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The tax gap is the difference between tax the IRS believes it should collect and what is actually paid. Tax preparers who are not familiar with the tax gap soon will learn about it as a result of their registered tax return preparer CPE.

To see what the IRS means by the tax gap only requires considering two workers conducting identical jobs. One is an employee who receives a W-2 each year reporting wages earned. The other is an independent contractor who is paid by each customer. They both are paid the same amounts.

However, all of the employee's paycheck income appears on the W-2. But, the self-employed independent contractor's income isn't reported anywhere. If some payments are in cash, they don't even appear as bank deposits.

These situations are encountered by paid tax professionals all the time. An employee discloses total wages because they are reported on a W-2 that the IRS has also received. The independent contractor is asked for total collected income, but only conveys what he believes is contained in a traceable record. There is no W-2 or any 1099s for payments from individuals.

The only thing that stops this from occurring is when the tax cheating is suspected as a result of techniques learned in a tax preparer ethics course. A professional tax practitioner will not participate in a scheme that appears fraudulent.

Efforts of tax preparation services therefore aim to close the tax gap. The IRS reports that the largest component of the tax gap is underreporting of income. Taxpayers doing this obviously believe they can escape IRS scrutiny. However, the IRS has estimated the gross tax gap is $345 million. After recovering the cost of enforcement and collection efforts, a remaining $290 million of tax gap is projected.

Consequently, plenty of money is deemed collectible even after IRS costs for recovery. The IRS challenge is identifying which particular cases to pursue that will yield results. Examinations of business records to identity unreported income is certainly less costly when conducted against small independent contractors. However, the IRS has to weigh this against the amount of potential tax recovery.

The IRS apparently believes that tax collections from multiple small independent contractors is just as likely to close the tax gap as going after a single large income earner. That's why the IRS has increased examinations of individual tax returns with business interests.

The best choice for independent contractors to limit their amount of tax doesn't involve the risk inherent in under reported income. Instead, self-employed individuals should simply rely upon a professional with registered tax return preparer training to identify all eligible deductions.

The complexity of the tax code often leads to omission of deductible business expenses. Utilizing an RTRP assures the capture of all legitimate deductions from conducting a business. This is more beneficial than avoiding the ethical responsibility of declaring all sources of income.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Fast Forward Academy is a leading publisher of education for tax return preparer CPE registered and tax professionals. Access to free questions for the paid tax professionals is available on their website.

By Sawyer Adams
Article Source: http://EzineArticles.com/?expert=Sawyer_Adams