Tax Compliance

The Internal Revenue Service's (IRS) Taxpayer Compliance Measurement Program plays an important role in tax policy and administration decisions. IRS uses the data for measuring compliance levels, estimating the tax gap (the difference between the amount of income tax owed and the amount voluntarily paid), identifying compliance issues, developing formulas for objectively selecting returns to audit, and allocating audit resources. Congress as well as federal and state agencies use the program's data for policy analysis, revenue estimating, and research. This report discusses the status of IRS' plans for carrying out the program in tax year 1994. It also identifies the potential effects of these plans on measuring taxpayer compliance.

GAO found that: (1) the 1994 TCMP survey will differ significantly from previous surveys and include over 150,000 tax returns from individuals, small corporations, partnerships, and S corporations; (2) IRS plans to analyze survey results by types of businesses and individuals and measure compliance on both a national and smaller geographical area basis; (3) IRS plans to use computers to record audit adjustments, tax issues, and the reasons for the adjustments, provide auditors with tax return data for 1992 through 1994 and other tax information on each taxpayer, use an economic reality audit technique to compare the taxpayer's lifestyle to the information reported on the tax return, and identify the causes of noncompliance and the associated tax; (4) IRS has not met its timetable for TCMP planning decisions which jeopardizes its planned October 1995 start date for the survey; (5) IRS is addressing its lack of a research plan and its lack of data on partnerships and S corporations; and (6) IRS plans to collect information on employees who incorrectly file as self-employed and other known compliance problems, and develop a mechanism to retrieve TCMP audit workpapers for researchers.