The gap between the amount of U.S. federal taxes paid and the amount of tax owed is staggering—over $500 billion per year.
A high level of voluntary tax compliance is critical to help ensure taxpayer faith and fairness in the tax system. Those who don’t pay what they owe ultimately shift the tax burden to those who properly meet their tax obligations.
The gross tax gap is the amount of true tax liability that is not paid voluntarily and timely. It includes the non-filing gap, the underreporting gap, and the underpayment (or remittance) gap.
The net tax gap is the portion of the gross tax gap that will never be recovered through enforcement efforts or late payments.
According to the Internal Revenue Service (IRS), between tax years 2008 and 2010, the U.S. had an annual gross tax gap of $504 billion, and an annual net tax gap of $447 billion, in 2016 dollars. (Compared to $450 billion in 2006.)
The annual net tax gap is lower because it is adjusted for late payments and payments due to enforcement.
According to the Tax Foundation:
Overall, the voluntary compliance rate was 81.7 percent, while the net compliance rate was 83.7 percent. These compliance rates are a few percentage points lower than tax gap estimates in 2001 and 2006, but according to the IRS, most of this decline is due to recent methodology changes and the addition of new tax gap components, not to changes in taxpayer behavior.
During the 2008 to 2010 time frame, the tax gap varied by tax type. The figure below shows noncompliance was highest under the individual income tax, at about $319 billion in nominal dollars. This compares to just $91 billion for employment taxes (which includes Self-Employment Taxes, FICA taxes to fund Medicare and Social Security, and Unemployment taxes witheld by employers to pay for programs like social security), and $44 billion for the corporate income tax. The tax gap for estate and excise taxes was even smaller, at about $4 billion.
The IRS contends that compliance is higher when amounts are subject to information reporting and even higher when also subject to withholding.
Read the full report for more information.