IRS says it collects $300 billion less in taxes than what is owed

Study of 2001 revenue shows gap widening

March 30, 2005|By Laura Smitherman | Laura Smitherman,SUN STAFF

The Internal Revenue Service said yesterday that the gap between what taxpayers owed and what they paid topped $300 billion in 2001, with owners of small businesses and the self-employed accounting for a large part of the problem.

The IRS released the data as Congress considers the agency's annual budget request, which includes an additional $500 million for enforcement, and as President Bush has called on lawmakers to simplify the federal tax code.

IRS Commissioner Mark W. Everson said the tax-gap study underscores the need for more funding and advocated a more streamlined tax system that would leave less room for errors.

The president formed an advisory panel in January to recommend tax-code changes and included $10.7 billion for the IRS in his budget.

The preliminary IRS data shows the tax gap was $312 billion to $353 billion in 2001, though the agency recovered about $55 billion of the unpaid taxes through audits and late payments.

That means that up to 16.6 percent of the total tax liability wasn't paid in 2001, compared with 14.9 percent in 1998, the last time the study was done. The IRS culled the data from a three-year study of 46,000 individual tax returns for 2001.

"The government is being shortchanged by over a quarter-trillion dollars by those who pay less than their fair share," Everson said, less than three weeks before the April 15 tax-filing deadline. "If you're planning to cheat, there's a greater and greater chance as time goes on that we're going to get you."

Individual income taxes, including those from small businesses that haven't incorporated, account for about two-thirds of unpaid taxes.

Corporate taxes account for less than 10 percent, though that estimate is based on older and less-reliable data. The rest of the tax gap comes from unpaid payroll taxes and estate and excise taxes.

About a fifth of the money paid in alimony was misreported to the IRS, though that resulted in less than $1 billion in unpaid taxes, according to the study. Individuals not reporting other income, including gambling winnings, resulted in as much as $18 billion in unpaid taxes.

Much of the unpaid income taxes from individuals stemmed from people who work for themselves. They understated their business income by up to $99 billion. They also didn't pay up to $56 billion in Social Security and Medicare taxes.

"Typically, your less-sophisticated business owners are those that don't incorporate," said Theresa Bandell, tax manager at the accounting company Stegman & Co. in Towson. "They're confused, and they often don't realize the tax consequences."

Everson said the IRS will continue to increase the number of audits of high-income taxpayers and corporations while expanding its focus on the self-employed. The number of audits topped 1 million last year, 37 percent more than in 2001.

"Those who try to follow the law but can't understand it are going to make mistakes or they're just going to throw up their hands and say, `Why bother?'" Everson said. "Individuals who seek to pay less than what they owe often hide behind the tax code's complexity in order to escape detection."

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