IRS Ratchets Up Efforts To Pursue Noncompliant Taxpayers

The United States Department of Treasury (the Treasury) issued “The American Families Plan Tax Compliance Agenda,” detailing how the current administration intends to tackle the ever-looming noncompliance issue. This report was a follow up to the April of 2021 American Families Plan that included proposals that the administration announced to increase tax compliance.

The Treasury has concluded that the tax gap for 2019 was approximately $600 billion. The tax gap is defined as the difference between the amount of tax owed by taxpayers versus the amount that those same taxpayers timely pay for that tax year. The Treasury’s analysis concluded that the tax gap will rise to $7 trillion over the course of the next decade if the noncompliance issue remains unaddressed.

To no one’s surprise, 99% of the taxes that are due from wage earners is timely paid, whereas only 45% from less visible sources is timely paid. Taxpayers who fail to file, those in the nonfiling gap, represent about 9% of the tax gap. Taxpayers who file timely, but fail to timely pay, those in the underpayment gap, represent about 11% of the tax gap. Taxpayers who underreport income or overclaim deductions and credits are those in the underreporting gap, which represent the largest portion of the tax gap, at approximately 80%.

As a result, the Treasury’s following proposals certainly have a focus on reducing that 80% underreporting gap:

  1. Increasing resources the Internal Revenue Service (IRS) uses to pursue noncompliant taxpayers and better serve those who are fully compliant. It would appear that the Treasury is focused on addressing the dreaded courtesy disconnect that many taxpayers and practitioners receive when trying to contact the IRS.
  2. Increase information reporting, including leveraging information that financial institutions already collect, to shed light on the taxpayers who misreport income derived from opaque categories. Treasury emphasized cryptocurrency reporting throughout its report and the above seems tailored to pursuing that aim.
  3. Overhauling the IRS’s antiquated technology and leveraging modern-day data analytics tools. Many states have already realized improved tax compliance as a result of the implementation of these tools; it is no surprise that the IRS is taking the same steps.
  4. Regulating paid tax preparers and increasing penalties for those who intentionally commit malfeasance.

The Treasury confirmed that the administration proposed nearly $80 billion in additional resources over the next decade. While these funds would not result in growth of the IRS of no more than 10% in any given year, these funds would be available to modernize information technology, improve data analytics, and hire and train agents dedicated to complex enforcement activities.