Latest news with #taxgap
Yahoo
30-07-2025
- Business
- Yahoo
How the IRS catches tax cheats: 3 ways your tax return may get flagged
Cheating on your taxes is a form of high-stakes gambling. You might catch a break and evade suspicion, but the IRS is incentivized to go after those Americans who don't pay what they owe — an amount that totals hundreds of billions in unpaid taxes each year. An estimated $514 billion in individual income taxes went unpaid in 2022, according to the most recent IRS data. Add in unpaid corporate, employment and estate taxes and the tax gap that year was $696 billion. Enforcement actions and late payments reduced that amount by an estimated $90 billion. Some Americans may be even more tempted to roll the dice now that the IRS has slashed its workforce by 25 percent so far this year, according to the most recent data from the Treasury Inspector General for Tax Administration. While 84 percent of taxpayers say it's 'not at all acceptable' to cheat on income taxes, 29 percent agree it's fair to avoid paying some taxes if they no longer trust the government will spend taxpayer dollars wisely, according to 2024 results of an annual taxpayer attitude survey conducted by the IRS. That's a pretty blasé attitude about a crime that carries consequences ranging from steep fines to potential prison time. Learn more: Tax fraud: What it is and what you should know to avoid scams And, while workforce cuts at the IRS could reduce audit activity, the IRS has other ways to monitor for cheating, says Heather Liston, a certified financial planner and principal of Clarity Financial in San Francisco. In particular, the IRS uses what's known as a DIF score (for 'discriminant function') to identify problematic returns, and the ratios are intentionally kept a secret so people can't game the system. 'We don't know what they are because the IRS doesn't want us to know what they are,' Liston says. Some common issues that raise potential 'cheating' flags with the IRS include math errors, underreporting income, unusually high business expenses or tax deductions, failing to take required minimum distributions from retirement accounts, and cost basis issues with restricted stock units or real estate transactions, Liston says. Here are three ways the IRS monitors tax returns for cheating. 1. Your numbers don't match third-party data When filing your taxes, you must input your wage information from the W-2 form your employer provided to you, along with income you may have earned from other sources that's documented on various 1099 forms. Those companies must also supply that information to the IRS. And the figures should match. 'What the IRS really likes, and strives for, is third-party reporting because there's very little opportunity for cheating,' says Mark Luscombe, a certified public accountant and principal analyst at Wolters Kluwer Tax & Accounting in Chicago. That's because it's easy for the IRS to identify reporting discrepancies that are problematic, he says. If the income or payment information you input doesn't match what was sent to the IRS, you will receive a CP2000 notice from the IRS. Read the CP2000 notice to understand why the IRS believes there's a discrepancy and what you need to do next, Liston says. Even if your inclination is to shove this notice under a stack of papers and ignore it, it's important that you take action. Call the phone number provided right away if you need more time to figure out why the problem occurred, she adds. There may be rare circumstances in which you knowingly provide information to the IRS that's different than what's on the tax form — in which case you should document why you're doing so, Luscombe says. Otherwise, the problem is often easily solved, though you may need to send more money for unpaid taxes. The longer it takes to resolve the issue, you could incur more interest on unpaid taxes and penalties, Liston says. That's why it's best to try to avoid receiving this notice in the first place. 'Anything a computer can catch, it will,' Liston says. 'In a way, it's a little bit silly the IRS makes us go through the exercise of filling out the information because they already know it.' Learn more: 2025 tax brackets and federal income tax rates 2. Your self-employed business income or expenses seem off While the IRS's exact methods for identifying potential instances of cheating remain a mystery, the agency does scrutinize the information that taxpayers report on Schedule C, Liston says. This form applies to taxpayers who are self-employed, either operating a business as a sole proprietor or working as a freelancer. Learn more: Schedule C: What it is and how it works If you claim very high business expenses every year — particularly in relation to your income — that could draw the attention of the IRS, Liston cautions. And while you should claim expenses you're entitled to, it's important to be accurate, Luscombe says. There's a long-held myth that home office-related expenses can trigger an audit. There's no evidence that's true, though these expenses could raise some red flags. There's 'clearly the potential for abuse' with taxpayers claiming a home office that's actually a part of the house that's not exclusively used as a home office, as the IRS dictates it should be, Luscombe says. 'I suspect there are a lot of 'home offices' where the kids go in and watch movies and the like.' The IRS won't appear on your doorstep to confirm your home office is the size you claim or that it's being used exclusively for that purpose, but that myth could be a good reminder to be cautious. When possible, Liston says, be sure to have documentation of expenses like meals or transportation costs. But just because these expenses could elicit extra scrutiny by the IRS, Liston notes, 'that doesn't mean you shouldn't claim them.' Learn more: The home office deduction: Who qualifies and how to calculate it 3. Your tax deductions or credits seem fishy The standard deduction for taxpayers was nearly doubled as part of the Tax Cuts and Jobs Act of 2017, which now means that less than 10 percent of taxpayers claim itemized deductions. (That higher standard deduction, plus a new inflation adjustment for 2025, was made permanent as part of the megabill that was signed into law in July.) Abuses of itemized deductions, particularly related to the value of charitable donations, was once something the IRS closely monitored to identify potential instances of fraud, Luscombe says. And it still does, albeit among the now-minority of taxpayers who itemize deductions. There are other tax breaks that many Americans can claim that may also seem fishy to the IRS. The IRS seems 'very concerned,' Liston says, with catching people who cheat in some way when claiming the earned income tax credit (EITC) for low- to moderate-income workers and families. While it's hard to know exactly what the IRS scrutinizes, it's important to only claim deductions that legitimately apply to your situation. Learn more: 10 easy tax deductions and credits to trim your tax bill Resist the urge to underreport your income Not all income is reported to the IRS through a third-party source, and it may be particularly tempting to omit this information while filing your taxes. That's because companies are only required to send you — and the IRS — a 1099 form for payments that exceed certain thresholds. And those thresholds were recently raised for some of the most common 1099 forms. Even if you made less than the amount required to generate a form, the IRS is looking for taxpayers who don't report all of their income, no matter whether they do so intentionally or mistakenly. 'That could be an honest mistake, but you still need to get caught up and make it right,' Liston says. You should receive a 1099 form if you did contract or freelance work that totaled at least $600 for one company in 2025, though the massive new tax bill signed into law in July boosts the reporting threshold for 1099-NEC and 1099-MISC forms to $2,000 starting in 2026. That same tax law also changed the reporting threshold for 1099-K forms — which report payments of goods and services on platforms like Venmo, Cash App and PayPal — to $20,000 plus 200 transactions. That reporting threshold is now in effect for 2025. The IRS has been pushing for more third-party reporting, especially in the case of the 1099-K forms, to ensure taxpayers are fairly reporting all of their income, Luscombe says. But the agency has been challenged by companies that argue this paperwork is unduly burdensome, he adds. The higher reporting thresholds — meaning that you can receive a higher amount of freelance income without the company that paid you reporting it — may tempt you to report less income. But knowingly omitting this income when you file your tax return is fraud. Even if it seems unlikely the IRS will catch you, you don't get off the hook for reporting income just because you don't receive a form for it, Liston says. 'I never advise anyone to lie about that,' she says. 'You are responsible for reporting all of your income.' Get started: Match with an advisor who can help you achieve your financial goals Why double-checking your tax return is so important Before you file your taxes, go through your return to make sure nothing stands out as peculiar. A vast majority of taxpayers now file their taxes electronically, which has reduced simple math errors, but you could still make a small mistake that will result in a big headache with the IRS. Receiving a notice in the mail from the IRS about a problem with your return, while unpleasant, doesn't necessarily suggest you'll be audited or accused of fraud. It's 'really important' not to panic, Liston says, though you need to take these notices seriously and reply in a timely manner, and that's particularly true if you have an explanation for why the information you supplied differs from the IRS's calculation. And you won't be surprised by a notice that immediately accuses you of tax fraud. Rather, that accusation will only come after a series of notices and fair warning before the IRS formally accuses you of tax fraud after a thorough investigation. Finally, your intent matters. Some taxpayers confuse tax avoidance via legitimate planning and legitimate tax strategies with tax evasion, in which you're illegally trying to lower your tax obligation. The two terms are very different, Luscombe says. 'Fraud implies a willfulness to it.' Learn more: Tax avoidance vs. tax evasion: One's illegal, the other is smart financial planning Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
30-07-2025
- Business
- Yahoo
I Asked ChatGPT What Would Happen If Elon Musk Paid Taxes at the Same Rate as the Middle Class
The wealth gap in America is staggering, but the tax gap might be even more shocking. When I asked ChatGPT to calculate what would happen if Elon Musk paid taxes at the same effective rate as middle-class Americans, the AI's response revealed numbers that will make you question everything you thought you knew about tax fairness. Explore More: Read Next: The answer involves billions in potential revenue, fundamental questions about how wealth should be taxed and a tax loophole so effective that billionaires have turned it into an art form. The Massive Tax Rate Gap Between Billionaires and Regular Americans According to ChatGPT's analysis, the effective tax rate difference between Musk and middle-class Americans is almost unbelievable. While middle-class households typically pay an effective tax rate of 20% to 25% when combining federal income tax, payroll taxes and other obligations, Musk's situation tells a very different story. Based on ProPublica's investigation of IRS files, ChatGPT revealed that Musk paid a 'true tax rate' of just 3.27% on his wealth growth between 2014 and 2018. In 2018 specifically, he reportedly paid $0 in federal income tax despite his wealth increasing dramatically. The AI explained this isn't because Musk is breaking the law — it's because most of his wealth exists as unrealized gains in Tesla and SpaceX stock, which aren't taxed until sold. He can also borrow against his equity holdings, and loans aren't considered taxable income. What $3 Billion in Extra Tax Revenue Could Actually Fund ChatGPT ran the numbers on what would happen if Musk paid a 25% effective tax rate during that 2014 to 2018 period. With his wealth increasing by approximately $13.9 billion, he would have owed about $3.475 billion in taxes instead of the roughly $455 million he actually paid. That extra $3 billion could have funded some serious public programs: Free community college for over 1 million students Universal school lunches for millions of children Clean water infrastructure projects in cities like Flint Significant boosts to child tax credits or affordable housing grants The AI shared that this represents just one person over five years, making the potential impact even greater. How the Bezos and Buffett Comparisons Make It Even More Shocking ChatGPT compared Musk with other billionaires and the results were even more eye-opening. According to the same ProPublica data: Jeff Bezos saw his wealth grow by $99 billion from 2014- to 2018 while paying $973 million in taxes — an effective rate of just 0.98%. Warren Buffett increased his wealth by $24.3 billion during the same period but paid only $23.7 million in taxes — a microscopic 0.10% effective rate. If all three paid taxes at a 25% rate on their wealth growth, ChatGPT calculated they would have collectively contributed an additional $32.85 billion to federal revenue over just five years. 'That's from three people,' the AI shared, which really puts the spotlight on the scale of potential revenue from properly taxing extreme wealth. The 'Buy-Borrow-Die' Strategy That Makes It All Possible ChatGPT explained the sophisticated but perfectly legal strategy that allows billionaires to avoid most taxes: Buy assets (stocks, real estate, businesses) that appreciate over time. Borrow against those assets at low interest rates — loans aren't taxable income. Die and pass appreciated assets to heirs, who receive a 'stepped-up basis' that eliminates taxes on all previous gains. This approach allows billionaires to fund lavish lifestyles through borrowed money while their actual wealth compounds tax-free indefinitely. The AI pointed out that regular Americans can't use this strategy because we rely primarily on taxable wages rather than appreciating assets we can borrow against. Why Current Tax Rates Miss the Real Problem ChatGPT clarified an important distinction that often confuses discussions about billionaire taxes. When billionaires do have taxable income, they often pay rates similar to or higher than middle-class Americans on that specific income. But here's the key insight the AI provided: 'The tax code isn't broken because billionaires are cheating it. The tax code is broken because it treats labor as taxable and capital as optional.' Middle-class Americans pay taxes on nearly 100% of their economic gains through wages. Billionaires pay taxes on maybe 5% to 10% of their economic gains, since most wealth growth remains unrealized and untaxed. The Market Impact Question ChatGPT Couldn't Ignore The AI also addressed potential downsides of requiring billionaires to pay higher effective tax rates. Forcing someone like Musk to sell billions in stock to pay taxes could significantly impact share prices, potentially affecting retirement accounts and institutional investors. However, ChatGPT suggested this concern might be overblown, noting that well-designed tax policies could include provisions for gradual implementation or alternative payment methods to minimize market disruption. Policy Solutions That Could Actually Change Things ChatGPT outlined several approaches that could create more tax equity: Wealth taxes that apply annual rates to net worth above certain thresholds Minimum tax rates on total income including unrealized gains for ultra-high-net-worth individuals Closing borrowing loopholes by treating large loans against equity as taxable events Capital gains reform that taxes investment profits at the same rates as wages The AI wrote that while these changes would require significant political will, they're not technically impossible to implement. What This Means for Regular Taxpayers ChatGPT's analysis revealed that the current system essentially subsidizes billionaire wealth accumulation through tax policy. While middle-class Americans pay substantial portions of their income in taxes, the ultra-wealthy can legally structure their finances to minimize tax obligations dramatically. This creates a compounding effect where wealth concentrates at the top not just through investment returns, but through preferential tax treatment that allows more capital to remain invested and growing. The AI's Bottom Line on Tax Fairness When I asked ChatGPT for its overall assessment, the AI concluded that requiring billionaires to pay taxes at middle-class rates would generate massive federal revenue while establishing important principles about shared civic responsibility. 'The federal government could collect billions more in revenue annually,' the AI explained. 'It would set a precedent for tax equity.' However, ChatGPT wrote that achieving this would require 'major changes to the U.S. tax code, especially how wealth (not just income) is taxed.' The AI's analysis suggested that while the technical solutions exist, the political challenge lies in restructuring a tax system that currently treats different types of economic gains very differently. Why These Numbers Matter Beyond Politics ChatGPT's calculations reveal something beyond partisan tax policy debates — they show how current tax structures affect public investment capacity. The AI noted that tens of billions in additional revenue could fund infrastructure, education and social programs that benefit everyone, including the wealthy. 'If Musk, Bezos and Buffett paid taxes like the middle class, tens of billions more would flow into public programs,' the AI concluded. 'It would dramatically shift the conversation about economic fairness and tax equity.' Whether you think that's good policy or not, ChatGPT's analysis made clear that the current system creates vastly different tax obligations for different types of Americans — and the numbers are bigger than most people realize. More From GOBankingRates The 10 Most Reliable SUVs of 2025 This article originally appeared on I Asked ChatGPT What Would Happen If Elon Musk Paid Taxes at the Same Rate as the Middle Class Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
22-07-2025
- Business
- Yahoo
HMRC sets out long-term vision in new Transformation Roadmap
His Majesty's Revenue and Customs (HMRC) published its plan to become a digital-first tax and customs authority by 2030. The Transformation Roadmap outlines how it aims to achieve its objectives, with increased automation, and new and improved digital services designed to ensure a 'right first time' level in its service offerings. As per the Departmental Efficiency Plans, the Government has invested around £7bn ($9.45bn) per year over the SR25 period that will establish critical foundations for HMRC digitisation. HMRC also has aims to become more productive by delivering a further £773m of efficiencies by 2028-29 through actioning three priorities: to improve day to day performance; close the tax gap; and drive reform and digital modernisation of the tax and customs system. HMRC priorities To elaborate, HMRC is to deliver a more digital 'self-serve' option with a minimum of 90% of interactions undertaken digitally by 2029-30, an increase from its current 76% benchmark, to expand the range and type of online services it provides – mainly through the HMRC app, to automate tax where possible and provide targeted support for those who need it. The second priority is to close the tax gap. According to the official statistics from the Measuring Tax Gaps 2025 report, it is estimated that 5.3% of total theoretical tax liabilities, or £46.8bn in absolute terms, was unpaid in 2023-24. HMRC collected £829bn in 2023-24, representing 94.7% of all tax due, and closing this tax gap is a key strategic priority for HMRC to increase this percentage. Finally, HMRC plans to drive reform and digitisation by 2030 through modernising its IT infrastructure, replacing the long outdated legacy systems with innovative technology and AI, simplifying the legislative and administrative framework, and sharing data and collaborating cross-government. The department also seeks to upskill employees to use AI effectively; evidently with more than 80,000 digital, data and technology courses completed, of which more than 11,000 were AI-focused. VOA to be merged There is also a structural integration objective which will see the Valuation Office Agency (VOA) merged into HMRC. This integration seeks to strengthen the ministerial accountability and is expected to deliver between 5 to 10% of additional savings in VOA administrative costs by 2028-29. The plan is an ambitious one to say the least. However, we are confident the above vision can be achieved with robust governance. This, though, must be driven primarily through creating great working relationships with suppliers to ensure a smooth and streamlined digital transformation process takes place. This should also be backed up with intentional requirements gathering and mapping of the department's enterprise architecture to further increase the probability of the department implementing the right technologies that connect seamlessly and efficiently, thereby reducing the risk of paying twice for the 'same but different'. "HMRC sets out long-term vision in new Transformation Roadmap" was originally created and published by Verdict, a GlobalData owned brand. The information on this site has been included in good faith for general informational purposes only. It is not intended to amount to advice on which you should rely, and we give no representation, warranty or guarantee, whether express or implied as to its accuracy or completeness. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content on our site.
Wall Street Journal
11-07-2025
- Business
- Wall Street Journal
Want to Repair Social Security? Enlist the IRS
Trustees estimate that the Social Security Trust Fund will run dry by 2032 ('Fears for Social Security Stir Search for a Fix,' U.S. News, July 7). When this happens, the $1.6 trillion paid out each year will decrease by an estimated 23%, or $368 billion. The Trump administration could head off this problem by providing sufficient resources to the Internal Revenue Service to enable it to close the estimated $118 billion employment-tax gap, the amount of employment taxes the IRS fails to collect every year. If the administration decided to close the entire tax gap of $606 billion and dedicate the additional funding to the trust fund, benefit cuts may be avoided. Yet after the rescission of much of the $80 billion Inflation Reduction Act funding for the IRS, an indefinite hiring freeze, the firing of approximately 7,000 probationary employees and the deployment of special agents to arrest foreign nationals in the country without proper authorization instead of working tax cases, the chances of this happening are infinitesimally small.
News.com.au
30-06-2025
- Business
- News.com.au
If you do this at tax time, you're definitly on the ATO's radar
Tax time is upon us, which means many Aussies are scrambling to get their finances sorted. At-home money managers should note however that the Australian Tax Office (ATO) is unhappy with a $9 billion tax gap and will be zeroing in on some trouble spots. Below are four key areas you need to keep an eye on, or risk an audit from the ATO. Work related expenses Director of tax communications at H&R Block, Mark Chapman says most of the tax gap is people incorrectly claiming work related expenses. 'It's important for tax payers to remember the golden rules – only claim something actually incurred for work purposes, have full substantiation (or evidence), and don't claim anything you were reimbursed for by your employer. 'If you can tick off all of those boxes then you can claim it.' Working from home deductions have also become a minefield because many people don't keep full records or timesheets. 'The ATO is looking at these claims very closely,' Chapman said. 'Unfortunately many don't have substantiation and get their claims knocked down.' Rental property risks After work related expenses, property is seen as the largest contributor to the tax gap. 'The ATO has looked at tax returns from property investors and noted that up to 90 per cent of them are wrong,' Chapman said. 'We don't know if it's a dollar or two incorrect or thousands of dollars. But it does indicate that the ATO is looking closely at people who have a rental property.' Chapman says the pitfall here is people simply not knowing that rental income is taxable and not declaring it. Tax partner at Pitcher Partners in Melbourne, Daniel Burt agrees that rental properties are on the ATO's radar as the risks have increased. The issue of the ATO focusing on holiday homes is not new,' Burt said. 'But what has changed is the prevalence of airbnb and being able to use an online platform to make a second home available for a short period of time. 'The risk may be higher with a less formal arrangement that has less documentation.' To keep things in order, Burt says records need to be kept for the period of rent, income received and for all expenses. 'If the property is not genuinely available to rent for the entire year, the ATO expects some sort of apportionment (division). They're looking to see if it's reasonable based on property use.' Sharing economy and crypto Those moonlighting with Uber, Airtasker or similar should take note – the sharing economy is also setting off alarm bells at the ATO. Chapman says if you work in these areas and don't properly declare your income, you're lining yourself up for an ATO audit. 'The ATO knows who is working in the shared economy and expects to see that disclosed,' he said. Cryptocurrency investors better stay sharp too. 'Similarly, the ATO does have information about who invests through crypto currency exchanges,' Chapman said. Don't disclose and you'll typically get a 'please explain letter' from the ATO, he warns. Another area to check is general investing to see if any of your shares have gone down, which is called an unrealised loss, Burt says. Such a loss can be used to reduce your capital gains. This matters because your net capital gain is added to your taxable income, which is then taxed at the appropriate marginal tax rate. 'So there's an opportunity to sell those shares and generate the loss before the end of the financial year,' Burt said. In short, this means you can offset your gains and losses in the same income year to come to a net amount. Super contributions Burt also recommends people look at their super more closely ahead of tax time. Under current tax rules you can claim up to $30,000 of deductions during the financial year for concessional contributions. This means if an employer puts in $18,000, you can add $12,000 of concessional contributions and claim a tax deduction, says Burt. 'If you have surplus cash from selling some assets or an inheritance, for example, you can reduce your tax liability by making these additional voluntary super contributions,' Burt said. 'But act quickly because we've only got a week before the end of financial year.'
