U.S. Treasury says can shrink $7 trillion 'tax gap' by 10% over next decade

WASHINGTON, May 20 (Reuters) - The U.S. Treasury Department on Thursday said its plans to invest in new Internal Revenue Service tax compliance efforts will shrink by about 10% the “tax gap” now estimated at $584 billion in 2019.

The tax gap -- the difference between taxes legally owed and those collected by the IRS -- is expected to grow to $7 trillion over the next decade, or about 3% of U.S. GDP, the Treasury said in a new policy paper.

The Treasury said the Biden administration’s proposal to invest $80 billion in IRS enforcement over that same period would raise $700 billion in new revenues over a decade, an estimate that it called “conservative.”

By the second decade, it estimated that the investments would yield $1.6 trillion in additional revenue, as revenue agents hired in prior years gain experience in dealing with highly complex tax returns filed by wealthy individuals.

The investments would allow for the hiring of least 5,000 additional enforcement personnel, the Treasury said.

The IRS investment plan also would replace the Treasury’s 1960s-era computer architecture with new machine-learning-capable systems that will be better able to detect suspect tax returns. IRS is the only federal agency with computers that run on the antiquated Common Business-Oriented Language (COBOL) system, Treasury said. (Reporting by David Lawder Editing by Chizu Nomiyama)