Tax Notes logo

IRS Seeks Congress’s Aid to Tackle Possible $1 Trillion Tax Gap

Posted on Apr. 14, 2021

The IRS needs consistent funding and a coordinated approach with Congress to make a meaningful dent in the potentially $1 trillion annual tax gap, the agency’s chief said.

“I think it would not be outlandish to believe that the actual tax gap could approach, and possibly exceed, $1 trillion per year,” IRS Commissioner Charles Rettig told a Senate Finance Committee hearing on the 2021 filing season on April 13.

Rettig’s tax gap estimate is more than double the gross $441 billion annually that the IRS calculated it lost to taxpayer noncompliance from 2011 to 2013, the last time the gap was assessed between what taxpayers owed and what the IRS collected. It is also around $400 billion higher than a previous worst-case estimate by former IRS Commissioner Charles O. Rossotti published in March 2020.

Rettig said the 2011-2013 tax gap estimate fails to account for the tax implications of major economic developments since then, including more than 8,600 varieties of cybercurrencies now worth almost $2 trillion.

An updated tax gap calculation would also have to consider reduced compliance due to the loss of 17,000 enforcement personnel at the IRS since 2010, Rettig noted.

Noting that Rettig’s $1 trillion tax gap is in line with the committee’s own analysis, Chair Ron Wyden, D-Ore., said that “it’s time to throw out business as usual on this” because that “has proven to be a rainmaker for cheaters and criminals, and unfair to everybody else.”

Wyden said he planned to make the IRS’s progress, or lack of it, on addressing the tax gap an annual feature of hearings on tax agency performance.

Rettig noted that the IRS expects to release an updated estimate of the tax gap in 2022.

‘A Lot of Heavy Lifting’

Wyden expressed support for the Biden administration’s $1.2 billion, 10.4 percent fiscal 2022 boost to the IRS’s $12 billion enacted budget. Sustained tax agency funding will be necessary to restore IRS enforcement for an assault on the tax gap after a decade of GOP-led budget cuts, he said.

Rettig said historical estimates suggest that “with resources, the IRS could probably bring in 10, 15, 20 percent” of the tax gap, adding, “I think a modernized IRS could beat that.”

A $1 billion appropriation solely for IRS enforcement would allow the agency to hire 4,875 new frontline enforcement personnel and their counterparts in the Taxpayer Advocate Service, the Independent Office of Appeals, and the Office of Chief Counsel, Rettig said. 

Some of that $1 billion appropriation would be used to improve systems to detect tax fraud and evasion “that even two years ago we could not identify,” Rettig added. “We’re headed in the right direction” with IT systems modernization, he said.

Congress should expand income information reporting so the IRS can match it with tax returns and have a better chance of catching tax scofflaws, Rettig said.

Information matching could be especially helpful in assessing taxes against cybercurrencies, which “are not visible items by design” to tax authorities, Rettig noted. 

Congress should also grant the IRS authority to regulate and set continuing education standards for paid return preparers, Rettig said, adding that incompetent or unscrupulous tax practitioners are part of the tax gap problem.

Wyden agreed with Rettig’s call for a multifaceted approach to the tax gap, embracing both tax agency funding and reforms to tax law.

“There’s a connection between these [tax gap] issues,” Wyden said. “We’re seeing a huge tax gap. We’re seeing the question of the shell companies. We’re seeing how modern crooks are constantly being more inventive and have better resources than the people who are trying to catch them when they abuse the laws. So we’ve got a lot of heavy lifting to do here.”

Copy RID