Addressing the Tax Gap with Artificial Intelligence

Published: June 9, 2021 by Eric Thompson

The tax gap—the difference between what taxpayers should pay and what they actually pay on time—can have a substantial impact on states’ budgets. Tax agencies and other state departments are responsible for helping states manage their budgets by minimizing expected revenue shortfalls. Underreported income is a significant budget complication that continues to frustrate even the most effective tax agencies, until the right tools are brought into play.  

The Problem

Underreporting is a large, complex issue for agencies. The IRS currently estimates the annual tax gap at $441 billion. There are multiple factors that comprise that total, but the most prevalent is underreporting, which represents 80% of the total tax gap. Of that, 54% is due to underreporting of individual income tax.

In addition to being the largest contributor to the tax gap, underreporting is also extremely challenging to identify out of the millions of returns being filed. With 85% of taxes owed correctly reported and paid, finding underreporting can be like trying to locate a needle in the proverbial haystack. Making this even more challenging is the limited resources available for auditing returns, which makes efficiency key.

The Solution

Data, combined with artificial intelligence (AI) equals efficient detection.

The problem with trying to detect which returns are most likely to have underreported income is similar to many other challenges Experian has solved with AI. Partnerships between Experian and state agencies combine what we know about consumers with what their agency knows about their population. We can take the data and use AI to separate the signal from the noise, finding opportunities to recoup lost revenue.

Read our case study on how Experian was able to help an agency identify instances of underreporting, detecting an estimated $80 million annual lost revenue from underreported income.

Download case study Contact us

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