 Internal Revenue Service, IRS Tax News, IRS Updates Tax Gap Estimates New Data Points The Way Toward Enhancing Taxpayer Service Compliance Efforts. Tax Gap? What's that? Some kind of government euphemism for the giant hole blowing through my finances caused by the government taking my money and blowing it on who knows what? Honestly. So long as we're renaming everything these days to confuse the hell out of people, maybe we can rename some stuff to actually be more descriptive instead of intentionally ambiguous. For example, I propose we rename the term taxes to government plundering. I mean just imagine the next time the administration wanted to raise taxes, they'd have to say something like the administration would like to raise the government plundering rates by 30%, resulting in a tax gap, no, resulting in personal financial holes deep enough to drive families from eating steak to top ramen, which is after all our long term plan because cows fart too much. And that's not good for global warming. I mean don't worry people. We really know what we're doing over here. We know what we're talking about. Did I mention that we recently asked for policy advice from a growing man who transitioned into not a woman, mind you, but a little girl about 90 days ago in order to sell massive amounts of makeup on TikTok? Yeah, we now constructed our entire platform on the advice of this dude, dudeette, or girly dude, and of course Greta Thunberg. So you know things are going to improve around here, people, but first a joke, an IRS officer contacted me and I was like who are you? The IRS officer said I'm your worst nightmare, and I was like wait a second, I mean is that good or bad? Very shut up and take my money. Are you the worst nightmare in terms of like the scariest nightmare? Attention passengers, please remain seated until the plane comes to a complete crash. Or like the worst nightmare in that the nightmare's not that scary for a nightmare. I'm so embarrassed, I wish everybody else was dead. And since nightmares are supposed to be scary you're like the worst one. I mean if you had a nightmare contest, the best nightmare would be the one that was the most scary, wouldn't it? Nervous? Yes. First time. No, I've been nervous lots of times. Therefore, if you really wanted to threaten somebody you would say something like I'm your best nightmare, not I'm your worst nightmare. Everyone, I have a very dramatic announcement so anyone with a weak heart should leave now. Goodbye. Uh, Professor. Meaning I'm like the nightmare that actually won the nightmare contest. By like being the most scary. For example, one time I had a nightmare of a horrifying demon but soon realized the only scary thing about him was the ridiculous lives coming out of his mouth. Well first it was a time that old farmer tried to sell me for some magic beans, I ain't never got over that. Then this fool went off and had a party and he had all the guests trying to pin a tail on me. Then they all got drunk and stopped beating me with a stick on. Pinata, pinata. What is a pinata anyway? So it wasn't really that scary. My imagination not doing a very good job. Therefore, it was one of my worst nightmares. With a word of advice, don't go around calling yourself the president. I wouldn't do that and I don't think you should either, it just doesn't hold water. For that matter neither do I. I mean you see what I mean? We've got the phrase backwards. I remember it like it was interesting. Resulting in us unfairly mischaracterizing nightmares. I hate these nerds just because I'm stupider than them. They think they're smarter than me. Kill them all starting with the math teacher. IR 2022-192 October 28th 2022 Washington. The Internal Revenue Service today released a new set of tax gap estimates on tax years 2014 through 2016 showing the estimated gross tax gap increased to $496 billion, a rise of over $58 billion from the prior estimate. The gross tax gap is the difference between estimated true tax liability for a given period and the amount of tax that is paid on time. So they're trying to determine what the actual taxes should be and then they're trying to determine how much was actually paid in taxes to see what the difference is between what people basically should be paying and what people are actually paying. Now you can imagine the calculations to try to estimate that type of thing can be quite complex. You're going to have to use assumptions and estimates and so on but you could try to ballpark and get some ideas. So as discussed below it is important to note that the tax gap estimates cannot fully account for all types of evasion. These findings underscore the importance of ensuring fairness in our nation's tax system end quote the IRS Commissioner Chuck Reddick said. So obviously they're going to make the argument here that some people are not being in compliance with the taxes and therefore that would result or necessitate some kind of crackdown in terms of being able to look over everyone's shoulder with more bureaucracy in order to enforce the collection process. So quote the increase in the tax gap estimates reflects that the IRS needs to do more both in improving taxpayer service as well as working to improve tax compliance. The IRS remains committed to ensuring fairness and helping taxpayers while also working to better identify emerging emerging compliance issues that contribute to the tax gap. The recent funding addition will help the IRS in many ways. So they got more funding in order to hire more people. They talked about hiring people on the phone but you would think that many of the people that they're going to be hiring are going to be trying to go forward with audits and what not to try to enforce do more enforcement action you would think right. And the thing that the audits to me are you know if they're going to if they're going to pick some audits and do some random audits and stuff that's kind of part of the normal system. The things that are a little bit more worrisome to me just at the first glance is when they start to do things that are trying to force businesses to take added bureaucratic steps in order to enforce compliance and that would be things like the gig work economy for example when they're forcing say the intermediary platforms to issue 1099s and so on stuff with the with the electronic exchanges and things like that which could slow up the actual business could actually harm you know productivity because of the added bureaucratic steps. So that's this kind of stuff that I think you know they got to be very careful at. So the recent funding addition will help the IRS in many ways increasing taxpayer education significantly improving service to all taxpayers and focusing on high income high wealth non compliance in a fair and impartial manner supporting compliance taxpayers and quote. So the idea here are obviously the popular talking point from a political standpoint would be yes we needed all this money so that we can hire people to improve the phone service and go after just really wealthy individuals. But I mean again I'm somewhat skeptical that that those are the only people that are going to be impacted by it. I would I would think they're probably going to go after compliance just in general and possibly try to implement things that are going to force compliance you know on the front end instead of on the back end with audits and the things that they might be going after might be the wealthy individuals that own things like the intermediary platforms that people use for the gig work and so on. But clearly if they make those platforms less effective then that's going to impact everyone because it's going to make the economy you know less efficient. So that's where I have I'm not I don't fully trust the idea that they're only hiring phone service people and they're only going to be impacting very wealthy individuals. But you know take it I'll take that with a grain of salt fairly large one. After late payments and IRS efforts collected an additional $68 billion the IRS estimated the net tax gap was $428 billion. This increase in the tax gap can be attributed to economic growth. So between the two periods 2011 2013 and 2014 2016 the estimated tax liability increased by more than 23%. So obviously as the economy grows you would expect the gap to grow in total dollar amounts in proportion to the growth of the economy. So some of the things that impact the tax gap you would assume would be one obviously if the economy grows again the tax gap you would think would grow kind of in proportion to that growth in the economy and two when they raise taxes then oftentimes that's going to pressure people to try to not pay the taxes right. If you feel like I'm paying a reasonable amount of tax tax system is fair it's not being overly burdensome on me as opposed to my neighbor and so on then you're likely to pay the tax and there's going to be less compliance issues because people are content basically with the system. If the taxes go up then you're going to have more people saying well this is just not fair possibly at some point in time it depends the tax code should be perceived as fair and reasonable and therefore that will incentivize compliance. If it's not fair meaning it's people perceive it to be going on them more harshly than their neighbor or it's just too high in general you would expect people to try to do more things to pay less taxes whether those things be legal or illegal and generally the people that are more wealthy are ones that usually can find legal ways to not comply with the taxes at that point right and at the end of the day if that kind of pressure goes for too long what ends up happening is the more wealthy individuals go somewhere else which means the country loses the capital that those people have which really is not exactly the answer that we want typically we want the capital in our economy but in any case between so the tax gap estimates translates to about 85 percent of taxes paid voluntarily and on time which is in line with recent levels the new estimate is a slight improvement from 83.7 percent in a revised tax year 2011 to 2013 estimate which dipped slightly from the original estimate released earlier after IRS compliance efforts are taken into account the estimated share of taxes eventually paid is 87 percent for 2014 to 2016 the gross tax gap comprises three components non-filing so tax not paid on time by those who do not file on time that's $39 billion under reporting tax understated on timely filed returns so meaning you filed but now the taxes were not enough you didn't pay enough in taxes was understated on the return $398 billion under payment tax that was reported on time but not paid on time $59 billion a particular challenge for tax gap estimation is the time it takes to collect compliance data especially data on under on under reporting that come from compliance examinations audits to address this issue the current release includes estimated tax gap projections for tax year 2017 2019 based on the projections for 2017 2019 the estimated average gross tax gap is projected to be 540 billion dollars per year the associated voluntary compliance rate is projected to be 85.1 percent the projection of enforced of enforced and other late payments is 70 billion dollars which yields a net tax gap projection of 470 billion dollars the associated non-compliance rate projection is 87 percent the gross tax gap non-filing under reporting and under payment component projections for tax year 2017 to 2019 time frame are 41 billion dollars 433 billion dollars and 66 billion respectively as part of the large effort to reduce the actual tax gap the IRS will continue to fairly enforce the tax laws so again part of the the rationale or part of what needs to happen with the tax code is for people to perceive that it's a fair and reasonable tax code that's the best way to to lower the tax gap naturally because people should feel that you know want to pay into the tax system if they feel it's a reasonable tax system and their money is then being spent well and obviously again the tax the IRS only has some control over that because clearly they're not the ones making the laws they're the ones that are putting the laws in place but that's the general idea so in 2021 the latest year for which data is available the IRS currently collected more than four trillion dollars in taxes penalties interest and user fees tax gap studies through the years have consistently demonstrated that third-party reporting of income significantly raises voluntary compliance with the tax laws so third-party reporting meaning meaning notice how the tax system works here they're gonna say every every transaction if it was a business-to-business transaction or even business to a personal transaction but if you think business-to-business one side of the table is receiving money that's gonna be revenue the other side is giving money which would be an expense or for taxes a deduction for taxes income is bad deductions are good so how can the IRS enforce third-party reporting to enforce compliance they can pressure the person that's paying to say I want you to give me information if it was an employee I want you to actually withhold the money that you're giving to this individual if it's if it's a non-employee then I want you to give me a 1099 or something like that so that's the general idea and you can see what they're trying to do is increase force the people to do that that are on the paying side because that's where the leverage is because they want the deduction now again that you can see where the holes are on that and you can see where the IRS is aiming they want this third-party compliance but in some industries industries that deal with cash industries that sell directly services to the customer such as hair salons and massage parlors and bars and restaurants and stuff often times then you can't pressure the end user who went to a restaurant or the end user they got a massage or something to 1099 the masseuse or something like that because they don't get a deduction for the massage so there's no there's no leverage so you can see how they might be saying okay how can we leverage that and then you've got the gig work the gig work has these platforms that put people together that really have their own businesses if you're a driver driving people food or if you're doing the uber stuff or something like that then you really have your own business that you're using the platform as the intermediary the platform isn't hiring you you're doing your own business and using the platform to connect you to the customers is the general idea but you can see how the iris would want to make the platform force them to to be an employer so they can force them to report your income to them the same with the financial intermediaries they have a problem with the financial transactions things like a PayPal and whatnot you're generating money through these through these things could they force the PayPal platform to 1099 you so these are the kinds of things that you expect them to be aiming at and they they will increase tax compliance you would think but there also could be quite damaging on the economies that they implement those rules and so they need to be quite careful of that I don't trust them to be quite careful honestly but so and voluntary compliance rises even higher when income payments are also subject to withholding the IRS also has an array of other taxpayer service programs aimed at supporting accurate tax filing and helping address the tax gap these range from working with businesses and partner groups to a variety of education and outreach efforts the voluntary compliance rate of the US tax system is vitally important for the nation a 1% point increase in voluntary compliance would bring in about 40 billion dollars in additional tax receipts so the best way to do that in my opinion is to create trust and fairness in the system in actuality so the tax gap estimate provides insight into the historical scale of tax compliance and to the persisting resources of low compliance quote keeping the voluntary compliance rate as high as policy possible ensures that taxpayers believe our system is fair in quote reddick said quote the vast majority of taxpayers strive to pay what they owe on time those who do not pay their fair share ultimately shift the tax burden to those people who do which fuels the tax gap the IRS will continue to direct our resources to help educate taxpayers about the tax requirements under the law will also refocusing on pursuing those who avoid their legal responsibility in quote estimating the tax gap offshore digital assets other categories not fully represented given the complexity of the tax system and available data no single approach can be used for estimating each component of the tax cap each approach is subject to measurement or non sampling error so they have to use of course some kind of sampling estimating methods here so they're not going to be perfect so the component estimate that are based on samples are also subject to sampling error for the individual income tax under reporting tax gap detection controlled estimation is used to adjust for measurement errors that results out when some existing non-compliance is not detected during an audit so when you have an audit it doesn't necessarily mean that they're going to catch everything that was wrong in the audit even though they're putting more scrutiny on it than if there was no audit so other statistical techniques are used to control the bias in estimates based on operational audit data because a multiple methods are used to estimate different sub components of the tax gap no standard errors are reported in addition those reviewing this data should be mindful of these limitations when using these estimates given available data these are the best possible estimates of the tax gap components presented although they do not represent the full extent of potential non-compliance there are several factors to keep in mind the estimates cannot fully represent non-compliance in some components of the tax system including offshore activities issues involving digital assets and cryptocurrency as well as corporate income tax income from flow through entities illegal activities because data are lacking the tax gap associated with illegal activities has been outside the scope of the tax gap estimation because the objective of government is to eliminate these activities which would eliminate any associated tax so obviously the fact that you have an illegal activity doesn't actually waive the fact that you should be reporting your income from the illegal activity but clearly reporting the income from illegal activity is not generally a wise idea considering the fact that that would be a clear paper trail to the fact that you're doing illegal activity so it's hard to estimate that man so for non-compliance associated with digital assets and other emerging issues it takes times to develop the expertise to uncover associated non-compliance and for examinations to be completed that can be used to measure the extent of that non-compliance the IRS continues to actively work on new methods for estimated and projecting the tax gap to better reflect changes in taxpayer behavior as they emerge additional information can be found at the links below you got the federal tax compliant research tax gap estimates for tax year 2014 2016 publication 1415 you got the tax gap ex-executive summary that's publication 5364 and you got the tax cap map publication 5365 there's links to all that stuff here if you want to look into their calculations here and a bit more detail I think it would be interesting to try to hone down how exactly they got to some of these numbers but I'm probably not going to do that so but I think it'd be worthwhile for someone to do that but in case there'll be a link to this in the description