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As much as half a trillion in unpaid taxes every year makes our budget deficit far worse

An estimated $400 billion to 500 billion in taxes go uncollected every year in the United States because of tax evasion and noncompliance. [1]

The United States loses some $100 billion more in tax revenues annually because of offshore tax abuses by wealthy individuals and corporations.

This yawning “tax gap” increases the deficit and undermines the faith of honest taxpayers who don’t cut corners.

Every additional $1 invested in tax enforcement and compliance can shrink the deficit by at least $3

President Barack Obama’s proposal to invest an additional $13 billion in IRS enforcement and compliance activities over the next decade will generate more than three times that amount in additional revenues—$42 billion, according to official estimates.

The funding will allow the IRS to contact potentially noncompliant taxpayers that “it currently identifies but cannot contact given resource constraints” and strengthen pre-refund compliance checks, according to the Government Accountability Office.

Better enforcement leads to greater compliance: After the IRS in recent years began targeting people using offshore bank accounts to evade taxes, about 19,000 taxpayers entered a voluntary compliance program and paid billions in back taxes and penalties.

Efforts to cut the IRS will only make the budget deficit worse

“Cuts of this magnitude would be substantial and affect all of IRS operations,” from answering taxpayers’ questions on the phone to conducting audits, according to IRS Commissioner Douglas Shulman.

Not only would cutting the IRS benefit tax cheats, it would make it harder for honest taxpayers “to understand and comply with changes in the tax law . . . as well as to successfully resolve pre-filing, filing and post-filing tax matters,” according to a recent report by law firm K&L Gates.

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Seth Hanlon is Director of Fiscal Reform at the Center for American Progress. Julia Kantor, an intern at CAP, provided research assistance.

Endnotes

[1]. The IRS estimated that in 2001, the “net tax gap"—the difference between what is owed in taxes and what is actually paid (including after IRS enforcement actions)—was nearly $300 billion. Assuming that the tax gap has expanded at the same rate as the overall economy over the last decade, it would stand at between $400 billion to 500 billion today.