TIGTA Questions Tax Gap Stats

The most current “tax gap” figure is $450 billion — a little too nicely rounded, isn’t it? Seems like a wild guess, right?

Every year Americans collectively owe hundreds of billions of dollars in taxes.  But the IRS is successful in collecting only part of that.  The “tax gap” is the difference between these two figures.  It is the difference between taxes owed and taxes paid without resorting to enforced collections.  Of course it is much more than a “gap” these days; it is more like a chasm.  Tax gap data is some of the most important data there is for an agency whose primary duty is to figure out who isn’t paying and get them to pay.

As important as this information is, the IRS calculates and reports the tax gap only once every 5 years.  The most recent tax gap analysis was completed in January 2012, which provided tax gap data for tax year 2006 ($450 billion).  If you see a problem with this delay in information, you’re not the only one.  Recently the Treasury Inspector General for Tax Administration (TIGTA) issued an audit report criticizing the IRS’ tax gap analysis procedures.

One of the criticisms was related to the turnaround time on these reports.   Granted, tax gap figures are not easy to come by.  We’re talking about some very difficult calculations that are based on pretty convoluted data.  Indeed, part of the reason why the IRS only does this report every 5 years is because it takes nearly that long to gather and report on the data.  However, TIGTA would like to see tax gap reports churned out more regularly.  The more current the data, the more likely it is to assist with tax policy and administration.

As you can imagine, there are probably a thousand different versions of the tax gap (a thousand different ways to calculate it).  That’s what I mean by “convoluted data.”  But, as if it weren’t complicated enough already, TIGTA also recommended that the IRS include separate estimates for revenues lost in the “informal economy” (i.e., drug deals and small cash transactions) and offshore tax evasion.  Also, the IRS has been asked to change the way it calculates the corporate tax gap.

So, really it’s the same old story with the IRS: they’re being asked to do more, do it more quickly, and do it with less money.  Poor guys.

Tax Gap Widening in California

I’m posting this video partly for the rare glimpse inside the California Franchise Tax Board.  Can somebody who works at FTB help me to understand what all those aqua colored contraptions are for?  It looks like they may be used to sort mail, but for all I know, they are the machines that actually assist in processing our state returns.

The actual story reported in this video clip is that more and more Californians are not paying their taxes and that this impacts all residents of the state either directly or indirectly.  The tax gap in California has nearly doubled in the past few years, according to the report.  Jerome Horton, spokesperson for FTB, is quoted saying that the state sees people who fail to pay their taxes as criminals.  The report naively lumps honest taxpayers with unpaid tax debt into the same category as tax evaders.  I would like to say that this the reporter’s error, but it definitely appears that Horton shares this view.

Newest Tax Gap Figures are Astounding

On Friday the IRS released its “tax gap” figures for tax year 2006. The previous measurement was five years earlier in 2001.

The tax gap is the difference between what taxpayers should be paying and what is actually paid.  And while the newest figures may make you choke, they are not too much worse than 2001.

The gross tax gap in 2006: $450 billion.

The gross tax gap in 2001: $345 billion.

What contributes to the tax gap is failing to file, failing to report all income, and simply failing to pay. The biggest contributing factor is the underreporting of income.

A comprehensive explanation of the 2006 tax gap can be found on the IRS website.