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Op-ed: The tax gap is a real problem but so, too, is the ‘reverse tax gap’

  • As the national debt approaches $30 trillion, officials are laudably attempting to close the "tax gap," the amount of tax owed but never collected.
  • But an equally large issue is the fact that too many Americans overpay their taxes each year due to poor planning and lack of information and guidance.
  • The IRS does make efforts to help, and services like the Taxpayer Advocate Service need to be acknowledged. But they're not enough.

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As our elected officials debate how best to address a national debt approaching $30 trillion while simultaneously increasing spending levels and addressing wealth inequality, it should not be surprising that tax policy is at the forefront of the discussion

In that context, there has been an especially intense focus on the tax gap. That "gap" is the amount of tax that taxpayers legally owe the U.S. government but is not actually collected.

The tax gap, however, is a macro measurement based on estimates surrounding millions of taxpayers. It does not translate consistently at the individual level. In fact, many people — at all levels of taxable income — embody what some have referred to as a "reverse tax gap."

These people overpay their taxes, often repeatedly. Given this phenomenon, while reducing the tax gap seems a laudable goal, reducing the reverse tax gap should also be prioritized.

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The IRS has long studied the tax gap as a way of measuring tax compliance. According to the IRS, recent estimates for 2011, 2012 and 2013 showed an average annual gross tax gap for all types of taxpayers, including individuals and businesses, of approximately $441 billion.

After late payments and audits, the net tax gap was about $381 billion. The IRS estimates that these numbers translate into a compliance rate of about 83.6% or, after enforcement efforts, 85.8%, leading the IRS to conclude, perhaps surprisingly, that "in general, the tax gap estimates dating back decades consistently show the United States enjoys a relatively high and stable voluntary tax compliance rate."

Importantly, however, while the country's tax gap is substantially smaller than it is in many other countries (it's about twice as large in Italy), it may be increasing.  IRS Commissioner Charles Rettig recently suggested that transactions involving cryptocurrency, offshore transactions and illegal income could eventually lead to a tax gap of more than $1 trillion if not adequately addressed.

There is logic in focusing on the tax gap, especially as overall tax receipts increase.


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