In a recent revelation, the Internal Revenue Service (IRS) announced that Americans failed to pay a staggering $688 billion in taxes for the year 2021.
This marks the highest tax shortfall ever recorded. But what’s behind this massive gap, and how does the IRS plan to address it?
The Breakdown of the Tax Gap
The IRS provided a detailed breakdown of the tax shortfall ¹. A significant portion, $542 billion, is attributed to underreported income. The remaining amount is owed by individuals who either didn’t file their tax returns on time or never settled their tax bills.
Interestingly, the total gap has seen an increase of over $138 billion compared to the estimates from 2017 to 2019.
The IRS attributes much of this rise to economic growth and a noticeable shift from wage income, which has tax withholdings, to gig economy jobs that often see lower compliance.
The Role of the Gig Economy & Compliance Rates
The gig economy has been a game-changer in many ways. With the rise of freelance and contract work, there’s been a decrease in wage income where taxes are typically withheld. This shift has contributed to the tax gap, as gig workers often have a lower degree of tax compliance.
Despite these challenges, the overall taxpayer compliance rate is expected to remain steady at 86.3% for 2021, post-audits and enforcement actions.
The Largest Chunk: Business & Farm Income
The most significant noncompliance amount, a whopping $182 billion, comes from undeclared business and farm income. These incomes are usually reported on Schedule C and F on individual tax returns.
IRS Commissioner Danny Werfel emphasized the importance of enhancing IRS compliance efforts in these key areas.
IRS’s Strategy: More Audits & Enhanced Reporting
The IRS is gearing up to intensify audits, especially targeting high-income taxpayers. They’re also preparing for a surge in reporting from gig workers and entrepreneurs as new rules for income reporting through payment apps will be implemented in 2023.
With third-party information reporting earnings and withholding, taxpayers are more likely to comply. As Natasha Sarin, a Yale law professor, puts it, “If people know the IRS has that information, they’re not going to underreport.”
AI-Powered Audits: A Game Changer for the IRS
IRS Commissioner Danny Werfel revealed that the agency employed artificial intelligence (AI) to assist in selecting the companies for auditing. While the specific names of these companies remain confidential, they average a whopping $10 billion in assets. These firms will be notified about the audits in the upcoming weeks.
Historically, the IRS has faced challenges in auditing large, multitiered partnerships. However, with the infusion of funds from Congress and the integration of AI, the agency aims to overturn this trend.
Werfel commented on the transformative power of these new tools, stating, “These new tools are helping us see patterns and trends that we couldn’t see before.”
The Hidden Tax Evasion Methods
The IRS acknowledges that their estimates might not cover all tax evasion methods. Tactics like using cryptocurrency, stashing money in secret offshore accounts, and utilizing flow-through entities are often hard to track.
Sarin comments, “When it comes to noncompliance, there’s a lot that’s difficult to measure.”
Historical Context: The Rising Tide of the Tax Gap
Delving deeper into the historical trajectory of the tax gap, the IRS’s recent projections have unveiled some startling figures. The gross tax gap for 2021 has surged by an eye-opening $192 billion when compared to the prior estimates for tax years 2014-2016. This escalation is not just a mere statistical anomaly but represents a trend that has been gaining momentum over the years.
What’s even more noteworthy is the IRS’s commitment to transparency and accountability. For the first time, the agency has provided tax gap projections for individual tax years, breaking away from the tradition of presenting aggregated data.
This shift signifies the IRS’s intent to closely monitor and address the tax gap on an annual basis, ensuring that the public and policymakers are consistently informed about the state of tax compliance in the country.
The Bigger Picture: Federal Deficit & Revenue Generation
The report’s findings are crucial in the context of the growing federal deficit and discussions on revenue generation, especially with the expiration of the Trump tax cuts looming in 2024.
Sarin suggests that better revenue collection could be a step towards fiscal sustainability and prioritizing spending.
In Conclusion: A Call for Vigilance
With a net tax gap of $625 billion for 2021, even after accounting for IRS compliance efforts and late payments, it’s clear that there’s a need for increased vigilance and enforcement.
As the landscape of income generation shifts, it’s crucial for both taxpayers and the IRS to adapt and ensure compliance.
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Sources
This article was produced and syndicated by Viral Chatter.
- irs.gov/newsroom/irs-updates-tax-gap-projections-for-2020-2021-projected-annual-gap-rises-to-688-billion
- wsj.com/personal-finance/taxes/americans-failed-to-pay-a-record-688-billion-in-taxes-the-irs-says-that-will-change-631ce518
- wsj.com/politics/policy/irs-with-ai-help-readies-audits-of-large-hedge-funds-real-estate-partnerships-c70c9aea
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Martha A. Lavallie
Martha is a journalist with close to a decade of experience in uncovering and reporting on the most compelling stories of our time. Passionate about staying ahead of the curve, she specializes in shedding light on trending topics and captivating global narratives. Her insightful articles have garnered acclaim, making her a trusted voice in today's dynamic media landscape.