NCPA - National Center for Policy Analysis

What Is the Tax Gap?

December 18, 2014

The American tax code is confusing. Senator Tom Coburn (R-Okla.) has released a 300-page report on the U.S. tax code, detailing just how complex filing taxes has become. Between 2001 and 2012, more than 4,600 changes were made to the tax code -- an average of more than one per day. As of 2012, the Internal Revenue Code was 9,000 pages long.

That the tax code is complex is evidenced by the amount of time Americans spend complying with it:

  • Americans spend 6.1 billion hours annually complying with IRS filing requirements, which Coburn notes is equal to an entire year's work for 3 million full-time workers.
  • Most people rely on third parties to prepare their taxes. For individual filers, 59 percent used tax preparers in 2010, and 30 percent used tax software.
  • Businesses also use tax preparers, and compliance is especially costly for small businesses -- according to the NFIB, it costs small businesses 67 percent more to comply with the tax code than it costs large businesses.
  • Small businesses spend between $18 and $19 billion annually in tax compliance costs. That money, the report says, could otherwise "be used to hire new employees, invest in research and development, or market products."

There is another cost to this complexity: the tax gap. The tax gap is the difference between the amount owed to the federal government and the amount actually paid; in 2006 (the most recent data available), that gap was at $450 billion. It dropped to $385 billion after late payments were made and the IRS took enforcement action. The government's collection rate for that year was 86 percent, in line with previous rates. If these trends continue, the 2014 tax gap will be close to $500 billion; were it paid, the Coburn report says the entire 2014 deficit ($483 billion) could disappear.

How to close the tax gap? The report offers a few options, one of which is to prevent serious tax delinquents from being employed by the federal government, as their salaries are paid by taxpayers. According to a 2013 IRS report, 318,000 federal workers owed more than $3.3 billion in federal taxes, not including the taxpayers already paying back tax debts through installment agreements.

But, according to the report, the easiest option would be to make the tax code simpler and eliminate the likelihood of mistakes. Not only do payment errors result from the complexity, but more complexity leads to more confusion, with the IRS increasingly unable to meet its demands:

  • The IRS saw an increase in phone calls from taxpayers seeking help from 71 million to 108 million between 2004 and 2012.
  • Over that same time, the number of phone calls answered fell from 36 million to 31 million.
  • During the same period, the IRS had a written correspondence backlog that tripled from 357,151 cases to 1,028,539 cases.

The report also notes that an overly complex tax code opens the door to tax avoidance, and taxpayers look for loopholes and ambiguities hidden within its 9,000 pages.

Source: "Tax Decoder," Office of Senator Tom Coburn, December 2014. 


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