Tax underpayment at $450 billion, says IRS

Friday, January 6th, 2012 By

IRS 1040

The IRS estimates that up to $450 billion in taxes went unpaid in 2006. Photo Credit: Kenteegardin/Flickr.com/CC-BY-SA

A new year has just begun, which means it’s almost time to file income tax returns. The Internal Revenue Service is going to be watching for underpayments, which it estimates at around $450 billion per year.

Budget deficits may not be entirely due to waste

Fiscal reform has been a rallying cry for years and politicians love to wax stentorian about it. The Internal Revenue Service has stumbled across a possible cause behind major shortfalls.

In 2006, according to Bloomberg, there was a federal budget deficit of $248.2 billion. It also happened that in that same year, according to the Washington Post, that the amount of taxes that went uncollected totaled up to about $450 billion, before any actions or audits were taken, meaning 17 percent of taxes by dollar amount went unpaid. Once audits and enforcement actions were taken, it shrank to $385 billion.

The bulk of the tax gap, as its called, comes from individuals under-reporting income that, according to Bloomberg, was estimated by the IRS to add up to $235 billion. Of that, an estimated $122 billion was due to business income not being reported on individual returns.

Compliance shrank slightly

The IRS releases its figures on tax compliance, or the amount of taxes that should have been paid but weren’t, five years after the tax year concludes, which is about how long it takes to collect the data, according to the Wall Street Journal, so 2006 is the most recent year for which complete data is available.

The rate of compliance, or how many individuals and businesses correctly report and pay their taxes, for 2001 was 86.3 percent, compared to 85.5 percent in 2006, meaning a non-compliance rate of 13.7 percent and 14.5 percent in those years, respectively.

However, once compliance measures were taken and audits were performed, the tax gap narrowed to 14 percent for all taxes by dollar amount, down from 17 percent before audits and enforcement, according to the Washington Post.

Corporations are people who dodge taxes, too

Though the bulk of unpaid taxes after enforcement actions were still attributable to individuals misreporting income, the single infraction that left the biggest shortfall was the $122 billion loss from business income not reported on individual returns. According to the Wall Street Journal, that income is from Schedule C and Schedule F, located on Form 1040, or income from small businesses or farms.

According to Bloomberg, large businesses underpaid their taxes by $67 billion in 2006. Of that, $48 billion was taxes unpaid by large businesses that have at least $10 million in assets.

Sources

Bloomberg

Wall Street Journal

Washington Post

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