WASHINGTON, Sept 16 The U.S. government should take into account the "informal economy" and offshore tax evasion when it calculates the so-called "tax gap," an estimate of the difference between taxes owed and taxes collected, a report said on Monday.
The Internal Revenue Service's latest estimate of the gap is $385 billion between taxes owed and taxes not collected; and $450 billion between taxes owed and taxes not voluntarily reported. The latter figure excludes taxes collected after IRS enforcement activity.
The gap is reported by the IRS every five years, most recently in January 2012 for the 2006 tax year.
The report by the Treasury Inspector General for Tax Administration said the gap - which now points to "mom and pop" small businesses as the top source of unpaid taxes - should also encompass the "informal" economy, including small cash wages and illegal drug sales, as well as offshore tax havens.
While acknowledging both areas are difficult to define and analyze, they should be estimated so that the IRS can use the data to crack down on tax dodgers, TIGTA said.
Additionally, the IRS is not accurately estimating uncollected taxes owed by corporations, TIGTA said.
The IRS also needs to speed up tax gap reports, TIGTA said, noting that the consequences from the economic recession of 2008 and 2009 have not been analyzed yet.
The IRS said in response that it agreed with TIGTA's recommendations and is studying ways to improve the tax gap estimate.