Tax Gap as Pay-For: What it Means

July 14, 2021

Reducing the tax gap has been proposed as one of the ways to offset the spending required for the bipartisan infrastructure deal. The latest infrastructure proposal, which was agreed to by the White House and a bipartisan group of senators proposed that an additional $100 billion could be collected by the IRS over the next 10 years if IRS enforcement is increased.

The tax gap is the difference between taxes paid and taxes owed by law. The Department of the Treasury estimated a “gross tax gap” of $630 billion in tax year 2019, and after accounting for $76 billion of additional revenue from Internal Revenue Service (IRS) enforcement activities and late payments, Treasury estimates the “net tax gap” totaled $554 billion in 2019.

Narrowing this gap is a way to increase government revenue without increasing taxes on the wealthy, which conservatives do not support.

Sen. Mark Warner (D-Va.), who is part of the bipartisan group working on the infrastructure deal, told reporters that “there’s lot of evidence that if you invest more in the IRS, it’s going to pay a huge dividend.” Warner argued that a $40 billion investment in the IRS could bring in a gross of $100 billion, a net of around $60 billion that could fund spending.

NSBA fully supports efforts to collect legally owed tax revenues, but not at the undue expense of the privacy and integrity of honest, hard-working entrepreneurs. NSBA believes that the IRS should conduct more research to better identify noncompliant taxpayers, enhance taxpayer services to inform taxpayers of correct tax obligations and adjust its enforcement tools to target those who intentionally evade paying taxes. Adding new burdens and requirements on small businesses already struggling to do the right thing is simply the wrong answer.

Addressing the tax gap must entail balancing the desire to collect taxes that are duly owed with the importance of minimizing intrusive and complicated reporting requirements and additional audits of small businesses. Accurate tax reporting and compliance is extremely important to small business. Those who make a good faith effort, yet are inaccurately complying should be assisted through education and tax simplification efforts. Those willfully disregarding their tax liability should be held accountable. The more assistance offered to taxpayers and the simpler it is to understand and comply with tax laws, the more taxpayers will accurately meet their tax obligations. However, increased enforcement at the expense of taxpayer education will not in the long term accomplish sustained, improved compliance.

NSBA supports proposals that are fair and reasonable to address the issues of the tax gap and to increase tax compliance. The majority of small-business taxpayers want to comply with existing tax laws, thus tax simplification and education is the most effective and equitable way to improve compliance and to reduce the tax gap. Congress needs to support proposals that are fair and reasonable, without hindering the survival, growth and innovation of our nation’s entrepreneurs.