IRS: Underreporting Boosts ‘Net Tax Gap’ to $385 Billion

The Internal Revenue Service calls it the “tax gap” – the amount of federal tax dollars unpaid – and it amounts to near 15 percent, or $385 billion, according to the very latest IRS study.
And that’s the net tax gap, the amount after $65 billion was collected through audits.
The biggest factor is underreporting by those citing business income on the tax forms for individuals.
The second and third contributing factors for the gap are taxpayers who do not file a tax return at all or underpay what they owe. Whilst some may be able to apply for the Fresh Start Program to annul these owed amounts, others should be reconsidering their situation carefully.
The just-released study focuses on the year 2006. It found an 85.5 percent compliance rate that year, only slightly down from the 86.3 percent compliance rate for 2001, when the last tax gap study was done. Both figures represent the net tax gap.
The gross tax gap, before audits: $450 billion (83.1 percent compliance) in 2006, compared with $345 billion (83.7 percent compliance) in 2001.
“On a relative basis, the tax gap is largely in line with the growth in total tax liabilities,” the IRS said. “In addition, some growth in the tax gap estimate is attributed to better data and improved estimation methods.”
The tax gap can be divided into three components: non-filing, underreporting and underpayment.
As was the case in 2001, the underreporting of income was the biggest contributing factor to the tax gap in 2006.
Under-reporting across taxpayer categories accounted for an estimated $376 billion of the gross tax gap in 2006, up from $285 billion in 2001.
Tax non-filing accounted for $28 billion in 2006, up from $27 billion in 2001.
Underpayment of tax increased to $46 billion, up from $33 billion in the previous study.
Underreporting by small businesses and those citing business income on the individual tax return is the biggest single component, representing more than a quarter of the gap.

Year 2001

(billions)

Year 2006

(billions)

Total Tax Liabilities

$2,112

$2,660

Gross Tax Gap

$345

(83.7%
compliance)

$450

(83.1%
compliance)

Enforcement and Late Payments

$55

$65

Net Tax Gap

$290

(86.3%
compliance)

$385

(85.5%
compliance)

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