The “tax gap” is a term coined to describe the amount of tax taxpayers fail to pay each year. Also known as noncompliance taxpayer debt, it is the gap between what taxpayers legally owe to the government and what is actually paid and collected from taxpayers for the year.
The primary reasons behind the tax gap are tax evasion and tax avoidance, both of which contribute to a loss of government revenue. Tax evasion refers to the illegal act of intentionally evading taxes through underreporting income or inflating deductions. Tax avoidance, on the other hand, involves exploiting legal loopholes to minimize tax liability.
Three main issues contributing to the gap are non-filing, underreporting, and underpayment. Non-filing means a taxpayer just did not file their tax return. While underreporting taxpayers may have filed timely, they typically did not pay their full tax burden due to the underreporting of income or the overreporting of deductions on their returns. Underpayment relates to those taxpayers filing their returns properly but simply pay less than what is legally owed. The sum of non-filing, underreporting, and underpayment equals the country’s gross tax gap.
The consequences of the tax gap are complex. First, it leads to a significant loss of government revenue, which in turn affects the funding of essential public services such as healthcare, education, and infrastructure development. Secondly, the tax gap furthers income inequality as those who evade or avoid taxes disproportionately benefit from their reduced tax burden and therefore shift the burden to honest taxpayers. This perpetuates a cycle of inequality, hindering social and economic activities.
The current average yearly tax gap for the United States is about $381 billion each year. The tax gap is an issue governments face worldwide. Reducing the tax gap overall is good for the economy as it increases the government’s ability to provide and fund public service programs, infrastructure upgrades, and military security.
Closing the tax gap requires taxpayers to make more timely and accurate tax filings and payments. To that end, the IRS could improve reporting requirements guidelines and forms to be less ambiguous. Policymakers can develop effective measures to ensure fair and equitable taxation, thereby bolstering government revenue and public services.
The Biden administration implemented an approach to reduce the gap which includes allocating roughly $80 billion to the IRS to fund increased audits for high-income taxpayers, those earning over $225,000 per year and businesses. Biden’s plan calls for financial institutions to report consumer account information, which would be similar to W-2 reporting for wages and income . Reporting information would include total deposits and withdrawals for the year and adding two new boxes on Form 1099-INT for reporting interest income. The Inflation Reduction Act, created under the Biden administration, is intended to reduce expenses for millions of American families. The goal of the act is to stabilize prices by reducing inflation rates and increase the supply of goods and services through capital investments in infrastructure and support for small businesses. The bill also promotes more affordable healthcare, education, and housing through specific tax credits. Since passage of the Inflation Reduction Act, millions of Americans, especially the elderly and those on Medicare, have been able to receive more affordable health care. The Inflation Reduction Act also prompts projects aimed to clean the environment and stimulate economic activity.
Next Steps – Get Help
For further questions regarding the tax gap or personal tax liability, you may contact the IRS Hotline at 1-800-829-1040.
For questions or assistance regarding a tax liability, please reach out to the qualified tax attorneys at RJS LAW for a free consultation at either RJS LAW’s website or by phone at 619-595-1655.
Written by Judith Jeremie