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Tax Gap Flap

2 min readBy: Brian Phillips

Lawmakers looking for a way to raise taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revenue without increasing taxes have decided the pot of gold rests with closing the so-called “tax gapThe tax gap is the difference between taxes legally owed and taxes collected. The gross tax gap in the U.S. accounts for at least 1 billion in lost revenue each year, according to the latest estimate by the IRS (2011 to 2013), suggesting a voluntary taxpayer compliance rate of 83.6 percent. The net tax gap is calculated by subtracting late tax collections from the gross tax gap: from 2011 to 2013, the average net gap was around 1 billion. .” The tax gap is the difference between what the IRS says people owe and what they pay. Estimates of the tax gap are roughly $300 billion annually.

A number of proposals to address the problem have been floated, but no one has any solid estimates as to how much revenue they would recoup. Further, no one is sure what the added burden of stepped-up enforcement, administrative reform, or stringent reporting standards would cost the federal government or the vast majority of taxpayers who already comply. Nevertheless, Senate Finance Committee Chairman Max Baucus smells blood in the water.

The IRS Commissioner Mark Everson told the Senate Budget Committee last month that “we will never be able to auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. our way out of the tax gap.” Still, Baucus wants the IRS to shoot for $30 billion per year. That’s no small potatoes, to be sure. But Everson warns, “we will actually have to complicate the tax laws to go after the non-compliant taxpayers.”

Nina Olson, the National Taxpayer Advocate, says “that an estimated 94% of noncompliance is the result of honest mistakes by tax filers” who already find the tax code too complicated. It appears the “cure” would exacerbate the disease.

And speaking of cures…

Baucus’ counterpart on the Senate Finance Committee, Sen. Chuck Grassley, recently said:

[T]he way people talk around here, they view that the tax gap is a “cure-all.” Have to pay for AMT? Tax gap. Want to expand spending on health care? Tax gap. Balance the budget? Tax gap. Given the amount of faith people have put into it, tax gap has suddenly become one of those magic elixirs the peddlers used to sell in the old west. “It will cure what ails you” was the slogan the slick salesmen used to say. And so the tax gap has become the elixir for all fiscal problems. I’m surprised folks don’t think the tax gap can cure baldness.

Given the number of bald or balding Senators, there may be something to that.

At any rate, something’s fishy. No one’s sure how much we could recoup, or how much it would cost to recoup it, and the proposals to go after it could make the problem worse — yet they push on.

What Baucus called the “crisis of unpaid taxes” barely scratches the surface of our unfunded entitlement liabilities.

Now there’s a crisis.