'Tax Gap' Hasn't Grown, IRS Reports

With all the political blather about tax cuts, tax reform and taxing the rich, you might think Americans are so fed up they're not paying their taxes anymore.

But that doesn't seem to be the case, at least according to the latest "tax gap" survey from the Internal Revenue Service, which admittedly was a bit dated even before the ink dried, since it covers tax year 2006.

The tax gap, for those unfamiliar with the term, is defined as the amount of tax liability faced by taxpayers that is not paid on time -- delinquent taxes, in other words.

The new tax gap estimate is the first full update full update in five years, and it shows the nation’s compliance rate is essentially unchanged from the last review covering tax year 2001.

The tax gap statistic is a helpful guide to the scale of tax compliance and to the persisting sources of low compliance, but it is not an adequate guide to year-to-year changes in IRS programs or to year-to-year returns on IRS service and enforcement initiatives.

According to the study, the voluntary compliance rate — the percentage of total tax revenues paid on a timely basis — for tax year 2006 is estimated to be 83.1 percent. The voluntary compliance rate for 2006 is statistically unchanged from the most recent prior estimate of 83.7 percent calculated for tax year 2001.

This table summarizes the new estimates being released today, as compared to the 2001 estimates, along with the total tax liabilities in each year.

	Tax Year 2001 (billions)	Tax Year 2006 (billions)
Total Tax Liabilities	$2,112	$2,660
Gross Tax Gap	$345 (83.7% compliance)	$450 (83.1% compliance)
Enforcement and Late Payments	$55	$65
Net Tax Gap	$290 (86.3% compliance)	$385 (85.5% compliance)

 

On a relative basis, the tax gap is largely in line with the growth in total tax liabilities, the IRS said. In addition, some growth in the tax gap estimate is attributed to better data and improved estimation methods.

The tax gap can be divided into three components: non-filing, underreporting and underpayment.

Under-reporting

As was the case in 2001, the underreporting of income remained the biggest contributing factor to the tax gap in 2006. Under-reporting across taxpayer categories accounted for an estimated $376 billion of the gross tax gap in 2006, up from $285 billion in 2001. Tax non-filing accounted for $28 billion in 2006, up from $27 billion in 2001. Underpayment of tax increased to $46 billion, up from $33 billion in the previous study.

Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.