IRS Updates Tax Gap Estimates

by Glen Shapiro, LawAndTax-News.com, New York

16 February 2006

Internal Revenue Service officials announced on Tuesday that they have updated their estimates of the Tax Year 2001 tax gap, based on the findings of the National Research Program (NRP).

According to the IRS, the updated estimate of the overall gross tax gap for Tax Year 2001 – the difference between what taxpayers should have paid and what they actually paid on a timely basis – comes to $345 billion. This figure falls at the high end of the range of $312 billion to $353 billion per year, an estimate released last March.

IRS enforcement activities, coupled with other late payments, recovered about $55 billion of the tax gap, leaving a net tax gap of $290 billion for Tax Year 2001.

“The vast majority of Americans pay their taxes accurately and are shortchanged by those who don’t pay their fair share,” announced IRS Commissioner Mark W. Everson, continuing:

“The magnitude of the tax gap highlights the critical role of enforcement in keeping our system of tax administration healthy.”

The IRS believes that the complexity of the tax law is also a significant factor in causing the tax gap, which can be seriously addressed only in the context of fundamental tax reform and simplification.

One important administrative step already taken to improve compliance has been the updating of the audit selection system with the NRP information. The newer statistics enable the IRS to audit more efficiently and improve the detection of underreported income and overstated deductions, credits, etc.

To gain an estimate of taxpayer compliance, the IRS launched the NRP, a three-year study of tax year 2001 returns of individuals. The study involved the review and examination of about 46,000 randomly selected returns, which was completed by the fall of 2005.

As with prior estimates, the updated estimate of the tax gap shows that the largest component of this gap, more than 80 percent, comes from underreported taxes.

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