The tax gap—the difference between what is owed and paid to the government—widened to $696 billion in tax year 2022.
The federal government is losing hundreds of billions of dollars annually in tax revenue, with the main culprit being underreporting by taxpayers, according to the IRS.
The tax gap “reflects the difference between projected ‘true’ tax liability and the amount of tax that is actually paid on time,” the IRS said.
For tax year 2022, the country’s projected gross tax gap is calculated to be $696 billion, the agency said in an Oct. 10 statement. In 2021, this figure was $688 billion. The 2022 figure is an increase of more than $200 billion from tax years 2014–2016. It is also up from 2017–2019 numbers. The IRS attributed the increase to economic growth.
“The increase for 2022 is similar to the 41 percent increase in the economy since the 2014–2016 time period as measured by the Gross Domestic Product,” the agency noted.
The voluntary compliance rate among taxpayers remained steady at 85 percent. The 2022 tax gap increase “ultimately reflects growth in the economy and changes in the sources of income—not a change in taxpayer behavior involving filing or paying their taxes,” the IRS stated.
Underreporting of taxes, which reflects tax understated on timely filed returns, was found to be the biggest reason for the tax gap, making up 77 percent of the deficit. Individual income tax made up the majority of the tax gap, contributing $514 billion to the gross tax gap and $447 billion to tax year 2022’s tax gap projection. This is followed by employment tax including self-employment and corporation income tax.
The latest projections are from a period before the IRS began increasing tax compliance work after the Inflation Reduction Act was passed in August 2022.
In February, the IRS launched an initiative to pursue high-income, high-wealth individuals who have not filed their taxes since 2017. These people were estimated to have received annual incomes in the range of $400,000 to $1 million or higher.
Since then, the agency “has stepped up compliance activity” and collected $1.3 billion from high-income taxpayers, the tax agency noted.
