About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

1 1 (October 30, 2023)

handle is hein.crs/govenif0001 and id is 1 raw text is: Con gressionol Research Service Inlorming the IegisIative debate since 1914 Updated October 30, 2023 Federal Tax Gap: Size, Contributing Factors, and the Debate over Reducing It Nature of the Federal Tax Gap The federal tax gap is a measure of overall taxpayer noncompliance in a specified period. The Internal Revenue Service (IRS) provides two estimates of the federal tax gap: a gross measure and a net measure. The gross tax gap 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 on time. The net tax gap is the difference between all taxes owed and taxes paid after accounting for late taxpayer payments and taxes collected through IRS enforcement actions. This estimate does not consider the deterrent effects of IRS enforcement on taxpayer noncompliance. The federal tax gap has three main components: failure to file, income underreporting, and tax underpayment. There are several reasons why the federal tax gap may be a concern for policymakers. The gap represents uncollected revenue that the federal government could use for many purposes, including reducing the budget deficit. The gap imposes costs on compliant taxpayers that are not borne equally by noncompliant taxpayers (e.g., higher taxes in the future, cutbacks in beneficial government programs, and larger interest payments on federal debt to finance budget deficits). Sustained growth in the tax gap may undermine public confidence in the fairness and integrity of the federal tax system, encouraging more noncompliance. Estimating the Federal Tax Gap The IRS has been estimating the size and composition of the tax gap since 1979. Until 1989, the estimates for tax compliance were based on data obtained through the Taxpayer Compliance Measurement Program (TCMP). The data came from comprehensive in-person audits by IRS examination officers of random samples of individual, corporate, and employment tax returns. Many audited taxpayers found them burdensome, as they were required to provide supporting documents for every tax return line item. The IRS suspended use of the TCMP in 1988. In 2000, the IRS adopted a different method of collecting individual tax compliance data known as the National Research Program (NRP), which is still in use today. To estimate compliance, the NRP uses a random stratified sample of about 13,000 taxpayers deemed representative of the entire filing population to select tax returns for audit. Random sampling provides information on both compliant taxpayers and noncompliant taxpayers who otherwise might be difficult to identify using the IRS's income detection tools. To estimate other components of the tax gap (e.g., corporate income and employment taxes), the IRS relies on a variety of data sources and empirical methods. There are some deficiencies with the IRS's estimation methods that have raised some questions about the accuracy of its tax gap estimates. In a March 2023 report, the Treasury Inspector General for Tax Administration found that the IRS does not include estimates of all sources of taxpayer noncompliance in its tax gap estimates. For instance, in estimating income underreporting, the IRS excludes excise taxes; estate and trust taxes; unrelated business income taxes; some employment taxes; subchapter S corporate income; and individual income taxes for U.S. taxpayers with foreign addresses. It is unclear how much larger the income underreporting estimate would be if those sources were included. Size of the Tax Gap The most recent tax gap estimate by the IRS covers tax years 2020 and 2021. According to the report, the average gross gap in that period was a projected $688 billion, which yielded a taxpayer net compliance rate of 86.2% for all federal taxes owed. Late payments and IRS enforcement actions resulted in a projected average net gap of $582 billion. As Table 1 shows, between 2001 and 2021, the net federal tax gap (2021 dollars) reached its lowest level in 2001 ($444 billion) and its highest level in 2021 ($582 billion), with some ups and downs in between. The net taxpayer noncompliance rate was the same in 2001 and 2021, with the highest rate in 2008-2010 and the lowest rate in 2014- 2016. Table 1. Net Federal Tax Gap Estimates from 2001 to 2021 Billions of Billions of Net Taxpayer Current 2021 Noncompliance Year(s) Dollars Dollars Ratea (%) 2001 2006 2008- 2010 2011 - 2013 2014- 2016 2017- 2019 $290 $385 $406 $380 $428 $481 $444 $516 $508 $450 $486 13.7% 14.5% 16.3% 14.2% 13.0% $514 13.2%

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Purchase Access

Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most