Appearing before a Senate Finance Committee packed with Democrats frustrated with the administration's record on this "tax gap," Paulson said that aggressive steps to collect taxes on underreported income would create a backlash from law-abiding taxpayers.

"There is a big part of the tax gap that we simply won't be able to reach without adding draconian and painful requirements on all taxpayers," Paulson said.

The tax gap issue has taken on a high profile in recent years as lawmakers search for ways to close the budget deficit without raising taxes. The most recent data on the tax gap - from 2001 - reveals $290 billion in taxes owed but not paid.

But the administration's budget for next year contains proposals that would generate just $29 billion over the next decade - closing the tax gap by 1 percent.

The administration's efforts drew brickbats from Democrats.

"The American people have a right to expect that their government will have a goal and a credible plan to reduce this tax gap," said finance Committee Chairman Max Baucus, D-Mont. "And it is the Treasury's job to fix it. Yet the administration does not appear to take the job seriously."

Paulson also warned Democrats that their pending budget blueprint contains unrealistic assumptions that closing the tax gap would allow them to extend many of President Bush's tax cuts - which mostly expire at the end of 2010 - without raising taxes elsewhere in the code.

"The tax gap is simply not a pot of gold," Paulson said. "Nor should it be viewed as an easy solution to existing challenges, such as the alternative minimum tax."

Baucus gave the assembled Treasury officials three months to come up with a plan on how to improve taxpayer compliance from the current rate of 85 percent, up to 90 percent, by 2017. Paulson said he couldn't guarantee a workable plan.

Paulson said the bulk of uncollected taxes come from unreported and underreported income, much of which comes from small businesses, the self-employed, farmers and ranchers.

Ways to find out unreported income, such as new paperwork requirements to track transactions with service providers would be too burdensome on those who follow the rules already, Paulson said. So are other ideas, such as eliminating cash transactions in favor of electronic ones and requiring banks to report client information to the IRS so the agency can check business income.

"The cost of compliance for individuals and businesses - most of whom already pay what they owe - would far outweigh the gains," Paulson said.