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Tax News
California Tax Gap

In this issue of Tax News we shine a spotlight on some of our efforts to close the tax gap, through our audit, filing, and collection programs.

We have heard a lot about the tax gap in the last few years, as California has struggled to dig itself out of a budget deficit. California’s tax gap is estimated at $6.5 billion, based on federal data.

The tax gap is composed of:

  • Taxpayers who file returns but underpay or underreport.
  • Taxpayers who file but don't pay at all.
  • California residents and nonresidents, who neither file the tax returns nor pay the taxes they owe.

Taxes that are underpaid, or evaded entirely, consist of employment tax, sales tax, property tax, etc. However, income tax is by far the largest contributor to both the federal and the state tax gap. Honest taxpayers pay as much as 20 percent more to make up the difference for those who cheat.

Much of what we do at FTB is aimed at shrinking the tax gap. Our recent Voluntary Compliance Initiative and Tax Amnesty Program will result in a combined net revenue gain of $4.8 billion (www.ftb.ca.gov/amnesty/summary.shtml). Our audit, filing compliance, special investigation, and collection programs annually produce $2 billion in revenue.

Cheating on taxes is not a victimless crime. The ongoing existence of the tax gap hurts honest taxpayers, who pay their fair share and more. Honest businesses are also hurt by the unfair competitive advantage gained by dishonest businesses that don’t pay their fair share of taxes.