# GrossTax Gap EstimatesandProjections > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3Ae17a2404f0a4651c ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text - " Income Tax Compliance Research I GrossTax Gap EstimatesandProjections for 1973-1992 ~ Departmentof the Treasury Internal Revenue Service ResearchDivision Publication 7285 (3-88) I l c, ~ ~fet1~rtment In com e Tax C . Treasury Internal Om p llanCe Revenue Research Service Gross Tax Gap Estimates and Projections for 1973-1992 Publication7285 March1988 ~ i Lawrence B. Gibbs Commissioner John L. Wedick, Jr. Deputy Commissioner (PlanningandResources) John D. Johnson AssistantCommissioner (Planning,FinanceandResearch) Frank M. Malanga Director, ResearchDivision This reportcontainsthe InternalRevenueService'snew estimatesof the grossincometax gap. Earlier estimateswere revisedto reflect recenttax law changes,recentcompliance data,andimprovementsin tax gapestimationmethods. For additionaldetailon the methodsusedto derivethe estimates, write to: Chief, ComplianceAnalysisGroup, ResearchDivision (PFR:R),InternalRevenueService, 1111ConstitutionAvenue,N.W., Washington,DC 20224. Alternatively,for the additionalinformation,call: (202) 376-0720. Irene W. Sherk AssistantDirector, ResearchDivision Dennis R. Cox Chief, ComplianceAnalysisGroup Berdj Kenadjian Chief Economist ,1 I (Compliance Estimates) II ! Suggested Citation InternalRevenueService IncomeTax ComplianceResearch: GrossTax GapEstimatesandProjectionsfor 1973-1992 Publication7285(March 1988) Washington,DC 20224 I L ~-'-~- r:-~- Tax Gap Estimatesand Projectionsfor 1973-1992 ! Table of Contents I I I Page Table of Contents ii List of Tables and Charts iii Introduction iv Chapters: I. The Estimates """"""""""""""""""""""""""" 1 A. Definitions 1 B. Noncompliance in 1987 1 1. Individual GrossTax Gap for 1987 .. 2 2. Corporation Gross Tax Gap for 1987 4 C. Voluntary Reporting Percentages 4 1. Individual VRPs for 1987 4 2. Corporation VRPs for 1987 """"""""""""""""""'" 6 6 D. Trends ll. Comparisons With Prior IRS Estimates 9 A. Shift of Tax Liabilities from Individualsto Corporations... . . . . . . . 9 B. New Data 9 C. ImprovedMethods 11 D. RemittanceGap , 11 1lI. Methodology , A. Filers of Individual Returns B. Individual Nonfilers of Returns C. Corporations 1. Small Corporations 2. Large Corporations 3. "Other" Tax Gap ii ~ 13 13 15 15 15 16 16 , Tax Gap Estimates and Projections for 1973 -1992 List of Tablesand Charts Page Tables: 1-1. Distribution of the GrossIncomeTax Gapby Source, Tax Year 1987 3 1-2. ReportedandUnderreportedIncomes,OverstatedItemsand Voluntary ReportingPercentages (VRPs)for Individual Tax Return Filers,Tax Year 1987 5 1-3. GrossTax GapsandVoluntary ComplianceRates,Selected Tax Years, 1973-1992 7 11-1. DifferencesBetweenOld andNew GrossTax GapEstimates for Tax Years1981and 1987by Reasonfor Change 10 Charts: 1. 2. RevisedEstimatesof the GrossTax Gap,Tax Year 1987 2 Estimatesof the GrossTax Gapby Major Component,Selected Tax Years,1973-1992 6 . iii L. , - (' ":c '" .-- Tax Gap Estimatesand Projections/or 1973-1992 Introduction . The mission of the Internal Revenue Service is to collect the proper amount of tax revenue at the least cost to the public, and in a manner that warrants the highest degree of public confidence in our integrity, efficiency and fairness. To achieve this purpose, IRS must determine the extent of noncompliance with the tax law and regulations. The tax gap is a comprehensive measure of noncompliance which conveys significant information on the challenges faced in collecting taxes that are not voluntarily paid. This report presents IRS's revised estimates of the gross tax gap, which is the amount of income tax owed but not voluntarily paid. The "net tax gap" is the gross tax gap less taxes paid as a result of IRS enforcement activity.1 In this report the words "gap" or "tax gap" always refer to the gross tax gap. The tax gap consists of unpaid individual and business income taxes on legally earned income. The gap exists becausesome individuals and businessesunderstateincome, overstate deductions, credits, and exemptions, and make math errors on the tax returns they file. It exists also because some do not file the tax returns they are required to file, and because some do not voluntarily pay taxes they report. (This report, however, does not contain estimates for taxes reported but not paid.) The tax gap estimates presented in this report do not include gaps resulting from failure to report employment or excise taxes, or any tax other than the Federal income tax. IRS has revised the tax gap estimatesfor 1987 and forward in order to reflect effects of recent tax legislation on individual and corporation income tax liabilities, the availability of more recent data, and improvements in estimating methods. The estimates are projected forward to 1992. Chapter I presents the tax gap estimates in detail for 1987 and analyzes trends and projections through 1992. Chapter n compares the new with the old estimates and discusses the reasons why the new estimates are lower than those published in 1983. (The previous IRS tax gap estimates appeared in Income Tax Compliance Research: Estimates for 1973-1981, published in July 1983.) Chapter ill describes the methods used in making the estimates. 1 IRS annually collects over $20 billion of income tax through enforcement programs. Estimates of the net tax gap are currently being developed for publication in a later report. The report should be available in the summer of 1988. iv ~ ( I : : Tax Gap Estimatesand Projections/or 1973-1992 Page 1 Chapter I The Estimates IRS estimates the gross income tax gap for tax year (TY) 1987 to be $84.9 billion. This consists of a $63.5 billion gap for individuals and a $21.4 billion corporate gap. This chapter explains what these gap estimates measure,discussesindividual and corporate noncompliance in 1987, and setsthe 1987 tax gap in the context of preceding years and projections through 1992. A. Definitions The income tax gap is the amount of income tax owed for a given year, but not voluntarily paid. The word "voluntarily" means without actual enforcement action, such as examination, collection, or criminal investigation. These estimates do not correspond directly to any figures in the budget of the Federal Government. IRS, through enforcement programs, does assessand collect part of what taxpayers owe but do not voluntarily pay and, thus, closes part of the tax gap. The tax gap estimates in this report do not net out this enforcement revenue, however; nor do they include penalties and interest, which Federal budget receipts include. Although the estimatesprepared for this report are called gross tax gap measures,they are net of tax which is voluntarily overreported. The unreported income estimates should not be equated with income earned in the so-called "underground economy." Press reports and scholarly works have defined the underground economy in various ways. In particular, it is not clear which types of business activities should be included. Such ambiguities make this "economy" more a figure of speech than an operational concept that can be measured. Further, this term usually encompassesboth illegal and legal transactions. Although income from illegal transactionsis taxable, it is extremely difficult to measure and to tax, and is therefore not included in the estimates prepared for this report. IRS estimates, besides accounting for unreported income earned in the regular economy, also account for noncompliance in the legal portion of the underground economy, such as unreported informal supplier income and unreported tip income. (Informal suppliers include roadside or sidewalk vendors, moonlighting craftsmen or mechanics, unlicensed providers of child or elderly care services, and similar operators with informal business styles.) B. Noncompliance in 1987 The estimatesof noncompliance in 1987 are essentially projections from earlier data. Tax year 1982 is the latest year for which we have compliance data for individual taxpayers. We based the 1987 tax gap figures on the assumption that voluntary reporting percentages (VRPs-amounts reported expressed as percentages of amounts which should have been reported) have remained at 1982 levels for each income, deduction, and credit item. (Estimated effects of the compliance provisions of the 1982, 1983, 1984 and 1986 tax acts were superimposed on this baseline.) Notwithstanding the assumption of constant VRPs, recent tax legislation will reduce the individual income tax gap by reducing the number of tax items that may be overreported and by lowering marginal tax rates. .,- Tax-Gap Estimates andProjectionsfor 1973-1992 Page2 1. Individual GrossTax Gapfor 1987 As Chart 1 and Table 1-1 show, individual taxpayers who file returns but underreporttheir tax liabilities accountfor most tax dollars lost to noncompliance.For TY 1987,we estimatethe fIler tax gapto be $56.3billion, which is almosteight times aslarge as the gap resulting from individuals who fail to file required tax returns. There are three sourcesof this gap: underreportedincome, overstatedsubtractions(itemized deductions, adjustments,and exemptions)and credits, and "math errors." Of the three parts, income underreportedby individual filers contributesby far the largestamountto the tax gap. In 1987,this amountedto $48.3 billion. Nonfarm and farm sole proprietor incomesaccount for over half ($26.3billion) of this amount Chart 1. Revised Estimates of the Gross Tax Gap (in billions), Tax Year 1987 Total: $84.9 billion ..""","'" ,... ,."."., Corporations ($21.4) ".., . ,. ,. ,. ,. Net Math Error ($1.0) ,."",."",."" ",." Overstated ,. ,. ,.,. Sb . u tractions andCredits($7.0) U nderreported Income($48.3) Individual Nonfilers ($7.2) Individual Filers ($56.3) In Table 1-1, tax on underreported " nonfarm , proprietor income is divided into two major parts. First, an estimated$7.7 billion of tax on underreportedproprietor incomewas earnedby "informal suppliers"who tend to operate"off the books." Second,about $16.6 billion of the tax gap was due to understatednonfarm businessincome of self-employed individuals operating in more conventionalways. Tax on underreportedfarm proprietor incomeis $1.9 billion. Table 1-1combinespartnershipincomeand smallbusinesscorporationdistributions to individuals.2 Inadequatereporting of these incomes on 1987 returns contributed an estimated$3.2 billion to the tax gap. Underreportednetrent androyalty incomeaccountsfor $3.1 billion. Failure to report capital gains contributedanother$6.6 billion, while underreportedinterestand dividendsaccountsfor $3.2 billion. The shortfall in reportedtax due to underreportedwages,salaries,pensionsand annuitiesis approximately$1.5 billion. 2 The net income of a qualified small business corporation (defined in section 1371 of the Internal Revenue Code), whether or not distributed, is taxed as ordinary income through each stockholder. Theretore, it is quite similar to partnership income for tax purposes. Tax Gap Estimatesand Projections/or 1973-1992 I Page 3 Table 1-1. Distribution of the Gross Income Tax Gap by Source, Tax Year 1987 ! ![ Sourceof Gap ! Total Income Tax 84,874 100.0 f Individual Income Tax 63,475 74.8 : Filersof taxreturns 56,301 66.3 ~ I I L. TaxGap ($ millions) Underreported income Percentage Distributions ofilie Tax Gap 48,292 56.9 1,417 3,227 6,650 7,739 1.7 3.8 7.8 9.1 16,646 1,904 19.6 2.2 3,216 123 3,141 64 86 173 3.8 0.1 3.7 0.1 0.1 0.2 338 3,566 0.4 4.2 6,062 545 3,478 2,039 7.1 0.6 4.1 2.4 Credits 899 1.1 Maili Errors 1,049 1.2 Wagesandsalaries Interestanddividends Capital gains Informal suppliers1 Oilier nonfarmproprietor iocome Farm income Partnershipand small businesscorporationincome Pensionsand annuities Rentsandroyalties Estateand trust income Stateincometax refunds Alimony income Taxableunemploymentand Social Securitybenefits Oilier income Overstatedsubtractions Adjustments Deductions Exemptions Nonfilers of tax returns 7,174 8.4 Income Tax 21,399 25.2 Small corporations (assetsunder $10 million) 5,225 6.2 Corporation Unreportedincome Overstateddeductions Largecorporations (assetsof $10 million or more) Oilier 2 2,519 2,706 3.0 3.2 15,845 329 18.7 0.4 1 Infonnal suppliers are proprietors who operate with infonnal businessstyles. See page 1. 2 Consists of $1.64~illion gap for fiduciaries and $165 million gap for unrelated business income of tax exempt organIzatIons. Note: Details do not add due to rounding. L; I- Tax Gap Estimatesand Projectionsfor 1973-1992 Page 4 The remaining $4.2 billion is attributed to estateand trust income, underreported stateincome tax refunds, alimony, taxable social security and unemployment insurance payments, and other income. "Other income" consists of such items as prizes, awards, gambling profits, recovery of bad debts, insurance received as reimbursement for medical expensesincurred in a previous year, and deductions for carryovers or carrybacks of business net operating losses. 2. Corporation Gross Tax Gap for 1987 The corporation tax gap estimates shown in Table 1-1 refer to filers of corporate ] returns. Due toexpenses lack of specific compliance data for large unreported income and overstated appearas separatesources only for corporations, small corporations. "1 The fIrSt column of Table 1-1 shows that large corporations ($10 million or more in assets),with a tax gap of $15.8 billion, dominate the total corporate tax gap of $21.4 billion. The relative sizes of the gaps largely reflect the much larger aggregate tax liability of large corporations. Small corporations (less than $10 million in assets)account for $5.2 billion of the total, split almost equally between underreported income and overstated deductions and credits. c. Voluntary Reporting Percentages Voluntary reporting percentages(VRPs) measurethe relationships between the total amounts of income or other related items that are voluntarily reported for any given year, and the corresponding correct amounts that should have been reported for that year. The correct amounts depend on the income tax provisions of the Internal Revenue Code in effect for that year as well as such things as the strength of the economy during that year. 1. Individual VRPsfor 1987 Noncompliance means reporting too little or too much tax, income, or any of the various deductions or credits that taxpayers may subtract from tax or income. Underreporting or overreporting is measured on a net basis. Ordinarily, taxpayers underreport incomes more frequently than they overreport them. Consequently, VRPs for income items are less than 100 percent. Conversely, offsets to tax or income, such as credits and exemptions, are overreported more frequently than they are underreported. Consequently,VRPs for these items generally exceed 100 percent. Table 1-2 shows estimates of how much income and offsets to income individual filers underreported or overreported in 1987, along with the corresponding VRPs. Note that these estimates do not reflect nonfiler noncompliance. Estimates of unreported nonfiler income can be misleading becausetax on such incomes has frequently been fully or partially paid, principally through withholding of tax by the taxpayer's employer. Thus, for tax year 1987, although delinquent nonfiler' incomes totaled $158.7 billion, the nonfiler tax gap was only $7.2 billion (see Table 1-1). Moreover, data on nonfilers, available only for 1972 and 1977, are much less conclusive than data on filers, whose returns are scientifically sampled and thoroughly examined. 3 We distinguish delinquent nonfilers from legitimate nonfilers who are not required to file tax returns since their total incomes fall below the filing thresholds. Legitimate nonfilers do not contribute to the tax gap. . 8- TaxGapEstimates andProjectiO7Lrfor 1973-1992 Table Page 5 1-2. Reported and Underreported Incomes, Overstated Items and Voluntary Reporting Percentages (VRPs) for Individual Tax Return Filers, Tax Year 1987 Amount Reported ($ millions) ] J Total Income of Filers 2,750,292 Wagesandsalaries Interest anddividends AmountUnder/ OverreJX>rted VRP 1 ($ millions) 247,734 91.7 2,051,093 9,427 99.5 229,078 13,153 94.6 Capital gains Informal suppliers2 Other nonfarmproprietorincome 191,002 7,740 89,330 25,261 51,417 86,018 88.3 13.1 Farmproprietor income -11,313 11,289 - Partnershipand small business co1]JOI'ation income Pensionsand annuities Rentsand royalties Estateand trust income Stateincometax refunds Alimony income Taxableunemployment TaxableSocial Securitybenefits Otherincome3 10,607 125,589 67 15,138 9,287 3,341 16,113 10,785 2,435 14,589 2,103 15,715 285 463 1,362 1,965 364 14,323 867,345 36,522 104.4 Adjustments Deductions 36,686 390,189 2,186 16,555 106.3 104.4 Exemptions 440,470 17,781 104.2 2,078,015 4 284,254 88.0 Total Subtraction Taxable Income Items of Filers - - 98.4 98.2 95.2 71.0 89.1 96.7 - 1 Five VRPs are not shown becausethey would be distorted by the combination of positive and negative amounts of income. The VRPs that are shown would have been lower if the unreported incomes of nonfilers had been included. 2 Informal suppliers are proprietors who operate with informal businessstyles. See page 1. 3 Includes deductions for carryovers and carrybacks of businessnet operating losses. 4 Reported taxable income exceedstotal reported income less subtractionsbecause,for returns with subtractions greater than income, taxable income is zero. , I L In tax administration,it is axiomaticthat whenthird partiesrepon to the tax agency the incometheypay to individuals,compliancein reportingsuchincomemarkedlyimproves. Withholding tax at the sourcehasproven to be an even more effective meansof assuring compliance. Due to the variety of circumstances underwhich incomeis earnedandpaid in a modem economy,one cannot precisely quantify the impacts of information reporting or withholding on compliance. Nevenheless,the VRPs in Table 1-2 reflect the positive influenceof withholding andinformationreportingon compliance. For example, a very large ponion of wage and salary income is covered by withholding, and we estimatethe VRP for wagesand salariesto be 99.5 percentfor filers. The VRP for pensionsand annuitiesis almostashigh-98.4 percent. Although withholding is optional to the taxpayer, pensions and annuities are almost universally covered by -~-, --:-~ ~ -- I Tax Gap Estimatesand Projectionsfor 1973-1992 Page 6 infonnation reporting. At the other extreme, when IRS has no infonnation on the incomes earned and taxpayers keep poor books and records, compliance tends to be very low. For example, we estimate the VRP for infonnal supplier income to be only 13.1 percent. Most interest and dividend income is covered by infonnation reports. However, substantial amounts of interest and dividends, particularly when received from abroad, are not subject to infonnation reporting. Infonnation reporting for capital gains is less complete than for interest and dividends. For example, brokers' reports to IRS are limited to infonnation on the sale of their clients' publicly traded securities. Reflecting the more limited infonnation IRS receives from third parties, the estimated filer VRPs for interest and dividends and capital gains are 94.6 percent and 88.3 percent, respectively. Notice that Table 1-2 does not present VRPs for some income categories. When a particular income type can be negative as well as positive, the VRP may become inaccurate. Moreover, negative values included in the aggregate for an income type will distort VRPs even if the aggregatein question is positive. 2. Corporation VRPsfor 1987 VRPs cannot be calculated for large corporation income and deduction items because specific data on what should have been reported are not available. (Taxpayer Compliance Measurement Program [TCMP] studies have not been conducted for large corporations.) In the caseof small corporations, for which TCMP studies are available, the VRPs for 1987 are 97.3 percent for total income reported (after expansion for unreported income not detectedin TCMP-see page 15) and 101.4 percent for deductions reported. D. Trends Knowledge of income tax compliance patterns for a given year is vital for effective tax administration. However, compliance trends also provide important infonnation. These Chart 2..Estimates of the Gross Tax Gap by Major Selected Tax Years, 1973-1992 Component, ,-.. 100 120 f/} = 0 S .0 80 ~ ~Q. ~ ~ f-- 60 40 ... . 20 ... . I II Ii 'I II I I : 0 73 76 79 ~ Individuals 82 Tax Year . 85 86 87 88 89 90 91 92 Corporations Tax Gap EstimatesandProjectionsfor 1973-1992 Table 1-3. Gross Tax Gaps and Voluntary Compliance Rates, Selected Tax Years, 1973-1992 I . : I Page 7 . ,c/o 1973 1976 1979 1982 1985 1986 1987 1988 1992 Total 28.4 40.7 61.7 62.6 87.8 95.0 84.9 87.1 113.7 Individuals 19.7 29.6 46.8 51.9 73.3 79.3 63.5 64.3 82.6 Filers 17.9 26.8 42.3 46.2 65.5 71.2 56.3 56.9 72.4 Understated income Overstateddeductions OverstatedcreCUts 15.4 2.4 -0.1 24.6 2.0 -0.3 36.4 4.7 0.6 38.1 6.5 0.9 54.6 8.6 1.2 60.0 8.9 1.3 48.3 6.0 0.9 48.5 6.1 1.1 62.8 6.8 1.3 ~d1errors 0.2 0.2 0.5 0.7 1.0 1.0 1.0 1.1 1.5 Tax Gapl ($ billions) r{onfuers 1.8 2.8 4.5 5.7 7.8 8.1 7.2 7.3 10.2 Corporations 2 8.8 11.1 15.0 10.7 14.4 15.6 21.43 22.8 31.1 Voluntary Compliance Rate (percent) Total 83.7 82.4 81.7 83.4 81.6 81.1 83.2 83.6 84.2 Individuals Corporations 2 84.6 81.3 82.6 81.6 81.8 81.3 83.7 81.8 81.6 81.7 81.0 81.7 83.5 82.5 84.0 82.4 84.9 82.5 Source: See text. 1 Alternate estimates,based on tax that would be assessedafter all appeals,are shown below. See page 8. 1973 1976 1979 1982 1985 1986 1987 1988 1992 Gross Tax Gaps (in $ billions) Total 23.7 34.2 Individuals 17.5 26.3 Corporations 2 6.2 7.8 52.0 41.4 10.6 53.9 46.3 7.6 75.5 64.8 10.7 81.1 70.1 11.0 71.2 56.1 15.1 72.8 56.8 16.0 95.0 73.1 21.9 Voluntary Compliance Total Individuals Corporations 2 Rates (in percent) 86.0 84.8 84.1 85.3 83.8 83.4 85.6 85.9 86.6 86.1 85.9 84.3 86.2 83.6 86.0 85.2 86.3 83.4 85.8 82.9 86.4 85.1 87.0 85.6 86.9 86.4 87.1 .; 2Includes the tax gaps for fiduciaries and unrelated businessincome tax of tax-exempt organizations. 3The increase in the corporate tax gap from an estimated $15.6 billion in 1986 to an estimated $21.4 ~ billion in 1987 is attributable to the increase in corporate tax liabilities due to tax law changesenacted in 1986 and to the increase in corporate profits. L trendsare illustrated in Chart 2, and aredetailedin Table 1-3. The estimatesof the total tax gapin currentdollars showan increasefrom $28 billion for 1973to $62 billion for 1979and to $85 billion for 1987. The gapis projectedto increaseto $114billion for 1992. The estimatedgrowth of the tax gapis duein largepart to the growth of incometax liabilities through real expansionof the economyand through inflation. The growth rate alsoreflectschangesin the voluntarycompliancerate (VCR), which for eachyearis the total amount of tax voluntarily reported as a percent of total tax liability. For example, the ~-_:~ ' c ' 1 , L Tax Gap Estimatesand Projections/or 1973-1992 Page 8 individual gap grew rapidly from 1973 to 1979, but from 1979 to 1982 it grew at a much slower rate. This change in the growth rate reflects corresponding changes in the VCR for individuals, which decreased from 84.6 percent in 1973 to 81.8 percent in 1979, and increased back to 83.7 percent in 1982. The most recent year for which TCMP data exist for individuals is 1982. For years after TY 1982, IRS assumedthat the VRP for each source of individual income (e.g., sole proprietor income or wage income) and for each deduction item remained constant. Some types of income, such as proprietor income, are not reponed as completely as other types. Consequently, when the relative importance of the more poorly-reponed types increases in response to changing economic conditions, the VCR for individual income tax declines. Thus, the individual VCR declined from 83.7 percent in 1982, a recession year, to 81.6 percent in 1985, a year of expansion. The combined influence of a period of prosperity, which enlarged the tax base, and the decline in the VCR accelerated the growth rate of the individual tax gap from 1982 through 1985. The tax gap estimates themselves, however, were lowered for years after 1982 to account for the expected impact of all recent tax law changes designed to improve compliance. The drop in the individual tax gap from $79.3 billion in 1986 to $63.5 billion in 1987 is primarily due to the reduction of individual income tax liabilities enacted in 1986. This legislation lowered marginal tax rates, but it also repealed or limited many deductions from taxable income, thereby minimizing the possibility for taxpayers to overstate these income offsets. 1:1 Corporate compliance data over time are quite limited. Consequently, in estimating and projecting the total corporate tax gap, essentially one composite VCR was used to represent corporate compliance for all years. The decline in the corporate gap from an estimated $15.0 billion in 1979 to an estimated $10.7 billion in 1982 does not reflect VCR changes, but rather the drop in corporate tax liabilities over that period due to the two back-to-back recessionsof 1980 and 1981-1982 plus tax cuts enacted in 1981. The increase in the corporate tax gap from an estimated $15.6 billion in 1986 to an estimated $21.4 billion in 1987 is attributable to the increase in corporate tax liabilities enacted in 1986 and to the increase in corporate profits. The VCR for all corporations in TY 1987 was approximately 82.5 percent. The primary estimatesfor individual filers and corporations depend on the results of audits of tax returns. The recommendations of the IRS examiners are the basis for our estimates of tax liabilities, and of tax gaps. Taxpayers are, of course, provided the opportunity to contest the recommendations of IRS examiners. In some cases, the appeals processesreverse the examiners' recommendations in part or altogether. In these cases,the amount of additional tax assessedis smaller than the amount recommendedby the examiners. Our alternate estimates, shown in a footnote to Table 1-3, reflect the difference between the amounts recommended and assessed.The adjustments are based on data from the Audit Information Retrieval System (AIRS), which tracks aggregaterecommendationsof tax change, including recommendations made on TCMP examinations, through assessments of additional tax. This system does not state the issues (underreponed income vs. overstated subtractions) on which recommendations were reduced. Thus, the alternate estimates are not available by source, and the aggregate alternate estimates cannot be derived precisely from the primary estimates. Furthermore, in using the AIRS data, we were not able to account for the following considerations: (1) in some cases,IRS appealsofficers settle for less than the full liabilities to avoid the hazards and costs of litigation; (2) taxpayers whose audits did not reveal deductions, businessexpenses,exemptions, or adjustmentswhich they had overstated on their returns do not appeal; (3) taxpayers who disagree with their examiners' recommendations for small increasesin tax may not appeal. c:, .'~ -Tax Gap Estimatesand Projectionsfor 1973-1992 Page 9 Chapter II Comparisons With Prior IRS Estimates . The previous IRS tax gap estimates, published in 1983, were based largely on ! 1 1 compliance data on individuals for 1976 and earlier years. For large corporations, the most recentcompliancedatausedwerefrom examinationsclosedin 1980;for small corporations, 1 the most recent data came from a TCMP study of firms with accounting periods centered around tax year 1977. The revised estimates incorporate compliance data on individuals derived from TCMP examinations of returns filed for TYs 1979 and 1982. The revised compliance estimates for corporations are basedon examinations closed as recently as 1986. This report also incorporates data from a 1985 household survey that provided information on informal suppliers working "off the books," and from other special studies. I In addition to these new data, significant improvements in estimation methods and changes in the tax laws have contributed to making the old estimates out of date. The estimates in this report, therefore, replace those published in 1983. Our analysis of the differences will focus on tax year 1987 as well as on 1981, since the latter was the last tax year for which the 1983 report contained detailed estimates. Table II-I highlights the four principal reasons why the new tax gap estimates are lower than those published in 1983. These are: effects of recent tax legislation on individual flit ~ndcorporatetax liabilities, .th~ availability.of new co~plianceand