International Tax Gap Numbers Questioned

The amount of taxes owed to the U.S. government from cross-border transactions by U.S. and foreign citizens and businesses is murky, according to a new report, but could be as high as $123 billion.

The Treasury Inspector General for Tax Administration said in a report that the Internal Revenue Service has not developed an accurate or reliable estimate of the size of the international tax gap, but non-IRS estimates range from $40 billion to $123 billion.

A report by the Senate Permanent Subcommittee on Investigations estimated that each year, the U.S. loses about $100 billion in tax revenues due to offshore tax abuses, for example. Even estimates of domestic tax abuse are out of date. The IRS estimated that the entire tax gap for tax year 2001 was $345 billion. However, TIGTA noted that it is doubtful that the IRS’s tax gap estimate includes the entire international tax gap because identifying hidden income within international activity is very difficult and time-consuming.

The IRS has no plans to comprehensively measure the international tax gap due to cost, staffing and technical limitations that make direct measurement unfeasible, TIGTA noted in its report. Thus, there is less certainty that international tax compliance resources are efficiently allocated to address noncompliance.

Nevertheless, over the past few years the IRS has taken action to better coordinate international tax compliance issues. In September 2007, the IRS announced a service-wide approach to international tax administration. IRS Commissioner Douglas Shulman has announced that international issues will be a top priority during his tenure. Additional changes were made by modifying organizational structures, changing processes to facilitate compliance improvements, investing in human capital and information technology, and increasing cooperation and outreach to foreign governments.

Beyond the IRS, legislation has been introduced to address tax haven abuse, TIGTA noted. Both the Senate Finance Committee and the Senate’s Permanent Subcommittee on Investigations held hearings in July 2008 advocating more tools for the IRS to combat offshore evasion.