What is the tax gap?
The gross tax gap is the difference between total taxes owed and taxes paid on time.
The Internal Revenue Service (IRS) estimates that over the past 30 years, the tax gap has fluctuated in a narrow range—15 to 18 percent of total tax liability. Some view the tax gap as a possible major revenue source that could be used to close the federal budget deficit without raising taxes. In practice, though, the potential revenue gains from proposals to improve enforcement are quite limited.
The most recent IRS tax gap report was released in 2019 and covered tax years 2011–13 (IRS Research, 2019). For those years, the IRS reported an average annual gross tax gap of $441 billion (slightly over 16 percent of total tax liability). Of this, the IRS eventually recovered $60 billion through voluntary late payments and enforcement activities. That left an average annual net tax gap of about $381 billion (or about 14 percent of total tax liability).
Failure to file a tax return (nonfiling) and underpayment of reported taxes accounted for 20 percent of the gross tax gap (figure 1). Underreporting on timely filed tax returns made up the bulk of it: $352 billion, or 80 percent of the gross tax gap in the years studied.
Underreporting on individual income tax returns alone was $245 billion (figure 2), about 70 percent of the underreporting tax gap in 2011–13. Almost 45 percent of the underreported individual income tax was owed on business income, which the IRS has no easy way to verify independently. About 11 percent of the underreporting gap was attributable to corporate income tax, and only 0.3 percent to the estate tax.
Individual taxpayers failed to report about 55 percent of income from sources for which there is no information reporting, such as sole proprietorships. In contrast, only 5 percent of income from easily verified sources—interest, dividends, and pensions—was unreported. For income subject to both information returns and tax withholding, as with wages, only about 1 percent went unreported.
Updated May 2020
Internal Revenue Service (IRS). 2019. “Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2011–2013.” Publication 1415 (rev. 09-2019).
Erard, Brian, and Jonathan Feinstein. “The Individual Income Reporting Gap: What We See and What We Don’t.” IRS Research Bulletin: Proceedings of the 2011 IRS/TPC Research Conference, 129–42. Publication 1500 (rev 4-2012). Washington, DC: Internal Revenue Service.
Erard, Brian, Mark Payne, and Alan Plumley. 2012. “Advances in Non-filing Measures.” Washington, DC: Internal Revenue Service.
Holtzblatt, Janet and Jamie McGuire. 2016. “Factors Affecting Revenue Estimates of Tax Compliance Proposals.” Congressional Budget Office Working Paper 2016-05.
Johns, Andrew and Joel Slemrod. 2010. “The Distribution of Income Tax Noncompliance.” National Tax Journal 63 (3): 397–418.
Mazur, Mark J., and Alan Plumley. 2007. “Understanding the Tax Gap.” National Tax Journal 60 (3): 569–76.
Toder, Eric J. 2007. “What Is the Tax Gap?” Tax Notes. October 22.