The amount of tax money owed but not paid to the IRS will continue to grow, according to projections released Thursday by the federal tax collection agency.
For the 2021 and 2020 tax years, the latest for which the IRS has provided such estimates, the projected gross “tax gap” rose to $688 billion and $601 billion, respectively. That’s a significant jump from previous years – the gross tax gap projections for 2017-2019 were $550 billion and $496 billion for 2014-2016.
One of the IRS’s biggest challenges is ensuring that people actually pay their taxes. While the agency’s data shows that the vast majority of Americans voluntarily pay their taxes on time, hundreds of billions of dollars in unpaid taxes pile up each year – and estimates of the tax gap continue to grow.
IRS Commissioner Danny Werfel said the rising tax gap estimates “underscore the importance” of increased compliance efforts. Part of the $80 billion the IRS received from the Biden administration’s Inflation Reduction Act will be used for this purpose.
“We are increasing our focus and resources on areas of compliance concern, including high-income and high-net-worth individuals, partnerships and corporations,” Werfel said in a statement. “These steps are urgent on a number of fronts, including making the tax system fairer, protecting those who pay their taxes and tackling the tax gap.”
The tax gap may also be larger than expected. Some projections from previous years have already been revised upwards. For example, the gross tax gap for 2017-2019 was originally expected to be $540 billion, but later estimates have increased it by $10 billion.
Estimates for 2021 assume that noncompliant behaviour hasn’t changed since the last audit in 2014-2016, IRS officials noted in a call with reporters – meaning that current projections don’t reflect filing behaviour seen during the pandemic, for example. But they do account for shifts in economic activity and changes in the mix and type of income reported for 2021 – so as total tax liability increases, so does the tax gap.
Agency officials added that funding from the Inflation Reduction Act will also be used to develop more sophisticated methods to measure recent changes in behaviour.
Thursday’s announcement also marks the first time that tax gap projections have been provided for individual tax years.
The projected gross tax gap – made up of missed payments due to nonfiling, underreporting and underpayment – doesn’t include late payments or IRS enforcement. In 2021, the IRS expects to collect $63 billion through late payments and enforcement efforts, bringing the estimated net tax gap to $625 billion.
