Tax season is upon us, and many of us will soon be sitting down to figure out and pay our share. But this year, like every year, some taxpayers intentionally or inadvertently won’t fully pay what they owe. The difference between the amount that taxpayers owe and what they actually pay is known as the tax gap, and it’s hundreds of billions of dollars each year.
Today’s WatchBlog discusses some of our recent reports on the tax gap, and what IRS might do to address it.
How big is it?
In 2016, the Internal Revenue Service estimated an average gap of $458 billion each year from 2008 to 2010. IRS expects eventually to collect part of this, but the rest—$406 billion per year for those years—will never be collected. That’s more than it costs to fund 10 of the largest federal agencies for a year. It’s more than 20 times what it costs to fund NASA for a year.
IRS’s Annual Average Tax Gap Estimate for Tax Years 2008-2010
The tax gap is made up of five types of taxes — individual income, corporate income, employment, estate, and excise taxes. Taxpayers may intentionally or accidentally fail to accurately report tax liabilities on tax returns (underreporting), fail to pay taxes due from filed returns (underpayment), or fail to file a required tax return altogether or on time (nonfiling).
There’s no magic bullet, but there are strategies that could gain millions
Reducing the tax gap would help steer the nation from its unsustainable fiscal path without raising taxes or cutting programs. However, given that it touches many different types of taxes and taxpayers, totally eliminating it is not likely, nor is there one magic bullet that will greatly reduce it.
But if it can reduce it by just 1%, the nation could gain millions in revenue.
IRS must attack the tax gap on multiple fronts and with multiple strategies, such as:
- Using tax gap and other data to develop a strategy to address noncompliance with tax requirements;
- Better using whistleblower information to find taxpayers who aren’t fully paying their taxes;
- Providing better customer services (by phone, mail, and online) to help with tax prep; and
- Improving management of information technology systems and investments.
Reducing the tax gap may also require targeted legislative actions, including:
- Enhancing and expanding third-party information reporting (for example, business’s reporting of payments to nonemployees);
- Enhancing electronic filing;
- Expanding IRS’s authority to correct some tax return errors during processing; and
- Regulating paid preparers.
For more information on IRS’s estimate of the tax gap, check out our full report.