IRS Uses Latest “Tax Gap” Data to Highlight its Push for Enforcement
The Internal Revenue Service (IRS) released its “tax gap” projections for the 2022 tax year on October 10, 2024. As the IRS explains in its News Release, the tax gap, which is an estimated $696 billion, “reflects the difference between projected ‘true’ tax liability and the amount of tax that is actually paid on time.” The IRS attributes much of the tax gap to high-income and high-net-worth taxpayers, and with the IRS prioritizing enforcement of these taxpayers’ responsibilities, those who have compliance-related concerns will want to consult with a highly experienced Texas tax fraud lawyer promptly.
The IRS is Specifically Targeting High-Income and High-Net-Worth Taxpayers
Along with discussing the tax gap’s history and some of the reasons for the substantial increase in the tax gap in recent years, the IRS also highlights its ongoing enforcement efforts. These include its efforts to target high-income and high-net-worth taxpayers specifically. For example, after acknowledging that the tax gap has increased by approximately $200 billion since 2016 (which the IRS attributes to “growth in the economy and changes in the sources of income – not a change in taxpayer behavior involving filing or paying their taxes,”) the IRS notes that since 2022, “[it] has stepped up compliance activity in a variety of areas . . . including the agency collecting an initial $1.3 billion from high-income taxpayers.”
While 2022 is the most recent year for which tax gap data are available, this year is significant for another reason as well: This is when Congress passed (and President Biden signed) the Inflation Reduction Act (IRA). The IRS provided the IRS with tens of billions of dollars in additional funding—including funding earmarked specifically for high-income and high-net-worth taxpayer enforcement.
The IRS’ Projected Tax Gap Data
The IRS’ October 10, 2024, News Release discusses both gross tax gap and net tax gap data. The gross tax gap reflects the total amount of delinquent taxpayer liability, while the net tax gap reflects anticipated future tax payments resulting from both voluntary delinquent filings and the IRS’ enforcement efforts. Here are the key figures:
- The IRS attributes the substantial majority of the gross tax gap—approximately $539 billion in 2022, to taxpayers underreporting their federal tax liability.
- Underpayment is the second largest factor contributing to the gross tax gap—with underpayments totaling approximately $94 billion as of 2022.
- Non-filing accounts for less than 10 percent of the gross tax gap, with non-filers failing to pay an estimated $63 billion in 2022.
- The IRS estimates the net tax gap at $606 billion for 2022, which is a slight reduction from the $617 billion projected net tax gap in 2021.
As the IRS also acknowledges, “the tax gap estimates and projections cannot fully account for all types of noncompliance.” In other words, the total amount that taxpayers in the U.S. and abroad owe to the federal government is unknown. The IRS relies on financial institutions, whistleblowers, its federal law enforcement partners, and its state and international counterparts to help it determine when enforcement action is necessary in many cases—and it uses information obtained from these sources to target high-income and high-net-worth taxpayers suspected of failing to disclose offshore holdings, failing to disclose cryptocurrency and gambling income, using unlawful tax avoidance schemes, and engaging in other forms of tax evasion and fraud.
Individual Income Tax Enforcement Will Be a Priority Going Forward
With its enhanced funding under the Inflation Reduction Act, the IRS is seeking to use its resources in the areas where they will be most effective. As the 2022 tax gap data make clear, this will primarily involve individual income tax enforcement, with a particular emphasis on high-income and high-net-worth individuals.
The IRS attributes the substantial majority of the projected tax gap to individual taxpayer noncompliance. In 2022, the IRS estimates that individuals underpaid their federal tax liability—whether due to non-filing, non-payment or underreporting—by $514 billion. Well over half of this amount ($381 billion) is attributed to underreporting specifically.
The IRS pursues individual taxpayer enforcement through various means, including (but by no means limited to):
- Conducting Random and Targeted Audits – The IRS collects tens of billions of dollars annually through its auditing procedures. It conducts both random and targeted audits, and its auditing efforts resulted in $31.9 billion in additional tax liability in 2023. When conducting audits, the IRS can look back several years—and potentially uncover several years’ worth of filing errors, underpayments and disclosure violations.
- Conducting Investigations Triggered By Taxpayers’ Filings – The IRS’s Criminal Investigation Division (IRS CI) investigates taxpayers suspected of willfully violating the law. Along with liability for back taxes and interest, criminal tax investigations can also expose taxpayers to substantial fines and prison time. In many cases, IRS CI launches investigations based on issues identified with taxpayers’ filings, though it routinely relies on other sources of information as well.
- Working with Other Law Enforcement Authorities – As noted above, the IRS works with other law enforcement authorities to pursue enforcement as well. This includes not only working with state and international tax authorities, but also working with the Federal Bureau of Investigation (FBI), U.S. Securities and Exchange Commission (SEC), and other federal agencies to pursue enforcement actions targeting both tax-related and non-tax-related offenses.
- Obtaining Information from Financial Institutions, Exchanges and Other Entities – The IRS relies heavily on its ability to obtain information from entities in the private sector as well. This includes financial institutions, securities and cryptocurrency exchanges, casinos, online gambling platforms, and a wide range of other businesses that have information about taxpayers’ holdings and earnings (both in the U.S. and abroad).
Request an Appointment with a Texas Tax Fraud Lawyer at Brown Tax, P.C.
If you are a high-income or high-net-worth taxpayer and you have concerns about facing scrutiny from the IRS or IRS CI, we invite you to get in touch. To request an appointment with a Texas tax fraud lawyer at Brown Tax, P.C., please call 888-870-0025 or contact us confidentially online today.