IRS Report Suggests US ‘Tax Gap’ Is Widening

by Leroy Baker, Tax-News.com, New York

31 March 2005

The preliminary results of a major research project assessing compliance with the US tax laws, released by the Internal Revenue Service on Tuesday, revealed that the vast majority of American taxpayers abide by the tax rules. However, the figures also suggest that non-compliance is on the increase.

The findings show that the gross tax gap - essentially the difference between what taxpayers are obliged to pay and what they actually pay - exceeds $300 billion per year. The results indicated that the gap increased slightly to between $312 billion and $353 billion in tax year 2001 compared to a previous estimate of $311 billion based on earlier studies.

According to the IRS, enforcement activities, coupled with late payments, recover about $55 billion of the tax gap, leaving a net tax gap of between $257 billion and $298 billion.

“This research confirms that the vast majority of Americans pay their taxes honestly and accurately,” IRS Commissioner Mark W. Everson observed.

However, Everson added that the latest figures indicated that non-compliance remained a growing problem for the agency, which is attempting to plug the tax gap through a range of new enforcement initiatives.

“We are ramping up our audits on high-income taxpayers and corporations, focusing more attention on abusive shelters and launching more criminal investigations,” he explained.

The initial tax gap findings come from a three-year study called the National Research Program (NRP), which audited 46,000 individual income tax returns for 2001. The findings show a modest deterioration in tax compliance among individual taxpayers since the last study was conducted in 1988.

Under-reporting of income is said to account for more than 80% of the tax gap, with non-filing and underpayment constituting around 10% each of the total.

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