Question

Define the term “net tax gap,” describe roughly its size, and state the biggest factor thought to cause it.

Answer 1

The gross tax gap is the difference between total taxes owed and taxes paid on time.

The Internal Revenue Service (IRS) estimates that over the past 30 years, the tax gap has fluctuated in a narrow range—15 to 18 percent of total tax liability. Some view the tax gap as a possible major revenue source that could be used to close the federal budget deficit without raising taxes. In practicallity ,even though, the potential revenue gains from proposals to improve enforcement are very limited.

The latest IRS tax gap report was made  in 2016 and covered tax years 2008–10 (IRS Research, Analysis, and Statistics 2016). For those years, the IRS reported an average annual gross tax gap of $458 billion (slightly over 18 percent of tax liability). Of this, the IRS eventually recovered $52 billion through voluntary late payments and enforcement activities. which  left a net tax gap of about $406 billion.

Failure to file a tax return (nonfiling) and underpayment of reported taxes account for just over 15 percent of the gross tax gap (figure 1). Underreporting on timely filed tax returns makes up the bulk of it: $387 billion, or 85 percent of the gross tax gap.