The tax gap - the difference between taxes owed and taxes paid on time - serves as a crucial measure of federal tax compliance. Government agencies regularly estimate this gap to assess historical compliance patterns across different taxpayer categories. These comprehensive estimates account for both taxes payable and refundable/non-refundable tax credits.
Decades of tax gap estimates consistently demonstrate that the United States maintains relatively high and stable voluntary compliance rates. Maintaining strong taxpayer compliance remains vital, as even minor declines could result in billions in lost revenue, effectively shifting the tax burden from compliant taxpayers to those who avoid their obligations. Understanding the components of the tax gap helps policymakers and tax administrators make informed decisions about resource allocation and tax administration strategies.
Recent Tax Gap Estimates Show Significant Increase
The latest estimates reveal the gross tax gap rose to $496 billion for 2014-2016, marking a $58 billion increase from previous estimates. This gap represents the difference between true tax liability and taxes paid voluntarily and on time. After accounting for late payments and IRS collection efforts, which recovered an additional $68 billion, the net tax gap stands at $428 billion. This increase correlates strongly with economic growth, as the estimated tax liability grew by over 23% between 2011-2013 and 2014-2016 periods.
Current estimates indicate approximately 85% of taxes are paid voluntarily and on time, consistent with recent levels. The voluntary compliance rate shows slight improvement from the revised 83.7% rate calculated for 2011-2013. When including IRS compliance efforts, the overall compliance rate reached 87% for 2014-2016.
Three Key Components of the Tax Gap
The total tax gap breaks down into three primary components:
- Non-filing ($39 billion): Taxes not paid by those who fail to file required returns
- Underreporting ($398 billion): Taxes understated on filed returns
- Underpayment ($59 billion): Taxes reported but not paid on time
Forward-Looking Estimates and Methodology Challenges
One significant challenge in tax gap estimation involves the time required to collect compliance data, particularly for underreporting figures which typically come from completed audits. To address this, the current release includes preliminary estimates for 2017-2019, projecting:
- Average annual gross tax gap: $540 billion
- Projected voluntary compliance rate: 85.1%
- Projected late payments: $70 billion
- Projected net tax gap: $470 billion
- Overall compliance rate: 87.0%
The projected 2017-2019 components break down as $41 billion (non-filing), $433 billion (underreporting), and $66 billion (underpayment). Due to tax system complexity and data limitations, no single methodology can estimate all tax gap components perfectly. Each approach contains potential measurement errors, while sample-based estimates may include sampling errors. These figures represent the best available estimates given current data, though they may not fully capture all compliance issues.