Baucus Highlights Need to Narrow Tax Gap, Says Gap Must Be a Focus of Tax Reform

According to New IRS Report, 2006 Tax Gap was $450 Billion

Washington, DC – Senate Finance Committee Chairman Max Baucus (D-Mont.) today highlighted the need to narrow the “tax gap,” or the amount of taxes owed that go unpaid each year, and said finding ways to do so must be a major focus of tax reform alongside strengthening the economy and creating jobs. His comments follow the release of the Internal Revenue Service’s (IRS) 2006 Tax Gap Report, which found the tax gap for 2006 was $450 billion, up from $345 billion in 2001. The IRS releases a Tax Gap Report every five years.

“This report shows that closing the tax gap needs to be a major focus of tax reform. An improved tax code that’s simple and fair to all Americans will help close the tax gap, boost our economy and create jobs,” Baucus said. “In an era when we’re squeezing the federal budget for every dollar of savings, we have to make every effort to recover these lost funds. We simply can’t afford to lose $450 billion while we’re asking each American to pitch in to reduce the deficit.”

Although compliance rates were steady, with 83 percent voluntary participation and 86 percent after audits and enforcement, the difficulty of compliance and administration remained significant drivers of the gap. The $450 billion gap, from a perspective of federal funding, represents a sum nearly four times the entire 2011 budget of the Department of Veterans Affairs.

Chairman Baucus, as part of his work on tax reform, convened a hearing last June addressing the relationship between the complexity of the tax code and the tax gap. At the hearing, he said Congress should pursue an effort to simplify the code and reduce its complexity as a means of narrowing the gap. He noted that taxpayers and businesses spend more than six billion hours each year complying with their tax responsibilities, and the Taxpayer Advocate added that if those resources were dedicated to one single industry, it would be one of the largest in the U.S. and employ more than three million full-time employees.

The IRS report is available here.

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