The Internal Revenue Service today released the tax gap projections for tax year 2022, a detailed analysis showing the nation’s projected gross tax gap at $696 billion. This reflects the difference between projected ‘true’ tax liability and the amount of tax that is actually paid on time.
The new tax gap projections reflect an increase over the tax year 2014-2016 estimates and the tax year 2017-2019 projections. The 2022 projection is an increase of $200 billion over tax years 2014-2016.
However, the IRS noted the increase for 2022 is similar to the 41 percent increase in the economy since the 2014-2016 time period as measured by the Gross Domestic Product. With the new study also showing the voluntary compliance rate among taxpayers remaining steady at 85%, the IRS noted the tax gap increase ultimately reflects growth in the economy and changes in the sources of income – not a change in taxpayer behavior involving filing or paying their taxes.
In addition, the new tax gap projections reflect the time period before the IRS began increasing tax compliance work following passage of the Inflation Reduction Act (IRA) in August of 2022. Since then, the IRS has stepped up compliance activity in a variety of areas with the additional funding, including the agency collecting an initial $1.3 billion from high-income non-filers following IRA funding.
“This is a critical study about the nation’s tax system, and the results underscore there remains a sizable tax gap between taxes that are legally owed but aren’t actually being paid,” said IRS Commissioner Danny Werfel. “While the bottom line for the new tax gap numbers shows the increase basically reflects growth in the larger economy, the size of the gap also vividly illustrates the ongoing need for adequate funding for the IRS. We need to focus both on compliance efforts to enforce existing laws as well as improving service to help taxpayers with their tax obligations to help address the tax gap. Since passage of the Inflation Reduction Act in 2022, we have taken important steps to begin improving tax compliance. While our recent work will not be fully reflected in the tax gap analysis for several years, we will continue to provide routine, interim updates on how enhanced enforcement on complex areas of tax evasion and delinquency impacts compliance.”
The new projections are published in Tax Gap Projections for Tax Years 2021 and 2022 (IRS Publication 5869).
Gross tax gap
The projected $696 billion gross tax gap is the difference between projected ‘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 – non-filing of taxes, underreporting of taxes and underpayment of taxes.
The primary focus on tax gap estimation is to measure compliance behavior as manifested in tax paid voluntarily and on time. The tax gap estimates and projections provide insight into the historical scale of tax compliance and to the persisting sources of low compliance.
Net tax gap
Late payments and IRS enforcement efforts are projected to generate an additional $90 billion on tax years 2021 and 2022 returns, resulting in a projected net tax gap of $617 billion and $606 billion respectively.
Between tax years 2017-2019 and tax year 2022, the estimated tax liability increased by about 27%, roughly the same increase as the gross and net tax gaps. Much of these increases in true total tax liability and the gross tax gap can be attributed to economic growth.
The IRS notes that the tax gap estimates and projections cannot fully account for all types of noncompliance.
Voluntary compliance rate remains unchanged
The tax year 2021 and 2022 tax gap projections translate to about 85% of taxes paid voluntarily and on time, which is consistent with recent levels. The projections are based largely upon the compliance behavior estimated from the most recent set of completed audits (from tax years 2014-2016). That estimated compliance behavior is projected forward to taxpayers in subsequent tax years to generate the gross tax gap.
After IRS compliance efforts and other late payments are factored in, the projected share of taxes eventually paid is 86.9% for tax year 2022, down slightly from the 87% for tax years 2014-2016.
Tax gap analysis consistently shows that compliance is higher when there is third-party information reporting, and even higher when also subject to withholding.
With the help of Inflation Reduction Act resources, the IRS is taking a variety of steps to help improve voluntary compliance by improving taxpayer services and offering new technology tools to work in concert with additional compliance work. In fiscal year 2023, the latest year for which data is available, the IRS collected more than $4.6 trillion in taxes, penalties, interest and user fees.
The IRS also has an array of other taxpayer service programs aimed at supporting accurate tax filing and helping address the tax gap. These range from working with businesses and partner groups such as IRS’s Volunteer Income Tax Assistance and Tax Counseling for the Elderly to a variety of education and outreach efforts.
The voluntary compliance rate of the U.S. tax system is vitally important for the nation. A one-percentage-point increase in voluntary compliance would bring in about $46 billion in additional tax receipts.
Projecting the tax gap
Given the complexity of the tax system and available data, no single approach can be used for estimating each component of the tax gap. Each approach is subject to measurement or non-sampling error; the component estimates that are based on samples are also subject to sampling error.
The projections do not fully represent noncompliance in some components of the tax system, particularly as it relates to corporate income tax, income from flow-through entities, foreign or illegal activities, digital assets and pandemic credits because data are lacking.
Details on how the IRS projects the Tax Gap can be found in IRS Publication 6031: Tax Gap Projections Methodology.
The IRS continues to actively work on new methods for estimating and projecting the tax gap to better reflect changes in taxpayer behavior as they emerge. More information about the tax gap and estimates for prior tax years can be found at IRS: The tax gap.
172 million recovered from 21,000 wealthy taxpayers who have not filed tax returns since 2017 in first six months of new initiative.
In the first six months of this initiative, nearly 21,000 of these wealthy taxpayers have filed, leading to $172 million in taxes being paid.
The IRS in the fall of 2023 launched a new initiative using Inflation Reduction Act funding to pursue high-income, high-wealth individuals who have failed to pay recognized tax debt, with dozens of senior employees assigned to these cases. This work is concentrated on taxpayers with more than $1 million in income and more than $250,000 in recognized tax debt. The IRS was previously unable to collect from these individuals due to a lack of resources. After successfully collecting $38 million from more than 175 high-income, high-wealth individuals last year, the IRS expanded this effort last fall to around 1,600 additional high-income, high-wealth individuals
The Internal Revenue Service today encouraged taxpayers to consider using the end of the summer to make tax withholding or payment updates to avoid a potential surprise next year at tax time.
While most taxpayers get a refund after filing their taxes, many also find they unexpectedly owe taxes. This can be due to a life or job change for which they did not make the necessary tax adjustment during the year.
Those who should be especially careful are:
• Gig economy workers.
• Those with a “side hustle.”
• Anyone earning income not subject to withholding.
These individuals should check the amount they pay, or the amount of tax they have withheld throughout the year, to bring the tax they pay closer to what is owed. The IRS has a special Tax Withholding Estimator that can help taxpayers align their tax withholding or tax payments with what they owe.
The IRS reminds taxpayers that tax planning done now can save time and frustration later. Here are some important things to keep in mind:
How refunds work
The federal tax system is pay-as-you-go. Taxpayers pay tax as they earn wages or receive income during the year. For many, taxes are withheld from their paycheck by their employer and then given over to the IRS on their behalf. Others, such as gig economy workers, make or should make quarterly estimated tax payments throughout the year to stay current. A refund normally results when too much is withheld or paid throughout the year.
Recent IRS statistics show that two-thirds of taxpayers received a refund so far in 2024. As of mid-May, nearly $270 billion in refunds went to taxpayers with the average refund just under $2,900.
Avoid an unexpected bill
On the other hand, many taxpayers end up with estimated tax penalties because they underpay throughout the year. The penalty amount varies but for some it can be several hundred dollars. Adjusting withholding on paychecks or the amount of estimated tax payments can help prevent penalties. This is especially important for self-employed people, including those in the gig economy, those with more than one job and those with major changes in their life, like a recent marriage or a new child.
With that in mind, the IRS encourages taxpayers to use the IRS Tax Withholding Estimator this summer to help better align their tax withholding or tax payments with what they owe.
Tax Withholding Estimator
This handy tool on IRS.gov helps people figure the amount of federal income tax they should pay during the year. All that’s needed for taxpayers to use it are paystubs for all their jobs or other income information, such as from side jobs, self-employment or investment income, and a copy of their 2023 tax year return.
People can use the Tax Withholding Estimator to:
• Estimate their federal income tax withholding.
• See how a refund, take-home pay or tax due are affected by withholding amounts.
• Choose an estimated withholding amount that works for them and their family.
If a withholding change is needed upon completion, taxpayers should adjust their withholding by submitting a new Form W-4 to their employer or pension provider. They can also adjust quarterly estimated tax payments as appropriate.
IRS also reminds people to use the Tax Withholding Estimator if there’s a major life change such as a:
• New job or other paid work.
• Major income change.
• Marriage.
• Childbirth or adoption.
• New home purchase.
While the Tax Withholding Estimator works for most taxpayers, people with more complex tax situations should instead use the instructions in Publication 505, Tax Withholding and Estimated Tax. This includes taxpayers who owe Alternative Minimum Tax or certain other taxes, and people with long-term capital gains or qualified dividends.
Additional information
• Tax Withholding Estimator FAQs
• Paycheck Checkup
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The Internal Revenue Service is continuing to expand the features within Business tax account (BTA), an online self-service tool for business taxpayers that now allows them to view and make balance-due payments.
Launched last fall, BTA is a key part of the agency’s service improvement initiative funded under the Inflation Reduction Act (IRA). When fully developed, BTA will allow many types of business taxpayers to check their tax history, make payments, view notices, authorize powers of attorney and conduct other business with the IRS.
With the latest expansion, an eligible business taxpayer can now use BTA to pay Federal Tax Deposits (FTDs) and see and make a payment on their full balance due – all in one place. The account is also now accessible in Spanish with more translations planned.
BTA is a key part of the agency’s ongoing work to transform and modernize service at the IRS by offering a seamless and convenient digital experience. It’s also an important part of a wide-ranging initiative to reduce paper-based processes that hamper the IRS and frustrate taxpayers.
Business taxpayers who can activate and use their IRS business tax account include:
Currently, a limited liability company that reports business income on a Schedule C can’t access Business Tax Account. Future access will be available for these businesses, as well as other entities including tax-exempt organizations, government agencies, partnerships, C corporations and S corporations.
Within BTA, business taxpayers can now:
Future capabilities made available through funding from the IRA will enable access by all business and organizational entities and help the business tax account become a robust online self-service tool.
To set up a new business tax account, or for more information visit Business tax account.
An educational assistance program is an employer’s written plan to provide employees with undergraduate or graduate-level educational assistance. These programs allow employers to pay student loan debt and other education expenses tax-free.
Eligible expenses
Educational assistance programs can help pay for:
Loan payments
These programs can be used to pay principal and interest on an employee’s qualified education loans.
The option is available only for payments made after March 27, 2020. Under current law, this option will be available until Dec. 31, 2025.
Payments made directly to the lender and those made to the employee qualify under these programs. By law, tax-free benefits under an educational assistance program are limited to $5,250 per employee per year. Normally, assistance provided above that level is taxable as wages.
For other requirements, see Publication 15-B, Employer’s Tax Guide to Fringe Benefits. Chapter 10 in Publication 970, Tax Benefits for Education, provides details on what qualifies as a student loan.
More information
Frequently asked questions about educational assistance programs
There are two education tax credits designed to help offset education costs: the American Opportunity Tax Credit and the Lifetime Learning Credit.
Eligibility requirements
For both tax credits, to be eligible:
Things taxpayers should know about the education tax credits.
The American Opportunity Tax Credit is:
The Lifetime Learning Credit is:
Claiming the credits
To claim either credit, taxpayers must complete Form 8863, Education Credits, and file it with their federal tax return.
More information
Compare Education Credits
Tax Benefits for Education: Information Center
Following inaccurate tax advice from social media influencers can have bad consequences. Taxpayers can protect themselves from misinformation and scams by following the IRS verified social media accounts and e-news services.
IRS social media platforms
Visit IRS.gov to get direct links to IRS verified social media accounts. IRS has accounts on:
The IRS never contacts taxpayers on social media to ask for their personal or financial information. Taxpayers should be aware that scammers may pose as the IRS to steal a taxpayer’s identity or defraud them.
Sign up for automatic email updates
The IRS e-News subscription service sends tax information by email for many different audiences, including:
The Internal Revenue Service today issued Notice 2024-55, which provides guidance on exceptions to the additional tax when taking early permissible retirement plan distributions for emergency personal expenses and for victims of domestic abuse.
This was added by the SECURE 2.0 Act of 2022, and the provisions became effective on January 1, 2024.
Emergency personal expense distributions
The notice provides that a taxpayer is permitted to receive a distribution from an applicable eligible retirement plan to meet unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. The notice:
Distributions to victims of domestic abuse
The notice also provides that a taxpayer is permitted to receive a distribution from an applicable eligible retirement plan if made during the one-year period beginning on the date on which the individual is a victim of domestic abuse by a spouse or domestic partner. The notice:
The notice also provides guidance to applicable eligible retirement plans on the plan requirements relating to emergency personal expense distributions and domestic abuse victim distributions, including that it is optional for a plan to permit these types of distributions.
In addition, the notice provides that the Department of the Treasury and the IRS anticipate issuing regulations on the 10% additional tax (including the exceptions to the 10% additional tax) and request comments relating to the notice. Comments are specifically requested on repayments of certain distributions permitted under section 72(t)(2).
Taxpayers should know that these distributions are includible in gross income but are not subject to the 10% additional tax. Individuals report early distributions that are not subject to the 10% additional tax on line 2 of Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts. In tax year 2021, the latest year for which the IRS has statistics, about 608,000 individuals reported that early distributions from qualified plans (including IRAs) were not subject to the 10% additional tax.
Mediation – also known as Alternative Dispute Resolution – can help taxpayers resolve tax issues early and efficiently.
The process provides taxpayers a faster, more collaborative and cost-effective approach to case resolution. The traditional appeal process is still available for taxpayers who choose it.
Mediation might be right for a taxpayer if:
• The taxpayer wants to resolve the dispute at the earliest possible stage of their audit.
• The taxpayer doesn’t have many disputed issues.
• The taxpayer gave the IRS information to support their position.
• The IRS is still considering the taxpayer’s case and issues remain unresolved.
Mediation is:
• Voluntary for both parties.
• Nonbinding, meaning each party retains 100% control over whether to settle the case. No one can force either party to do something they don’t agree to do.
• Effective when both parties have a desire to resolve the disputed issue.
• Appropriate when all issues are fully resolved except the issue for which mediation is requested.
• A chance to avoid a lengthy appeal process or costly litigation.
Mediation is not:
• Required by either party.
• A replacement for the audit or collection process.
• A process in which the parties in the dispute offer arguments directly to the mediator hoping to “win.”
• Effective if either party believes the only way the dispute will get resolved is if the other party concedes or gives up on its position.
• A time to present new information or raise new issues.
• An opportunity to try and get a more favorable outcome or delay the examination or collection process.
Mediation works best if taxpayers prepare for success. Find out what to expect from the Independent Office of Appeals.
More information
• Appeals Mediation – Alternative Dispute Resolution (ADR)
• Publication 4167, Appeals – Introduction to Alternative Dispute Resolution
• IRS Independent Office of Appeals forms Alternative Dispute Resolution Program Management Office
he IRS has several options to help businesses who have discovered they have questionable ERC claims.