The projected gross tax gap jumped to $601 billion in tax year 2020 and $688 billion in tax year 2021, the IRS said in Publication 5869, released last week, adding that the figures do not cover areas such as corporate income tax and noncompliance with pandemic credit rules.
The projections marked the first year that the IRS has issued figures for single tax years rather than for a three-year period. The IRS said it would continue to issue single-year projections in the future.
"This increase in the tax gap underscores the importance of increased IRS compliance efforts on key areas," IRS Commissioner Danny Werfel said in a statement. "With the help of Inflation Reduction Act funding, we are adding focus and resources to areas of compliance concern, including high-income and high-wealth individuals, partnerships, and corporations. These steps are urgent in many ways, including adding more fairness to the tax system, protecting those who pay their taxes and working to combat the tax gap."
Growth in the projected gross tax gap from tax year 2020 to tax year 2021 is driven by growth in the projections for nonfiling and underreporting of individual income tax, along with underreporting of the self-employment tax, the IRS said.
The revised tax year 2017–2019 gross tax gap projection is $550 billion per year, $10 billion higher than the prior projection, the IRS said.
The net tax gap for 2021, which considers late payments and IRS enforcement efforts that are projected to generate $63 billion on tax year 2021 returns, would be an estimated $625 billion. The Service also projects that $63 billion of the gross tax gap for tax year 2020 eventually will be paid, resulting in a projected net tax gap of $539 billion, the IRS said.
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. It covers nonfiling of taxes, underreporting of taxes, and underpayment of taxes.
The breakdown of those three components is:
- Nonfiling, or tax not paid on time by those who do not file on time: $77 billion in tax year 2021, up from $41 billion in tax years 2017–2019.
- Underreporting, or tax understated on timely filed returns: $542 billion in tax year 2021, up from $445 billion in tax years 2017–2019.
- Underpayment, or tax that was reported on time, but not paid on time: $68 billion in tax year 2021, up from $64 billion in tax years 2017–2019.
Because data is lacking, the projected tax gap does not cover offshore activities; issues involving digital assets or cryptocurrency as well as corporate income tax; income from flowthrough entities; and illegal activities, the IRS said. The projections also do not cover noncompliance related to pandemic relief credits because there are no estimates for compliance behavior associated with those credits.
Emerging issues such as digital assets also are not considered because "it takes time to develop the expertise to uncover associated noncompliance and for examinations to be completed that can be used to measure the extent of that noncompliance," the IRS said.
Tax gap projections are based largely upon the compliance behavior estimated from the most recent set of completed audits (from tax years 2014–2016). That estimated compliance behavior is projected forward to taxpayers in tax years 2020 and 2021.
The 2020 and 2021 tax gap projections translate to about 85% of taxes paid voluntarily and on time, which is in line with recent levels, the IRS said. A one-percentage-point increase in voluntary compliance would bring in about $46 billion more in taxes, the IRS said.
In 2022, the latest year for which data is available, the IRS said it collected almost $5 trillion in taxes, penalties, interest, and user fees.
— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.
