Tax Gap Over Past Decade Has Increased

Tax Gap Estimates For Tax Years 2008-2010

The tax gap – the difference between what taxpayers owe and what they pay – widened over the past 10 years, the IRS has reported. At the same time, the voluntary compliance rate has declined slightly. However, and I'm not sure what this means: according to the IRS, the drop in the voluntary compliance rate was not attributable to changes in taxpayer behaviors.

Commerce Clearing House Take away. "The IRS makes inefficient use of what resources it does have," Contributing to the inefficiency, it's been observed, is a failure on the part of IRS supervisors. "They all read from the same script and give the agents free reign to waste whatever resources they feel like. "  All I can say is "wow".

The Tax Gap

The gross tax gap, the IRS explained, is the amount of true tax liability that is not paid voluntarily and timely. The IRS reported that the gross annual tax gap for TY 2008-2010 is estimated to be $458 billion. That's billion dollars. And I'm sure that's accurate given some of the statements I've heard from people about tax return preparation matters. 

Enforcement activities and late payments resulted in an additional $52 billion in tax paid, which resulted in a net tax gap for the 2008-2010 period of $406 billion per year. In comparison, the gross tax gap for TY 2006 was $450 billion and the net tax gap for TY 2006 was $385 billion.

The gross tax gap is composed of three components: (1) non-filers, (2) under-reporting, and (3) just not paying (underpayment). The IRS reported that the estimated gross tax gaps for these components are $32 billion, $387 billion, and $39 billion, respectively. Further, the gross tax gap estimates can be grouped by type of tax. The estimated gross tax gap for individual income tax is $319 billion, $91 billion for employment taxes, $44 billion for corporate income tax, and $4 billion for estate and excise taxes combined.

"It is not possible to eliminate the tax gap completely," IRS Commissioner said at a news conference in Washington, D.C. "Getting to 100 percent tax compliance would require a huge increase in audits, and significantly greater third-party reporting and withholding than we have now. Realistically, that wouldn’t work, because the burden on taxpayers and the strain on IRS resources would be too great."

And as one could imagine, the tax gap typically moves with changes in the economy. Gross collections were $2.52 trillion in FY 2006, $2.69 trillion in FY 2007 and $2.75 trillion in FY 2008. Reflecting the economic downturn, gross collections declined to $2.35 trillion in FY 2009 and remained at that level in FY 2010.

Voluntary compliance rate

The IRS reported that the voluntary compliance rate is estimated at approximately 81.7 percent. After accounting for enforcement and late payments, the net compliance rate is 83.7 percent. The prior estimated voluntary compliance rate, calculated in 2006, was 83.1 percent, the IRS reported.

Reference: taken from CCH (Commerce Clearing House) Tracker News letter, dated May 5, 2016.