IRS Tax Guidelines and Small Business Information

Reducing the Tax Gap Continues as a Top Priority for the IRS

To meet their expenses, the government needs income, called "revenue," which it raises through taxes. The Federal Government relies mainly on income taxes for its revenue. State governments depend on both income and sales taxes. Most county and city governments use property taxes to raise their revenue.

Taxes provide revenue for federal, local, and state governments to fund essential services--defense, highways, police, and a justice system--that benefit all citizens, who could not provide such services very effectively for themselves. Taxes also fund programs and services that benefit only certain citizens, such as health, welfare, and social services; job training; schools; and parks.

The government provides public goods and services for the community as a whole. To pay its bills, the government needs revenue, or a source of income. The money that the federal government uses to pay its bills comes mostly from taxes. Taxes shift resources from private individuals and businesses to the government.

The Internal Revenue Service developed the concept of the tax gap as a way to gauge taxpayers' compliance with their federal tax obligations. The tax gap measures the extent to which taxpayers do not file their tax returns and pay the correct tax on time. It is the difference between what taxpayers should have paid and what they actually paid on a timely basis

The tax gap is an estimate of the difference between the individual, corporate, employment, estate and excise taxes that should have been voluntarily paid on time and what was actually paid for a specific year.

The National Research Program (NRP) Individual Reporting Compliance Study, concluded in 2004, examined over 46,000 individual returns. By analyzing the data, the IRS was able to get a much better picture of how income and deductions were being reported. This information has proven invaluable in a number of ways, including measuring and analyzing the tax gap.

The updated estimate of the overall gross tax gap for Tax Year 2001-- the latest year for which data is available -- comes to $345 billion. IRS enforcement activities, coupled with other late payments, recover about $55 billion of the tax gap, leaving a net tax gap of $290 billion for Tax Year 2001.

While Federal grants vary widely from state to state, generally speaking, Federal grants account for 31% of state funding. Tax dollars support Medicare/Medicaid and medical research, public school funding and subsidized school lunches, defense funding, social security, public roadways, police and fire protection, public libraries, job training and scientific research, bank regulation, food inspectors and Food and Drug Administration, air traffic controllers, and unemployment benefits. It is critical the each American pay their fair share toward strengthening and supporting the country we live in.

Self-employed individuals and businesses must pay their taxes in regular installments, known as estimated tax payments. Paying taxes through withholding or estimated taxes during the year helps reduce the government's expense for borrowing money. It also provides an easier method for taxpayers to pay their taxes. The Internal Revenue Service expects all taxpayers to comply with the law voluntarily. Most taxpayers figure out how much tax they are supposed to pay and file their income tax return by the date it is due.

What can you do? Understand and comply with the tax laws, seek assistance when you have a question, and help others in your profession understand the need to comply with the tax laws.

To help understand this issue, the IRS created a Tax Gap page at It includes links to news releases and other information about the tax gap. In addition, the Web site has information specifically geared to assist the small business taxpayer at