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GAO-23-106448 1 (2023-02-27)

handle is hein.gao/gaoohl0001 and id is 1 raw text is: The Big Picture The Internal Revenue Service (IRS) estimated the tax gap- the difference between tax amounts that taxpayers should have paid and what they actually paid voluntarily and on time-to be $496 billion per year for tax years 2014-2016. The tax gap is a complex problem that requires a multipart solution. A small reduction in the gap could yield major fiscal benefits to the federal government. IRS's Annual Average Tax Gap Estimate for Tax Years 2014-2016 Taxpayers Dollars (in trillions) owed about $3.3 trillion/ I This difference of $496 blio/y er year in federal the Gross Tax Gap. taxes from things like: - Individual Although IRS estimated that it will income taxes collect an extra Corporate bilin/ea through income taxes late payments and - Employment enforcement activities, taxes it also estimated that However, they S l onlyea actually paid about Taxes Taxes owed paid Source: Internal Revenue Service (IRS). I GAO-23-106448 IRS uses several approaches to estimate the different components of the tax gap, but these approaches have limitations. Estimates can have measurement and sampling error and can vary in the quality of information available. Further, the estimates do not fully reflect all areas of the tax system. For example, foreign or illegal activities, digital assets, and some corporate income tax are not fully included because data are either not reliable or not available. Despite those limitations, IRS's estimate provides useful insights into the sources of the tax gap. For example, IRS found underreporting of tax liabilities makes up 80 percent of the gross tax gap. Individual underreporting alone represents more than half (56 percent) of the gross tax gap. The individual underreporting category includes estimates related to income from sole proprietorships, partnerships, S Corporations, estates, and trusts, among others. Estimated Average Annual Gross Tax Gap by Type of Noncompliance and Tax (Tax Years 2014-2016) Share of Gross Tax Gap ITax Years 2014-2016 Gross Tax Gap $496 billion 60% 50 40 30 20 10 0 40 8% 50 40 30 5W4 20 10 Individual 60% is income tax 50 Employment tax 40 _ 30 Corporate 3 incomnetax 20 10 Estate tax 0 . N $398 billion UNDERREPORTING of tax liabilities on timely filed tax returns $59 bilion UNDERPAYMENT of taxes due from timely filed returns Source: GAO analysis of Intemal Revenue Service (IRS) data, I GAO-23-106448 What GAO's Work Shows Our work identified issues that contribute to the tax gap. * Limited third party inforrrmation reportin . The extent to which individual taxpayers accurately report their income is closely aligned with whether third parties (e.g., employers) report income to them and to GAO-23-106448 Tax Gap $b 4 $ $39 billion NON FI-ING when a taxpayer fails to file a required tax return altogether or on time No estimate available $7$<.05 $3 Page 1

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