tigtalogo 300x283 IRS needs to improve the Tax Gap estimateThe new report by the Treasury Inspector General for Tax Administration,or TIGTA, was released on September 16, 2013 – stating that the IRS needs to improve accuracy, timeliness and reliability and comprehensiveness of the United States Tax Gap estimate.

The Tax Gap is the estimate between the tax liability and the amount of taxes you pay voluntarily and on time in a given year. It is widely used by the IRS for tax policy discussions, congressional hearings strategic planning and budgeting among other things. It is important that Tax Gap reflects accurately the relationship between the different form of non-compliance and the types of taxes.

The most recent Tax Gap estimate is around $450 billion dollars for tax year of 2006. Why should you care? The Tax Gap and its component, the Voluntary Compliance Rate, are important to individual taxpayers, as they reflect the fairness of the tax system. And if Voluntary Compliance drops, IRS will most likely increase the number of audits.

One area that needs improvements per TIGTA report is to include estimates for informal economy (like selling goods over Internet) and offshore tax evasions, accounting for $63 billion and between $40 and $70 billion in lost revenue per tax year. It was recommended that the IRS should study the feasibility of including both into the estimation of the Tax Gap.

The report also stated that corporate tax gap might be too high – they are currently based on the tax adjustment recommendations from the audits. TIGTA suggested that using the post-appeals final tax assessment will provide a more realistic picture for corporate tax gap.

Smaller corporations with revenue under $10 million, present a different problem – some small C corporations might behave more like S corporations, either underreporting income or overreporting expanses. The report recommended modifications to the current estimation model for large corporations and recommended a National Research Program review on the smaller corporations.

And finally, the current report examined the Tax Gap released in January of 2012 and is using data from 2006. TIGTA recommended more frequent updates of the Tax Gap for a more realistic representation of the current economic situation.

You can find the full report here.