IRS Tax Gaps Estimates Show Taxpayers owe $385 Billion in 2006 Taxes

The Internal Revenue Service recently released new “tax gap” estimates for tax year 2006, showing that taxpayers owe $385 Billion (an increase of about 1/3 over the tax gap from tax year 2001).  The tax gap is defined as the amount of tax liability owed by taxpayers that is not timely paid.

The tax gap is divided into three components: non-filing, underreporting and underpayment.  Most of the increase in the tax gap from tax years 2001-2006 occurred in underreporting and underpayment; in the non-filing segment, the numbers were largely unchanged.

Underreporting in 2006, as in 2001, was the largest contributing factor to the tax gap, increasing to $376 billion (and $67 billion on corporate income taxes) from $285 billion five years earlier.  Underpayment of tax in 2006 increased to $46 billion, up from $33 billion in 2001.  Non-filing accounted for $28 billion in 2006, up a billion from five years before.

Despite the increase in the tax gap over the five years, the voluntary compliance rate (the percentage of total tax revenues paid on a timely basis) stayed almost statistically unchanged, at around 83%.

The 2006 gross tax gap (the amount that was not timely paid), was estimated at $450 billion, an increase from $345 billion in 2001.  The 2006 net tax gap, (the amount of tax that was never paid), was $385 billion, up from $290 billion from five years earlier.