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Closing the Tax Gap

If everyone paid what they owe, wouldn't this help reduce our federal debt?

Q: I have heard that only about half of the taxes that Americans owe the federal government are ever paid. Is that correct? If compliance were higher, wouldn't this help eliminate the $17 trillion federal debt?

A: The most recent IRS data on the "tax gap" is for 2006. The IRS defines the tax gap as the "amount of true tax liability faced by taxpayers that is not paid on time." For 2006 it is estimated to be $450 billion. The voluntary compliance rate (VCR) for 2006 was 83.1 percent. IRS data reveals that compliance is far higher when reported amounts are subject to information reporting and, more so, when subject to withholding. For example, the "net misreporting percentage" for amounts subject to information reporting and withholding is 1 percent; for amounts subject to information reporting but no withholding, it is 8 percent; and for amounts subject to little or no information reporting it is 56 percent. Information reporting refers to the reporting of taxable compensation on W-2 and 1099 forms.

Clearly, if every American paid his or her taxes, the staggering federal debt could be substantially reduced in a decade, even at current levels of spending and tax revenue. Closing this gap is the problem, given limited resources for tax enforcement.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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  • January 1, 2013

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