The Tax Gap

 

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Tax Gap Estimates for Tax Years 2014-2016

The Internal Revenue Service periodically estimates the tax gap to gauge historical overall compliance of all types of taxpayers with their federal tax obligations. The estimates take into account federal taxes due as well as refundable and non-refundable tax credits.

In general, the tax gap estimates dating back decades consistently show the United States enjoys a relatively high and stable voluntary tax compliance rate. Sustaining and improving taxpayer compliance is important because small declines in compliance cost the nation billions of dollars in lost revenue and shift the tax burden away from those who don't pay their taxes onto those who pay their fair share on time every year. Understanding the elements of the tax gap enables policymakers and tax administrators to make better decisions regarding how to allocate resources used to administer the tax code. All initiatives by the IRS to improve tax collection are intended to narrow the tax gap and increase compliance.

The tax gap estimates on tax years 2014 through 2016 showing the estimated gross tax gap increased to $496 billion, a rise of over $58 billion from the prior estimate. 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. After late payments and IRS efforts collected an additional $68 billion, the IRS estimated the net tax gap was $428 billion. This increase in the tax gap can be attributed to economic growth.

Between the two periods, 2011-2013 and 2014-2016, the estimated tax liability increased by more than 23 percent.

The tax gap estimates translate to about 85% of taxes paid voluntarily and on time, which is in line with recent levels. The new estimate is a slight improvement from 83.7 percent in a revised Tax Year 2011-2013 estimate, which dipped slightly from the original estimate released earlier. After IRS compliance efforts are taken into account, the estimated share of taxes eventually paid is 87% for 2014-2016.

The gross tax gap comprises 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). To address this issue, the current release includes estimated tax gap projections for Tax Years 2017-2019.

Based on the projections for 2017-2019, the estimated average gross tax gap is projected to be $540 billion per year. 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 non-compliance rate projection is 87.0 percent.

The gross tax gap nonfiling, underreporting, and underpayment component projections for Tax Years 2017-2019 timeframe are $41 billion, $433 billion, and $66 billion respectively.

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 nonsampling error; the component estimates that are based on samples are also subject to sampling error. Given available data, these are the best possible estimates of the tax gap components presented, although they do not represent the full extent of potential non-compliance.

Tax Gap Estimates for Tax Years 2011-2013

The Internal Revenue Service periodically estimates the tax gap to gauge historical overall compliance of all types of taxpayers with their federal tax obligations. The estimates take into account federal taxes due as well as refundable and non-refundable tax credits.

In general, the tax gap estimates dating back decades consistently show the United States enjoys a relatively high and stable voluntary tax compliance rate. Sustaining and improving taxpayer compliance is important because small declines in compliance cost the nation billions of dollars in lost revenue and shift the tax burden away from those who don't pay their taxes onto those who pay their fair share on time every year. Understanding the elements of the tax gap enables policymakers and tax administrators to make better decisions regarding how to allocate resources used to administer the tax code. All initiatives by the IRS to improve tax collection are intended to narrow the tax gap and increase compliance.

The latest estimates for tax years 2011, 2012 and 2013 show the nation's tax compliance rate is substantially unchanged from prior years. The average gross tax gap was estimated at $441 billion per year based on data from those three years. After late payments and enforcement efforts were factored in, the net tax gap was estimated at $381 billion.

The tax gap estimates translate to about 83.6%, of taxes paid voluntarily and on time, which is in line with recent levels. The new estimate is essentially unchanged from a revised Tax Year 2008-2010 estimate of 83.8%. After enforcement efforts are taken into account, the estimated share of taxes eventually paid is 85.8% for both periods. And it is line with the TY 2001 estimate of 83.7% and the TY 2006 estimate of 82.3%.

Tax Gap Estimates for Tax Years 2008-2010

IRS Statement on the Tax Gap Update

The IRS periodically estimates the tax gap, which gives a broad view of the nation's compliance with federal tax laws. The new study covers tax years 2008-2010. The report finds that there has been no significant change in the amount of the tax gap or the rate of compliance since the last report was issued for tax year 2006.

The average annual tax gap for 2008-2010 is estimated to be $458 billion, compared to $450 billion for tax year 2006. IRS enforcement activities and late payments resulted in an additional $52 billion in tax paid, reducing the net tax gap for the 2008-2010 period to $406 billion per year. The voluntary compliance rate is now estimated at 81.7 percent compared to the prior estimated rate of 83.1 percent. After accounting for enforcement and late payments, the net compliance rate is 83.7 percent.

The small increase in the estimated size of the tax gap and small decrease in the voluntary compliance rate are largely attributable to improvements in the tax gap estimation methodology, and do not represent a significant change in underlying taxpayer behavior. The changes also reflect the overall decline in the nation's tax revenues due to the severe recession during the time period covered by this study, as well as changes in the mix of income sources that have different compliance rates.

A high level of voluntary tax compliance remains critical to help ensure taxpayer faith and fairness in the tax system. Those who don't pay what they owe ultimately shift the tax burden to those who properly meet their tax obligations. The new tax gap estimate updates long-standing research findings that information reporting and withholding are strongly associated with higher levels of voluntary compliance.

The IRS continues to look for ways to keep the voluntary compliance rate high, including educational efforts aimed at preparers and taxpayers, ongoing efforts to improve compliance in the international tax arena, and working with businesses on employment tax issues.

Tax Gap Estimates for Tax Year 2006

The IRS released a set of tax gap estimates for tax year 2006. These estimates represent the first full update of the report in five years; the update showed that the nation's compliance rate was essentially unchanged at about 83 percent from the review covering tax year 2001.

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Page Last Reviewed or Updated: 13-Sep-2024