One of the most fair and efficient ways for policymakers to raise revenue would be to close some portion of the “tax gap.” The tax gap is the difference between taxes paid and taxes owed by law. In this primer, we answer the following questions:
- How Big is the Tax Gap?
- Why Is There a Tax Gap?
- Which Unpaid Taxes Contribute to the Tax Gap?
- Who Contributes to the Tax Gap?
Full article: https://www.crfb.org/blogs/primer-understanding-tax-gap
“Former IRS Commissioner Charles Rossotti estimates that $574 billion in legally owed taxes went uncollected in 2019; new research indicates this may be an understatement. In fact, IRS Commissioner Charles Rettig said today that figure could exceed $1 trillion.”
“A funding plan needs to be pursued in tandem with an effort to strengthen the legislative and regulatory regime around reducing the tax gap, including to fill in the gaping holes in required information reporting.”
Further, the revenue raised by each incremental dollar of enforcement funding can be greatly increased if additional funding is paired with technology upgrades and, critically, enhanced reporting requirements. Rossotti, who is also a technology expert, estimates returns over a decade of 15 to 20 times the cost and has noted that “this large ratio of gain is driven by the combination of modestly increased third-party reporting and a modernized compliance and taxpayer communications program supported by advanced technology.”
Full Report: https://www.cbpp.org/research/federal-tax/rebuilding-irs-would-reduce-tax-gap-help-replenish-depleted-revenue-base
“The nation responded with significant resources to address the public health and economic impacts of the COVID-19 virus. But as the public health goals are achieved, and the economy recovers, the government must turn its attention to developing a strategy to deal with our debt and put the government on a long-term sustainable fiscal path,” said Gene L. Dodaro, Comptroller General of the United States and head of the GAO. “GAO also proposes a number of immediate steps to help address the situation.
–> Narrowing the tax gap. Reducing the difference between taxes owed and those paid could increase tax revenues by billions of dollars annually. The net tax gap is currently estimated to be $381 billion annually.
Full report: https://www.gao.gov/assets/gao-21-275sp.pdf
Enforcement of Tax Laws
Congressional Actions Needed
“Given that the tax gap has been a persistent issue, reducing the tax gap will require targeted legislative actions. Specifically, Congress should consider … expanding third-party information reporting. For example, reporting could be required for certain payments that rental real estate owners make to service providers, such as contractors who perform repairs on their rental properties, and for payments that businesses make to corporations for services.”
Full report: https://files.gao.gov/reports/GAO-21-119SP/index.html
“Even a partial increase in third-party reporting can positively affect voluntary compliance. For example, a 2019 National Bureau of Economic Research working paper estimates that increasing information reporting requirements even modestly for income that is currently subject to little or no information reporting requirements, including sole proprietor income, could generate roughly $115 billion in revenue in 2020.”
Full report: https://www.gao.gov/assets/720/711228.pdf
“TIGTA estimates that if the IRS identified, created, and worked just the nonfiler and underreporter cases with Form 1099-K income of $1 million or more for businesses (Form 1120) and $100,000 or more for individuals, the IRS could potentially assess an additional $5.723 billion in taxes.”
Full report: https://www.treasury.gov/tigta/auditreports/2021reports/202130002fr.pdf
“TIGTA….. identified 879,415 high-income nonfilers that did not have a satisfied filing requirement, with an estimated tax due of $45.7 billion. …”
“The IRS did not work 369,180 high-income nonfilers, with estimated tax due of $20.8 billion. …..In addition, the remaining 510,235 high-income nonfilers, totaling estimated tax due of $24.9 billion, …..will likely not be pursued as resources decline.”
“The IRS removed high-income nonfiler cases from inventory, resulting in 37,217 cases totaling $3.2 billion in estimated tax dollars that will not likely be worked by the IRS.”
Full report: https://www.treasury.gov/tigta/auditreports/2020reports/202030015fr.pdf