Wednesday, February 15, 2012

Tax gap grows to $450 billion; compliance rate holds steady

Doeren Mayhew 
Tax gap grows to $450 billion; compliance rate holds steady
The "gross tax gap," or the amount of tax owed to the U.S. government that is not paid on time, climbed from $345 billion in Tax Year (TY) 2001 to $450 billion in TY 2006, the IRS has reported. (Because of the time it takes to collect unpaid taxes and to analyze the data, 2006 is the most recent year for which the statistics necessary for the report were available.)

The growth in the tax gap over five years was concentrated in underreporting and underpayment, which jointly accounted for nine out of 10 tax gap dollars, according to the agency. The IRS also reported that despite the increase in the tax gap, the voluntary compliance rate for TY 2006 was statistically unchanged from TY 2001.

The net tax gap, as opposed to the tax gap, is the amount of tax liability that is never collected, even after the IRS completes its enforcement actions. In TY 2001, the gross tax gap was $345 billion and the net tax gap was $290 billion. In TY 2006, the gross tax gap climbed to $450 billion and the net tax gap grew to $385 billion. The IRS reported that enforcement activities and late payments reduced the TY 2006 net tax gap by $65 billion, compared to $55 billion in TY 2001.

The overall voluntary compliance rate in TY 2006 was 83.1 percent compared to 83.7 percent in FY 2001. According to the IRS, the two rates are essentially the same because the TY 2006 rate is within the range of error of the TY 2001 rate.

Underreporting of income remained the largest contributing factor to the tax gap, the IRS explained. Underreporting accounted for an estimated $376 billion (84 percent) of the $450 billion TY 2006 gross tax gap. Underreporting grew 32 percent between TY 2001 and TY 2006, the IRS reported.

Individuals. According to the IRS, individuals underreported by an estimated $235 billion in TY 2006 compared to $197 billion in 2001.

Corporations.  The IRS estimated that the tax gap for large corporations (assets over $10 million) was $48 billion in TY 2006 and $19 billion for small corporations in TY 2006.

Employment taxes.  Underreporting of self-employment taxes contributed $57 billion to the TY 2006 tax gap, the IRS reported. Taxpayers underreported FICA taxes by $14 billion in TY 2006.

Nonfiling made up $28 billion of the TY 2006 gross tax gap, the IRS explained. Nonfiling by individuals accounted for nearly 90 percent of all nonfiling in TY 2006.

What does the future hold?
The IRS did not speculate on what an eventual examination of TY 2011 would reveal another five years from now. However, it did mention the attention that IRS Commissioner Shulman has given to the tax gap since taking office in 2008, emphasizing that virtually all major initiatives launched by the IRS since then "have been designed to focus on the tax gap.

Please feel free to call Doeren Mayhew for a more targeted explanation of these issues.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

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