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.