Citing Increased “Tax Gap,” IRS Plans More Robust Enforcement Going Forward

Posted in Offshore Account Update on November 18, 2022 | Share

According to a recent News Release from the Internal Revenue Service (IRS), the federal “tax gap” increased by $58 billion for tax years 2014 through 2016. At $496 billion, the tax gap during this period was the highest in history. While the IRS notes that this increase “can be attributed to economic growth,” it is nonetheless planning to institute more robust enforcement efforts in 2023 and beyond.

What Is the Federal “Tax Gap?”

As the IRS explains, the federal tax gap is “the difference between estimated 'true' tax liability for a given period and the amount of tax that is paid on time.” In other words, it is the difference between what all U.S. taxpayers collectively owe and how much they collectively pay. For the 2014 through 2016 tax years (the most recent years for which tax gap data are available), this difference increased by nearly 25 percent over the prior three-year period.

Even so, the IRS reports that the most-recent tax gap is “in line with recent levels” when factoring in current economic conditions. In fact, according to the IRS, the total percentage of taxes paid for the 2014-2016 period actually increased to 87 percent from 83.7 percent during the prior period. This takes into account payments made following IRS enforcement efforts and other amounts “eventually paid,” which collectively reduced the net tax gap from $496 billion to $428 billion.

According to the IRS’s News Release, the tax gap is the result of three primary factors:

  • Non-Filing – $39 billion in unpaid taxes from 2014-2016
  • Underpayment – $59 billion in unpaid taxes from 2014-2016
  • Underreporting – $398 billion in unpaid taxes from 2014-2016

Underreporting was by far the biggest contributing factor to the nation’s tax gap for the 2014 through 2016 tax years, and this is consistent with prior periods. The IRS’s News Release also includes preliminary estimates for tax years 2017 through 2019; and, here too, underreporting is the biggest factor. According to the IRS’ preliminary estimates for the 2017-2019 period, underreporting accounted for $433 billion out of a total estimated tax gap of $540 billion.

IRS Plans To Reduce Tax Gap By Focusing On Both Intentional and Unintentional Violations

Given the size of the federal tax gap, reducing the gap is one of the IRS’ top priorities. To do so, the IRS plans to focus on both intentional and unintentional violations of the Internal Revenue Code. In its News Release, the IRS states that it “ will continue to direct . . . resources to help educate taxpayers about the tax requirements . . . while also focusing on pursuing those who avoid their legal responsibilities.” As a result, taxpayers who have fallen short of meeting their obligations will be at risk of facing IRS audits and criminal tax fraud investigations in 2023, and they will need to be prepared to execute strategic defenses in order to avoid unnecessary tax liability and penalties.

Request an Appointment at Thorn Law Group in Washington D.C.

Thorn Law Group represents individual and corporate taxpayers in all IRS-related matters. If you have concerns about facing scrutiny from the IRS, we invite you to get in touch. To schedule an appointment with tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 202-349-4033, email or contact us online today.

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