Addressing the tax gap—the difference between taxes owed and those paid on time—could help improve the government’s fiscal position.
Taxpayers fail to pay hundreds of billions of dollars in taxes every year. This tax gap—the difference between tax amounts that taxpayers should pay and what they actually pay voluntarily and on time—has been a persistent problem for decades. However, the amount of the tax gap fluctuates over time due to things like changes in taxpayer behavior, Internal Revenue Service (IRS) enforcement activities, new tax gap components and updated methods for estimating the tax gap, changes in economic activity, and changes in tax law and administration.
IRS's Annual Average Tax Gap Estimate for Tax Years 2011-2013
The tax gap arises when taxpayers, whether intentionally or inadvertently, fail to accurately report tax liabilities on tax returns (underreporting), fail to pay taxes due from filed returns (underpayment), or fail to file a required tax return altogether or on time (nonfiling). Underreporting accounted for most of the tax gap estimate for tax years 2011-2013.
Estimated Average Annual Gross Tax Gap by Type of Noncompliance and Tax (Tax Years 2011-2013)
See Figure 12 in GAO-20-403SP for figure notes.
Reducing the Tax Gap
Because the tax gap affects a variety of taxes and taxpayers, reducing it will require multiple strategies. For instance, the IRS has worked to develop a strategy to address noncompliance with tax requirements for employment tax.
However, the IRS does not adequately measure the effect of other compliance programs, such as those used for large partnerships, because it has not clearly defined them, tracked the results, or analyzed how to better use audit resources. In addition, IRS has not established long-term, quantitative goals for improving voluntary compliance. Further, IRS has not evaluated options to increase compliance by expanding third-party information reporting to require more information on sole proprietor's income and expenses. The agency could also improve taxpayer experience by developing performance goals for desired improvements, as well as improve its management of IT systems and investments.
Congress could also help reduce the tax gap by:
- Enhancing and expanding third-party information reporting (for example, businesses’ reporting of payments to nonemployees)
- Enhancing electronic filing
- Expanding IRS’s authority to correct some tax return errors during processing
- Regulating paid preparers
For more information on efforts to reduce the tax gap, see the enforcement of tax laws area of the High Risk list.