The White House has put out a litany of statements and press releases claiming that it is taking steps to “close the tax gap.” You might be wondering what this actually means. What is the tax gap and why is it so important to eliminate it? How does the government plan to do this? What do these new steps mean for your taxpayer status?
The tax gap is how the government refers to the difference between the total amount of tax dollars they estimate they are owed if taxpayers filed properly and the total amount of tax dollars they actually receive. When the government fails to recover the proper amount of tax liability, they expect in a given year, they are losing money. Closing the tax gap requires the government to increase funding for civil and criminal investigatory tax measures to find & attempt to recover this lost money.
The Biden administration is publicly and repeatedly claiming that they are attempting to close the tax gap, so it logically follows that the rate of criminal tax investigations and civil, eggshell, and reverse eggshell audits should substantially increase. To that end the IRS is hiring 86,000 additional IRS agents nationwide and their budget has substantially increased for the first time in several tax years.
If you are concerned about a potential hike in IRS civil and criminal tax investigative measures to combat the growing tax gap, you should secure our help. The experienced dually licensed Tax Attorneys and CPAs at The Tax Law Offices of David W. Klasing stay on top of current IRS trends so that we can predict how they may affect our current and future clients. To prepare your finances for a higher level of government oversight and reduce or eliminate the risk of criminal tax prosecution, call us today at (800) 681-1295 or schedule online here.
The tax gap is created when taxpayers purposely underreport their taxable income, thereby fraudulently paying less in taxes to the IRS. The tax gap is typically measured annually and is assessed based on the taxable income that the IRS expects to be honestly reported in a given year.
In March of 2021, the National Bureau of Economic Research (NBER) published a report entitled, “Tax Evasion at the Top of the Income Distribution: Theory and Evidence.” The report found that evasion at the highest income levels was at such a high rate that administrative intervention would be necessary to rectify the tax gap. According to the report, the top 1% of annual earners do not report an estimated 21% of their income annually. Members of the top 1% of earners make an average of $1.7 million per year. Statistically, over $340,000 of this income goes unreported to the federal government. While 1% may not seem substantial, this constitutes well over one million taxpayers in the United States.
The report suggests administrative action in the form of an increase in the budget and functional capability of the IRS to pursue unreported income in the top tier of taxpaying earners. Per the report, an increase in the IRS’ budget would alleviate the need to raise tax rates.
Taking cues from the report and advice of treasury officials, the Biden administration has made its intentions clear that it plans to address the tax gap through several rounds of budget increases for its tax watchdog agency.
Over the next 10 years, the Biden administration hopes to increase the base budget of the IRS by $80 billion. The plan includes an immediate $900 million cash infusion into the IRS’ Criminal Investigations department for the purposes of heightened criminal tax enforcement.
The additional funds will help the IRS in several ways. Critically, it will allow the agency to modernize by adding the technological capabilities necessary to pursue more sophisticated, complex evasion schemes that had previously been undetectable. The IRS will also use the budget increase to hire additional staff and conduct more civil eggshell and reverse eggshell audits. Casting a wider net is a critical measure for the IRS in catching noncompliance with the tax code.
The fresh cash will also find its way into the courtroom, as the IRS plans to use their increased capabilities to fight audit appeals and levy more criminal tax prosecutions for the deterrent effect this has on the public in general. Increased prosecution rates will lead to more financial penalties imposed and will also serve as a warning to potential tax evaders. The federal government hopes that publicizing their new, aggressive mode of operation will deter taxpayers from attempting to shortcut the system, thereby closing the tax gap.
The federal government is not taking these steps just to punish taxpayers. It hopes to make its lost revenue back. Proponents of the IRS budget increase suggest that the additional measures could yield the government an extra $175 billion per year. The only way that the government lives up to this hype is if they are able to find noncompliance and punish it, so they will be looking for every opening they can find.
Before it is too late, you should ensure that you are compliant with all aspects of the tax code. This means a thorough compliance investigation of your past filings and more rigorous due diligence with any tax preparation in the future.
If you are concerned that some of your past tax filings with the IRS may not be compliant and are worried about more frequent audits & criminal tax investigations, you may want to consider a voluntary disclosure. A voluntary disclosure is how a taxpayer through tax counsel voluntarily reports mistakes and errors in past filings to the IRS without incurring criminal tax liability. Often, disclosers will face proportionally smaller penalties than they would have had their noncompliance been discovered through enforcement action. You should never attempt a voluntary disclosure with the IRS without the seasoned assistance of a Tax Attorney as it can create even more trouble for you if the procedure is handled incorrectly.
Whether you have been compliant with the tax code or not, the IRS is coming. Hire the award winning dually licensed Tax Attorneys and CPAs at The Tax Law Offices of David W. Klasing to ensure that you and your family are protected against IRS civil and criminal tax audits and criminal tax investigations. Call our offices today at (800) 681-1295 or schedule a reduced rate initial consultation online here.