1022 Publ 5364 (PDF)

Official source: IRS Forms, Instructions & Publications (https://www.irs.gov/pub/irs-pdf/p5364.pdf), retrieved 2026-10-03. U.S. Government work (17 U.S.C. § 105).

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Publication 5364 (Rev. 10–2022) Catalog Number 73348Z Department of the Treasury Internal Revenue Service www.irs.gov

(And Projections for Tax Years 2017–2019)

Overview

his overview presents estimates of the tax gap for the Tax Year (TY) 2014–2016 timeframe and tax gap projections

for TY 2017–2019. It also provides revised estimates for TY 2011–2013 that incorporate data that were not yet avail

able when the estimates were initially released. The tax gap is a measure of the level of overall noncompliance, in the context of Internal Revenue Code (IRC) provisions in effect at the time. The estimates provide the Internal Revenue Service (IRS) with

periodic appraisals of the nature and extent of noncompliance for use in formulating tax administration strategies. The word “tax” in the phrase “tax gap” is used broadly to encompass both

“tax paid voluntarily and timely” and “enforced and other late

payments” divided by “total true tax”, expressed as a percentage. The estimated NCR is 87.0 percent.

The tax gap estimates are also segmented by type of tax. Table 1 shows that individual income tax makes up the largest components of the tax gap, contributing $357 billion to the gross tax gap and $306 to the net tax gap. The second and third largest components involve employment tax, which includes selfemployment, FICA and FUTA tax, and corporation income tax.

Comparison with Previous Estimates

Many factors contribute to differences over time in both the gross tax gap and the VCR. These include factors such as the overall level of economic activity, changes in the composition of economic activity, for example shifts toward those activities with higher or lower compliance rates, changes in tax law and tax administration practices, updated data and improved methodologies, and changes in underlying compliance behavior on the part of taxpayers, tax preparers, and other tax advisors.

The estimated VCR for TY 2014–2016 (85.0 percent) is

slightly higher than the revised TY 2011–2013 estimate, 83.7 percent (Table 2). However, the TY 2014–2016 gross and net tax gap estimates of $496 billion and $428 billion, respectively, are higher than their respective revised TY 2011–2013 estimates by $58 billion (gross) and by $48 billion (net). These increases can be attributed to economic growth between the two periods as evidenced by the more than 23 percent increase in true tax liability shown in the table.

tax and refundable and nonrefundable tax credits.

The gross tax gap is the amount of true tax liability that is not

paid voluntarily and timely. The estimated annual gross tax gap for Tax Years (TY) 2014–2016 is $496 billion (Table 1). The voluntary compliance rate (VCR) is a ratio measure of relative compliance and is defined as the amount of “tax paid voluntarily and timely” divided by “total true tax”, expressed

as a percentage. The estimated VCR is 85.0 percent.

The gross tax gap comprises three components:

• Nonfiling (tax not paid on time by those who do not file required returns on time, $39 billion),

• Underreporting (tax understated on timely filed returns, $398 billion), and

• Underpayment (tax that was reported on time, but not paid on time, $59 billion).

The net tax gap is the gross tax gap less tax that subsequently will be paid, either voluntarily but late or collected through IRS administrative and enforcement activities. The net tax gap is the portion of the gross tax gap that will not be paid. An estimated $68 billion of the gross tax gap eventually will be paid, resulting in a TY 2014–2016 net tax gap of $428 bil- lion. The Net Compliance Rate (NCR) is defined as the sum of

The Effect of Information Reporting on Tax Compliance

Consistent with findings from earlier tax gap analyses, compliance is higher when amounts are subject to information reporting and even higher when also subject to withholding. The extent of coverage by information reporting and/or with holding is called “visibility” because incomes that are reported to the IRS are more “visible” to both the IRS and taxpayers. Misreporting of income amounts subject to substantial information reporting and withholding is 1 percent of income. For amounts subject to substantial information reporting but not withholding, it is 6 percent; and for income amounts subject to little or no information reporting, such as nonfarm sole proprietor income, it is 55 percent. (Figure 1)

Tax Gap Projections, TY 2017–2019

This release of the tax gap estimates includes tax gap projec tions for the TY 2017–2019 timeframe. The projected annual gross tax gap for the TY 2017–2019 timeframe is $540 bil- lion. The VCR is projected to be 85.1 percent. An estimated annual $70 billion of the gross tax gap is expected to be paid eventually resulting in an annual net tax gap of $470 billion. The NCR projection is 87.0 percent. The underreporting tax gap accounts for $35 billion of the $44 billion increase between the TY 2014–2016 gross tax gap estimate and the TY 2017–2019 projection. The rest of the difference is due to increases in the underpayment tax gap of $7 billion and the nonfiling tax gap of $2 billion. (Table 3.) Figures 2 and 3 provide a visual summary of tax gap estimates and projections in the form of a Tax Gap Map.

Methodology

Tax Gap Estimates TY2014–2016

1 For detailed discussion of methods used to estimate each component, see “Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2014–2016,” Publication 1415 (Rev. 08-2022) Catalog Number 10263H, Department of the Treasury Internal Revenue Service www.irs.gov.

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In keeping with earlier tax gap releases, the new estimates and

projections in this report reflect an estimated average compliance rate and associated annual tax gap covering a timeframe of three tax years. The approaches used to estimate the various tax gap components for TY 2014–2016 generally follow the methods used for the previous TY 2011–2013 estimates, with some improvements.

For the largest components, these TY 2014–2016 estimates, like the prior TY 2011–2013 estimates, are based on actual compliance data from completed examinations. ¹ Improvements for TY 2014–2016 are reflected in the individual income tax

and self-employment tax nonfiling tax gap methodologies that incorporate an expanded set of data which includes information that was not available for previous estimates. The individual income tax underreporting tax gap estimation methodol

ogy is modified slightly to address changes in the underlying statistical sample data that are the foundation of that component estimate. The estate tax nonfiling and underreporting tax gap estimates reflect an updated methodology that takes into account recent increases in the filing threshold that greatly reduced the number of estates subject to this tax.

A particular challenge for tax gap estimation is the time it takes

to collect certain compliance data, especially data on underreporting that come from completed examinations. Waiting for the data to become available allows the estimates to reflect the compliance behavior for the years of the estimates, but by then the timeframe of the estimates can be several years prior to the year of the tax gap release. To address this issue, the current release includes tax gap projections for TY 2017–2019 as a bridge between the competing priorities of the need for more contemporaneous tax gap estimates and having tax gap estimates based on compliance data for the timeframe of the estimates. Differences between the estimation methods used to produce the tax gap estimates and the projections vary by component, reflecting the timing in which compliance data become available for use in estimation. For example, the projections of the underreporting tax gap generally reflect the level of the tax gap that takes into account the growth in the reported tax or the reported amount of line items on tax returns while assuming compliance behavior has not changed from prior years. The projections will be updated annually as additional compliance data become available.

Data Limitations

Given the complexity of the tax system and available data, no single approach can be used for estimating each component of the tax gap. Each approach is subject to measurement or nonsampling error; the component estimates that are based on samples are also subject to sampling error. For the individual income tax underreporting tax gap, Detection Controlled Estimation is used to adjust for measurement error that results when some existing noncompliance is not detected during an

audit. Other statistical techniques are used to control for bias in estimates based on operational audit data. ² Due to the heterogenous nature of the estimation methodology no standard errors are reported; however, the user should be mindful of these limitations when using these estimates.

Given available data, these are the best possible estimates of the tax gap components presented. However, the estimates cannot fully represent noncompliance in some components of the tax system, particularly as they relate to corporation income tax, income from flow-through entities, foreign or illegal activities, and digital assets, because data are lacking. For example, the IRS does not have a reliable method for estimating the corporation income tax nonfiling tax gap. The tax gap associated with illegal activities has been outside the scope of tax gap estimation because the objective of government is to eliminate those activities, which would eliminate any associated tax. With respect to noncompliance associated with digital assets and other emerging issues, it takes time to develop the expertise to uncover related noncompliance and to complete examinations that can be used to measure the extent of that noncompliance. Notwithstanding, the IRS is actively working on new methods for estimating and projecting the tax gap to better reflect changes in taxpayer behavior as they emerge.

2 Ibid .

Tax Gap Estimates TY2014–2016

[4] The Other Taxes component inclused the Alternative Minimum Tax, Excess APTC Repay ment, and taxes reported in the “Other Taxes” section of the Form 1040 except for selfemployment tax and unreported social security and Medicare tax (which are included in the employment tax gap estimates).

[5] The Unallocated Marginal Effects component reflects the difference between (1) the estimate

of the individual income tax underreporting tax gap where underreported tax is calculated based on all misreporting combined and (2) the estimate of the individual income tax underreporting tax gap based on the sum of the tax gaps associated with each line item where the line item tax gap is calculated based on the misreporting of that item only. There may be a difference whenever more than one line item has been misreported on the same return and the combined misreporting results in a higher marginal tax rate when the tax on the misreported amounts is calculated separately.

Detail may not add to total due to rounding.

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Table 1. Tax Year 2014–2016[1] Tax Gap Estimates

[Money amounts are in billions of dollars]

Share of Gross Tax Gap Component TY2014–2016 [1]

Tax Gap

Estimated Total True Tax $3,307

Gross Tax Gap $496 100%

Voluntary Compliance Rate 85.0%

Enforced and Other Late Payments $68

Net Tax Gap $428

Net Compliance Rate 87.0%

Individual Income Tax $47 9%

Corporation Income Tax $4 1%

Employment Tax $5 1%

Estate Tax $3 1%

Excise Tax [3] [2]

[1] The estimates are the annual averages for the Tax Year 2014–2016 timeframe.

[2] Less than 0.5 percent.

[3] Less than 0.5 billion.

Table 2. Comparisons of Tax Gap Estimates for Tax Years 2011–2013 and 2014–2016

[Money amounts are in billions of dollars]

TY 2011–2013 Tax Gap Component Prior Published [1]

TY 2011–2013

TY 2014–2016 [1] Revised [1]

Estimated Total True Tax $2,683 $2,688 $3,307

Gross Tax Gap $441 $438 $496

Nonfiling Tax Gap $39 $37 $39

Underreporting Gap $352 $349 $398

Underpayment Gap $50 $52 $59

Voluntary Compliance Rate 83.6% 83.7% 85.0%

Enforced and Other Late Payments $60 $58 $68

Net Tax Gap [2] $381 $380 $428

Net Compliance Rate 85.8% 85.9% 87.0%

[1] The estimates are the annual averages for the covered timeframe.

[2] The net tax gap is the gross tax gap reduced by the amount of enforced and other late payments that will eventually be paid.

Detail may not add to total due to rounding.

Table 3. Tax Gap Estimates and Projections

[Money amounts are in billions of dollars]

[1] The estimates are annual averages for the tax year timeframes.

[2] The projections are annual averages for the tax year 2017–2019 timeframe. These figures will be updated as more complete compliance data become available.

[3] Less than $0.5 billion.

Detail may not add to total due to rounding.

Tax Gap Estimates TY2014–2016

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Figure 1 Visibility Chart: Tax Years 2014–2016 [1] Individual Income Tax Underreporting Tax Gap and Net Misreporting Percentage [2] Estimates by Visibility Category of Income Items

Tax Gap Estimates TY2014–2016

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Figure 2

Tax Gap Estimates TY2014–2016

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Figure 3

Total True Tax Liability $3,621

Tax Paid Voluntarily & Timely $3,081

NOTES:

• Totals include Excise Tax.

#—No estimate.

Detail may not add to totals due to rounding.

[1] Includes adjustments, deductions, and exemptions.

[2] Includes the Alternative Minimum Tax and taxes reported in the “Other Taxes” section of the Form 1040 except for self-employment tax and unreported social security and Medicare tax (which are included in the employment tax gap estimates).

[3] Is the difference between (1) the estimate of the individual income tax underreporting tax gap where underreported tax is calculated based on all misreporting combined and (2) the estimate of the individual income tax underreporting tax gap based on the sum of the tax gaps associated with each line item where the line item tax gap is calculated based on the misreporting of that item only. There may be differences if the marginal tax rates are different in these two situations.

[4] Self-employment tax only.

Revised 03/2022

By Type of Tax

Individual Income Tax $1,919

Corporation Income Tax $340

Employment Tax $1,279

Estate Tax $19

Individual Income Tax $1,528

Employment Tax $1,177

Estate Tax $15

Tax Gap Estimates TY2014–2016

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