IRS estimates average annual 'tax gap' of $441 billion for 2011 to 2013

IRS estimates average annual 'tax gap' of $441 billion for 2011 to 2013
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The IRS on Thursday released new estimates of the "tax gap" — the difference between the amount of taxes owed and the amount that’s paid on time — which lawmakers had been awaiting as they consider funding for the agency and ways to boost tax compliance.

The estimates show that the average annual gross tax gap was $441 billion for the tax years from 2011 to 2013. The agency estimated that $352 billion of the tax gap was due to underreporting, $50 billion was due to underpayment and $39 billion was due to nonfiling.

The agency said that it expects $60 billion in unpaid taxes to eventually be paid, whether in the form of late payments or as a result of enforcement efforts, leading to a net tax gap of $381 billion.

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The figures reflect the IRS's first estimates of the U.S. tax gap since 2016, when the agency estimated an average annual $458 billion gap for the 2008 to 2010 tax years. The agency’s revised estimate of the tax gap for those tax years was $394 billion.

The IRS estimated that the tax compliance rates for 2011 to 2013 were about the same as the revised compliance rates for 2008 to 2010. In its latest estimates, the IRS found that about 83.6 percent of taxes for 2011 to 2013 were paid voluntarily and on time, and that 85.8 of taxes were eventually paid once enforcement efforts are factored in.

"Voluntary compliance is the bedrock of our tax system, and it’s important it is holding steady," IRS Commissioner Charles Rettig said in a news release. "Tax gap estimates help policy makers and the IRS in identifying where noncompliance is most prevalent. The results also underscore that both solid taxpayer service and effective enforcement are needed for the best possible tax administration.” 

IRS officials said that the dollar amount of the tax gap for 2011 to 2013 was higher than it was for 2008 to 2010 because of the improving economy. The total amount of taxes owed for 2011 to 2013 was also higher than the total taxes owed for 2008 to 2010.

Lawmakers on both sides of the aisle have been interested in taking steps to shrink the tax gap. A spending bill that the Senate Appropriations Committee unanimously advanced earlier this month proposes increasing the IRS’s enforcement funding by $200 million to address the discrepancy between taxes owed and taxes paid. And the House Ways and Means Committee held a hearing on the tax gap in May.

The time period covered in the IRS’s new estimates was at the start of the period when the agency saw budget cuts. IRS officials said that the estimates show that they aren’t seeing the budget cuts negatively impacting the tax gap in the early years of the cuts, but that they don’t know what data will say about the impact of budget cuts in subsequent years. 

Updated: 3:39 p.m.