By Jason Bramwell
A new report released by the Treasury Inspector General for Tax Administration (TIGTA) on September 16 recommended that the IRS needs to make improvements to the tax gap estimate.
The tax gap is the difference between taxes owed and taxes paid voluntarily and on time, and the estimate is commonly used in tax policy and administration. The IRS' most recent tax gap estimate was $450 billion for tax year 2006.
According to the TIGTA report, The Internal Revenue Service Needs to Improve the Comprehensiveness, Accuracy, Reliability, and Timeliness of the Tax Gap Estimate, as Congress considers tax reform, the tax gap should reflect as accurately as possible the many forms and areas of noncompliance so that tax policy options can be considered.
"Measuring the tax gap is both complex and challenging", Treasury Inspector General for Tax Administration J. Russell George said in a written statement. "However, I am concerned about the overall accuracy of the estimate."
During a review performed at IRS headquarters in Washington, DC, from July 2012 through March 2013, the TIGTA found that the individual tax gap estimate could be more comprehensive if it included estimates for the informal economy and offshore tax evasion. Informal economy is defined as the part of an economy that is not taxed, monitored by any form of government, or included in a gross national product.
These areas present significant challenges to tax administration, and the absence of an estimate could hinder or delay possible solutions.
In addition, the estimates for the underreporting of corporate taxes are based on operational examinations and may not be representative of all corporate taxpayers.
"By its very definition, a significant portion of the tax gap is inferred and not observed. This means that the IRS does not actually observe all noncompliance, but infers indirectly the extent of noncompliance through the use of statistics and economic models", the report states. "Because of this, the tax gap cannot be significantly reduced through traditional examination techniques."
The TIGTA recommended the IRS study the feasibility of developing separate estimates for the informal economy and offshore tax evasion. In addition, it recommended the IRS consider changing the approach to measuring the corporate tax gap estimates.
According to the TIGTA, the IRS substantially agreed with its recommendations to study the feasibility of developing separate estimates for the informal economy and offshore tax evasion. The IRS also agreed to study the merits of changing the approaches to estimating corporate tax underreporting.
"The IRS agrees that some steps may be taken that would improve the quality of tax gap estimates and provide additional insights to policymakers", Rosemary Marcuss, IRS director of research, analysis, and statistics, wrote in a memorandum in response to the TIGTA's recommendations.