Tax gap rises as IRS finds amount of unpaid taxes is increasing

The amount of taxes owed but not paid to the government is increasing, an IRS report released Friday has found.

The shortfall, known as the “tax gap,” is measured every three years. The latest numbers show that it went up by $58 billion to $496 billion for the three-year period ending in 2016, from $438 billion between 2011 and 2013.

The total amount of annual taxes owed to the government also increased over that period to $3.3 trillion from $2.68 trillion.

As a result, even though more money was collected and the rate of taxpayer compliance also increased, the tax gap also rose.

Democrats who recently passed an $80 billion funding increase for the IRS in order to collect more taxes said the increased gap justifies their legislation.

“With at least half a trillion in unpaid taxes annually, the new IRS Tax Gap estimates confirm the urgent need for investments in the IRS to ensure taxes owed are taxes paid,” Senate Finance Committee Chair Ron Wyden (D-Ore.) said in a statement.

Tax-writing Ways and Means Committee member Rep. Bill Pascrell (D-N.J.) said the IRS should be going after wealthy tax cheats.

“The estimated net tax gap growing from [a net] $380 billion to [a net] $428 billion is powerful evidence of why the IRS must be properly funded to finally begin cracking down on wealthy tax scofflaws,” he said in a statement.

“The passage of $80 billion in IRS funding over the next decade by congressional Democrats will allow the agency to answer the phones and collect what is owed by the wealthiest tax cheats to our great country.”

Wyden said that IRS measurements of unpaid taxes are lacking for taxpayers at the top of the income ladder, and that the agency knows it.

“Importantly, IRS acknowledges that it underestimates tax avoidance by the wealthiest Americans and corporations. The IRS made clear that the report does not adequately capture sophisticated avoidance schemes favored by billionaires, including partnerships, other pass-through entities, and secret offshore accounts,” Wyden said. 

“Here’s a key point: Noncompliance in these areas is extrapolated from audits, and audits in these areas are at historic lows. There’s clearly far more avoidance at the top that IRS needs to pursue,” he added.

Republicans have raged against the new funding for increased audits and tax enforcement by the IRS, which totals more than $45 billion in the Inflation Reduction Act.

“Contrary to claims the agency made while advocating for $80 billion in additional funding to conduct more audits on all Americans, this latest report finds an increase in voluntary compliance and a much smaller ‘tax gap’ – the difference between taxes owed and taxes collected than the $1 trillion Commissioner Rettig suggested,” House Ways and Means Republican leader Kevin Brady (R-Texas) said in a statement to The Hill.

“However, we need to ensure that Congress receives an accurate and reliable estimate, which is why Senator Crapo and I have introduced the Tax Gap Reform and IRS Enforcement Act. This is a commonsense approach to getting a better picture of how to improve our tax collection efforts and one that policymakers can have confidence in,” he said

— Updated at 7:06 p.m.