IRS reports tax underpayment at $450 billion

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A new year has just started, which means it is almost time for you to file income tax returns. The Internal Revenue Service is going to be watching for underpayments, which it estimates at around $450 billion per year. Article resource: Tax underpayment at $450 billion, says IRS

Waste not the only place cash is disappearing

Fiscal reform has been a rallying cry for several years and political figures love to wax stentorian about this. The Internal Revenue Service has stumbled across a possible trigger behind major shortfalls.

In 2006, as reported by Bloomberg, there was a federal budget deficit of $248.2 billion. It also happened that in that same year, according to the Washington Post, that the amount of taxes that went uncollected totaled up to about $450 billion, before any actions or audits were taken, meaning 17 percent of taxes by dollar amount went unpaid. Once audits and enforcement actions were taken, it shrank to $385 billion.

The bulk of the tax gap, as it is called, comes from people who were under-reporting income that, according to Bloomberg, was estimated by the IRS to add up to $235 billion. Of that, an estimated $122 billion was due to business income not being reported on individual returns.

Five year window for tax info

Tax complains is the amount of taxes which were not paid even though they should have been. The 2006 numbers are the most recent from the IRS that we have. This is because it takes about five years for the IRS to collect and publish data.

The rate of compliance, or how many individuals and businesses correctly report and pay their taxes, for 2001 was 86.3 percent, compared to 85.5 percent in 2006, meaning a non-compliance rate of 13.7 percent and 14.5 percent in those years, respectively.

After there were audits and measures taken, the compliance numbers changed. They dropped from 17 percent to 14 percent, the Washington Post explains.

Businesses do not pay up

Though the bulk of unpaid taxes after enforcement actions were still attributable to individuals misre-porting income, the single infraction that left the biggest shortfall was the $122 billion loss from business income not reported on individual returns. As reported by the Wall Street Journal, that income is from Schedule C and Schedule F, located on Form 1040, or income from smaller businesses or farms.

According to Bloomberg, large companies underpaid their taxes by $67 billion in 2006. Of that, $48 billion was taxes unpaid by large companies that have at least $10 million in assets.

Sources

Bloomberg

Wall Street Journal

Washington Post

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