Tax gap

April 15, 2005

THE INSTRUCTIONS defy comprehension, the forms make your head spin, and writing checks to the Internal Revenue Service ranks among the ultimate downers, but the U.S. system is a wonder of voluntary compliance. Given that today is the dreaded deadline for filing 2004 taxes - groan - it's worth noting that the vast majority of Americans appear to pay pretty much what they owe to the federal government. Sure, many work hard at legally reducing their tax bills as much as possible - per Judge Learned Hand's famed 1934 ruling that "nobody owes any public duty to pay more than the law demands" - but they nonetheless comply willingly.

Trouble is, this honest majority is being cheated by a minority of taxpayers - estimates start at a million filers - who don't pay or who underpay their taxes. An overvalued deduction here or off-the-books income there may not seem like a big deal, but the cost to the nation as a whole is startling: According to a recently released IRS study, individual and corporate tax underpayment was about $300 billion to $350 billion in 2001. This likely conservative estimate of the collection gap totals about 15 percent of the $2 trillion annually collected by the IRS, and it almost equals last fiscal year's $412 billion federal budget deficit.

The IRS must be given additional resources to invest in more tax enforcement, said to bring in more than $4 for every $1 spent. The agency is doing more than at the end of the 1990s, when by all accounts it hit a low: Total audits, audits of high-income filers and larger corporations, and criminal investigations have been rising. But they remain below their mid-1990s' levels, as does IRS staffing. The agency has received modest budget increases in recent years, but not enough to keep up with the rapid growth in its workload. To not sharply boost enforcement is to ask the majority of honest taxpayers to carry the minority of cheaters.

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