Are We a Nation of Tax Cheaters? New Econometric Evidence on Tax Compliance

In 1982, then Commissioner of Internal Revenue Roscoe Egger reported to Congress that legal sector noncompliance with the Federal Income Tax statutes generated an income tax gap of $81 billion in 1981, up from $29 billion in 1973. He further projected a gap of $120 billion for 1985 (U.S. Congress, 1982). Perceptions of accelerating noncompliance inspired a crisis mentality within the Internal Revenue Service, Congress, and the tax bar. The IRS responded in part by funding a major independent study of tax noncompliance via the National Academy of Sciences, and the American Bar Foundation initiated an investigation of its own in 1984. Congress enacted compliance legislation in 1981, 1982, and 1984, and completely overhauled the federal income tax laws in 1986. These enactments added a wide variety of new penalties for noncompliance and strengthened others, dramatically expanded requirements for third-party reporting of information to the IRS, added to the IRS\u27s arsenal of procedural weapons, and adopted everyone\u27s favorite vehicle to combat noncompliance – lower tax rates