On 10/12/23 announced new tax gap projections for tax years 2020 and 2021 showing the projected gross tax gap increased to $688 billion in tax year 2021, a rise of more than $192 billion from the prior estimates for tax years 2014-2016 and a rise of $138 billion from the revised projections for tax years 2017-2019. This marks the first-year tax gap projections have been provided for single tax years and also marks the beginning of tax gap updates on an annual basis according to the IRS. The tax gap (the difference between what taxpayers owe and what they pay on time) has been a persistent problem for the U.S. government for decades and the enforcement of tax laws is on GAO’s (The U.S. Government Accountability Office) High-Risk List. GAO, known as the U.S. “congressional watchdog”, is an independent, non-partisan agency that works for Congress by examining how taxpayer dollars are spent and provides Congress and federal agencies with objective, non-partisan, fact-based information to help the government save money and work more efficiently.
The tax gap is the difference between estimated ‘true’ tax liability for a given period and the amount of tax that is paid on time
The gross tax gap covers three key areas:
- Nonfiling, which means tax not paid on time by those who do not file on time: $77 billion in tax year 2021, up from $41 billion in tax years 2017-2019.
- Underreporting, which reflects tax understated on timely filed returns: $542 billion in tax year 2021, up from $445 billion in tax years 2017-2019.
- Underpayment, or tax that was reported on time, but not paid on time: $68 billion in tax year 2021, up from $64 billion in tax years 2017-2019.
IRS states that there are limitations to the tax gap projections due to offshore assets, digital assets, pandemic credits not fully represented due to:
- The projections cannot fully represent noncompliance in some components of the tax system including offshore activities, issues involving digital assets and cryptocurrency as well as corporate income tax, income from flow-through entities and illegal activities because data are lacking.
- Projections rely upon estimates of compliance behavior. No such estimates are available for pandemic credits, so there is no reliable method of representing noncompliance for pandemic credits.
- The tax gap associated with illegal activities has been outside the scope of tax gap estimation because the objective of government is to eliminate those activities, which would eliminate any associated tax.
- For noncompliance associated with digital assets and other emerging issues, it takes time to develop the expertise to uncover associated noncompliance and for examinations to be completed that can be used to measure the extent of that noncompliance.
IRS adds focus and resources to areas of compliance concern, including high-income and high-wealth individuals, partnerships, and corporations to combat the tax gap
Although 85% of taxes are paid voluntarily and on time, on 9/8/23 the IRS announced new compliance efforts that will focus increasing scrutiny on high-income taxpayers, partnerships, corporations and promoters abusing tax rules on the books by using Artificial Intelligence and improved technology to identify sophisticated schemes to avoid taxes. The new IRS compliance efforts are geared towards having the IRS compliance teams better detect tax cheating, identify emerging compliance threats, improve case selection tools, and reduce the tax gap.
The IRS efforts include:
- Prioritization of high-income cases in the High Wealth, High Balance Due Taxpayer Field.
- Expansion of pilot focused on largest partnerships leveraging Artificial Intelligence.
- Greater focus on partnership issues through compliance letters.
- Compliance efforts to address abusive micro-captive insurance arrangements and syndicated conservation easement abuses.
- Expanded work on digital assets.
- More scrutiny on FBAR violations.
- Adress labor brokers and ensure proper employment tax withholding.
- Protect taxpayers and businesses from aggressive scams and schemes and ensure audit fairness.
- Improved equity in audits.
- Protection against identity theft.
- Working with businesses and partner groups through a variety of education and outreach efforts.
- Strengthen cybersecurity protections and information technology systems.
Get started with coming into compliance
Taxpayers ought to understand the importance of timely filing and paying their taxes, and that there are several options available to help people having trouble paying. Moreover, taxpayers should file on time, even if they can’t pay the full amount due. Then, they should pay the rest as soon as they can. The sooner it is paid, the less owed in terms of added interest and penalties.
If you are out of compliance, do not wait to come forward. There are options available for non-compliant Taxpayers if the IRS does not contact you first. Consult a specialized Tax Advisor for your best option now. ©