2007 Federal Budget Proposals Target the Non-Compliance-Attributed Employment Tax Gap

The Treasury Department reports that non-compliance with employment tax and income tax reporting is a significant part of the current tax gap. Treasury is offering a number of provisions in the 2007 budget proposal designed to help close this tax gap. The IRS reports that under-reporting of income, or failure to report income, accounts for half of the current budget tax gap. Improved employment tax compliance and enforcement would significantly lower the current budget deficits, as better than 98% of taxpayers who receive Forms W2 from their employer properly report and pay their income taxes too.

The 2007 Federal Budget includes significant increases in funding for IRS Audits. This is a cycle that is often repeated. When Treasury revenues are down (as they were in the late 80's and early 90's) audit activity picks up tremendously. Then when the revenues pick up as they did in the late 90's enforcement dropped off. With $300 billion plus budget defecits and an estimated $238 billion non-compliance tax gap attributed to employment and income taxes alone, I expect to see more serious enforcement activities in this direction.

I would remind the household employers that your household employment taxes are reported on your personal Federal Form 1040 annually. If you have a nanny or other domestic and are not reporting and paying the tax on Form 1040 Schedule H, you are submitting a knowingly false Form 1040. These forms are submitted under penalties of perjury, and persons caught not reporting nanny wages may face criminal as well as civil penalties. I have never seen anyone go to jail for non-payment of nanny taxes, but I have seen some very expensive back tax settlements, including penalties and interest.

Consider the following situation I am involved in. Mom was ill for quite some time and an adult child was appointed trustee of Mom's assets. The Trustee paid Mom's housekeeper/companion for a period of almost 20 years. Taxes were never paid, income was never reported. Mom passed away and the housekeeper/companion has filed a claim against the estate for non-reporting of the wages. Apparently the housekeeper who is in her late 60's found that she was ineligible for Social Security and Medicare benefits because of this non-compliance. She has worked as a domestic being paid in cash her entire adult life. Everyone was complicit in the tax avoidance (non-compliance), but the estate faces back taxes, penalties and interest in excess of $100K! $29K of this is the actual tax - the remainder is penalties and interest.

No one likes paying taxes - at least no one that I have ever met! It is important to remember, however, that non-payment of the housekeeper or nanny's employment tax is NOT a victimless action. The family above and their Mom's housekeeper are certainly realizing this the hard way.