Joint Committee On Taxation: Overview Of The Tax Gap

Following up on my previous post, House Holds Hearing Today On The Tax Gap:  the Joint Committee on Taxation has released Overview Of The Tax Gap (JCX-19-19) (May 08, 2019):

This document ... provides a standard definition of the tax gap, a description of issues relevant to measurement of the tax gap, and a discussion of taxpayer behavioral responses and the effectiveness of measures to increase compliance.  ...

A standard definition of the tax gap is the shortfall between the amount of tax voluntarily and timely paid by taxpayers and the actual tax liability of taxpayers. It measures taxpayers’ failure to accurately report their full tax liabilities on tax returns (i.e., underreporting), pay taxes due from filed returns (i.e., underpayment), or file a required tax return altogether or on time (i.e., non-filing). Estimates of the tax gap provide a picture of the level of overall noncompliance by taxpayers for a particular tax year, and include shortfalls in individual income taxes, corporate income taxes, employment taxes, estate taxes, and excise taxes. The individual behavioral responses to taxation that result in the tax gap raise a set of important policy questions, such as the optimal level of resources to devote to tax administration and the manner in which those resources are best deployed.  

The Internal Revenue Service (“IRS”) periodically conducts studies to estimate the size of the tax gap and analyze its components. Table 1 indicates that in the most recent study, the estimated annual gross tax gap, per year on average for tax years 2008-10, was $458 billion and the annual net tax gap, which is the gross tax gap adjusted for late payments and collections due to enforcement activities, was $406 billion. Adjusted for inflation, the gross and net tax gaps are $504 billion and $447 billion in 2016 dollars, respectively.  With total average tax liabilities of $2.5 trillion per year between 2008 and 2010, the voluntary compliance rate is 81.7 percent and the net compliance rate is 83.7 percent.

According to these data, both gross and net compliance rates fell by 1.4 and 1.8 percentage points, respectively, relative to those in the previous compliance study of tax returns for tax year 2006. The two studies were conducted at different points in the business cycle, near the peak of the cycle for the 2006 study and in the midst of a severe recession during the most recent study, which is consistent with a relationship between the state of the economy and tax compliance. However, the IRS attributes most of the decline in the estimates of compliance rates to recent changes in its methodology and inclusion of new tax gap components, and not to changes in taxpayer behavior.

Tax Foundation, The Tax Gap Tops $500 Billion a Year