What is the Tax Gap?
The tax gap is a term used by the Internal Revenue Service (IRS) and by many state and local tax agencies. It represents the difference between what is actually owed to tax-collecting agencies and what is really paid to them. It’s difficult to know exactly the exact tax gap is for institutions like the IRS. Audits in 1998 led to projected tax gap figures of about 250-300 billion US dollars (USD) per year. Only 50,000 people or businesses were audited, so the figure is a projection from a relatively small sample. In large states like California, 2005 projections suggest a loss of about 6 billion dollars a year in state taxes. 2005 federal studies concluded that the tax gap cannot be estimated with complete accuracy, but suggest the tax gap has widened since 1998 while ability to collect owed taxes remained about the same. Some portion of the tax gap is recovered each year by enforcing payment of taxes owed, and through auditing. About 55 billion USD a year is eventually paid. This means
The tax gap is the difference between taxes owed and taxes paid. The Internal Revenue Service estimates that over the past thirty years the tax gap has ranged from 16 to 20 percent of total tax liability. For 2001 the IRS estimates the gross tax gap at $345 billion, or slightly over 16 percent of tax liability, of which $55 billion will eventually be recovered through voluntary late payments and enforcement activities, leaving a net tax gap of about $290 billion. Some view the tax gap as a major revenue source that can be used to close the federal budget deficit or to pay for reform of the alternative minimum tax, without raising taxes. In fact, the potential revenue gains from proposals to improve enforcement are quite limited. • Nonfiling and underpayment of reported taxes account for less than 20 percent of the gross tax gap; underreporting on timely filed tax returns makes up the bulk of the gap. Underreporting on individual income tax returns alone accounted for about 68 percent o
In this paper Toder addresses issues related to measurement of the tax gap—the difference between tax liability under the current Federal tax law and taxes paid. He discusses how the tax gap is defined, reviews the main components of the tax gap, and describes how the IRS estimates it, as well as some of the major methodological issues in and weaknesses of current estimates. Toder concludes with some brief observations on the use and potential misuse of tax gap estimates and how compliance data might lead to better tax law administration.
Experts define the tax gap as the difference between what taxpayers owe and what they voluntarily pay. The IRS estimates the national tax gap to be approximately $290 billion. Based on this figure, we estimate California’s tax gap (at least for the personal and business taxes that we administer) to be about $6.5 billion per year. This page provides you more details on how we are addressing California’s tax gap.
The tax gap is really a compliance gap, arising when taxpayers do not pay the correct amount of taxes they owe.[1] The gap is not large in relative terms—the IRS estimates about an 84 percent compliance rate.[2] According to the IRS, of those who underpay, 82 percent underreport their tax liability, 8 percent fail to file returns, and 10 percent underpay known tax debts. Most of the compliance problem comes from honest taxpayers who try to comply with the tax code but are tripped up by its increasing complexity and unwieldiness. The remainder is due to tax evasion by those who knowingly break the law.[3] Tax compliance is high when payments or wages are reported by a third party, such as a W-2 from an employer or a 1099 from a bank for interest earned. Compliance is the highest (nearly 99 percent) when there is also tax withholding, such as with the withholding of income and Social Security taxes from paychecks. Compliance is lowest when there is no third party reporting, such as payme
