Reducing the Tax Gap

Experts convened in January 1995 at a GAO symposium on the federal "tax gap" agreed that major changes to the current tax system were needed to improve taxpayer compliance with the tax laws. Available Internal Revenue Service (IRS) data suggest that taxpayers fail to pay about 13 percent of the federal income taxes due on income from legal sources. Among the recommendations: make tax laws simpler; extend the reach of tax requirements, such as income tax withholding, that promote taxpayer compliance; and improve IRS' ability to resolve compliance problems quickly. But as the panelists recognized, any change that extended the reach of the tax system would also increase the extent to which the tax system intruded into taxpayers' affairs and must be carefully weighed.

GAO found that: (1) the federal tax system does not ensure uniform compliance among various groups of taxpayers; (2) major modifications in the current tax system would be required to substantially improve taxpayer compliance with tax laws, such as reducing tax law complexity and extending income tax withholding requirements; (3) the Internal Revenue Service (IRS) could improve taxpayer compliance by expanding compliance techniques, addressing unreported income, improving the utility of compliance data, and improving its ability to resolve taxpayer compliance problems promptly; and (4) IRS officials must determine the acceptable levels of compliance and tax system intrusiveness to promote compliance for each type of taxpayer.