IRS: Tax Gap Stands at Nearly Half a Trillion

Earlier this month, the Internal Revenue Service (IRS) released an updated analysis of the tax gap – the difference between the total amount in federal taxes owed by people and businesses, and the total paid. What did the IRS find? In 2006, the most recent year for which information is available, Americans underpaid their taxes by $450 billion. Extended over a decade, this could represent a shortfall of trillions, robbing the country of needed funds for infrastructure and other investments.

The last time the IRS put together an analysis of the tax gap – issued in 2006 and based on 2001 data – the agency estimated a gap of $345 billion. Despite a $105 billion increase in the gap between 2001 and 2006, the rate at which individuals and businesses voluntarily comply with the tax code has "remained essentially unchanged," says the IRS, due to an increasing population.

For those that do not voluntarily comply, the IRS attempts to recover unpaid taxes through enforcement efforts. The IRS estimates that Uncle Sam eventually recovered $65 billion in unpaid taxes from 2006, bringing the net tax gap down to $385 billion. Similarly, according to the IRS, the government recovered $55 billion worth of unpaid taxes from 2001.

With deficit reduction being all the rage on Capitol Hill, one would think that Congress might invest in IRS enforcement activities to help shrink the tax gap further, especially seeing as the government gets a four to five dollar return on investment. One would be wrong in this assumption, however, as congressional Republicans, and even a few misguided Blue Dog Democrats, have recently stepped up their attacks on the IRS and its budget.

Last fiscal year (FY), House Republicans inserted a policy rider in the continuing resolution that funded the federal government through FY 2011 that specifically prevented the IRS from hiring additional tax enforcement agents. The rider exacerbated an already serious staffing situation at the agency, which, as Bruce Bartlett notes, has lost almost 32,000 employees since 1992 "despite an increase in the population of the United States of 53 million over that period." Think about that for a moment.

Moreover, as conservatives' efforts translate into a weaker IRS that can't fully enforce the tax code, it gives a green light to would-be tax cheats who might otherwise fully comply with their tax-paying responsibilities if they knew they would get caught evading their taxes. This vicious cycle ends up increasing the tax gap even further.

While you can never fully close the tax gap, Congress must increase funding for the IRS, especially for enforcement activities. Even if we could only eventually recover a quarter of the tax gap from 2006, that's $113 billion that could go to better roads, better schools, lower taxes, or even lower deficits.

Image by Flickr user kenteegardin at www.SeniorLiving.org, used under a Creative Commons license.

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