1022 Publ 5786 (PDF)

Official source: IRS Forms, Instructions & Publications (https://www.irs.gov/pub/irs-pdf/p5786.pdf), retrieved 2026-10-03. U.S. Government work (17 U.S.C. § 105).

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October 2022

Publication 5786 (10-2022) Catalog Number 93942J Department of the Treasury Internal Revenue Service www.irs.gov

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Suggested Citation:

Plumley, A.H. The Net Tax Gap for Tax Years 2014-2016 Research, Applied Analytics & Statistics Technical Paper Internal Revenue Service Publication 5786 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. How Much of the Gross Tax Gap Will Eventually Be Collected? ............................................ 1

2. Estimating Late Payments for a Given Tax Year ....................................................................... 2

2.1 Data by Fiscal Year and Tax Year ....................................................................................... 3

2.2 Projection Method ................................................................................................................ 4

2.3 Corporation Income Tax ...................................................................................................... 6

3. Trends in Late Payments by Type of Tax .................................................................................. 7

Appendix

1. Tax Class 1 (Employment Taxes) .............................................................................................. 9

2. Tax Class 2 (Forms 1041 and 1065) ........................................................................................ 11

3. Tax Class 4 (Excise Taxes) ...................................................................................................... 13

4. Tax Class 5 (Estate & Gift Taxes) ............................................................................................ 15

5. Tax Class 7 (Railroad Retirement Tax) .................................................................................... 17

6. Tax Class 8 (Unemployment Tax) ........................................................................................... 19

Tables and Figures

Table 1. Enforced and Late Payments of Tax by Type of Tax, ...................................................... 2

Table 2. Late Payments of Individual Income Tax by Tax Year of Liability and Fiscal Year of

Payment......................................................................................................................... 3

Table 3. Enforced Payment of Corporation Income Tax by Tax Year of Liability and Fiscal Year

of Payment .................................................................................................................... 7

Table 4. Projected Total Enforced and Other Late Payments, Tax Years 2014-2019 .................... 7

Table 5. Percent of the Gross Tax Gap That Will Be Collected ..................................................... 8

Figure 1. Late Payments of Individual Income Tax by Tax Year, FY2008-FY2020 ..................... 5

Figure 2. Projected Eventual Late Payments of Individual Income Tax, TYs 2011-2019 ............. 6

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ii

Executive Summary

The gross tax gap for a given tax year is the amount true tax liability that is not paid on time. The net tax gap is the portion of that amount that is never paid. The difference is the amount of tax for that tax year that is paid late (i.e., after the payment due date). Some of it is collected through IRS enforcement efforts, and some is paid without IRS intervention (e.g., remitted when filing a return just before an extended filing deadline, ¹ or when filing an amended return). Our estimate of the average annual gross tax gap for the Tax Year 2014 to 2016 period is $496 billion (see our summary report). We estimate that $68 billion of this would eventually be paid late, leaving an average annual net tax gap estimate of $428 billion for this period. ²

Unlike most components of the tax gap, we can observe and tabulate all late payments. However, for any given tax year, late payments are typically made over many subsequent fiscal years, and that process is not usually complete by the time we need to estimate the tax gap. Therefore, to estimate the net tax gap we need to project the amount of tax likely to be paid for the tax year in question after the year the late payment tabulations were compiled. We tabulate from the IRS Master File all late payments by type of tax, by tax year of liability, and by fiscal year of payment, making it possible to project future late payments for a given tax year based on the trends observed for earlier tax years. Moreover, because the tabulations are compiled separately for each type of tax, we are able to produce estimates of the net tax gap for each type of tax. This report documents the methods used to estimate enforced and late payments, providing estimates by type of tax for Tax Years 2006 through 2016. Section 1 introduces the net tax gap concept. Section 2 explains our method for estimating late payments for a given tax year (with supplemental details provided in the Appendix). Section 3 presents the net tax gap estimates by type of tax, and Section 4 comments on the trends in late payments.

1 The payment due date is generally the original due date of the return; extending the filing deadline does not extend the payment deadline.

2 Note that all of these payment amounts include tax only since interest and penalty payments do not reduce the tax gap. Payments are allocated first to satisfy tax assessments, then to penalties and interest.

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The Net Tax Gap for Tax Years 2014-2016

Introduction

Some of the gross tax gap is collected through IRS enforcement efforts, and some is paid late (i.e., after the payment due date) without IRS intervention (e.g., remitted when filing a return just before an extended filing deadline, ³ or when filing an amended return). The net tax gap for a given tax year is the gross tax gap minus these enforced and late payments; it is the amount that will never be paid. Our estimate of the average annual gross tax gap for the Tax Year 2014 to 2016 period is $496 billion (see our summary report). We estimate that $68 billion of this would eventually be paid late, leaving an average annual net tax gap estimate of $428 billion for this period. ⁴

This is not the same as the underpayment gap, which is the amount of tax that is reported on timely filed returns, but is not paid on time. Rather, these enforced and late payments relate to all three components of the tax gap: nonfiling, underreporting, and underpayment.

1. How Much of the Gross Tax Gap Will Eventually Be Collected?

Unlike most of the tax gap, late payments can be observed. However, since enforcement and other late activity often happen many years after a given tax year has ended, we must project into the future to estimate how much will eventually be collected for any recent tax year.

It is therefore helpful to start by tabulating enforced and late payments by fiscal year of payment, as in Table 1, which indicates that most of the late revenue is due to enforcement. Other late payments account for roughly 30 percent of the total each fiscal year. Historically, roughly half of corporation income tax enforcement revenue is paid late (i.e., after the payment due date for the tax year in question). This is primarily because corporations often make (timely) estimated tax payments (or realize other credits) that are eventually applied to enforcement assessments related to a tax year that begins after the payment was made (or the credit was realized). These payments cannot be tracked in the standard tabulations of late payments used for the other types of tax. Instead, the corporation income tax figures are taken entirely from the tabulations of Total Enforcement Revenue Collected (TERC) from the Enforcement Revenue Information System (ERIS), assuming that corporations do not make any late payments that are not already captured by TERC.

3 The payment due date is generally the original due date of the return; extending the filing deadline does not extend the payment deadline.

4 Note that all of these payment amounts include tax only since interest and penalty payments do not reduce the tax gap. Payments are allocated first to satisfy tax assessments, then to penalties and interest.

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The Net Tax Gap for Tax Years 2014-2016

Table 1. Enforced and Late Payments of Tax (in $M) by Type of Tax, Fiscal Years 2014-

2019

lines are comparable.

• The total corporation income tax figures are the tax portion of TERC from ERIS; the late portion is tabulated from the Master File; the timely portion is the difference.

2. Estimating Late Payments for a Given Tax Year

The figures in Table 1 are amounts paid in a given fiscal year, regardless which tax years to which they apply. Since the tax gap is a tax year concept, and since many late payments are made many years after they were due, we need to project from historical trends how much will eventually be paid for a given tax year. Although the method for doing so is generally the same for each type of tax, the trends themselves are unique to each type of tax. This section explains the projection method using individual income tax—the largest source of late payments, by far— as an example.

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The Net Tax Gap for Tax Years 2014-2016

2.1 Data by Fiscal Year and Tax Year

Table 2 shows the distribution of individual income tax (including self-employment tax) late payments across tax years for Fiscal Years 2008 through 2013—the only years so far for which we have complete data. As might be expected, the largest sums occur in the two fiscal years following the end of the tax year (highlighted in bold). The amounts paid in subsequent fiscal years continues to decline each successive year since older assessments are harder to collect and they are eventually deemed uncollectible by the statute of limitations.

Another key observation from Table 2 is that payments in any given fiscal year relate to at least 20 tax years—even for individual income tax. Put another way, we can expect payments for a given tax year to trickle in for at least 20 years. This makes it challenging to project how much will eventually be paid for a recent tax year. This is made even more difficult by the fact that payment records are generally dropped from the Master File after just three years of inactivity, so any payments tabulated now for older fiscal years (before FY 2008) are not complete.

Table 2. Late Payments of Individual Income Tax (in $M), by Tax Year of Liability*

(1995-2019) and Fiscal Year of Payment (2014-2020)

• Includes self-employment tax.

Payments of the other types of tax display a similar distribution across the years; see the Appendix.

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The Net Tax Gap for Tax Years 2014-2016

2.2 Projection Method

Our detailed tabulations of complete late payments began with Fiscal Year 2008 data. Although we have data related to earlier fiscal years, those tabulations are incomplete in that they do not include amounts that had been dropped from the Master File (due to inactivity) before the tabulation was made. So, we don’t have a complete set of data for any tax year.

However, we have accurate data for Fiscal Years 2008 through 2020 for each tax year (as in Table 2). That means that between Tax Years 2007 and around 2014, we have complete data for the critical first several fiscal years of a tax year’s flow of payments. The rest (“tail”) of each tax year’s flow can be estimated from the average shape of that tail across all years. In fact, a composite average can be derived from the FY2008-2020 segments taken from each tax year’s flow, recognizing that these segments are taken from different years in the flows relative to the tax year in question. For example, the FY2008-2020 segment begins just two years after the tax year in the TY2006 flow, while it begins ten years after the tax year in the TY1998 flow. These segments are plotted in Figure 1 for individual income tax, where the X-axis is defined by the number of years a given payment took place after the tax year in question. (So, for example, FY2008 payments for Tax Year 1998 are plotted at TY+10.)

The striking observation from Figure 1 is that after the first few fiscal years of payment flow for any given tax year, the “tail” is very closely the same magnitude—even in dollar terms—for each tax year. That simplifies the task of projecting future payments for a given tax year. Starting in TY 2007 our projection uses actual tabulations for at least the first three fiscal years (more, if available), then the composite average flow over the remaining years up to the 25 ^th year following the tax year.

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The Net Tax Gap for Tax Years 2014-2016

Figure 1. Late Payments of Individual Income Tax ^† by Tax Year, FY 2008 - FY 2020

† Includes self-employment tax.

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The Net Tax Gap for Tax Years 2014-2016

Figure 2 illustrates the cumulative value of the tax year flows of individual income tax late payments across fiscal years for Tax Years 2011 through 2019. We applied this approach to the other types of tax, as well. They all exhibited the same type of “tails,” though most displayed a bit more scatter than did individual income tax. See the Appendix for details.

Figure 2. Projected Eventual Late Payments of Individual Income Tax, TYs 2011-2019

2.3 Corporation Income Tax

The one exception to this approach of relying solely on tabulations of payments recorded on the IRS Master Files has to do with corporation income tax, which had to be estimated from enforcement payments tabulated from ERIS (rather than Master File) data, as explained in Section 1 above. Table 3 displays these amounts by tax year of liability and fiscal year of payment, with the largest amounts highlighted in bold; note that for a given tax year these are scattered much more than with individual income tax. Our projections of total eventual payments for each tax year followed an analysis of the tails that was similar to the other types of tax, but with known payment flow for each tax year over a time segment (FY2006-2013) that was two years longer than for the other types of tax.

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The Net Tax Gap for Tax Years 2014-2016

Table 3. Enforced Payment of Corporation Income Tax (in $M), by Tax Year of Liability

and Fiscal Year of Payment

Source: Enforcement Revenue Information System; tax portion of Total Enforcement Revenue Collected (TERC)

3. Trends in Late Payments by Type of Tax

Our projections of late payments for each type of tax for Tax Years 2014 through 2019 are provided in Table 4. Note that the projected totals for these tax years are of the same order of magnitude as the fiscal year totals given in Table 1.

Table 4. Projected Total Enforced and Other Late Payments ($B), Tax Years 2014-2019*

• The more recent the tax year, the fewer fiscal years of historical data are available, so more years needed to be

projected. ** Includes self-employment tax

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The Net Tax Gap for Tax Years 2014-2016

We present in Table 5 estimates of the percentage of the tax gap that will be collected, broken out by type of tax, for each of the recent tax year periods for which we have published tax gap estimates. ⁵ Note that the employment tax gap is typically the hardest to close; this is partly due to the fact that delinquent small businesses often go bankrupt, making tax collection much less likely. Table 5 suggests that the overall percentage of the gross tax that will eventually be collected is somewhat stable over time, though it may have been increasing slightly in recent years.

Table 5. Percent of the Gross Tax Gap That Will Be Collected

• Includes self-employment tax

5 Excise taxes are excluded from Table 5 because we do not have underreporting or nonfiling gap estimates for them and the underpayment gap is so small.

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The Net Tax Gap for Tax Years 2014-2016

Appendix

Enforced and Other Late Payments

1. Tax Class 1 (Employment Taxes)

Table A1. Payments of Tax (in $M), by Tax Year of Liability and Fiscal Year of Payment

Source: IRS Business Master File

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The Net Tax Gap for Tax Years 2014-2016

Figure A1. Late Payments of Employment Taxes by Tax Year, FY1995 - FY2020*

• Tax Class 1

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The Net Tax Gap for Tax Years 2014-2016

2. Tax Class 2 (Forms 1041 and 1065)

Table A2. Payments of Tax (in $M), by Tax Year of Liability and Fiscal Year of Payment

Source: IRS Business Master File

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The Net Tax Gap for Tax Years 2014-2016

Figure A2. Late Payments of Estate & Trust Income Tax by Tax Year, FY1995 - FY2020*

• Tax Class 2, Forms 1041 and 1065

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The Net Tax Gap for Tax Years 2014-2016

3. Tax Class 4 (Excise Taxes)

Table A3. Payments of Tax (in $M), by Tax Year of Liability and Fiscal Year of Payment

Source: IRS Business Master File

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The Net Tax Gap for Tax Years 2014-2016

Figure A3. Late Payments of Excise Taxes by Tax Year, FY1995 - FY2020

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The Net Tax Gap for Tax Years 2014-2016

4. Tax Class 5 (Estate & Gift Taxes)

Table A4. Payments of Tax (in $M), by Tax Year of Liability and Fiscal Year of Payment

Source: IRS Business Master File

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The Net Tax Gap for Tax Years 2014-2016

Figure A4. Late Payments of Estate & Gift Taxes by Tax Year, FY1995 - FY2020

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The Net Tax Gap for Tax Years 2014-2016

5. Tax Class 7 (Railroad Retirement Tax)

Table A5. Payments of Tax (in $K), by Tax Year of Liability and Fiscal Year of Payment

Source: IRS Business Master File

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The Net Tax Gap for Tax Years 2014-2016

Figure A5. Late Payments of Railroad Retirement Tax by Tax Year, FY1995 - FY2020

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The Net Tax Gap for Tax Years 2014-2016

6. Tax Class 8 (Unemployment Tax)

Table A6. Payments of Tax (in $M), by Tax Year of Liability and Fiscal Year of Payment

Source: IRS Business Master File

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The Net Tax Gap for Tax Years 2014-2016

Figure A6. Late Payments of Unemployment Tax by Tax Year, FY1995 - FY2020

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