How you can resist funding the government → about the IRS and U.S. tax law/policy → IRS incompetence → enforcement effort/results → the “tax gap”

Some news on the “tax gap” and on IRS enforcement efforts:

Appearing before the Senate Homeland Security and Governmental Affairs Federal Financial Management, Government Information and International Security Subcommittee on October 26, IRS Commissioner Mark W. Everson delivered testimony concerning the growing “tax gap,” a term used to describe the growing disparity between the taxes owed the IRS and the taxes actually paid. Everson’s remarks focused on the issues surrounding noncompliance that the IRS believes contribute to the growing number of taxpayers failing to pay their taxes on time and in full. He also reviewed steps that the IRS is currently taking to curb the noncompliance.

Everson attributed the tax gap to a wide variety of problems, ranging from taxpayer misunderstanding, as well as intentional taxpayer underreporting and overdeducting, to IRS budgetary constraints, to unscrupulous tax practitioners. Despite the disparate causes, however, Everson said that the IRS is working on the tax gap and is making headway. He reported that, between fiscal years 2001 and 2004, the IRS increased its enforcement revenues from $33.8 billion to $43.1 billion. He predicted that the revenues collected from enforcement efforts will be even greater in 2005.

In response to questions from members of the subcommittee, Everson emphasized that the focus has been on, and will continue to be on, higher-income taxpayers, corporate taxpayers and flow-through entities, the number of which, he explained, “have exploded.”

Today, some bits-and-pieces that have collected over the past weeks that I haven’t been able to fit in anywhere else:

• A site calling itself The $3 Trillion Shopping Spree brings the war tax resister “penny poll” into the digital age: asking people to fill a shopping cart with things they’d rather have bought than the Iraq War for that $3,000,000,000,000.
• Steev Hise reports back from the NWTRCC conference in Birmingham, Alabama.
• The Tax Prof Blog notes a study on cigarette smuggling in the wake of sharp rises in tobacco taxes in some states. The Tax Foundation says this has often been accompanied by a rise in smuggling-related crime.
• A TIGTA audit shows that in conflicts with the IRS, low-income taxpayers get poor service from the Taxpayer Advocate Service. Another TIGTA report looked at the challenges facing the government in its attempts to close the “Tax Gap.”
• The IRS got caught playing a sneaky trick in Tax Court — a “fraud on the court” in the words of one judge, who applied sanctions to the agency in 1,300 cases it was prosecuting, leading to over $30 million in refunds.
• The Tax Foundation notes that while we’re distracted complaining about the windfall profits of ExxonMobil and the like, the real bandits are getting off skot free: “the total amount of taxes the company paid or remitted [last quarter was] $29.3 billion, nearly three times the net profits it earned for shareholders. The financial statements of two other large U.S.-based oil companies, ConocoPhillips and ChevronTexaco, show similar large tax payments. Indeed, these three companies paid or remitted a combined $47.8 billion in taxes in the first quarter of 2008, nearly $28 billion more than they earned in net profits.”
• Mimi Copp says that the Iraq War has cost American families about $16,500 each. But she’s decided to stop payment. “It is something that I’ve been thinking about for a long time. But this year, with a core group of people in my church community, Circle of Hope, I was able to walk with them through the discernment process and I felt quite strongly about doing this form of resistance to war-making, while at the same time redirecting money to life-giving initiatives. Here’s a letter to the editor I wrote for tax day, which was not published.”:

  How can we stop the war in Iraq? Soldiers can refuse to fight. Government leaders can de-fund the occupation. Taxpayers can stop paying for it.

  This year I will not pay my federal income tax to the U.S. government. I will no longer support my country’s war-making by giving it my money.

  In FY 2006, out of every dollar the U.S. government spent, 5 cents was spent on education and 12 cents on food and housing assistance, while it spent 41 cents on war & preparations for war. This type of spending does not reflect my Christian values and therefore I will not support it.

  Instead, I will redirect my tax dollars to two organizations working on life-giving initiatives: healthcare for the uninsured and aid for Iraqi refugees.

  When Congress passes the Religious Freedom Peace Tax Fund Bill (HR-1921), I will resume paying my income tax to the U.S. government.

  I know that I will be breaking the law and I am prepared to accept the consequences, because when a country wages war there are consequences; ask a solider returning home or an Iraqi refugee being resettled in Philadelphia.

• The MakingPeace blog reports on another variation of the “penny poll”-style war tax protest. It’s pretty simple: just pieces of paper on which are printed “I’d rather buy _______ than war!”, accompanied with magic markers aplenty.
• Everybody in the willfully ineffective wing of the American anti-war movement is going to Cleveland next month for an Open National Conference to Stop the War in Iraq and Bring the Troops Home Now. They seem to have concluded, before the conference even begins, that the most important thing they can be doing right now is to organize another big march and rally like the ones that have been so effective in the past.
• The Urban Institute has published a paper on War and Taxes to note that the Iraq War seems to be an anomaly in that the U.S. government is spending hand over fist on the war, but not trying to raise revenue accordingly.

The IRS last tried to figure out the “tax gap” — its name for the difference between how much tax the law obligates people to pay and what the government successfully squeezes out of them — based on data from the 2001 tax year.

It has occasionally released reports on the tax gap since then, but these have just been statistical extrapolations of the data from the 2001 survey.

But the IRS has been working on a new study of the tax gap, based on tax year 2006, the results of which they released this afternoon — Friday afternoon, which is usually the time chosen by government agencies to release reports they hope the news media will ignore. This is probably a sign that the report isn’t good news for the IRS, so let’s take a closer look.

First, though, look at this summary graphic that purports to show where the gap comes from — which taxes, and which varieties of collection failures (nonfiling, underreporting, and underpayment). Note that only for the “underpayment” category does the IRS claim to provide “actual amounts” — this is only about 1½% of the total tax, and 10% of the estimated gross tax gap. The rest of the gap is based on estimates (some based on data last collected as far back as 1984!), although in some cases the agency could not even provide estimates. This was also true of the 2001 numbers.

The agency reports little change between 2001 and 2006 in the rate of taxpayer noncompliance. The rate is slightly higher in 2006 (with 16.9% of taxes not voluntarily paid on-time, and 14.5% remaining uncollected after IRS enforcement activity), but within the margin of error of the earlier estimates.

The total amount of “underpayment” (that is, amounts that people or corporations declared that they owed, by filing forms or what-have-you, but failed to actually remit by the deadline) — the only part of the new estimates that the IRS had the capability to directly measure rather than estimate — rose in the five years between 2001 and 2006 from $33 billion to $46 billion, a 39% increase. This, while the estimated total tax liability only rose 26%, from $2,112 billion to $2,660 billion.

What I take away from glancing at this report is 1) the IRS didn’t make any headway on tax compliance between 2001 and 2006, and may have lost ground if you think there is reason to suspect that they have been generous in keeping their extrapolated estimates flat while their actually-measured numbers took a leap; and 2) that the government doesn’t really have a very good idea of how big the tax gap is or where its biggest problems are. These are the best numbers it has, and they are so loosely guesstimated as to inspire little confidence in their accuracy.

A common argument against tax resistance goes something like this: The government will add penalties and interest and such to the amount you refuse to pay, and when they eventually wring the money out of you, in the end you’ll have given even more financial support to the government than you would have if you’d just paid up in the first place.

Today I’ll show you some evidence that I hope will convince you that this is not a very good argument.

Lots of people don’t pay the IRS what the agency thinks they should. The IRS has tried to figure out where this missing money is hiding, but their methodology isn’t all that great, and it’s not an easy mystery to solve.

Their best guess is that the vast majority of missing taxes comes from “underreporting” — that is, taxable activities that the IRS never becomes aware of. For example: if you placed a bet with a friend on the outcome of the Super Bowl, the winner of that bet should have added the amount won to their income and should have paid taxes on it, according to the IRS anyway. Most people don’t go out of their way to report taxable transactions like these that the IRS wouldn’t learn about on its own, and so a lot of these transactions never get taxed and they stay in the “underground economy.”

An estimated 84% of the “tax gap” comes from unreported taxable activities like these. Another 6% comes from taxable activities the IRS does learn about, but for which the responsible party never bothers to file a tax return. The remaining 10% comes from people whose tax debt is registered on paper according to Hoyle, but who never get around to forking over the money.

According to IRS financial statements for fiscal year 2014, there were at that time about $380 billion in outstanding unpaid taxes that it knew about. This includes about $205 billion in interest & penalties added to the originally-due taxes, but it does not count any taxes that people have thus far successfully evaded by keeping out of the IRS’s view — that is, all the stuff in the 84% blue area above. It also doesn’t include amounts that the agency can no longer pursue because the statute of limitations has expired.

Of that $380 billion, the agency considers $116 billion to be “currently uncollectible” (“primarily because of the economic situations of the taxpayers”). Another $86 billion is something called “compliance assessments” — which I think means the IRS tells a taxpayer who hasn’t filed a return (or a fully-revealing one) what the agency suspects the taxpayer would have owed if they had filed accurately, but the taxpayer isn’t going along with it and the controversy is still in limbo. The agency doesn’t have much confidence in collecting this money either. There is also a category called “write-offs” that totals $138 billion. This is tax debt that is hopelessly uncollectible because the taxpayer is bankrupt, insolvent, dead, vanished into thin air, or something of that sort. That only leaves about ten percent of the total that the IRS considers to be collectible and includes as a potential asset on its financial statements.

So to $175 billion in unpaid taxes, the IRS has added $205 billion in interest & penalties, but it only expects to collect $40 billion of the total (in recent years it has actually collected closer to $46–49 billion per year by means of its enforcement arm, so it may somewhat exceed its expectations). This I think shows conclusively that people who don’t pay their taxes do not, in the aggregate, ironically end up paying more to the government.

For tax resisters — who are typically alive, solvent, and often have seizable assets and income streams — the news isn’t quite as good as this chart would suggest. But even from juicy targets like us, the IRS fails to seize enough money in penalties and interest from some of us to make up for the money it fails to seize from those of us it lets slip through its clutches.

An informal survey of war tax resisters a few years back, for example, found that the IRS had successfully seized only about 25% of what those resisters had refused to pay.

In addition, it is costly for the agency to deploy its collection apparatus: sending out all of those letters, filing liens & levies, managing the associated bureaucracy — all of that costs money. The IRS spends about $5 billion dollars on enforcement (including investigations, audits, and collection), and so resisters contribute to this additional cost of the government conscripting our support.

So if you are hesitating to refuse to pay taxes because you worry that by doing so you may inadvertently swell government coffers… I hope this has reassured you that in the aggregate, tax resisters do indeed cost the government money.

The IRS today released a new estimate of the “tax gap”, or what the gap was on average during the 2008–10 span. (See ♇ 6 January 2012 for their previous report, on the 2006 tax gap.)

In summary, the IRS estimates that Americans “voluntarily” and on-time cough up 81.7% of what is due, and the agency successfully shakes down the reluctant for an additional 2%, leaving 16.3% uncollected.

The agency says that although the gross (voluntary/on-time) and net (total) tax gaps rose 1.8% and 5.5% respectively from those reported in the previous estimate, this does not in their opinion indicate that noncompliance is increasing and the tax gap is growing larger. Instead, they say “improvements in the accuracy and comprehensiveness of the estimates” is to blame, which is another way of saying the earlier estimates were probably too low and should be retrospectively increased.

Here is some data on where the agency thinks the missing money is hiding:

I haven’t seen the complete report, only a summary, so I haven’t learned much, and I don’t know which of their method changes resulted in the higher estimates — or whether their claim that there was no underlying change in taxpayer behavior is plausible.

Some tabs that have slid across my browser in recent days:

International Tax Resistance

• International direct action against traffic-ticket-generating robots continues, with such machines being destroyed or disabled in Italy, France, and Germany; France and Italy; France and England (plus news that the new president of Brazil plans to discontinue use of the machines); and France and Saudi Arabia.
• Here’s some more information (in Spanish) about the two war tax resisters from Spain who had their fines overturned in court, including what looks to be some excerpts from the ruling (see ♇ 7 May 2019 for an English translation of a newspaper article on the case).
• You may remember that Indian Prime Minister Modi abruptly removed high-denomination bank notes from the ranks of legal tender in late 2016. This was meant to strike a knockout-blow at the underground economy by forcing people to use more legible, traceable economic transactions than anonymous cash. It doesn’t seem to have worked. Despite the significant short-term inconvenience and blow to the economy, the amount of cash currency in circulation quickly recovered to its previous levels and is now back on-trend to where it was before the experiment. You may have heard calls to eliminate the U.S. $100 bill, for similar motives. This experience may discourage such an effort.
• Farmers in Kurdistan who have refused to pay a “war tax” to what remains of the Islamic State (Daesh/ISIS) have suffered reprisals, such as having their fields burned down for their refusal.
• Ugandan legislator and entertainer Bobi Wine (Robert Kyagulanyi) has been arrested on charges relating to an anti-tax street protest he helped to organize last year.

War Tax Resistance in the U.S.

• The National War Tax Resistance Coordinating Committee held a national conference in Washington, D.C. this month. Here’s a write-up by one of the attendees. Unfortunately they got tangled up in ongoing actions by leftist activists who were trying to occupy the Venezualan embassy there on behalf of the brutal, disastrous Maduro regime. It has been a disappointing thing to see groups like NWTRCC, CodePink, Veterans for Peace, and United for Peace and Justice carrying water for the cruel Maduro tyranny as though that were the only way to oppose disingenuous U.S. machinations there. It puts a shameful stain on what’s left of the U.S. peace movement every time a group like this uses a phrase like “the legitimate democratic Maduro government of Venezuela”.
• Lincoln Rice and Sue Barnhart recently talked about war tax resistance on the Spirit in Action radio show, as did Ann Barron and Larry Bassett in a follow-up.
• The Greenfield Reporter profiles war tax resister Thomas Wilson, who died last year.

U.S. Taxpayer Morale

A number of items that have been in the news lately concern how the U.S. tax system has become increasingly corrupt and imbalanced in favor of wealthy tax evaders. Stories like this tend to damage what’s known in tax wonk circles as “taxpayer morale” — the willingness of citizens to pay their taxes without evasion or the necessity of harsh arm-twisting and draconian oversight. For example:

• Income tax audits of the Americans with the highest reported incomes have fallen dramatically. Just in the last year alone the rate fell by half.
• Income taxes on corporations represent the lowest percentage of federal revenue since at least 1960, with the burden increasingly resting instead on individuals.
• The New York Times pointed out that in California, local governments and corporations have rigged the sales tax system in such a way that a portion of the sales tax people pay is gifted to the same companies who collect it. In other words, the sales tax becomes a “bonus profit” to those companies, collected from consumers and enforced by law.
• Millions of former U.S. tax filers appear to have dropped out — not filing returns in the last filing season. One theory is that the tax reform legislation that came into effect last year caused some people to owe where they hadn’t before, or to owe more, and that they decided not to file as a result. Three million people who received refunds in 2018 didn’t file at all in 2019.
• Trump’s tariffs are on target to reverse the benefits of recent income tax cuts for low- and middle-income taxpayers by raising the prices of consumer goods.
• There’s been another report put out about the “tax gap” (the difference between what’s owed and what’s collected) in the U.S. However it still uses largely stale numbers, updating them largely based on estimates and trends rather than evidence.

Recent links of note:

• Some more details have emerged about the Biden administration plan to beef up the IRS enforcement budget. Treasury Secretary Janet Yellen says the administration is seeking a $1.2 billion / 10.4% total increase in the agency budget, most of which would go to tax enforcement.
• Every once in a while, the IRS crunches the numbers and tries to figure out the size of the “tax gap” — the difference between what Americans owe and what they actually cough up. The problem is that there are a lot of unknowns — unpaid taxes that the government currently has no way of knowing that it is owed. So it has to make guesses and extrapolations. Now, in testimony to a Congressional committee, IRS Commissioner Charles Rettig has admitted what I’ve long suspected: the agency’s estimates of the “tax gap” have been far too low and the real number is more than double what has been reported.
• Meanwhile, the IRS is still struggling to get through its backlog of tax year 2019 income tax return filings as this year’s tax filing season hits its peak. This is further complicated this year by the agency’s role in administering a new stimulus check dispersal, and last-minute retroactive changes to the tax laws that made some already-filed returns incorrect and that gave the agency responsibility for rolling out a new tax credit.
• United for Peace & Justice highlights how war tax resisters are organizing for this year’s tax season.
• Sojourners highlights Christian war tax resisters.
• Cartoonist Peter Bagge examines the life of Henry David Thoreau at Reason.
• The war tax resistance season has also begun in Spain.
• More traffic ticket robots are disabled by rebels in France, Italy, and Germany.

As I mentioned a couple of days ago, IRS Commissioner Charles Rettig reported to Congress that the agency’s estimates of the “tax gap” have been far too low and the real number is more than double what has been reported: as much as $1 trillion dollars per year.

The “tax gap” is defined as the difference between what the tax laws say people ought to be paying in taxes to the federal government and what they actually cough up when all is said and done. To put the $1 trillion figure in perspective, the IRS collects about $2 trillion in individual federal income tax each year. That’s a lot of tax evading.

But it’s also kind of phony, in that nobody expects that any amount of tax enforcement is going to bring in an extra $1 trillion or anywhere near it. The voting public wouldn’t tolerate being suddenly milked for an extra tril’, nor for the more invasive IRS that would be required to find it.

However, the Biden administration is hoping they can get their hands on at least some of that yearly trillion by boosting the IRS enforcement budget. That way, if things go according to plan, they can have more revenue to play with without taking the political hit of raising tax rates or expanding the tax base. (Though they want to do all that, too, but hope you’ll believe it’ll only tap people richer than you.)

Some tabs that have slid through my browser in recent days:

• The IRS published a new estimate of the federal “tax gap” — the difference between the amount of taxes people legally owe and what they actually fork over. The new estimate, which is based on data from the 2014–16 period, puts the tax gap at almost $500 billion dollars. The government recovers some of that through nagging and enforcement actions, leaving about $428 billion that never gets captured. I haven’t looked into the methodology by which these numbers were conjured up. Several years ago I took a deeper look and found that these estimates typically did a lot of extrapolating from even older guesstimates. It’s also the sort of calculation that must necessarily concentrate on “known unknowns” while the “unknown unknowns” remain in the shadows. As a result, it’s the kind of number that ought to have broad error-bars around it, but for some reason it’s always reported as a single, precise amount.
• Last time I checked in with the “Don’t Pay” U.K. campaign, it was collecting signers to a pledge to begin refusing to pay home energy bills on October 1^st if the pledge were to get a million signers (they had collected 108,000 when I checked). When I look at their site to day, I see that they have pivoted a bit. Now they claim that 256,924 people “have pledged to strike” on December 1^st, and they don’t mention anything about a one-million-person threshold.
• The scrappy human rebellion against the traffic ticket robots continues. Shotgun fire in Cyprus, blinding paint in Germany and France, fire and paint in France, blunt force trauma in Germany, lens-smashing and legal action in Spain, an angle grinder in France, more paint in Germany, a dozen stacked tractor tires in France, ramming and yet more paint in Germany were among the tactics used against the radar cameras.
• Spartacus Educational profiles Women’s Tax Resistance League pioneer Octavia Lewin.