The tax gap is the amount of taxes owed that are not collected, due to both intentional and unintentional errors. The IRS categorizes the federal tax gap as due to three causes: "
non-filing, underreporting and underpayment."
The article refers to research that suggests:
- Taxpayers are more compliant in good economic times than in bad.
- The gap increases when taxes are lower.
$600 billion is a lot of money! Consider the following comparisons:
- It is about 60% of the roughly $1 trillion annual deficit we've had for each of the last few years.
- It is 25% of the roughly $2.4 trillion of federal taxes collected annually.
- It is about three times larger than the amount of corporate income tax collected annually.
- The National Taxpayer Advocate describes the $385 billion annual tax gap estimate of the IRS as meaning that "each household [is] effectively paying a "surtax" of some $3,300 to subsidize noncompliance by others." [Click here, page 7.]
What would you suggest be done to reduce the tax gap?
4 comments:
The 1099-K credit card sales reporting is only beginning. As a tax pro, I've now seen just a couple that have brought long-time nonreporters out of the woodwork. It will be interesting to see how it plays out.
Many working professionals are concerned about the practical difficulties of reconciling the reporting, so far suspended by IRS. Obviously, at some point, effective enforcement will require reconciliation.
For now, though, I think the initial efforts will bear fruit in tax gap reduction.
Meanwhile in the non-criminal economy, cash transactions continue to decline. That leaves nonreporters with fewer alternatives!
I think reducing the complexity of the tax law will help cut the tax gap which may be caused by intentional or unintentional errors. Complexity was reported by the Taxpayer Advocate Service (TAS) as the most serious problem of the tax law in its 2012 report to Congress: http://www.taxpayeradvocate.irs.gov/userfiles/file/Full-Report/Most-Serious-Problems-Tax-Code-Complexity.pdf.
The TAS explains that complexity makes compliance difficult. A simpler tax code; with fewer tax expenditure such as special deductions, exemptions and credits; will make it easier for taxpayers to comply, reduce the risk of errors and provide fewer opportunities for sophisticated taxpayers to evade tax.
The elimination of tax expenditures will also achieve a major goal of tax reform: broadening base and lowering rates. However, it will be hard work for the policymakers because each tax provision is supported by a group of advocates. So let’s hope TAS is correct. In the 2012 report to Congress, it concluded that the “public support for a simpler code will be strong and deep.”
The tax gap is a serious problem that is a major contributor to the current deficit, as professor Nellen pointed out. I think that the way to address the current tax gap is to both increase IRS enforcement efforts and to focus on the types of taxpayers that have resulted in the greatest collection of revenue under audit historically. I expect that they would determine they should target businesses and individuals that deal primarily in cash, and larger profitable companies and individuals that are not seeking adequate professional assistance with their tax returns. The Tax Policy Briefing Book notes that, “Sustained increases in IRS enforcement funds could lead to more revenue. If, for example, the $11 billion IRS budget proposed for 2008 were permanently raised by 20 percent, with the increase directed to enforcement, the IRS could ultimately raise $9 billion to $10 billion more per year at fiscal 2008 levels. This estimate includes direct receipts from enforcement only and not any increase in voluntary compliance in response to the increased enforcement.” (http://www.taxpolicycenter.org/briefing-book/background/tax-gap/how-much.cfm) If I owned a business and knew that if I increased my budget by about $2M, I would bring in additional revenue of an estimated $9-10 billion, it would be a no brainer for me. I think the IRS should beef up enforcement efforts and intentionally target the expected high reward audits.
Correction on the previous post - s/b $2B rather than $2M.
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