Tracking difference is the simple return gap over a period; tracking error is usually the standard deviation of that gap, a measure of how consistently the fund misses. A fund can have a large difference and tiny error if it simply trails by the expense-ratio every year, which is the well-behaved case.
Sources to check are sampling in illiquid indices, foreign withholding tax on dividends, cash held for redemptions, and the cost of trading each index-rebalance. Securities lending revenue can push tracking the other way and make a fund beat its index gross of fees.
Example: the index returns 9.80% and the fund 9.61%, a 19 basis point difference on a 7 basis point fee. The extra 12 points came from rebalancing costs and dividend withholding, not from the fee schedule.
Related: expense-ratio, index-fund, nav, index-rebalance, securities-lending