The Tax Gap is the amount the Internal Revenue Service says it is owed, but which it's been unable to collect.
That amount now is $496 billion. The figure, which was reached after the IRS analyzed tax activity from 2014 through 2016, is an increase of $58 billion from the agency's last estimate.
The IRS also did some Tax Gap forecasting. The agency's projections for tax years 2017 through 2019 show an estimated $540 billion per year.
Both those Tax Gap amounts are huge, and disturbing. That's why they earn this weekend's dual By the Numbers recognition.
Tax Gap components: The gross tax gap is the difference between estimated true tax liability for a given period and the amount of tax that is paid on time.
There are three components that contribute to the Tax Gap:
- Nonfiling, which is tax not paid on time by those who don't file;
- Underreporting, which is tax paid on timely-filed returns, but which is less than what is legally owed; and
- Underpayment, which is tax that was reported on time, but not paid on time.
The latest Tax Gap of $496 billion comes from $39 billion that's not filed, $398 billion that is understated on returns, and $59 billion that is underpaid by filers.
As for the projected 2017 to 2019 Tax Gap, the IRS breakdown is $41 billion from nonfiling, $433 billion from underreporting, and $66 billion due to underpayment.
Enhanced compliance efforts: "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," said IRS Commissioner Chuck Rettig in announcing the new number.
As part of its larger (and primary) effort to reduce the Tax Gap, the IRS said it will continue to focus on its regular collection efforts.
The agency collected more than $4 trillion in taxes, penalties, interest, and user fees in 2021, the latest year for which data is available.
Such collections are greatly aided by third-party reporting of taxable income. When taxpayers know their earnings amounts will be shared with the IRS via W-2s for wages and 1099 for myriad other payouts (contract income, investment earnings), their compliance level improves significantly.
Voluntary compliance rates increase even more when income payments are also subject to withholding.
Taxpayers' compliance is critical, notes the IRS, which says a one-percentage-point increase in voluntary compliance would bring in about $40 billion in additional tax receipts.
"Keeping the voluntary compliance rate as high as possible ensures that taxpayers believe our system is fair," Rettig said. "The vast majority of taxpayers strive to pay what they owe on time. Those who do not pay their fair share ultimately shift the tax burden to those people who do, which fuels the tax gap."
Next step, audits: Where taxpayers don't comply, IRS exams, which we taxpayers tend to call audits, are the next step.
"The IRS will continue to direct our resources to help educate taxpayers about the tax requirements under the law while also focusing on pursuing those who avoid their legal responsibilities," said Rettig.
The outgoing commissioner also cited the IRS' recent added funding from the Inflation Reduction Act. The IRS expects to put a portion of the almost $80 billion (over 10 years) toward additional taxpayer education efforts, improving taxpayer services, and increasing audits of high-income/high-wealth individuals.
Other complicated gap contributors: The complexity of the U.S. tax code also is an unintentional contributor to the Tax Gap.
Available data shows that other factors contribute to the trillions in uncollected taxes. But the IRS says the full extent of potential noncompliance in certain parts of the tax system is lacking.
The IRS has made progress over the years in locating and bringing offshore holdings into the tax system.
But the agency notes that taxes associated with illegal activities have been outside the scope of Tax Gap estimates because the government's objective is to eliminate those criminal acts, thereby eliminating any associated tax.
Taxes lost to digital asset issues and cryptocurrency also are hard to calculate. The IRS points to the time it takes to develop the expertise to uncover associated noncompliance in these and other emerging issues.
But, says the IRS, it will continue to work on new methods for estimating and projecting the tax gap to better reflect changes in taxpayer behavior as they emerge.
You also might find these items of interest:
- Former IRS execs say they know how to close Tax Gap
- Tax Gap likely $1 trillion, thanks largely to cryptocurrency
- IRS gets $80 billion over 10 years in additional funding in Inflation Reduction Act