For every one dollar in federal income taxes owed, the IRS is only able to collect 84 cents. The missing 16 cents is called the tax gap. 

It’s the difference between what individuals and businesses should pay and what they actually do pay. After adjusting for late payments and enforcement actions by the IRS, the “net tax gap” is estimated to be approximately $290 billion a year.

With the federal budget suffering from massive deficits, closing the net tax gap and collecting those additional funds has become a priority.

In IRS jargon, failing to pay your tax liability — the amount you owe — is called “non-compliance”. There are three types of non-compliance that cause the tax gap:

  • Underreporting of one’s tax liability by inflating your expenses or failing to report a portion of your income.
  • Underpayment of one’s  tax liability by not sending the IRS the full amount you owe when its due.
  • Non-filing of one’s return and failure to make any kind of payment towards what you owe. 

Underreporting is estimate to account for 82 percent of the net tax gap. Across all three types of non-compliance, businesses account for 70 percent. To address this situation, 1099 filing requirements have been expanded.

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