IRS Projects $688 Billion Tax Gap: How It Affects You and What You Can Do

Understanding the $688 Billion Tax Gap: What It Means for You

When it comes to taxes, most people know that they need to pay a portion of their income to the government. However, there’s a big problem that affects the government’s ability to fund services: the tax gap. The tax gap is the difference between the amount of money the government is supposed to collect in taxes and what it actually collects.

In 2021, the IRS (the agency in charge of taxes) projected that the tax gap for that year would reach an eye-popping $688 billion. This is a huge number, and it’s one of the largest gaps ever seen. But what does this mean for you, and how does it affect the country?

What is the Tax Gap?

First, let’s break down what the tax gap really is. Think of it like this: imagine a big jar where everyone’s tax money is supposed to go. The government has a target amount they want to collect. However, some people don’t file their taxes, or they don’t report all their income correctly. This causes a gap, or missing money, in that jar.

In 2021, the IRS estimated that this missing money amounted to $688 billion. That’s almost $700 billion that the government didn’t get because of mistakes, missed filings, or people hiding income.

The tax gap is made up of three main parts:

1. Nonfiling: This is when people don’t file their taxes at all.
2. Underreporting: This happens when people don’t report all their income or don’t claim all their tax deductions correctly.
3. Underpayment: This happens when people file their taxes but don’t pay the full amount they owe.

The biggest part of the tax gap is underreporting of income, especially among people who are self-employed or work in cash-based jobs.

Why is the Tax Gap So Big?

The tax gap has been growing for years, and one reason it’s so large in 2021 is that many people are still underreporting their income. With more people working as freelancers or in the gig economy, it’s harder for the IRS to track income. Freelancers, for example, often don’t have taxes automatically taken out of their paycheck, so they must report it themselves. If they forget to report part of their earnings, it adds to the tax gap.

Another issue is that some people intentionally hide income, especially in cash-based businesses. If someone gets paid in cash for a job, they may not report it at all, leading to a loss in tax revenue.

The Effect of the Tax Gap

The $688 billion tax gap can have a big impact on the country. Since the government isn’t collecting all the money it should, it may have to borrow more or cut back on important programs. This includes things like:

• Schools: If the government doesn’t get enough money, funding for schools could be affected.
• Healthcare: Money for public health programs may be reduced.
• Infrastructure: Roads, bridges, and other public infrastructure could be impacted.

If the government doesn’t have enough money to fund these things, it can affect everyone. Even if you don’t realize it, the tax gap is one reason why things like schools and public services don’t always have the resources they need.

How Does This Affect You?

The tax gap doesn’t just impact the government—it can affect you, too. If the IRS is losing out on hundreds of billions of dollars because of tax noncompliance, the government may decide to raise taxes on the people who do pay. This could lead to higher taxes for individuals and businesses that follow the rules.

Moreover, if the government has to find ways to make up for the missing tax revenue, they might look at things like increasing the rates on sales taxes, property taxes, or even income taxes for regular people. That means people who follow the tax rules could end up paying more because others are not paying their fair share.

What is the IRS Doing About It?

The IRS is taking several steps to try to reduce the tax gap. One big change is focusing more on self-employment income. The IRS wants to make sure that freelancers, gig workers, and small business owners are paying their fair share of taxes. These groups often report less income or misreport their earnings, leading to a bigger gap.

The government is also improving its technology and data systems. For example, there is talk of using more advanced technology to track people’s financial transactions to make sure they are reporting all their income. By getting better at spotting underreporting or missed income, the IRS hopes to shrink the tax gap.

Another step the IRS is taking is to educate taxpayers. This includes providing more resources for small business owners and self-employed individuals to understand their tax responsibilities. Educating people is key to making sure everyone is on the same page when it comes to paying taxes.

How Can You Help Close the Tax Gap?

You might not be able to fix the entire $688 billion tax gap, but you can make sure you are doing your part to help. Here’s how:

1. File your taxes correctly: Always report all of your income, even if it’s from freelance or cash-based jobs. This helps the government get the money it needs and keeps you from getting into trouble with the IRS.
2. Use tax software or hire a professional: If you’re not sure how to file taxes correctly, consider using tax software or hiring a tax professional. They can help you avoid mistakes and make sure you don’t miss anything.
3. Pay your taxes on time: Don’t wait to pay your taxes. If you owe money, make sure to pay it by the due date to avoid penalties and interest.
4. Learn about tax deductions: There are legal ways to lower your tax bill, like tax deductions. The IRS offers several credits and deductions that can reduce your taxable income. Take advantage of these so you aren’t overpaying.
5. Report anything that seems wrong: If you notice someone else is misreporting income, you can report it to the IRS. This helps keep everyone honest.

Why This Matters for the Future

The tax gap is a growing problem that could affect the country for years to come. If the government can’t collect the taxes it needs, it may have to make cuts or increase taxes for people who follow the rules. By paying your taxes properly and helping reduce the tax gap, you can be part of the solution.

As the government continues to work on ways to close this gap, it’s important for every citizen to do their part. Whether you’re a small business owner or someone working a regular job, make sure you understand your tax responsibilities and follow the rules.

In the end, paying your taxes isn’t just a requirement—it’s a way to help ensure that our communities and the country stay strong, with the resources needed for schools, healthcare, and infrastructure that everyone relies on.