1022 Publ 5783 (PDF)

Official source: IRS Forms, Instructions & Publications (https://www.irs.gov/pub/irs-pdf/p5783.pdf), retrieved 2026-10-03. U.S. Government work (17 U.S.C. § 105).

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October 2022

Publication 5783 (10-2022) Catalog Number 93939M Department of the Treasury Internal Revenue Service www.irs.gov

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Suggested Citation:

Plumley, A.H. and E. Spitzer The Underpayment Gap for Tax Years 2014-2016 Research, Applied Analytics & Statistics Technical Paper Internal Revenue Service Publication 5783 Washington, DC October 2022

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Internal Revenue Service | Research, Applied Analytics & Statistics

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Table of Contents

Executive Summary ....................................................................................................................... iii

Introduction ..................................................................................................................................... 1

1. Estimates ................................................................................................................................... 1

2. Employer Underdeposit of Withheld Income Tax .................................................................. 2

3. Separating Self-Employment Tax .......................................................................................... 2

4. Underpayment Tax Gap Measures by Type of Tax .................................................................. 3

Tables and Figures

Table 1. Underpayment Tax Gap Measures, Tax Years 2003-2016............................................... 1

Table 1. Tax Forms Included in Each Type of Tax ........................................................................ 4

Table 3. Gross Underpayment Tax Gap by Type of Tax, Tax Years 2003-2016 ($ B) ................. 4

Table 4. Payment Noncompliance Rate by Type of Tax, Tax Years 2003-2016 ........................... 5

Figure 1. Shares of the Gross Underpayment Tax Gap by Type of Tax, Tax Years 2003-2016 .... 4

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ii

Executive Summary

Taxpayers are required by the Internal Revenue Code to file income tax returns with the IRS by the established due date, on which they are to report all of their tax liability; it also requires them to pay that tax liability on time. However, not all taxpayers pay on time the tax that they report on their returns. The gross underpayment tax gap ¹ for a given tax year (or range of tax years) is the amount of tax that is reported on timely filed returns but is not paid on time. For Tax Years 2011 to 2013, the average gross underpayment gap was $50 billion, accounting for around 11 percent of the gross tax gap but was only 1.91 percent as large as total IRS collections for the corresponding fiscal year. ² For the Tax Year 2014 to 2016 period, the average annual underpayment gap was $56 billion, and was 1.73 percent as large as total IRS collections. As one might expect, when taxpayers voluntarily report a certain amount of tax as due, they tend to pay it on time or soon after it is due. In fact, the underpayment gap consistently represents less than 2 percent of the tax that is reported on timely filed returns, and around two-thirds of that is consistently paid within three years.

Since the amounts reported on timely returns and the amounts paid are observed, we are generally able to tabulate payment compliance measures from IRS systems for each tax year and each type of tax without estimation. ³ This report documents various measures related to the underpayment gap for Tax Years 2014 through 2016. The basic estimates are provided in Section 1. Section 2 explains the unique role of employer underdeposits of withheld income tax, and Section 3 provides underpayment gap estimates by type of tax.

1 Hereinafter referred to simply as the underpayment gap.

2 Gross collections from the IRS Data Book, Table 1. SOI Tax Stats - IRS Data Book

3 There is one small exception to this rule (employer underdeposit of withheld income tax), which is explained in Section 2.

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The Underpayment Tax Gap for Tax Years 2014-2016

Introduction

The gross underpayment gap for a given tax year is the amount of tax that is reported on timely filed returns for that tax year but is not paid on time. The corresponding Voluntary Payment Compliance Rate (VPCR) is the percentage of tax that is reported on timely filed returns and is paid timely, while the Payment Noncompliance Rate is 100% minus the VPCR. The Cumulative Payment Compliance Rate (CPCR) is the percentage of tax that is reported on timely filed returns and is paid within a specified amount of time after the close of the tax year. Finally, the net underpayment gap for a given tax year is the amount of the gross underpayment gap that is still not paid after a specified amount of time. ⁴

1. Estimates

Since the amounts reported on timely returns and the amounts paid are generally observed, we are able to tabulate these payment compliance measures from IRS systems for each tax year without estimation. However, we need to modify these tabulations for individual income tax and employment tax to account for employer underdeposits of withheld income tax, as described in Section 2. Table 1 shows the final measures for Tax Years 2003-2016 for all types of tax combined.

Table 2. Underpayment Gap Measures,

Tax Years 2003-2016

4 We do not project future payments of the underpayment gap separately from the other components of the tax gap for a given tax year.

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The Underpayment Tax Gap for Tax Years 2014-2016

2. Employer Underdeposit of Withheld Income Tax

Basic tabulations of the underpayment gap from the IRS Master File treat withheld income tax as an employment tax since it is actually paid (deposited) by employers on behalf of their employees. However, the ultimate tax liability that these payments are intended to satisfy is the income tax liability of the individual employees. So, we must adjust those basic tabulations in two ways.

1. Transfer amounts from employment tax to individual income tax: If an employer reports on

time the amount that he had withheld from employees, but he didn’t deposit it on time, that amount would be characterized in the basic tabulations as part of the employment tax underpayment gap; we need to characterize it instead as part of the individual income tax underpayment gap. We are now able to tabulate withheld income tax separately from employment taxes on the various employment tax forms (Forms 941, 943, 944, 945, and 1042), so this is straightforward.

2. Add in amounts not reported on time by the employer: If an employer withholds income tax

from his employees but doesn’t report it on time (or pay it on time), that amount will not be included in the basic tabulations since they are based solely on timely filed returns. The reason why these amounts should be included in the underpayment gap is that they are ultimately payments of individual income tax, and we assume that the individual employee reported the tax liability (and withholding) on time, even though the employer didn’t pay it on time on his behalf.

We identify these amounts associated with late or missing employment tax returns using separate tabulations. However, the amounts tabulated are just what was unpaid as of the date of the tabulation . Since the amount associated with late returns filed after the tabulations is likely to be quite small, these special tabulations presumably capture almost all the amount that could eventually be observed in tax records. However, an unknown amount is presumably withheld from employees and never paid to the government by their employers; we do not estimate this amount, even though it is by definition part of the individual income tax underpayment gap.

3. Separating Self-Employment Tax

Self-employment tax is reported by individuals on their Form 1040. Because this is a type of employment tax, we need to move this portion of the underpayment gap from the individual income tax underpayment gap to the employment tax underpayment gap. The basic tabulation from IRS systems doesn’t distinguish between the two, so we tabulate the total underpayment gap associated with Form 1040, then allocate that gap between individual income tax and employment tax proportional to their reported tax liabilities.

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The Underpayment Tax Gap for Tax Years 2014-2016

4. Underpayment Tax Gap Measures by Type of Tax

The underpayment gap amounts are tabulated from IRS Master File data by type of tax from the relevant tax forms, as listed in Table 2.

Table 3. Tax Forms Included in Each Type of Tax

Having made the adjustments for employer underdeposit of withheld income tax and selfemployment tax, the underpayment gap is tabulated by type of tax and by tax year in Table 3 and illustrated in Figure 1. The corresponding payment noncompliance rates are provided in Table 4. These reveal that growth in the overall underpayment gap has been driven by individual income tax, partly because the individual income tax payment noncompliance rate has been increasing somewhat (Table 4). That may be caused in part by the growing share of sole proprietors during this period and the fact that it is often much harder for sole proprietors to make timely tax payments throughout the year than is the case for employees, who have taxes withheld from their paychecks.

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The Underpayment Tax Gap for Tax Years 2014-2016

Table 3. Gross Underpayment Tax Gap by Type of Tax, Tax Years 2003-2016 ($ B)

2003 20.5 2.9 3.4 1.6 0.8 29.3 2004 23.8 2.7 5.4 0.4 0.9 33.1

2007 30.8 4.1 4.7 0.1 1.4 41.1 2008 31.6 2.9 4.7 0.9 0.9 41.0

2011 33.1 6.0 4.3 0.1 1.1 46.2 2012 37.9 4.8 8.6 0.1 1.4 50.8

2015 48.2 4.2 2.1 0.1 1.0 57.7

• Mostly estate & gift taxes

Figure 1. Shares of the Gross Underpayment Tax Gap by Type of Tax, Tax Years 2003-2016

• Mostly estate & gift taxes

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The Underpayment Tax Gap for Tax Years 2014-2016

Table 4. Payment Noncompliance Rate by Type of Tax, Tax Years 2003-2016

2003 2.7% 1.9% 0.5% 3.2% 7.7% 1.4% 2004 2.9% 1.4% 0.6% 0.8% 5.9% 1.4%

2007 2.8% 1.3% 0.4% 0.1% 4.8% 1.3% 2008 3.1% 1.2% 0.4% 2.0% 4.7% 1.4%

2011 3.0% 2.6% 0.5% 0.1% 5.4% 2.0% 2012 3.1% 1.8% 1.0% 0.3% 4.5% 2.2%

2015 3.2% 1.4% 0.2% 0.2% 3.7% 1.9% 2016 3.0% 1.0% 0.3% 0.2% 4.0% 1.8%

• Mostly estate & gift taxes

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