New estimates of the tax gap from the Internal Revenue Service (IRS) reveal a sizeable increase over previous years.
The tax gap is a figure calculated by the IRS that describes the difference between the amount of tax paid on time in, and the amount of tax likely owed in this country. The IRS bases its estimate on three factors:
- Tax that is reported on time, but not paid on time (non-filing)
- Tax that is not correctly reported on tax returns that were filed on time (underreporting)
- Taxes not paid on time by those who do not file tax returns on time (underpayment)
In October, the IRS released new estimates for the 2020 and 2021 tax years that suggest the gross tax gap increased to $688 billion in 2021. Information on compliance and the tax gap has been collected for decades. The gap has been previously estimated over three-year segments. The 2021 tax gap estimate is $192 billion over the estimate for 2014 to 2016, and $138 billion higher than the tax gap estimated for years 2017 to 2019. Given rising figures and the better availability of analytic tools, the IRS will be updating its tax gap estimates on single years and on an annual basis going forward.
In its announcement, the IRS notes voluntary tax compliance remains fairly stable. With updates to its technology and workforce, the IRS has stated its intention to improve voluntary tax compliance. In 2022 alone, the IRS collected $4.9 trillion in taxes and associated penalties, fees, and interest.
The IRS has also ranked tax enforcement of higher earners as a priority. Lacking adequate resources and analysts trained to evaluate sophisticated business partnerships and high-asset transactions, the IRS has long been unable to pursue tax evasion of the highest earners. With its funding boost and increased use of automation and artificial intelligence, the IRS is embarking on a new era in its efforts to reduce the tax gap and increase voluntary compliance at all taxpayer levels.
Given the size of the tax gap at present, the IRS estimates that even one percentage point increase in voluntary compliance translates to about $46 billion in tax receipts.
Interestingly, tax crime and associated financial loss that occurs as a result is not a factor in tax gap estimations because the aim of enforcement is elimination of those activities—and any taxes gained thereon.
Bottom line—the tax gap is getting larger, and the IRS has a robust appetite for compliance these days. You do the math.
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