The Internal Revenue Service (IRS) has recently updated its tax gap projections for the years 2020 and 2021, revealing an increase in the projected annual tax gap to a staggering $688 billion. The tax gap represents the difference between the amount of tax owed and the amount actually paid. In this article, Optima Tax Relief breaks down the key findings from the IRS’s updated projections.
The Widening Tax Gap
The updated IRS projections indicate that the tax gap in the United States has been steadily widening. According to the IRS, this gap has grown from $496 billion in 2014 to a projected $688 billion for 2020 and 2021. The increase highlights the challenges the IRS faces in enforcing tax compliance and collecting the revenue that is legally owed.
Components of the Tax Gap
The tax gap is comprised of three main components, each contributing to the overall shortfall:
- Underreporting: This component represents taxpayers who underreport their income, either unintentionally or deliberately, by misrepresenting their earnings, deductions, or credits. Underreporting was the cause of $542 billion in tax year 2021, up from $445 billion in tax years 2017-2019.
- Non-Filing: Some taxpayers fail to file their tax returns altogether, contributing to the tax gap. This can result from a variety of reasons, including non-compliance, oversight, or financial hardship. Non-filing was the cause of $77 billion in tax year 2021, up from $41 billion in tax years 2017-2019.
- Underpayment: This component encompasses taxpayers who file their returns but do not pay the full amount of tax owed, often due to financial difficulties. Underpayment was the cause of $68 billion in tax year 2021, up from $64 billion in tax years 2017-2019.
Causes and Consequences
Several factors contribute to the widening tax gap. These include the increasing complexity of the tax code, the growth of the gig economy, offshore tax evasion, and inadequate IRS resources for enforcement and collection. The consequences of a growing tax gap are significant and can lead to reduced government revenue, budgetary constraints, and potential tax burden shifts to compliant taxpayers.
IRS Efforts to Address the Tax Gap
To combat the tax gap, the IRS has outlined several key strategies:
- Modernization: The IRS is actively modernizing its systems and infrastructure to improve its ability to detect underreporting and non-compliance.
- Enhanced Enforcement: The agency is investing in increasing enforcement efforts, including hiring more agents and examiners and using data analytics to identify tax evasion.
- Public Awareness: The IRS is working to educate taxpayers about their responsibilities and the consequences of non-compliance.
- Legislative Proposals: The IRS has proposed legislative changes aimed at closing tax loopholes and addressing areas of tax law that are vulnerable to abuse.
The widening tax gap, as indicated by the IRS’s updated projections, presents a significant challenge for the U.S. government. To bridge this gap and ensure that taxpayers fulfill their obligations, the IRS is investing in modernization, enforcement, public awareness, and legislative proposals. These efforts aim to enhance tax compliance, reduce tax evasion, and ultimately strengthen the country’s revenue base. Addressing the tax gap is crucial for maintaining the integrity of the tax system and ensuring a fair distribution of tax burdens.
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