Yesterday, the IRS released new federal tax gap estimates, including a new Tax Gap Map. My first substantive post on this blog, back in May 2016 (linked here), was on the IRS’s tax gap study for the 2008-2010 tax years. The new report covers averages from tax years 2011-2013, i.e., picking up where the 2016 report left off.
The new estimates show an average estimated gross tax gap of $441 billion (compared to $458 billion on average for 2008-2010) and an estimated overall “voluntary compliance rate” of 83.6% of tax liability. The new Tax Gap Map shows that, according to the IRS’s estimates, the single largest contributor to the federal tax gap, in dollars, remains underreporting by individuals of business income, at an average of $110 billion per year.
The new report is not only careful to state that methodology changes from the previous tax gap study influence the gross and net tax gap figures, it redoes the 2008-2010 voluntary compliance rate calculation with its revised methodology, to provide an apples-to-apples comparison. The IRS reports that, under the current methodology, the voluntary compliance rate for those years would be 83.8% instead of the 81.7% reported—very similar to the 83.6% voluntary compliance rate the IRS estimates for 2011-2013.
One thing that’s obvious in reviewing the new report is that the format of the new Tax Gap Map is different. (Compare the 2019 version with the 2016 version.) One difference from the previous Tax Gap Map is that the new release does not color code or label “Actual Amounts,” “Updated Estimates,” and “No Estimates Available.” The new version instead adds a visual illustration of the relative sizes of estimated total tax liabilities, tax collections and tax gap amounts. The color coding in the “map” reflects those categories. Another difference is that the new version does not include excise taxes in the map. The previous Tax Gap Map included them, although the dollar amount of the underpayment gap for excise taxes was small and the IRS did not have estimates for nonfiling or underreporting of those taxes. Continue reading “The IRS’s new Tax Gap Map”
By: Joseph C. Dugan, Trial Attorney, Department of Justice, Civil Division*
On February 14, 2019, the Treasury Inspector General for Tax Administration (TIGTA) released a Valentine’s Day treat: a comprehensive report following a TIGTA audit concerning self-employment tax compliance by taxpayers in the emerging “gig economy.”
As Forbes noted last year, over one-third of American workers participate in the gig economy, doing freelance or part-time work to supplement their regular incomes or stringing together a series of “gigs” to displace traditional employment. Popular gig services include ride-sharing giants Uber and Lyft; arts-and-crafts hub Etsy; food delivery services GrubHub and Postmates; and domestic support networks Care.com and TaskRabbit. Even Amazon.com, the second-largest retailer in the world and a traditional employer to many thousands of workers in Seattle and at Amazon distribution centers worldwide, has gotten in on the gig economy with its Amazon Flex service. And for those interested in more professional work experience to pad their resumes, Fiverr connects businesses with freelance copywriters, marketers, and graphic designers. The power of smartphones and social media, coupled with flat wage growth in recent years, makes the digital side hustle appealing and, for many households, necessary.
From a tax revenue perspective, the gig economy is great: it is creating billions of dollars of additional wealth and helping to replenish government coffers that the so-called Tax Cuts and Jobs Act (TCJA) has left a little emptier than usual. From a tax compliance perspective, however, the gig economy presents new challenges. Gig payers generally treat their workers as independent contractors, which means that the payers do not withhold income tax and do not pay the employer portion of FICA. Instead, the contractor is required to remit quarterly estimated income tax payments to the IRS and to pay the regressive self-employment tax, which works out to 15.3% on the first $128,400 in net earnings during TY2018, and 2.9% to 3.8% on additional net earnings. That self-employment tax applies even for low-income freelancers (i.e., it cannot be canceled out by the standard deduction or nonrefundable credits). Continue reading “TIGTA’s Report on the Growing Gig Economy”