IRS Study: 17 Percent of Taxes Went Unpaid

WASHINGTON – People and businesses underpaid their taxes by an estimated 17 percent in the most recent year studied, meaning they failed to send the government $450 billion it was owed, according to an Internal Revenue Service report released Friday.

The study covered 2006, the most recent for which the IRS said it had data available. The amount of underpaid taxes far exceeded the size of the entire federal budget deficit at the time.

After IRS audits and other enforcement efforts, non-compliance shrank to 14 percent, leaving the final amount of unpaid taxes at $385 billion.

That is still larger than the budget deficit for fiscal 2006, which was $248 billion. Fiscal years begin in October of the previous year.

Altogether, the IRS estimates it was owed nearly $2.7 trillion in taxes in 2006.

Since then, federal deficits have mushroomed out of control, hitting a record $1.4 trillion in 2009 and barely receding to $1.3 trillion last year. President Obama and Republicans in Congress have agreed to some spending cuts but have remained deadlocked over how to curb the massive budget shortfalls that are projected indefinitely.

The IRS has made efforts to improve compliance, such as increasing oversight of professional tax return preparers and increasing the information that must be reported to the agency by stock brokers, mutual fund companies and for some business transactions.

Even so, tax analysts said there was no reason to believe that today's compliance rate has changed significantly from the 2006 figures. That is chiefly because significant portions of the underpaid taxes are believed to come from businesses and individuals who report information about their income that is difficult for the IRS to verify.

"It's hard to get to that," said Clint Stretch, a tax policy expert for Deloitte Tax LLP. "Nobody wants a bunch of IRS police hammering on small business people."

The 2006 compliance rates were roughly similar to 2001, the last year the IRS had examined.

In that year, 16 percent of taxes were unpaid initially, while enforcement efforts lowered the non-compliance rate to 13 percent.

That meant that $345 billion in taxes were uncollected initially and $290 billion remained unpaid even after IRS audits and other enforcement efforts.

The dollar amounts of unpaid taxes were larger in 2006 largely because the size of the economy and the amount of taxes owed had grown.