IRS UPDATES TAX GAP PROJECTIONS FOR 2020, 2021:

The Internal Revenue Service has released new tax gap projections for tax years 2020 and 2021 showing the projected gross tax gap increased to $688 billion in tax year 2021, a significant jump from previous estimates.

The new estimate reflects a rise of more than $192 billion from the prior estimates for tax years 2014-2016 and a rise of $138 billion from the revised projections for tax years 2017-2019. This marks the first year tax gap projections have been provided for single tax years and also marks the beginning of tax gap updates on an annual basis.

"This increase in the tax gap underscores the importance of increased IRS compliance efforts on key areas," said IRS Commissioner Danny Werfel. "With the help of Inflation Reduction Act funding, we are adding focus and resources to areas of compliance concern, including high-income and high-wealth individuals, partnerships and corporations. "These steps are urgent in many ways, including adding more fairness to the tax system, protecting those who pay their taxes and working to combat the tax gap."

The $688 billion gross tax gap is the difference between estimated 'true' tax liability for a given period and the amount of tax that is paid on time. The gross tax gap covers three key areas – nonfiling of taxes, underreporting of taxes and underpayment of taxes.

The gross tax gap comprises these components:

• Nonfiling, which means tax not paid on time by those who do not file on time:
  • $77 billion in tax year 2021, up from $41 billion in tax years 2017-2019.
• Underreporting, which reflects tax understated on timely filed returns.
  • $542 billion in tax year 2021, up from $445 billion in tax years 2017-2019.
• Underpayment, or tax that was reported on time, but not paid on time).
  •  $68 billion in tax year 2021, up from $64 billion in tax years 2017-2019.

The full report is available here.