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National Research Program

National Research Program

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Published by McKenzieLaw
In the National Research Program article, tax attorney Robert E. McKenzie discuss the IRS tax gap estimate.
In the National Research Program article, tax attorney Robert E. McKenzie discuss the IRS tax gap estimate.

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Categories:Types, Business/Law
Published by: McKenzieLaw on Dec 24, 2009
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12/30/2009

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National Research Program (NRP)By: Robert E. McKenzieIRS Study Provides Tax Gap Estimate3.100
In February, 2006, Internal Revenue Service officials announced that they have updated theirestimates of the Tax Year 2001 tax gap based on the National Research Program (NRP). Theupdated estimate of the overall gross tax gap for Tax Year 2001 – the difference between whattaxpayers should have paid and what they actually paid on a timely basis – comes to $345 billion.This figure falls at the high end of the range of $312 billion to $353 billion per year, an estimatereleased in March, 2005.
 Net Tax Gap Tops Quarter-Trillion Dollars3.110
IRS enforcement activities, coupled with other late payments, recover about $55 billion of thetax gap, leaving a net tax gap of $290 billion for Tax Year 2001. “The vast majority of Americans pay their taxes accurately and are shortchanged bythose who don’t pay their fair share,” said IRS Commissioner Mark W. Everson. “Themagnitude of the tax gap highlights the critical role of enforcement in keeping oursystem of tax administration healthy.” The complexity of the tax law is also a significant factor in causing the tax gap, which can beseriously addressed only in the context of fundamental tax reform and simplification. While no taxsystem can ever achieve 100 percent compliance, the IRS is committed to taking all reasonable stepsto improve compliance through increased and better targeted enforcement and through increased
 
taxpayer service and outreach efforts. 
Sources of Misreporting3.120
Though the net misreporting percentage varies by category of income, the rates reflectthat compliance is highest where there is third-party reporting or withholding. Simply stated,compliance is highest where there is third-party reporting. 
For example,
one percent of all wage, salary, and tip income is misreported,contributing an estimated $10 billion to the tax gap. In contrast, nonfarm sole proprietorincome, which is reported on a Schedule C and is subject to little third-party reportingor withholding, has a net misreporting percentage of 57 percent, contributing about $68billion to the tax gap.
 Understanding the Tax Gap3.130
The Internal Revenue Service developed the concept of the tax gap as a way to gaugetaxpayers’ compliance with their federal tax obligations. The tax gap measures the extent to whichtaxpayers do not file their tax returns and pay the correct tax on time.
 
 
Components of the Tax Gap3.140
The tax gap can be divided into three components: 
·
 
nonfiling,
·
 
underreporting and
·
 
underpayment. Nonfiling occurs when taxpayers who are required to file a return do not do so on time.Underreporting of tax occurs when taxpayers either understate their income or overstate theirdeductions, exemptions and credits on timely filed returns. Underpayment occurs when taxpayers filetheir return but fail to remit the amount due by the payment due date. 
Three Components3.150
Of these three components, underreporting of income tax, employment taxes and other taxesrepresents about 80 percent of the tax gap. The single largest sub-component of underreportinginvolves individuals understating their incomes, taking improper deductions, overstating businessexpenses and erroneously claiming credits. Individual underreporting represents about half of thetotal tax gap. Individual income tax also accounts for about half of all tax liabilities. 
Underreporting Is Largest Component3.160
Underreporting noncompliance is the largest component of the tax gap. Preliminary estimatesshow underreporting accounts for more than 80 percent of the total tax gap, with non-filing andunderpayment at about 10 percent each. Individual income tax is the single largest source of theannual tax gap, accounting for about two-thirds of the total. For individual underreporting, more than80 percent comes from understated income, not overstated deductions. 

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