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Q: Estimate of revenue lost to the federal government due to unpaid taxes and fraud ( Answered 5 out of 5 stars,   0 Comments )
Question  
Subject: Estimate of revenue lost to the federal government due to unpaid taxes and fraud
Category: Relationships and Society > Government
Asked by: hellblazer-ga
List Price: $10.00
Posted: 12 Feb 2003 10:08 PST
Expires: 14 Mar 2003 10:08 PST
Question ID: 160514
I'd like an estimate of unpaid federal income taxes for as many years
as I can get data for.  Hopefully good references.

What I'm looking for is estimates regarding how much revenue the
federal governemnt is not receiving due to unpaid taxes and tax fraud.
Answer  
Subject: Re: Estimate of revenue lost to the federal government due to unpaid taxes and fraud
Answered By: pafalafa-ga on 12 Feb 2003 16:55 PST
Rated:5 out of 5 stars
 
Hello Hellblazer,

Thanks for an interesting question, one who's relevance grows as we
all get closer and closer to that fateful April 15th deadline.

The US government has made suprisingly few careful estimates of what
is known as the "tax gap" -- the gulf (or chasm, perhaps) between what
is actually collected, and what is actually owed.

Four official estimates are available for the years 1985, 1988, 1992,
and 1998.

The first three are included in a hard-to-find, hard-to-download IRS
document, "Individual Income Tax Gap Estimates for 1985, 1988, and
1992" (April 1996).  The report can be found here:

http://www.irs.gov/taxstats/article/0,,id=96655,00.html

but it exists as a downloadable, exe file at the very bottom of the
page.  The file name is:  92D1415.EXE

Click on it, download it to your computer, and then click on the
downloaded file, and it will self extract into a Wordperfect document
(how simple is that?)

Here are two extracts from the report:  the Executive Summary, and the
key data for the tax gap:

-----
	EXECUTIVE SUMMARY

	This report presents current Internal Revenue Service estimates of
the individual income tax gap.  Both gross and net tax gap estimates
are presented.  The gross tax gap is the amount of "true" tax
liability for a particular tax year that is not paid voluntarily and
timely.  The net tax gap is the gross tax gap minus the amount of tax
remitted late or collected by IRS through its enforcement activities. 
The estimates relate only to payment of tax on income earned in legal
activities.  For example, the income tax due but not paid on income
from distribution of narcotics is not included.

	Both gross and net tax gaps consist of three main components:
nonfiling, underreporting, and underpayment.  The nonfiling gap is the
amount of tax liability owed by taxpayers who do not voluntarily and
timely file returns.  The underreporting gap is the amount of tax
liability not voluntarily reported by taxpayers who do file returns. 
The underpayment gap is the amount of tax liability that individuals
report on their tax returns, but do not pay voluntarily and timely.

	Our estimates of the gross individual income tax gap for tax year
(TY) 1992 range from $93.2 to $95.3 billion.  Of this amount, the
nonfiling gap accounts for an estimated $13.5 to $13.8 billion.  The
underreporting gap is estimated to account for another $71.3 to $73.1
billion, while our estimate of the underpayment gap is $8.4 billion. 
We estimate total "true" individual income tax liability to be $550.2
to $552.3 billion for TY 1992.  Therefore, our estimates of the
overall individual noncompliance rate (the gross tax gap as a
percentage of the "true" tax liability) for TY 1992 range from 16.9 to
17.3 percent.

	The net tax gap is the gross tax gap less amounts remitted late or
collected as the result of enforcement.  We estimate that IRS
enforcement actions will eventually bring in $14.9 billion of TY 1992
revenue.  Of this amount, an estimated $3.2 billion relates to the
nonfiling gap, $6.9 billion to the underreporting gap, and $4.8
billion to the underpayment gap. Hence our estimates of the net tax
gap for TY 1992 range from $78.3 to $80.4 billion.  Of this amount,
the net nonfiling gap accounts for an estimated $10.3 to $10.6
billion.  The net underreporting gap is estimated to account for
another $64.4 to $66.2 billion, while our estimate of the net
underpayment gap is $3.6 billion.

	Previously published IRS individual income tax gap estimates were
based primarily on compliance data for TY 1982 and earlier years.  The
estimates presented in this report are derived from more recent
compliance data, particularly Taxpayer Compliance Measurement Program
(TCMP) examinations of individual income returns filed for TY 1985 and
TY 1988, and the TCMP survey of nonfilers for TY 1988.  The current
estimates also reflect changes in tax law including changes from the
Tax Reform Act of 1986 and the Omnibus Budget Reconciliation Act of
1990.

-----

A.  Gross Tax Gap

	Table 1 presents our estimates of the gross individual income tax gap
by main gap components for tax years 1985, 1988, and 1992.  The
estimated gross gap ranges from $68.9 to $70.4 billion for TY 1985,
from $79.3 to $80.9 billion for TY 1988, and from $93.2 to $95.3
billion for TY 1992.

-----

All told, the IRS estimates that 17-18% of taxes that are due do not
get paid.  The report gives a great deal of additional detail on which
categories contribute how much to the tax gap, so I certainly
recommend downloading the full report if you are interested in more
information.

It's important to note that this report focuses exclusively on
individual taxes, and does not include an estimate of unpaid/underpaid
business taxes (but we all know how honest *they* are...!) or other
tax categories.

----

A more recent IRS document, "IRS MOVES TO ENSURE FAIRNESS OF TAX
SYSTEM;RESEARCH PROGRAM WORKS TO INCREASE COMPLIANCEPROGRAM
EFFECTIVENESS, REDUCE BURDENS ON TAXPAYERS" can be found here:

www.irs.gov/pub/irs-soi/newsrelease-ir-02-05.pdf

with updated tax gap information for 1998 (the most recent estimate
available):

"The gross tax gap, which includes amounts associated with non-filing,
underreporting and underpayment of all taxes (individual, corporate,
employment and estate) is estimated at $278 billion for tax year
1998."

Note that this estimate now includes other tax categories, besides
just individual tax, so it is not directly comparable to earlier
numbers.

This same document also reports on the plans of the IRS' "National
Research Program" to get a better, more up-to-date handle on missing
tax dollars -- sort of fixing the information gap on the tax gap, if
you will.

-----

I spoke with one of the program directors in the research office about
the $278 billion figure, trying to track down a report that would
serve as a source for the data.  He told me very frankly that this was
a back of the envelope type of calculation that was generated due to
intense political pressure to "come up with a number".  It is not part
of any formal IRS study, though it has certainly entered the
literature as an oft-quoted statistic.

----

That's about all there is on this topic...the IRS official was almost
apologetic that we, as a country, didn't have more and better
information, but the presumption is that the new research effort will
go a long way towards correcting that.


I hope this meets your information needs.  If for any reason you feel
some additional effort is warranted, let me know how I can be of
service, but posting a "Request for Clarification".


search strategy:  Google search on:  IRS statistics "tax gap"

Clarification of Answer by pafalafa-ga on 13 Feb 2003 08:46 PST
Hey...thanks for the nice rating.

The IRS actually sent me some follow-up information on the 1998 data
(I told you they were feeling guilty!).  It's a graphic that lays out
the sources of the tax gap -- you and I are probably the first non-IRS
folks to ever see it.  It's in Powerpoint format, so you'll need a
viewer that's capable of looking at the file -- if you don't have one
already, I think it's possible to get a free powerpoint viewer from
one of the freeware download sites.

Anyway, the file is here for the dowloading and for your viewing
pleasure:

http://www.lucidmatrix.com/uploads/Tax Gap Map 2-03.ppt

Request for Answer Clarification by hellblazer-ga on 13 Feb 2003 09:30 PST
Most excellent.  This is exactly the kind of stuff I was looking for. 
I'm in an argument with some friends over how much the government is
losing due to fraud and underpayment of taxes.  They don't believe
it's anywhere near this magnitude.

Of course, the new revelations of Enron's use of their tax department
as an income center in this morning's papers makes the case all by
itself.

Again, many thanks.

Clarification of Answer by pafalafa-ga on 13 Feb 2003 09:41 PST
Thanks again.

Clarification of Answer by pafalafa-ga on 08 Apr 2003 15:50 PDT
Hey there,

I don't know if you're still checking into Google Answers, but I'm
sitting here watching ABC Evening News, and one of their big stories
is that the IRS fails to collect almost $300 billion in taxes...they
must have found our report!  Maybe they'll have the story on their
website, if you want to check it out.

Cheers.

paf

Request for Answer Clarification by hellblazer-ga on 08 Apr 2003 16:32 PDT
<heh>

Figures.

Nice thing I like about Google Answers is that the answers are public domain.

Once into the Google black hole, it enters the consciousness of the net.

Thanks for the update.

Clarification of Answer by pafalafa-ga on 08 Apr 2003 17:24 PDT
Sure thing.
hellblazer-ga rated this answer:5 out of 5 stars and gave an additional tip of: $5.00
Excellent!

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