In September 2019, the Internal Revenue Service (IRS) released tax gap estimates for tax years 2011 through 2013. The numbers indicate that the gap has stayed the same as the previous tax years. However, the IRS will continue to pursue taxpayers who are not compliant. Here’s what you need to know.
What Is a Tax Gap?
The tax gap refers to the difference between the taxes paid and taxes that should have been paid. From 2011 to 2013, the gross tax gap averaged $441 billion per year. After factoring for late-payments and enforcement efforts, the net tax gap was about $381 billion per year.
Annually, the IRS collects about $3 trillion in taxes, penalties, interest, and user fees. Together, these numbers indicate that taxpayers voluntarily pay 83.6% of their taxes on time. In tax years 2008 to 2010, the number was the same, with taxpayers submitting 83.8% of their owed taxes voluntarily. Similarly, in the tax year 2001 and tax year 2006, the rate was 83.7% and 82.3%, respectively.
What Is Voluntary Tax Compliance?
The United States has a voluntary tax compliance system. This set-up means that taxpayers are personally responsible for filling out and submitting accurate tax returns. As indicated by the numbers above, the majority of taxpayers pay their tax liabilities on time. Moreover, the percentage of taxes paid on time has been virtually unchanged for nearly 20 years. However, some people take advantage of the voluntary nature of the tax system to avoid paying taxes, and the IRS is serious about addressing this issue.
What Increases Tax Compliance?
In addition to assessing the tax gap, the IRS also looks at issues that contribute to increasing compliance among taxpayers. When people do not pay their taxes, they unfairly shift the tax burden onto the people who are voluntarily paying their taxes on time, and ultimately, that can make people feel like the tax system is unfair.
According to IRS Commissioner Chuck Rettig, the agency believes that having the highest possible compliance rates improves the perception of the IRS as fair and in turn, increases the voluntary compliance rate even more.
How the IRS Increases Compliance Rates
Beyond that, the IRS uses a variety of measures to increase compliance rates, including the following:
- Third-party reporting — For example, if you earn money from an employer, the employer reports your earnings to the IRS. As a result, the agency notices if you don’t indicate that income on your personal tax return. Because people are aware of third party reporting, they tend to be compliant.
- Subjecting Income Payments to Withholding — Taxpayers also tend to be more compliant when taxes are automatically withheld from their payments. For instance, if someone’s employer withholds income tax from their paycheck, they are often more likely to be compliant than someone who has to report and pay their income tax from their earnings.
- Education and outreach efforts — The IRS reaches out to taxpayers in a variety of ways to let them know about the importance of filing and paying their taxes on time.
- Pursuing delinquent taxpayers — Although the U.S. tax system is considered voluntary, the IRS essentially can force people to pay their taxes. The agency uses a range of collection activities, including tax liens, garnishing wages, seizing assets, and more to compel taxpayers to cover their tax liabilities.
If compliance increases by just 1%, the IRS collects an additional $30 billion in revenue. To put that number into perspective, consider that the government spends about $69 billion through the Department of Veteran’s Affairs on medical care for veterans and medical research, and the government also spends about $70 billion on food stamps for low-income Americans. In other words, increasing compliance by 2% essentially covers either of these significant programs.
What Should You Do If You Have Tax Debt?
If you have unpaid tax debt, you are not alone. About 17% of taxes go unpaid every year. However, the IRS is serious about increasing compliance. If you have a tax debt, you need to be aware that this agency can collect debts more aggressively than any private entity. At the same time, however, the agency is also willing to work with delinquent taxpayers, but navigating the system on your own can be scary and confusing.
Do you have tax debt? Are you looking for help setting up a payment plan? Do you want to eliminate penalties, reduce interest, or potentially even lower your liability with the IRS? Then, contact us today. We can connect you with a tax debt specialist who will help you work with the IRS to find the best, most affordable solution for your tax debt.
You can read more about this report here: https://www.irs.gov/pub/irs-pdf/p1415.pdf