Tax Gap Looms Large, But Maybe Not For Long

I hope you have managed to stay safe and well! We focus on resolving tax issues in Prince William County and throughout the lower Northern Virginia area.

The Internal Revenue Service recently released a new set of tax gap estimates on tax years 2014 through 2016 (slow I know) showing the estimated gross tax gap increased to $496 billion, a rise of over $58 billion from the prior estimate. You can imagine that this number has just continued to grow in the past several years.

For reference, the gross tax gap is the difference between estimated ‘true’ tax liability for a given tax period and the amount of tax that is paid on time. This prompted the following: “These findings underscore the importance of ensuring fairness in our nation’s tax system,” said IRS Commissioner Chuck Rettig. “The increase in the tax gap estimates reflects that the IRS needs to do more, both in improving taxpayer service as well as working to improve tax compliance. The IRS remains committed to ensuring fairness and helping taxpayers while also working to better identify emerging compliance issues that contribute to the tax gap. The recent funding addition will help the IRS in many ways, increasing taxpayer education, significantly improving service to all taxpayers and focusing on high-income/high-wealth non-compliance in a fair and impartial manner supporting compliant taxpayers.”

Which brings us to the state of affairs that taxypayers find themselves in today. Staring down a reality that IRS will use its increased funding to close this “Tax Gap” and unfortunately, snag more than a few honest tax paying citizens in the process. After IRS compliance efforts are taken into account, the estimated share of taxes eventually paid is 87% for 2014 – 2016.

The gross tax gap comprises three components:
• Nonfiling (tax not paid on time by those who do not file on time, $39 billion),
• Underreporting (tax understated on timely filed returns, $398 billion), and
• Underpayment (tax that was reported on time, but not paid on time, $59 billion).
Based on the projections for 2017 – 2019, the estimated average gross tax gap is projected to be $540 billion per year. The associated voluntary compliance rate is projected to be 85.1 percent.

In 2021, the latest year for which data is available, the IRS currently
collected more than $4 trillion in taxes, penalties, interest and user fees.
Tax gap studies through the years have consistently demonstrated that third-party reporting of income significantly raises voluntary compliance with the tax laws. Which is why the threshold for receiving a 1099 form has dropped to $600.  “Keeping the voluntary compliance rate as high as possible ensures that taxpayers believe our system is fair,” Rettig said. “The vast majority of taxpayers strive to pay what they owe on time. Those who do not pay their fair share ultimately shift the tax burden to those people who do, which fuels the tax gap. The IRS will continue to direct our resources to help educate taxpayers about the tax requirements under the law while also focusing on pursuing those who avoid their legal responsibilities.”

Should you need assistance in calculating what your “fair share” of the tax burden is, or you’re just feeling overburdened by your tax situation and you’d rather be doing something else with your time, just remember we’re here to help you with all of your tax preparation, resolution/representation needs.  Now and in the future. Don’t put off addressing your tax situation. Feel free to contact us with any questions you may have in approaching your specific tax scenario.