The “Tax Gap”

16/04/12 9:29 pm | Comments (0) | Posted By:

Did you ever wonder how many people do not actually pay their taxes under our “voluntary compliance” system here in the United States? Well, it turns out that the latest IRS estimates show about 15% of the total tax liability owed for 2006 was actually collected.
This rate is virtually unchanged from the 2001 compliance rate and amounts to $450 billion for 2006. This represents a $105 billion increase over the2001 estimated tax gap of $345 billion. Enforcement efforts and late payments reduce the net tax gap to $385 billion for 2006 which is still $95 billion greater than the $290 billion net tax gap in 2001. While these numbers are staggering, the growth in the tax gap somewhat mirrors the growth in total tax liabilities. Furthermore, the increased estimate may well result from better data and improved estimation methods.

This “tax gap” results from three different types of non-compliance: failure to file, underreporting taxable income, and underpayment of amount of tax due. Underreporting of income continues to be the largest contributing factor to the 2006 gross tax gap accounting for $376 billion of the $450 billion total. Tax non-filing and underpayment of tax accounts for $28 billion and $46 billion, respectively.
As you might imagine, non-compliance is lowest where there is third-party information reporting and/or withholding, such as wages and salaries. Conversely, amounts not subject to information reporting had a 56% net misreporting rate in 2006.

Just think how much progress we could make towards reducing our horrendous deficit if this gap were closed!


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Employee or Independent Contractor?

16/04/12 9:27 pm | Comments (1) | Posted By:

Washington has recently renewed its interest in worker classification issues, i.e. employee v. independent contractor. In September the IRS and Department of Labor signed a memorandum of understanding to share information regarding worker “misclassification.” The same month the IRS established a new voluntary classification settlement program that provides some relief from federal unemployment for eligible taxpayers who agree to prospectively treat workers as employees.

This has been a bone of contention from the IRS for decades because businesses that hire workers as independent contractors save money on federal employment taxes. There is a facts-and-circumstances based test under common law to help determine the proper classification that considers whether the employer has the right “to direct and control” how the worker performs the services provided.

Section 530 of the Revenue Act of 1978 does provide some relief from worker misclassification. As long as a taxpayer has a “reasonable basis” for treating a worker as an independent contractor, Section 530 may allow the worker to be treated as a nonemployee.

President Obama’s plan, “Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction,” released in September 2011 includes provisions that would permit the IRS to issue guidance on proper worker classification and require the prospective reclassification of workers who are currently considered misclassified, and whose reclassification would otherwise be prohibited under Section 530.

Of course all this awaits congressional action on the President’s jobs plan or perhaps a new separate bill to address worker classification issues.

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Protecting Yourself from Identify Theft

16/04/12 9:25 pm | Comments (0) | Posted By:

Let’s assume you are a law-abiding taxpayer but do not get around to filing your return until later in the filing season. Suddenly you are informed that two returns have been filed using the same social security number. Yours! Guess what? Your identity has been stolen.

To avoid having your identity heisted, there are a number of things you should know.

The IRS does not initiate contact with taxpayers by email with requests for personal or financial information, or to notify you that you are being audited or getting a refund. If you receive an email like this, forward it to the IRS at

Identity thieves might gain access to personal information by stealing your wallet, requesting information about you on the phone, rifling through your trash or accessing information you have provided to an unsecure internet site. If your social security number is stolen, another individual might use it to get a job. When that person’s employer reports the income to the IRS it will look like you have underreported your income. When this occurs, contact the IRS to show that the income isn’t yours.

To protect against theft do not routinely carry your social security card or other documents that show your social security number.

It is important to be extra vigilant now since IRS impersonation schemes flourish during the income tax filing season. Such scams can take the form of e-mail, phone, fax, even tweets.

For more information about identity theft, including how to report it, search “Identity Theft” on the home page.

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