The IRS estimates the tax gap from the individual income tax (the amount of true income tax liability that goes unpaid) was $245 billion annually from 2011-2013. The gross tax gap has three components: non-filing, underpayment, and underreporting, of which underreporting makes up 80 percent. Income underreporting on income tax returns has implications for income tax collection at the state level.
Combining SOI aggregate data for tax year 2018 with new estimates of income underreporting, Figure 1 presents a map of state-level data with PWBM’s estimates of income underreporting and related trends. Use the drop-down menu to choose between which estimate or statistic the map displays. All numbers are for tax year 2018.
Please view online for interactivity.
(per return):
from sophisticated evasion:
(per return):
We estimate $1.33 trillion of income goes underreported on federal income tax returns. Nationally, we estimate that Schedule C business income constitutes 69 percent of underreported income in 2018. Underreporting of Partnership and S-Corp income is 13 percent of total underreporting, and 11 percent is underreporting of financial income (capital gains, dividends, and interest).1 States with high levels of reported Schedule C income are the same states with high per-return income underreporting (a 1 percentage point increase in average schedule C income per return predicts a 0.96 percentage point increase in total per-return underreporting). However, states with high rates of schedule C filers are not the same states with high reported (and therefore underreported) amounts of Schedule C income (correlation between the two is 0.25).
Further, states with higher percentages of returns in the highest AGI groups are also correlated with high per-filer underreporting from sophisticated evasion (with a correlation of 0.76). This result accords with Guyton et al. (2021)’s findings of sophisticated evasion practices among the top 1 percent.
SOI historical table 2 has aggregate amounts of reported income of major income types, presented by state and by AGI class. For income types that are net values (capital gains income, partnership and S-corp income, and Schedule C business income) we adjust using national aggregates from SOI Table 1.4 to produce estimates of positive income.2
To these income amounts, we apply estimates of income underreporting rates from Guyton et al. (2021). These multipliers come from IRS estimates of income underreporting from the National Research Program with detection-controlled estimation (DCE) correction. Income type-specific estimates of underreporting rates are presented separately for the top 1 percent by total true income and the full population. We apply these rates to income reported in the SOI bulletin based on their Adjusted Gross Income (AGI) class. In 2018, the top 1 percent of the overall income distribution were families with AGI above $488,000; we apply underreporting factors to the SOI aggregates AGI groups with $500,000 AGI and above (top 1 percent) and all lower AGI groups are presumably the bottom 99 percent.3
We present underreporting estimates for the following income types: Wages and salaries, capital gains, income from partnerships and S-corps, dividend income, Schedule C business income, interest income, and other income (which is comprised of Pensions and IRA distributions, Social Security, unemployment income, and income from state and local tax refunds).4
The above methodology produces income-specific estimates of tax evasion in accordance with DCE-corrected IRS detection. To account for Guyton et al. (2021) benchmark estimates of sophisticated evasion, we apply the ratio of their benchmark estimates to the DCE-corrected evasion estimates separately between the top 1 percent and the 99 percent to compute sophisticated evasion totals. We distribute the sophisticated evasion totals proportionally between capital gains income, interest income, dividend income, and pass-through business income.
This analysis was conducted by Victoria Osorio. Prepared for the website by Mariko Paulson.
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These estimates of underreporting by income type are proportional, on average, to the amount of each income type reported in the SOI aggregates in that state. ↩
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In SOI Table 1.4, net gains and net losses are aggregates of returns with a net gain and net loss, respectively. Even the sum of net gains are net values offset by losses within each return. As a result, these estimates of positive income are effectively lower-bound estimates, as we cannot accurately estimate the amount of positive income from the aggregates of net values. ↩
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The underreporting rates calculated by [GLRRZ21] are reported separately between the top 1 percent and full population as ranked by true income. The SOI aggregate data only observes reported income, and so we apply the income-specific underreporting rates according to the tax return’s place in the reported income distribution. ↩
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While Guyton et al. (2021) estimates also present underreporting rates for some additional minor income types such as rental income, the aggregates for these income types are not provided in the SOI data and therefore we cannot include them in our analysis. Further, we are unable to estimate overreporting of deductions and credits, which would further increase estimates of income underreporting. ↩
US Total 1327955476.79381 8.70 17733000 0.69 0.06 0.13 0.11 0.01 2.3 0.17 0.027
AK 2990569 8.57 27595.23 0.76 0.05 0.12 0.07 0.007 2.4 0.16 0.007
AL 12503364 6.06 140991.9 0.69 0.07 0.15 0.08 0.01 1.6 0.17 0.006
AR 7820082 6.32 81407.79 0.67 0.06 0.13 0.13 0.008 1.6 0.17 0.006
AZ 23416401 7.57 259843.6 0.69 0.06 0.13 0.11 0.01 1.9 0.16 0.008
CA 2.12E+08 11.69 2993563 0.72 0.05 0.12 0.1 0.009 3.3 0.19 0.016
CO 28341541 10.25 307236.9 0.68 0.05 0.15 0.11 0.008 2.7 0.18 0.012
CT 22759353 12.87 371102.4 0.72 0.05 0.09 0.12 0.012 3.7 0.16 0.019
DC 4955580 14.16 110950.1 0.71 0.05 0.13 0.1 0.013 4.1 0.19 0.022
DE 2918187 6.21 27408.62 0.66 0.07 0.15 0.1 0.013 1.6 0.13 0.007
FL 87620758 8.57 1478852 0.6 0.05 0.19 0.15 0.013 1.9 0.22 0.011
GA 29936436 6.53 411566.1 0.63 0.07 0.18 0.11 0.01 1.5 0.23 0.009
HI 6093031 8.77 55996.13 0.77 0.05 0.09 0.08 0.01 2.6 0.16 0.006
IA 9350302 6.41 80508.42 0.67 0.07 0.15 0.1 0.009 1.6 0.14 0.006
ID 6179570 7.89 61581.65 0.65 0.05 0.19 0.1 0.008 1.9 0.17 0.007
IL 48310502 7.9 714998.6 0.65 0.07 0.14 0.13 0.011 2 0.16 0.011
IN 18927363 6.01 192376.1 0.68 0.07 0.16 0.08 0.009 1.6 0.13 0.006
KS 10255857 7.68 114531.5 0.68 0.06 0.15 0.1 0.008 2 0.15 0.008
KY 12094406 6.29 113066.7 0.71 0.06 0.12 0.1 0.008 1.7 0.15 0.005
LA 14013871 7.14 178537.5 0.7 0.06 0.16 0.07 0.009 1.8 0.2 0.007
MA 42721495 12.25 686141.3 0.7 0.05 0.12 0.12 0.009 3.4 0.16 0.017
MD 24848879 8.27 335788.6 0.7 0.07 0.14 0.09 0.012 2.2 0.2 0.011
ME 5554341 8.33 37503.8 0.77 0.05 0.1 0.08 0.007 2.4 0.17 0.006
MI 32301363 6.75 375810.5 0.69 0.06 0.14 0.1 0.01 1.8 0.15 0.007
MN 21892373 7.83 239131.5 0.67 0.07 0.16 0.1 0.009 2 0.15 0.01
MO 19314948 6.87 214226.1 0.69 0.06 0.14 0.1 0.01 1.8 0.15 0.007
MS 6765406 5.51 66353 0.73 0.06 0.13 0.07 0.009 1.5 0.19 0.004
MT 4361657 8.53 46509.12 0.68 0.04 0.17 0.11 0.008 2.2 0.17 0.007
NC 33589710 7.24 342467.5 0.7 0.06 0.14 0.09 0.009 1.9 0.18 0.008
ND 2732818 7.51 28442.2 0.65 0.06 0.18 0.1 0.007 1.9 0.15 0.009
NE 5882278 6.47 59311.96 0.62 0.07 0.18 0.12 0.009 1.5 0.15 0.007
NH 8020313 11.26 91136.07 0.79 0.05 0.06 0.09 0.007 3.5 0.15 0.01
NJ 49169118 11.02 712441.8 0.72 0.06 0.12 0.08 0.01 3.2 0.16 0.016
NM 5613929 6.04 51036.78 0.73 0.06 0.11 0.09 0.01 1.7 0.15 0.005
NV 11361987 7.84 181158 0.62 0.05 0.16 0.16 0.011 1.8 0.17 0.009
NY 1.08E+08 11.1 1986214 0.68 0.05 0.13 0.12 0.012 3 0.17 0.015
OH 38470307 6.84 391477.8 0.72 0.06 0.12 0.09 0.009 1.9 0.14 0.007
OK 11092706 6.76 109673.6 0.7 0.06 0.14 0.09 0.009 1.7 0.18 0.007
OR 17361591 8.83 155588.9 0.71 0.05 0.14 0.1 0.009 2.4 0.15 0.008
PA 49184753 7.86 562376.5 0.72 0.06 0.11 0.1 0.01 2.2 0.13 0.009
RI 4405489 8.13 43183.12 0.74 0.06 0.11 0.09 0.008 2.3 0.15 0.008
SC 15302737 6.72 166094 0.69 0.06 0.15 0.09 0.011 1.7 0.17 0.007
SD 3271281 7.77 34756.08 0.63 0.05 0.19 0.12 0.007 1.9 0.15 0.008
TN 31529782 10.32 417354.7 0.81 0.04 0.07 0.07 0.005 3.3 0.19 0.008
TX 1.10E+08 8.73 1442640 0.72 0.06 0.12 0.1 0.007 2.4 0.21 0.011
UT 9117265 6.69 111141.1 0.56 0.07 0.25 0.12 0.009 1.4 0.16 0.009
VA 31886894 8 401657.3 0.67 0.07 0.14 0.1 0.012 2.1 0.16 0.01
VT 2941828 8.95 20672.3 0.75 0.04 0.09 0.1 0.007 2.6 0.18 0.006
WA 34360333 9.48 430968.9 0.67 0.06 0.13 0.13 0.008 2.5 0.14 0.014
WI 18978468 6.6 198468.4 0.66 0.07 0.16 0.1 0.01 1.7 0.12 0.007
WV 3986776 5.21 34785.45 0.75 0.07 0.1 0.07 0.009 1.5 0.12 0.004
WY 2490396 9.11 36828.82 0.59 0.05 0.17 0.17 0.01 1.9 0.16 0.01