{"id":26314,"date":"2023-10-12T17:41:01","date_gmt":"2023-10-12T17:41:01","guid":{"rendered":"https:\/\/isafespend.com\/personal-finance\/taxes\/irs-says-tax-gap-for-2021-expected-to-be-688-billion\/"},"modified":"2023-10-12T17:41:02","modified_gmt":"2023-10-12T17:41:02","slug":"irs-says-tax-gap-for-2021-expected-to-be-688-billion","status":"publish","type":"post","link":"https:\/\/isafespend.com\/?p=26314","title":{"rendered":"IRS Says Tax Gap For 2021 Expected To Be $688 Billion"},"content":{"rendered":"<div>\n<p>The good news: Most taxpayers pay what they owe in full and on time. A report released by the IRS indicates that the nation&#8217;s tax compliance rate is holding at 85%, more or less the same as in prior years.<\/p>\n<p>The not so good news: New tax gap projections for tax years 2020 and 2021 showing the projected gross tax gap increased to $688 billion in tax year 2021, a significant jump from previous estimates.<\/p>\n<h2 class=\"subhead-embed color-accent bg-base font-accent font-size text-align\">Tax Gap Defined<\/h2>\n<p>The tax gap refers to the difference between the amount of taxes owed to the government as compared to what the government actually collects. The tax gap can be further broken down into two pieces: the gross tax gap and the net tax gap.<\/p>\n<p>The gross tax gap is the amount of true tax liability that is not paid voluntarily and timely. The net tax gap is the amount between the gross tax gap and tax that will eventually be paid late or as a result of IRS enforcement activities.<\/p>\n<p><fbs-ad position=\"inread\" progressive=\"\" ad-id=\"article-0-inread\" aria-hidden=\"true\" role=\"presentation\"><\/fbs-ad><\/p>\n<h2 class=\"subhead-embed color-accent bg-base font-accent font-size text-align\">Latest Data<\/h2>\n<p>The IRS estimates the total true tax liability for 2021 to be $4.565 trillion. Of that $3.877 trillion was paid voluntarily and one time. That difference\u2014$688 billion\u2014represents the tax gap.<\/p>\n<p>The tax gap breaks down into three pieces: non-filing (tax not paid on time by those who do not file on time, $77 billion), underreporting (tax understated on timely filed returns, $542 billion), and underpayment (tax that was reported on time, but not paid on time, $68 billion).<\/p>\n<p>The IRS still hopes to collect an additional $63 billion on tax year 2021 returns through late payments and IRS enforcement efforts. That results in a projected net tax gap of $625 billion.<\/p>\n<p>The specific numbers, by type of tax, look like this:<\/p>\n<ul>\n<li>Individual income tax: $475 billion<\/li>\n<li>Corporation income tax: $37 billion<\/li>\n<li>Employment tax: $112 billion<\/li>\n<li>Estate and excise tax: $1 billion<\/li>\n<\/ul>\n<p>According to the IRS, the new estimate reflects a rise of more than $192 billion from the prior estimates for tax years 2014-2016 and a rise of $138 billion from the revised projections for tax years 2017-2019. This marks the first year tax gap projections have been provided for single tax years and also marks the beginning of tax gap updates on an annual basis.<\/p>\n<p>\u201cThis increase in the tax gap underscores the importance of increased IRS compliance efforts on key areas,\u201d said IRS Commissioner Danny Werfel. \u201cWith 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.\u201cThese 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.\u201d<\/p>\n<h2 class=\"subhead-embed color-accent bg-base font-accent font-size text-align\">Not All Noncompliance<\/h2>\n<p>The IRS notes that the tax gap estimates and projections cannot fully account for all types of noncompliance. For example, it may be difficult to assign dollar figures to noncompliance related to offshore activities, issues involving digital assets and cryptocurrency as well as corporate income tax, income from flow-through entities and illegal activities because data are lacking. And, the IRS notes that the tax gap associated with illegal activities is outside the scope of tax gap estimation for a good reason\u2014the objective of government is to eliminate those activities, which would eliminate any associated tax.<\/p>\n<h2 class=\"subhead-embed color-accent bg-base font-accent font-size text-align\">Fixing the Problem<\/h2>\n<p>According to the IRS, tax gap studies through the years have consistently demonstrated that third-party reporting of income significantly raises voluntary compliance with the tax laws. For example, computerized document matching in the early 1980s\u2014where the IRS matched data reported by third-party financial institutions to data reported by taxpayers\u2014significantly reduced underreporting of dividend and interest income. And the requirement that taxpayers supply Social Security numbers for dependent children resulted in marked differences in the numbers of dependents claimed on returns.<\/p>\n<p>Additional changes to reporting requirements, including those related to online and cryptocurrency assets, should be expected to boost those numbers.<\/p>\n<p>Voluntary compliance rises even higher when income payments are also subject to withholding. That\u2019s the number on your Form W-2. Expecting taxpayers to remit voluntarily without withholding (think about your Form 1099) historically results in a lower level of compliance. For example, the data from 2014\u20132016 shows that misreporting of wages subject to substantial information and withholding (again, think Form W-2) is 1% compared to 55% for nonfarm proprietor income, which is subject to little or no information reporting.<\/p>\n<p>Inflation Reduction Act resources\u2014the extra funding provided by Congress\u2014will also allow the IRS to help improve voluntary compliance by improving taxpayer services and offering new technology tools for additional compliance work. In 2022, the latest year for which data is available, the IRS collected more than $4.9 trillion in taxes, penalties, interest and user fees.<\/p>\n<h2 class=\"subhead-embed color-accent bg-base font-accent font-size text-align\">Liability Is Growing<\/h2>\n<p>While it\u2019s true that voluntary compliance is in line with recent levels, the overall dollar numbers owed have gone up. Between tax years 2014-2016 and tax year 2021, the estimated tax liability increased by about 38%, roughly the same increase as the gross and net tax gaps. Much of these increases in tax liability and the tax gap can be attributed to economic growth.<\/p>\n<h2 class=\"subhead-embed color-accent bg-base font-accent font-size text-align\">Why Does It Matter?<\/h2>\n<p>Clearly, the voluntary compliance rate can be a basic issue of fairness. There\u2019s a sense that we should all be doing our part\u2014that\u2019s why high-profile and newsy tax avoidance cases are so public.<\/p>\n<p>But there\u2019s also a practical, dollar-based reason to encourage compliance: according to the IRS, a one-percentage-point increase in voluntary compliance would bring in about $46 billion in additional tax receipts.<\/p>\n<h2 class=\"subhead-embed color-accent bg-base font-accent font-size text-align\">More Info<\/h2>\n<p>Federal Tax Compliance Research: Tax Gap Projections for Tax Years 2020 and 2021, Pub. 5869<\/p>\n<\/div>\n<p>Read the full article <a href=\"https:\/\/www.forbes.com\/sites\/kellyphillipserb\/2023\/10\/12\/irs-says-tax-gap-for-2021-expected-to-be-688-billion\/\" target=\"_blank\" rel=\"noopener\">here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The good news: Most taxpayers pay what they owe in full and on time. A report released by the IRS indicates that the nation&#8217;s tax compliance rate is holding at 85%, more or less the same as in prior years. The not so good news: New tax gap projections for tax years 2020 and 2021<\/p>\n","protected":false},"author":1,"featured_media":26315,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[56],"tags":[],"class_list":{"0":"post-26314","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-taxes"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.12 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>IRS Says Tax Gap For 2021 Expected To Be $688 Billion | iSafeSpend<\/title>\n<meta name=\"description\" content=\"The good news: Most taxpayers pay what they owe in full and on time. 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