Filling the IRS’ Tax Deficit

Well, it’s tax time, so here’s a slap for all of us taxpayers out there.

Almost 50% of Americans pay no federal income tax – but that’s not news, really. Those numbers have been around for some time.

But here are some numbers that I’ll bet you haven’t heard about the taxes people don’t pay…

The IRS reports that only 84% of the money owed in taxes is actually collected each year, and that results in a net tax gap of $406 billion.

The IRS does collect $52 billion of that owed money after the fact in delinquent taxes. And in case you’ve never gone round and round with the IRS, it isn’t the tax that hurts when it finally catches you – it’s the penalty and interest. That’s usually as much as or more than the taxes owed.

The IRS reports that 84% of the gross amount owed, $387 billion, comes from underreporting income. Another $32 billion comes from people who didn’t file any returns at all. The vast majority of all of this deficit comes from individual income tax returns.

In cases where income isn’t reported and taxes haven’t been withheld before a person was paid, 63% of their income is misreported. When the income has taxes withheld, that number drops to 1%.

Now, in the age of supercomputers, it doesn’t seem like a herculean task to get this unpaid tax number down. But it isn’t happening.

In fact, IRS funding has been decreasing almost every year since 2010, while by 2016 the number of taxpayers had increased by 10 million. That means fewer audits are happening and fewer people are getting caught.

A CPA friend of mine recently told me not to worry because nobody gets audited anymore. That’s good news in some cases, I guess.

But the biggest roadblock to fixing this tax gap isn’t funding, audits or more personnel for the IRS. No, to fix it we have to give the IRS more power than it already has.

In most IRS matters, the rules of evidence and many of the personal privacy safeguards that are provided in the Constitution are thrown out the window by default.

Once, over the paltry sum of $250 in taxes the IRS said I owed in 1983, that I did not, I was told by both the attorney representing the IRS and the judge in the case that I had to prove that I had not been paid this income.

And I really hadn’t been paid the money.

In case you’ve never thought about it, it is impossible to prove a negative. But that didn’t matter to the tax court. I ended up paying taxes on money I never received.

Luckily, I was able to talk my way out of the interest and penalties, which were twice the tax owed.

My better half, Eileen, got a bill from the IRS last year for $10,000 in taxes it said she owed. She was able to prove that she did not owe it, but it cost $600 for a CPA to take the case and convince the IRS it was wrong.

But there is nothing in the law that says the IRS has to refund any of the money it costs for private citizens to correct the situation and convince the IRS it has made an error.

So should we give the IRS more power to fix the tax gap? Not if I have anything to do with it.

The only solution? Pay your taxes. Believe me, the money you might save is not worth the trouble the IRS can create in your life.

Good investing,

Steve