In 2005, the IRS released preliminary results from a major research project that assessed U.S. citizens’ (including business entities) compliance with tax laws. The findings revealed that the vast majority of Americans paid taxes in a timely and accurate manner. However, there still remained a substantial tax gap, which is the difference between what taxpayers should pay and what was actually paid on a timely basis. According to the report, this gap exceeds $300 billion per year. IRS enforcement activities, along with late payments, recoup approximately $55 billion per year.
Other significant findings:
- Underreporting of income constituted the largest component of the tax gap, and accounted for approximately 80 percent of total noncompliance. Non-filing and underpayment of taxes each contributed about ten percent to the total tax gap.
- Individual income tax is the single largest source of the annual tax gap. More than 80 percent of underreporting of income comes from understated income, not overstated deductions. Most understated income comes from business activities and not wages or investment income.
- Compliance rates are highes where there is third-party reporting or withholding. Preliminary findings estimate less than 1.5 percent of wages and salaries are misreported.