7 Pages Posted: 15 Jul 2010
Date Written: April 26, 2010
Under current law, a taxpayer may generally take a tax return position without penalty or disclosure if there is substantial authority that the position will be sustained if challenged. Taxpayers can therefore take positions that they believe are unlikely to be right, but might be. The disclosures under Financial Accounting Standards Board Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes,’’ show that companies have failed to pay billions of dollars of taxes they think are legally owed according to their tax returns. A country needing tax revenue should collect the taxes that are rightfully owed before it seeks to raise additional taxes, and the FIN 48 disclosures reveal billions of dollars lost to noncompliance. This proposal would require taxpayers to report on their tax return only positions that they believe are more likely than not correct. With this new higher standard, the tax system could rely on financial reporting standards to better enforce compliance with the tax law. For a more detailed discussion of this proposal, please see ‘‘Voluntary Compliance: This Return Might Be Correct, but Probably Isn’t,’’ in the spring 2010 issue of the Virginia Tax Review.
The proposal is made as a part of the Shelf Project, a collaboration among tax professionals to develop and perfect proposals to help Congress raise revenue without raising tax rates. The deficit is now at $1.6 trillion or 11.2 percent of GDP, and government debt is projected to increase to 68 percent of GDP by 2019. In an impending revenue crisis, base-protecting revenue provisions that are ordinarily politically impossible become political necessities. Tax rates can’t be raised on this loophole-ridden tax base. Shelf Project proposals defend the tax base and improve the rationality and efficiency of the tax system. They are intended to raise revenue without raising rates, because the best tax systems have the broadest possible base to reach the lowest feasible tax rates. Shelf Project proposals are intended to eliminate the alternatives of 85 percent individual income tax rates or 35 percent federal sales tax rates. Alonger description of the Shelf Project and an inventory of its proposals after two years may be found at ‘‘Two Years of the Shelf Project,’’ Tax Notes, Jan. 25, 2010, p. 513, Doc 2010-150, or 2010 TNT 17-12.
Keywords: tax reform, tax noncompliance, tax returns
JEL Classification: H20, H26, K34
Suggested Citation: Suggested Citation
Wells, Bret, Adopting the More Likely than Not Standard for Tax Returns (April 26, 2010). Tax Notes, Vol. 127, p. 451, April 2010. Available at SSRN: https://ssrn.com/abstract=1601422 or http://dx.doi.org/10.2139/ssrn.1601422