Tax evasion is a crime and it carries significant penalties. Millions of Americans still try it. But how serious is the problem, and how pervasive is tax evasion?
We gathered the most recent data available on tax evasion in the UD, for both individuals and corporations.
Key Findings
- 85% of Americans pay taxes on time.
- The tax gap in the US is $496 billion, with the net tax gap (after late payments) being $428 billion.
- Underreporting is the most common type of tax evasion. It accounts for 80.24% of the gross tax gap.
- 63.3% of the people involved in tax fraud cases were sentenced to prison.
- The average length of sentence for tax fraud offenders was 14 months.
- The average age of tax fraud offenders is 52 years.
- 96.2% of the offenders are US citizens.
- American companies hold $5.8 trillion in offshore tax havens.
- British Virgin Islands is the #1 tax haven for US companies
- The US loses more tax revenue to tax evasion than any other country.
How Many People Evade Taxes?
Most Americans pay their taxes voluntarily and on time. According to the latest tax gap estimates available, 85% of Americans paid their taxes on time.
In other words, out of the $3.3 trillion per year in federal tax owed in the period of the study, Americans paid $2.8 trillion.
However, the analysis found that the gross tax gap (the difference between estimated ‘true’ tax liability for a given period and the amount of tax that is paid on time) during the period under review increased by over $58 billion compared to the previous period. After late payments, the IRS collected $68 billion more, bringing the net tax gap to $428 billion.
According to the IRS, the higher tax gap was due to economic growth[2].
How Much Money Is Lost to Tax Evasion?
According to IRS estimates, the US loses approximately $496 billion to individual tax evasion, with the majority being attributable to non-filing, underreporting, and underpayment of individual income tax[2].
In a US Senate panel statement in August 2021, IRS Commissioner Chuck Rettig said the country loses about $1 trillion to individual tax evasion annually[3].
Tax Evasion by Type of Tax
The IRS defines a tax gap as the difference between true tax liability for a given tax year and the amount paid on time. It comprises three main components: non-filing, underreporting, and underpayment (or remittance) gap.
Individual Income Tax
The individual income tax category is the most affected by tax fraud in the US. According to the IRS’s latest tax gap estimates (tax years 201-2016), the total true tax liability under individual income tax was $1,740 billion, but only $1,383 billion was paid. Thus, the gross tax gap in the period was $357 billion. However, this came down to $306 billion after late payments and IRS collection efforts.
Corporate Income Tax
According to the IRS, the gross tax gap for tax years 2014 to 2016 for this category was $41 billion. That is, out of the $354 billion liability, $313 billion was paid. However, only $34 billion was not collected after late payments and IRS enforcement actions.
Employment Tax
The tax gap estimates for tax years 2014 to 2016 under the employment tax category were $93 billion for the gross tax gap and $87 billion net tax gap. In other words, $1.038 trillion was paid voluntarily and on time out of a $1.131 trillion tax liability.
Estate Tax
The IRS estimates show that the total estate tax liability for tax years 2014 to 2016 was $22 billion, but taxpayers only paid $17 billion. This produced a $5 billion gross tax gap. However, after enforcement action and late payments, the gap narrowed by $3 billion.
Tax Gap Estimates for Tax Years 2011–2013 and 2014–2016
| Tax Gap Component | Tax Gap Estimates (billions of dollars) | Tax Gap Projections (billions of dollars) | |
| TY 2011-2013 | TY 2014-2016 | TY 2017-2019 | |
| Nonfiling Tax Gap | $37 | $39 | $41 |
| Individual income tax | $31 | $32 | $33 |
| Self-employment tax | $6 | $7 | $7 |
| Estate tax | Less than $0.5 billion | Less than $0.5 billion | Less than $0.5 billion |
| Underreporting Tax Gap | $349 | $398 | $433 |
| Individual income tax | $248 | $278 | $304 |
| Corporation income tax | $31 | $37 | $37 |
| Employment tax | $70 | $82 | $91 |
| Estate tax | $1 | $1 | $1 |
| Underpayment Tax Gap | $52 | $59 | $66 |
| Individual income tax | $38 | $47 | $53 |
| Corporation income tax | $5 | $4 | $6 |
| Employment tax | $6 | $5 | $4 |
| Estate tax | $2 | $3 | $3 |
| Excise tax | Less than $0.5 billion | Less than $0.5 billion | Less than $0.5 billion |
Most Common Types of Tax Evasion
According to IRS estimates, underreporting is the most common type of tax evasion in the US. The latest IRS estimates show that underreporting accounted for 80.24% of the gross tax gap.
Underpayment is the second most common type of tax evasion, accounting for 11.90% of the gross tax gap in the latest IRS estimates.
Nonfiling is the least common type of tax evasion, with a 7.86% share of the gross gap in the IRS’s latest estimates. Unlike the other two, non-filing dropped in the latest IRS estimates compared to the previous estimates[5].
How Many People Go to Jail for Tax Evasion?
63.3% of the people involved in tax fraud cases were sentenced to prison in FY2021[6].
The average length of sentence for tax fraud offenders was 14 months.
In comparison, 68.7% of tax fraud offenders were sentenced to prison in FY2020 and spent an average of 16 months in jail[7].
Demographics of Tax Offenders
Tax Offenders by Gender
The majority of tax offenders in the US are male. According to the latest USSC data, 67.9% of the offenders were male[6].
In the previous year (FY2020), the share was 73.1%[7].
Tax Offenders by Race
The USSC data also shows that more than half of the tax offenders were White (52.4%), followed by Black (28.3%), Hispanic (11.1%), and other races (8.2%)[6].
Again, this picture is unchanged from FY2020, where Whites were the majority (52.2%), followed by Blacks (29.8%), Hispanics (9.6%), and other races (8.4%)[7].
Corporate Tax Evasion
2015
This amount is more than double what a study found in 2015. The study, a collaborative effort among various organizations, established that US companies held over $2.1 trillion in offshore tax havens in 2015.
Apple, Inc. was the worst offender, hoarding $181 billion. Others were GE ($119 billion), Microsoft ($108.3 billion), and Pfizer ($74 billion)[10].
2016
In 2016, the amount of money held offshore by US companies grew to $2.6 trillion.
Still, Apple was the worst offender, with $246 billion held in a subsidiary registered in the Republic of Ireland. Pfizer came second with $198.9 billion, Microsoft ($142 billion), GE ($82 billion), and IBM ($71.4 billion)[11].
2021
The latest analysis indicates that American companies hold $5.8 trillion in cash in offshore tax havens as of August 2022[9].
Where is the Money Held?
According to Tax Justice Network, US companies hold money in notorious tax havens, most in the Caribbean.
British Virgin Islands (BVI) is the #1 tax haven for US companies, based on a Corporate Tax Haven Index (CTHI) value.[12].
Others are the Cayman Islands, Bermuda and the Netherlands[12].
Top 10 Tax Havens
Top 10 tax havens by Corporate Tax Haven Index (CTHI)
| Tax Haven | CTHI Value | CTHI Share |
|---|---|---|
| British Virgin Islands | 2,853 | 6.4% |
| Cayman Islands | 2,653 | 6.0% |
| Bermuda | 2,508 | 5.7% |
| Netherlands | 2,454 | 5.5% |
| Switzerland | 2,261 | 5.1% |
| Luxembourg | 1,814 | 4.1% |
| Hong Kong | 1,805 | 4.1% |
| Jersey | 1,724 | 3.9% |
| Singapore | 1,714 | 3.9% |
| United Arab Emirates | 1,664 | 3.8% |
How Much Does the US Lose to Tax Evasion Compared to Other Countries
The US loses more tax revenue to tax evasion than any other country. Statista data shows that the US lost $188.8 billion in 2017, compared to $66.8 billion for China and $46.8 billion for Japan[13].
The table below presents annual corporate tax losses in selected countries.
| Country | Annual Corporate Tax Losses (billion USD) |
|---|---|
| United States | 188.8 |
| China | 66.8 |
| Japan | 46.8 |
| India | 41.2 |
| France | 19.8 |
| Germany | 15.0 |
| Australia | 6.1 |
| Spain | 5.5 |
| South Korea | 1.1 |
| United Kingdom | 1.1 |
