IRS tax collection trouble grows

February 16, 2006 @ 4 Comments

The Internal Revenue Service came up $345 billion short in 2001, the latest year data were available, due to noncompliance, or the so-called tax gap, the difference between what IRS thinks taxpayers owe and what they actually paid, and Congress is looking for ways to get people, who mostly quietly refuse to pay taxes for various reasons, to pony up.

After IRS conducts various enforcement actions, it only expects to reduce that gap to $290 billion, leaving a significant revenue shortfall for the federal government.

Projections (PDF) compiled by the Government Accountability Office show that federal spending will quickly outpace revenue, even if tax cuts set to expire this year are allowed to expire. The same projections also show federal revenues to be approximately 20% of the gross domestic product (GDP).

Even more interesting than the fact that the government’s broke, for lovers of liberty, is exactly how widespread noncompliance is. “IRS most recently estimated that for tax year 2001, 83.7 percent of owed taxes were paid voluntarily and timely, which translated into an estimated gross tax gap of $345 billion,” the GAO report states. That’s 16.3% of taxes IRS thinks it’s owed that aren’t being paid. And IRS simply doesn’t have enough resources to go after everyone; not to mention, it isn’t cost-effective to spend $10,000 to enforce a $5,000 tax obligation.

Of that $345 billion, 57%, or $197 billion, was individual underreporting, that is, people who didn’t tell the IRS about all their income, or who claimed too many credits or deductions. Another $39 billion was individuals who did not pay self-employment taxes. And $61 billion, or about 18%, were from individuals who simply did not file tax returns or pay any tax at all. The remainder was corporate underreporting of employment taxes and other taxes.

This is undoubtedly good news to people like talk show host Ian Bernard, who announced on his radio show that this year he would not file or pay taxes.

“I don’t like the way people use tax terms like ‘your income taxes,’ as though I own a piece of the IRS or as though I owe them something, as though they’re mine to pay and I’m just not paying them,” Bernard said Wednesday on his radio show, Free Talk Live. “I’m just not dealing with the IRS. As far as I’m concerned, they’re a group of strangers that sends me threatening letters from time to time.”

Such sentiment is popular among people who believe that the federal government has overstepped its lawful authority or has no right to exist at all. For instance, during the Vietnam War, many people refused to pay taxes as a form of protest of the war.

In some cases, there’s virtually nothing the IRS can do. For instance, according to the GAO, “it is inherently difficult for IRS to observe and measure some types of underreporting or nonfiling, such as tracking cash payments that businesses make to their employees, as businesses and employees may not report these payments to IRS in order to avoid paying employment and income taxes, respectively.”

GAO recommended that the IRS set and measure tax compliance goals and improve its services to taxpayers, and that Congress simplify the tax code. In the meantime, the IRS doesn’t have enough resources to go after everyone who doesn’t pay taxes, so having anything significantly bad happen is possible, but not very likely, for most people who fail or refuse to pay taxes.

4 Comments → “IRS tax collection trouble grows”

  1. Jan 19, 2007

  2. Apr 23, 2007


  3. Bhupinder Sood CPA

    Jun 08, 2007

    Where can one obtain names and email addresses of individuals and businesses seeking Tax help with IRS/State?

  4. Jan 08, 2010


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