Underground Economy--What Can and Should Be Done

The Federal Role Gao ID: 113937 November 19, 1980

If people had paid the taxes which the Internal Revenue Service (IRS) estimated went unreported in 1976, the Federal Government's fiscal year 1977 budget deficit would have been reduced by 58 percent. Certain actions are being taken by IRS to improve its programs to detect and deter noncompliance. Other actions need congressional attention. IRS compliance enforcement programs include collections, document matching, withholding, audits or examinations, and criminal investigations. IRS needs to improve the effectiveness of each program and needs to combine the use of the programs by developing an overall compliance strategy, which properly matches all forms of noncompliance with the best enforcement tool available, and reallocating its resources accordingly. Many people who were not required to file were selected for investigation, while many who may have been required to file were not selected. Because IRS selects more people than it could thoroughly investigate with its limited resources, its investigative policies and procedures limit the extent to which they are pursued. IRS can match reports of payments of wages, interest, dividends, and 16 other types of payments to income reported by taxpayers on their tax returns. One of the continuing problems with document matching is that payers do not submit all the required information documents, and IRS has not developed a means to ensure compliance. The main tools of IRS for detecting payer noncompliance are the package audit and full compliance check. These checks are selective, and little information is available on their overall effectiveness. Many documents filed by payers are not used and, thus, are not matched against tax returns. More income could be subjected to information reporting and document matching. Computerized operations could be more efficient and effective. IRS and the Treasury Department want more income types subject to withholding because of the underreporting problem and have advocated a withholding system for interest and dividends. IRS audits have not been as effective as they might be in detecting underreporters because of inadequate data detected by audits, because its process for selecting returns for audit has been more deduction oriented than income oriented, and because of inadequate examination time. IRS attempts to detect nonreporting or underreporting are impeded by complex and inequitable tax laws and a lack of resources.

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