The “Tax Gap” is difference between the amount of tax that the IRS should collect if everyone followed the law and the amount that it actually collects. There are three components of the gap: nonfiling, under-reporting, and underpayment. Of course, the ridiculous complexity of the Tax Code is also a contributing factor.
Last February, the IRS estimated the Tax Gap at $290 billion. This morning’s Wall Street Journal reports that the IRS is likely underestimating the problem. The report, from the Department of the Treasury’s Inspector General for Tax Administration (TIGTA), concludes that:
“…the IRS still does not have sufficient information to completely and accurately assess the overall tax gap and voluntary compliance. The IRS has significant challenges in both obtaining complete and timely data and developing the methods for interpreting the data…We concluded that, despite the significant efforts undertaken in conducting the individual taxpayer National Research Program (NRP) for under-reporting, the IRS still does not have sufficient information to completely and accurately assess the overall tax gap and the VCR.”
The report is interesting and is available here. You can find the Wall Street Journal’s article here (paid subscribers only).