Tax gap is likely larger than estimated, IRS commissioner says

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IRS Commissioner Charles Rettig told lawmakers on Tuesday that the tax gap may be even larger than the massive estimates that have already been put forward.

Rettig said during testimony before the Senate Finance Committee that the gross tax gap for tax years 2011 to 2013 is estimated at $441 billion.

However, he noted that calculations don’t take into account several factors, including information with respect to virtual currencies, foreign-sourced income or illegally-sourced income, which is still taxable.

Rettig added that a recent National Bureau of Economic Research report found that the top 1% of taxpayers by income account for an additional $175 billion worth of unpaid obligations per year based on an analysis focused on pass-through entities and offshore income.

"If you aggregate the points that I’m talking about and you look at the fact that there’s a current estimate by folks on the outside that the tax gap is $7.5 trillion over the next 10 years, and you add in the component pieces that I referenced – there are more, I’ve just referenced the ones that are most highly visible at this point … it would not be outlandish to believe that the actual tax gap could approach, and possibly exceed, $1T per year," Rettig said.

When asked who pays the price when wealthy taxpayers evade their obligations, the IRS commissioner said the costs are borne by taxpayers who are following the law.

To see a meaningful reduction in the tax gap, Rettig said the IRS needs a multi-faceted approach, including resources to hire enforcement personnel and modernize its systems. It could also benefit from more information reporting.

The IRS has been combating both a decline in staffing and a decline in resources. In the collection group alone there was a 19% decline in workers between fiscal 2013 and fiscal 2018. It has lost half of its revenue offices, the agency said, and about one-third of its total workforce over the past decade.

Over the same time period, the agency has lost 17,000 enforcement personnel, Rettig added.

Funding as of fiscal 2018 was $11.4 billion, down from $12.15 billion in 2010.

As previously reported by FOX Business, U.S. Treasury Secretary Janet Yellen said that if the IRS were funded appropriately and therefore able to crack down on tax cheats, the U.S. would be able to collect more revenue without raising taxes.

"The tax gap is huge, and I think we would have a fairer tax system and collect more tax revenue without the need to raise rates if we resourced the IRS properly to be able to address this issue," Yellen said during testimony before the Senate last month.


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