The tax gap is a topic that has found its way into the news recently. Pundits are looking to how the Biden Administration’s ambitious (yet costly) infrastructure and COVID 19 relief bills will get funded. Although the latest revision of the infrastructure bill no longer contains increased funding for the IRS to close the tax gap, some pundits believe increased funding for the IRS may find its way into another bill.
What is the Tax Gap?
The tax gap is the difference between taxes owed to the IRS and the taxes it collects. Basically it includes taxes that are underreported and unpaid to the IRS. One IRS estimate puts the tax gap at over $400 billion per year. Common causes cited for the tax gap are the IRS being understaffed and lacking the technology it needs to administer the world’s largest tax system. Legislative proposals seek to increase funding to the IRS so it can hire more agents and update its technology.
But what does all this mean for the everyday American? How will IRS efforts to close the tax gap affect Americans and their businesses? This article will discuss some of the potential consequences of the IRS’ efforts to close the tax gap.
More Individual and Business Tax Audits
As the IRS expands its ranks, this will inevitably lead to more audits. A large part of the tax gap consists of underreported taxes. More audits will lead to the IRS catching more taxpayers underreporting their income. It may also create a change in culture where taxpayers and tax preparers will become more reluctant to take “aggressive” or even fraudulent positions on tax returns.
There will also be more new Revenue Agents in the field auditing individual and business tax returns. Not only will more returns be subject to traditional audits by human Revenue Agents, but Artificial Intelligence (AI) will be placing more returns (perhaps all returns) under increased scrutiny. The IRS can also use AI to gather and analyze information from third parties, such as banks, and use that information to track down taxpayers who are under reporting their taxes in ways that are now not feasible or even imaginable.
As the IRS expands it ranks, it will have more employees working on collecting taxes. This will inevitably lead to swifter collections to close the tax gap.
The IRS has already streamlined its collection which can be a blessing and curse for the taxpayer who owes back taxes. IRS Automated Collections (ACS) is currently handling individual income tax balances of up to $1 million. Previously, ACS did not handle balances that exceeded $250,000. ACS previously required taxpayers who owed more than $100,000 to provide a financial statement. Now, only taxpayers who have balances over $250,000 are required to provide a financial statement. (Taxpayers claiming hardship still need to provide a financial statement regardless of the amount owed).
The upside to ACS’ new polices for taxpayers is that setting up payment plans are easier. Many taxpayers who owe the IRS over $250,000 will not have to worry about being investigated by a Revenue Officer (an IRS Field Agent whose job it is to collect back taxes and enforce tax compliance). Most taxpayers will not need a financial statement to set up a payment plan and taxpayer these plans may be created with a phone call to ACS or by scanning their IRS notice with a smart phone.
The downside to the IRS’ new approach is the IRS is moving quicker. Many taxpayers previously had several months or even years before the IRS would initiate collection activity. Now, those same taxpayers will not have time on their side. Those taxpayers will have less time to bring themselves back into tax compliance and to begin paying their past due taxes.
The legislative proposals to close the tax gap give the IRS more boots on the ground and better technology to carry out its mission of enforcing the tax laws and collecting taxes. The legislative proposals do not, however, diminish taxpayers’ rights before the IRS.
While we will all benefit from the IRS closing the tax gap, the IRS cannot or should not trample on taxpayers’ rights when doing so. Individuals and businesses who find themselves facing the new IRS may need professional representation well versed on taxpayers’ rights now more than ever. RJS Law and its Tax Attorneys have decades of combined experience helping taxpayers with IRS tax problems.
Published by Joseph Cole, JD, LL.M.