The Internal Revenue Service released new tax gap projections for tax years 2020 and 2021 showing the projected gross tax gap increased to $688 billion in tax year 2021, a significant increase from previous estimates. The tax gap is the amount of estimated tax due, compared to the amount that is actually paid on time. The gap represents not only amounts from taxpayers who do not file tax returns, but also tax returns that understate or underpay taxpayers’ true liabilities. The largest portion of the tax gap, nearly 80%, is due to taxpayers who file their returns on time, but who understate their true liability. This underreporting represents approximately $77 billion of the tax gap.
Approximately 10% of the gap will be collected through IRS efforts and voluntary late tax payments, reducing the gap to an estimated $625 billion.
With the help of Inflation Reduction Act resources, the IRS will be taking a variety of steps to help improve voluntary compliance by improving taxpayer services and offering new technology tools to work in concert with additional compliance work. Additionally, the IRS is targeting high-income taxpayers for audit purposes.
Compliance with our voluntary reporting and payment system is crucial for our nation to operate. The federal government receives nearly half of its budget from income taxes, another 35% from social security, Medicare, and other payroll taxes, and 10% from corporate taxes. The remainder is made up of excise taxes, customs and tariffs, estate taxes and interest income.
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