Final answer:
The IRS must write off uncollectible taxes as bad debts and can invest in better monitoring and enforcement to reduce tax evasion. Tax systems should be designed to be fair, simple, and efficient to ensure compliance and public trust.
Step-by-step explanation:
The proper treatment for uncollectible amounts of taxes involves considering them as bad debts. If the Internal Revenue Service (IRS), the agency responsible for collecting taxes, determines that a tax amount is uncollectible, they must write it off as a loss. This decreases their accounting balance for tax receivables. To handle this issue, the government may need to invest more in monitoring and enforcement to reduce tax evasion and free riding, which costs the U.S. Treasury about $400 billion each year.
On a broader scale, the government must ensure that tax systems are equitable, simple, and efficient to maintain public trust and compliance. When economic conditions worsen, leading to reduced tax collection, the government might have to borrow funds to keep operating and maintain service levels, provided there's no widespread political corruption and mismanagement of funds.