Inspector General Questions Accuracy of IRS’s Tax Gap Estimate

The Internal Revenue Service’s estimate of the so-called “Tax Gap,” the difference between taxes owed and taxes paid voluntarily and on time, needs to be more accurate, reliable, comprehensive and timely, according to a new government report released to the public Monday by the Treasury Inspector General for Tax Administration.

The Tax Gap estimate is a widely used measure in tax policy and administration, TIGTA pointed out. Effective tax administration depends on comprehensive, reliable, accurate and timely information to identify noncompliance and develop strategies to improve voluntary compliance. The IRS’s most recent Tax Gap estimate was $450 billion for tax year 2006.

TIGTA found that the IRS’s individual Tax Gap estimate could be more comprehensive if it also included estimates for the informal economy and offshore tax evasion. These areas present significant challenges to tax administration, and the absence of an estimate could hinder or delay possible solutions, TIGTA acknowledged. In addition, the estimates for the underreporting of corporate taxes are based on operational examinations and may not be representative of all corporate taxpayers, TIGTA noted.

“Measuring the Tax Gap is both complex and challenging,” said TIGTA Inspector General J. Russell George in a statement. “However, I am concerned about the overall accuracy of the estimate.”

TIGTA recommended that the IRS study the feasibility of developing separate estimates for the informal economy and offshore tax evasion. In addition, TIGTA recommended that the IRS consider changing the approach to measuring the corporate Tax Gap estimates.

The IRS substantially agreed with TIGTA’s recommendations to study the feasibility of developing separate estimates for the informal economy and offshore tax evasion. The IRS also agreed to study the merits of changing the approaches to estimating corporate tax underreporting.

“The IRS agrees that some steps may be taken that would improve the quality of Tax Gap estimates and provide additional insights to policymakers,” wrote IRS director of research, analysis and statistics Rosemary D. Marcuss in response to the report.