subcommittee hearing on the tax gap, is one that is being pushed by former IRS commissioner Rizzotti that would also be increased reporting requirements by banks.

Now, banks already do a lot of financial reporting with currency transactions and suspicious activity reports. And this would just add to their actual load and would send these forms to the IRS.

ALEXIS CHRISTOFOROUS: All right, wow, lots to think about there-- thanks for breaking it down for us. Tax professor Caroline Bruckner, we appreciate it.