The Treasury Department said Thursday that the tax gap totaled nearly $600 billion in 2019 and will rise to about $7 trillion over the course of the next decade if left unaddressed — roughly equal to 15% of taxes owed.
The Treasury analysis is part of a report released Thursday on President Joe Biden’s tax compliance initiatives that seek to close the “tax gap”— the difference between taxes owed to the government and actually paid — which were part of the proposals in the American Families Plan.
“These unpaid taxes come at a cost to American households and compliant taxpayers as policymakers choose rising deficits, lower spending on necessary priorities, or further tax increases to compensate for the lost revenue,” Treasury said.
“While roughly 99% of taxes due on wages are paid to the Internal Revenue Service, compliance on less visible sources of income is estimated to be just 45%,” Treasury said.
The compliance proposals in the American Families Plan provide the IRS with resources and information to overhaul and enhance tax administration.
The Treasury Office of Tax Analysis estimates that these initiatives would raise $700 billion in additional tax revenue over the next decade.
“This revenue is backloaded in the 10-year budget window as several of these new investments — such as hiring revenue agents capable of complex global high-net-worth examinations and building the technological infrastructure to support a new information reporting regime — take years to reach their full potential,” according to the report. “The revenue raised in the second decade amounts to $1.6 trillion.”
Biden’s compliance agenda, as explained by Treasury in its report, includes four elements:
1. Give the IRS nearly $80 billion over the next decade to address sophisticated tax evasion.
The IRS would grow no more than around 10% annually but would also have funding in place to make investments with large fixed costs — like modernizing information technology, improving data analytic approaches, and hiring and training agents dedicated to complex enforcement activities.
2. Provide the IRS with more complete information.
When the IRS can verify taxpayer filings with third-party information reports, such as the W-2 forms submitted by employers to report wages, compliance rates exceed 95%. Without third-party reporting, compliance rates fall below 50%.
3. Overhaul the IRS’ 1960s-era technology.
The IRS still relies on Individual and Business File Systems that date back to the 1960s — the oldest in the federal government. These resources would also support efforts to meet threats to the security of the tax system, like the 1.4 billion cyberattacks the IRS experiences annually.
4. Regulate paid tax preparers and increase penalties for those who commit or abet evasion.
Taxpayers often make use of unregulated preparers who lack the training to provide accurate tax assistance, according to Treasury. These preparers submit more returns than all other preparers combined, and taxpayers rely on their guidance, in part because of challenges in reaching the IRS in a timely manner when questions arise.