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IRS Report on the Tax Gap

IRS Report on the Tax Gap

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Published by: CheatingCulture.com on Feb 17, 2011
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 Update on Reducing the Federal Tax Gapand Improving Voluntary Compliance
U.S. Department of the TreasuryJuly 8, 2009
The Internal Revenue Service (IRS) collects 96 percent of the government’s total receipts,approximately $2.7 trillion in FY 2008. The vast majority of those revenues come fromtaxpayers who voluntarily report and pay the taxes that they owe. The IRS has estimated theoverall voluntary compliance rate to be approximately 84 percent.Despite the voluntary compliance rate and vigorous enforcement by the IRS, a significantamount of revenue remains unreported and unpaid. In 2005, the IRS estimated this gross tax gapto be approximately $345 billion. After subtracting revenue obtained through enforcementactions and other late payments, the IRS estimated the net tax gap to be approximately $290billion. These estimates, which remain the most recent estimates available, were conducted usingdata collected in tax year 2001 and before.As a result of an increase in funding included in the IRS FY 2009 budget, the Department of theTreasury (Treasury) and the IRS have recently initiated intensive efforts to update the estimate of the tax gap on an ongoing basis, which will permit more regular and effective assessments.Consistent with its commitment to long-term fiscal soundness, the Administration is committedto working closely with Congress to narrow the tax gap, which imposes an unfair burden onevery American who pays taxes in full. Ongoing updates of the tax gap estimate starting in 2011will form the basis for regularly assessing progress towards that goal.Building on reports previously released, this report is intended to provide a comprehensiveoverview of efforts to close the tax gap. This report is also intended to serve as a baseline forfurther work and discussion. After briefly discussing the nature and scope of the tax gap, thisreport summarizes previous Treasury and IRS tax gap reports and identifies the areas of strategicpriority detailed in those reports. This report then summarizes the achievements, ongoing efforts,and new initiatives for achieving progress in each of those areas of strategic priority, organizedaccording to the components of the strategy to reduce the tax gap detailed in prior reports.As this report will make clear, the IRS and Treasury, working with Congress, are pursuing awide range of initiatives, including a series of legislative proposals included in theAdministration’s FY 2010 budget. The Administration recognizes the particular value of thoseefforts and initiatives that improve voluntary compliance by making the tax filing process easierand more taxpayer-friendly. While aggressive enforcement activity can also help to narrow thetax gap, it is important to recognize that increased enforcement efforts require certain trade-offs.The Administration is committed to working closely with Congress to strike an appropriatebalance to maximize revenue collection without imposing unreasonable compliance andenforcement burdens on the vast majority of individuals and businesses that fully and willinglypay what they owe.
The Tax Gap
The Tax Gap Map that follows illustrates the nature and scope of the tax gap based on data from2001 and prior years. As this map shows, noncompliance takes three forms:--2--
Underreporting (not reporting one’s full tax liability on a timely-filed return);
Underpayment (not timely paying the full amount of tax reported on a timely-filedreturn); and
Nonfiling (not filing required returns on time and not paying the full amount of tax thatshould have been shown on the required return).The IRS has separate tax gap estimates for each of these three types of noncompliance.Underreporting (in the form of unreported receipts and overstated expenses) constitutes over 82percent of the gross tax gap. The single largest sub-component of underreporting involves theindividual income tax, which represents more than 50 percent of the total tax gap. Underpaymentconstitutes nearly 10 percent, and nonfiling almost 8 percent of the gross tax gap.--3--

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