IRS Estimates American Underpayment Caused $688 Billion Tax Gap

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The Internal Revenue Service (IRS) estimates that the gross tax gap amounts to at least $688 billion, resulting from Americans’ non-filing, underpaying, and underreporting of their taxes. In a Thursday press release, the IRS characterized the tax gap increase as “a significant jump” from previous years’ estimates, though noncompliance was at around 15 percent. IRS Commissioner Danny Werfel said that the agency would apply Inflation Reduction Act (IRA) funds into compliance efforts, namely targeting those with higher incomes and wealth. “With the help of Inflation Reduction Act funding, we are adding focus and resources to areas of compliance concern, including high-income and high-wealth individuals, partnerships and corporations,” said Werfel. “These steps are urgent in many ways, including adding more fairness to the tax system, protecting those who pay their taxes and working to combat the tax gap.” Last month, the IRS announced that it would establish a 3,700-member special pass-through organization within its Large Business and International (LB&I) Division to assist in raising high-income compliance. The newest LB&I Division followed an earlier announcement pledging to “shift attention to [the] wealthy from working-class taxpayers” using an Artificial Intelligence-bolstered detection system. The IRS promised to ensure audit rates wouldn’t increase for those earning less than $400,000 annually and additional safeguards for those claiming the Earned Income Tax Credit. It also promised to began investigations into 75 of the largest industry partnerships in the nation by the end of the month. Earlier this week, the IRS told Microsoft it owed $28.9 billion in tax for 2004 to 2013, plus penalties and interest. Microsoft responded that it disagreed with the IRS determination, and that it has paid over $67 billion in taxes since 2004. Microsoft also said its taxes paid under the Tax Cuts and Jobs Act would decrease the IRS estimation by up to $10 billion. In the largest audit in U.S. history, the IRS rejected Microsoft’s attempts to channel profits to a small factory in Puerto Rico that burned Windows software onto CDs. https://t.co/Kr460cDtnf— ProPublica (@propublica) October 13, 2023 According to the IRS, one percent in compliance equals about $46 billion in collections. That 15 percent noncompliance, therefore, amounts to about $688 billion. CLICK HERE TO GET THE DAILY WIRE APP Last year’s compliance efforts yielded over $4.9 trillion in taxes, penalties, interest, and user fees. The IRS noted in Thursday’s announcement that it anticipated its enforcement efforts and taxpayers’ late payments to shrink the tax gap by $63 billion, achieving 86.3 percent compliance. The projected share of taxes paid between 2014-2016 was 87 percent. The IRS stated that the decline in compliance was due to changes in types of income and how that income is reported, not a shift in compliance behavior. Taxes owed due to nonfiling increased from $41 billion in 2017-2019 to $77 billion in 2021. Taxes owed due to underreporting increased from $445 billion in 2017-2019 to $542 billion in 2021. Taxes owed due to underpayment increased from $64 billion in 2017-2019 to $68 billion in 2021. However, the IRS noted that noncompliance may be greater than their estimates. The agency cited their shortcomings in oversight on pandemic credits, offshore activities, digital assets, cryptocurrency, corporate income tax, and income from flow-through entities and illegal activities as factors that likely rendered their $688 billion figure too low. The IRS also announced that the estimate was the first given for a single tax year, breaking away from prior practice of issuing biennial tax gap projections. Tax gap estimates and projections rely on compliance behavior derived from the most recent completed audits. This latest estimate was gleaned from the 2014-2016 tax years’ audits. The IRS estimated the tax liability to have increased by 38 percent from those years to 2021.

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