The tap gap, part 2: The underreported income program

Let’s continue our discussion of the disparity between the cumulative amount of tax that the IRS says taxpayers owe as a whole and the amount that the agency collects in practice.

This difference or disparity is called the “tax gap.” In the first part of this two-part post, we noted that underreporting of income is by far the biggest contributor to the gap.

We also noted the distinction between the gross tax gap and the net tax gap. The net figure is smaller than the gross figure because the IRS expects to eventually be able to collect billions of dollars of the unpaid taxes that are included in the gross figure.

In this part of the post, we will discuss one way in which the IRS seeks to recover underreported income: the automated underreporter program (AUP).

 

IRS computers compare the income you report on your tax returns with information the IRS receives from third parties such as employers and financial institutions. This information comes from key informational returns such as W-2s and 1099s.

If the IRS computers notice a discrepancy in income reporting, it would make sense to involve a human agent to try to resolve the discrepancy at that point. But the IRS only has the resources to have a manual review of about 20 percent of these returns.

For the others, a Notice of Underreported Income is automatically generated. This notice is also called a CP-2000 notice. The IRS’s automated program generates more than 20 million of these notices every year.

Just because the IRS sends such a notice doesn’t mean that it is right. But you do need to respond within 30 days. And in certain cases, there may be a tax penalty for substantial or negligent understatement of income.

We will address those penalties and their role in tax compliance in an upcoming post. For now, our point is that the IRS’s automated underreporting program is one of the ways it tries to close the tax gap.

 

No Comments

Leave a comment
Comment Information
Email Our Team

Contact Us to Get Started Today

Located in the Washington, D.C area, we serve clients in the District of Columbia, Maryland and Northern Virginia, as well as across the country and overseas. For a free initial consultation, call 202-381-1261 or complete our brief online form.

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

close

Privacy Policy

Six Convenient Office Locations in and around the DC Metropolitan Area

Washington, D.C.
1050 Connecticut Ave NW #500
Washington, D.C. 20036

Phone: 202-618-1873
Fax: 888-235-8405
Washington Law Office Map

Columbia Office
10440 Little Patuxent Parkway, Suite 300
Columbia, MD 21044

Phone: 202-618-1873
Phone: 410-497-5947
Fax: 888-235-8405
Columbia Law Office Map

Annapolis Office
839 Bestgate Road
Suite 400
Annapolis, MD 21401

Phone: 202-618-1873
Phone: 410-497-5947
Fax: 888-235-8405
Annapolis Law Office Map

Fairfax Office
8280 Willow Oaks Corporate Drive
Suite 600
Fairfax, VA 22031

Phone: 202-618-1873
Phone: 703-988-4817
Fax: 888-235-8405
Fairfax Law Office Map

Rockville Office
199 E. Montgomery Avenue
Suite 100
Rockville, MD 20850

Phone: 202-618-1873
Phone: 240-599-5009
Fax: 888-235-8405
Rockville Law Office Map

Baltimore Office
400 East Pratt Street
8th Floor
Baltimore, MD 21202

Phone: 202-618-1873
Phone: 443-743-3381
Fax: 888-235-8405
Baltimore Law Office Map