Tax Cheats Stick Honest Taxpayers with a $406 Billion Annual Tax Bill

A new report from the Internal Revenue Service (IRS) estimates that the “tax gap,” meaning the amount in taxes that are owed but go unpaid each year, was $406 billion on average between 2008-2010. This is a $406 billion cost that honest taxpayers are forced to make up for due to the illegal actions of individuals and corporations.

While the $406 billion figure is rather staggering, many experts believe that this could be an understatement of the cost of tax evasion. In testimony before the Senate Budget Committee, Bob McIntyre, director of Citizens for Tax Justice, explained that the IRS estimates likely underestimate the amount of income that individuals and corporations are able to evade by hiding their money in tax havens.

It is also important to note that the vast majority of middle income taxpayers are not the ones evading taxes. That’s mainly because they can’t cheat even if they were so inclined. Employers must report wages to the IRS and remit withholding taxes. The majority of the tax gap ($247 billion) is due to underreporting of business income.

The most obvious way to crack down on tax evasion is to beef up enforcement by the IRS. But due to serious budget cuts enacted by Congress, the IRS estimates that its enforcement actions reduced the tax gap by only 11 percent.

Providing the IRS with the resources it needs to do a better job cracking down on tax cheats would seem to be a no brainer, except to the brain dead members of Congress. According to one estimate, increasing funding for IRS enforcement, modernization and management systems can save the government $200 for every dollar invested.

Rather than increasing the funding of the IRS to close the tax gap however, Congress has actually cut the IRS budget by 17 percent since 2010, after accounting for inflation. While cutting the IRS budget may appeal to members of Congress who are in favor of tax cheating, it’s counterproductive in terms of deficit reduction and protecting honest taxpayers.

So if Congress wants to get serious about closing the tax gap, the first thing it should do is reverse these budget cuts and increase the IRS’s funding substantially. In addition, there are numerous legislative actions that Congress could take to crack down on tax evasion. For example, Congress could require more information reporting, increase penalties for tax-evasion facilitators and close the various offshore loopholes that create the opportunity for tax cheating businesses to game the tax system. 

Allowing for rampant tax evasion steals money from honest taxpayers and the public investments that we need. Congress should act immediately to stop this theft of taxpayer money.