9 - Tax Information Reporting

Summary

Tax-information reporting is an essential element of the tax compliance system. Despite the power of tax-information reporting to maximize the IRS’s ability to collect taxes owed, these rules also contain significant gaps. High-end taxpayers can often earn their income through transactions that do not require a third party to file tax-information reports with the IRS. This chapter demonstrates how the activity-based approach to information reporting often allows high-end taxpayers to engage in noncompliance with the tax law, while other taxpayers face significant automatic IRS scrutiny. It also shows that the government’s approach to tax-information reporting applies almost exclusively to specific activities, ranging from methods of earning income to designated transactions. This approach is consistent with the government’s design of other tax compliance rules that apply to certain types of activities, such as the use of tax shelters, offshore bank accounts, and transactions lacking economic substance to avoid tax liability.