Points to Consider in the US Tax Gap


One of the most efficient ways for tax policymakers to increase revenue would be to reduce the tax gap. The difference between taxes owed by an individual and the taxes collected is known as the tax gap. Though sometimes it is considered a measure of fraud or tax evasion, the tap gap may arise due to intentional and unintentional actions. Tax compliance must be levied to increase income or profits for social and physical infrastructure. Minimizing the tax gap is a great way to raise revenue, but it is not possible without trade-offs, and imperative to go about it correctly.

How huge Is the Tax Gap?

The official IRS recently estimated a gross tax gap of around USD 630 billion over USD 3.6 trillion in taxes owed but only around USD 3 trillion willingly paid. After accounting for additional revenue generated by Internal Revenue Service enforcement activities and late payments, the subsequent tax gap is estimated to be around USD 554 billion, or about 2.6 percent of GDP. The true tax gap is estimated to be approximately USD 1 trillion after adding in the cryptocurrency earnings and under-measured offshore tax evasion.

Joe Biden’s Tax Administration Proposal

President Joe Biden’s plan to improve the tax administration is based on four vital points. Those are to regulate tax preparers, increase the budget of IRS – especially in the enforcement sector, increase the reporting essentials for financial institutions, and invest in advanced IRS information technology. The president’s administration estimates around USD 700 billion in revenue in a decade. But it is still being analyzed as to how much income would be generated by enhancing tax enforcement.

Costs for compliance are the main downside that can be measured

One of the probable drawbacks of implying tax enforcement is higher compliance expenditure for honest taxpayers. A clear example to earn more revenue amongst higher compliance costs and stronger enforcement is by increasing audits. Increasing audits would help to catch hold of tax evaders and eventually raise revenue. At the same time by increasing, the audit process will be a burden to the law-abiding taxpayers.  Some evidence also shows that a hostile tax collection decreases the trust in the organization, thus leading to minimal voluntary compliance in the future. Lawmakers should assess the typical revenues against the greater compliance costs and additional expenditures before investing in further enforcement measures.

Simplification Can Reduce Compliance and Noncompliance Costs

Changing the administration of the IRS is not the only way to reduce the tax gap. Simplifying the code by making an easy filing process may reduce non-payment of taxes. The complexity of refundable tax credits is one of the major reasons for errors in tax filings.  Rather, reconstituting or composing them in simple social spending programs will aid in reducing these errors and will be quick and easy for the IRS to concentrate on revenue collection. Simultaneously, generating a code with lower tax rates and fewer individual deductions would save taxpayers time. These will eventually reduce the returns to evade taxation.


Like other strategies to increase tax income, narrowing the tax gap isn’t a free lunch either. It’s a fact that there indeed is a sizable tax gap and the new technologies add up to more enforcement challenges. Efforts to reduce the gap should be based on data-derived expectations about the actual revenue collection by such efforts. A comprehensive plan and a keen understanding of the IRS’s structural failures will help to address them before giving enforcement responsibilities. The IRS’s capacity, as well as its funding, has decreased in recent years. By simply bringing the enforcement levels back to where they were in the last decade and upgrading the technology will aid in increasing revenue.

The tax gap that occurs unintentionally can be catered to by sourcing the right tax consultants. The current demand for tax consultants has therefore been enormous and will grow in the future. Aspire to be one of the important resources for the US economy, learn taxation and accounting from one of the leading accounting firms, the Legacy Academy.

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