IRS Says Tax Compliance Rising, but Hundreds of Billions Still Go Uncollected

The estimates still point to significant opportunities for the IRS to collect more unpaid taxes, using the $80 billion that Congress just authorized for the agency’s expansion over the next decade. For 2017 through 2019, the annual net tax gap—the difference between taxes owed and collected—was $470 billion. 

That suggests a decadelong tax gap exceeding $5 trillion, including missing revenue from those who fail to file returns and those who admit owing but don’t pay. Collecting all of that is virtually impossible, requiring a much more intrusive IRS than Americans would accept. The $80 billion in additional funding would yield $180 billion in revenue, according to the Congressional Budget Office; administration officials say they expect to collect far more. 

Separately Friday, Treasury Secretary

Janet Yellen

tapped Deputy Commissioner Douglas O’Donnell to run the agency on an interim basis after IRS Commissioner

Charles Rettig

departs; his term ends Nov. 12.

The latest IRS report attributes the improved tax compliance in part to the economic recovery occurring in those years.

“Keeping the voluntary compliance rate as high as possible ensures that taxpayers believe our system is fair,” Mr. Rettig said. “The IRS will continue to direct our resources to help educate taxpayers about the tax requirements under the law while also focusing on pursuing those who avoid their legal responsibilities.”

Measuring tax dodging is difficult, because it requires the IRS to see what it can’t normally see. For this research, the agency uses special intensive audits to look for noncompliance and then extrapolate. The IRS said its estimates don’t fully include several potential sources of tax dodging, including corporate maneuvers, cryptocurrency, offshore entities and illegal activities. 

“Importantly, IRS acknowledges that it underestimates tax avoidance by the wealthiest Americans and corporations,” said Senate Finance Committee Chairman

Ron Wyden

(D., Ore.) “There’s clearly far more avoidance at the top that IRS needs to pursue.”

As in the past, the IRS found more noncompliance in parts of the tax system where it doesn’t have withholding or independent information from third parties. Wage earners, for example, are very unlikely to underreport their income because they know the IRS is getting Form W-2 directly from employers; the IRS estimates such misreporting at just 1%. Many business owners don’t have those independent checks, and about half of such income is misreported, according to the IRS. 

As the IRS plans for its $80 billion expansion, Mr. O’Donnell, an agency veteran, will be in charge.

The first phase is under way; the IRS said this week that it had hired 4,000 of the 5,000 customer-service representatives it is seeking to improve telephone wait times in the upcoming filing season. 

Mr. O’Donnell started at the IRS in 1986 and recently oversaw the large business and international division. He became deputy commissioner for services and enforcement last year. Mr. Rettig on Friday called him the “ideal person to lead the agency during this period.”

Mr. O’Donnell may serve as interim commissioner for a while. President Biden hasn’t yet nominated a replacement for Mr. Rettig, who was chosen in 2018 by then-President Trump. 

A nominee—who would get a term ending in November 2027—requires Senate confirmation. That process could be arduous if Republicans win control of the Senate following the midterm elections and Democrats don’t confirm a nominee before the new Congress starts in January. GOP lawmakers opposed the IRS expansion and have been pressing administration officials for details on their plans and assurances about audit rates of business owners and middle-income households. 

Write to Richard Rubin at [email protected]