The Internal Revenue Service yesterday estimated that Americans are not reporting between $100 billion and $135 billion of their income each year, depriving the Treasury of between $19 billion and $26 billion in taxes.
The IRS said $75 billion to $100 billion of this unreported income stems from legal sources, such as tips or commissions, and another $25 billion to $35 billion comes from crime -- drugs, prostitution and gambling.
The figures, the result of an 18-month study by a special IRS panel, marked the first formal effort by the government to calculate the size of the so-called "underground economy."
The $135 billion estimate was based on 1976 income levels. If those figures were enlarged to account for inflation, the underground economy would total $167 billion this year, with the amount of lost taxes at $32 billion.
The IRS estimates are accurate, that means that more than$1 of every $10 that Americans take in as income went unreported in 1976. Technically, all income must be reported unless it is specifically tax-exempt.
These amounts are sure to raise questions about the adequacy of IRS enforcement efforts. The service repeatedly has contended that compliance with the tax laws generally is good, with relatively few violations.
IRS Commissioner Jerome Kurtz yesterday declined to answer questions about the new report publicly, apparently out of reluctance to upstage congressional committees planning to conduct hearings on the issue next week.
However, officials said at a briefing that, while the totals were "a cause for concern," the figures were "not shocking" in a $2.3 trillion economy. They said even with such gaps, the IRS still collects 90 percent of all taxes owed.
Kurtz noted in a preface to the report that the Treasury has proposed legislation to mandate withholding on income from tips and commissions, and said officals were planning other measures to broaden withholding requirements.
However, neither Kurtz nor the officials who briefed reporters yesterday would comment on whether the agency needed more enforcement agents.The White House, as part of its efforts to restrain spending, has held down agency personnel.
Yesterday's report showed that the bulk of the otherwise-legal income that now is going unreported in the United States is going into the pockets of ordinary citizens, who appear to be hiding all or part of their total income from the IRS.
The document showed that between $33 billion and $39.5 billion of the total, just under half, is going to self-employed people, such as doctors, lawyers and small businessmen.
Another $21 billion to $27 billion represents unreported wages, salaries, alimony, lottery winnings and other prizes or awards. About $9 billion is in interest. The rest is in rents, pensions and capital gains.
In the case of the illegal income, the IRS estimated that between $16 billion and $24 billion of it comes from illegal drugs, while another $4 billion to $5 billion stems from bookmaking.
The rest is in relatively small amounts: $2.5 billion to $3 billion from numbers games, $1.6 billion to $2 billion from other gambling and $1 billion to $1.6 billion from prostitution. There were no further breakdowns provided.
Conspicuously, the IRS figures did not include estimates of income or lost taxes from so-called "White-collar" crime: embezzling, fraud and similar activities. Officials said there simply were not enough data available.
The IRS said it did not have any idea whether the amount of non-reporting had increased or diminished since the 1976 figures were compiled. However, some outside polls have suggested that tax-cheating may be on the rise.
The IRS estimates of the size of the "underground economy" were based on a series of detailed projections of other government data, such as statistics on drug traffic, and on other, more complex estimating techniques.
At one point, for example, estimators used the rapid growth of $100 bills during the 1970s as indirect evidence that drug sales were increasing. They also took advantage of reports of regular IRS compliance checks.
For all the magnitude of the IRS estimates, they still fell short of those by some private analysts. Peter M. Gutmann, a New York finance expert, has set the total of unreported income at $175 billion for 1976, rising to $200 billion by 1978.
Kurtz conceded in the report that the IRS figures were merely the best available guesses, and cautioned that its estimates of income from illegal sources were particularly "soft" compared with more traditional data.
However, the agency argued in the document that Gutmann's estimates were even more flawed, and it also dismissed several other widely hailed claims about the size of the "underground economy."
Besides the legislative changes he said Treasury would propose, Kurtz said the IRS plans to tighten its review and auditing procedures, including making more prompt comparisons of individuals' income-tax returns with other income forms.
He also disclosed that the IRS soon will appoint an ombudsman to help taxpayers who have complaints about how their cases have been handled. He said the ombudsman would have full authority to cut through any red tape.
The IRS report is scheduled to be the subject of hearings next week by a House Ways and Means subcommittee headed by Rep. Sam M. Gibbons (D-Fla.). The panel has been keeping tabs on the subject for several months.