Homage to information returns.

Another relatively easy way Congress can foster compliance and help close the tax gap is to reduce the Code's complexity. (84) Complexity is problematic for taxpayers and the Service alike. Complexity frustrates even the most civic-minded taxpayers, who wish to be compliant but, when faced with page after page of instructions and intricate schedules (particularly with respect to the alternative minimum tax), throw up their hands in disgust and resentment. The staff at the Service, too, is not immune to the problems of complexity: it must train longer and harder to understand the Code and the complexity itself often enables taxpayers to cloak illegitimate transactions with an aura of legitimacy. (85) It is beyond the scope of this analysis to detail all the Code simplification measures Congress should consider, but some of the nation's foremost tax scholars have already offered numerous worthwhile suggestions. (86) A perusal of these suggestions makes one thing clear: as a general matter, much of the Code's complexity would fall by the wayside if Congress did not use the Code to advance social agendas or surreptitiously disguise spending programs.

Finally, helpful as these reforms might be, the tax gap will be greatly narrowed only if Congress addresses one of its root causes, namely, the underground cash economy. Because cash transactions fall below the Service detection apparatus, they are the single largest contributor to overall tax noncompliance. (87)

Why is cash a critical lubricant of the underground economy? One reason is that the use of cash leaves no paper or electronic trail. Another is that cash presents parties with a mutual opportunity. Consider the fact that many sellers of products and services often offer two prices: the regular price and a discounted cash price. These sellers enthusiastically accept cash because they are then strategically placed in a position where they can readily commit fraud or, as they like to rationalize, do what everyone else does (i.e., not report their cash receipts). For obvious reasons, buyers relish discounted cash prices and seem unperturbed by the fraud they abet.

Surprisingly, in this advanced age of electronic commerce, old-fashioned cash usage remains disturbingly ubiquitous. We all know, for example, friends, neighbors, and other "upright" members of the community who, when it comes to remodeling their homes, literally deliver suitcases filled with $50 bills to their general contractors. Their remodeled homes look beautiful, but it goes without saying that Uncle Sam will not find a single one adorned with a welcome mat. The pas de deux between sellers and cash-paying buyers works well for both, but it obviously leaves the government to stand alone as a wallflower.

Aside from the government, unreported cash transactions are also grossly unfair to those taxpayers who receive wages, interest, and dividends in the form of checks or electronic transfers or who make noncash payments for their goods and services. These modes of receipt generate the issuance of Form W-2s and 1099s--dissuasive factors against taxpayer noncompliance--and noncash payments are not afforded price discounts. The National Taxpayer Advocate has put a dollar figure on this inequity: on average, she estimates that it costs every compliant taxpayer an extra $2000 a year to account for the revenue shortfall brought about by noncompliant taxpayers. (88)

In making their purchases, what if buyers were induced or required to use noncash alternatives? The underground economy would quickly rise to the surface. The Service could then perform its traditional enforcement role for transactions now plainly within its sight. The resulting revenue flow could be used to shrink the deficit, expand services, and institute tax reductions.

To promote alternative modes of payment and to discourage the use of cash, Congress should prohibit buyers from using cash in transactions over $500. Violators of this limited cash rule would be subject to fines, and repeat offenders would be required to perform community service. To make this proposal politically feasible, the quid pro quo for curtailing cash transactions would be a revenue-neutral across-the-board 10% tax reduction, to be offset by the tax revenue generated on the newly transparent underground economy.

If the notion of doing away with or curbing cash seems drastic, so too in the minds of many Americans is the thought of raising taxes, a near certainty if the tax gap is not narrowed. Congress can safeguard the nation's coffers and remove inequities by reconsidering the role of cash in the nation's economy, evaluating its shortcomings, and setting boundaries on its usage.

V. CONCLUSION

Consider for a moment the implications were Congress to eliminate the requirement that third parties issue information returns. On the one hand, employers, banks, and brokerage firms might applaud this change as it would relieve them from the burden of having to expend time, money, and energy collecting, processing, and distributing this information to taxpayers and the government. On the other hand, if existing studies accurately depict what happens in the absence of information return issuance, taxpayer compliance would probably hover around 50%, seriously jeopardizing the Code's administration. (89) A necessary by-product of rampant taxpayer noncompliance is that the federal government and many state governments would have to slash their budgets, run deficits, raise their taxes, or institute a combination of the foregoing. This outcome would be neither economically stable nor politically tolerable.

Notwithstanding the draconian outcome were information return issuance eliminated, Congress cannot be overzealous in its information return expansion endeavors. As previously indicated, the issuance of such returns is not a cost-free endeavor. Certainly, the burdens associated with compliance have to be carefully weighed against the benefits they produce. In many cases, particularly in light of technological changes, the putative benefits far outweigh the putative costs--these are the areas in which Congress should focus its expansion efforts.

In the end, no one should sell short the importance of information returns. Information return expansion, along with the institution of other reforms, can enable the government to make great strides in its goal to close the tax gap. If Justice Oliver Wendell Holmes is correct and "taxes are what we pay for civilized society," (90) the issuance of information returns represents a welcome bridge to help deliver us out of our state of savagery. Fortunately, technology now affords Congress the opportunity to add an extra lane or two to the existing bridge.

Jay A. Soled*

* Jay A. Soled is a professor at the Rutgers University School of Business.

(1) See I.R.S News Release IR-2006-28 (Feb. 14, 2006) (IRS Study Updates Tax Gap Estimates) (finding that for nonfarm individual proprietor income for which there is no third-party reporting, the misreporting rate was 57%, whereas for wages, salaries, and tips for which there is third-party reporting, the misreporting rate was 1%); see also Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax Gap: Testimony Before the U.S. S. Comm. on the Budget, 110th Cong. (Jan. 23, 2007) [hereinafter Tax Gap Testimony] (statement of Michael Brostek, Director, Tax Issues Strategic Issues Team, asserting that withholding and information returns are particularly powerful tools to reduce the tax gap); JON BAKIJA & JOEL SLEMROD, TAXING OURSELVES: A CITIZEN'S GUIDE TO THE DEBATE OVER TAXES 178 (3d ed. 2004) (describing a study showing a 99.1% compliance rate for wages and salaries and an 18.6% compliance rate for informal suppliers (e.g., sidewalk vendors and housepainters)).

(2) The Internal Revenue Service (Service) estimates that the tax gap for 2001, the latest year in which such an analysis was conducted, was $290 billion. I.R.S News Release IR-2006-28, supra note 1.

(3) See I.R.C. [section][section] 6051-6053 (listing over twenty-five instances that require the issuance of third-party information returns).

(4) See, e.g., Austan D. Goolsbee, Why Tell the IRS What It Already Knows, N.Y. TIMES, Apr. 6, 2006, at 25A. The article reports:

With a small adjustment in processing procedures, the revenue service

could send you a tax form already filled out with the information it

has for you--a Simple Return--rather than a blank tax form. You would

simply check the numbers against your W-2 and 1099 and then sign it.

Id.

(5) Matthew Grocki et al., Offshore Outsourcing of Tax-Return Preparation: Promising Business Opportunities and Professional Standards, 75 CPA J. 54 (June 2005); Jay A. Soled, Outsourcing Tax Return Preparation and Its Implications, 75 CPA J. 14, 14-15 (Mar. 2005).

(6) See JOINT COMM. ON TAXATION, 97TH CONG., GENERAL EXPLANATION OF THE REVENUE PROVISIONS OF THE TAX EQUITY AND FISCAL RESPONSIBILITY ACT OF 1982 (Comm. Print 1982). For legislative background, see H.R. 4961, 97th Cong. [section] 313 (as reported by the Senate Finance Committee); S. REP. No. 97-494, vol. 1, at 245-46 (1982); H.R. REP. NO. 97-760, at 565 (1982) (Conf. Rep.).