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First, Go After The Tax Cheats

So one thing Joint Tax might have recommended was giving the IRS the money to hire more auditors and investigators -- at least to the point that the odds of being audited might increase enough to be a credible threat. But of course the committee doesn't view that as its role.

Failing that, it might have made tougher recommendations about records of payments. So-called third-party reporting -- the W-2s and 1099s that taxpayers and the IRS get from employers, banks, brokerages and others -- has been quite effective in making taxpayers include that kind of income on their returns. The IRS knows they got the money, and they know the IRS knows, so they report it.

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But when self-employed people and small businesses get paid, their clients or customers don't have to tell the IRS. The IRS has long known that a lot of this income doesn't find its way onto the returns of the recipients, and it's very difficult for the agency to track down.

The Joint Tax report suggested requiring government agencies, at least, to start telling the IRS about payments they make to contractors and others. But the report said broadening such a requirement to other businesses or individuals would be too burdensome.

And how about capital gains? Two professors, Joseph M. Dodge of Florida State University and Jay A. Soled of Rutgers University, estimated last week in the journal Tax Notes that underreporting of capital gains is likely to cost the government $21 billion a year, or $210 billion over a decade.

"On the sale of investments, taxpayers inflate their tax basis and do so with impunity," the two wrote. (Tax basis, generally speaking, is the cost of an asset -- the amount a taxpayer subtracts from the sale proceeds to calculate taxable gain.)

Part of the underreporting is the result of confusion and complexity, but the professors note that "there is effectively no sanctionable duty for taxpayers to maintain their basis records," and courts have allowed taxpayers, in the absence of such records, to estimate their basis.

Dodge and Soled suggest that imposing a recordkeeping requirement and third-party reporting would help.

But the Joint Tax report has other ideas.

Congress could, for example, impose Social Security and other payroll taxes on students working on campus, the report said. It could eliminate the deduction for home equity loan interest, and it could limit the income-tax exemption for short-term rental (15 days or less) of a residence.

It could also extend the federal excise tax on telephone service to all voice and data communications, and it could extend the airline flight segments tax to domestic segments of international flights.

These and numerous other loophole closers may well be good policy. But Congress might find more support for them if it first did more to ensure that everyone pays the taxes he already owes.

The Treasury Department last week issued a helpful guide for property owners who would like to combine the tax exclusion that's available for profit on the sale of a personal residence with the tax deferral available with a Section 1031 "like kind" exchange of a rental property.

In Revenue Procedure 2005-14, the IRS explains that owners who meet the tests for both benefits can apply them both to the same property.

This means living in the property for at least two years, then renting it out, then buying another rental property. Doing so allows the owner of, for example, an expensive house to use one benefit to exclude part of the gain from tax and the other to defer tax on the rest. And the gain excluded -- up to $250,000 for a single homeowner and $500,000 for a couple -- can be added to the "basis" of the new house, reducing the potential tax if it is sold.

The revenue procedure doesn't address the question of what happens if the owner stops renting the new house and moves into it, but last fall Congress tightened the law so that a property that has been acquired in a 1031 exchange in the five years prior to its sale doesn't qualify for the homeowner exclusions.


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