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Latest Tax Gap Estimate: Almost Half a Trillion Dollars

S.J. Steinhardt
Published Date:
Nov 1, 2022

GettyImages-174879501 IRS Internal Revenue Service

The estimated gross tax gap—the difference between estimated true tax liability for a given period and the amount of tax that is paid on time—is $496 billion for the years 2014-2016, the IRS reported.

That number represents an increase of $58 billion from the previous estimate for the years 2011-2013. Between the two periods, 2011-2013 and 2014-2016, the estimated tax liability increased by more than 23 percent.

"These findings underscore the importance of ensuring fairness in our nation's tax system," said IRS Commissioner Chuck Rettig. "The increase in the tax gap estimates reflects that the IRS needs to do more, both in improving taxpayer service as well as working to improve tax compliance. The IRS remains committed to ensuring fairness and helping taxpayers while also working to better identify emerging compliance issues that contribute to the tax gap. The recent funding addition will help the IRS in many ways, increasing taxpayer education, significantly improving service to all taxpayers and focusing on high-income/high-wealth non-compliance in a fair and impartial manner supporting compliant taxpayers."

The IRS attributes that gap to three components: nonfiling (tax not paid on time by those who do not file on time, $39 billion), underreporting (tax understated on timely filed returns, $398 billion), and underpayment (tax that was reported on time, but not paid on time, $59 billion).

"A particular challenge for tax gap estimation is the time it takes to collect compliance data, especially data on underreporting that come from completed examinations (audits)," the IRS stated. "To address this issue, the current release includes estimated tax gap projections for Tax Years 2017-2019."

The IRS elaborated on those tax gap projections. "Based on the projections for 2017-2019, the estimated average gross tax gap is projected to be $540 billion per year," the IRS stated. "The associated voluntary compliance rate is projected to be 85.1 percent. The projection of enforced and other late payments is $70 billion, which yields a net tax gap projection of $470 billion. The associated noncompliance rate projection is 87.0 percent." The projected $540 billion per year would encompass $41 billion for nonfiling, $433 billion for underreporting and $66 billion for underpayment.

The agency added that these data do not represent the full extent of potential noncompliance, citing the following factors:

• The estimates cannot fully represent noncompliance in some components of the tax system including offshore activities, issues involving digital assets and cryptocurrency as well as corporate income tax, income from flow-through entities, illegal activities because data are lacking;

• The tax gap associated with illegal activities has been outside the scope of tax gap estimation because the objective of government is to eliminate those activities, which would eliminate any associated tax; and

• For noncompliance associated with digital assets and other emerging issues, it takes time to develop the expertise to uncover associated noncompliance and for examinations to be completed that can be used to measure the extent of that noncompliance.

This announcement prompted responses from two prominent lawmakers.

Rep. Bill Pascrell (D-N.J), chairman of the House Ways and Means Oversight Subcommittee, called the growth of the estimated gap "powerful evidence of why the IRS must be properly funded to finally begin cracking down on wealthy tax scofflaws.” Sen. Ron Wyden (D-Ore.), chairman of the Senate Finance Committee said, "Noncompliance in these areas is extrapolated from audits, and audits in these areas are at historic lows. There's clearly far more avoidance at the top that IRS needs to pursue.”

The IRS collected more than $4 trillion in taxes, penalties, interest and user fees in 2021.

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