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$458 Billion In Unpaid Taxes Every Year, IRS Says

By Andrew Galbreath
Published on: 12:58 PST, Apr 29, 2016

The Internal Revenue Service (IRS) announced on Thursday that annual unpaid taxes have increased to $458 billion, or nearly half a trillion dollars.

In the agency’s latest analysis of what it calls the “tax gap,” meaning an estimate of the difference between the total liability owed and the taxes that are actually paid, they measured an average annual “tax gap” of $458 billion for 2008 to 2010. To put this in perspective, that amount is roughly three-quarters of the projected budget deficit for this year.

The IRS report says the gross tax gap is due to three factors: nonfiling, underreporting, and underpayment. Of these, the agency estimates $32 billion is due to nonfiling, $387 billion is due to underreporting, and $39 billion is due to underpayment. Filers who underreport what they owe do not always do it on purpose; much of it is the result of honest mistakes or confusion, as CNN Moneynotes.

“The biggest culprit in this regard is a lack of third-party reporting and tax withholding on some types of income — such as that made by small businesses or made through rents and royalties. The IRS noted that only about one percent of income reported by third parties and from which tax is withheld — such as workers’ pay — is misreported. But 63% of income for which there is little or no information reporting and withholding is misreported.”

Individual income taxes were the biggest portion of the tax gap, weighing in at $319 billion, which includes taxes from small businesses and partnerships. Non-payment of employment taxes, such as payroll taxes from entrepreneurs, racked up another $91 billion, and $44 billion was from unpaid corporate taxes.

The figures for 2008-2010 are an increase from the figure of $450 billion in 2006, the last year when such an analysis was conducted, though the IRS said the increase was largely due to newer and more precise methods of estimates and said the figure represented “no significant change in the amount of the tax gap or the rate of compliance,” according to the New York Times.

In announcing these latest findings, the IRS said that it expects to eventually collect $52 billion of the unpaid taxes through enforcement efforts such as audits, which brings the tax gap down to $406 billion per year.

“A high level of tax compliance remains critical to help ensure taxpayer faith and fairness in the tax system,” the agency said in a statement quoted by the NY Times. “Those who don’t pay what they owe ultimately shift the tax burden to those who properly meet their tax obligations.”

The top Republicans and Democrats in the Senate Finance Committee both called for the IRS to improve its methods and further close the tax gap. Committee Chairman and Senate Republican Orrin Hatch of Utah said that the best way to improve the methods of the agency was through tax reform.

“This recent data further underscores the need for the I.R.S. to get smarter about guaranteeing tax compliance and restore trust and faith in the agency,” he said in a statement to the NY Times.

Committee member and Democrat Ron Wyden of Oregon, considered the senior Democrat on the committee, expressed concern over the $44 billion tax corporations’ tax gap, and called for tougher enforcement on corporate taxes.

“This is money that could be put to good use shoring up critical programs such as Medicare. It’s time the I.R.S. put an effective tracking and auditing system in place to locate this lost money,” he said, according to the Times.

Despite this huge figure, American citizens are famously good at paying their taxes compared to other countries; the U.S. had an average voluntary compliance rate of 81.7 percent for the tax years 2008 to 2010, the IRS estimates, though this was a slight decrease from the 83.1 percent estimate for the year 2006.

[Photo Illustration by Scott Olson/Getty Images]

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