“As Americans file their state and federal income taxes this month, history suggests that they will pay hundreds of billions of dollars less than they should,” writes Josh Goodman in an April analysis for the Pew Charitable Trusts. “This “tax gap”—the difference between the taxes legally owed to the government and the amount paid—is caused by taxpayers who should file but do not, who underreport their income, and who do not pay in a timely manner.”

Closing these tax gaps could be of great help in a fiscally trying environment, yet according to Goodman, “few states have measured their tax gaps, in part because of the complexities of doing so.” Beyond that, short staff in many state tax departments stand in the way of getting a grip on the problem. In fact, Pew reports “a 2024 Federation of Tax Administrators survey of state and local revenue departments found that the “top challenge faced by tax administrations is overwhelmingly hiring and retention.”

Without data in hand, states are in the dark in terms of knowing whether those gaps are growing or shrinking, but, according to the Pew research, “there are reasons to think the problem of tax noncompliance could get worse.”

For one thing, data from the IRS, which can help the states to understand their own tax gaps, is increasingly challenged. According to the Pew analysis, “while states fund and conduct most of their tax enforcement efforts, they also rely on information from federal agencies—because, for example, someone misstating income on federal returns is likely to do so on state returns, too. As a result, less federal enforcement could mean less state enforcement.”

There is some hope at both the federal and state levels, in terms of new technology and AI-based methods to accurately determine which taxpayers to audit, but technology can’t provide solutions itself, People also have a critical part to play. 

As Terri Steenblock, director of tax and revenue administration with the Federation of Tax Administrators, told Pew, “Taxes are complicated, and ensuring they are administered appropriately is not just a science, but it’s an art,” she said. “It’s a balance of the entire tax administration cycle, which includes the appropriate mix of human and technological resources to foster compliance and reduce the tax gap.”

This isn’t an inconsequential issue. “Full taxpayer compliance might not be a realistic goal,” according to Pew, “yet if states collected even a few percentage points more of what they are legally entitled to, they could afford to cut taxes or invest in priorities in good times—and avoid tax hikes and service cuts in bad ones.”

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