Top Taxpayer Mistake To Avoid And How The IRS Plans To Close The Tax Gap

Tax Gap

Tax season is over!

However, the repercussions of the 2018 tax year on individual taxpayers are still reverberating. That’s due to this being the first full year after the passing of the 2017 Tax Cuts and Jobs Act.

The biggest beef is related to withholding taxes.

Even though the IRS warned taxpayers to look into their withholding, many people either ignored the warnings or simply decided to let the chips fall where they may. To say that most of those people were unhappy with where the chips fell is an understatement.

To shed light on what I’m talking about, a few statistics will help. This first one was published by foxbusiness.com. They said that nearly one in five Americans owed additional money to cover their 2018 tax bill. Of those, 32% said they had received a refund last year.

In addition, the average refund was a little less than the previous year. The average refund for 2018 was $2,725 versus $2,780 for 2017. But the good news is that getting a refund at all, even if it was less, is an indication that you didn’t underpay taxes during the year. And if you ended up owing, that means you underpaid. It’s much better to not owe even if your refund is less.

Thirty-five percent of people said their refund was smaller than the amount they had received last year. But roughly the same percentage of taxpayers said theirs was larger.

So, check with your employer to make sure you’re having enough withheld so you’re not in for an unpleasant surprise next tax season.

Now, The Tax Gap

According to the House Ways and Means Committee there is a $400 billion to $460 billion difference between taxes that are owed and those actually paid. That is what the powers that be refer to as the tax gap. And according to an article on accountingtoday.com those figures are actually low. That’s because they don’t take into account the income owed on “illegal activities or taxes avoided on certain international activities.” As the article states, “The tax gap simply represents estimates of different types of noncompliance with our individual, corporate and other tax laws.”

The types of non-compliance referred to includes those taxpayers who understate their income or overstate their deductions, exemptions, or credits. This apparently accounts for a whopping $390 billion. Then there is the noncompliance of taxpayers who file their returns but fail to meet the deadline to pay what they owe. That is said to account for roughly $40 billion. And then there are taxpayers who are required to file a tax return, but they don’t. That supposedly accounts for about $32 billion of that $460 billion.

How The IRS Plans To Close The Gap

So, just exactly how does the IRS plan to close that gap? As the article points out, the IRS has been suffering from insufficient funding for quite a few years now. So, they really don’t have the money to go after the people who could most afford to pay their outstanding taxes. The article states that “Insufficient IRS funding creates incentives for some taxpayers to take aggressive tax positions. Well-advised taxpayers, including multinational companies and high-income taxpayers, have the resources and incentives to do just that.” That is take aggressive positions.

So, with the limited staff, who is the IRS going after? You guessed it. Low-income, Earned Income Tax Credit taxpayers. It’s just like the IRS to try to get blood out of a stone.