Latest IRS Tax Gap Report Reveals Where Billions Went Uncollected

The latest IRS report for Tax Year 2022 reveals some eyebrow-raising numbers around the tax gap—the difference between what’s owed and what’s actually paid. Despite slight gains in compliance, the tax gap looms large as a persistent challenge. Let’s break down the highlights and see how the IRS plans to close the gap. 

How Big Are We Talking?

The 2022 gross tax gap—a whopping $696 billion—reflects unpaid taxes before any enforcement. While that’s a tad lower than 2021’s projections, it shows there’s plenty of room for improvement. Compared to previous years, this projection represents an increase of $200 billion over tax years 2014-2016, which the IRS attributes to a 41% rise in the economy since that period. After factoring in $90 billion likely to be recovered through enforcement or late payments, the net tax gap lands at $606 billion. This translates to a Voluntary Compliance Rate (VCR) of 85% and a Net Compliance Rate (NCR) of 86.9%—both showing some progress, but the journey’s far from over.

The IRS also emphasized that this tax gap increase reflects economic growth and changing income sources rather than a shift in taxpayer behavior. Furthermore, these projections cover a period before the agency began ramping up compliance efforts following the Inflation Reduction Act (IRA) in August 2022. Since then, the IRS has collected $1.3 billion from high-income taxpayers as part of its intensified enforcement efforts funded by the IRA.

The Triple Threat

Here’s how the tax gap stacks up: 

• Nonfiling Gap: Coming in at $63 billion, this portion is what’s owed by those who didn’t file at all. Nonfiling of individual income tax is the biggest piece, with self-employment and estate taxes filling in the rest. 
• Underreporting Gap: The heavyweight here, underreporting, totals $539 billion and covers income discrepancies on returns. Individual underreporting remains the largest slice at $381 billion, with business income underreporting alone contributing 28%.

• Underpayment Gap: At $94 billion, this covers reported but unpaid taxes. Individual income tax underpayment alone takes up $80 billion of this. 

Visibility Matters

One standout insight? Visibility. When income is subject to information reporting (like wages), misreporting drops drastically, as the IRS can track it. For example, misreporting on wages is only 1%, compared to a staggering 55% for nonfarm proprietor income, where visibility is lower. The takeaway? People are much more likely to report income accurately when they know it’s on the IRS’s radar. 

How Do Compliance Rates Vary by Tax Type?

When it comes to tax types, the Voluntary Compliance Rate varies: 

• Individual Income Tax: Consistently around 80%, holding steady thanks to established reporting practices. 
• Corporate Tax: At about 87%, corporations show higher compliance, likely due to stricter rules and scrutiny. 
• Employment Tax: Withholding plays a major role here, driving the VCR to an impressive 92% as underreporting and underpayment are kept in check.

The IRS Game Plan

To make sense of these numbers, the IRS uses a range of techniques, from sampling and detection-controlled estimation to statistical adjustments. These methods aim to capture non-detected noncompliance for a clearer picture of the gap. Of course, there are limitations—especially with emerging areas like digital assets or temporary reliefs from recent legislation. Still, these models are critical for tackling the tax gap. 

What’s Next? Closing the Gap One Dollar at a Time

Looking ahead, recent funding boosts from the Inflation Reduction Act could supercharge the IRS’s resources. While it’s too soon to see the impact, these funds could enable better enforcement and support for compliance. The 2022 report shows the IRS’s ongoing battle to close the gap through transparency, reporting, and enforcement. This tax gap isn’t just a number—it’s a major revenue frontier where each percentage improvement translates to billions in recovered taxes. 

To dive deeper into the IRS's latest projections and understand the full scope of the 2022 tax gap, be sure to check out the official report here. Follow our regular updates to stay ahead on all things tax-related!