September 01, 1997
The Individual Income Tax Gap
& Accounts Receivable
The Tax Gap
Several years ago the Internal Revenue Service developed the concept of the tax gap as
a way to measure voluntary federal income tax compliance.
The gross tax gap is the difference between taxes owed (the "true" tax
liability) and taxes paid voluntarily and timely for any given tax year.
The net tax gap is the gross tax gap minus taxes collected through various IRS
enforcement programs for the same tax year. Both gross and net individual income tax gaps
consist of three main components: nonfiling, underreporting and underpayment.
The nonfiling gap is the amount of tax liability owed by taxpayers who do not
voluntarily and timely file returns.
The underreporting gap is the amount of tax liability not voluntarily reported by
taxpayers who do file returns.
The underpayment tax gap is the amount of tax liability individuals report on returns
but do not pay voluntarily and timely. IRSs latest estimates of the gross individual
income tax gap for tax year 1992 (the most recent year for which figures are available)
range from $93 to $95 billion. The estimated total "true" individual income tax
liability is between $550 and $552 billion for tax year 1992.
This means the overall individual noncompliance rate is about 17 percent. Conversely,
the voluntary compliance rate, as measured by tax gap research, is about 83 percent. That
is, 83 percent of taxes owed are paid voluntarily by taxpayers. While the rate of tax
noncompliance has remained fairly stable over the last 20 years, the dollar value of the
noncompliance rate has risen sharply.
As these tax gap estimates indicate, the vast majority of taxpayers pay the taxes they
owe voluntarily and on time. Out of fairness to the millions or Americans who meet their
tax obligations, the IRS has a compliance program to collect overdue taxes from those who
However, we do not treat all noncompliant taxpayers the same. We know that in some
cases taxpayers are able to comply with the tax law but for some reason are unwilling to
do so. On the other hand, we also realize that some taxpayers who owe overdue taxes would
like to comply with the law but are unable to pay the taxes they owe because of serious
hardship. (Taxpayers in this kind of situation have accounts that we consider
"Currently Not Collectible"; see below.)
Like any business, the IRS maintains an accounts receivable inventory, money that is
owed the business -- in this case the federal government. It is important to understand
what makes up the total amount of the IRS accounts receivable inventory. When a taxpayer
either does not file a return or files an inaccurate return, we make an assessment -- that
is, send a bill -- based on the tax laws. In sending these bills, we do not consider
ultimate collection potential. If we did not make such assessments, it would seriously
undermine our voluntary tax system. It would also be unfair to those taxpayers who do file
timely and accurately. We record these unpaid assessments -- plus ever-increasing interest
and penalties related to the unpaid taxes -- as accounts receivable. We keep them on our
books for as long as they are legally collectible -- 10 years, as prescribed by law. Thus,
unlike private businesses, the IRSs accounts receivable cannot be simply written off
At the end of FY 1996, IRSs gross accounts receivable inventory was $216.3
billion, of which 30 percent, or about $65 billion, reflected accrued interest and
Components of the Accounts Receivable Inventory
The IRSs gross accounts receivable inventory for compliance purposes is divided
into two components: Currently Not Collectible and Active Accounts Receivable.
Currently Not Collectible Accounts are those that IRS Collection employees, after
carefully reviewing specific facts and circumstances, determine that taxpayers cannot
currently pay. We can make this determination for a number or reasons, including personal
hardship. At the end of FY 1996, $105.8 billion -- nearly half of the gross receivable
total -- was classified as Currently Not Collectible. Over 70 percent of that amount (or
$75 billion) is not collectible either because the tax is owed by a defunct corporation;
the taxpayer is in bankruptcy; we are unable to locate the taxpayer; or the taxpayer is
under such a hardship that he or she cannot pay the amount owed.
Active Accounts Receivable are accounts that are potentially collectible and that
continue to be pursued through normal collection activities: first, a series of notices
and telephone contacts; then installment agreements and offers in compromise; and
ultimately as a last resort, liens, levies and seizures. At the end of FY 1996, $110.5
billion of gross accounts receivable, a little over 50 percent, made up this component .
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