As noted on the TaxProf weblog, the Treasury Inspector General for Tax Administration (TIGTA) has released a report on the IRS's determination of the "tax gap", the amount by which tax liabilities are underpaid, underreported or simply not reported at all. TIGTA's report, "Some Concerns Remain About the Overall Confidence That Can Be Placed In INternal Revenue Service Tax Gap Projections," concludes that the IRS estimate of the tax gap is weak. According to the IRS, the total tax gap was $341.7 billion in February 2006, comprised of 31.7 billion underpayments, 25 billion nonfilings, and 285 billion underreporting. (See Figure 1 in the study, which presents these three broad areas and itemizes within those areas with indications of the freshness of the data or the relative weakness because of lack of new information.) TIGTA notes that some information is simply missing: the IRS is currently conducting a study of S Corps flow throughs, and without that study, it is not clear what degree of noncompliance occurs in this area. Other areas that should be studied have not been because of lack of resources. Without adequate resources to do studies, the information will continue to be "stale and less useful." Id. at 13.
TIGTA conducted a survey of 1000 IRS managers to see what they thought of the accuracy of the tax gap information. 95 percent say that compliance is a problem and one-third think the IRS does not have enough data. Id. at 3. Not a reassuring picture of the tax collection division of the world's sole superpower.
TIGTA also looked to other sources of information that might provide some idea of the degree of error in the IRS tax gap figure. One source is the Bureau of Economic Analysis, which showed an "income gap" of $834.4 billion in 2001. That number, multiplied by the tax rate, would provide another estimate of the tax gap. At 20%, the tax gap would be only $166.8 billion, considerably less than that estimated by the IRS.
The uncertainty about compliance, or lack thereof, is a genuine problem for the IRS. Congress should fund the staff needed by the IRS to conduct regular studies of compliance and enforcement issues. Without accurate information, the IRS cannot determine the greatest pressure points for tax evasion.
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