The United States Internal Revenue Service (IRS) has released a new set of
tax gap estimates for the 2006 tax year, the first full update of the report
in five years.
The tax gap is defined as the amount of tax liability faced by taxpayers that
is not paid on time. It is considered to be a helpful guide to the scale of
tax compliance and to the persisting sources of low compliance, but it is not
to be used as an adequate guide to year-to-year changes in IRS programmes or
to year-to-year returns on IRS service and enforcement initiatives.
In fact, the new figures show that the US compliance rate is essentially unchanged
from the last review covering the 2001 tax year. With estimated total tax liabilities
rising from USD2.11 trillion in 2001 to USD2.66 trillion in 2006, the tax gap
also increased from USD290bn to USD385bn over the same period. Therefore, the
estimated tax compliance reached a level of 85.5% in 2006, compared with 86.3%
five years earlier.
Some growth in the tax gap estimate is attributed to better data and improved
estimation methods. For example, the IRS developed a new econometric model for
estimating the tax gap attributable to small corporations which was then applied
to newer operational data. Also, large corporation tax gap estimates for 2006
are based on improved statistical methods and updated data. Finally, the data
related to individual income taxpayers continues to improve based on improved
estimation techniques and newer data.
It is said that the tax gap can be divided into three components: non-filing,
under-reporting and underpayment.
As was the case in 2001, the under-reporting of income remained the biggest
contributing factor to the tax gap in 2006. Under-reporting across taxpayer
categories accounted for an estimated USD376bn of the gross tax gap in 2006,
up from USD285bn in 2001.
Overall, the IRS reported that compliance is highest where there is third-party
information reporting and/or withholding. For example, most wages and salaries
are reported by employers to the IRS and are subject to withholding. As a result,
a net of only 1% of wage and salary income was misreported. But amounts subject
to little or no information reporting had a 56% net misreporting rate in 2006.
USA-TAX-NEWS.COM 
