Understanding the $600 Billion Annual Federal Tax Gap

A Time magazine article of March 27, 2013, "The $600 Billion the IRS Can’t Collect," by Christopher Matthews, suggests that the federal tax gap is much larger than the IRS estimates. The IRS estimates the gross tax gap at about $450 billion per year brought down to a net gap of $385 through enforcement actions. 

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.

These are interesting observations because they indicate the tax gap is due to more than complexity of the tax system and challenges of tracking cash sales. 

$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.]

While there is budget debate in Congress on whether tax reform should be revenue neutral or also raise revenue for deficit reduction, I hope that there is at least consideration of how reform should result in a lower tax gap.  For more, see my 3/17/13 post on this topic.

What would you suggest be done to reduce the tax gap?

Understanding the $600 Billion Annual Federal Tax Gap 2013-04-01T08:18:00-07:00 Rating: 4.5 Diposkan Oleh: Unknown