Internal Revenue Service officials announced that their latest estimates of the tax gap for the 2001 tax year comes to $345 billion.
The tax gap is the difference between what taxpayers should have paid, and what they actually paid on a timely basis. The updated figure falls at the high end of the annual gap estimate of $312 to $353 billion year, an estimate also released last March by the federally funded National Research Program.
The NRP was launched as a three-year program to better estimate taxpayer compliance, and has focused its analysis on a review and examination of about 46,000 randomly selected returns from the 2001 tax year. IRS enforcement activities, coupled with other late payments, recovered about $55 billion of the tax gap for 2001, leaving a net gap of $290 billion. More than 80 percent of the gap is due to the underreporting of taxes.
IRS Commissioner Mark W. Everson said that simplifying the tax code would have the biggest impact on reducing the tax gap, though the recommendations from the President's Advisory Panel on Tax Reform to do just that have gained little political traction since being released in November 2005. The agency's proposed budget for the 2007 fiscal year does include a handful of changes to combat the gap.
The IRS said that one important administrative step it has taken to improve compliance has been the updating of its audit selection system based on data gathered by the NRP. The agency hopes the changes will make for more efficient auditing and improve fraud detection.
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