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Taxpayers stiff IRS by nearly $300B
Preliminary findings from an IRS study show the gap has widened between what's owed and what's paid.
March 29, 2005: 1:59 PM EST
IRS gets tough
gains since 2001, IRS
Number of audits: + 37%
HIgh-income audits: + 100%
Enforcement revenue: + 28%

NEW YORK (CNN/Money) - Most Americans pay what they owe in federal taxes...but not everyone.

There's still a yawning gap between what some taxpayers owe and what they pay, according to the IRS. That gap -- known as the net tax gap -- is between $257 billion and $298 billion, according to preliminary findings from a three-year study on taxpayer compliance released Tuesday.

"Even after IRS enforcement efforts and late payments, the government is being shortchanged by over a quarter-trillion dollars by those who pay less than their fair share," IRS Commissioner Mark Everson said in a statement.

The major source for the gap -- about 80 percent of it -- is from individual taxpayers underreporting their income.

Five ways to avoid an audit

The majority of taxpayers understate their income rather than overstate deductions, the IRS found. And the income they underreport is mostly from business activities, rather than wages and investments.

In other words, income from small-business owners and self-employed earners is most likely to be underreported.

The other sources for the tax gap are underpayment of taxes and non-filing of returns. The study did not update the IRS figures on corporate non-compliance.

Since 2001, the IRS has collected almost 28 percent more in enforcement revenue (the money the IRS collects in late taxes and penalties as a result of audits and other collection efforts). Revenue from enforcement rose from $33.8 billion in 2001 to $43.1 billion in 2004, which was up 15 percent from 2003.

Although the chances of being audited remain small, last year, individual taxpayer audits exceeded 1 million for the first time since 1999. And audits of taxpayers earning at least $100,000 more than doubled since 2001, to over 195,000 last year.

In a press conference Tuesday, Everson indicated that the increase in audits is a trend that may continue. "We expect to continue to make progress in these areas," he said.

In his 2006 budget, President Bush requested an additional $500 million be devoted to IRS enforcement efforts, which is a 7.8 percent increase over the $6.4 billion spent last year.

The IRS said it would use the new money to increase audits of corporations and high-income earners, expand collection efforts and investigate criminal activities.

"We're moving aggressively to reduce the tax gap," Everson said."But no one should think we can totally eliminate the gap. That would take Draconian measures and make the government too intrusive. We have to strike the right balance."

The taxpayer compliance study, the results from which will be finalized by the end of this year, is intended in part to help the IRS update its statistical formulas that determine which returns are most likely to have underreported income. That, in turn, the agency said, "lessens the likelihood that those with accurate tax returns will receive the same degree of scrutiny."

To see how people plan to use their refunds, click here.

For CNN/Money's complete tax coverage, click here.  Top of page

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