According to the IRS, a recent estimate reveals that Americans have set a new record by failing to pay $688 billion in taxes on their 2021 returns. In response to this alarming situation, the agency has emphasized the need for immediate action to improve compliance, including the implementation of more audits targeting higher-income taxpayers, businesses, and partnerships.
The $688 billion estimate reflects the first time the IRS is providing information about the so-called tax gap on an annual basis, with the agency noting in a Thursday statement that it plans to continue providing the data on a yearly basis. The number reflects an increase of more than $138 billion from estimates for tax years 2017 to 2019, the agency said.
The IRS is ratcheting up audits on wealthy taxpayers, part of its directive after receiving billions in new funding through the Inflation Reduction Act (IRA). The agency has said it wants to go after higher earners who skirt their tax obligations in order to help close the tax gap and raise more money for federal coffers, which will be used for programs like the IRA’s $370 billion in green energy investments.
IRS Commissioner Danny Werfel stated that the significance of increased IRS compliance efforts on key areas is highlighted by the rise in the tax gap.
He emphasized the importance of these steps in numerous aspects, such as promoting fairness in the tax system, safeguarding law-abiding taxpayers, and addressing the issue of the tax gap.
According to the IRS, there will be no rise in audits for households with an annual income of less than $400,000.
What is a tax gap?
According to the IRS, the tax gap refers to the variance between the taxes that should be paid based on estimations and the actual amount paid within the designated time frame.
There are three main deficiencies encompassed: Unfiled taxes, underreported taxes, and underpaid taxes.
The IRS observed that approximately 85% of taxes are willingly and promptly paid.
Why are Americans underpaying their taxes?
Nonfiling occurs when people don’t file their annual tax returns on time, and so taxes aren’t paid on time. This can happen for a number of reasons, according to accounting firm Simpson & Simpson Accounting.
According to Simpson & Simpson, there are various reasons why individuals fail to file their taxes. One common reason is avoidance, particularly when individuals are concerned about having a substantial tax debt. Additionally, some individuals may fall behind in their tax filings due to personal crises such as a divorce or the loss of a family member. Others may find themselves overwhelmed by the intricate details involved in the process.
According to the IRS, approximately $77 billion in taxes went unpaid in 2021 as a result of nonfiling.
The act of underreporting refers to individuals failing to disclose their complete income, which includes instances where individuals who receive cash payments neglect to report them on their yearly tax returns. This omission can lead to lower tax payments than what is truly owed. According to the IRS, underreporting was responsible for $542 billion of the tax gap observed in 2021.
According to the IRS, an amount of $68 billion was attributed to underpayment in the 2021 tax gap. Underpayment occurs when individuals, such as freelancers, gig workers, or those who pay quarterly estimated taxes, inaccurately estimate their taxes and fail to pay the owed amount on time. Additionally, individuals who owe money to the IRS but delay payment also contribute to the underpayment category.
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