What is the “Tax Gap”?
The IRS justifies many of its actions based on “closing the tax gap”.
The term “tax gap” is used by the IRS to describe the concept of tax compliance, and the amount they estimate is under reported each year. The larger the tax gap the greater the non-compliance. Non-compliance is when tax payers don’t file their tax returns or don’t pay the correct amount of tax on time.
The IRS seems to believe that amount to be approximately $350 billion and that the non-compliance rate is about less 16% than the true tax that should rightfully be collected from US citizens.
Whether the IRS is asking Congress for more money to hire more Revenue Officers (collectors) or to modernize their computer system, their reasoning is always that it will help “close the tax gap”.
The IRS claims it recovers about $55 billion of the tax gap through enforced collection and audits.
The tax gap can be divided into three areas according to the IRS.
- - nonfiling
This occurs when tax payers don’t file a required tax return on time, or at all.
- - underreporting of of tax
This occurs when tax payers either understate their income or overstate their deductions, exemptions, or credits.
- - underpayment of tax
This occurs when tax payers file their tax return on time, and properly, but fail to pay the amount due by the due date.
In my opinion Congress loves the concept of the tax gap because it justifies allowing the IRS to aggressively collect tax revenue.
Putting aside what the Congress thinks, and whether the tax gap is as large as the IRS says it is or not, one cold fact remains – the IRS is getting more and more aggressive about collecting taxes, and the “tax gap” is just another justification they use to hammer delinquent tax payers.
Collecting the Tax Gap Money
If there really is a Tax Gap, then what methods does the IRS use to hunt down this huge amount of unpaid taxes?
The methods are pretty simple:
- matching program
- more filing requirements on returns
- more audits
- filing of more tax liens, and filing them more quickly
- less mercy (there’s no such thing as a “kinder and gentler” IRS)
The IRS is putting great effort into making it ever harder to remain hidden, whether you are a non-filer, or whether you have filed an incorrect tax return.
Until next time,
Jeff Fouts, Tax Attorney
Bio: I live with my wife and two kids in a small town (Ellijay, pop. 1,584) where I am an IRS tax lawyer . I’ve represented tax clients against the IRS in all 50 states, and in 21 foreign countries and have 18 years experience, thousands of satisfied clients and an A+ BBB Rating.
I’m a member in good standing of the bar and have active memberships in courts from Georgia to Washington D.C., including the U.S. Supreme Court and U.S. Tax Court. I deal directly with my clients and have a small, tireless staff of tax specialists.
You can put off your tax problem, or put us to work.