The Internal Revenue Service (IRS) has issued news release IR-2023-187 which contains new tax gap projections for tax years 2020 and 2021.  The tax gap is the difference between the estimated “true” tax liability for a given period and the amount of tax that is actually paid on time.  Here are some key points from the announcement:

  1. Increase in the Tax Gap: The projected gross tax gap for tax year 2021 increased to $688 billion, which is a significant jump from previous estimates.  This is an increase of more than $192 billion from prior estimates for tax years 2014-2016 and an increase of $138 billion from the revised projections for tax years 2017-2019.
  2. Components of the Tax Gap: The gross tax gap is divided into three main areas:
    • Nonfiling of taxes: $77 billion in tax year 2021.
    • Underreporting of taxes: $542 billion in tax year 2021.
    • Underpayment of taxes: $68 billion in tax year 2021.
  3. Late Payments and Enforcement: Late payments and IRS enforcement efforts are projected to generate an additional $63 billion from tax year 2021 returns, resulting in a projected net tax gap of $625 billion.
  4. Voluntary Compliance: The tax year 2020 and 2021 tax gap projections translate to about 85% of taxes being paid voluntarily and on time, in line with recent levels.  After factoring in IRS compliance efforts, the projected share of taxes eventually paid is 86.3% for tax year 2021, down slightly from 87.0% for tax years 2014-2016.
  5. IRS Efforts: The IRS plans to enhance compliance efforts with a focus on high-income and high-wealth individuals, partnerships, and corporations.  It also aims to improve voluntary compliance by offering taxpayer services and new technology tools.
  6. Importance of Third-Party Reporting and Withholding: Third-party reporting of income and withholding is shown to significantly raise voluntary compliance with tax laws.  A one-percentage-point increase in voluntary compliance could bring in about $46 billion in additional tax revenue.
  7. Limitations of Projections: The tax gap projections do not fully account for all types of noncompliance, such as offshore activities, digital assets, cryptocurrency, and corporate income tax.  Additionally, they do not estimate noncompliance for pandemic era credits, as there is no reliable method to represent it.  The IRS continues to actively work on new methods for estimating and projecting the tax gap to better reflect changes in taxpayer behavior.

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The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice. This communication may not be applicable to your specific circumstances and may require consideration of non-tax and other tax factors if any action is to be contemplated. Please contact your tax professional prior to taking any action based on this information. Accuity LLP assumes no obligation to the reader of any changes in tax laws or other factors that could affect the information contained herein.