• The “tax gap” is the gap between revenues that should have been collected and those that actually were collected in a given year. IRS estimates the tax gap to be between $311 and $353 billion for the 2001 tax year annually. IRS can not report more recent data!
• IRS tax gap estimates are unreliable because of outdated methodologies and lack of reliable data.
• IRS has no specific plans to regularly measure tax compliance.
Impact on Taxpayers:
• The National Taxpayer’s Advocate reports that given the size of the current tax gap, the average tax return includes a $2,000 per year “surtax” to subsidize all the noncompliant “bad actors.”
• When taxpayers fail to comply with tax laws, the burden of funding the nation’s commitments, including funding growing budget deficits, falls more heavily on taxpayers who voluntarily and accurately pay their taxes.
These Findings Demand a Response:
• An external study by experts and scholars is needed to estimate the tax gap. There is a conflict of interest in relying on IRS for tax gap estimates, because an accurate and comprehensive assessment of the problem would only highlight the agency’s failure to mitigate the problem.
• Legislation that calls for a regular method of developing tax gap estimates. Before proposing reforms to reduce the tax gap, a system needs to be in place to accurately measure the problem so that the effects of reform efforts are also measurable.
