A bunch of American dollars banknotes (1$), US, circa 1985. (Photo by Alfred Gescheidt/Getty Images)
Every filing season, millions of taxpayers miss out on the opportunity to maximize their tax refunds—leaving billions of dollars in unclaimed tax credits and deductions on the table. Despite efforts by the IRS to educate taxpayers and streamline filing, a significant gap remains between what folks are eligible for and what they claim.
This credits and deductions gap highlights the barriers many individuals and families face in navigating a complex tax system. In many cases these unclaimed benefits could make a meaningful difference in individual household budgets, more so for low- and moderate-income families. The problem spans multiple areas of financial assistance, from the Earned Income Tax Credit (EITC) to education-related credits and deductions.
A recent IRS report puts specific numbers to the phenomenon, revealing both the scale of the issue and some of the factors that contribute to it. Understanding the gap is crucial both for individuals missing out on refunds and policymakers intending to build a more fair and effective tax system overall.
Credit and Deductions Gap
The credits and deductions gap represents, at base, the difference between the tax benefits taxpayers are eligible for and what they claim. This gap arises from various factors, ranging from a lack of information regarding eligibility, challenges in understanding the requirements, and more systemic barriers like inaccessible filing tools or insufficient public guidance.
Tax credits and deductions come in various forms: tax deductions reduce taxable income, lowering the amount of tax owed; non-refundable tax credits reduce tax liability only to the extent of taxes owed, and; refundable tax credits reduce tax liability and allow taxpayers to receive any balance as a refund—even if no taxes are owed.
Low- and moderate-income families often struggle with the complexity of refundable credits like the EITC or the Child Tax Credit (CTC). Others, most often non-filers, may not even realize they qualify for benefits—assuming if they don’t owe taxes, and don’t have to file, there is nothing more to be done.
The IRS report sheds light on some of these issues, quantifying the gap and identifying what credits and deductions are most often missed.
Findings of the Report
The recently-released IRS report used tax year 2022 data and reveals striking figures about unclaimed benefits. Significant gaps persist in three major areas: the EITC, the CTC and education credits including the American Opportunity Tax Credit and the Lifetime Learning Credit.
More than 470,000 taxpayers contributed to a $864 million estimated credit gap for the EITC, while 110,000 taxpayers contributed to a $133 million CTC credit gap. Education credits contributed to a whopping $6.3 billion estimated credit gap across 6 million taxpayers—clearly an area requiring significantly more attention.
One of the reasons for the overarching gap as well as the shortfalls in individual programs may be difficulty in navigating the filing process. Filing taxes can be overwhelming, especially for those with limited financial resources or without access to professional assistance—making programs like IRS Direct File a crucial investment.
Implications of the Gaps
The persistent gaps in claimed tax credits and deductions have far-reaching implications, affecting individuals, families, and even the tax system writ large. For the millions of taxpayers who miss out on benefits, the consequences are immediate and personal. Unclaimed EITC and CTC credits can represent hundreds or even thousands of dollars that could ease financial strain, pay bills, or support long-term savings.
At the systemic level, these gaps highlight inequities in the tax system: those most in need of financial support often face the greatest challenges in accessing it. Each time a public assistance program is added to the tax code, designed to alleviate burdens and lift vulnerable populations, its success relies on eligible taxpayers taking full advantage of the benefits. When they do not, the intended impact of the program is diminished despite political will being expended to get the credit or deduction expanded.
These gaps in claimed benefits highlight broader issues of accessibility and understanding within the tax system, and also call for increased investment in taxpayer education programs. By addressing the twin barriers of information and access, there is an opportunity to help individuals and families make the most of the tax provisions already in place to support them.
