FAQs

A: The Tax Gap is all the money that is legally due under the tax law but is not collected each year.

That is over $600 billion per year. No business would accept such an enormous loss, but each year the loss grows because the government fails to do enough to collect it.

The Tax Gap is a matter of many taxpayers not paying all of what they legally owe and the government allowing that huge loss to continue.

It is intrinsically unfair, since it’s a financial advantage that only non-compliant taxpayers receive.

We hear a lot about the budget deficit and the possibility of tax increases that will sooner or later be needed to pay for this deficit. Any tax increases will be paid by the people who are already paying.

Wouldn’t it make sense to collect more of the taxes that are already on the books, all from people who are not paying what they owe?

That’s only fair!!

That’s what Shrink the Tax Gap is all about. See www.shrinkthetaxgap.com for more information and sign up for our Blog from the website.

No business will pay more tax than they currently owe. Our plan does not increase any taxes.

All individuals with business income, all S-corporations and all Partnerships will prepare their returns and pay tax exactly as they do today. No additional reporting or schedules will be required for 75% of individuals with business income or businesses they own.

Individuals with business income, or who own S-corporations or Partnerships, and who have total income in the top 25% of taxpayers will receive a new 1099 Form from their bank that reports the annual total of deposits and withdrawals in their bank accounts. They and their preparers will use this information to prepare an accurate tax return, much as other taxpayers use 1099’s and W-2’s.

A schedule will be provided by the IRS for taxpayers and their preparers to reconcile this information with their tax return, which will reduce the need for the IRS to audit returns which might otherwise indicate possible discrepancies.

As we note in the September Tax Notes article, the IRS has also had several major notable large technology project success, especially in recent years with the Return Review Program (RRP), the Foreign Account Tax Compliance Act (FATCA) program and the IRS responsibilities under the Affordable Care Act. Many of the unsuccessful projects in the past were those that tried to replace legacy systems in complex step-by-step ways. Our proposal tries to minimize its dependence on integration with the IRS’s legacy systems. Of course, some integration is essential, but in the main we envision standing up new systems that will eventually just replace current systems.

The tax gap is almost $600 billion PER YEAR: money due the government under the tax code that is not paid and never collected.  Just missing.

Most of us can’t image a number that big so here’s another way of looking at it.

It is more than ALL the income taxes paid by 90% of individual taxpayers.

If you earned less than $145,000 and paid your income tax, ALL of the taxes you and your fellow taxpayers paid were completely offset by a minority of mostly high-income taxpayers who failed to pay what they owe.

It’s almost as much as the government spends for all domestic programs such as roads, bridges, airports, medical research, education and law enforcement.

Some people think we should spend more for programs like roads and medical research, others disagree. But who thinks it makes sense to finance all that spending by borrowing from the future when we don’t bother to collect so much of the taxes already on the books?

It has grown to such a huge number because little or nothing is being done reduce it.  All of IRS’s auditing activities recover less than 3% of the tax gap.

Almost all of taxes the government collects comes from taxpayers who have no choice because their tax is withheld by their employer or their income is clearly reported to the IRS on the familiar W-2 or 1099 form.

But that still leaves a large amount of income, mostly received by those in upper income brackets, which is not easily checked. Some taxpayers take advantage of that fact to underpay, accounting for the ever-increasing tax gap.

That shifts the burden to those who do pay what they owe.

The tax gap is the all the money that is legally due under the tax law but is not collected each year.

That is almost $600 billion per year. No business would accept such an enormous loss, but each year the loss grows because the government fails to do enough to collect it.

 A lot of that loss comes from businesses that fail to report all their income.

Is that fair to small businesses?

Think about this: at least 85% of the loss is from the 25% of taxpayers in the top brackets — not the small guys. And most of the businesses in the upper brackets also pay what they owe.

If you are a businessperson paying your taxes, you are carrying the load for those who don’t.

The Tax Gap measured in money: it is all the money that is legally due under the tax law but is not collected each year.

But shrinking the Tax Gap is NOT just about money.

It’s about making our federal government fairer to every American who pays their taxes.

The Tax Gap is a result of a minority of taxpayers, mostly in upper income brackets, not reporting all their income and therefore not paying all the taxes they legally owe. And every year the government allows that huge loss to continue.

It is intrinsically unfair, since it’s a financial advantage that only non-compliant taxpayers receive.

Many activities our citizens want and need, from health care to better roads and bridges can only be paid for with money from somewhere. Where will money that come from?

Wouldn’t it make sense to collect more of the taxes that are already on the books, all from people who are not paying what they owe?

The Tax Gap is all the money that is legally due under the tax law but is not collected each year. That was a $574 billion loss to the government in 2019 — an increase of over 50% in the last eight years.

That loss is now more than all of the income taxes paid by 90% of individual taxpayers.

Why doesn’t the IRS do something about that huge loss? Isn’t that their job?

Yes, it is their job. But in the last 25 years, IRS budgets aimed at reducing the Tax Gap have gone down by 28% while the number of returns has increased by 31%. Today, the entire IRS budget amounts to 2% of the ever-increasing tax gap.

Making sure the IRS has the resources it needs to do its job is smart government. It’s also logical, fair and a great investment.

Our plan to Shrink the Tax Gap would produce 15 to 20 times its cost in increased revenue, all without raising taxes one dollar from people who already simply pay what they owe. It would also make it faster and easier for taxpayers who need to interact with the IRS to resolve problems.

That’s what Shrink the Tax Gap is all about.

The Tax Gap is a result of a minority of mostly upper income taxpayers not reporting all their income and therefore not paying all the taxes they legally owe. And every year the government allows that huge loss to increase.

If taxes are increased, they will be paid by the people who are already paying.

Wouldn’t it make sense to collect taxes that are already on the books, all from people who are not paying what they owe?

And there is a practical way to collect a big part of that tax gap — we estimate a gain of $1.4 trillion over 10 years.

That is not a partisan issue. It is just common sense.

If taxes in any form are increased, they will be paid by the people who are already paying, increasing the tax gap even more.

Let’s make it a priority to collect taxes from people who owe but don’t pay before we rush to raise taxes on people who already pay what they owe.

This approach will be better for every compliant taxpayer, no matter what bracket you are in.

And there is a practical way to collect a big part of that tax gap — we estimate a gain of $1.4 trillion over 10 years.