June 8 2021

Joint Committee on Taxation Explains Tax Gap

Source: IBFD Tax Research Platform News

The Joint Committee on Taxation (JCT) of the US Congress has released a report with a description of US federal tax law, and an analysis of selected issues, related to the tax gap.

The JCT report is entitled "Joint Committee on Taxation, Tax Gap: Overview of Federal Tax Provisions and Analysis of Selected Issues." The report, designated JCX-30-21, is dated 7 June 2021.

A standard definition of the tax gap is the shortfall between the amount of tax voluntarily and timely paid by taxpayers and the actual tax liability of taxpayers. It measures:

  • taxpayers' failure to accurately report their full tax liabilities on tax returns (i.e. underreporting);
  • taxpayers' failure to pay taxes due from filed returns (i.e. underpayment); and
  • taxpayers' failure to file a required tax return altogether or on time (i.e. non-filing).

The tax gap includes shortfalls in individual income taxes, corporate income taxes, employment taxes, estate taxes, and excise taxes.

According to the JCT report, the most recent study shows that the estimated average annual tax gap for tax years 2011-2013 was USD 441 billion, and the annual net tax gap (i.e. the gross tax gap adjusted for late payments and collections due to enforcement activities) was USD 381 billion.

With total average tax liabilities of USD 2.7 trillion per year between 2011 and 2013, the voluntary compliance rate was 83.6% and the net compliance rate was 85.8%.

In 2011-2013, the largest source of the tax gap was the individual income tax, followed by employment taxes, and the corporate income tax. Underreporting was the largest component of the tax gap. Only 20% of the gross tax gap was attributable to non-filing (including late filing) and underpayment.

The JTC report was prepared in connection with a public hearing titled "Minding the Tax Gap: Improving Tax Administration for the 21st Century," which the Subcommittee on Select Revenue Measures and the Subcommittee on Oversight of the House Committee on Ways and Means will jointly hold on 10 June 2021.

Note: The JCT is a non-partisan committee of the US Congress that assists members of the majority and minority parties in both chambers on tax legislation.