IRS reports estimated gross tax gap increased to $496B

The Internal Revenue Service (IRS) reported that the estimated gross tax gap increased to $496 billion, a rise of over $58 billion from the prior estimate, for the tax years 2014 through 2016.

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The gross tax gap is the difference between the estimated ‘true’ tax liability for a given period and the amount of tax that is paid on time.

“These findings underscore the importance of ensuring fairness in our nation’s tax system,” IRS Commissioner Chuck Rettig said. “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. The IRS remains committed to ensuring fairness and helping taxpayers while also working to better identify emerging compliance issues that contribute to the tax gap. The recent funding addition will help the IRS in many ways, increasing taxpayer education, significantly improving service to all taxpayers, and focusing on high-income/high-wealth non-compliance in a fair and impartial manner supporting compliant taxpayers.”

The tax gap estimates translate to about 85 percent 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 the Tax Year 2011-2013 estimates. After IRS compliance efforts are taken into account, the estimated share of taxes eventually paid is 87 percent for 2014-2016.

Breaking it down, the gross tax gap includes non-filing (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). Further, based on the projections for 2017-2019, the estimated average gross tax gap is projected to be $540 billion per year.

IRS officials say 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 $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. 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.”