October 1, 2014

IRS Reports on Billions in Unpaid Taxes

  • The nation's fiscal future depends on the balance between the spending in the federal budget and the revenues flowing into the treasury. Tax policy...

New government figures on unpaid taxes underscore the importance of broad tax reform as well as adequate enforcement efforts.

The Internal Revenue Service this month updated its calculations on the “tax gap” – the difference between what Americans owe in taxes and what has been paid on time. For 2006, the IRS found that the gross tax gap was $450 billion. Enforcement efforts and late payments, however, brought the figure down to $385 billion.

The IRS said the voluntary compliance rate – the percent of total tax liabilities paid on time -- was about 83 percent, close to what it had been five years earlier. In 2006, as in 2001, the biggest factor contributing to the tax gap was the under-reporting of income. “Overall, compliance is highest where there is third-party information reporting and/or withholding,”  the IRS said.

Comprehensive tax reform could help rein in federal deficits by eliminating many “tax expenditures,” which are essentially spending programs embedded in the tax code. An additional benefit of such reforms would be simplicity; they would make it easier for taxpayers to correctly determine what they owe the government, and enforcement would be easier as well.

All this would make the tax system more fair, which in turn could encourage even greater voluntary compliance in the future, providing additional revenue that could make further deficit reduction possible.