Department of Revenue Services Commissioner Mark Bowden told the General Assembly’s finance committee that Connecticut’s 2022 gross tax gap — the difference between taxes owed under full compliance and taxes actually collected — is roughly $3.7 billion, and that enforcement activity typically recovers roughly $700 million to $800 million of that total.

The report, prepared at the General Assembly’s direction and publicly released at the hearing, breaks the gap into three broad categories: underreporting (about 80 percent of the gap), underpayment (about 14 percent) and nonfiling (about 6.5 percent). Bowden said the agency measured the gap for the single year 2022 and will continue to refine the estimates in future reports.

The tax gap matters because it affects state revenues available for programs without raising tax rates. "We were charged, by the general assembly to develop something called the tax gap report," Bowden said, adding that the study is a first step and a work in progress. He emphasized the report also touches on fairness: "Everybody ... want folks to pay their fair share," Bowden said.

Key findings and figures

- Gross tax gap for 2022: approximately $3,700,000,000.
- Enforcement recoveries (multi-year processes included): about $700,000,000–$800,000,000.
- Underreporting accounts for roughly 80 percent of the gross gap; Bowden said the bulk of that is driven by cash-based, informal or irregular transactions such as personal services and other underground-economy activity.
- Net underpayment shortfall cited in the presentation: about $101,000,000; net nonfiling gap: about $73,000,000.

Bowden and Deputy Commissioner John Bialos described the underreporting problem as concentrated in cash and informal sectors: "Think about your barber. Think about the housekeeper. Think about the landscaper that all operate off of the cash business," Bowden said. The agency said large, organized retailers generally use point-of-sale systems and are not the primary source of the lost revenue.

Staffing and enforcement recommendations

DRS told the committee its audit coverage is well below the benchmark used by many tax administrators. The agency reported personal income tax audit coverage near 0.4 percent of taxpayers and sales-tax audit coverage near 0.68 percent. Bialos said raising personal income tax audit coverage to roughly 1 percent would require about 50 additional personal-income auditors; raising sales-tax audit coverage to 1 percent would require roughly 25 additional sales-tax auditors. The department asked in its materials for 50 auditors but said it would be realistic to add about 30 in a year.

Bowden and Bialos said hiring pays for itself but requires time and capacity: an auditor takes about 18 months to reach full productivity and the department estimates an average return of about $2,000,000 in additional recoveries per auditor per year. The department also described efforts to shorten state onboarding timelines (from roughly 33 weeks in past years to nearer 20 weeks) and said it has training capacity to bring new auditors on board.

Policy tools and procedural changes discussed

DRS presented several options it has recommended or previously sought from the legislature or other state agencies:

- Contract clearance letters for state vendors: the department can require businesses with large state contracts to obtain a tax clearance to bid or receive state work. "If we said any business with a contract more than $1,000,000 doing business with the state of Connecticut has to get a clearance letter from us, we could do that," Bowden said.
- Using out-of-state counsel for collections: current statute (12-35c referenced in the hearing) limits DRS’s ability to hire outside attorneys for some collection work. Bowden said other states hire outside counsel for collections and that Connecticut could realize a "revenue lift" if given similar authority.
- Driver’s license or business-contract sanctions: Bowden said models used in California, Massachusetts and New York that tie certain state privileges to tax clearance are feasible but would require coordination and phased rollouts with DMV and others.
- Amnesty programs: DRS noted a prior amnesty in 2021–2022 that yielded about $120 million versus an earlier estimate of $75 million; the agency warned amnesties must be carefully crafted because repeated amnesties can reduce voluntary compliance.

Health-care provider fees and litigation background

The presentation included a detailed explanation of Connecticut’s provider-fee structure. Lou Bakari, DRS chief legal counsel, summarized Chapter 211 of Title 12 and described the second hospital user fee adopted after litigation with hospitals in 2019. Bakari said the multi-year settlement established statutorily prescribed payments by hospitals over a seven-year period, with formulas tied to inpatient and outpatient revenues; nursing-home and intermediate-care facility fees are assessed as per‑bed (daily) charges and are paid quarterly.

Technology, analytics and AI

DRS described a modernized tax administration system (internally "C Tax") used for case management and notices and said it plans to restore predictive-modeling tools in the new platform to focus collection and enforcement resources. The agency reported prior predictive models were highly accurate when applied to collections and said it aims to reintroduce those capabilities. Officials said the state is exploring artificial intelligence for future work but that no tax administrator has widely deployed AI in production for enforcement yet; the department noted any AI use would follow statewide policy.

Committee questions and next steps

Members pressed DRS on whether simplifying Title 12 and improving taxpayer-facing guidance could raise compliance; Bowden said recodification would help but is complex. He also noted outreach, dual-language services and a single small-business landing page as low-cost compliance tools. Representatives raised concerns about hospitals, sales-tax compliance, penalties and cross-agency data-sharing; DRS acknowledged limits from confidentiality rules and differing agency systems.

DRS said it will post recommendations and steps by July 1 and committed to notifying committee chairs and ranking members before posting. The department emphasized that some proposals will require statutory change or budget approvals.

No formal committee votes were recorded on agency proposals during the session.

Ending

DRS framed the report as an initial baseline and invited legislative collaboration on staffing, statutory tools and technology. "We will post those up and and folks will be able to comment on that," Bowden said. The department asked lawmakers to weigh the tradeoffs of stronger enforcement tools against political and operational costs and to consider targeted investments in auditors and analytics to increase collections without raising tax rates.