Faced with a $688B shortfall, the IRS is coming after tax dodgers
Americans owe Uncle Sam $688 billion in unpaid taxes on their 2021 returns, according to the IRS. It’s the largest shortfall ever recorded.
The tax gap widened significantly from pre-pandemic levels, where the IRS estimated a $496 billion shortfall for the 2014-2016 tax years and $550 billion for 2017-2019.
For the 2021 tax year, underreported income contributed a whopping $544 billion to the gap. The remainder of the shortfall was due to underpayment and those who didn’t file returns on time.
It wasn’t all bad news for the revenue service: Taxpayers’ compliance rate is forecast to have stayed relatively steady at 86.3%—once audits and other enforcement measures are factored in.
“This increase in the tax gap underscores the importance of increased IRS compliance efforts on key areas,” IRS Commissioner Danny Werfel said in the Oct. 12 release. “With the help of Inflation Reduction Act funding, we are adding focus and resources to areas of compliance concern."
The Inflation Reduction Act increased the IRS budget by about $80 billion over ten years. This seems like a huge amount until you realize that about one-quarter of the IRS' enforcement budget was slashed in the previous decade.
High-income earners, corporations under the microscope
With fresh funding in the pipeline, the IRS didn’t mince words when it outlined its new enforcement targets last month.
The IRS announced it would shift its focus from working-class taxpayers to high-income earners, partnerships, corporations, and “promoters aggressively peddling abusive schemes.”
“As part of the effort, the IRS will also ensure audit rates do not increase for those earning less than $400,000 a year,” the agency said. Individuals with an annual income of $400,000 or more represent the top 1.8% of income earners.
This demographic has faced greater scrutiny since President Biden took office in 2021 with plans to raise taxes on the wealthy—a category that includes all earners above $400,000.
In his 2022 State of the Union address, Biden promised that nobody earning less than that “will pay an additional penny in taxes.”
It’s not just the wealthy
While Biden and the IRS say they’re targeting wealthier Americans, the tax agency’s broadening scope means it’ll have more resources to enforce compliance in other population segments.
Beginning in the 2023 tax year, payment services like Venmo and Cash App and platforms like eBay and Airbnb must send tax slips to anyone earning more than $600.
According to Yale law professor and former Treasury official Natasha Sarin, taxpayers are more likely to report income when third-party services send their information to the IRS.
“If people know the IRS has that information, they’re not going to underreport,” she told The Wall Street Journal.
Sarin also said that more effective tax collection could help Washington better manage its massive federal deficit.
However, fiscal responsibility with the government’s current spending habits seems like a pipedream since the Treasury spent $711 billion on interest payments alone last fiscal year, according to the Congressional Budget Office.