United States Government Accountability Office GAO November 2010 Report to the Secretary of the Treasury _part8 pptx

Other Accompanying Information Page 88 GAO-11-142 IRS’s Fiscal Years 2010 and 2009 Financial Statements INTERNAL REVENUE SERVICE Other Accompanying Information - Unaudited For the Years Ended September 30, 2010 and 2009 34 Social Security and Medicare Taxes The Federal Insurance Contributions Act (FICA) provides for a Federal system of old-age, survivors, disability, and hospital insurance benefits. Payments to trust funds established for these programs are financed by payroll taxes on employee wages and tips, employers’ matching payments, and a tax on self-employment income. A portion of FICA benefits involves old-age, survivors, and disability payments. These benefits are funded by the social security tax which is currently 6.2 percent of wages and tips up to $106,800 and an employer matching amount of 6.2 percent bringing the total rate to 12.4 percent. These benefits are also funded by a self-employment tax of 12.4 percent on self employment income up to $106,800 for calendar year 2009. Remaining benefits under FICA pertain to hospital benefits (referred to as “Medicare”) and are funded by a separate 1.45 percent tax on all wages and tips (there is no wage limit) and the employer matching contribution of 1.45 percent bringing the total rate to 2.9 percent. Self-employed individuals pay a Medicare tax of 2.9 percent on all self employment income. Social Security taxes collected by the IRS were estimated to be approximately $639 billion and $661 billion in FY 2010 and FY 2009, respectively. Medicare taxes collected by the IRS were estimated to be approximately $182 billion and $192 billion in FY 2010 and FY 2009, respectively. Social Security taxes and Medicare taxes are included in individual income, FICA/SECA and other on the Statement of Custodial Activity. Tax Gap The tax gap i s the difference between the amount of tax imposed by law and what taxpayers actually pay on time. The tax gap arises from the three types of noncompliance: not filing required tax returns on time or at all (the nonfiling gap), underreporting the correct amount of tax on timely filed returns (the underreporting gap), and not paying on time the full amount reported on timely filed returns (the underpayment gap). Of these three components, only the underpayment gap is observed; the nonfiling gap and the underreporting gap must be estimated. The tax gap, estimated to be about $345 billion for tax year 2001 (the most recent estimate made), represents the net amount of noncompliance with the tax laws. Underreporting of tax liability accounts for 82 percent of the gap, with the remainder almost evenly divided between nonfiling (eight percent) and underpaying (ten percent). Part of the estimate is based on data from a study of individual returns filed for tax year 2001. It does not include any taxes that should have been paid on income from illegal activities. Each instance of noncompliance by a taxpayer contributes to the tax gap, whether or not the IRS detects it, and whether or not the taxpayer is even aware of the noncompliance. Some of the tax gap arises from intentional (willful) noncompliance, and some of it arises from unintentional mistakes. The collection gap is the cumulative amount of tax, penalties, and interest that has been assessed over many years, but has not been paid by a certain point in time, and which the IRS expects to remain uncollectible. In essence, it represents the difference between the total balance of unpaid assessments and the net taxes receivable reported on the balance sheet of the IRS. The tax gap and the collection gap are related and overlapping concepts, but they have significant differences. The collection gap is a cumulative balance sheet concept for a particular point in time, while the tax gap is like an income statement item for a single year. Moreover, the tax gap estimates include all noncompliance, while the collection gap includes only amounts that have been assessed (a small portion of all noncompliance) This is trial version www.adultpdf.com . instance of noncompliance by a taxpayer contributes to the tax gap, whether or not the IRS detects it, and whether or not the taxpayer is even aware of the noncompliance. Some of the tax gap. paying on time the full amount reported on timely filed returns (the underpayment gap). Of these three components, only the underpayment gap is observed; the nonfiling gap and the underreporting. FICA/SECA and other on the Statement of Custodial Activity. Tax Gap The tax gap i s the difference between the amount of tax imposed by law and what taxpayers actually pay on time. The tax gap