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Income Underreporting
Journal article   Peer reviewed

Income Underreporting

Dustin Grant and Gregory Kordecki
The journal of theoretical accounting research, Vol.18(1), pp.1-30
10/01/2022

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Abstract

The United States tax gap-the difference between amounts currently owed by taxpayers and the amounts actually collected by the federal government-continues to widen in the 21st century. Estimates by the Internal Revenue Service (IRS) reveal the average annual gross tax gap at $630 billion for the 2019 tax year. Based on the most recently available published data the amount of the gap is at least $441 billion. Approximately $352 billion or 80% is attributable to income underreporting. The taxpayers' underreporting of income includes not only issues of understating revenue inflow items but also of overstating exemptions, deductions, expenses, and tax credits. Either of these strategies, and especially a combination of the two, generate lower taxable income, liability, and payments, causing underreporting and expanding the tax gap. This paper explores causes behind taxpayer income underreporting and suggests ways that regulators can narrow the tax gap leading toward building a bridge of greater compliance. Selective solution alternatives are offered where future research may consider empirical and theoretical studies to analyze public finance issues.

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