Pay Your Taxes

I received a dreaded audit letter from the IRS in 2015, covering the 2013 tax year. I contacted my CPA, gathered my documents, and made the trek to their office at the appointed time. After 90 minutes, the auditor determined I underpaid on my 2013 taxes by $37. He was wrong, but any net change of $200 or less is considered a “no-change” audit, so I didn’t push it.

My audit ended well because I pay my taxes. Most of us do, but there’s a significant portion of Americans who don’t. They underreport their taxes, underpay them, or flat out don’t file.

That’s not fair to the rest of us.

The difference between aggregate taxes owed and those paid is called the Tax Gap. During 2011 to 2013, the latest data we have available, Americans underpaid their taxes by $405 billion per year. That Tax Gap drops to $381 billion after enforcement and late payments. Uncollected tax dollars increase our annual deficits and then our national debt. The gap between what we owe and what we pay is remarkably stable, hovering around 15% to 18%, and was $290 billion in 2001.

If the federal government collected just $250 billion more per year in taxes for the last 30 years, it would have trimmed $7.5 trillion off of our national debt of $23 trillion. We also would have saved the interest we didn’t have to pay on that extra debt.

As weird as it might sound, we need more IRS agents, and we need more capital spending in that department.

From 2010 through 2016, we starved the IRS, cutting the budget to the level of 1998. In 2017, we had 9,510 auditors, one-third fewer than in 2010, and about the same number as we had in 1953. Many of the systems used by the IRS today were created in the 1960s. Their computers and software should be updated to this century, at least. President Trump’s budget proposal would raise the IRS budget from $11.51 billion to $12 billion, which is a good start.

One estimate shows that for every additional dollar we spend at the IRS, we collect $7 in additional taxes.

Individuals are responsible for the largest amount of unpaid taxes, accounting for $319 billion of the average unpaid taxes from 2011 through 2013.

We could follow California’s lead, making filing as easy as possible by sending workers pre-filled tax returns that they can electronically affirm and send in.

California runs a tax prep program called ReadyReturn that uses the W-2s of workers sent in by their employers to create pre-populated state returns. Workers log into the program to check over the documents and click to agree.

There’s no reason we can’t develop the same system for federal income taxes. For workers with one employer who have simple returns, they should be able to click on a pre-populated document and send it in.

This won’t do anything about those who don’t claim business income on their taxes, but it should help with a portion of non-filers, which would free up assets to investigate others while also bringing in tax revenue.

With our annual deficit approaching $1.4 trillion, we need all the help we can get. Before we levy new taxes on those of us who already pay, let’s get everyone to kick in what they owe.

Rodney Johnson

Rodney’s investment focus tends to be geared towards trends that have great disruptive potential but are only beginning to catch on to main-stream adapters. Trends that are likely to experience tipping points in the next 5 years. His work with Harry Dent – studying how people spend their money as they go through predictable stages of life and how that spending drives our economy – helps he and his subscribers to invest successfully in any market.