IRS Can Use Tax Gap Data to Improve Its Programs for Reducing Noncompliance

GAO discussed Internal Revenue Service (IRS) efforts to reduce the tax gap, defined as the difference between the amount of income taxes that taxpayers owe and the amount they voluntarily pay. GAO noted that: (1) IRS estimated that the gross tax gap was $84.9 billion for 1987 and would reach $113.7 billion by 1992; (2) sole proprietors, informal suppliers, small corporations with assets under $10 million, and large corporations with assets over $10 million accounted for 50 percent of the tax gap; (3) noncompliance stemmed from cash-basis operations, lack of third-party controls and income documentation, unreported income, overstated deductions, improper accounting, uncertainty about tax laws, and a desire to increase profits; (4) IRS did not specifically target its major enforcement programs to particular tax gap components; (5) IRS examined about 1 percent of individuals' tax returns and less than 2 percent of corporate tax returns, but recently began to focus on cases with higher potential for generating tax revenue; (6) the IRS document-matching program helped to disclose unreported income, although some returns had erroneous information about income recipients and IRS did not have enough resources to investigate all indications of unreported income; and (7) state and local assistance, increased employer withholding, increased business reporting, and increased taxpayer assistance and education could enhance IRS enforcement efforts. GAO believes that IRS could further analyze its tax gap data to more specifically pinpoint the types of taxpayers and noncompliance resulting in the tax gap.