June 26, 2009
Congress is interested in closing the so-called "tax gap." The IRS most recently estimated that the gross tax gap reached $290 billion for tax year 2001.[1] The IRS estimates that taxpayers misreported $13.6 billion in deductions for charitable cash contributions.
The tax gap arises when taxpayers fail to comply with their individual income, corporate income, employment, estate, or excise tax obligations through (1) underreporting of tax liabilities on tax returns; (2) underpayment of taxes due from filed returns; or (3) non-filing, which refers to the failure to file a required tax return altogether or on time.
The Government Accountability Office (GAO) studied, at the direction of the Senate Finance Committee, the possibility of a change in federal law which would require all congregations and other charities to file an annual report with the federal government detailing contributions on a per donor basis. The study included requiring charities to obtain the social security number or employer identification number of each donor as a basis for filing an annual Form 1098-type document for each donor.
The GAO study concluded that requiring information reporting for charitable cash contributions may not be an effective way to improve compliance. Charities could incur substantial costs and burdens if they were required to file information returns with IRS and taxpayers on the cash contributions they receive. Exempting some cash contributions, such as those below a certain dollar amount or those made to small or religious charities, from information reporting could reduce the burden on some charities. However, exempting some cash contributions from information reporting would reduce the effect that the reporting would have on improving compliance, in part because IRS may not be able to match information returns against tax returns without complete information reporting. Also, the extent to which information reporting would improve voluntary compliance is unclear. The Pension Protection Act of 2006 included more stringent requirements for the documentation taxpayers must keep to substantiate their cash contributions, starting in tax year 2007. It is not yet known whether the enhanced substantiation requirements have improved taxpayer recordkeeping and reporting compliance, although an updated National Research Program study of individual taxpayers could show whether compliance improved following the passage of the act. Finally, requiring information reporting could result in reduced charitable cash contributions from taxpayers, for example, because taxpayers may not want the federal government to know to which charities they donate, particularly for donations to religious organizations.[2]
The GAO interviewed ECFA's president, Dan Busby, as part of this study. ECFA raised significant concerns regarding requiring churches and other nonprofits to file annual reports with the IRS reflecting donations based on the donors social security numbers/taxpayer identification numbers.
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[1] IRS estimated that it would eventually collect about $55 billion of the gross tax gap through late payments and IRS enforcement actions, leaving a net tax gap of around $290 billion.
[2] Report to the Committee on Finance, U.S. Senate, Requiring Information Reporting for Charitable Cash Contributions May Not Be an Effective Way to Improve Compliance, May 14, 2009, GAO-09-555
This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.