The Internal Revenue Service relies on taxpayers voluntarily filing correct tax returns and paying the tax amount shown on those forms. Millions will be doing just that tomorrow, Oct. 16, to comply with the extended filing deadline.
Unfortunately, however, too many people find ways to avoid paying the U.S. Treasury what they legitimately owe.
They are why the latest update on the Tax Gap shows it has grown. A lot.
The Tax Gap is the amount of money the IRS is owed, but which it hasn't been able to collect. The agency's latest estimates put the 2021 Tax Gap at $688 billion.
That's an increase of more than $192 billion from IRS estimates for tax years 2014 through 2016, and a rise of $138 billion from the revised projections for tax years 2017 through 2019.
The IRS' latest numbers represent the first year Tax Gap projections have been provided for single tax years. They also mark the beginning of annual IRS Tax Gap updates.
The $688 billion new Tax Gap total also is this weekend's By the Numbers figure.
Tax Gap adds up in three areas: The gross Tax Gap covers three key areas — nonfiling of taxes, underreporting of taxes, and underpayment of taxes.
Nonfiling, which means taxpayers don't file or pay tax due on time accounted for $77 billion in tax year 2021, up from $41 billion in tax years 2017 through 2019.
Underreporting reflects an incorrect lower amount of tax due shown on timely filed returns. That amounted to $542 billion in tax year 2021, up from $445 billion in tax years 2017 through 2019.
Underpayment, or tax that was reported on time, but not paid on time, came to $68 billion in tax year 2021, up from $64 billion in tax years 2017 through 2019.
The IRS already uses penalties in those noncompliance areas to encourage taxpayers to file on time and accurately.
Late payments and IRS enforcement efforts are projected to generate an additional $63 billion on tax year 2021 returns, resulting in a projected net tax gap of $625 billion.
Between tax years 2014-2016 and tax year 2021, the IRS' estimated tax liability increased by about 38 percent, roughly the same increase as the gross and net tax gaps.
In 2022, the latest year for which data is available, the IRS reported collecting more than $4.9 trillion in taxes, penalties, interest, and user fees.
More compliance efforts are on the way: Those collection forecasts are based largely on compliance behavior estimated from the most recent set of completed audits, from tax years 2014 through 2016. That estimated compliance behavior is projected forward to taxpayers in tax years 2020 and 2021.
IRS collections could improve soon, narrowing the Tax Gap, thanks to additional Inflation Reduction Act funds.
"This increase in the Tax Gap underscores the importance of increased IRS compliance efforts on key areas," said IRS Commissioner Danny Werfel in announcing the latest Tax Gap number. The new funding, noted Werfel, will allow the agency to add resources that will let it focus on areas of compliance concern, including high-income and high-wealth individuals, partnerships, and corporations.
In addition, the IRS plans to improve taxpayer services, which should increase voluntary, and correct, filing. A one-percentage-point increase in voluntary compliance would bring in about $46 billion in additional tax receipts, according to the IRS.
The agency noted that it also is continuing to employ new technology tools to complement existing IRS tax compliance efforts. Last month, Werfel announced that artificial intelligence (AI) will be part of an expansive IRS crackdown on wealthy and corporate tax evaders.
Gaps in Tax Gap projections: While $688 billion is a huge amount of owed but uncollected taxes, it's likely on the low side.
The IRS noted that, given available data, its latest Tax Gap projections don't cover all missing tax components. The IRS has long noted that offshore and digital assets are not fully represented in its Tax Gap calculations. The COVID-19 pandemic also messed with its numbers.
Specifically, according to the IRS, the following factors need to be kept in mind when assessing the Tax Gap.
- Current projections cannot fully represent noncompliance in some tax areas because data are lacking. These include offshore activities; issues involving digital assets and cryptocurrency; and corporate income tax on flow-through entity earnings.
- For noncompliance associated with digital assets and other emerging issues, it takes time to develop the expertise to uncover this missing money, and for examinations to be completed that can be used to measure the extent of that noncompliance.
- Similarly, the Tax Gap amount associated with illegal activities has been outside the scope of the IRS' estimates because the government's objective is to eliminate those activities. That would then eliminate any associated tax.
- Projections rely upon estimates of compliance behavior. No such estimates are available for coronavirus pandemic credits, so there is no reliable method of representing noncompliance for pandemic credits.
However, added the IRS, it continues to actively work on new methods for estimating and projecting the Tax Gap to better reflect these areas, as well as changes in taxpayer behavior as they emerge.
You can find more Tax Gap numbers in IRS Publication 5869, Tax Gap Projections for Tax Years 2020 and 2021, a more visual look of the 2020-2021 numbers — that's an excerpted image below — in IRS Publication 5870.
You also might find these items of interest:
- Tax audits bring in 3x more money in subsequent years
- New IRS bots available to help resolve tax payment notices
- IRS to hire 3,700 nationwide to expand tax compliance efforts
- AI start-up gets $12.5M to upgrade, expand tax evasion tracking technology
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