The Internal Revenue Service (IRS) periodically issues reports that estimate taxpayer compliance with federal tax obligations. These analyses measure the difference between total taxes owed and total taxes paid, otherwise known as the tax gap.
The process of estimating the tax gap is very complex and time-consuming, which is why the IRS does not share official analyses regularly and the data often lags several years behind.
Tax Gap Has Stayed Consistent Over Previous Decades
Over the last few decades, the tax gap has fluctuated within a narrow range — around 15-18% of total tax liability — which indicates a relatively high and consistent voluntary tax compliance rate throughout the United States. The latest IRS tax gap report was released in 2019 and covered tax years 2011-2013.
The total annual tax liability for 2011 through 2013 was estimated at $2.68 trillion and the average gross tax gap was estimated at $441 billion per year. This data translates to a voluntary compliance rate of 83.6%.
After late payments and enforcement efforts were taken into account, the IRS recovered an additional $60 billion. This left a net tax gap of $381 billion and a net compliance rate of 85.8%.
With compliance rate estimates sitting at 83.8% in tax years 2008-2010, 82.3% in 2006, and 83.7% in 2001, findings indicate that the tax compliance rate is largely stable compared to prior years.
Non-filing — or failure to file a tax return — and underpayment of reported taxes accounted for 20% of the gross tax gap. The report further breaks down the nature of taxpayer noncompliance. The majority of noncompliant taxpayers vastly understate the amount they owe ($352 billion), followed by those who file returns but do not make the payment on time ($50 billion), and finally, non-filers who do not file a tax return at all ($39 billion).
The IRS also accounts for different types of federal taxes and how much they contribute to the gap. The $441 billion estimated annual gap is divided among individual income taxes ($314 billion), employment taxes ($81 billion), corporate income taxes ($42 billion), and estate taxes ($3 billion).
Why Tax Gap Estimates Are Important
Understanding various components of the tax gap enables the IRS to maintain and improve taxpayer compliance. Tax administrators can then make better decisions when allocating resources and create initiatives to improve tax collection and further narrow the gap.
While the nominal tax gap may vary slightly depending on economic conditions, it is vital to maintain a high rate of voluntary tax compliance. It reinforces taxpayer confidence and ensures fairness within the system. Those who fail to properly fulfill their tax obligations ultimately shift the burden to taxpayers who consistently file a return and pay what they owe on time.
The IRS continues to integrate multi-year strategies to reduce the tax gap, improve voluntary compliance, and sustain a sound tax administration. These efforts aim to build on the current framework to establish comprehensive solutions that will cut down opportunities for evasion, improve information technology, enhance taxpayer services, and reform and simplify the tax law.