Tax Gap Estimates For Tax Years 2008-2010
The tax gap – the difference between what taxpayers owe and what they pay – widened over the past 10 years, the IRS has reported. At the same time, the voluntary compliance rate declined slightly. According to the IRS, the drop in the voluntary compliance rate was not attributable to changes in taxpayer behaviors.
The gross tax gap, the IRS explained, is the amount of true tax liability that is not paid voluntarily and timely. The IRS reported that the gross annual tax gap for TY 2008-2010 is estimated to be $458 billion. Enforcement activities and late payments resulted in an additional $52 billion in tax paid, which resulted in a net tax gap for the 2008-2010 period of $406 billion per year. In comparison, the gross tax gap for TY 2006 was $450 billion and the net tax gap for TY 2006 was $385 billion.
The gross tax gap is composed of three components: (1) nonfiling, (2) underreporting, and (3) underpayment. The IRS reported that the estimated gross tax gaps for these components are $32 billion, $387 billion, and $39 billion, respectively. Further, the gross tax gap estimates can be grouped by type of tax. The estimated gross tax gap for individual income tax is $319 billion, $91 billion for employment taxes, $44 billion for corporate income tax, and $4 billion for estate and excise taxes combined.
The tax gap typically moves with the economy, the IRS observed. Gross collections were $2.52 trillion in FY 2006, $2.69 trillion in FY 2007 and $2.75 trillion in FY 2008. Reflecting the economic downturn, gross collections declined to $2.35 trillion in FY 2009 and remained at that level in FY 2010.
Voluntary compliance rate
The IRS reported that the voluntary compliance rate is estimated at 81.7 percent. After accounting for enforcement and late payments, the net compliance rate is 83.7 percent. The prior estimated voluntary compliance rate, calculated in 2006, was 83.1 percent, the IRS reported.