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More Background on the Tax Gap

Experts define the tax gap as the difference between what taxpayers owe and what they voluntarily pay. The IRS estimates the national tax gap to be approximately $290 billion. Based on this figure, we estimate California’s tax gap (at least for the personal and business taxes that we administer) to be about $6.5 billion per year.

image of Tax Gap pie chart

We expect to collect as much as 1.5 billion in tax revenue over the next three years through voluntary compliance and through our enforcement programs.

The Franchise Tax Board addresses the tax gap through four main program areas:

  1. The Filing Division identifies nonfilers through an automated income matching process. Over 220 million income information records are received each year and matched to individual taxpayers. Those taxpayers with an apparent filing requirement and without a return on file are then contacted. We estimate that we will contact approximately 800,000 nonfilers this year.
  2. The Audit Division reviews returns to determine the correct liability for individuals and business entities. Audit activities includes both the detailed examination of tax returns and supporting documents, and the automated verification of self assessed tax returns during return processing. Annually net assessments from these activities total approximately one billion dollars.
  3. The Accounts Receivable Management Division collects delinquent accounts that are established by the department’s self-assessment, audit, settlement and nonfiler activities. An automated billing system combined with manual collections, collects approximately two billion dollars annually.
  4. The Criminal Investigation Program identifies, investigates and effects prosecution of taxpayers engaging in tax evasion or fraud. Approximately 500 taxpayers are under investigation annually for criminal prosecution.

Current Activities

The Franchise Tax Board recently put forth a plan to address segments of the tax gap. The plan includes a group of initiatives intended to attack the problem in a comprehensive manner by increasing enforcement of existing statutes, by undertaking new deterrent measures and by creating public awareness of the consequences of tax-related cheating. Read the plan (PDF).