Corporate Income Taxes Are a Significant Source of Federal Revenue and Must Be Part of the Overall Considerations for Fiscal Reform

At about $277 billion, corporate income taxes are far smaller than the $841  billion in social insurance taxes and $998 billion in individual income taxes  that OMB estimates will be paid in fiscal year 2006 to fund the federal  government. Consequently,  although not the largest, it remains an important source of federal  revenue. Corporate tax revenues of the magnitude shown in figure 2 make them  relevant to considerations about how to address the nation’s long-term  fiscal imbalance. Corporate tax policy, corporate tax  expenditures, and corporate tax enforcement need to be part of the overall  tax review because of the amount of revenue at stake. Opportunities Exist to Improve Corporate Tax Compliance

Ensuring corporate income tax compliance is challenging because much  corporate tax avoidance is legal and the true tax liability for large  corporations is difficult to determine. Opportunities to pursue include simplifying the tax code, obtaining better  data to the extent feasible on noncompliance, continuing to oversee the  effectiveness of IRS’s efforts, continuing to leverage technology, and  sending sound compliance signals through such things as increased  effectiveness in collecting taxes owed. A complex tax code,  complicated business transactions, and often multinational corporate  structures make determining corporate tax liabilities and the extent of  corporate tax avoidance a challenge. This and other opportunities to leverage  modern technology can serve to help IRS deal with the complex tax issues  in corporate tax returns. Capital Gains Basis Reporting

Finally, you also asked us to testify on a report—done at your request— that we are issuing today on individual taxpayers’ compliance in reporting  capital gains’ income from the sale of securities. IRS also faces difficulties in ensuring that taxpayers  understand their obligations for determining and reporting their capital  gains and losses. Expanding information reporting to taxpayers and IRS on securities  sales to include cost basis has potential to improve taxpayer voluntary  compliance and help IRS verify securities gains or losses. Based on these results, our report includes matters that Congress may  want to consider, including requiring brokers to report to both taxpayers  and IRS the adjusted basis of sold securities and ensuring that IRS has  sufficient authority to implement the requirement.
Why GAO Did This Study

Corporate income taxes are expected to bring in about $277 billion in 2006 to help fund the activities of the federal government. Besides raising revenue, the tax alters investment decisions and raises concerns about competitiveness in an environment of increasing global interdependency. The complexity of the tax breeds tax avoidance, including an estimated $32 billion of noncompliance detected by the Internal Revenue Service (IRS). This testimony provides information on trends in corporate taxes and opportunities to improve corporate tax compliance. Congress also asked that GAO discuss recent work on the misreporting of capital gains income from securities sales and options to improve compliance. This statement is based largely on previously published GAO work.

What GAO Found

The corporate income tax is an important source of federal revenue and must be considered in dealing with the nation's long-term fiscal imbalance. Reexamining both federal spending and revenues, including corporate tax policy, corporate tax expenditures and corporate tax enforcement must be part of a multi-pronged approach to address the imbalance. The total amount of corporate tax avoidance, which includes the $32 billion in noncompliance estimated by IRS, is unknown. A complex tax code, complex business transactions, and often multinational corporate structures make determining corporate tax liabilities and the extent of corporate tax avoidance a challenge. Opportunities exist to improve corporate tax compliance and include simplifying the tax code, obtaining better data on noncompliance, continuing to oversee the effectiveness of IRS enforcement, leveraging technology, and sending sound compliance signals through increased collections of taxes owed. In a companion report issued today, GAO found that many taxpayers misreport capital gains or losses, sometimes inappropriately underpaying their taxes and sometimes overpaying them. IRS has efforts in place to help ensure proper reporting of capital gains and losses, but these efforts face several obstacles. GAO found that expanding third-party information reporting on the cost basis of capital assets could help mitigate this problem if related problems are addressed. GAO suggested that Congress consider requiring brokers to report adjusted basis to taxpayers and IRS and requiring IRS to work with the securities industry to develop cost-effective ways to mitigate reporting challenges. GAO also recommended that IRS clarify its guidance on reporting capital gains and losses.