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The so-called "tax gap" is increasingly a topic of concern on Capitol Hill. The tax gap is the difference between the amount of tax that taxpayers should pay and the amount they actually pay. The noncompliance takes three forms:

• Not filing required returns on time;
• Not reporting one's full tax liability on a return (including unreported receipts and overstated expenses);
• Not paying the full amount of tax reported on a return.

The Treasury issued a report outlining steps the IRS will take to increase voluntary compliance and reduce the tax gap. Then, earlier this year, the Government Accountability Office (GAO) began a study of the cash charitable contribution tax gap.

Imposing cash charitable contribution information reporting requirements on churches (and other charities) was the initial thought considered by the GAO in this study. When increased information reporting has been used in general, it tends to lead to high levels of taxpayer compliance. It allows the IRS to match data from information returns against taxpayers' income tax returns to see if taxpayers have correctly reported their income or deductions.

Exactly what would an increase in information reporting for churches look like? The GAO's hypothesis was that every church (and other charity) in America would be required to annually file an information form with the IRS (a 1098-type form) reflecting the total cash charitable contributions for the year, using the donor's social security number or Taxpayer Identification Number (TIN) for donors other than individuals. Serious policy analysts say that the only genuine solution to close the cash contribution tax gap is to require what many would consider to be an onerous reporting burden on the church (and other charities). Can you imagine church leaders telling congregants, "When you write a check, please note your social security number on your check?"

Backpedaling a bit, the GAO suggested that perhaps a threshold could be used, only requiring reporting to the IRS if the annual giving total were more than, say, $250. Of course, even with a threshold, churches would need to obtain the social security number for the first gift, even of a few dollars, because the church would not know which donors would reach the filing threshold.

I recently told the GAO that the enactment of such reporting provisions would cause the law of unintended consequences to run in at least two respects: (1) donations to churches would decline because of donor privacy concerns related to divulging social security numbers, and (2) churches would have less money with which to carry out good work.

The GAO study is now complete and its report has been issued. The report indicated that individual taxpayers overstated the deductions they took for donating cash to charities by an estimated $13.8 billion for tax year 2001. Since this amount is in deductions, not tax dollars, the tax gap from the misreported cash contributions was much less than $13.8 billion, perhaps in the range of $4 billion to $5 billion annually.

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