April 15th is the perfect day to focus on the ramifications of federal and state tax gaps

• At other points in the nation’s history, perhaps the tax gap was of less importance to some in government.

Talking about taxes, Nobel Prize-winning Irish playwright George Bernard Shaw wryly observed: “A government which robs Peter to pay Paul can always depend on the support of Paul.” Herman Wouk, the Pulitzer Prize-winning author of “The Caine Mutiny,” was more pointed when he said: “Income taxes are the most imaginative fiction written today.”

Leave it to the taciturn Nebraska billionaire investor, Warren Buffett, to put the cherry on top of the Tax Day sundae: “Government can’t deliver a free lunch to the country as a whole. It can, however, determine who pays for lunch.”

But it’s not all funny or at least erudite observations that confront us on 2026’s Tax Day. There’s that pesky thing called The Tax Gap, and there’s one at the federal level and the state level. The gross tax gap is the difference between the true tax liability for a given tax year and the amount paid on time.

The Internal Revenue Service defines the Tax Gap as “the difference between true tax liability for a given tax year and the amount that is paid on time.” For example, the 2022 tax year saw IRS projections estimating a total true tax liability of $4.635 billion. Of that total, $3.939 billion was paid voluntarily and on time.

The tax gap was $696 billion. Of that figure, $90 billion was collected by the IRS through enforcement or other late payments, leaving a net federal tax gap of $606 billion, or a net compliance rate of 86.9%, meaning 13.10% of the federal taxes owed to the IRS in 2022.

The gross tax gap comprises the non-filing gap (tax not paid on time by those who do not file on time), the underreporting gap (tax understated on timely-filed returns), and the underpayment gap (tax reported on time but not paid on time). The net tax gap is the portion of the gross tax gap that will never be recovered through enforcement or other late payments.

On April 7 of this year, the Pew Charitable Trusts and the Pew Research Center conducted a comprehensive study of the tax gap and came to this conclusion:

“As many states face near-term budget shortfalls, long-term deficits, or both, smaller tax gaps could help to provide the revenue that states need to avoid tax increases and cuts to core services. Yet few states have measured their tax gaps, in part because of the complexities involved.

“Meanwhile, staffing cuts and hiring challenges at the federal Internal Revenue Service (IRS) and at state tax departments could drive tax gaps wider by lowering officials’ capacity to answer taxpayer questions, conduct audits, and collect unpaid taxes,” the researchers said.

Pew’s examination pointed to research by Robert Warren, a retired IRS criminal investigation special agent who is now an assistant professor of accounting and finance at Radford University in Virginia. Warren contacted all states with income taxes in 2020 and 2021, asking whether they had ever estimated their tax gaps. Only eight states had done so since 1992.

Mississippi was not one of the states that had crunched those numbers. Mississippi is in the process of phasing out its individual income tax, moving from a 4% rate in 2026 to 3% by 2030, with further reductions planned, effectively reducing the tax gap by eliminating the income tax. The state already eliminated taxes on the first $10,000 of income as of 2023. 

Worries over the tax gap are not a new problem. Over a decade ago, the U.S. Government Accountability Office (GAO) reported that “taxpayers fail to pay hundreds of billions of dollars in taxes every year. This tax gap has been a persistent problem for decades. The size of the tax gap can fluctuate due to taxpayer behavior, IRS enforcement activities, updated methods for estimating the tax gap, changes in economic activity, and changes in tax law and administration.” 

At other points in the nation’s history, perhaps the tax gap was of less importance to some in government. But it’s hard to believe that budget makers at the federal level or in most states forecast the advance of runaway energy prices tied to attempts by Iran to close the Strait of Hormuz. The inflation that protracted higher oil prices will generate on most products will make tax gaps at every level less tolerable.