Subterranean Economy

The subterranean economy report of the Internal Revenue Service (IRS) revealed that taxes are not paid on at least $135 billion of income; if people had paid the $26 billion in taxes on this income, the fiscal year 1977 budget deficit would have been reduced by 58 percent, from $45 billion to $19 billion. The Government should take actions to develop a comprehensive compliance strategy. The Treasury Department, the Office of Management and Budget, and the Congress should be involved with IRS in deciding how to most effectively allocate the compliance dollars the IRS may use to insure that the Government can more adequately go after unreported income. IRS needs a more effective national criminal enforcement strategy to deal with the extensive amount of illegal income on which no taxes are paid. Withholding of income tax at source and document matching must be extended. The IRS should take the following corrective actions: monitoring relative noncompliance; determining the extent to which its resources should be devoted to areas of noncompliance; determining the impact of its programs on compliance; and developing an overall compliance strategy. Little effort has been made to coordinate the investigative gathering activities of the 58 district offices. The document matching program and tax withholding are powerful tools for fighting noncompliance on a mass scale. Some potential problem areas include the fact that payers are not submitting all required information documents; many information documents submitted are not used; and more income could be subject to matching. Besides document matching, tax withholding on income payments represents the only tool for dealing with income underreporting on a mass scale.