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The White House says closing the 'tax gap' will help pay for the $1 trillion infrastructure bill—here's what that means

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US President Joe Biden in the Oval Office.
MANDEL NGAN | AFP | Getty Images

The $1 trillion bipartisan infrastructure bill passed the Senate on Tuesday with a 69-30 vote, promising to pour $550 billion into the nation's crumbling bridges and roads, as well as into airports and electric vehicle infrastructure.

The White House has proposed several financing sources for the spending, one of which is providing the Internal Revenue Service (IRS) with nearly $80 billion so that it can close the so-called "tax gap." Provisions within the Biden administration's fiscal 2022 budget would help bulk up the service if they are supported by lawmakers. 

The proposal would help the IRS to recoup $700 billion worth of additional tax revenue over the next decade, according to the Treasury's Office of Tax Analysis, which could go toward the infrastructure bill's trillion dollar tab.

What is the tax gap?

Put simply, the tax gap is the difference between the estimated amount of taxes that the IRS is owed and the amount that it receives each year.

"It's the true tax liability that the IRS can compute versus what is actually paid voluntarily and timely," explains Mark Steber, chief tax officer for Jackson Hewitt Tax Services.

The IRS estimates that 83.6% of taxes are paid voluntarily and on time, and that ultimately 85.8% of taxes are collected after enforcement. The most recent estimate from the IRS puts the tax gap at $441 billion per year, calculated using data from the 2011, 2012 and 2013 tax years. That number shrinks slightly to $381 billion when late payments and the IRS' enforcement efforts are taken into account.

Earlier this year, IRS commissioner Chuck Rettig told the Senate Finance Committee that the current gap is approximately $1 trillion, thanks in part to the growing popularity of cryptocurrencies, whose taxable transactions the IRS did not make a priority until recently.

A Treasury analysis released in the spring said that if all things remain the same, the gap will rise to $7 trillion over the course of the next decade.

In addition to losing more than 33,000 employees between 2010 and 2020, including those auditing returns and collecting unpaid taxes, the IRS has been dealing with a backlog of pandemic-related tax issues. CNBC previously reported that while the number of millionaires have nearly doubled since 2012, tax audits have dropped by 72%, to 11,331 in 2020, from 40,965 in 2012.

"The IRS not only has less people than it did last decade, they've received a great many new responsibilities that they have to take care of," Steber said, citing cryptocurrencies, new tax credits and stimulus checks as extra work on its plate.

Closing this gap, the White House argues, will help the government recoup billions of dollars that it is already owed and use those funds to fuel new initiatives.

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