The U.S. is Said to Have a $1 Trillion Tax Gap: What Does This Mean?

You may recall some big news from Washington D.C. this past week, when the U.S. Senate passed a $1 trillion bipartisan infrastructure bill. And while the bill still has to go back to the House of Representatives before it can be signed into law, it’s a huge generational investment in infrastructure – and a deal that has eluded multiple past presidents.

But if the bill does make its way to President Joe Biden’s desk awaiting his signature to become law, there’s a big question about how this bill will specifically be funded. One of the avenues the White House has pitched is closing the tax gap. What exactly does this mean?

Let’s take a closer look at the tax gap and how it could be a major source of funding for the big infrastructure deal that is inching closer to becoming law.

The Tax Gap Explained

So just what is the tax gap? To put it in the most basic of terms, it’s the difference between the amount of tax revenue that the IRS is actually owed every year and the amount that it actually receives.

According to estimates from the IRS, more than 83 percent of taxes are paid on time and about 86 percent of all taxes are paid later after reminders or enforcement from the IRS. But it’s estimated that this tax gap still currently sits at about $1 trillion. And analysts believe that the gap can increase up to $7 trillion if things continue the way that they’re going over the next 10 years.

How Can the IRS ‘Close the Gap’

First of all, we should note that the White House is proposing spending about $80 billion to help the IRS close this gap in the fiscal year 2022 budget. And if its plan works, it believes it can recoup about $700 billion worth of additional tax revenue over the next decade, which is significant.

But how will it do it? It’s a multi-faceted approach.

For starters, it will have to hire more IRS workers. It’s estimated that the IRS lost some 33,000 staff members between 2010 and 2020, many of whom were responsible for auditing returns and helping with the collection of late or unpaid taxes. As you may have expected, the number of tax audits that the IRS has conducted over the last decade has subsequently decreased by more than 70 percent as a result. For reference, the IRS conducted nearly 41,000 audits in 2012 and only 11,300 in 2020. Throw in a pandemic backlog and some extra help can go a long way toward closing the gap.

Secondly, the IRS has to do a better job of taxing cryptocurrency, which continues to become more and more popular. The IRS has only just recently begun to focus on taxing crypto.

It only seems natural to want to recoup dollars that you’re already owed, and if the plan works it can go a long way toward financing government programs.