The U.S. Department of Treasury has released a report discussing investment in the IRS and improving tax compliance. IRS has difficulty identifying income from unverified sources and whether if it is properly reported. Non-compliance is concentrated at the top of the distribution. The press release begins as follows:
A well-functioning tax system requires that all taxpayers pay what they owe. An unfortunate characteristic of the current system, however, is an asymmetric adherence to tax law by the nature of income received. While roughly 99% of the taxes due on wages are remitted to the Internal Revenue Service, compliance across other forms of income is substantially less, as the IRS has difficulty verifying whether income from opaque sources is properly reported. Noncompliance is concentrated at the top of the distribution: A recent study found that the top 1 percent failed to report 20 percent of their income and failed to pay nearly $175 billion in taxes owed annually.
Lower levels of compliance not only impact tax progressivity, but they also lower tax revenue and deteriorate our nation’s fiscal position. Left unaddressed, this tax gap— the difference between taxes owed to the government and taxes actually paid—will total about $7 trillion over the course of the next decade. This massive gap in revenue means policymakers must choose between higher taxes elsewhere in the tax system, lower spending on fiscal priorities, or rising budget deficits.
To see the full press release: Investing in the IRS and Improving Tax Compliance
Posted by Jessica Ji, Associate Editor, Wealth Strategies Journal.