The Great Tax Gap

By Sandy LeDuc
LeDuc and Sikowitz

If you feel as though you are single-handedly supporting the federal government you may be right. The IRS’s National Research Program has just released its first estimate of lost tax revenue since 1988. The study is based on 2001 income tax and concludes that as much as 19% of total tax that legally should have been collected was not. That was $345 billion. In today’s dollars it may be as much as $400 billion. That should get even a politician’s attention.

If you are asking yourself how you carve out your 19%, most of us have neither the stomach nor the opportunity for this tax savings. Most is due to gross income slipping in under the radar screen as opposed to improper deductions.

This problem takes the form of domestic workers who are not reported by employers, business workers who do not receive 1099s or W2 forms, cash business revenue (both legal and illegal) that doesn’t get recorded, improper tax shelters, “misinterpretation” of the law, and all sorts of reporting errors. Some was due to failure to file returns or just the inability of taxpayers to pay their tax.

The IRS Commissioner Mark Everson points out that tax simplification will eliminate some of the problem by reducing errors and preventing intentional misreporting. He is not alone in this belief. The current Internal Revenue Code and regulations are tens of thousands of pages long and just plain unworkable. Compliance is complicated and expensive and, frequently, common sense is missing from the equation.

The Commissioner also promises he will make use of the study to inform both the process and the targets of audits which are scheduled to be stepped up.

To be effective, the IRS staff, which has been less than effective due to a shortage in experienced workers, should be beefed up with more seasoned auditors.

What will it mean to taxpayers? Businesses will be burdened with new efforts to increase information reporting so that the computer audit process can be expanded. The last time there was a comprehensive expansion in information reporting—1986—we experienced a couple of years of irritation and process development headaches until compliance became routine. It has been an effective tool for the IRS.

Perhaps the rest of us can expect our tax bill to be reduced. Sure we can!

Spring 2006 -Volume 16, Number 2

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