The White House released a statement on February 8, 2018 that President Trump nominated Charles Rettig as the new Commissioner of Internal Revenue Code for the remainder of a five year term that began in November 2017. Unlike other recent presidential nominees that may have ignited fierce debate among political parties, Rettig’s nomination has been universally praised across party lines and by both the public and private sector of tax practitioners. Rettig spent over thirty-five years in private practice defending clients against the IRS, but also recently published an article discussing the pitfalls of tax collection today and encouraging greater tax enforcement. Although Rettig’s professional experience is in the private sector, he has consistently encouraged and advocated for voluntary tax compliance and tax enforcement. Rettig will likely bring this perspective to his new position as IRS Commissioner.
Rettig spent the last thirty-five years at Hochman, Salkin, Rettig, Toscher & Perez, P.C. in Beverly Hills, California representing clients in a variety of tax matters. His peers and other national sources have deemed Rettig as a leading practitioner in tax fraud, tax law, and tax litigation and controversy. See Charles P. Rettig, Biography, Hochman, Salkin, Rettig, Toscher & Perez, P.C. Throughout his career, Rettig represented thousands of individual, business, and corporate taxpayers involved in civil examinations, tax collection matters, and criminal tax investigations, often representing clients against the IRS.
Concurrent to defending clients in tax matters, Rettig was appointed by the IRS to serve as Chair of the IRS Advisory Counsel (“IRSAC”), and was an active member since 2008. The IRSAC receives commentary from the public regarding the public’s perception of IRS activities. The IRSAC then advises the IRS Commissioner on its findings to encourage the public’s involvement regarding tax administration policy, programs, and initiatives. See Internal Revenue Service Advisory Council Facts, IRS.
With Rettig’s professional backdrop in mind, an analysis of Rettig’s recent publication regarding IRS tax enforcement paints a full picture of Rettig’s viewpoints. These viewpoints will most likely follow Rettig to his position as IRS Commissioner.
Viewpoint on the IRS and Tax Enforcement
In a fall 2017 issue of the Journal of Tax Practice and Procedure, Rettig published an article entitled A Lesson in Accountability and IRS Enforcement. Overall, Rettig sets a tone for the need for a new era of increased tax enforcement. The article addresses three main areas: (1) facts on the IRS and current tax collection efforts; (2) the underlying causes of the problems with tax collection and enforcement; and (3) proposed solutions to increase tax collection.
After providing statistics on the billions of tax dollars collected by the IRS, Rettig explains the current tax gap. The gross tax gap is the difference between the amount of tax imposed on taxpayers in any given year and the amount that taxpayers voluntarily and timely pay. The gross tax gap from 2008 to 2010 is about $458 billion. The net tax gap is the portion of the gross tax gap that never gets paid. It is the gross tax gap less the tax that the IRS will subsequently collect, either through voluntary payments or IRS enforcement. Rettig says that it is estimated that the IRS will be able to collect $52 billion of the gross tax gap, leaving a net tax gap of $406 billion.
Problems with Closing the Tax Gap
Rettig addresses three issues that lead to the tax gap. First, Rettig explains the direct causes of the tax gap: underreporting income, underpaying taxes owed, and not filing taxes at all. Of those three, underreporting accounts for the greatest portion of the tax gap: $387 billion. Underpayment accounts for $39 billion and non-filing accounts for $32 billion. In addressing underreporting, Rettig explains that IRS research shows that people that have federal taxes withheld from income report 99% of their income. Taxpayers that have reporting requirements under the law also tend to report almost all of their income (96%). The problem lies with taxpayers that are not subject to withholding or information reporting, with that group only reporting only 68% of their income, and sole proprietors often reporting only 48% of their income.
Second, Rettig highlights that the IRS currently has a historically low number of enforcement agents, which is most likely attributable to the IRS budget. Rettig cautions that the resource-challenged IRS impacts tax enforcement efforts, which in turn explains another contributing factor to the billion dollar tax gap.
Lastly, Rettig explains that the IRS relies on voluntary compliance. Rettig states that research shows that increasing civil tax penalties do not increase voluntary compliance by taxpayers. With IRS examination of taxpayers operating at low rate, Rettig suggests that this may only encourage tax payers to “push the compliance envelop” because it seems like there is not much risk of detection from the IRS.
Proposed Solutions to Close the Tax Gap
Rettig offers three solutions that will target this billion dollar tax gap. First, Rettig suggests that the IRS should “hunt” for under-reporters and non-filers. He suggests that technology can help target the taxpayers that fall in the categories of significant underreporting through electronic programs designed to identify these tax payers. Technology can also be used to identify those tax payers that underreport foreign income, with the cooperation of foreign governments.
Second, Rettig discusses the need for tax practitioners to enhance professional responsibilities within their own fields. Although the IRS is the governmental tax enforcement agency, Rettig suggests that tax practitioners also play an important role in the voluntary compliance aspect of our tax system. Specifically, Rettig states that attorneys, accountants, and other tax practitioners must make sure their clients follow the law and observe the appropriate standards set within each profession. Rettig states, “Tax returns are not to be perceived as an offer to negotiate with the government–information set forth on a tax return, signed by a paid return preparer, must be accurate with a reasonable foundation and reasonable support for the characterization of items set forth within the return.”
Lastly, Rettig suggests that the only way to increase voluntary tax compliance is to increase tax enforcement. If tax payers know that there is a significant risk of IRS detection associated with underreporting, underpayment, or non-filing, tax payers will be more likely to voluntarily comply. Because Rettig stated that research shows that increased civil penalties alone do not create the needed effect of increased compliance, only increased tax enforcement through civil examination, field (in-person) examination, and investigation will create the needed effect of increased voluntary compliance by taxpayers.
In sum, Rettig offers both sides of the coin: extensive experience in advocating from the taxpayer’s point of view against the IRS and extensive experience with the inner workings of the IRS and the contributing factors to the billion dollar tax gap. With this two-sided experience, taxpayers can expect a new frontier of the IRS focusing its resources on targeting the greatest causes of the tax gap, increasing examination of these taxpayers, and hopefully adding millions, if not billions, of uncollected tax revenue to the federal treasury.