IRS Tax Gap Data Previews the Future of 10-series Reporting Requirements

A recent fact sheet released by the IRS shows the latest tax gap estimates and overall taxpayer compliance, and demonstrates why the IRS is likely to strengthen its tax reporting enforcement policies.

The findings are based on data from tax years 2011, 2012 and 2013. The purpose of this document is to let the public know what the state of compliance is and how effective current tax compliance strategies are at closing the tax gap.

What is the tax gap?

The tax gap is calculated by the voluntary compliance rate (amount of tax paid voluntarily and on time) divided by the total true tax (total amount of tax that should be paid). It is then expressed as a percentage. The difference between the voluntary compliance rate and the total true tax is the gap.

This provides a rough gauge of the level of overall noncompliance given all the events that occurred during the relevant tax periods and the Internal Revenue Code (IRC) provisions in effect at the time.

The IRS uses tax gap data to develop future tax enforcement policies. Generally, the larger the gap, the tougher the enforcement.

Summary of the IRS fact sheet

• The total true tax (total amount of tax that should be paid) is estimated at $2.68 trillion per year
• The IRS collects approximately $2.24 trillion per year (83.58% voluntary compliance rate)
• This creates a gross tax gap of approximately $441 billion (16.45% of total true tax)
• After enforcement and late payments are taken into account, the IRS collects another $60 billion 
• This leaves a net tax gap of $381 billion
• The net compliance rate is 85.8%.
• The gross average gap was estimated at $441 billion per year
  • Breakdown by error:
    • Non-filing was estimated at $39 billion 
    • Underreporting was $352 billion
    • Underpayment was $50 billion
  • Breakdown by tax type:
    • Individual income was estimated at $314 billion
    • Corporate income was $42 billion
    • Employment was $81 billion
    • Estate and excise tax combined gap was $3 billion

There is still a lot of money out there

With hundreds of billions of dollars still up for grabs, and with underreporting making up such a large chunk of the tax gap, it’s unlikely the IRS will decrease the complexity of its current 10-series reporting requirements anytime soon. In all likelihood, complexity and penalties for non-compliance will only increase in the coming years as the IRS seeks to narrow the gap.