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 estimates also inform policymakers of potential areas that need to be addressed in other ways.
Tax gap components
The tax gap is comprised of three main components: non-filing, underreporting and underpayment:
- The non-filing tax gap is the tax not paid on time by those who do not file the required returns on time.
- The underreporting tax gap is the net understatement of tax on timely filed returns.
- The underpayment tax gap is the amount of tax reported on timely filed returns that is not paid on time.
The tax gap is also categorized by five types of tax, including individual income tax, corporate income tax, employment taxes (Social Security and federal unemployment insurance – also known as payroll taxes), estate tax and excise tax.
The latest tax gap estimates
The gross average tax gap was estimated at $441 billion per year, based on data from tax years 2011, 2012 and 2013. This does not reflect subsequent payments either voluntarily or through IRS administrative and enforcement efforts. Those payments were estimated at $60 billion, resulting in a net tax gap estimate of $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%.
The voluntary compliance rate is defined as “tax paid voluntarily and timely” divided by the “total true tax” and expressed as a percentage. The latest tax gap estimate translates to a voluntary compliance rate of 83.6%. After enforcement and late payments are taken into account, the net compliance rate is 85.8%.
Looking at the components, the non-filing tax gap was estimated at $39 billion, the underreporting tax gap was $352 billion and the underpayment tax gap was $50 billion. And by the various types of taxes, the estimated gross tax gap for individual income tax was estimated at $314 billion, the tax gap for corporate income tax was $42 billion, the tax gap for employment tax $81 billion, and the tax gap for estate and excise tax combined was $3 billion.
Tax gap studies through the years have consistently demonstrated that third-party reporting significantly raises voluntary compliance. And compliance rises even higher when income payments are also subject to withholding. The IRS also has an array of other programs aimed at supporting accurate tax filing and helping address the tax gap. These range from working with businesses and partner groups to a variety of education and outreach efforts.
FS-2019-11, September 2019