Tax Gap Hits $458 Billion Per Year: Who's Not Paying Their Tax Debt?

The Internal Revenue Service has released new estimates of the “tax gap,” the amount of tax liability faced by taxpayers that is not paid on time. The agency’s estimate of this gap between what is owed in taxes, and what the IRS receives, at about $400 billion annually.

Estimating the gap requires a “major statistical effort,” according to the IRS, so the gap is only estimated every few years. The last full update reported showed that the compliance rate for tax year 2006 was basically unchanged from the report on tax year 2001. And again, IRS reports that the tax gap is essentially unchanged since it last reported this figure ten years ago.

“We need to keep in mind several facts when considering this data,” said Robert Kerr, Senior Director, Government Relations for the National Association of Enrolled Agents (NAEA). “The first is that IRS takes years to estimate the tax gap, so the newest data considered is from tax years 2008-10, before IRS’ budget took an approximately $1B hit (annually) and before staffing dropped by some 16,000 or so. Let’s not conclude that a flat tax gap indicates tax compliance hasn’t taken a hit because of reduced IRS resources. We won’t know that for years.”

“The second fact is that even though many Americans are completely compliant—they file timely, accurate tax returns and pay taxes due—the net tax gap is enormous; a bit over $400B annually, which, roughly speaking, is nearly large enough to fund all non-defense federal discretionary spending. The third fact, and I believe Commissioner Koskinen has made this observation, is that it is practically speaking impossible to eliminate the tax gap altogether. We wouldn’t want to live in a country that had 100 percent compliance. The apparatus to get there would be far too oppressive.”

For more information, see the IRS’ Tax Gap Estimates for Tax Years 2008-2010.