Tax Administration

Nonwage income, which is derived from such sources as pensions, self-employment, dividends, and capital gains, has grown significantly since 1970, when it accounted for just 16.7 percent of total taxpayer income. For tax year 1992, nonwage income has risen to 23.4 percent of the $3,665 billion in total taxpayer income. Pension income--at about $186 billion--was by far the largest and fastest growing source of nonwage income. Internal Revenue Service data show that taxpayers earning most of their income from nonwage sources are more likely to have problems paying their taxes than are wage earners and, as a result, owe more delinquent taxes than do wage earners. IRS' inventory of tax debt for individual taxpayers at the end of 1993 totaled nearly $80 billion, of which $58.5 billion was owed by taxpayers with primarily nonwage income. IRS data show that self-employment income was the largest share of nonwage income included in IRS' inventory of tax debts at the end of fiscal year 1993. Options for improving the timely payment of taxes of nonwage income include withholding income taxes on more sources of nonwage income, increasing taxpayer awareness of their tax payment responsibilities, and modifying the estimated tax payment system.

GAO found that: (1) from 1970 to 1992, individuals' nonwage income increased from 16.7 percent to 23.4 percent; (2) pensions, interest, self-employment, capital gains, dividends, and partnerships accounted for 91.6 percent of all nonwage income reported for 1992; (3) individual tax returns showing only nonwage income increased from about 10 percent to over 15 percent in 1992; (4) the proportion of the taxpayer population reporting nonwage income will continue to increase as the population ages because pension income is the largest and fastest growing source of nonwage income; (5) taxpayers whose income derives mainly from nonwage sources are more likely to have problems paying their income taxes; (6) these taxpayers accounted for 74 percent of the $79.2 billion in delinquent taxes owed by individuals in fiscal year 1993; (7) taxpayers with self-employment, interest, and dividend income accounted for about two-thirds of the nonwage income included in the IRS inventory of tax debts; and (8) options for improving timely tax payments on nonwage income include expanding withholding to more nonwage income sources, increasing taxpayer awareness of tax payment responsibilities for nonwage income, and modifying the estimated tax payment system.