Decoding the IRS's Latest Tax Gap Data: Insights and Trends

Decoding the IRS's Latest Tax Gap Data: Insights and Trends

Understanding the Tax Gap: Unveiling the Numbers

The gross tax gap for 2011-2013 stands at a substantial $441 billion annually. This figure represents the true tax liability not paid voluntarily and on time. To dissect the tax gap further, the IRS classifies it into three main components:

  • Non-filing ($39 billion): Tax not paid on time by those failing to file required returns promptly.
  • Underreporting ($352 billion): Net understatement of tax on timely filed returns.
  • Underpayment ($50 billion): Tax reported on timely filed returns but not paid on time.

This categorization provides a nuanced understanding of the challenges the IRS faces in enforcing tax compliance.

Tax Gap Breakdown by Federal Taxes

The tax gap extends across various federal taxes:

    • Income Taxes:
      • Individual ($314 billion)
      • Corporate ($42 billion)
  • Employment Taxes:
        • $81 billion
  • Estate and Excise Taxes:
      • $3 billion each (combined)

    These estimates translate to about 83.6% of taxes paid voluntarily and on time. Notably, the 2008-2010 estimate was 83.8%, emphasizing the stability of compliance rates.

    Comparing Historical Tax Trends: JCT Report Insights

    To contextualize these tax gap figures, a report by the Joint Committee on Taxation (JCT) offers historical perspectives and projections. The "Overview of the Federal Tax System as in Effect for 2018" report reveals intriguing trends over 75 years and provides key projections for 2018.

    Individual vs. Corporate Income Taxes

    Historical tables in the report illustrate that individual income tax represented 40% of federal receipts in 1950 and has consistently ranged between 40-50% for the last 75 years. The projection for 2018 suggests an increase to 50%. In stark contrast, corporate income taxes, which accounted for over 30% in 1950, are projected to represent a mere 7.2% of federal receipts in 2018.

    Business Tax Return Filings: An Evolution

    Examining the decline in corporate income tax revenue necessitates a look at business tax return filings. In 1986, the last major tax code overhaul, C corporation returns filed with the IRS numbered 2,602,301. By 2015, this figure plummeted to 1,632,229. In contrast, S corporation returns surged from 826,214 in 1986 to 4,487,336 in 2015. The proliferation of non-farm sole proprietorship returns also contributed to this shift.

    With the Tax Cuts and Jobs Act offering new business deductions to S corporations and sole proprietors, the trend of increasing flow-through entity returns is anticipated to persist.

    Employment Taxes: A Surging Contributor

    The decline in corporate income tax revenue is counteracted by a significant rise in employment taxes. Between 1950 and 2010, employment taxes surged from 10% to over 40% of federal receipts. The JCT report estimates that employment taxes will comprise about 35% of federal receipts in 2018, indicating a sustained upward trajectory.

    Estate and Excise Taxes: Minor Contributors

    In 2018, estate and excise taxes together are projected to account for less than 5% of federal receipts. This aligns with the $3 billion contribution from estate and excise taxes in the $441 billion gross tax gap.

    Putting It All Together

    Analyzing both the IRS and JCT reports in tandem provides a cohesive and detailed picture of the federal tax system and taxpayer compliance. Policymakers and tax administrators can leverage this data for informed decision-making and system improvements.

    Navigating Tax Compliance in a Changing Landscape

    The IRS's release of tax gap data illuminates the ongoing challenges in ensuring taxpayer compliance. The intricate interplay of individual and corporate income taxes, evolving business structures, and the resilience of employment taxes underscore the dynamic nature of the tax landscape. As policymakers consider reforms and enhancements, these comprehensive insights serve as invaluable guides in navigating the complex world of tax administration.

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