Paul L. Caron

Thursday, April 27, 2006

TIGTA Questions IRS Tax Gap Projections

Treasury_3 The Treasury Inspector General for Tax Administration has released Some Concerns Remain About the Overall Confidence That Can Be Placed in Internal Revenue Service Tax Gap Projections.  Here is the synopsis:

In April 2004, the ranking member of the Senate Finance Committee, Senator Max Baucus, called for 90% voluntary tax compliance by 2010. Senator Baucus stated, in part, that “Today, I’m calling on the IRS to achieve a 90% voluntary compliance rate by the end of the decade, which would raise at least an additional $100 billion each year without raising taxes.” Perhaps the greatest challenge facing the IRS is finding ways to improve the VCR.

Using different terms, Senator Baucus challenged the IRS to reduce what is commonly known as the tax gap. The IRS defines the gross tax gap as the difference between the estimated amount taxpayers owe and the amount they voluntarily and timely pay for a tax year. In February 2006, the IRS estimated the gross tax gap at $345 billion for Tax Year 2001.

To determine whether the IRS can achieve the VCR called for by Senator Baucus, we first evaluated the reliability of the IRS developed tax gap figures. We concluded the IRS still does not have sufficient information to completely and accurately assess the overall tax gap and voluntary compliance. The IRS has significant challenges in both obtaining complete and timely data and developing the methods for interpreting the data. However, it is important to tax administration and tax policy decision makers that an estimate be developed that is within tolerable parameters. Otherwise, inappropriate decisions can be made on how to address the tax gap. If one assumes that, in Tax Year 2010 the total tax liability is the same as it was in Tax Year 2001, noncompliant taxpayers would have to timely and voluntarily pay an additional $134 billion to achieve the Senator Baucus challenge to reach a 90% VCR by 2010.

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