How Large is the Federal Tax Gap, and Why Should Noncompliant Taxpayers Be Concerned?

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How Large is the Federal Tax Gap, and Why Should Noncompliant Taxpayers Be Concerned?

If you follow tax news, business, or politics, you’ve probably heard about the tax gap and ways it could be addressed. For those who are unfamiliar with the term, the tax gap, according to the IRS’ definition, is simply “the difference between [a taxpayer’s] true tax liability for a given tax year and the amount that is paid on time.” Every time a taxpayer fails to timely pay federal taxes for which he or she is liable, the national tax gap widens – and, with an estimated average tax gap of around $441 billion per year (based on data from 2011 through 2013), it’s easy to see why the government places such a strong emphasis on intercepting tax offenders. In an effort to narrow the tax gap, the IRS aggressively pursues noncompliant taxpayers, imposing hefty penalties (and interest charges) even for non-willful errors. If you have unfiled tax returns, owe unpaid income taxes, or owe other outstanding tax debt, it is in your best interests to consult an experienced IRS tax attorney, like those at the Tax Law Office of David W. Klasing – before you become the target of a tax fraud investigation.

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IRS Tax Gap Statistics

Earlier this year, the IRS released an updated set of tax gap estimates – which, perhaps unsurprisingly, revealed that “the nation’s tax compliance rate is substantially unchanged from prior years.” According to IRS estimates, the average gross tax gap is approximately $441 billion per year, based on the period from 2011 through 2013. Using the same data, the IRS calculated that roughly “83.6% of taxes [are] paid voluntarily and on time” (implying that roughly 16.4% are not), which the Internal Revenue Service described as being “in line with recent levels.” Consistent with the IRS’ observation that compliance rates have remained fairly steady, “The new estimate [of 83.6%] is essentially unchanged from a revised Tax Year 2008-2010 estimate of 83.8%.”

Failure to timely pay federal tax liabilities is not the only contributing factor to the tax gap. According to an IRS analysis, the tax gap is attributable to three major causes or components:

  1. Non-Filing – Part of the tax gap is caused by failures to file federal income tax returns.
  2. Underpayment – Part of the tax gap is caused by failures to make full tax payments.
  3. Underreporting – Part of the tax gap is caused by failures to report all of the taxpayer’s income.

Not only are non-filing of tax returns, non-payment of taxes, and underreporting of income top contributors to the tax gap – they are also commonly the catalysts for IRS tax audits and criminal tax investigations followed by prosecutions for felony Spies Evasion and Evasion of Payment. If you have these or other compliance errors in your tax history, you are strongly advised to consult with an experienced IRS audit attorney for guidance on how to proceed.

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As IRS Struggles to Narrow Tax Gap, Non-Filers Are at High Risk for Auditing – and Penalties

As IRS Commissioner Chuck Rettig has stated, “Tax gap estimates help policy makers and the IRS in identifying where noncompliance is most prevalent.” In other words, the IRS knows what sorts of “trouble areas” to focus on – and if you belong in one of those groups, you are at high risk of being audited or even criminally investigated for tax fraud. In an era of IRS budget cuts, noncompliant taxpayers – whose actions directly contribute to the tax gap – are a high enforcement priority for the government. This means non-filers, delinquent filers, and filers who fail to pay taxes all have an increased likelihood of being audited (along with small business owners, foreign account holders, U.S. expats, large corporations, cash-intensive businesses, and various other taxpayers). If an IRS auditor discovers indicators of tax fraud, the case could even be referred to the IRS Criminal Investigation (IRS-CI) Division, which could result in criminal prosecution.

Civil + Criminal Tax Audit Defense Attorneys for IRS Non-Filers in California

The IRS tax lawyers at the Tax Law Office of David W. Klasing provide a wide range of tax services targeted to your individual or business tax needs. Our award-winning team of tax lawyers and CPAs can help you get caught up on back taxes, prepare you to face a civil or criminal tax audit, reenter the tax system with minimal damage, and if necessary, fight back against tax evasion charges. Contact us online right away to set up a reduced-rate consultation, or call the Tax Law Office of David W. Klasing at (800) 681-1295 today.

In addition to our staffed main offices in Irvine,  the Tax Law Offices of David W. Klasing has unstaffed (conference room only) satellite offices in Los AngelesSan BernardinoSanta BarbaraPanorama CityOxnardSan DiegoBakersfieldSan JoseSan FranciscoOakland, Carlsbad and Sacramento.

 

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Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company?  Absolutely not!  See our policies that address this issue here.