Going shopping at the Gap

The Tax Gap, that is.

This is the difference between the amount of taxes that Americans owed and what they actually paid.

The Internal Revenue Service says the U.S. Treasury was shortchanged $345 billion in 2001. This is the agency's first look at the gap in 15 years. Some of the underpayments were because of honest taxpayer mistakes.

Given the complexity of the tax laws (reform anyone?), that's not a big surprise.

Also not a big surprise: A chunk of the missing tax money was due to plain old tax cheating.

IRS Commissioner Mark Everson, ever politic and probably painfully aware that his job makes him one of the least popular people in the country, refuses to come out and call us a bunch of criminals. The commish told the Washington Post that "we do not have specific conclusions about how much is willful" cheating and how much is "lack of understanding of the code."

Yeah, right.

You'll get no argument from me that the tax laws are confusing, contradictory, exasperating and intimidating. I remember the first time I tried to compute depreciation; I struggled with it for hours and ended up in tears, no closer to what I hoped was the correct answer that when I started the painful process.

When something leaves you in that state, your frustration quickly turns to anger. And you lash out. And often when it comes to taxes, the only way to strike back is to say "screw it."

At that point, many people will turn to outside help. Others will just make do with what they've got and hope for the best. That's what I did. Honest!

And a good many will fight back, as Everson phrases it, willfully.

"Hey," the irate filer thinks, "they took hours of my life making me jump through tax form hoops and worksheet hell and a little bit of unreported income here or under-reported cash there is only fair compensation for all my trouble." Again, I repeat, I really, really tried to get the depreciation amount right!

The prez says he wants to improve voluntary tax-law compliance and has included some funds for the effort in his fiscal 2007 budget. But, as I noted here, it's going to take a lot more money than the prez plans to spend to get people to toe the tax-payment line.

I'm glad to see that some lawmakers agree with me.

Sen. Max Baucus, ranking Democrat on the Senate Finance Committee, told the New York Times that the administration's proposal "just nibbles at this crisis. … It's time for a comprehensive plan to go after scofflaws and tax cheats big and small, who are contributing to the deficit by not contributing their fair share."

Although Baucus is a Democrat, a group tarred by the GOP as overly fond of taxes, it's hard to argue against efforts to catch lawbreakers, even if you're not fond of the law being broken. (Sorry, had to bite my tongue, I mean fingertips, for a minute to keep from digressing here.)

So don't be surprised if, in this mid-term election year with politicians looking for ways to get a handle on the growing national deficit, they decide to help out the IRS in its enforcement efforts.

Yep, IRS agents nationwide will be shopping at the Tax Gap, with tax cheats on notice that they will foot the bill.

IRS eyes: The review of 2001 returns found that 80 percent of that year's missing money was because of underreported taxes; nonfiling and underpayment of taxes accounted for the remaining part of the tax gap.

To better combat such filing errors, innocent and otherwise, the IRS says it has taken several steps over the last few years to bolster enforcement, AKA audit activities.

The agency's enforcement budget in 2005 was $47.3 billion, up nearly 40 percent from the 2001 level. Audits of high-income taxpayers (those earning $100,000 or more) topped 221,000 in fiscal year 2005, the highest number in the past 10 years.

If you didn't make that much, you're not off the hook. The IRS says all its audits last year topped 1.2 million, a 20 percent jump from the year before.

So what might catch an auditor's eye? Basically, the agency looks very carefully at areas where it has to totally trust the taxpayer. Apparently, we're not all that trustworthy.

The 2001 tax gap investigation found that individuals whose primary tax liability comes from wages are pretty reliable taxpayers. The IRS found that 99 percent of these filers reported and paid their taxes. Of course, when you know the IRS can easily check your filing information against the copy of your annual W-2, you're more inclined to make sure you file accurately.

But it's a different story when it comes to businesses, both large and small, full-time operations or part-time endeavors of also-salaried filers.

In these cases, the IRS found that 43 percent misreported their income, leading to $109 billion in unpaid taxes.

So if you file a Schedule C or C-EZ with your return, make sure you don't try to slip something through. You, and that includes me this year, are on the top of the IRS list.

For more information on what might make you audit bait, check out this story.

Comments

[sockmonk]

I wonder whether they have made any effort to calculate how much of the tax gap is offset by people overpaying their taxes? We know this happens when people don't claim all the credits or deductions that they could. Sometimes these are just overlooked, sometimes it seems like the credit is too small compared to how many additional forms and details would need to be completed, and sometimes I think people are too conservative and afraid of triggering an IRS audit.

Also, have they factored in all the interest they collect from employer's withholding more taxes than the taxpayer winds up actually owing? How about the penalties and interest the IRS collects? These amounts also help offset the actual 'tax gap.'