oversight

Tax Gap: Multiple Strategies Are Needed to Reduce Noncompliance

Published by the Government Accountability Office on 2019-05-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          United States Government Accountability Office
                          Testimony
                          Before the Committee on Ways and
                          Means, House of Representatives


                          TAX GAP
For Release on Delivery
Expected at 10:00 a.m.
Thursday, May 9, 2019



                          Multiple Strategies
                          Are Needed to
                          Reduce Noncompliance
                          Statement of James R. McTigue, Jr., Director,
                          Strategic Issues




GAO-19-558T
                                                May 9, 2019

                                                TAX GAP
                                                Multiple Strategies Are Needed to Reduce
                                                Noncompliance
Highlights of GAO-19-558T, a testimony before
the Committee on Ways and Means, House of
Representatives




Why GAO Did This Study                          What GAO Found
The tax gap—the difference between              The Internal Revenue Service’s (IRS) latest tax gap estimate (2016) found that
tax amounts that taxpayers should have          taxpayers voluntarily and timely paid about 81.7 percent of owed taxes for tax
paid and what they actually paid                years 2008-2010, leaving an annual gross tax gap of $458 billion. IRS estimated
voluntarily and on time—has been a              a net tax gap—after late payments and enforcement actions—of $406 billion.
persistent problem for decades. The tax
gap estimate is an aggregate estimate           IRS’s Annual Average Tax Gap Estimate for Tax Years 2008-2010
of the five types of taxes that IRS
administers—individual income,
corporation income, employment,
estate, and excise taxes. For each tax
type, IRS attempts to estimate the tax
gap based on three types of
noncompliance: (1) underreporting of
tax liabilities on timely filed tax returns;
(2) underpayment of taxes due from
timely filed returns; and (3) nonfiling,
when a taxpayer fails to file a required
tax return on time or altogether.

This testimony discusses factors
contributing to the tax gap and
strategies to reduce it. This testimony is
based on prior GAO reports on the tax
gap and enforcement of tax laws,
including those with open
                                                GAO’s work has found that three important factors contribute to the tax gap.
recommendations or matters for
congressional consideration that could          •   Limited third party information reporting. The extent to which individual
help reduce the tax gap.                            taxpayers accurately report their income is closely aligned with whether third
Enforcement of tax laws has been on                 parties (e.g., employers) report income (e.g., wages) to them and to IRS.
GAO’s High Risk List since its inception        •   IRS resource tradeoffs. IRS’s budget and staffing levels have fallen over
in 1990, and GAO has made various                   the past decade, and IRS faces increasing responsibilities, such as
recommendations to IRS and
                                                    implementing Public Law 115-97—commonly known as the Tax Cuts and
suggestions to Congress to reduce the
                                                    Jobs Act—which involved significant changes to tax law.
tax gap that have resulted in
improvements. For example, GAO                  •   Tax code complexity. The federal tax system contains complex rules that
recommended that IRS consider                       may be necessary to appropriately target tax policy goals; however, this can
comparing individuals’ tax returns with             engender errors and lead to underpaid taxes.
the information educational institutions
report to verify taxpayers’ education tax       GAO’s work has demonstrated that no single approach will fully and cost-
benefits claims and suggested that              effectively address noncompliance since the problem has multiple causes and
Congress require brokers to report to           spans different types of taxes and taxpayers. In light of these challenges, GAO
both taxpayers and IRS the adjusted             has made numerous recommendations to IRS—some of which have not yet
cost of the securities sold by taxpayers.       been implemented—such as developing and documenting a strategy that
These actions resulted in billions of           outlines how IRS will use data to update compliance approaches to help address
dollars in additional revenue.                  the tax gap. Reducing the tax gap will also require targeted legislative actions.
                                                For example, expanding third-party information reporting could increase
View GAO-19-558T. For more information,         voluntary compliance and providing IRS with the authority to regulate paid tax
contact James R. McTigue, Jr. at (202) 512-     return preparers could improve the accuracy of the tax returns they prepare.
9110 or McTigueJ@gao.gov.
                                                ______________________________________ United States Government Accountability Office
Letter
         Letter




         Chairman Neal, Ranking Member Brady, and Members of the Committee:

         I am pleased to be here today to discuss the tax gap—the difference
         between tax amounts that taxpayers should pay and what they actually
         pay voluntarily and on time. The most recent data available show that, in
         2016, the Internal Revenue Service (IRS) estimated an average annual
         gross tax gap of $458 billion for tax years 2008 to 2010. IRS estimated
         that through late payments and enforcement actions, it will collect an
         additional $52 billion annually for tax years 2008 to 2010, resulting in an
         average annual net tax gap of $406 billion.

         The tax gap has been a persistent problem for decades, and enforcement
         of tax laws has been on our High Risk List since its inception in 1990. 1
         We have previously reported that there are no easy fixes to this problem,
         and given persistent levels of noncompliance, reducing the tax gap will
         not likely be achieved through a single solution. Rather, the tax gap must
         be attacked on multiple fronts with multiple strategies over a sustained
         period of time.

         Even modest reductions to the tax gap would yield significant financial
         benefits and help improve the government’s fiscal position. For example,
         just a 1 percent reduction of the 2008-2010 average annual net tax gap
         would have resulted in about $4 billion more in annual revenue for those
         years. For illustrative purposes, for fiscal year 2019, this amount of
         revenue could fund about 82 percent of IRS’s enforcement budget; the
         entire operation of the U.S. Census Bureau; or the combined federal
         budgets of the national park system Operations account, Smithsonian
         Institution, and the National Archives and Records Administration. 2

         My testimony today discusses (1) factors contributing to the tax gap and
         (2) strategies for reducing the tax gap. My comments are based on prior
         reports on the tax gap and enforcement of tax laws, including those with
         1
          Every 2 years, we issue a list of programs and operations that are “high risk” due to their
         vulnerabilities to fraud, waste, abuse, and mismanagement, or that need transformation.
         Progress in addressing areas on this list has led to more than $350 billion in financial
         benefits to the federal government in the past 13 years. For the most recent update, from
         March 2019, see GAO, High-Risk Series: Substantial Efforts Needed to Achieve Greater
         Progress on High-Risk Areas, GAO-19-157SP (Washington, D.C.: Mar. 6, 2019).
         2
          For fiscal year 2019, IRS’s enforcement budget was $4.86 billion; the entire operation of
         the U.S. Census Bureau was $3.8 billion; and the combined budgets of the national park
         system Operations account ($2.5 billion), Smithsonian Institution ($1.0 billion), and the
         National Archives and Records Administration ($0.4 billion) was about $4 billion.




         Page 1                                                                GAO-19-558T Tax Gap
             open recommendations or matters for congressional consideration that
             could help reduce the tax gap. 3 The products cited throughout this
             statement include detailed explanations of the methods used to conduct
             our work. We conducted the work on which this statement is based in
             accordance with generally accepted government auditing standards.
             Those standards require that we plan and perform the audit to obtain
             sufficient, appropriate evidence to provide a reasonable basis for our
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives.


             In April 2016, IRS released its most recent tax gap estimate, stating that
Background   taxpayers should have paid an average of about $2.5 trillion dollars per
             year in federal taxes for tax years 2008 to 2010. Of this amount, IRS
             estimated that taxpayers voluntarily and timely paid about 81.7 percent,
             or $2.04 trillion, leaving $458 billion in unpaid taxes per year, as shown in
             figure 1. 4




             3
              For example, see GAO, Internal Revenue Service: Strategic Human Capital Management
             is Needed to Address Serious Risks to IRS’s Mission, GAO-19-176 (Washington, D.C.:
             Mar. 26, 2019); Tax Gap: IRS Needs Specific Goals and Strategies for Improving
             Compliance, GAO-18-39 (Washington, D.C.: Oct 31, 2017); Fiscal Outlook: Addressing
             Improper Payments and the Tax Gap Would Improve the Government’s Fiscal Position,
             GAO-16-92T (Washington, D.C.: Oct 1, 2015); Tax Gap: IRS Could Do More to Promote
             Compliance by Third Parties with Miscellaneous Income Reporting Requirements,
             GAO-09-238 (Washington, D.C.: Jan. 28, 2009); and Tax Gap: Actions That Could
             Improve Rental Real Estate Reporting Compliance, GAO-08-956 (Washington, D.C.: Aug.
             28, 2008).
             4
              In its financial statements, IRS reported that taxpayers paid an average of $2.5 trillion per
             year for 2008–2010. However, this figure represents gross collections, which includes
             amounts to be refunded to taxpayers, as well as penalties, interest, and enforcement
             revenue, which are not paid voluntarily. Additionally, the financial statement amounts are
             calculated on a fiscal year basis, while the tax gap is calculated on a tax year basis.




             Page 2                                                                 GAO-19-558T Tax Gap
Figure 1: IRS’s Annual Average Tax Gap Estimate for Tax Years 2008 to 2010




The tax gap estimate is an aggregate estimate of the five types of taxes
that IRS administers—individual income, corporation income,
employment, estate, and excise taxes. 5 For each tax type, IRS attempts
to estimate the tax gap based on three types of noncompliance:
(1) underreporting of tax liabilities on timely-filed tax returns;
(2) underpayment of taxes due from timely-filed returns; and (3) nonfiling,
when a taxpayer fails to file a required tax return altogether or on time.

Underreporting of tax liabilities accounted for most of the tax gap estimate
for tax years 2008 to 2010, making up 84 percent of the entire estimated
gross tax gap, as shown in figure 2.




5
 Employment taxes include both employer-withheld employment taxes and self-
employment taxes.




Page 3                                                          GAO-19-558T Tax Gap
Figure 2: Estimated Average Annual Gross Tax Gap by Type of Noncompliance and
Tax, Tax Years 2008 to 2010




Note: Data may not sum to totals because of rounding. Individual income tax includes individual
business income tax. Estate tax underreporting noncompliance is not shown in this graphic because it
represents less than one-half percent of total underreporting noncompliance. Excise tax is not shown
in this graphic because IRS does not have excise tax underreporting noncompliance or nonfiling
noncompliance estimates, and its estimate for excise tax underpayment noncompliance represents
less than one-half percent of total underpayment noncompliance. In addition, IRS does not have a
corporation income tax estimate for nonfiling noncompliance.



Individual income taxes made up the largest portion ($264 billion) of
underreporting. Underreporting of business income accounted for nearly
half ($125 billion) of that amount, as shown in table 1. Business income
underreporting includes income from sole proprietors, which accounted
for the largest share ($78 billion) of individual income tax underreporting. 6


6
 Sole proprietors are self-employed individuals who should file a Schedule C with their
individual tax return to report profits and losses from their business. Sole proprietors
include those who provide services, such as doctors or accountants; produce goods, such
as manufacturers; and sell goods, such as car dealers and grocers.




Page 4                                                                     GAO-19-558T Tax Gap
Table 1: Estimated Average Annual Individual Income Underreporting Tax Gap by
Tax Return Item or Category, Tax Years 2008 to 2010
Dollars in billions
    Tax return items or category                                                Tax gap estimate
    Business income                                                                              125
    Sole proprietor income                                                                        78
     Income from partnerships, S corporations,                                                    22
    estates/trusts
    Rents and royalties                                                                           20
    Farming income/loss                                                                           5
    Non-business income                                                                           64
                        a
    Other income                                                                                  29
    Capital gains                                                                                 11
    Taxable Social Security benefits                                                              7
    Pensions and annuities                                                                        5
    Wages                                                                                         5
    Business sale/Form 4797 income                                                                4
    Dividends                                                                                     1
    Interest                                                                                      1
    State income tax refunds                                                                      1
    Unemployment compensation                                                                     1
    Credits                                                                                       40
    Earned income tax credit                                                                      27
    Child tax credit                                                                              7
    Education credits                                                                             4
    Other credits                                                                                 2
    Deductions                                                                                    18
                                         b
    Unallocated marginal effects                                                                  12
    Exemptions                                                                                    6
    Filing status                                                                                 5
    Other taxes                                                                                   1
                    c
    Adjustments                                                                                   -5
    Total individual income underreporting                                                       264
Source: Internal Revenue Service data. | GAO-19-558T

Note: Data may not sum to total because of rounding.
a
 Other income includes any taxable income not reported elsewhere on the tax return or other
schedules—such as gambling winnings, rental of personal property, and canceled debts—as well as
deductions for net operating losses.
b
 Unallocated marginal effects represent the difference between the total estimated tax gap for
individual income tax underreporting and the sum of tax gap estimates of individual income tax




Page 5                                                                      GAO-19-558T Tax Gap
underreporting by tax return line item. This discrepancy occurs whenever more than one line item has
been underreported on the same tax return, leading to an understatement of the true tax gap.
c
 Adjustments are the line items that are subtracted from the total income line to arrive at adjusted
gross income. For the 2008–2010 estimate, the majority of the adjustments can be attributed to
understated individual income tax deductions for self-employment tax. Underreported self-
employment income can lead to an underreported self-employment tax liability, which, in turn, can
lead to understated income tax deductions for self-employment tax.



IRS uses various approaches to estimate the different components of the
tax gap. A primary source of information IRS uses is its National
Research Program (NRP) study of individual tax returns. Through NRP,
IRS examines a stratified, random sample of tax returns, and uses
statistical modeling to produce estimates of noncompliance for the
population of individual income tax return filers. Other areas of the tax
gap are estimated using payment data or other statistical models. In
2016, IRS completed examinations for an NRP study on employment tax
returns filed from tax years 2008 to 2010. IRS employees reported that
they plan to start analyzing the results by June 2019. However, IRS has
not provided plans for how it will use the results to update the current
state of the employment tax gap estimate, as we previously
recommended. 7 The tax gap includes unintentional errors as well as
intentional evasion, such as intentionally underreporting income,
intentionally overreporting expenses, and engaging in abusive tax
shelters or frivolous tax schemes. 8

As we have previously reported, completely closing the tax gap is not
feasible, as it would entail more intrusive enforcement and more
burdensome recordkeeping or reporting than the public is willing to
accept, and more resources than IRS is able to commit. 9 However, even
modest reductions would yield significant financial benefits and help
improve the government’s fiscal position.

7
 GAO, Employment Taxes: Timely Use of National Research Program Results Would
Help IRS Improve Compliance and Tax Gap Estimates, GAO-17-371 (Washington, D.C.:
Apr. 18, 2017).
8
 By definition, legal tax avoidance (i.e., legally lowering tax liability) is not included in the
tax gap. IRS has not developed specific estimates for the tax gap related to income
earned from illegal activities or certain forms of fraud. However, if IRS discovers these
types of income over the course of an audit, it could be included in the tax gap estimates.
In general, refund fraud related to identity theft would not be included in the tax gap
estimate because it does not involve evading a tax liability.
9
  GAO, Tax Gap: Sources of Noncompliance and Strategies to Reduce It, GAO-12-651T
(Washington, D.C: Apr 19, 2012).




Page 6                                                                         GAO-19-558T Tax Gap
                        Tax noncompliance, even when unintentional, could discourage compliant
                        taxpayers and undermines the integrity of the tax system and the public’s
                        confidence in it. For example, consider two groups of taxpayers with
                        similar tax situations—those who pay the full amount of tax due and those
                        who do not. Those who do not pay taxes are not meeting their obligation
                        to fund government services, which, in effect, shifts the fiscal burden to
                        those who do pay. Further, IRS devotes resources to attempt to collect
                        taxes due from noncompliant taxpayers—resources that could be used
                        for other purposes.

                        In addition, noncompliance can create an unfair competitive advantage
                        among businesses because those that do not pay tax debts are avoiding
                        costs that tax-compliant businesses are incurring. For example, our past
                        investigations identified instances in which federal contractors with tax
                        debts won awards based on price differentials over tax compliant
                        contractors. 10


                        Our past work has found that three important factors contributing to the
Key Factors             tax gap are the extent to which income is reported to IRS by third parties,
Contributing to the     IRS’s resource trade-offs, and tax code complexity.
Tax Gap Include
Limited Third-party
Information
Reporting, Resource
Trade-offs, and
Complexities in the
Tax Code
Limited Third-Party     As we have previously reported, the extent to which individual income tax
Information Reporting   taxpayers accurately report their income is closely aligned with the

                        10
                           We made recommendations to IRS, the Department of Defense (DOD), the Financial
                        Management Service, and the Office of Management and Budget to address issues with
                        delinquent federal contractors. See GAO, Financial Management: Thousands of Civilian
                        Agency Contractors Abuse the Federal Tax System with Little Consequence, GAO-05-637
                        (Washington, D.C.: June 16, 2005), and Financial Management: Some DOD Contractors
                        Abuse the Federal Tax System with Little Consequence, GAO-04-95 (Washington, D.C.:
                        Feb. 12, 2004).




                        Page 7                                                         GAO-19-558T Tax Gap
amount of income that third parties report to them and to IRS. For
example, according to 2008–2010 IRS data, taxpayers misreported more
than half of the types of income for which there is little or no third-party
information reporting, such as business income (see figure 3). In contrast,
when employers both withheld taxes from, and reported information on,
wages and salaries to employees and IRS (through Form W-2, Wage and
Tax Statement), taxpayers misreported on only 1 percent of such income.
Similarly, taxpayers misreported less than 10 percent of investment
income that banks and other financial institutions reported to account
holders and IRS (through Forms 1099).

Figure 3: Effect of Third-Party Information Reporting on Individual Income Tax
Compliance, Tax Years 2008 to 2010




Note: Net misreporting percentage is the sum of the net misreported amount divided by the absolute
values (over or underreported) of the amounts that should have been reported, expressed as a
percentage.
a
 IRS receives information from third parties that it uses to verify income or deduction amounts that
taxpayers report on their tax returns. IRS categorized various line items on the individual income tax
return into four different groupings of third-party reporting in IRS Publication 5161, Estimation of the
Underreporting Tax Gap for Tax Years 2008–2010: Methodology Research, Analysis and Statistics




Page 8                                                                          GAO-19-558T Tax Gap
                          Technical Paper, September 2016. However, IRS did not provide a scale to define the differences
                          between substantial, some, and little or no third-party information reporting.
                          For items subject to substantial third-party information reporting, IRS is
                          able to use automated processes to address noncompliance. The
                          automated underreporter program, through which IRS matches amounts
                          reported on tax returns with amounts reported on information returns
                          submitted by third parties, is one such process. This computer matching
                          program allows IRS to identify discrepancies between tax returns and
                          information returns, and propose automatic changes to taxpayers. 11 For
                          items with little to no third-party information reporting, IRS must rely on
                          more resource-intensive methods, such as correspondence or face-to-
                          face examinations, to address noncompliance. While these examinations
                          may be started by reviewing specific tax return line items, they may also
                          be expanded to cover other areas of the tax returns if there are
                          indications of misreporting in areas of the return not previously identified.
                          However, it is harder for IRS to detect noncompliance in areas with little
                          third-party information reporting.


IRS Resource Trade-offs   IRS’s budget declined by about $2.6 billion (18.8 percent) from fiscal
                          years 2011 through 2019, and IRS’s budget for fiscal year 2019 is less
                          than its fiscal year 2000 budget, after adjusting for inflation (see figure
                          4). 12




                          11
                            Sometimes, if the discrepancy exceeds a certain tax threshold, an automated
                          underreporter reviewer will contact a taxpayer asking for an explanation of the
                          discrepancy or payment if additional taxes are assessed.
                          12
                               In 2018 dollars.




                          Page 9                                                                     GAO-19-558T Tax Gap
Figure 4: IRS Appropriations Nominal and Inflation Adjusted (2018 Dollars, in Millions), from Fiscal Years 2000 through 2019




                                          Note: Inflation adjustments were made using Bureau of Economic Analysis data and Congressional
                                          Budget Office projections of the fiscal year chain weighted gross domestic product price index. The
                                          fiscal year 2008 enacted budget includes supplemental funding for Economic Stimulus payment of
                                          $202.1M.



                                          Since fiscal year 2011, IRS staffing has fallen from 95,544 full-time
                                          equivalent employees to an estimated 75,676 in fiscal year 2019, a 20.8
                                          percent reduction. At the same time, IRS faces increasing responsibilities,
                                          such as implementing relevant aspects of Public Law 115-97, which
                                          included significant changes to corporate and individual tax law. 13 IRS
                                          also faces ever-evolving and significant challenges protecting taxpayer
                                          information, preventing identity theft and fraud, and modernizing an aging
                                          technology infrastructure.

                                          13
                                             To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the
                                          budget for fiscal year 2018, Pub. L. No. 115-97, 131 Stat. 2054 (Dec. 22, 2017)
                                          (commonly referred to as the Tax Cuts and Jobs Act).




                                          Page 10                                                                      GAO-19-558T Tax Gap
                      We previously reported that available staff has been a key factor in IRS
                      decisions to scale back a number of program activities, such as
                      examining tax returns, according to IRS officials. 14 Our analysis of IRS
                      data shows the rate of individual returns audited has declined between
                      fiscal years 2011 and 2018 (see figure 5). Reducing examinations can
                      reduce revenues collected through such enforcement action, and may
                      indirectly reduce voluntary compliance.

                      Figure 5: Rates of Internal Revenue Service (IRS) Individual Income Tax Return
                      Examinations, Fiscal Years 2011 through 2019




Tax Code Complexity   The federal tax system contains complex rules that may be necessary to
                      appropriately target tax policy goals, such as providing benefits to specific
                      groups of taxpayers. However, this complexity imposes a wide range of
                      recordkeeping, planning, computing, and filing requirements upon
                      taxpayers. For example, taxpayers who receive income from rents, self-
                      employment, and other sources may be required to make complicated
                      calculations and keep detailed records. This complexity can lead to errors
                      and underpaid or overpaid taxes. Complexity, and the lack of

                      14
                           GAO-19-176.




                      Page 11                                                        GAO-19-558T Tax Gap
transparency that it can create, can also exacerbate doubts about the tax
system’s integrity.

Tax expenditures—tax credits, deductions, exclusions, exemptions,
deferrals, and preferential tax rates estimated by the Department of the
Treasury to reduce tax revenue by about $1.38 trillion in fiscal year
2018—can add to tax code complexity. In part, this is because taxpayers
must learn about, determine their eligibility for, and choose between tax
expenditures that may have similar purposes. For example, as we
reported in 2012, about 14 percent of filers in 2009 (1.5 million of almost
11 million eligible returns) did not claim an education credit or deduction
for which they appeared eligible. 15

The complexity involved with tax expenditures may be acceptable if they
achieve their intended purposes. 16 However, in many cases, their
effectiveness is questionable or unknown. With some exceptions, tax
expenditures generally are not subject to reauthorization and the annual
congressional budget processes. We have recommended greater scrutiny
of tax expenditures since 1994, as periodic reviews could help determine
how well specific tax expenditures achieve their goals, and how their
benefits and costs (including complexity) compare to those of other
programs with similar goals. 17 Such actions would help facilitate oversight
and accountability of tax expenditures more in line with the performance
management and reporting requirements of other federal programs.

Paid tax return preparers and tax software developers help taxpayers
navigate the complexities of the tax code. However, some paid preparers
may introduce their own mistakes. For example, in a limited study in
2014, we found that seven of 19 preparers who completed returns for our
undercover investigators made errors with substantial tax consequences

15
   GAO, Higher Education: Improved Tax Information Could Help Families Pay for College,
GAO-12-560 (Washington, D.C.: May 18, 2012).
16
   GAO, Tax Expenditures: IRS Data Available for Evaluations Are Limited, GAO-13-479
(Washington, D.C.: Apr. 30, 2013).
17
   GAO, Tax Expenditures: Opportunities Exist to Use Budgeting and Agency Performance
Processes to Increase Oversight, GAO-16-622 (Washington, D.C.: July 7, 2016); Tax
Expenditures: Background and Evaluation Criteria and Questions, GAO-13-167SP
(Washington, D.C.: Nov. 29, 2012); Government Performance and Accountability: Tax
Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined,
GAO-05-690 (Washington, D.C.: Sept. 23, 2005); and Tax Policy: Tax Expenditures
Deserve More Scrutiny, GAO/GGD/AIMD-94-122 (Washington, D.C.: June 3, 1994).




Page 12                                                           GAO-19-558T Tax Gap
                      while, only two preparers calculated the correct refund amount. 18
                      Likewise, using NRP data, which are statistically representative, we
                      estimated that 60 percent of returns prepared by preparers contained
                      errors.


                      IRS’s overall approach to reducing the tax gap consists of improving
Multiple Strategies   services to taxpayers, and enhancing enforcement of the tax laws. In
Are Needed to         spite of these efforts, the percentage at which taxpayers pay their taxes
                      voluntarily and on time has remained relatively constant over the past
Reduce the Tax Gap    three decades. Our past work has demonstrated that no single approach
                      will fully and cost effectively address noncompliance since the problem
                      has multiple causes and spans different types of taxes and taxpayers. In
                      light of these challenges, we have made numerous recommendations to
                      IRS that have not yet been implemented, as well as matters for
                      congressional consideration. For example, in our most recent high-risk
                      update, we highlighted various actions IRS should take to improve
                      enforcement of tax laws and reduce the tax gap. 19

                      •      Strategy for using compliance data. Developing and documenting a
                             strategy that outlines how IRS will use data to update compliance
                             strategies could help address the tax gap. For example, a strategy
                             that outlines how IRS plans to use NRP data to update compliance
                             programs and approaches would help IRS determine resource trade-
                             offs and more fully leverage the investment it makes in compliance
                             research, while providing Congress with a better understanding of the
                             merits of the research it is being asked to fund. 20

                      18
                         GAO, Paid Tax Return Preparers: In a Limited Study, Preparers Made Significant Errors,
                      GAO-14-467T (Washington, D.C.: Apr. 8, 2014).
                      19
                         GAO-19-157SP. These recommendations represent only some of the recommendations
                      we have made to IRS related to the enforcement of tax laws high-risk area. Among those
                      recommendations are some we consider to be of highest priority—those that we believe
                      warrant priority attention from heads of key departments or agencies. They are highlighted
                      because, upon implementation, they may significantly improve government operation, for
                      example, by realizing large dollar savings; eliminating mismanagement, fraud, and abuse;
                      or making progress toward addressing a high-risk or duplication issue. For example, some
                      priority recommendations address the need for IRS to improve taxpayer services, such as
                      by developing strategies for providing web-based services to taxpayers and to improve
                      telephone and correspondence services. For details of the 23 recommendations to IRS we
                      believe should be given highest priority, see GAO, Priority Open Recommendations:
                      Internal Revenue Service, GAO-19-324SP (Washington, D.C.: Apr. 4, 2019).
                      20
                           GAO-18-39.




                      Page 13                                                             GAO-19-558T Tax Gap
•      Voluntary compliance goal. A long-term, quantitative goal for
       improving voluntary compliance may provide IRS with a concrete
       target the agency can use in fulfilling its mission. Without a
       quantitative goal, it will be more difficult for IRS to determine the
       success of its strategies, adjust its approach when necessary, and
       remain focused on results, especially since factors that affect
       compliance change over time. 21
•      Analyzing employment tax NRP study results. Developing and
       documenting plans to assess its NRP employment tax study results
       would help IRS (1) identify areas of noncompliance, (2) devise actions
       to address such noncompliance, and (3) update its employment tax
       gap estimate. Without completed analysis of the NRP employment tax
       study results, IRS risks using outdated data to make decisions about
       compliance and areas of the tax gap to pursue. 22
•      Leveraging the Return Review Program. IRS’s Return Review
       Program (RRP) is a tool to detect and select potentially fraudulent
       returns to prevent the issuance of invalid refunds. Evaluating the costs
       and benefits of expanding RRP to analyze individual returns not
       claiming refunds could support other enforcement activities by
       streamlining the detection and treatment of other types of
       noncompliance and fraud. 23

Given that the tax gap has been a persistent issue, reducing it will also
require targeted legislative actions, such as those we highlighted in our
2019 high-risk update. 24

•      Additional third-party information reporting. Expanding third-party
       information reporting to IRS could increase voluntary tax compliance.
       For example, reporting could be required for certain payments that
       rental real estate owners make to service providers, such as
       contractors who perform repairs on their rental properties, and for
       payments that businesses make to corporations for services. 25

21
     GAO-18-39.
22
     GAO-17-371.
23
 GAO, Tax Fraud and Noncompliance: IRS Could Further Leverage the Return Review
Program to Strengthen Tax Enforcement, GAO-18-544 (Washington, D.C.: July 24, 2018).
24
     GAO-19-157SP.
25
     GAO-09-238 and GAO-08-956.




Page 14                                                         GAO-19-558T Tax Gap
                   •   Enhanced electronic filing. Requiring additional taxpayers to
                       electronically file tax and information returns could help IRS improve
                       compliance in a resource-efficient way. For example, expanding the
                       mandate for corporations to electronically file their tax returns could
                       help IRS reduce return processing costs, select the most productive
                       tax returns to examine, and examine fewer compliant taxpayers. 26
                   •   Math error authority. Providing IRS with authority—with appropriate
                       safeguards—to correct math errors and to correct errors in cases
                       where information provided by a taxpayer does not match information
                       in government databases, among other things, could help IRS correct
                       errors and avoid burdensome audits and taxpayer penalties.
                   •   Paid preparer regulation. Providing IRS with the authority to regulate
                       paid tax return preparers could improve the accuracy of the tax
                       returns they prepare. 27

                   Chairman Neal, Ranking Member Brady, and Members of the Committee,
                   this completes my prepared statement. I would be pleased to respond to
                   any questions that you may have at this time.


                   If you or your staff have any questions about this testimony, please
GAO Contact and    contact James R. McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov.
Staff              Contact points for our Offices of Congressional Relations and Public
                   Affairs may be found on the last page of this statement. Key contributors
Acknowledgements   to this testimony include Jeff Arkin, Assistant Director; Robyn Trotter,
                   Analyst-in-Charge; A.J. Stephens; and Alicia White. Other staff who made
                   key contributions to the reports cited in the testimony are identified in the
                   source products.




                   26
                      GAO, Partnerships and S Corporations: IRS Needs to Improve Information to Address
                   Tax Noncompliance, GAO-14-453 (Washington, D.C.: May 14, 2014).
                   27
                      GAO-14-467T. A previous study found similar results: see Paid Tax Return Preparers: In
                   a Limited Study, Chain Preparers Made Serious Errors, GAO-06-563T (Washington, D.C.:
                   Apr. 4, 2006).




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                   Page 15                                                            GAO-19-558T Tax Gap
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