In a recent unveiling, the Internal Revenue Service (IRS) shed light on a historic tax gap of $688 billion for the tax year 2021. This revelation marks the highest ever recorded shortfall in tax payments, signaling a pressing issue that demands immediate action.
Understanding the Tax Gap
The tax gap essentially reflects the difference between the taxes owed by individuals and businesses and the amount that’s actually collected. For 2021, the gross tax gap is primarily comprised of underreported income ($542 billion), followed by non-filing ($77 billion), and underpayment ($68 billion). This discrepancy doesn’t account for late payments and IRS enforcement efforts, which are projected to bring in an additional $63 billion, adjusting the net tax gap to $625 billion for the year.
A Rising Concern
Comparatively, this gap showcases a significant rise of $192 billion from prior estimates for tax years 2014-2016, and a $138 billion increase from estimates for 2017-2019. The IRS attributes much of this increase to economic growth, along with other factors that have yet to be fully estimated like noncompliance associated with digital assets and offshore activities.
IRS’s Responsive Measures
To tackle this burgeoning issue, the IRS plans to bolster its audit and enforcement efforts. With new rules coming into play in 2023, especially governing payment apps like Venmo and PayPal, the IRS expects an influx of income reporting from gig workers which could play a part in bridging the tax gap. The focus is not solely on increased scrutiny but also on improving taxpayer services and deploying new technology tools for better compliance.
A Long-term Impact
The efforts to close this gap are crucial to ensuring a fair tax system and safeguarding the interests of compliant taxpayers. It’s a step towards fostering a culture of voluntary compliance, which, as per the IRS, is vital for the nation’s economic framework.
Final Word
The widening tax gap may have several implications for taxpayers:
- Increased Scrutiny: The IRS may intensify audit and enforcement efforts which could mean more scrutiny on tax returns and financial activities.
- Reporting Changes: With new rules, especially for gig economy workers and digital transactions, individuals may need to adapt to new reporting requirements.
- Service Improvements: The IRS’s plan to improve taxpayer services may lead to a better experience for taxpayers.
- Fairness and Compliance: Efforts to close the tax gap aim to create a fairer tax system, which benefits compliant taxpayers by ensuring everyone pays their fair share.
The IRS’s proactive steps to address the tax gap underline the importance of compliance and the collective responsibility to uphold the integrity of the nation’s tax system. The sizable tax gap is a stark reminder of the challenges ahead, but with enhanced enforcement and better reporting mechanisms, there’s a path towards reducing this gap significantly.
