The estimated amount of unpaid taxes (the “tax gap”) from 2014 through 2016 is nearly $500 billion. More than half of this amount is due to taxpayers who underreport their income and therefore underpay their tax liabilities. In fact, nearly 80% of the tax gap is made up of underreported income. Approximately 2/3 of this is by individuals, with the remainder primarily made up by underreported employment taxes and corporate income tax.
The Treasury Inspector General for Tax administration (TIGTA) reported that the IRS had been granted funds to increase examinations of high-income taxpayers, noting that there should not be an increase to audits of small businesses or households that earn less than $400,000. But the IRS has not updated its definition for high-income taxpayers in many years, still using a $200,000 threshold. TIGTA recommended the IRS leverage its Large Business and International Division’s extensive knowledge base to ensure the IRS is following the directive to prioritize audits of those businesses and households earning more than $400,000.
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