IRS ‘tax gap’ widens to $688 billion in 2021: report

The gap between taxes owed and paid to the government is wider than originally estimated, according to a new report released Thursday by the Internal Revenue Service.

The projected gross “tax gap,” the difference between the total taxes owed to the IRS and how much is collected on time, jumped to $688 billion for tax year 2021, the agency projects. That’s about $138 billion higher than revised projections for the three-year period ending in 2019.

Late payments and IRS enforcement efforts are expected to bring in an additional $63 billion, which would narrow the projected net tax gap to $625 billion for 2021.

Previously measured every three years, this is the first time the tax gap projection has been provided for a single tax year. The agency says it will provide tax gap estimates on an annual basis moving forward.

The Inflation Reduction Act (IRA), passed by Democrats last August, included an additional $80 billion in funding for the IRS to beef up its enforcement efforts. 

Republicans have opposed the new IRS funding, and they made a bill that would reverse most of that funding their first legislative priority when the party retook the House in January. The bill is a nonstarter in the Democrat-controlled Senate.

Democrats agreed to scrap $20 billion of the additional IRS funding in a deal struck with Republicans this summer to raise the debt ceiling. But they have balked on following through after GOP lawmakers’ spending cuts for other federal agencies that were far steeper than what Democrats agreed to in debt ceiling talks.

The IRS says it plans to use additional IRA resources to increase the voluntary compliance rate, which the agency projects at 84.9 percent, with a focus on wealthy taxpayers. 

“With the help of Inflation Reduction Act funding, we are adding focus and resources to areas of compliance concern, including high-income and high-wealth individuals, partnerships and corporations,” said IRS Commissioner Danny Werfel.

Even a 1 percent rate increase would bring in an additional $46 billion, the agency said Thursday. In 2022, the most recent tax year, the IRS collected more than $4.9 trillion in taxes, penalties, interest and fees.

The IRS established a new division last month that would go after uncollected taxes sheltered in “pass-through entities” including limited liability partnership, S corporations and sole proprietorships.

“These steps are urgent in many ways, including adding more fairness to the tax system, protecting those who pay their taxes and working to combat the tax gap,” Werfel said.