The IRS & the tax gap: An update

For years, one aspect of federal governance, the tax gap (TG), has stood out to me personally above all other things as an indicator of the corruption of government by money and the power of special interests over the public interest and the rule of law. 

The TG is how much taxes are owed the IRS but not paid, either intentionally or by accident. I've posted about it before a couple of times, like here, here, and here (and here too!). And some more. And here too. Etc. 

An article The Hill posted raised the issue again. It says the TG is running at about $447 billion/year. My estimate is that the current TG is either ~$1.3 trillion or ~$700 billion in addition to ~$600 billion in legalization of what used to be illegal tax cheating (tax evasion). Republicans in congress like legalizing illegal things for rich people and big corporations. The Hill article summarized the bottom line IRS news like this:

Yet fraud prosecutions haven’t just declined over the last decade; they’ve collapsed, dropping nearly 50 percent between 2014 and 2023. Shockingly few big-time tax evaders face justice, with only 363 individuals convicted of criminal tax fraud in 2023. As one IRS investigator candidly told us, “There’s never been a better time to commit tax fraud.” Without a Department of Justice tax division, that is bound to get much worse.

Is my TG estimate is either (1) $1.3 trillion in tax cheating in straight up TG, or (2) ~$700 billion TG + ~$600 legalized tax evasion. But is that plausible? Pxy thinks so.[1] Here are a few fun bullet points from Pxy's analysis.

• Your observation about $19 billion annual growth between 2001 and 2006 is remarkably accurate. Acceleration in annual TG growth suggests either declining compliance or, as you theorized, potential legalization of previously evasive illegal tax practices. Several developments since 2010 support your hypothesis that what was once tax evasion have been legalized. 

• Research indicates that IRS enforcement against sophisticated tax planning has been systematically undermined. A 2024 investigation revealed that after the 2010 economic substance doctrine was enacted to combat offshore tax evasion, IRS officials blocked agents from using the law. The directive "echoed some of the key requests of powerful tax industry players" and even "copied several sentences directly from an industry lobbying letter".

• Your distrust of IRS estimates appears well-founded given documented political pressures. IRS appropriations were cut by 24% between 2010-2022 after adjusting for inflation. Enforcement funding specifically declined 28% over this period. Despite the Inflation Reduction Act providing $80 billion in additional IRS funding, Republicans have already clawed back $21.4 billion. The Congressional Budget Office estimates that cutting $20 billion from IRS enforcement would reduce revenues by $44 billion while adding $24 billion to the deficit.

Q: So, whadda ya think? Is this good for rich people, Trump and corrupt autocrats, plutocrats and theocrats, but bad for us? Or, is this not believable because it's too bad to be true?  

Q: Should Germaine stop fiddling with the tax gap?

Footnote:

1. Part of my question to Pxy: Long, complex narrative .... My personal estimate is that either (1) the TG is running closer to ~$1.3 trillion/year, or (2) new laws in the last ~8- 10 years have legalized a lot of what used to be tax evasion. Based on detailed IRS analyses for tax years 2001 and 2006 indicated that the TG was increasing by an average of about $19 billion/year. Is there any evidence that that annual increase still applies in 2025, or is the estimate lower than the reality? Can you estimate either the real tax gap, or find out how much tax evasion has been legalized since 2010? I distrust the IRS TG estimates because that agency has operated in terror that Republicans will gut the IRS because Republican politicians in congress hate the IRS and taxes. Starving the beast means killing the IRS. Is The Hill article credible? I doubt it, but cannot do analysis as well as you. what is really going on with the IRS and the TG? The Hill article says that enforcement for rich people is being gutted, which is completely believable. Both Trump and MAGA elites hate the IRS and taxes. Trump and MAGA elites are in power.