QoD: What percent of taxes owed by taxpayers are NOT paid (a.k.a. "the tax gap")?

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Apr 14, 2019
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Question of the Day, Taxes

It's tax season! Rather than focus on the taxes that paid every year, I thought it would be interesting to look at taxes that are NOT paid. It's a big number as you will see below. Other item to note is that the IRS seems to have given up trying to calculate that number as the last estimates are from 2008-10. 

Answer: About 20% (or $458 billion) 

Questions:

  • What do you think are the reasons that people pay less tax than they owe to the I.R.S.?
  • What are some of the consequences of this tax gap when it comes to the federal budget? 
  • What are the penalties if you don't pay all the federal taxes that you owe?
  • If you were running the I.R.S. (the agency that collects the taxes), what steps could you take to reduce this tax gap?

Here's the ready-to-go slides for this Question of the Day that you can use in your classroom.

Behind the numbers (GAO Report)

The tax gap—the difference between tax amounts that taxpayers should have paid and what they actually paid—has been a persistent problem for decades. The tax gap estimate is an aggregate estimate of the five types of taxes that IRS administers—individual income, corporation income, employment, estate, and excise taxes. For each tax type, IRS attempts to estimate the tax gap based on three types of noncompliance: (1) underreporting of tax liabilities on timely filed tax returns; (2) underpayment of taxes due from timely filed returns; and (3) nonfiling, when a taxpayer fails to file a required tax return altogether or on time.

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Be sure to check out our updated Taxes Unit to reflect new tax legislation! 

 

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.