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Thread: Mind the tax gap

  1. #1

    Default Mind the tax gap

    While reading about corporate income tax I learned something terrifying:

    As recently as 2006, the gap between taxes owed and taxes paid was about 17%, in the US. In total, $385 billion in owed taxes were not paid. At first I thought liberals were responsible, but

    Sole proprietors, a major class of small businesses, report less than half of their income to the IRS.

    In fact, under-reported business income is the single largest source of the tax gap, amounting to fully $122 billion in 2006 alone.
    And, as we know, liberals don't run businesses, preferring government handouts to buy their books about evolution.

    But, is dodging your taxes that much better than getting handouts from a broke government being witheld 17% of its income?

    Is this tax gap due to people dodging their taxes, and, if so, should they be stopped from doing so?

    What are the consequences of this tax-gap, and how may the negative consequences best be addressed?
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  2. #2
    Stingy DM Veldan Rath's Avatar
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    If the business owners are willfully dodging taxes, that is punishable. Legit computation errors are another thing altogether.

    I don't see that being broken down in the article...if all of that is willful dodging, why not go after them?
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  3. #3
    Well your source is pretty biased. Basically its the IRS saying "There are tax dodgers out there give us more funding and we can go after them!"

    Government studies in general shouldn't be trusted.

  4. #4
    IRS not getting enough money, says IRS

    Alternatively-

    Impossibly complex tax code is owed more taxes, say tax collectors

  5. #5
    Is the IRS miscalculating how much taxes are owed, to the tune of 385 billion? Are they becoming increasingly bad at calculating how much taxes are owed? What is it about the tax code that makes this large minority of style proprietors and other business owners so much so much worse at tax compliance than their peers?
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  6. #6
    Anyone deliberately illegally evading taxes, eg cash in hand etc, is a thief and should be viewed with the same contempt as any other thief. Why should I obey the law, play by the rules and be undercut by some petty criminal?

    OTOH if its due to the Byzantine complexity of tax laws then politicians share some of the blame.
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  7. #7
    Senior Member Flixy's Avatar
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    Quote Originally Posted by Aimless View Post
    What is it about the tax code that makes this large minority of style proprietors and other business owners so much so much worse at tax compliance than their peers?
    Business taxes are a lot more complicated than personal income taxes, and in a single proprietor business you don't have a bookkeeping department but are more likely to do it yourself, and therefore more likely to make mistakes.

    Though I must say, if it really is 17% of all taxes, it must be a higher percentage for small businesses, and that seems too high by far for just errors.
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  8. #8
    Quote Originally Posted by Aimless View Post
    Is the IRS miscalculating how much taxes are owed, to the tune of 385 billion? Are they becoming increasingly bad at calculating how much taxes are owed? What is it about the tax code that makes this large minority of style proprietors and other business owners so much so much worse at tax compliance than their peers?
    Lots of cash business which relies on self-reporting the business-income but without the extra auditing tools larger corporations with a lot of cash-income use to detect employees/management misappropriating funds.
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  9. #9
    Quote Originally Posted by Flixy View Post
    Business taxes are a lot more complicated than personal income taxes, and in a single proprietor business you don't have a bookkeeping department but are more likely to do it yourself, and therefore more likely to make mistakes.

    Though I must say, if it really is 17% of all taxes, it must be a higher percentage for small businesses, and that seems too high by far for just errors.
    The misreporting percentage for non-farm sole proprietor [non-corporate] business income is, like, 57%, which accounts for something like 40% of the tax gap. Which isn't quite as scary as half of all your drivers not knowing how to drive safely, I guess.

    According to the IRS, the greatest portion of the tax gap can be attributed to individuals in cash-heavy service-type businesses under-reporting income, and a significant portion of that can (again, according to the IRS but also other investigators) likely be attributed to difficulties with complying with a complex ever-changing tax-code rather than to wilful under-reporting or other dodginess.

    To the extent that non-compliance is caused by the complexity of navigating the tax-code for patriotic dutiful and angelic individuals who want nothing more than to tell the government how much they earned and how much they spent, we can reduce non-compliance by 1. simplifying the tax-code in different ways 2. Improving the IRS:s ability to help taxpayers figure things out, ie. the service aspect and 3. developing tools and services that make it easier and more affordable for people to comply.

    To the extent that non-compliance is caused by deliberate under-reporting, I think we can all agree--especially Lewk--that what you need is harsher, more extensive enforcement to deter these criminals. However, that should perhaps be complemented by increasing--if possible--third-party reporting, not so much because we want people to police each other so much as because it can help the IRS:s automated screening systems detect misreporting. Of course, as it is today, only about 1 in 6 of those hits can be followed up by the IRS, so maybe we don't want them to get better at finding problems

    If we focus only on the problem of non-compliance among sole proprietors and the like, how much money--if any--should we spend on trying to recover, in different ways, some of the $170+ billion that seems to get lost on the way to the treasury every year?

    If we consider the rest of the tax gap, what can we be reasonably sure are its most important components, and what can we do about it?



    Re. the difficulties of handling business taxes, I recognise that not all entrepeneurs are like the majority of shifty cheating non-chain restaurateurs I've had the pleasure of knowing so, question to those of you who have experience in that department: what are some specific challenges/obstacles you've identified? Eg. specific requirements such as receipts for transactions, or other components of the Byzantine tax code that are difficult to comply with without a book-keeping dept.
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  10. #10
    Btw, tips (that may or may not be 1. exaggerated or 2. outdated) from an accountant:

    http://www.businessknowhow.com/start...proprietor.htm
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  11. #11
    Senior Member Flixy's Avatar
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    We have a relatively simple tax code here with relatively easy reporting, but my problem when I was treasurer is that if you're not an accountant, about half the fields you don't really know what they mean (especially regarding ownership etc), and proper accounting can be tricky when aside from simple cash sales you have writeoffs, inventories, unpaid bills, etc (reporting cash income and properly doing sales tax was, IMO, simple). Creating a balance report that is up to the tax agency is hard, so I spent more time and effort in getting an exemption from reporting simple to avoid fines for accidental errors. Since we were a nonprofit woth, realistically, no taxable income for at least the near future, we got it.
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  12. #12
    Quote Originally Posted by Aimless View Post
    Is the IRS miscalculating how much taxes are owed, to the tune of 385 billion? Are they becoming increasingly bad at calculating how much taxes are owed? What is it about the tax code that makes this large minority of style proprietors and other business owners so much so much worse at tax compliance than their peers?
    Possibly. I rather question the gymnastics required to come up with a number that should be taxed but wasn't reported. The IRS doesn't have perfect super-vision into every corner of the US economy, even though some have certainly tried.

  13. #13
    Quote Originally Posted by Dreadnaught View Post
    Possibly. I rather question the gymnastics required to come up with a number that should be taxed but wasn't reported. The IRS doesn't have perfect super-vision into every corner of the US economy, even though some have certainly tried.
    One rather simple metric for the estimate is looking at how long the companies that are caught got away with it. Massaging the aggregate number of years per company provides a quick and dirty baseline for how many are pulling it off in any particular year. That number might be underestimate but it is unlikely to be a significant overestimate.
    Last night as I lay in bed, looking up at the stars, I thought, “Where the hell is my ceiling?"

  14. #14
    Quote Originally Posted by Aimless View Post
    While reading about corporate income tax I learned something terrifying:

    At first I thought liberals were responsible, but....as we know, liberals don't run businesses, preferring government handouts to buy their books about evolution.
    A few snips made it funny but also more pathetic.


    US tax codes are absolutely FUBAR. There's no coordination between state and federal agencies, which creates loopholes for "entrepreneurs" at every consumer or business level to exploit.

    Example: my property taxes aren't escrowed by the mortgage carrier (because my down payment was more than 20% of the value when I bought the house) so twice a year I have to pay our local Tax Collector. One bill for Real Estate, and another bill for School District.

    My township used to accept credit cards.....until the IRS sent the Tax Collector (and her husband) bills for "unpaid income taxes". Something about how credit card companies report their income made my township tax collector refuse credit card payments. It doesn't make any sense at all, since most homeowners don't "own" their homes outright anyway.

  15. #15
    Quote Originally Posted by LittleFuzzy View Post
    One rather simple metric for the estimate is looking at how long the companies that are caught got away with it. Massaging the aggregate number of years per company provides a quick and dirty baseline for how many are pulling it off in any particular year. That number might be underestimate but it is unlikely to be a significant overestimate.
    I'm not sure that gets us to how many companies actually are doing it.

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