August 2, 2021
Federal Tax Gap: Size, Contributing Factors, and the Debate
Over Reducing It
Federal Tax Gap
totaled $441 billion in that period, or about 16% of total
The federal tax gap is a measure of taxpayer
average annual federal taxes owed. Late payments and IRS
noncompliance. The Internal Revenue Service (IRS)
enforcement actions produced a net gap of $381 billion.
provides two estimates of the gap: a gross measure and a
This estimate makes no allowance for the extent to which
net measure. The gross federal tax gap is the difference
IRS’s enforcement actions deter taxpayer noncompliance,
between the total amount of federal individual and
which some studies have suggested could be substantial.
corporate income, employment, and estate and gift taxes
owed in a year and the total amount of those taxes paid
As Table 1 shows, the estimated net federal tax gap in 2020
voluntarily in full and on time. The net tax gap is the
dollars fluctuated within a range from 2001 to 2013, where
difference between all taxes owed and taxes paid after late
the highest value ($491 billion) was about 11% larger than
taxpayer payments and taxes collected through IRS
the lowest value ($423 billion). A similar result applied to
enforcement actions.
estimated taxpayer noncompliance rates: the highest net
taxpayer noncompliance rate (16.3%) was about 19% larger
The federal tax gap may be a concern for policymakers for
than the lowest such rate (13.7%). Although the table
several reasons. First, the gap represents tax revenue that
covers only four periods, the results do not show that the
the federal government could use for many purposes, such
federal tax gap has steadily grown over time. Estimates for
as reducing the budget deficit or paying for new programs.
periods after 2013, which are not currently available, may
Second, the gap imposes costs on compliant taxpayers that
produce a different pattern.
are not borne to the same extent by noncompliant taxpayers
(e.g., higher taxes in the future, cutbacks in beneficial
Table 1. Net Federal Tax Gap from 2001 to 2013
government programs, and interest payments on federal
($ billions)
debt to finance budget deficits). Third, sustained growth in
the tax gap can undermine public confidence in the fairness
Constant
Net Taxpayer
and integrity of the federal tax system.
Current
2020
Noncompliance
Year(s)
Dollars
Dollars
Ratea (%)
Estimating the Federal Tax Gap
2001
$290
$423
13.7%
The IRS has been estimating the size and composition of
the tax gap since 1979. Pre-1989 estimates were based on
2006
$385
$493
14.5%
compliance data collected through the Taxpayer
Compliance Measurement Program (TCMP). The data were
2008-
$406
$491
16.3%
collected through comprehensive in-person audits done by
2010
IRS examination officers; audited taxpayers had to provide
2011-
documents supporting every tax return item.
$381
$431
14.2%
2013
Source: Internal Revenue Service, Tax Gap Estimates; and Bureau of
Public and congressional opposition to the TCMP’s burden
on audited taxpayers led the IRS to adopt, in 2000, a
Labor Statistics, Annual Average Consumer Price Indexes.
different method of collecting compliance data known as
a.
the National Research Program (NRP). To estimate

The percentage of total taxes owed in a year that were not paid
in ful and on time after IRS enforcement actions.
compliance with the individual income tax, the NRP
employs a random sample of audits of about 13,000
Components of the Federal Tax Gap
taxpayers deemed representative of the entire filing
The federal tax gap has three main components. One is the
population. Random sampling has the advantage of
understatement of tax liability through underreporting
providing information on both compliant taxpayers and
noncompliant taxpayers who otherwise might be difficult to
income or overstating deductions, credits, and other income
identify using IRS’s income detection tools. To estimate
adjustments. A second component is the failure to pay the
full amount of taxes owed when filing a tax return on time,
other components of the tax gap (e.g., corporate income and
or tax underpayment. The third element is the failure to file
employment taxes), the IRS relies on a variety of data
a required return on time, or non-filing.
sources and empirical methods.
Recent IRS Research on the Tax Gap
The IRS estimated that 80% ($352 billion) of the gross tax
gap for 2011 to 2013 could be attributed to understated tax
The most recent tax gap study covers the years 2011 to
2013. According to the IRS, the average annual gross gap
liability. Underpayment of taxes accounted for 11% ($50
billion) of the gap, and non-filing for 9% ($39 billion).
https://crsreports.congress.gov

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Federal Tax Gap: Size, Contributing Factors, and the Debate Over Reducing It
Individual taxpayers understated their average annual
to hire tax accountants and attorneys to reduce their tax
income tax liability by an estimated $245 billion from 2011
liability through questionable tax law interpretations.
to 2013 (56% of the gross tax gap and 70% of total
understated tax liability). According to the IRS, most of this
Policy Issues
understated tax liability stemmed from three sources: (1)
The 117th Congress is considering options for decreasing
underreported noncorporate business income ($110 billion
the federal tax gap. Attention has largely focused on
or 45% of understated tax liability); (2) underreported
proposals to increase IRS’s resources, especially for
nonbusiness income ($57 billion or 23% of understated tax
enforcement, over a multiyear period. For example, the
liability); and (3) overstated tax credits ($42 billion or 17%
Biden Administration has called for a multiyear $79.2
of understated tax liability).
billion increase in IRS funding between FY2022 and
FY3031 to help reduce the federal tax gap. Nearly 70% of
Contributing Factors
those funds would be used to expand IRS’s enforcement
Several factors are thought to play key roles in the size and
activities. The Administration estimates that the plan would
composition of the federal tax gap.
collect $316 billion in gross revenue over that period. The
plan would also regulate paid tax preparers and require new
IRS Resources
information reporting for certain taxpayer transactions with
The size of the IRS budget and its staff, especially for
banks.
enforcement activities and taxpayer services, are likely to
contribute to the tax gap through their impact on taxpayer
Proposals such as this raise several policy issues. One issue
compliance. Recent decreases in those resources have led
is the return on investment (ROI) of new enforcement
some to express the concern that an underfunded IRS is
actions. Although an increase in these actions is likely to
setting the stage for rapid growth in the federal tax gap.
raise more revenue than their cost, enforcement activities
vary in their cost-effectiveness and the amount of revenue
Between FY2010 and FY2019, IRS’s enforcement budget
they collect. Some say the IRS should have a better
and staff declined more than did the overall IRS budget and
understanding of the reasons for this variation so it can
workforce. These cutbacks included a 40.5% reduction in
maximize its ROI on new enforcement activities.
the number of revenue agents, who handle the most
complex enforcement cases, and a 45.5% reduction in the
The success of efforts to shrink the tax gap may depend, in
number of field collection officers. These declines resulted
part, on the size and composition of the gap. These details
in declines in the audit rates during that period for all
might be crucial in designing effective strategies for
taxpayers. For example, in a development with implications
reducing taxpayer noncompliance. There is some dispute
for the federal tax gap, audit rates for individuals with
about the size of the current gap. An updated estimate from
incomes above $1 million fell 61% between 2010 and 2018.
the IRS is unlikely to be released before 2022. In testimony
given at a congressional hearing in April 2021, IRS
IRS’s prefiling assistance and education programs help
Commissioner Charles Rettig stated that the current gross
individuals avoid the unintended errors that cause some
federal tax gap could total as much as $1 trillion. Not
taxpayers not to file a required return, pay less tax than they
everyone agrees with this assessment, including former
owe, and underreport their income. From FY2010 to
National Taxpayer Advocate Nina Olson.
FY2019, IRS’s staffing for this purpose decreased 31.5%.
Some argue that a permanent reduction in the tax gap
Income Visibility
involves more than giving the IRS more resources; the
Another factor is thought to be the visibility of income to
federal tax code should also be simplified. In their view, tax
the IRS. This refers to the extent to which the IRS can
simplification would make it possible for more taxpayers to
detect taxable income. Income is most visible when it is
meet their tax obligations on their own with fewer errors.
subject to substantial information reporting by third parties.
And clarifying ambiguous areas of the tax code may make
Compliance is even greater when income is subject to
it harder for corporations and high-income individuals to
employer withholding, as is the case with most wage
prevail in disputes with the IRS over the legality of their tax
income. According to IRS estimates, the amount of
minimization strategies.
understated tax liability in 2011 to 2013 was an average
$109 billion for income subject to little or no reporting
Another policy issue is the impact of tax-gap reduction
(e.g., farm income, sole proprietor income, rents, and
proposals on taxpayer rights. Some argue that reducing the
royalties). In contrast, understated tax liability was $9
tax gap will also require major new investments in IRS’s
billion for income subject to substantial reporting and
information technology and employee training, a greater
withholding (e.g., wages and salaries).
emphasis on taxpayer services, and a redesign of its
information systems . These changes, in their view, should
Tax Code Complexity
be made without increasing taxpayer burdens, violating
The federal tax gap is also thought to be a product of tax
taxpayer rights, and disregarding the needs of compliant
code complexity. Complicated (and frequently changing)
taxpayers.
tax provisions likely make it difficult for many individuals
to fulfill their tax obligations without committing errors that
Gary Guenther, Analyst in Public Finance
can contribute to the federal tax gap. Tax code complexity
may also create opportunities for taxpayers who can afford
IF11887
https://crsreports.congress.gov

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Federal Tax Gap: Size, Contributing Factors, and the Debate Over Reducing It


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https://crsreports.congress.gov | IF11887 · VERSION 1 · NEW

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