IRS Commissioner pegs annual Tax Gap at $1 trillion

April 13, 2021

IRS Commissioner Charles Rettig on Tuesday estimated that his agency does not collect roughly $1 trillion in taxes that are owed to the federal government each year.

“It would not be outlandish to view that the actual tax gap could approach and possibly exceed $1 trillion each year,” he told the Senate Finance Committee during a hearing on the 2021 tax filing season.

The tax gap is the difference between the taxes that are owed and the amount that is collected on time. Roughly a decade ago, the agency pegged the annual tax gap at $441 billion for tax years 2011 through 2013. Rettig said that calculation is outdated, for several reasons.

“It does not include any focus with respect to virtual currency, which I indicated now is about a $2 trillion market cap. It does not include much information with respect to foreign source income. It does not include information with respect to illegal source income, which is taxable and we do chase,” Rettig said.

The IRS Commissioner also noted that a narrowly focused investigation found that the top 1% of income earners account for $175 billion of the annual tax gap.

“That’s associated with looking at only two issues, which was pass-thru entities, and offshore income,” Rettig said, adding that noncompliant high-income earners and corporations are the biggest reasons for the current size of the tax gap.  

Shrinking the tax gap would require an additional $1 billion in funding, which would allow the IRS to hire over 4,800 enforcement officers, Rettig said. This effort would include regulating tax preparers, which includes those who file returns for Earned Income Tax Credit recipients.

“We absolutely need the ability to regulate paid tax preparers,” Rettig said, adding that mistakes on EITC returns made by professionals are “significantly greater” than those prepared by filers.

The IRS last year conducted 450 investigations where agency officials posed as taxpayers seeking professional tax help. Several of those cases were referred to the Department of Justice.

“Many of those [cases] led to referrals to the Department of Justice for prosecution. Without regulation of paid preparers, it would be very difficult for us to monitor them,” Rettig said.

Increased information reporting rules would also be instrumental in shrinking the tax gap.

Rettig stressed that his agency would love the chance to clamp down on unethical tax professionals and catch tax cheats, adding that the pursuit of high-income tax cheats is a priority for the agency.

Committee member Sen. Sheldon Whitehouse (D-R.I.) challenged Rettig on the notion that auditing high income taxpayer is a priority for the IRS, saying that more EITC filers are audited than wealthier taxpayers. Rettig invited Whitehouse to meet with him after the hearing so he could show the Senator the steps the IRS is taking to rein-in wealthy tax cheats.

“Nobody should discount the desire of any employee at the IRS to get there. We want to get there,” he said.

Regarding the Child Tax Credit's online payment portal, Rettig said it will be accessible by July 1, as prescribed by law.

He also reiterated that his agency only extended the filing deadline for 2020 Forms 1040 and related tax payments to May 17.

“The only deadline we extended is the filing of form 1040… We did not extend any other deadline. Last year was different. This year is different,” Rettig said.

He also stressed that taxpayers choosing to pay their first quarter estimated tax payments for 2021 on May 17 will incur a small interest penalty. According to the Commissioner, a business earning $100,000 in gross income for 2021 will have an $8,000 estimated tax payment due on April 15. If that taxpayer waits until May 17 to make that payment, they will incur a $20 interest penalty.

“What I owe on May 17…is $20. So, it’s $8,020. If I made the payment on May 17,” he said.

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