Americans Failed to Pay a Record $688 Billion in Taxes. The IRS Says That Will Change.

Americans didn’t pay an estimated $688 billion in taxes due on their 2021 returns—the largest shortfall ever. Audits and other enforcement will be stepped up to reduce the gap, the Internal Revenue Service said Thursday.

The number includes $542 billion due to underreported income, with the remainder of the shortfall owed by those who didn’t file returns when they should have or never paid their bills. 

The total gap is up more than $138 billion from estimates for tax years 2017 to 2019.

The largest element of noncompliance, $182 billion, was attributable to undeclared business and farm income reported on Schedule C and F on individual returns. 

“This increase in the tax gap underscores the importance of increased IRS compliance efforts on key areas,” said IRS Commissioner Danny Werfel in a statement. 

The report comes as the IRS is ramping up audits on high-income taxpayers and fighting to keep funding it got in the Inflation Reduction Act to improve taxpayer service and increase enforcement. A recent bipartisan deal ratcheted back that funding. “The additional staff and hiring at senior levels is really a critical aspect of being able to expand our coverage,” said Melanie Krause, IRS chief data and analytics officer.

The agency is also preparing for an onslaught of additional reporting from gig workers and entrepreneurs as new rules for reporting income through payment apps take effect for tax year 2023. Taxpayers are more likely to comply with rules when there is third-party information reporting earnings and withholding. “If people know the IRS has that information, they’re not going to underreport,” said Natasha Sarin, a Yale law professor and former Treasury official.

After factoring in expected IRS compliance efforts and late payments bringing in $63 billion, the estimated net tax gap for 2021 is $625 billion.

The report will play into debates around the growing federal deficit and how to raise revenue in light of the expiration of the Trump tax cuts after 2024. “If we do a better job of collecting revenue we can make a down payment on fiscal sustainability and our spending priorities,” said Sarin. 

The IRS notes that its estimates don’t fully include all the ways Americans evade taxes such as using cryptocurrency, parking money in secret offshore accounts and using flow-through entities. 

“When it comes to noncompliance there’s a lot that’s difficult to measure,” said Sarin.

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