Federal Tax Gap Estimate is $385 billion

The IRS has released a new estimate of the total unpaid federal tax liability for 2006. Taxpayers owed an estimated $2.66 trillion in federal taxes for that year. Of this, $2.21 trillion was paid on time, for a voluntary compliance rate of 83.1%. The IRS collected an additional $65 million through enforcement actions, leaving a “tax gap” of $385 billion (14.1%) that will probably never be collected. Full compliance would have more than covered the $248.2 billion federal budget deficit for 2006.

The tax gap estimate is divided among three factors: (1) failure to file required returns ($28 billion), (2) underreporting of liability ($376 billion), and (3) underpayment of tax due ($46 billion). Not surprisingly, the best tax compliance applies to wages and salaries, which are subject to substantial third-party information reporting and withholding requirements. An IRS map shows the gap for each federal tax.

There is no state tax gap estimate for Connecticut. In a 2006 report on Connecticut’s tax system, the Program Review and Investigations Committee noted that estimating the tax gap “is such a complicated process that few states, including Connecticut, regularly compute it.”