The Internal Revenue Service has just released a new set of “tax gap” estimates for tax years 2014 through 2016. The report shows that the estimated gross tax gap increased to $496 billion which is a rise of over $58 billion from the prior estimate.
Take this report as a warning. It’s a sign to tax professionals that the IRS will boost its enforcement of the tax laws, and the information in the latest report will point the IRS to go after certain taxpayers and certain types of income.
WHAT IS THE TAX GAP
First, let’s be clear about what the tax gap is. The gross tax gap is the difference between estimated ‘true’ tax liability for a given period and the amount of tax that is paid on time. Yes, it is a measure of tax evasion.
IRS Commissioner Chuck Rettig said “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.” This means that the IRS will work to find out how to collect more taxes and where there are problems with tax compliance.
The IRS has been measuring the tax gap over two periods, the years of 2011-2013 and 2014-2016. The IRS says the estimated tax liability increased by more than 23 percent during those two periods.
WHAT PERCENTAGE OF TAXES IS GETTING PAID?
The IRS is also reporting that most taxes are getting paid properly. The IRS says that about 85% of taxes are paid voluntarily and on time, which is in line with recent levels. The new estimate of 85% is a slight improvement from the estimate of 83.7 percent that was found in a revised Tax Year 2011-2013 estimate.
THE IRS COLLECTS MORE AFTER COMPLIANCE EFFORTS
The IRS says that more taxes are paid after the IRS increases compliance efforts. After IRS compliance efforts are taken into account, the IRS says the estimated share of taxes eventually paid is 87% for 2014-2016.
That’s a clue — and a big clue — that the IRS is going to be increasing compliance measures even more.
WHERE DOES THE TAX GAP COME FROM?
The IRS has determined from its surveys that there are several key parts of the economy that are responsible for the tax gap. According to the IRS, 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).
TAX GAP PROJECTIONS FOR 2017-2019
The IRS has made some projections about the tax gap for the years 2017-2019. Based on the projections for 2017-2019, the estimated average gross tax gap is projected to be $540 billion per year. The IRS estimates that 85.1% of taxes are being paid voluntarily and correctly.
If you take IRS compliance efforts into account, then the tax gap for 2017-2019 drops to $470 billion, and payments increase to 87% and again this is another clue that the IRS is certain to be increasing compliance efforts going forward.
COMPLIANCE VS FAIRNESS
Now comes a big question. If the IRS is going to continue to push compliance, is the IRS still going to be fair? Well the IRS says that even though it plans to reduce the tax gap, “the IRS will continue to fairly enforce the tax laws.”
But let’s face it, collecting more money is what the IRS intends to do. As the IRS says, “the voluntary compliance rate of the U.S. tax system is vitally important for the nation. A one-percentage-point increase in voluntary compliance would bring in about $40 billion in additional tax receipts.”
The IRS is making it clear that it will continue to direct resources to help educate taxpayers about the tax requirements under the law “while also focusing on pursuing those who avoid their legal responsibilities.”
SO WHAT SHOULD YOU DO?
The message is simple and clear. The IRS is going to boost compliance with the tax laws and it is going to boost efforts to collect the taxes that are owed. You should talk to a tax professional how this might impact you. If you have tax debt take action now to resolve it.
We offer a free consultation about how to deal with your tax debt. Options include challenging the debt if the IRS made an error. Other options include payment plans, the IRS Fresh Start Initiative and the IRS Offer In Compromise Program.
Our tax resolution experts are happy to discuss these options with you free of charge. I’ll put you in touch with tax attorneys or CPAs or Enrolled Agents to help you resolve your case. Just give me a call at my private number: 949-570-9908
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Recently Congress gave the IRS a new $80-billion dollar warchest to boost compliance and the IRS will have 5,000 new employees by the end of this year. Resolve your tax debt now. Let our experts help you. Make the phone call and get your free consultation with a tax expert. 949-570-9908