The first study of taxpayer compliance since 1988 shows that the vast majority of American taxpayers pay their taxes on time and accurately, but that the nation still has a significant tax gap, according to the Internal Revenue Service. The National Research Program, launched in 2001, randomly selected about 46,000 returns for review and examination from 2001 to 2004. The return selection process included an oversampling of high-income returns to enable IRS researchers to draw valid conclusions about important sub-categories of taxpayers. The preliminary findings show that the gross tax gap -- the difference between what taxpayers should pay and what they actually pay on a timely basis -- exceeds $300 billion per year. IRS enforcement activities, coupled with late payments, recover about $55 billion of the tax gap, leaving a net tax gap of between $257 billion and $298 billion. The study found that underreporting of income is the largest component of the tax gap, accounting for more than 80 percent of the total, with non-filing and underpayment at about 10 percent each. Individual income tax is the single largest source of the annual tax gap, accounting for about two-thirds of the total. For individual underreporting, more than 80 percent comes from understated income, not overstated deductions, and most of the understated income comes from business activities, not wages or investment income. IRS Commissioner Mark W. Everson said that the study confirms two key points involving tax enforcement and simplification. "The IRS needs to enforce the law so that when Americans pay their taxes, they are confident that neighbors and business competitors are doing the same," Everson said. "At the same time, this research underscores [President George W. Bush's] call for tax reform. Complexity obscures understanding. Complexity in the tax code compromises both the service and enforcement missions of the IRS." "Those who try to follow the law but cannot understand their tax obligations may make inadvertent errors or ultimately throw up their hands and say, 'Why bother?' Meanwhile, individuals who seek to pay less than what they owe often hide behind the tax code's complexity in order to escape detection by the IRS and pay less than their fare share," Everson added.
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