IRS: American Tax Gap Caused $688B Underpayment
The Internal Revenue Service (IRS) has revealed that Americans’ non-filing, underpaying, and underreporting of taxes has resulted in a staggering gross tax gap of at least $688 billion. In a recent press release, the IRS characterized this increase as a “significant jump” from previous estimates, with noncompliance hovering around 15 percent. To address this issue, the IRS plans to allocate funds from the Inflation Reduction Act (IRA) to enhance compliance efforts, particularly targeting individuals and corporations with higher incomes and wealth.
IRS Commissioner Danny Werfel emphasized the urgency of these steps, stating that they aim to bring more fairness to the tax system, protect law-abiding taxpayers, and combat the tax gap. As part of their efforts, the IRS announced the establishment of a special pass-through organization within its Large Business and International Division to focus on high-income compliance. This division, supported by Artificial Intelligence technology, aims to shift attention from working-class taxpayers to the wealthy.
To alleviate concerns, the IRS assured that audit rates would not increase for those earning less than $400,000 annually and promised additional safeguards for those claiming the Earned Income Tax Credit. Furthermore, the agency pledged to initiate investigations into the 75 largest industry partnerships in the country by the end of the month.
In a recent development, the IRS informed Microsoft that it owed $28.9 billion in taxes for the period of 2004 to 2013, along with penalties and interest. Microsoft disputed this determination, asserting that it had already paid over $67 billion in taxes since 2004. The company also highlighted that its taxes paid under the Tax Cuts and Jobs Act would reduce the IRS estimation by up to $10 billion.
According to the IRS, every one percent increase in compliance equates to approximately $46 billion in collections. Therefore, the 15 percent noncompliance represents a staggering $688 billion. Last year’s compliance efforts resulted in over $4.9 trillion in taxes, penalties, interest, and user fees.
The IRS anticipates that its enforcement efforts and taxpayers’ late payments will reduce the tax gap by $63 billion, achieving 86.3 percent compliance. The projected share of taxes paid between 2014-2016 was 87 percent. The decline in compliance is attributed to changes in income types and reporting methods, rather than a shift in compliance behavior.
The amount owed due to nonfiling increased from $41 billion in 2017-2019 to $77 billion in 2021. Similarly, the amount owed due to underreporting rose from $445 billion in 2017-2019 to $542 billion in 2021, and the amount owed due to underpayment increased from $64 billion in 2017-2019 to $68 billion in 2021.
However, the IRS acknowledges that their estimates may underestimate the true extent of noncompliance. Factors such as oversight on pandemic credits, offshore activities, digital assets, cryptocurrency, corporate income tax, and income from illegal activities likely contribute to a higher tax gap than reported.
In a departure from previous practice, the IRS provided a single-year estimate for the tax gap, breaking away from biennial projections. These estimates rely on compliance behavior observed in completed audits, with the latest estimate based on audits conducted between 2014 and 2016. The IRS estimates that tax liability has increased by 38 percent from those years to 2021.
What is the IRS’s strategy for reducing the tax gap and creating a more equitable tax system?
2020. This revelation fueled further discussions about how large corporations contribute to the tax gap. The IRS has been investing in advanced data analysis and AI technology to better detect tax evasion by these entities.
The IRS expressed its determination to close the tax gap by expanding its compliance efforts and ensuring that all taxpayers pay their fair share. The agency believes that by targeting higher-income individuals and corporations, it can significantly reduce the gap and create a more equitable tax system.
One of the primary motivations behind the IRS’s approach is to instill confidence in law-abiding taxpayers. The agency acknowledges that the tax gap undermines the trust of taxpayers who fulfill their obligations. Therefore, by holding tax evaders accountable, the IRS aims to restore the trust and credibility of the tax system.
To achieve these goals, the IRS will be leveraging the Inflation Reduction Act’s funds. By allocating resources to enhance compliance efforts, the agency aims to increase its capacity to identify and address tax evasion. The establishment of a special pass-through organization within the Large Business and International Division signifies the IRS’s commitment to focusing on high-income compliance.
Artificial Intelligence technology will play a crucial role in these efforts. By utilizing advanced data analysis tools, the IRS expects to improve its ability to detect irregularities and inconsistencies in tax filings. This technological advancement will enable the agency to shift its attention from working-class taxpayers to the more affluent ones.
Contrary to concerns, the IRS clarified that audit rates would not see an increase for individuals earning less than $400,000 per year. This assurance aims to alleviate fears among the middle-class taxpayers who might worry about potential audits due to the IRS’s increased focus on high-income compliance. Additionally, the agency promised additional safeguards to protect those claiming the Earned Income Tax Credit, ensuring that they can avail of their rightful benefits without undue scrutiny.
In its pursuit to close the tax gap, the IRS plans to investigate the 75 largest industry partnerships in the country. By scrutinizing the activities of these prominent entities, the agency aims to ensure compliance and hold them accountable for any underreporting or underpaying of taxes.
The recent revelation of Microsoft’s outstanding tax bill further underscored the need to address tax evasion by large corporations. The IRS’s ongoing investment in advanced technology will strengthen its ability to detect tax evasion in the corporate sector and enforce compliance more effectively.
The IRS’s initiative to close the tax gap and enhance compliance efforts represents a significant step towards creating a fair tax system. By targeting higher-income individuals and corporations, the agency aims to recover billions of dollars in unpaid taxes, creating a more equitable system for all taxpayers. With the implementation of AI technology and increased scrutiny, the IRS is working diligently to restore trust in the tax system and ensure that everyone pays their fair share.
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