Understanding the Net Tax Gap and Its Causes

The net tax gap or the tax gap is a term that frequently appears in the news media following political discussions regarding the IRS, government spending, and budget shortfalls. It seems that everyone has a different idea as to how large the tax gap truly is, the causes behind the tax gap, and how to reduce and eliminate it. These are all complex topics without, necessarily, clear answers. However, there are three main schools of thought regarding potential fixes for the tax gap These schools of thought are the objective public service view, ideological perspectives, and the view of an actor working within the two-party system.

The Net Tax Gap Deprives the Government of Necessary Tax Revenue and Is Growing

The net tax gap is a straightforward concept: it is the difference between the amount of taxes owed to the government by individuals and companies and the amount that is actually paid to the IRS. Unfortunately, despite advances in technology that allows the IRS to review more tax returns and other tax filings with less manpower, the net tax gap has grown since at least 2001. In 2001, the tax gap totaled $290 billion. By the 2006 tax year, the gap had increased to $385 billion. While the IRS has declined to provide tax gap information for more recent years, if the average rate of increase between 2001 and 2006 remained constant, the tax gap in 2015 would be in the neighborhood of about $550 billion dollars. Since 2001, Americans have been cheated out of a total of about $4.56 trillion in tax revenue that could have been used to provide social services, build infrastructure, or provide for the national defense.

And yet despite the growing amount of tax revenue going uncollected each year, Congress has decided to cut the IRS’ funding year-over-year. In fact, since 2010 Congress has cut funding to the IRS by an, inflation-adjusted, 17 percent despite a reviving economy and an increased workload due to new filing obligations created by FATCA. The budget woes at the IRS have become so dire that taxpayers cannot even speak to someone at the agency when the call in. While quality scores for call center representatives were 83 percent in 2007, the quality score had fallen to 64 percent with average waits of almost nine minutes. A Taxpayer Advocate Service report shows that phone service has fallen even further. For calls made to the IRS customer service line from the beginning of January 2015 until April 18, 2015, only 37 percent of the calls actually reached an IRS representative. For those who were able to reach a human, the wait time was 23 minutes. Everyone else – 8.8 million taxpayers – received what the IRS calls a “courtesy disconnect.”

What Are the Proffered Reasons Behind the Tax Gap?

In light of the burgeoning tax gap and plummeting levels of service provided by the IRS it can be difficult to envision why we have not addressed this issue. In her report the Taxpayer Advocate warns, “For a tax system that relies on voluntary self-assessment by its taxpayers, none of this bodes well. In fact, there is a real risk that the inability of taxpayers to obtain assistance from the government, and their consequent frustration, will lead to less voluntary compliance and more enforced compliance.”

The objectivist perspective to the tax gap would undoubtedly find these facts to be a real problem demanding a solution. In fact, allowing these problems to develop is highly irrational and troubling from this perspective. However the objectivist solution is more difficult to predict because it does not adhere to traditional left-right political ideology. Rather, the objectivist view simply seeks the best fit solution for the identified problem or problems. An objectivist solution could include anything from increased IRS funding, to outsourcing, to a complete overhaul of the tax system.

In opposition to this perspective are the politically charged ideological viewpoints. A liberal ideologue would likely believe the IRS data and propose a budget increase to address the problems. In contrast, a conservative ideologue is unlikely to believe the IRS’ data, that a problem exists, and may believe that the actions of the IRS are illegal or unconstitutional. From a conservative perspective, funding increases at the IRS are nearly unfathomable. However, before you assume that we are blaming conservatives for the situation, the true culprit behind the problem is the next perspective.

Those who view the world, more or less, through the lens of the two-party system – that is, our politicians – are the real parties deserving blame. While conservatives may be more aligned with the two-party-system perspective, it is the elites that drive the two party system who are behind the tax gap. For some reason, those elites seem to want an IRS that is ineffective in catching the largest tax cheats. In fact, as budgets have plummeted the extremely wealthy, those with incomes greater than $10 million, have come under decreasing scrutiny and now face a decreased audit risk. The elites drive policy in the two party system and under this policy it is the poor, middle class, and individuals that are merely wealthy that are left to face audits and tax enforcement actions even in light of decreased support and resources from the government.

Rely on Our Tax Experience for Audits and Other Enforcement Actions

If you are doing well for yourself and your family, but you are still working on making it into the economic elite you need to protect yourself from an increased audit risk. Furthermore, the reduced resources available to taxpayers may mean that your questions may go unanswered unless you seek help from other sources. The tax professionals at the Tax Law Offices of David W. Klasing can provide guidance and options regarding your tax concerns and issues. To schedule a reduced-rate consultation call us at 800-681-1295 or contact us online.