As new rules and regulations introduce penalties for tax return errors, it’s essential to recognize that the U.S. tax system operates on voluntary compliance. Taxpayers receive clear guidelines and deadlines and are expected to follow them. Failure to do so can result in late filing penalties, underpayment fines, interest charges, and increased audit risk.

How the IRS monitors compliance

If you’ve ever wondered whether the IRS tracks taxpayer compliance, yes. The agency conducts ongoing research to analyze taxpayer behavior, which helps guide Congress and the Treasury Department to shape tax policy. These studies focus on understanding trends in non-compliance, leading to a critical estimate known as the tax gap.

Understanding what the tax gap is

The tax gap represents the difference between the total taxes owed and what is actually paid on time. Due to the complexity of the tax code, calculating this gap is challenging, but the IRS’s most recent projections reveal the following:

• Approximately 85% of taxes owed are paid voluntarily and on time, leaving a 15% shortfall
• Collection efforts, such as audits and enforcement actions, recover around 1% to 2% of this shortfall
• Even after these efforts, the net tax gap remains over $428 billion per year
• The gap is primarily caused by non-filing, underreporting, and underpayment, with underreporting being the most significant contributor

Why this matters to you

As underreporting continues, audits are more likely to identify discrepancies, increasing their frequency over time. Similarly, lower compliance rates often lead to stricter penalties, such as the growing trend of fines for late W-2 and 1099 filings. Given the IRS’s focus on closing the tax gap, it’s essential to remain compliant and avoid falling into the net tax gap category, where enforcement efforts are concentrated.

If you have any questions or need guidance on tax compliance, please contact our RRBB advisors. We’re here to help.