The “tax gap” - the difference between the amount of taxes collected by the IRS each year and the total amount potentially owed - has become a hot topic of conversation, as an influx of funding from the Inflation Reduction Act focused on enforcement is projected to raise revenue in a way that reduces the tax gap. The National Taxpayers Union Foundation has convened the Taxpayers For IRS Transformation (Taxpayers FIRST) project, a collection of some of the leading tax and IRS experts in the country, to study how this money can and will change the IRS, and how some of the important issues - like the tax gap - will play into it.
A new analysis from the Taxpayers FIRST project looks at how the tax gap is measured and ways that the IRS could improve both its data and its compliance rates.
There are areas of limitation that are not discussed within tax gap estimates, including certain types of taxpayers that are excluded from some estimates but not identified as such. TIGTA also notes that the IRS should provide more detailed information regarding actions taken to improve its methodology and ability to project additional areas of noncompliance...
The purpose of examining the tax gap is to identify areas where there are low rates of compliance. The lag in the data undermines the effectiveness of that goal... Identifying and quantifying the individual components of the tax gap is ultimately more important than the top line number that the IRS highlights in its tax gap analyses, as different components of the tax code can call for different approaches in terms of improving compliance.
The paper makes eight recommendations for improving the tax gap, including:
Work with outside experts and stakeholders to formalize and standardize the methodology and processes used to project the tax gap, and using ranges or confidence intervals where appropriate.
Set accountable goals and metrics to improve compliance across specified components of the tax gap.
Increase transparency on enforcement methods and tools, and what kind of results are expected from these expanded efforts.
Quantify benefits of improved taxpayer services and taxpayer knowledge in boosting compliance.
These and other recommendations are made in the tax gap policy paper.
The Taxpayers FIRST Advisory Board includes former IRS Commissioner Fred Goldberg, former National Taxpayer Advocate Nina Olson, American University tax professor Caroline Bruckner, former Federal Reserve economist Barbara Robles, and more of the leading tax and IRS experts in the country.
For more information on the Taxpayers FIRST project and the recommendations made on the tax gap, please contact NTUF Vice President of Communications Kevin Glass at 703-299-8670 or at kglass@ntu.org.
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