Key Issues > Tax Gap
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Tax Gap

The tax gap—the difference between taxes owed and those paid on time—has persisted for decades despite efforts by the Internal Revenue Service (IRS) and Congress to reduce it. IRS most recently estimated a tax gap of $450 billion for 2006. IRS eventually recovers part of the tax gap through enforcement actions and late payments; for 2006, it estimated it would recover $65 billion, resulting in a net tax gap of $385 billion.

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The tax gap arises when taxpayers, whether intentionally or inadvertently, fail to accurately report tax liabilities on tax returns (underreporting), pay taxes due from filed returns (underpayment), or fail to file a required tax return altogether or on time (nonfiling). The tax gap is spread across the five types of taxes that IRS administers—individual income, corporate income, employment, estate, and excise taxes. As shown in the figure below, underreporting, particularly of individual income taxes, accounts for most of the tax gap.

Figure 1: Tax Gap Noncompliance

Tax Gap: Noncompliance is Spread Across Various Types of Taxes and Tax Payers

Given the tax gap has been persistent and dispersed across different types of taxes and taxpayers, coupled with tax code complexity and a globalizing economy, reducing the tax gap will not likely be achieved through a single solution. Rather, the tax gap must be attacked on multiple fronts and with multiple strategies, such as:

  • enhancing information reporting by third parties;
  • ensuring high-quality services to taxpayers;
  • devoting additional resources to IRS enforcement;
  • expanding compliance checks before IRS issues refunds;
  • developing innovative compliance strategies;
  • leveraging external resources, such as paid tax return preparers and whistleblowers;
  • modernizing information systems; and
  • simplifying the tax code.

For more information on efforts to reduce the tax gap, see the enforcement of tax laws area of the High Risk list.

Looking for our recommendations? Click on any report to find each associated recommendation and its current implementation status.

Tax Gap

Sources of Noncompliance and Strategies to Reduce It
GAO-12-651T, Apr 19, 2012

Financial Derivatives

Disparate Tax Treatment and Information Gaps Create Uncertainty and Potential Abuse
GAO-11-750, Sep 20, 2011

Tax Gap

IRS Can Improve Efforts to Address Tax Evasion by Networks of Businesses and Related Entities
GAO-10-968, Sep 24, 2010

Tax Gap

IRS Has Modernized Its Business Nonfiler Program but Could Benefit from More Evaluation and Use of Third-Party Data
GAO-10-950, Aug 31, 2010

Tax Administration

Expanded Information Reporting Could Help IRS Address Compliance Challenges with Forgiven Mortgage Debt
GAO-10-997, Aug 31, 2010

More Reports

Government Efficiency and Effectiveness

Opportunities to Reduce Fragmentation, Overlap, and Duplication through Enhanced Performance Management and Oversight
GAO-13-590T, May 22, 2013

Government Efficiency and Effectiveness

Strategies for Reducing Fragmentation, Overlap, and Duplication and Achieving Cost Savings
GAO-13-631T, May 16, 2013

Tax Gap

IRS Could Significantly Increase Revenues by Better Targeting Enforcement Resources
GAO-13-151, Dec 5, 2012

Foreign Account Reporting Requirements

IRS Needs to Further Develop Risk, Compliance, and Cost Plans
GAO-12-484, Apr 16, 2012

Tax Gap

Complexity and Taxpayer Compliance
GAO-11-747T, Jun 28, 2011

Tax Preparer Regulation

IRS Needs a Documented Framework to Achieve Goal of Improving Taxpayer Compliance
GAO-11-336, Mar 31, 2011

Small Businesses

Tax Compliance Benefits and Opportunities to Mitigate Costs on Third Parties of Miscellaneous Income Reporting Requirements
GAO-11-218T, Nov 18, 2010

Internal Revenue Service

Assessment of Budget Justification for Fiscal Year 2011 Identified Opportunities to Enhance Transparency
GAO-10-687R, May 26, 2010

Tax Compliance

IRS May Be Able to Improve Compliance for Nonresident Aliens and Updating Requirements Could Reduce Their Compliance Burden
GAO-10-429, Apr 14, 2010

Tax Gap

Actions Needed to Address Noncompliance with S Corporation Tax Rules
GAO-10-195, Dec 15, 2009
More...
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