How Big is U.S. “Tax Gap”? Who Knows?

The IRS last tried to figure out the “tax gap” — its name for the difference between how much tax the law obligates people to pay and what the government successfully squeezes out of them — based on data from the tax year.

It has occasionally released reports on the tax gap since then, but these have just been statistical extrapolations of the data from the 2001 survey.

But the IRS has been working on a new study of the tax gap, based on tax year , the results of which they released this afternoon — Friday afternoon, which is usually the time chosen by government agencies to release reports they hope the news media will ignore. This is probably a sign that the report isn’t good news for the IRS, so let’s take a closer look.

First, though, look at this summary graphic that purports to show where the gap comes from — which taxes, and which varieties of collection failures (nonfiling, underreporting, and underpayment). Note that only for the “underpayment” category does the IRS claim to provide “actual amounts” — this is only about 1½% of the total tax, and 10% of the estimated gross tax gap. The rest of the gap is based on estimates (some based on data last collected as far back as 1984!), although in some cases the agency could not even provide estimates. This was also true of the numbers.

The agency reports little change between and in the rate of taxpayer noncompliance. The rate is slightly higher in (with 16.9% of taxes not voluntarily paid on-time, and 14.5% remaining uncollected after IRS enforcement activity), but within the margin of error of the earlier estimates.

The total amount of “underpayment” (that is, amounts that people or corporations declared that they owed, by filing forms or what-have-you, but failed to actually remit by the deadline) — the only part of the new estimates that the IRS had the capability to directly measure rather than estimate — rose in from $33 billion to $46 billion, a 39% increase. This, while the estimated total tax liability only rose 26%, from $2,112 billion to $2,660 billion.

What I take away from glancing at this report is 1) the IRS didn’t make any headway on tax compliance , and may have lost ground if you think there is reason to suspect that they have been generous in keeping their extrapolated estimates flat while their actually-measured numbers took a leap; and 2) that the government doesn’t really have a very good idea of how big the tax gap is or where its biggest problems are. These are the best numbers it has, and they are so loosely guesstimated as to inspire little confidence in their accuracy.

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