IRS revises long-term estimate of ‘tax gap’

For the first time in five years, the Internal Revenue Service revised its long-term estimate of the tax gap, defined as the "amount of tax liability faced by taxpayers that is not paid on time."

In a report released Friday, the IRS put the latest figure at $450 billion as of the 2006 tax year, up from the oft-cited $345 billion figure based on 2001 data.

The compliance rate among taxpayers, however, remained steady at about 83 percent, and the agency cautioned that the estimated overall gap "is not an adequate guide to year-to-year changes in IRS programs or to year-to-year returns on IRS service and enforcement initiatives."

It also noted that underreporting income, more than failure to file or underpayment, accounts for most of the tax gap. The components of tax returns that rely on automatic reporting have the highest rates of compliance, while those without third-party confirmation have lower compliance rates and problems show up only in an audit. The widening of the gap also can be explained in part by improved data measurements, the IRS said.

"This report shows that closing the tax gap needs to be a major focus of tax reform," Senate Finance Committee Chairman Max Baucus, D-Mont., said in a statement. "In an era when we're squeezing the federal budget for every dollar of savings, we have to make every effort to recover these lost funds."

In arguing for a simpler code, Baucus said the $450 billion gap "represents a sum nearly four times the entire 2011 budget of the Department of Veterans Affairs." He cited a statement by the National Taxpayer Advocate that if the estimated $6 billion Americans spend on tax compliance were dedicated to a single industry, it would employ more than 3 million full-time employees.

The tax gap often is cited in debates over the IRS budget and enforcement staffing levels.

Colleen Kelley, president of the National Treasury Employees Union, last February praised the Obama administration's fiscal 2012 budget favoring increases for the IRS.

"This commitment by the White House reflects an understanding of the reality that every dollar invested in the IRS results in additional revenue to the treasury -- an absolutely critical element in attacking the federal deficit and the $345 billion gap between taxes owed and those paid," she said.

Following release of the new tax gap number, Kelley said: "Voluntary tax compliance rates can also be improved through increased customer service coupled with the knowledge that enforcement efforts will be heightened. The IRS brings in 93 percent of the country's revenue. It is imperative to appropriately fund IRS efforts to close the tax gap to help our nation reduce its deficit and to appropriately fund critical public services."

Other specialists, however, say tax code complexity is more of a factor than the quality of IRS enforcement efforts.

"Ultimately, every agency is resource-constrained," said Robert Kerr, senior director for government relations at the National Association of Enrolled Agents. "But we need to be careful of what the goal is. It's easy to say we want 100 percent compliance, but we wouldn't want to live in a country that achieved 100 percent compliance. So it's a question of balance."

Curtis Dubay, senior tax policy analyst at the Heritage Foundation, said, "the tax gap arises because of complexity. I don't think adding to the IRS workforce would do much. The cure is tax reform, to make the code simpler, fairer and more straightforward."

Stay up-to-date with federal news alerts and analysis — Sign up for GovExec's email newsletters.
FROM OUR SPONSORS
JOIN THE DISCUSSION
Close [ x ] More from GovExec
 
 

Thank you for subscribing to newsletters from GovExec.com.
We think these reports might interest you:

  • Forecasting Cloud's Future

    Conversations with Federal, State, and Local Technology Leaders on Cloud-Driven Digital Transformation

    Download
  • The Big Data Campaign Trail

    With everyone so focused on security following recent breaches at federal, state and local government and education institutions, there has been little emphasis on the need for better operations. This report breaks down some of the biggest operational challenges in IT management and provides insight into how agencies and leaders can successfully solve some of the biggest lingering government IT issues.

    Download
  • Communicating Innovation in Federal Government

    Federal Government spending on ‘obsolete technology’ continues to increase. Supporting the twin pillars of improved digital service delivery for citizens on the one hand, and the increasingly optimized and flexible working practices for federal employees on the other, are neither easy nor inexpensive tasks. This whitepaper explores how federal agencies can leverage the value of existing agency technology assets while offering IT leaders the ability to implement the kind of employee productivity, citizen service improvements and security demanded by federal oversight.

    Download
  • IT Transformation Trends: Flash Storage as a Strategic IT Asset

    MIT Technology Review: Flash Storage As a Strategic IT Asset For the first time in decades, IT leaders now consider all-flash storage as a strategic IT asset. IT has become a new operating model that enables self-service with high performance, density and resiliency. It also offers the self-service agility of the public cloud combined with the security, performance, and cost-effectiveness of a private cloud. Download this MIT Technology Review paper to learn more about how all-flash storage is transforming the data center.

    Download
  • Ongoing Efforts in Veterans Health Care Modernization

    This report discusses the current state of veterans health care

    Download

When you download a report, your information may be shared with the underwriters of that document.