When one thinks of the IRS, the first response typically is a mixture of fear and anger, largely because their job is seen as taking away our money. This reaction may be an oversimplification of what the agency does but has enough grains of truth to be understandable. But when one looks deeper into it, it seems fair to question just how good the IRS is at getting that money.
This can be seen in recent tax gap projections released by the agency for tax years 2020 and 2021. If we were just doing some classroom grading, the agency may not be doing terrible as it achieved an 86.2% net compliance rate for 2020 and 86.3% for 2021 (this is essentially the percent of expected taxes owed that have been collected). If we go beyond that B-level grade mark, though, that still is a significant amount of money that the IRS expected and did not receive.
For things feel worse when going beyond percentages to actual dollar amounts. For 2020, the IRS has a net tax gap of $539 billion not collected and for 2021 that number stands at $625 billion. Yep, for two years, that adds up to over a trillion dollars. It really feels like a government could do something good with that amount of money.
And oh yeah, add to this that the IRS also offered new estimates of tax gaps for the periods of 2014-16 and 2017-19 that combined add up to more than another $300 billion. And to think us peons run around wildly for lottery jackpots once they start to approach only one billion.
Now just what should be taxed and at what rate is going to be a political debate that never comes to a final answer. But it should be easier to agree that there’s a problem when a government expects to receive a certain amount of money and then 15% of it gets lopped off and is just wandering around elsewhere in the universe.
Of course, discussing how to get this money back also turned into a political battle as recent increased funding to the IRS showed. And yes, there is definite debate to be had over just how the agency should go about fixing the gap.
I did, however, think that it was worth mentioning this just to give appreciation for the size of the gap. For hopefully if it can be acknowledged that there is a problem, it gives a base of agreement to begin upon.
Connect to Us ~ Facebook ~ Twitter
To ensure we don't make the folks at the IRS ornery, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.