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Tax gap hits $458 billion

April 30, 2016

Last week, millions of last-minute filers got their returns to the Internal Revenue Service. As of April 22, the federal tax collector had 136.5 million returns in hand.

Gap in the old Florida Keys bridge by Ewen Robert via Flickr CCThe tax gap is kind of like the break in the old Florida Keys bridge: Something's missing (Photo by Ewen Robert via Flickr CC)

The number of Americans who completed their annual tax duties by this year's April deadline(s) was slightly ahead of the 2015 filing pace. Before the year is over (and the 13+ million of us on extension get our returns in by Oct. 17), the IRS expects total filings to be close to last year's almost 151 million returns.

But all those 1040s still won't account for all the money Uncle Sam is due. That's not a surprise.

Some folks make mistakes on their returns that account for inaccurate, and low, tax payments. Others downright cheat.

The difference, for whatever reason, between the amount of tax that taxpayers should pay and the amount that they actually pay voluntarily and on time is known as the tax gap.

And the gap has grown.

Lots of lost dollars: In tax years 2008 to 2010, new IRS data show that the tax gap grew to around $458 billion a year.

In tax year 2006, the tax gap was $450 billion.

The good news, though, is that the IRS' enforcement efforts and taxpayer late payments eventually brought in an additional $52 billion, narrowing the latest tax gap amount to $406 billion per year.

IRS Commissioner John Koskinen's April 28 announcement of tax gap numbers was the first update in 10 years of the estimate of how much tax money goes uncollected each year.

Reasons for the gap: So why are more of us — and by us, I of course am not talking about any readers of the ol' blog; I know all y'all are diligent and honest taxpayers — stiffing the U.S. Treasury more than we did a decade ago?

During the years used to calculate the latest tax gap, the economy was in the depths of recession. People either didn't have the money to pay taxes and/or were doing any and everything they could to hang onto every possible penny.

There's disgruntlement with government in general. For most folks, their most direct contact with the federal apparatus is via the IRS. The most tempting and easiest way to express that hate is by trying to keep the agency from getting what's due.

And then there's the reduction in tax audits.

As the IRS noted, it's examiners in the past have been able to wheedle billions more out of taxpayers. But, as the commish tells Congress every chance he gets, budget cuts have meant cuts in IRS audits. Apparently, without the threat of an IRS agent asking questions, a lot of taxpayers will take their cheating chances.

Compliance rate about the same: The new numbers do offer the IRS and Treasury some good news.

While the real dollars that Uncle Sam is missing out on has gone up, the individual taxpayer compliance rate is about the same.

The IRS says that that filings are doing what it asks when it comes to annual filing at an estimated at 81.7 percent rate. That's down from the prior estimated rate of 83.1 percent.

But after accounting for even reduced enforcement and late payments, the IRS says the current net taxpayer compliance rate actually has inched up to 83.7 percent.

That's a lot of numbers the IRS released last week, but when it comes to awarding the latest By the Numbers weekly crown, I'm going with the new and higher annual tax gap amount of $458 billion.

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TAX-SAVVY WAYS 
TO WRAP UP 2026

It’s over! With October’s extended filing deadline behind us, it is now time to focus on year-end moves to reduce your 2026 tax bill. 

You’ll find ways to do just that on the Tax Tips page (see the More Tax Posts drop-down menu at the top of the blog), as well as the separate tax tip pages for each month, notably October through December. If you’re on the Tax Tips page, you’ll find a monthly list at the end of this column. If you’re on another blog page, you can head straight to the October tips; at the bottom of that tips page you’ll find links to all the other 11 months’ collections of tax advice.

Not to spoil what you’ll find in that tax advice, but it does cover such things as tax deductions for charitable donations, investment moves that could reduce tax due, and ways to max out your tax-favored retirement savings. 

Finally, as the year winds down, things get hectic. There are lots of other things to occupy our time, like the much more fun upcoming holidays. But don’t lose sight of taxes, since timing is key. To be of use, most tax moves must be made by the end of the tax year. That’s Thursday, Dec. 31, which also is the last business day of the year. 

So that you don’t miss that final tax year deadline, also keep an eye on the countdown clock below. It will keep you on top of just how much time is left to make important, tax-saving moves. (Note: I’m in the Central Time Zone, so adjust accordingly for where you live.)

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