Overview of the Tax Gap

The tax gap is a widespread phenomenon in tax compliance, representing the difference between taxes owed and taxes actually paid on time. According to recent estimates, the U.S. tax gap reached $496 billion between 2014 and 2016—an increase of more than $58 billion from previous estimates. This growth can be partially attributed to economic expansion, as estimated tax liabilities grew by more than 23% during this period.

The Importance of Tax Compliance

The United States maintains a relatively high and stable voluntary tax compliance rate, a trend consistently demonstrated in historical data. Tax compliance is crucial for the national economy because even small declines in compliance can result in billions of dollars in lost revenue, shifting the tax burden onto those who pay their taxes promptly. Understanding the components of the tax gap helps policymakers and tax administrators better allocate resources to improve compliance.

The Three Components of the Tax Gap

Current estimates break down the tax gap into three primary components:

• Nonfiling: Individuals who fail to submit required tax returns on time, accounting for an estimated $39 billion in unpaid taxes.
• Underreporting: Cases where filed tax returns underreport the actual tax liability, representing the largest component at $398 billion.
• Underpayment: Taxes that are properly reported but not paid on time, totaling $59 billion in unpaid revenue.

Policy Initiatives and Compliance Improvements

To reduce the tax gap and enhance compliance, tax authorities have implemented various initiatives aimed at increasing taxpayer awareness and voluntary compliance rates. Recent data shows the compliance rate for 2014-2016 was approximately 85%, consistent with previous estimates.

Tax Gap Research and Future Projections

Estimating the tax gap presents challenges due to the time required to gather compliance data, particularly audit information related to underreported taxes. To address this, tax authorities have released projections for 2017-2019, estimating an average annual tax gap of $540 billion with a voluntary compliance rate of 85.1%.

Conclusion

Maintaining and improving tax compliance rates is essential for ensuring fair distribution of the tax burden. Information reporting and withholding mechanisms play significant roles in boosting voluntary compliance. As the economy and tax systems evolve, tax authorities continue to explore ways to enhance taxpayer services and compliance. Ultimately, ensuring all taxpayers meet their obligations benefits both national finances and societal trust and equity.