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The IRS Tax Gap

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Steven A. Leahy
IRS Tax Gap

By Steven A. Leahy

The IRS calculates the amount of tax liability that taxpayers do not pay on time – the difference between the true tax liability for a year and the amount that is paid on time –this calculation is defined as the IRS Tax Gap. The IRS reports the IRS tax gap every 5 years. According to the most recent IRS Tax Gap estimates (2012 for the 2006 tax year), the American public voluntarily complies with IRS regulations 83.7% of the time. To many, the compliance rate is astounding. With little or no action, only 16% of the potential tax revenue requires government action to collect. Add enforcement and late payments to that number and compliance jumps to 86.3%. These are the IRS’ own numbers.

IRS compliance rates have been steady since at least 2001. The IRS divides the IRS tax gap into three (3) components: non-filing, under-reporting, and underpayment. The biggest gap is attributed to under-reporting ($376 billion in 2006, up from $285 billion in 2001). Taxes lost due to non-filing accounted for the lowest percentage of the gap ($28 billion in 2006, $27 billion in 2001).

Compliance is highest just where you would expect – when a third party reports and/or withholds taxes. Only 1% of the IRS tax gap is attributed to this category of reporting. These numbers are also compiled from real numbers – W-2 and 1099 information. Amounts subject to little or no reporting requirements made up 56% of misreporting in 2006. But, because there isn’t any reporting, these numbers are estimates, rather than actual numbers.

While many point to the compliance rate as impressive, the IRS uses these numbers and points to the low compliance rate as proof the IRS needs to be more aggressive in their collection efforts and require additional reporting requirements to third parties. To be more aggressive, the IRS needs more money. The IRS estimates that every dollar spent on collection, the IRS receives six dollars in return.

Congress, however, has cut the IRS budget over the last several years. For 2015, Congress passed a budget that would cut the IRS enforcement by $1.2 billion dollars; almost a 10% cut. So reducing the tax gap will have to come from reporting.

You may have noticed the additional filing requirements recently implemented by the IRS. For example, the 2011 reporting year saw a new IRS form, Form 8949 “Sales and Other Dispositions of Capital Assets.” This form was designed to replace Schedule D1, and did so for 2013 and thereafter.

The change adjusts how brokers must report adjusted basis and whether any gain or loss on a sale is classified as short-term or long-term from the sale of “covered securities.” Previously, determining the basis of an asset was left to the taxpayer. These changes require additional reporting by third parties in an attempt reduce the tax gap. The IRS is always seeking new ways to require third parties to increase their reporting to decrease the chance of non-compliance.

If you need help with the IRS, you should work with a local law firm. Better, you should give me a call – Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.

Child Exemptions on Taxes for Divorced or Separated Parents

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I am a contributor on the Web Site Avvo.com.  I answer legal questions in the Tax, Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, and Foreclosure Practice areas (mostly) posted by “Askers.”  The most common question, by far, asked in the Tax Practice area concerns child exemptions on taxes for divorced or separated parents.

So I thought it was a good area to post on our blog.  Generally, the parent who has custody (the “custodial parent”) is entitled to take the child exemptions on taxes.  The custodial parent is defined as the parent having custody for the greater part of the calendar year and the one who provides more than half of the child’s support.  The other parent (the “noncustodial parent”) may be entitled to the deduction when:

  • The custodial parent releases or gives the exemption to the noncustodial parent for the year
  • The child lives with the noncustodial parent for more than half the year

When both parents have joint physical custody of their child, it may not be clear which parent is entitled to the exemption. This can be avoided by agreeing, in advance,  on who will take the exemption and having the other parent sign a release (IRS Form 8332)  of the exemption and/or including your agreement concerning the child exemption on taxes in your Divorce Decree or Child Custody Agreement.

What should you do if the other parent claims the exemption when you are entitled to the exemption?  

I had a client call today who filed his return electronically, and his return was rejected because the noncustodial parent claimed the child exemption of taxes first.  He wanted to know what he could do. I told him, there are four steps to to take in this situation:

  1. First, determine if you want to make an issue of the exemption.  If you do,
  2. make SURE you are entitled to the exemption.
  3. Next, print, sign and date your return and MAIL it to the IRS.
  4. Expect to receive paperwork from the IRS – the noncustodial parent will also receive the same paperwork. Once you receive the paperwork from the IRS:
  • complete the paperwork and send it back promptly.
  • provide evidence that the child lived with you – school records are VERY persuasive.  But you could use Doctor visits, day care receipts, etc.  If your child has lived with you, you will find something to prove it.  The noncustodial parent will also have to complete the paperwork and send it back to the IRS.  The noncustodial parent will not be able to prove that your child lived with them – because your child didn’t.

I hope this post answers your questions about Child Exemptions on Taxes for Divorced or Separated Parents. If you have IRS problems, you need an attorney. You need me Steven Leahy. Call me (312) 664-6649 or Toll Free (866) 664-6647. 150 North Michigan Avenue, Suite 1120 Chicago, 60601

 

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