More than a third (36 per cent) of self-assessment taxpayers under-report their taxes, according to research by the Institute for Fiscal Studies (IFS) out today.
Most underpayments are less than £1,000. However, a small proportion of people owe more than £10,000 and represent close to half of the tax revenue that is unpaid. The average tax owed by people not paying their due is £2,320.
The IFS said a significant amount of the revenue that is missing could be brought into the government's coffers through audits. If all of the 10m taxpayers who self-assess their taxes were audited by HM Revenue and Customs (HMRC), this would bring in £8.3bn.
"HMRC has improved its targeting of non-compliant taxpayers, increasing the revenue raised per targeted audit conducted. However, the decline in the number of such audits reduced the total revenue raised from audits from a peak of £1.17 billion in 2002, to just over two-thirds of that by 2009," the IFS said.
However, the researchers cautioned that after a few years without audits, those who under-reported their taxes would fall back into failing to pay.
Arun Advani, research fellow at the IFS, said: "Audits bring in tax directly, but also change taxpayers' behaviour. Audits work not because they scare people into complying in future years, but because they give HMRC more information about people's incomes. The change in behaviour actually brings in more than the original audit."