Tax Gap Law and Legal Definition

Tax gap is the difference between what taxpayers owe and what they voluntarily pay. It measures the extent to which taxpayers do not file their tax returns and pay the correct tax on time. The tax gap can be divided into three components:

1) nonfiling;

2) underreporting; and

3) underpayment.

Nonfiling occurs when taxpayers who are required to file a return do not do so on time. Underreporting of tax occurs when taxpayers either understate their income or overstate their deductions, exemptions and credits on timely filed returns. Underpayment occurs when taxpayers file their return but fail to remit the amount due by the payment due date.