The IRS published the tax gap projections for 2022 on Oct. 10. They show the country’s projected gross tax gap at $696 billion. The new projections represent an increase of $200 billion over the 2014-2016 tax year estimates and a rise from 2017-2019 projections.
The projected gap is the difference between the projected “true” tax liability for a specified period and the amount of tax paid on time. The gross tax gap represents three key areas: non-filing, underreporting and underpayment of taxes.
“This is a critical study about the nation’s tax system, and the results underscore there remains a sizable tax gap between taxes that are legally owed but aren’t actually being paid,” IRS Commissioner Danny Werfel noted. “While the bottom line for the new tax gap numbers shows the increase basically reflects growth in the larger economy, the size of the gap also vividly illustrates the ongoing need for adequate funding for the IRS.
The new study also shows that the voluntary compliance rate among taxpayers is steady at 85%. The IRS noted that the tax gap increase demonstrates economic growth and changes in income sources instead of a shift in taxpayer behavior in filing or paying taxes.
According to the IRS, the U.S. tax system’s voluntary compliance rate is vitally important for the nation. A one-percentage-point increase in voluntary compliance would bring in about $46 billion in additional tax receipts.
“We need to focus both on compliance efforts to enforce existing laws as well as improving service to help taxpayers with their tax obligations to help address the tax gap,” Werfel noted. “Since passage of the Inflation Reduction Act in 2022, we have taken important steps improving tax compliance. While our recent work will not be fully reflected in the tax gap analysis for several years, we will continue to provide routine, interim updates on how enhanced enforcement on complex areas of tax evasion and delinquency impacts compliance.”
In addition, the new tax gap projections reflect a period before the IRS started increasing tax compliance work after the Inflation Reduction Act’s (IRA) package in August 2022. Since then, the IRS has intensified compliance activity in various areas, such as collecting an initial $1.3 billion from high-income non-filers.
The IRS is also taking various steps to improve voluntary compliance, such as enhancing taxpayer services and offering new technology tools to complement additional compliance work. In 2023, the IRS collected over $4.6 trillion in taxes, penalties, interest, and user fees.
The IRS also projected that late payments and enforcement would generate an added $90 billion on 2021 and 2022 tax returns, resulting in a projected net tax gap of $617 billion and $606 billion, respectively.