TOP DRAWER ARTICLE

The Tax Gap
by
HL Carpenter

So you’re getting ready to file your tax return and pay your taxes, just like your friends and neighbors are ... or maybe are not.

Here’s a message from the IRS: America has a tax gap. And that gap – which is the difference between what taxpayers should have paid in taxes and what they actually paid – is huge.

How huge? Estimates for tax year 2001, after the collection of overdue payments, put the net gap at $290 billion.

The numbers come from a three year study known as the National Research Program (NRP), which involved auditing tax returns selected at random. Based on the results, the gap is caused by people who don’t file returns, and those who file but either report less income than they actually have or underpay the tax they owe. The biggest problem - over 80 percent of the tax gap - was due to underreporting. Unincorporated business owners tend to lead in this area.

What does the tax gap mean to you? One unfortunate outcome is increased audits and enforcement activity by the IRS, which could bring your return under scrutiny. Another, more positive, change might be increased pressure on Congress to simplify the tax code. The IRS admits complexity is a big factor in creating the gap.

On the plus side, the IRS also says the NRP study shows the vast majority of Americans do follow the rules. That may be some consolation as you race to meet this year’s April 17 filing deadline.

Originally published March 2006.

Last update: December 30, 2009