IRS, Taxes

THE TAX GAP – Part 1

In recent years, the IRS has become  very concerned with the “Tax Gap”, which is the difference between the total  taxes that should have been remitted to the US government and the actual amount of tax revenues   the IRS collected in a timely manner.  For 2006, the Tax Gap is estimated to be  $450 billion.

According to the IRS, “The  voluntary compliance rate — the percentage of total tax revenues paid on a  timely basis — for tax year 2006 is estimated to be 83.1 percent. The voluntary  compliance rate for 2006 is statistically unchanged from the most recent prior  estimate of 83.7 percent calculated for tax year 2001.”  What this  means is that a whopping 17% of all federal taxes are initially going uncollected.

According toIRS’ Tax Gap Map, the IRS estimates that the Tax Gap is comprised of these  three segments:

  • Underreporting of taxes – $376 billion
  • Underpayment of taxes – $46 billion
  • Non-filing of returns – $28 billion

The IRS believes that through  “enforced and other late payments of tax”, $65 billion out of the $450 billion tax  gap will eventually be collected.  Even so, that still leaves a Net Tax Gap of $385  billion, or 14.5% of the total potential federal tax liability of $2.66  trillion.

Trust But Verify

The IRS has acknowledged that the  Service can’t “audit its way out of the tax gap.”  Even so, audits remain an  important compliance tool.

To make the most of their available  resources, the IRS has taken steps to streamline the audit process while trying  to better select which returns to audit.  Although a CPA representing a client  is thrilled when an audit ends as a “no change”, the IRS prefers that those tax  returns never even get selected in the first place.

Continued tomorrow!

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