For tax years 2021 and 2020, the last in which such IRS estimates were received, the projected gross “tax gap” increased to $688 billion and $601 billion, respectively. That represents a significant jump compared to recent years – in gross terms tax gap projections are $550 billion for 2017-2019 and $496 billion for 2014-2016.
One of the IRS’s biggest challenges is making sure people actually pay their taxes. Although the agency’s data shows that the vast majority of Americans pay their taxes voluntarily and on time, hundreds of billions of dollars in unpaid taxes pile up every year — and estimates of the tax gap continue to widen.
IRS Commissioner Danny Werfel said the increasing tax gap estimates “underscore the importance” of increased compliance efforts. Some of the $80 billion the IRS received from the Biden administration’s Inflation Reduction Act is being used for that purpose.
“We are adding focus and resources to areas of importance for compliance, including high-income and high-net-worth individuals, partnerships and corporations,” Werfel said in a statement. “These steps are urgent in many ways, including adding more fairness to the tax system, protecting those who pay their taxes and working to combat the tax gap.”
The tax difference could also be larger than expected. Some projections from previous years have already been adjusted upwards. For example, the gross tax gap for 2017-2019 was initially projected to be $540 billion, but has increased by $10 billion in subsequent estimates.
Estimates for 2021 assume that non-compliant behavior has not changed since the most recent 2014-2016 audit, IRS officials noted in a call with reporters — meaning current projections do not reflect the filing behavior seen during the pandemic, for example has been observed. But shifts in economic activity and changes in the mix and type of income reported for 2021 are taken into account. As total tax liability increases, so does the tax gap.
Agency officials added that Inflation Reduction Act funding is also being used to develop more advanced methods aimed at measuring more recent behavioral changes.
Thursday’s announcement also marks the first time tax gap projections for individual tax years have been provided.
