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1 1 (August 2, 2021)

handle is hein.crs/goveeeu0001 and id is 1 raw text is: reis W flesearah Service vS ~nnIri~ th ~ Jd te ~enLo W14 August2, 2021 Federal Tax Gap: Size, Contributing Factors, and the Debate Over Reducing It Federal Tax Gap The federaltaxgap is a measure of taxpayer noncompliance. The Internal Revenue Service (IRS) provides two estimates of the gap: a gross measure and a net measure. The gross federaltaxgap is the difference between the total amount of federal individual and corporate income, employment, and estate and gift taxes owed in a year and the total amount of those taxes paid voluntarily in full and on time. The net taxgap is the difference between alltaxes owed and taxes paid after late taxp ayerpayments and taxes collected through IRS enforcement actions. The federal tax gap may be a concern for policymakers for severalreasons. First, the gap represents taxrevenue that the federal government could use for many purposes, such as reducing the budget deficit or paying for new programs. Second, thegap imposes costs on compliant taxpayers that are not borne to the same extent by noncomplianttaxpayers (e.g., higher taxes in the future, cutbacks in beneficial government programs, and interestpayments on federal debt to fmancebudget deficits). Third, sustained growth in the tax gap can undermine public confidence in the fairness and integrity of the federal taxs ys tem. Estimating the Federal Tax Gap The IRS has been estimating the size and compositionof the taxgap since 1979. Pre-1989 estimates were based on compliance data collected through the Taxpayer Compliance Measurement Program(TCMP). The data weire collected through comprehensive in-person audits done by IRS examination officers; audited taxpayers had to provide documents supporting every taxreturn item. Public and congressional opposition to the TCMP's burden on audited taxpayers led theIRS to adopt, in 2000, a different method of collecting compliancedataknown as the National Research Program (NRP). To estimate compliance with the individual income tax, the NRP employs arandomsampleofaudits of about 13,000 taxpayers deemed representative of the entire filing population. Randoms ampling has the advantage of providing information on both compliant taxpayers and noncompliant taxpayers who otherwise might be difficult to identify using IRS's income detection tools. To estimate other components of the taxgap (e.g., corporate inconr and employment taxes), the IRS relies on a variety of data sources and empiricalmethods. Recent IRS Research on the Tax Gap The most recent taxgap study covers the years 2011 to 2013. According to the IRS, the average annual gross gap totaled $441 billion in that period, or about 16% of total average annual federal taxes owed. Late payments and IRS enforcement actions produced a net gap of $381 billion. This estimate makes no allowance for the extent to which IRS's enforcement actions deter taxpayer noncompliance, which some studies have suggested could be substantial. As Table 1 shows, the estimated netfederal taxgap in 2020 dollars fluctuated within a range from2001 to 2013, where the highest value ($491 billion) was about 11% larger than the lowest value ($423 billion). A similar result applied to estimated taxpayer noncompliance rates: the highestnet taxpayer noncompliance rate (16.3%) was about 19% larger than the lowest such rate (13.7%). Although the table covers only fourperiods, theresults do not show thatthe federal tax gap has steadily grown over time. Estimates for periods after 2013, which are not currently available, may produce a different pattern. Table I. Net Federal Tax Gap from 2001 to 2013 ($ billions) Constant Net Taxpayer Current 2020 Noncompliance Year(s) Dollars Dollars Ratea (%) 2001 $290 $423 13.7% 2006 $385 $493 14.5% 2008- $406 $491 16.3% 2010 2011- $381 $431 14.2% 2013 Source: Internal Revenue Service, Tax Gap Estimates; and Bureau of Labor Statistics, Ann ual Average Consumer Price Indexes. a. The percentage of totaltaxes owed in a yearthat were not paid in full and on time after IRS enforcement actions. Components ofthe Federal Tax Gap The federal tax gap has three main components. One is the understatementoftaxliability through underreporting income or overstating deductions, credits, and other inconr adjustments. A second component is the failure to pay the full amount of taxes owed when filing a tax return on time, or tax underpayment. The third element is the failure to file a required return on time, or nonfiling. The IRS estimated that 80% ($352 billion) of the gross tax gap for 2011 to 2013 could be attributed to understated tax liability. Underpayment of taxes accounted for 11% ($50 billion) of the gap, and nonfiling for9% ($39 billion). https://crs rept 9

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