IR-2024-262, Oct. 10, 2024 WASHINGTON — The Internal Revenue Service today released the tax gap projections for tax year 2022, a detailed analysis showing the nation’s projected gross tax gap at $696 billion. This reflects the difference between projected ‘true’ tax liability and the amount of tax that is actually paid on time. The new tax gap projections reflect an increase over the tax year 2014-2016 estimates and the tax year 2017-2019 projections. The 2022 projection is an increase of $200 billion over tax years 2014-2016. However, the IRS noted the increase for 2022 is similar to the 41 percent increase in the economy since the 2014-2016 time period as measured by the Gross Domestic Product. With the new study also showing the voluntary compliance rate among taxpayers remaining steady at 85%, the IRS noted the tax gap increase ultimately reflects growth in the economy and changes in the sources of income – not a change in taxpayer behavior involving filing or paying their taxes. In addition, the new tax gap projections reflect the time period before the IRS began increasing tax compliance work following passage of the Inflation Reduction Act (IRA) in August of 2022. Since then, the IRS has stepped up compliance activity in a variety of areas with the additional funding, including the agency collecting an initial $1.3 billion from high-income taxpayers following IRA funding. “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,” said IRS Commissioner Danny Werfel. “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. 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. Since passage of the Inflation Reduction Act in 2022, we have taken important steps to begin 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.” The new projections are published in Tax Gap Projections for Tax Years 2021 and 2022 (IRS Publication 5869) PDF. Gross tax gap The projected $696 billion gross tax gap is the difference between projected ‘true’ tax liability for a given period and the amount of tax that is paid on time. The gross tax gap covers three key areas – non-filing of taxes, underreporting of taxes and underpayment of taxes. Non-filing, which means tax not paid on time by those who do not file on time: $63 billion in tax year 2022, representing 9% of the gross tax gap. Underreporting, which reflects tax understated on timely filed returns. $539 billion in tax year 2022, representing 77% of the gross tax gap. Underpayment, or tax that was reported on time, but not paid on time. $94 billion in tax year 2022, representing 14% of the gross tax gap. The primary focus on tax gap estimation is to measure compliance behavior as manifested in tax paid voluntarily and on time. The tax gap estimates and projections provide insight into the historical scale of tax compliance and to the persisting sources of low compliance. Net tax gap Late payments and IRS enforcement efforts are projected to generate an additional $90 billion on tax years 2021 and 2022 returns, resulting in a projected net tax gap of $617 billion and $606 billion respectively. Between tax years 2017-2019 and tax year 2022, the estimated tax liability increased by about 27%, roughly the same increase as the gross and net tax gaps. Much of these increases in true total tax liability and the gross tax gap can be attributed to economic growth. The IRS notes that the tax gap estimates and projections cannot fully account for all types of noncompliance. Voluntary compliance rate remains unchanged The tax year 2021 and 2022 tax gap projections translate to about 85% of taxes paid voluntarily and on time, which is consistent with recent levels. The projections are based largely upon the compliance behavior estimated from the most recent set of completed audits (from tax years 2014-2016). That estimated compliance behavior is projected forward to taxpayers in subsequent tax years to generate the gross tax gap. After IRS compliance efforts and other late payments are factored in, the projected share of taxes eventually paid is 86.9% for tax year 2022, down slightly from the 87% for tax years 2014-2016. Tax gap analysis consistently shows that compliance is higher when there is third-party information reporting, and even higher when also subject to withholding. With the help of Inflation Reduction Act resources, the IRS is taking a variety of steps to help improve voluntary compliance by improving taxpayer services and offering new technology tools to work in concert with additional compliance work. In fiscal year 2023, the latest year for which data is available, the IRS collected more than $4.6 trillion in taxes, penalties, interest and user fees. The IRS also has an array of other taxpayer service programs aimed at supporting accurate tax filing and helping address the tax gap. These range from working with businesses and partner groups such as IRS’s Volunteer Income Tax Assistance and Tax Counseling for the Elderly to a variety of education and outreach efforts. The voluntary compliance rate of the U.S. tax system is vitally important for the nation. A one-percentage-point increase in voluntary compliance would bring in about $46 billion in additional tax receipts. Projecting the tax gap Given the complexity of the tax system and available data, no single approach can be used for estimating each component of the tax gap. Each approach is subject to measurement or non-sampling error; the component estimates that are based on samples are also subject to sampling error. The projections do not fully represent noncompliance in some components of the tax system, particularly as it relates to corporate income tax, income from flow-through entities, foreign or illegal activities, digital assets and pandemic credits because data are lacking. Details on how the IRS projects the Tax Gap can be found in IRS Publication 6031: Tax Gap Projections Methodology PDF. The IRS continues to actively work on new methods for estimating and projecting the tax gap to better reflect changes in taxpayer behavior as they emerge. More information about the tax gap and estimates for prior tax years can be found at IRS: The tax gap.
