The Tax Gap is generally defined as the difference between taxes owed vs. actually paid. In past years the tax gap has actually widened.
The last year that the tax gap was officially reported by the IRS was 2016 when it was estimated at $496B. It kept increasing every year, and government officials were widely criticized because of it, so they stopped reporting an official estimate.
The Government Accountability Office (GAO) completed a report on the problem which was released last Monday. In the report, they provided new information and several recommendations for closing the gap.
Underreporting of tax liabilities makes up 80% of the gap. Individual underreporting, which is included in that number, makes up 56% of it. This also includes underreporting from pass-through entities such as S Corps, Partnerships, Estates, and Trusts.
One factor that largely reduces the gap is third party reporting. Employers and others contractors like Ebay or Amazon that report income on W-2’s and 1099’s significantly reduce the gap by telling the IRS who earned what income.
The decline in audit rates over the past several years has significantly added to the tax gap. Many think that the additional funding recently provided to the IRS will go a long way to solving the problem.
But the funding probably won’t change much because it’s earmarked for audits on higher income individuals and companies that already file and pay their taxes. The report mentioned that much more work must be done with lower and middle income earners to encourage them to file.
The report sites the complexity of the Income Tax Code as being a barrier for people filing their returns. Of course, it doesn’t seem like anyone will ever do anything to simplify the code anytime soon why they even mentioned this is a mystery.
They also mentioned the difficulty people have in reaching anyone at the Service. We’ll see if they’re able to crack that nut anytime soon.
Let me leave you with this.
The deadline for S Corp and Partnership returns is a couple of weeks from now on March 15th. I’ll begin filing extensions on your returns if they haven’t yet been completed.
The six month extension does nothing but change the date that the “paper” return is due. If your return is extended, the new due date will be September 15th.
The extension does not extend the due date of any payments that may be due. If your return is extended and you don’t make a deposit with your extension, you may be forced to pay penalties.
If you would like to make a deposit with your extension, please contact our offices today. Also, if you haven’t sent in the rest of your work or the final answers to our year end questions, please do so today.
We’ll do our best to get your returns completed in a timely fashion.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether yo9u need Employee Retention Credits, M&A Due Diligence, Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Accounting Solutions Ltd.
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