Tax Compliance
Reducing the Tax Gap Can Contribute to Fiscal Sustainability but Will Require a Variety of Strategies Gao ID: GAO-05-527T April 14, 2005The Internal Revenue Service's (IRS) recent estimate of the difference between what taxpayers timely and accurately paid in taxes and what they owed ranged from $312 billion to $353 billion for tax year 2001. IRS estimates it will eventually recover some of this tax gap, resulting in a net tax gap from $257 billion to $298 billion. The tax gap arises when taxpayers fail to comply with the tax laws by underreporting tax liabilities on tax returns; underpaying taxes due from filed returns; or "nonfiling," which refers to the failure to file a required tax return altogether or in a timely manner. The Chairman and Ranking Minority Member of the Senate Committee on Finance asked GAO to review a number of issues related to the tax gap. This testimony will address GAO's longstanding concerns regarding tax compliance; IRS's efforts to ensure compliance; and the significance of reducing the tax gap, including some steps that may assist with this challenging task. For context, this testimony will also address GAO's most recent simulations of the long-term fiscal outlook and the need for a fundamental reexamination of major spending and tax policies and priorities.
Our nation's fiscal policy is on an unsustainable course. As long-term budget simulations by GAO, the Congressional Budget Office, and others show, over the long term we face a large and growing structural deficit due primarily to known demographic trends and rising health care costs. All simulations indicate that the long-term fiscal challenge is too big to be solved by economic growth alone or by making modest changes to existing spending and tax policies. Rather, a fundamental reexamination of major policies and priorities will be important to recapture our fiscal flexibility. Especially relevant to this committee will be deciding whether and how to change current tax policies and how to ensure that tax compliance is as high as practically possible. Tax law enforcement is one factor affecting compliance that has caused concern in the past, due in part to declines in IRS enforcement occupations, examinations, and other enforcement results. The recent turnaround in staffing and some enforcement results is good news, but IRS's recent compliance estimate indicates that compliance levels have not improved and may be worse than it originally estimated. Thus, sustained progress in improving compliance is needed. Reducing the tax gap would help improve fiscal sustainability, but will be challenging given persistent noncompliance. This task will not likely be achieved through a single solution. Rather, the tax gap must be attacked on multiple fronts and with multiple strategies over a sustained period of time, including reducing tax code complexity, providing quality services to taxpayers, enhancing enforcement of tax laws, and evaluating the success of IRS's efforts to promote compliance. Also important is obtaining current information on the extent of, and reasons for, noncompliance. IRS's 2001 tax gap estimate is based in part on recently collected compliance data for individual income tax underreporting. However, IRS does not have firm plans to obtain compliance data for other areas of the tax gap or again collect data on individual income tax underreporting. Finally, IRS lacks quantitative, long-term goals for improving taxpayer compliance, which would be consistent with results-oriented management.
GAO-05-527T, Tax Compliance: Reducing the Tax Gap Can Contribute to Fiscal Sustainability but Will Require a Variety of Strategies
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Testimony:
Before the Committee on Finance, U.S. Senate:
For Release on Delivery Expected at 10: 00 a.m. EDT Thursday, April 14,
2005:
Tax Compliance:
Reducing the Tax Gap Can Contribute to Fiscal Sustainability but Will
Require a Variety of Strategies:
Statement of David M. Walker, Comptroller General of the United States:
GAO-05-527T:
GAO Highlights:
Highlights of GAO-05-527T, a testimony to the Committee on Finance,
U.S. Senate:
Why GAO Did This Study:
The Internal Revenue Service's (IRS) recent estimate of the difference
between what taxpayers timely and accurately paid in taxes and what
they owed ranged from $312 billion to $353 billion for tax year 2001.
IRS estimates it will eventually recover some of this tax gap,
resulting in a net tax gap from $257 billion to $298 billion. The tax
gap arises when taxpayers fail to comply with the tax laws by
underreporting tax liabilities on tax returns; underpaying taxes due
from filed returns; or "nonfiling," which refers to the failure to file
a required tax return altogether or in a timely manner.
The Chairman and Ranking Minority Member of the Senate Committee on
Finance asked GAO to review a number of issues related to the tax gap.
This testimony will address GAO's long-standing concerns regarding tax
compliance; IRS's efforts to ensure compliance; and the significance of
reducing the tax gap, including some steps that may assist with this
challenging task. For context, this testimony will also address GAO's
most recent simulations of the long-term fiscal outlook and the need
for a fundamental reexamination of major spending and tax policies and
priorities.
What GAO Found:
Our nation's fiscal policy is on an unsustainable course. As long-term
budget simulations by GAO, the Congressional Budget Office, and others
show, over the long term we face a large and growing structural deficit
due primarily to known demographic trends and rising health care costs.
All simulations indicate that the long-term fiscal challenge is too big
to be solved by economic growth alone or by making modest changes to
existing spending and tax policies. Rather, a fundamental reexamination
of major policies and priorities will be important to recapture our
fiscal flexibility. Especially relevant to this committee will be
deciding whether and how to change current tax policies and how to
ensure that tax compliance is as high as practically possible. Tax law
enforcement is one factor affecting compliance that has caused concern
in the past, due in part to declines in IRS enforcement occupations,
examinations, and other enforcement results. The recent turnaround in
staffing and some enforcement results is good news, but IRS's recent
compliance estimate indicates that compliance levels have not improved
and may be worse than it originally estimated. Thus, sustained progress
in improving compliance is needed.
Reducing the tax gap would help improve fiscal sustainability, but will
be challenging given persistent noncompliance. This task will not
likely be achieved through a single solution. Rather, the tax gap must
be attacked on multiple fronts and with multiple strategies over a
sustained period of time, including reducing tax code complexity,
providing quality services to taxpayers, enhancing enforcement of tax
laws, and evaluating the success of IRS's efforts to promote
compliance. Also important is obtaining current information on the
extent of, and reasons for, noncompliance. IRS's 2001 tax gap estimate
is based in part on recently collected compliance data for individual
income tax underreporting. However, IRS does not have firm plans to
obtain compliance data for other areas of the tax gap or again collect
data on individual income tax underreporting. Finally, IRS lacks
quantitative, long-term goals for improving taxpayer compliance, which
would be consistent with results-oriented management.
IRS's Tax Year 2001 Gross Tax Gap Estimates by Type of Noncompliance
and Type of Tax:
Dollars in billions:
Type of noncompliance: Underreporting;
Individual income: $150-$187;
Type of tax: Corporate income: $30;
Type of tax: Employment: $66-$71;
Type of tax: Estate: $4;
Type of tax: Excise: No estimate;
Total: $250-$292.
Type of noncompliance: Underpayment;
Individual income: 19;
Type of tax: Corporate income: $2;
Type of tax: Employment: $7;
Type of tax: Estate: $2;
Type of tax: Excise: $1;
Total: $32.
Type of noncompliance: Nonfiling;
Individual income: 28;
Type of tax: Corporate income: No estimate;
Type of tax: Employment: No estimate;
Type of tax: Estate: $2;
Type of tax: Excise: No estimate;
Total: $30.
Type of noncompliance: Total;
Individual income: $198-$234;
Type of tax: Corporate income: $32;
Type of tax: Employment: $73-$78;
Type of tax: Estate: $8;
Type of tax: Excise: $1;
Total: $312-$353.
Source: IRS.
Note: Figures may not sum to totals due to rounding.
[End of table]
What GAO Recommends:
GAO is not making any new recommendations but discusses some past
recommendations and highlights some new areas for possible attention.
www.gao.gov/cgi-bin/getrpt?GAO-05-527T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Michael Brostek on (202)
512-9110 or brostekm@gao.gov.
[End of section]
Chairman Grassley, Senator Baucus, and Members of the Committee:
I appreciate this opportunity to discuss the annual tax gap--the
difference between what taxpayers timely and accurately pay in taxes
and what they should pay under the law--and how reducing that gap can
help the nation cope with its large and growing long-term fiscal
challenges. Most recently, the Internal Revenue Service (IRS) estimated
a gross tax gap from $312 billion to $353 billion for tax year
2001.[Footnote 1] IRS estimated that it would eventually recover some
of this amount through late payments and IRS enforcement actions,
resulting in an estimated "net" tax gap for 2001 from $257 billion to
$298 billion.[Footnote 2] The tax gap arises when taxpayers fail to
comply with the tax laws, either intentionally or unintentionally. As a
result of their noncompliance, the burden of funding the nation's
commitments, including funding growing budget deficits, falls more
heavily on taxpayers who voluntarily pay their taxes. In addition, IRS
expends substantial resources enforcing and explaining tax laws, with
the goals of increasing compliance and reducing the tax gap.
For context in considering the tax gap, I will first provide the
committee with the results of our most recent simulations of the long-
term fiscal outlook. I will also discuss briefly the need for a
fundamental reexamination of major spending and tax policies and
priorities that will be important to recapturing our fiscal flexibility
and updating our programs and priorities to respond to emerging social,
economic, and security challenges. Next, I will discuss our long-
standing concerns regarding tax compliance and IRS's efforts to ensure
compliance. Finally, I will discuss the significance of reducing the
tax gap and a number of issues related to this challenging task,
including various means to potentially improve compliance, measuring
the extent of the tax gap, IRS's understanding of the reasons why
taxpayers are noncompliant, and IRS's plans and strategies for reducing
the gap. My remarks are based on our previous reports on a variety of
issues as well as work we are performing for this committee on the tax
gap, which we will address in greater detail in a forthcoming report,
and will be performed under generally accepted government auditing
standards.
Let me begin by highlighting several major points:
* The overall picture on the long-term fiscal outlook is not news to
this committee. Simply put, our nation's fiscal policy is on an
imprudent and unsustainable course. In addition, our long-term fiscal
gap grew much larger in fiscal year 2004. Long-term budget simulations
by GAO, the Congressional Budget Office (CBO), and others show that
over the long term we face large and growing structural deficits due
primarily to known demographic trends and rising health care costs.
Continuing on this unsustainable fiscal path will gradually erode, if
not suddenly damage, our economy, our standard of living, and
ultimately our national security. Our current path also will
increasingly constrain our ability to address emerging and unexpected
budgetary needs and increase the burdens that will be faced by our
children, grandchildren, and future generations.
* Regardless of the assumptions used, all simulations indicate that the
long-term fiscal challenge is too big to be solved by economic growth
alone or by making modest changes to existing spending and tax
policies. Rather, a fundamental reexamination of major spending and tax
policies and priorities will be important to recapturing our fiscal
flexibility and updating our programs and priorities to respond to
emerging social, economic, and security challenges. Ultimately, this
reexamination will need to entail a national discussion about what
Americans want from their government and how much they are willing to
pay for those things. Especially relevant to this committee will be
determining whether and how to change our current tax policies--
including the type of tax base, the degree of progressivity in our tax
system, or the extent of tax preferences in our system--and how to
ensure that compliance with any tax system we may choose is as high as
practically possible.
* We have long been concerned about tax noncompliance and IRS's efforts
to address it. Since 1990 we have had various aspects of tax
noncompliance on our high-risk list, and this year we have affirmed our
broad concern by consolidating two prior high-risk areas into one--
Enforcement of Tax Laws. Tax law enforcement is a high-risk area in
part because past declines in IRS's enforcement activities threatened
to erode taxpayer compliance. Declines in key IRS enforcement
occupations and examinations and other enforcement results reinforce
the need to focus greater attention on tax compliance.[Footnote 3] The
turnaround that has begun in staffing and some enforcement results is
good news. However, IRS's preliminary new compliance estimate indicates
that compliance has not improved and may be worse than IRS originally
estimated. Therefore, sustained progress in improving compliance is
needed.
* Reducing the current tax gap would contribute to our fiscal
sustainability while simultaneously improving fairness for those
citizens who fully and timely meet their tax obligations. Although
closing the entire tax gap is not practical, even modest reductions
will have very significant financial benefits--each 1 percent reduction
in the tax gap that we could achieve would likely generate more than
$2.5 billion in revenue annually to help reduce deficits and/or fund
our most pressing national priorities. Reducing the tax gap will be a
challenging task given persistent levels of noncompliance and will not
likely be achieved through a single solution. Rather, the tax gap must
be attacked on multiple fronts and with multiple strategies over a
sustained period of time. These strategies could include efforts to
simplify the tax code, provide quality services to taxpayers, and
utilize enforcement tools such as tax withholding and information
reporting.
* Regularly measuring the extent and nature of noncompliance is
critical to effective efforts to reduce the tax gap given changes in
the economy and tax law. A significant portion of IRS's preliminary tax
gap estimate for 2001 is based on recently collected compliance data on
individual income tax reporting, which accounts for nearly 50 percent
of the tax gap. However, for some areas of the tax gap, the estimate
relies on outdated data and methodologies, including data from the
1970s and 1980s used to estimate corporate income tax underreporting
and some employment tax underreporting. IRS does not have firm plans
for obtaining more contemporary information on compliance for these
areas of the tax gap or again measuring individual income reporting
compliance. Further, IRS has missed opportunities to develop a better
understanding of why taxpayers were noncompliant, which can guide IRS
in determining what tools and techniques to use to address
noncompliance. Finally, IRS's strategies for improving compliance do
not have the clear focus on quantitative long-term goals and results
measurement that are associated with high-performing organizations and
that are incorporated into statutory management framework Congress has
adopted.
Background:
The tax gap is an estimate of the difference between the taxes--
including individual income, corporate income, employment, estate, and
excise taxes--that should have been timely and accurately paid and what
was actually paid for a specific year. The estimate is an aggregate of
estimates for the three primary types of noncompliance: (1)
underreporting of tax liabilities on tax returns; (2) underpayment of
taxes due from filed returns; and (3) nonfiling, which refers to the
failure to file a required tax return altogether or timely.[Footnote 4]
Estimates for each type of noncompliance include estimates for some or
all of the five types of taxes that IRS administers.
IRS develops its tax gap estimates by measuring the rate of taxpayer
compliance--the degree to which taxpayers fully and timely complied
with their tax obligations. That rate is then used, along with other
data and assumptions, to estimate the dollar amount of taxes not timely
and accurately paid. For instance, IRS recently estimated that for tax
year 2001, from 83.4 percent to 85 percent of owed taxes were paid
voluntarily and timely, which translated into an estimate gross tax gap
from $312 billion to $353 billion in taxes not paid that should have
been. IRS also estimates the amount of the unpaid taxes that it will
recover through enforcement and other actions and subtracts that to
estimate the net annual tax gap. For tax year 2001, IRS estimated that
it would eventually recover about $55 billion for a net tax gap from
$257 billion to $298 billion.
IRS has estimated the tax gap on multiple occasions, beginning in 1979.
IRS's earlier tax gap estimates relied on the Taxpayer Compliance
Measurement Program (TCMP), through which IRS periodically performed
line-by-line examinations of randomly selected tax returns. TCMP
started with tax year 1963 and examined individual returns most
frequently--generally every 3 years--through tax year 1988. IRS
contacted all taxpayers selected for TCMP studies. IRS did not
implement any TCMP studies after 1988 because of concerns about costs
and burdens on taxpayers.[Footnote 5]
Recognizing the need for current compliance data, in 2002 IRS
implemented a new compliance study called the National Research Program
(NRP) to produce such data while minimizing taxpayer burden.[Footnote
6] Under NRP, a program that we have encouraged, IRS recently completed
its initial review of about 46,000 randomly selected individual tax
returns from tax year 2001. Unlike with TCMP studies, IRS did not need
to contact taxpayers for every tax return selected under NRP; handled
some taxpayer contacts through correspondence, as opposed to face-to-
face examinations; and during face-to-face examinations, generally only
asked taxpayers to explain information that it was otherwise unable to
verify through IRS and third-party databases.
IRS has a strategic planning process through which it supports
decisions about strategic goals, program development, and resource
allocation. Under the Government Performance and Results Act of 1993
(GPRA),[Footnote 7] agencies are to develop strategic plans as the
foundation for results-oriented management. GPRA requires that agency
strategic plans identify long-term goals, outline strategies to achieve
the goals, and describe how program evaluations were used to establish
or revise the goals. GPRA requires federal agencies to establish
measures to determine the results of their activities.
Long-term Fiscal Challenge Provides Impetus to Reexamine Tax Policies
and Compliance:
The nation is facing a range of important new forces that are already
working to reshape American society, our place in the world, and the
role of the federal government. Our capacity to address these and other
emerging needs and challenges will be predicated on when and how we
deal with our fiscal challenges--the long-term fiscal pressures we face
are daunting and unprecedented in the nation's history. As this
committee is well aware, the size and trend of our projected longer-
term deficits means that the nation cannot ignore the resulting fiscal
pressures--it is not a matter of whether the nation deals with the
fiscal gap, but when and how. Unless we take effective and timely
action, our near-term and longer-term deficits present the prospect of
chronic and seemingly perpetual budget shortfalls and constraints
becoming a fact of life for years to come. Not only would continuing
deficits eat away at the capacity of everything the government does,
but they will erode our ability to address the wide range of emerging
needs and demands competing for a share of a shrinking budget pie.
Our long-term simulations illustrate the magnitude of the fiscal
challenges we will face in the future. Figures 1 and 2 present these
simulations under two different sets of assumptions. In the first, we
begin with CBO's January 2005 baseline---constructed according to the
statutory requirements for that baseline.[Footnote 8] Consistent with
these requirements, discretionary spending is assumed to grow with
inflation for the first 10 years and tax cuts scheduled to expire are
assumed to expire. After 2015, discretionary spending is assumed to
grow with the economy, and revenue is held constant as a share of gross
domestic product (GDP) at the 2015 level. In the second figure, two
assumptions are changed: (1) discretionary spending is assumed to grow
with the economy after 2005 rather than merely with inflation and (2)
all temporary tax cuts are extended. For both simulations, Social
Security and Medicare spending is based on the 2005 Trustees'
intermediate projections, and we assume that benefits continue to be
paid in full after the trust funds are exhausted.
Figure 1: Composition of Spending as a Share of GDP under Baseline
Extended:
[See PDF for image]
Note: In addition to the expiration of tax cuts, revenue as a share of
GDP increases through 2015 due to (1) real bracket creep, (2) more
taxpayers becoming subject to the Alternative Minimum Tax (AMT), and
(3) increased revenue from tax-deferred retirement accounts. After
2015, revenue as a share of GDP is held constant.
[End of figure]
Figure 2: Composition of Spending as a Share of GDP Assuming
Discretionary Spending Grows with GDP after 2005 and All Expiring Tax
Provisions Are Extended:
[See PDF for image]
Note: Although expiring tax provisions are extended, revenue as a share
of GDP increases through 2015 due to (1) real bracket creep, (2) more
taxpayers becoming subject to the AMT, and (3) increased revenue from
tax-deferred retirement accounts. After 2015, revenue as a share of GDP
is held constant.
[End of figure]
As both these simulations illustrate, absent policy changes on the
spending or revenue side of the budget, the growth in spending on
federal retirement and health entitlements will encumber an escalating
share of the government's resources. Indeed, when we assume that recent
tax reductions are made permanent and discretionary spending keeps pace
with the economy, our long-term simulations suggest that by 2040
federal revenues may be adequate to pay little more than interest on
the federal debt. Neither slowing the growth in discretionary spending
nor allowing the tax provisions to expire--nor both together--would
eliminate the imbalance. Although revenues will be part of the debate
about our fiscal future, assuming no further borrowing, making no
changes to Social Security, Medicare, Medicaid, and other drivers of
the long-term fiscal gap would require at least a doubling of taxes,
and that seems highly implausible. Such significant tax increases would
also likely have an adverse effect on economic growth and disposable
income available to Americans. Accordingly, substantive reform of
Social Security and our major health programs remains critical to
recapturing our future fiscal flexibility.
Although considerable uncertainty surrounds long-term budget
projections, we know two things for certain: the population is aging
and the baby boom generation is approaching retirement age. The aging
population and rising health care spending will have significant
implications not only for the budget but also the economy as a whole.
Figure 3 shows the total future draw on the economy represented by
Social Security, Medicare, and Medicaid. Under the 2005 Trustees'
intermediate estimates and CBO's long-term Medicaid estimates, spending
for these entitlement programs combined will grow to 15.2 percent of
GDP in 2030 from today's 8.5 percent. It is clear that taken together
Social Security, Medicare, and Medicaid represent an unsustainable
burden on future generations.
Figure 3: Social Security, Medicare, and Medicaid Spending as a Percent
of GDP:
[See PDF for image]
Notes: Social Security and Medicare projections based on the
intermediate assumptions of the 2005 Trustees' Reports. Medicaid
projections based on CBO's January 2005 short-term Medicaid estimates
and CBO's December 2003 long-term Medicaid projections under mid-range
assumptions.
[End of figure]
Early action to change these programs would yield the highest fiscal
dividends for the federal budget and would provide a longer period for
prospective beneficiaries to make adjustments in their own planning.
Waiting to build economic resources and reform future claims entails
risks. First, we lose an important window during which today's
relatively large workforce can increase saving and enhance
productivity, two elements critical to growing the future economy. We
also lose the opportunity to reduce the burden of interest in the
federal budget, thereby creating a legacy of higher debt as well as
elderly entitlement spending for the relatively smaller workforce of
the future. Most critically, we risk losing the opportunity to phase in
changes gradually so that all can make the adjustments needed in
private and public plans to accommodate this historic shift.
Unfortunately, the long-range challenge has become more difficult, and
the window of opportunity to address the entitlement challenge is
narrowing.
A Fundamental Review, Reexamination, and Reprioritization Is Needed:
Confronting the nation's fiscal challenge will require nothing less
than a fundamental review, reexamination, and reprioritization of all
major spending and tax policies and programs that may take a generation
or more to resolve. Traditional incremental approaches to budgeting
will need to give way to more fundamental and periodic reexaminations
of the base of government. Many, if not most, current federal programs
and policies were designed decades ago to respond to trends and
challenges that existed at the time of their creation. If government is
to respond effectively to 21ST century trends, it cannot accept what it
does, how it does it, who does it, and how it gets financed as "given."
Not only do outmoded commitments, operations, choices of tools,
management structures, and tax programs and policies constitute a
burden on future generations, but they also erode the government's
capacity to align itself with the needs and demands of the 21ST
century.
Reexamining the base of government will be a challenging task, and we
at GAO believe we have an obligation to assist and support Congress in
this endeavor. To that end, we recently issued a report[Footnote 9]
that provides examples of the kinds of difficult choices the nation
faces with regard to discretionary spending; mandatory spending,
including entitlements; as well as tax policies and compliance
activities. Regarding tax policy, a debate is under way about the
future of our tax system that is partly about whether the goals for the
nation's tax system can be best achieved using the current structure or
a fundamentally reformed tax structure. The debate is also motivated by
increasing globalization, the growing complexity of our tax system, and
the growing use of tax preferences whose aggregate revenue loss has
exceeded all discretionary spending in 5 of the past 10 years.
Although outside the scope of this hearing, today's pressing tax
challenges raise important questions. For example:
* Given our current tax system, what tax rate structure is more likely
to raise sufficient revenue to fund government and satisfy the public's
perception of fairness?
* Which tax preferences need to be reconsidered because they fail to
achieve the objectives intended by the Congress, their costs outweigh
their benefits, they duplicate other programs, or other more cost
effective means exist for achieving their objectives?
* Should the basis of the existing system be changed from an income to
a consumption base? Would such a change help respond to challenges
posed by demographic, economic, and technological changes? How would
such a change affect savings and work incentives? How would reforms
address such issues as the impact on state and local tax systems and
the distribution of burden across the nation's taxpayers?
Regarding compliance with our tax laws, the success of our tax system
hinges greatly on the public's perception of its fairness and
understandability. Compliance is influenced not only by the
effectiveness of IRS's enforcement efforts but also by Americans'
attitudes about the tax system and their government. A recent survey
indicated that about 12 percent of respondents say it is acceptable to
cheat on their taxes. Furthermore, the complexity of, and frequent
revisions to, the tax system make it more difficult and costly for
taxpayers who want to comply to do so and for IRS to explain and
enforce tax laws. Complexity also creates a fertile ground for those
intentionally seeking to evade taxes and often trips others into
unintentional noncompliance. The lack of transparency also fuels
disrespect for the tax system and the government. Thus, a crucial
challenge for reexamination will be to determine how we can best
strengthen enforcement of existing laws to give taxpayers confidence
that their friends, neighbors, and business competitors are paying
their fair share.
Enforcement of Tax Laws Is on GAO's High-Risk List:
We have long been concerned about tax noncompliance and IRS efforts to
address it. Collection of unpaid taxes was included in our first high-
risk series report in 1990, with a focus on the backlog of uncollected
debts owed by taxpayers. In 1995, we added Filing Fraud as a separate
high-risk area, narrowing the focus of that high-risk area in 2001 to
Earned Income Credit Noncompliance because of the particularly high
incidence of fraud and other forms of noncompliance in that program. We
expanded our concern about the Collection of Unpaid Taxes in our 2001
high-risk report to include not only unpaid taxes (including tax
evasion and unintentional noncompliance) known to IRS, but also the
broader enforcement issue of unpaid taxes that IRS has not detected. In
our high-risk update that we issued in January,[Footnote 10] we
consolidated these areas into a single high-risk area--Enforcement of
the Tax Laws--because we believe the focus of concern on the
enforcement of tax laws is not confined to any one segment of the
taxpaying population or any single tax provision.
Tax law enforcement is a high-risk area in part because past declines
in IRS's enforcement activities threatened to erode taxpayer
compliance. In recent years, the resources IRS has been able to
dedicate to enforcing the tax laws have declined. For example, the
number of revenue agents (those who examine complex returns), revenue
officers (those who perform field collection work), and special agents
(those who perform criminal investigations) decreased over 21 percent
from 1998 through 2003. However, IRS achieved some staffing gains in
2004 and expects modest gains in 2005. IRS's proposal for fiscal year
2006, if funded and implemented as planned, would return enforcement
staffing in these occupations to their highest levels since
1999.[Footnote 11]
Concurrently, IRS's enforcement workload--measured by the number of
taxpayer returns filed--has continually increased. For example, from
1997 through 2003, the number of individual income tax returns filed
increased by about 8 percent. Over the same period, returns for high
income individuals grew by about 81 percent.[Footnote 12] Due to their
income levels, IRS believes that these individuals present a particular
compliance risk. In light of declines in enforcement staffing and the
increasing number of returns filed, nearly every indicator of IRS's
coverage of its enforcement workload has declined in recent years.
Although in some cases workload coverage has begun to increase, overall
IRS's coverage of known workload is considerably lower than it was just
a few years ago. Figure 4 shows the trend in examination rates--the
proportion of tax returns that IRS examines each year--for field,
correspondence, and total examinations since 1995. Field examinations
involve face-to-face examinations and correspondence examinations are
typically less comprehensive and complex, involving communication
through written notices. IRS experienced steep declines in examination
rates from 1995 to 1999, but the examination rate has slowly increased
since 2000. However, as the figure shows, the increase in total
examination rates of individual filers has been driven mostly by
correspondence examinations, while more complex field examinations
continue to decline.
Figure 4: Examination Rate for Individual Income Tax Returns, Fiscal
Years 1995-2004:
[See PDF for image]
[End of figure]
On the collection front, IRS's use of enforcement sanctions, such as
liens, levies, and seizures, dropped precipitously during the mid-and
late 1990s. In fiscal year 2000, IRS's use of these three sanctions was
at 38 percent, 7 percent, and 1 percent, respectively, of fiscal year
1996 levels. However, beginning in fiscal year 2001, IRS's use of liens
and levies began to increase.[Footnote 13] By fiscal year 2004, IRS's
use of liens, levies, and seizures reached 71 percent, 65 percent, and
4 percent of 1996 levels, respectively.
Further, IRS's workload has grown ever more complex as the tax code has
grown more complex. IRS is challenged to administer and explain each
new provision, thus absorbing resources that otherwise might be used to
enforce the tax laws. Concurrently, other areas of particularly serious
noncompliance have gained the attention of IRS and Congress, such as
abusive tax shelters and schemes employed by businesses and wealthy
individuals that often involve complex transactions that may span
national boundaries. Given the broad declines in IRS's enforcement
workforce, IRS's decreased ability to follow up on suspected
noncompliance, and the emergence of sophisticated evasion concerns, IRS
is challenged in attempting to ensure that taxpayers fulfill their
obligations.
IRS is working to further improve its enforcement efforts. In addition
to recent favorable trends in enforcement staffing, correspondence
examinations, and the use of some enforcement sanctions, IRS has
recently made progress with respect to abusive tax shelters through a
number of initiatives and recent settlement offers that have resulted
in billions of dollars in collected taxes, interest, and penalties. In
addition, IRS is developing a centralized cost accounting system, in
part to obtain better cost and benefit information on compliance
activities, and is modernizing the technology that underpins many core
business processes. It has also redesigned some compliance and
collections processes and plans additional redesigns as technology
improves. Finally, the recently completed NRP study of individual
taxpayers not only gives us a benchmark of the status of taxpayers'
compliance but also gives IRS a better basis to target its enforcement
efforts. However, IRS's preliminary compliance estimate based on NRP
indicates that compliance has not improved and may be worse than IRS
originally estimated. As such, sustained progress toward improving
compliance is needed.
Multiple Service and Enforcement Strategies, Periodic Compliance
Measurement, and A Results-Oriented Compliance Approach May Help IRS
Reduce the Tax Gap:
Reducing the tax gap would be a step toward improving our fiscal
sustainability while simultaneously enhancing fairness for those
citizens who meet their tax obligations. That said, reducing the tax
gap is a challenging task, and closing the entire tax gap is not
practical. Reducing the tax gap will not likely be achieved through a
single solution, but will likely involve multiple strategies that
include reducing tax code complexity, providing quality services to
taxpayers, and enhancing enforcement of the tax laws through the use of
tools such as tax withholding and information reporting that increase
the transparency of income and deductions to both IRS and taxpayers.
Also, as IRS moves forward in continuing to address the tax gap,
building and maintaining a base of information on the extent of, and
reasons for, noncompliance as well as defining desired changes in the
tax gap and measuring results of efforts to address it will be
critical.
Reducing the Tax Gap Could Have a Positive Fiscal Impact but Will
Require Multiple Strategies:
Given its size, even small or moderate reductions in the net tax gap
could yield substantial returns. For example, based on IRS's most
recent estimate, each 1 percent reduction in the net tax gap would
likely yield more than $2.5 billion annually. Thus, a 10 percent to 20
percent reduction of the net tax gap would translate into from $25
billion to $50 billion or more in additional revenue annually.[Footnote
14]
Although reducing the tax gap may be an attractive means to improve the
nation's fiscal position, achieving this end will be a challenging task
given persistent levels of noncompliance. IRS has made efforts to
reduce the tax gap since the early 1980s; yet the tax gap is still
large--although without these efforts it could be even larger. Also,
IRS is challenged in reducing the tax gap because the tax gap is spread
across the five different types of taxes that IRS administers, and a
substantial portion of the tax gap is attributed to taxpayers who are
not subject to withholding or information reporting requirements.
Moreover, as we have reported in the past,[Footnote 15] closing the
entire tax gap may not be feasible nor desirable, as it could entail
more intrusive recordkeeping or reporting than the public is willing to
accept or more resources than IRS is able to commit.
Although much of the tax gap that IRS currently recovers is through
enforcement actions, a sole focus on enforcement will not likely be
sufficient to further reduce the net tax gap. Rather, the tax gap must
be attacked on multiple fronts and with multiple strategies on a
sustained basis. For example, efforts to simplify the tax code and
otherwise alter current tax policies may help reduce the tax gap by
making it easier for individuals and business to understand and
voluntarily comply with their tax obligations. For instance, reducing
the multiple tax preferences for retirement savings or education
assistance might ease taxpayers' burden in understanding and complying
with the rules associated with these options. Also, simplification may
reduce opportunities for tax evasion through vehicles such as abusive
tax shelters. However, for any given set of tax policies, IRS's efforts
to reduce the tax gap and ensure appropriate levels of compliance will
need to be based on a balanced approach of providing service to
taxpayers and enforcing the tax laws.
Furthermore, providing quality services to taxpayers is an important
part of any overall strategy to improve compliance and thereby reduce
the tax gap. As we have reported in the past,[Footnote 16] one method
of improving compliance through service is to educate taxpayers about
confusing or commonly misunderstood tax requirements. For example, if
the forms and instructions taxpayers use to prepare their taxes are not
clear, taxpayers may be confused and make unintentional errors. One
method to ensure that forms and instructions are sufficiently clear is
to test them before use. However, we reported in 2003 that IRS had
tested revisions to only five individual forms and instructions from
July 1997 through June 2002, although hundreds of forms and
instructions had been revised in 2001 alone.[Footnote 17]
Finally, in terms of enforcement, IRS will need to use multiple
strategies and techniques to find noncompliant taxpayers and bring them
into compliance. However, a pair of tools has been shown to lead to
high levels of compliance: withholding tax from payments to taxpayers
and having third parties report information to IRS and the taxpayers on
income paid to taxpayers. For example, banks and other financial
institutions provide information returns (Forms 1099) to account
holders and IRS showing the taxpayers' annual income from some types of
investments. Similarly, most wages, salaries, and tip compensation are
reported by employers to employees and IRS through Form W-2.
Preliminary findings from NRP indicate that more than 98.5 percent of
these types of income are accurately reported on individual returns.
In the past, we have identified a few potential areas where additional
withholding or information reporting requirements could serve to
improve compliance: [Footnote 18]
* Requiring tax withholding and more or better information return
reporting on payments made to independent contractors. Past IRS data
have shown that independent contractors report 97 percent of the income
that appears on information returns, while contractors that do not
receive these returns report only 83 percent of income. We have also
identified other options for improving information reporting for
independent contractors, including increasing penalties for failing to
file required information returns, lowering the $600 threshold for
requiring such returns, and requiring businesses to separately report
on their tax returns the total amount of payments to independent
contractors.[Footnote 19]
* Requiring information return reporting on payments made to
corporations. Unlike payments made to sole proprietors, payments made
to corporations for services are generally not required to be reported
on information returns. IRS and GAO have contended that the lack of
such a requirement leads to lower levels of compliance for small
corporations. Although Congress has required federal agencies to
provide information returns on payments made to contractors since
1997,[Footnote 20] payments made by others to corporations are
generally not covered by information returns.
* Require more data on information returns dealing with capital gain
income. Past IRS studies have indicated that much of the noncompliance
associated with capital gains is a result of taxpayers overstating an
asset's "basis," the amount of money originally paid for the asset.
Currently, financial institutions are required to report the sales
prices, but not the purchase prices, of stocks and bonds on information
returns. Without information on purchase prices, IRS cannot use
efficient and effective computer-matching programs to check for
compliance and must use much more costly means to examine taxpayer
returns in order to verify capital gain income.
Although withholding and information returns are highly effective in
encouraging compliance, such additional requirements generally impose
costs and burdens on the businesses that must implement them. However,
continued reexamination of opportunities to expand information
reporting and tax withholding could increase the transparency of the
tax system. Such reexamination could be especially relevant toward
improving compliance in areas that are particularly complex or
challenging to administer, such as noncash charitable contributions or
net income and losses passed through from "flow-through" entities such
as S corporations and partnerships to their shareholders and
partners.[Footnote 21]
Finally, making progress on closing the tax gap requires that the tools
and techniques being used to promote compliance are evaluated to ensure
that they actually are effective. IRS evaluates some of its efforts to
assess how well they work, perhaps most notably its current effort to
test new procedures designed to reduce noncompliance with the Earned
Income Tax Credit,[Footnote 22] but misses other opportunities. For
example, the lack of testing for forms and instructions mentioned
earlier is one instance where improved evaluation would be worthwhile.
We also reported in 2002 that the effectiveness of the Federal Tax
Deposit Alert program--a program that since 1972 has been intended to
reduce delinquencies in paying employment taxes--could not be evaluated
because IRS had no system to track contacts IRS made with delinquent
employers.[Footnote 23] The availability of current compliance
information should enhance IRS's ability to evaluate the success of its
efforts to promote compliance.
Regular Compliance Measurement Can Support Informed Decisions to Reduce
the Tax Gap, but IRS Lacks Firm Plans for Such Measurement:
Regularly measuring compliance can offer many benefits, including
helping IRS identify new or major types of noncompliance, identify
changes in tax laws and regulations that may improve compliance, more
effectively target examinations of tax returns or other enforcement
programs, understand the effectiveness of its programs to promote and
enforce compliance, and determine its resource needs and allocations.
For example, by analyzing 1979 and 1982 TCMP data, IRS identified
significant noncompliance with the number of dependents claimed on tax
returns and justified a legislative change to address the
noncompliance. As a result, for tax year 1987 taxpayers claimed about 5
million fewer dependents on their returns than would have been expected
without the change in law. In addition, tax compliance data are useful
outside of IRS for tax policy analysis, revenue estimating, and
research.
A significant portion of IRS's new tax gap estimate is based on recent
compliance data. IRS used data from NRP to update individual income tax
underreporting and the portion of individual employment tax
underreporting from self-employed individuals.[Footnote 24] Completion
of NRP is a substantial achievement--as table 1 indicates,
underreporting of individual income taxes represented about half of the
tax gap for 2001 (the estimate ranges from $150 billion to $187 billion
out of a gross tax gap estimate that ranges from $312 billion to $353
billion). Also, from $51 billion to $56 billion of the $66 billion to
$71 billion in estimated underreported employment tax was due to self-
employment tax underreporting. IRS used current, actual data from its
Master Files to calculate the underpayment segment of the tax gap.
Table 1: IRS's Tax Year 2001 Gross Tax Gap Estimates by Type of
Noncompliance and Type of Tax:
Dollars in billions:
Type of noncompliance: Underreporting;
Individual income: $150-$187;
Type of tax: Corporate income: $30;
Type of tax: Employment: $66-$71;
Type of tax: Estate: $4;
Type of tax: Excise: No estimate;
Total: $250-$292.
Type of noncompliance: Underpayment;
Individual income: 19;
Type of tax: Corporate income: $2;
Type of tax: Employment: $7;
Type of tax: Estate: $2;
Type of tax: Excise: $1;
Total: $32.
Type of noncompliance: Nonfiling;
Individual income: 28;
Type of tax: Corporate income: No estimate;
Type of tax: Employment: No estimate;
Type of tax: Estate: $2;
Type of tax: Excise: No estimate;
Total: $30.
Type of noncompliance: Total;
Individual income: $198-$234;
Type of tax: Corporate income: $32;
Type of tax: Employment: $73-$78;
Type of tax: Estate: $8;
Type of tax: Excise: $1;
Total: $312-$353.
Source: IRS.
Note: Figures may not sum to totals due to rounding.
[End of table]
IRS has concerns with the certainty of the overall tax gap estimate in
part because some areas of the estimate rely on old data and IRS has no
estimates for other areas of the tax gap. IRS does not have estimates
for corporate income, employment, and excise tax nonfiling or for
excise tax underreporting. For these types of noncompliance, IRS
maintains that the data are either difficult to collect, imprecise, or
unavailable. IRS has not recently collected compliance data for the
remaining segments of the tax gap. For example, IRS used data from the
1970s and 1980s to estimate underreporting of corporate income taxes
and employer-withheld employment taxes.
IRS is taking several steps that could improve the tax gap estimate for
tax year 2001. IRS plans to further analyze the preliminary results
from NRP and expects to publish a revised estimate by the end of 2005.
The revised estimate will incorporate new methodologies, including
those for estimating overall individual income tax underreporting as
well as for the portion attributable to self-employed individuals who
operate businesses informally, and for estimating individual income tax
nonfiling. In addition, IRS research officials have proposed a
compliance measurement study that will allow IRS to update
underreporting estimates involving flow-through entities. This study,
which IRS intends to begin in fiscal year 2006, would take 2 to 3 years
to complete. Because either individual taxpayers or corporations may be
recipients of income (or losses) from flow-through entities, this study
could affect IRS's estimates for the underreporting gap for individual
and corporate income tax.
While these data and methodology updates could improve the tax gap
estimates, IRS has no documented plans to periodically collect more or
better compliance data over the long term. Other than the proposed
study of flow-through entities, IRS does not have plans to collect
compliance data for other segments of the tax gap. Also, IRS has
indicated that given its current research priorities, it would not
begin another NRP study of individual income tax returns before 2008,
if at all, and would not complete such a study until at least 2010.
When IRS initially proposed the NRP study, it had planned to study
individual income tax underreporting on a 3-year cycle.
According to IRS officials, IRS has not committed to regularly
collecting compliance data because of the associated costs and burdens.
Taxpayers whose returns are examined through compliance studies such as
NRP bear costs in terms of time and money. Also, IRS incurs costs,
including direct costs and opportunity costs--revenue that IRS
potentially forgoes by using its resources to examine randomly selected
returns, which may include returns from compliant taxpayers, as opposed
to traditional examinations that focus on taxpayer returns that likely
contain noncompliance and may more consistently produce additional tax
assessments.
Although the costs and burdens of compliance measurement are legitimate
concerns, as we have reported in the past, we believe compliance
studies to be good investments.[Footnote 25] Without current compliance
data, IRS is less able to determine key areas of noncompliance to
address and actions to take to maximize the use of its limited
resources. The lack of firm plans to continually obtain fresh
compliance data is troubling because the frequency of data collection
can have a large impact on the quality and utility of compliance data.
As we have reported in the past, the longer the time between compliance
measurement surveys, the less useful they become given changes in the
economy and tax law.[Footnote 26]
In designing the NRP study, IRS balanced the costs, burdens, and
compliance risk of studying that area of the tax gap. Any plans for
obtaining and maintaining reasonably current information on compliance
levels for all portions of the tax gap would similarly need to take
into account costs, burdens, and compliance risks in determining which
areas of compliance to measure and the scope and frequency of such
measurement.
Knowing the Reasons for Noncompliance Could Help Guide Compliance
Efforts, but IRS Has Concerns with Its Data on These Reasons:
Data on whether taxpayers are unintentionally or intentionally
noncompliant with specific tax provisions are critical to IRS for
deciding whether its efforts to address specific areas of noncompliance
should focus on nonenforcement activities, such as improved forms or
publications, or enforcement activities to pursue intentional
noncompliance. Recognizing such benefits, the National Taxpayer
Advocate has urged IRS to consider performing additional research into
causes of noncompliance.[Footnote 27] We have also reported in the
past[Footnote 28] that rigorous research of the causes of noncompliance
seems intuitive.
IRS collects data on the reasons for noncompliance for specific tax
issues during its examinations of tax returns, including those reviewed
for NRP. However, IRS has a number of concerns with the data:
* The database is incomplete as not all examiners have been sending
information on the results, including reasons, of closed examinations
to be entered into the database.
* IRS has not tested the adequacy of the controls for data entry or the
reliability of the data being collected. IRS has found instances where
examiners close examinations without assigning a reason for
noncompliance or by assigning the same reason to all instances of
noncompliance, regardless of the situation.
* IRS has not trained all examiners to deal with the subjectivity of
determining reasons to ensure consistent understanding of the reason
categories.
* The data are not representative of the population of noncompliant
taxpayers because the examined tax returns were not selected randomly.
As IRS continues to collect data on the reasons for noncompliance in
the future, it will be important to take these concerns into account.
Additionally, as with its efforts to measure compliance, it will be
important for IRS to consider the costs and burden of obtaining data on
the reasons for noncompliance.
Long-term, Quantitative Goals for Improving Taxpayers' Compliance Would
Be Consistent with Results-Oriented Management:
Focusing on outcome-oriented goals and establishing measures to assess
the actual results, effects, or impact of a program or activity
compared to its intended purpose can help agencies improve performance
and stakeholders determine whether programs have produced desired
results. As such, establishing long-term, quantitative compliance goals
offers several benefits for IRS. Perhaps most important, compliance
goals coupled with periodic measurements of compliance levels would
provide IRS with a better basis for determining to what extent its
various service and enforcement efforts contribute to compliance.
Additionally, long-term, quantitative goals may help IRS consider new
strategies to improve compliance, especially since these strategies
could take several years to implement. For example, IRS's progress
toward the goal of having 80 percent of all individual tax returns
electronically filed by 2007[Footnote 29] has required enhancement of
its technology, development of software to support electronic filing,
education of taxpayers and practitioners, and other steps that could
not be completed in a short time frame. Focusing on intended results
can also promote strategic and disciplined management decisions that
are more likely to be effective because managers who use fact-based
performance analysis are better able to target areas most in need of
improvement and select appropriate interventions. Likewise, agency
accountability can be enhanced when both agency management and external
stakeholders such as Congress can readily measure an agency's progress
toward meeting its goals. Finally, setting long-term, quantitative
goals would be consistent with results-oriented management principles
that are associated with high-performing organizations and incorporated
into the statutory management framework Congress has adopted through
GPRA.
IRS's strategies for improving compliance generally lack a clear focus
on long-term, quantitative goals and results measurement. Although IRS
has established broad qualitative goals and strategies for improving
taxpayer service and enhancing enforcement of the tax laws, it has not
specified by how much it hopes these strategies will improve
compliance. IRS has also identified measures, such as compliance rates
for tax reporting, filing, and payment as well as the percentage of
Americans who think it is acceptable to cheat on their taxes,[Footnote
30] which are intended to gauge the progress of its strategies toward
its broad goals. However, IRS does not always collect recent data to
update these measures and has not established quantitative goals
against which to compare the measures. In response to a President's
Management Agenda[Footnote 31] initiative to better integrate budget
and performance information, IRS officials said that they are
considering various long-term goals for the agency. These goals are to
be released by May 2005. The officials have not indicated how many
goals will be related to improving taxpayer compliance or whether they
will be quantitative and results-oriented.
Not unlike other agencies,[Footnote 32] IRS faces challenges in
implementing a results-oriented management approach, such as
identifying and collecting the necessary data to make informed
judgments about what goals to set and to subsequently measure its
progress in reaching such goals. However, having completed the NRP
review of income underreporting by individuals, IRS now has an improved
foundation for setting a goal or goals for improving taxpayers'
compliance.[Footnote 33] Nevertheless, measuring progress toward any
goals that may be set could be challenging. For example, IRS
researchers have found it difficult to determine the extent to which
its enforcement actions deter noncompliance or its services improve
compliance among taxpayers who want to comply. Measuring these effects
is complicated in part because many factors outside of IRS's actions
can affect compliance. However, as the National Taxpayer Advocate's
2004 annual report to Congress[Footnote 34] pointed out, current and
existing data on noncompliance may help IRS better understand and
address this challenge. Furthermore, even if IRS is unable to show that
its actions directly affected compliance rates, periodic measurements
of compliance levels can indicate the extent to which compliance is
improving or declining and provide a basis for reexamining existing
programs and triggering corrective actions if necessary.
Concluding Observations:
The nation is currently on an imprudent and unsustainable fiscal path
that threatens our future. If we act now to address the looming fiscal
challenges facing the nation, the lives of our children and
grandchildren will be measurably better than if we wait. Nevertheless,
the decisions we must make will not be easy. They involve difficult
choices about the role of government in our lives and our economy.
Acting now will impose sacrifices, but today we have more options with
less severe consequences than if we wait.
Reducing the tax gap is one option that would help. While our long term-
fiscal imbalance is too large to be eliminated by one strategy,
reducing the tax gap can ease the difficult decisions that are needed.
But, regardless of the contribution that a reduced tax gap can make to
easing our long-term challenges, we need to make concerted efforts to
address the tax gap because it is fundamentally unfair and threatens
Americans' trust in their government. The tax gap is both a measure of
the burden and frustration of taxpayers who want to comply but are
tripped by tax code complexity and of willful tax cheating by a
minority who want the benefits of government services without paying
their fair share.
Chairman Grassley, Senator Baucus, and Members of the Committee, this
concludes my testimony. At the request of the committee, in the near
future, we will issue a report that addresses the tax gap in greater
detail and, as appropriate, may make recommendations related to the
topics covered in my statement. We look forward to continuing to
support the committee's oversight of the tax gap and related issues. I
would be happy to answer any questions you may have at this time.
Contact and Acknowledgments:
For further information on this testimony, please contact Michael
Brostek on (202) 512-9110 or [Hyperlink, brostekm@gao.gov]. Individuals
making key contributions to this testimony include Jeff Arkin,
Elizabeth Fan, Shannon Groff, George Guttman, Michael Rose, and Tom
Short.
(450330):
FOOTNOTES
[1] IRS's most recent estimates of the tax gap are preliminary, and as
such, IRS presents them as ranges.
[2] Throughout this report, references to the tax gap refer to the
gross tax gap unless otherwise noted.
[3] GAO, Internal Revenue Service: Assessment of Fiscal Year 2006
Budget Request and the Interim Results of the 2005 Filing Season, GAO-
05-416T (Washington, D.C.: Apr. 14, 2005).
[4] Taxpayers who receive filing extensions, pay their full tax
liability by payment due dates, and file returns prior to extension
deadlines are considered to have filed timely.
[5] GAO, Tax Administration: Status of IRS' Efforts to Develop Measures
of Voluntary Compliance, GAO-01-535 (Washington, D.C.: June 18, 2001).
[6] GAO, Tax Administration: New Compliance Research Effort Is on
Track, but Important Work Remains, GAO-02-769 (Washington, D.C.: June
27, 2002).
[7] Pub. L. No. 103-62 (1993).
[8] Congressional Budget Office, The Budget and Economic Outlook:
Fiscal Years 2006 to 2015 (Washington, D.C.: January 2005).
[9] GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: Feb. 2005).
[10] GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.:
January 2005).
[11] GAO-05-416T.
[12] High income individual taxpayers are those reporting $100,000 or
more of "total positive income," which is, in general, the sum of all
positive amounts shown for the various sources of income reported on
individual tax returns and thus excludes net losses.
[13] We made a number of recommendations to improve and expand IRS's
levy efforts. See GAO, Tax Administration: IRS's Levy of Federal
Payments Could Generate Millions of Dollars, GAO/GGD-00-65 (Washington,
D.C.: Apr. 7, 2000), and Tax Administration: Millions of Dollars Could
Be Collected if IRS Levied More Federal Payments, GAO-01-711
(Washington, D.C.: July 20, 2001).
[14] Any significant reduction of the tax gap would likely depend on an
improvement in the level of taxpayer compliance. In some instances, the
amount of the tax gap can change without a corresponding change in the
level of compliance. For example, a reduction in marginal tax rates
could result in a smaller tax gap simply because the amount of tax that
should be paid has been reduced, even if the level of compliance
remains unchanged.
[15] GAO, Taxpayer Compliance: Analyzing the Nature of the Income Tax
Gap, GAO/T-GGD-97-35 (Washington, D.C.: Jan. 9, 1997).
[16] GAO/T-GGD-97-35.
[17] GAO, Tax Administration: IRS Should Reassess the Level of
Resources for Testing Forms and Instructions, GAO-03-486 (Washington,
D.C.: Apr. 11, 2003).
[18] GAO, Tax Gap: Many Actions Taken, but a Cohesive Compliance
Strategy Needed, GAO/GGD-94-123 (Washington, D.C.: May 11, 1994).
[19] GAO, Tax Administration: Approaches for Improving Independent
Contractor Compliance, GAO/GGD-92-108 (Washington, D.C.: July 23,
1992).
[20] Taxpayer Relief Act of 1997, Pub. L. No. 105-34 (1997).
[21] Partnerships and S corporations are businesses commonly referred
to as flow-through entities, as they do not generally pay taxes on
income. Instead, they distribute net income and losses to partners,
shareholders, and beneficiaries, who are subsequently required to
report net income or losses on their individual tax returns and pay any
applicable taxes.
[22] GAO, Earned Income Credit: Qualifying Child Certification Test
Appears Justified, but Evaluation Plan Is Incomplete, GAO-03-794
(Washington, D.C.: Sept. 30, 2003), and Earned Income Tax Credit:
Implementation of Three New Tests Proceeded Smoothly, But Tests and
Evaluation Plans Were Not Fully Documented, GAO-05-92 (Washington,
D.C.: Dec. 30, 2004).
[23] GAO, Tax Administration: IRS's Efforts to Improve Compliance With
Employment Tax Requirements Should Be Evaluated, GAO-02-92 (Washington,
D.C.: Jan. 15, 2002).
[24] Self-employed individuals are required to calculate and remit
Social Security and Medicare taxes to the U.S. Treasury each quarter,
while employers generally withhold these taxes from their employees'
wages, match these amounts, and are required to remit these
withholdings to Treasury at least quarterly.
[25] GAO, Tax Administration: IRS' Plans to Measure Tax Compliance Can
Be Improved, GAO/GGD-93-52 (Washington, D.C.: Apr. 5, 1993).
[26] GAO/GGD-93-52.
[27] Testimony of Nina E. Olson, National Taxpayer Advocate, before the
Senate Committee on Finance, July 21, 2004, and Internal Revenue
Service, Taxpayer Advocate Service, National Taxpayer Advocate 2004
Annual Report to Congress (Washington, D.C.: Dec. 31, 2004).
[28] GAO, Tax Research: IRS Has Made Progress but Major Challenges
Remain, GAO/GGD-96-109 (Washington, D.C.: June 5, 1996).
[29] Congress established this electronic filing goal in the IRS
Restructuring and Reform Act of 1998, Pub. L. No. 105-206 (1998).
[30] Other measures for enhancing enforcement are (1) the percentage of
priority guidance list items published (percentage of tax issues IRS
will address through regulations, notices, and other forms of guidance)
and (2) average cycle time between receipt and completion of an audit
case.
[31] The President's Management Agenda is intended to help the federal
government become more results-oriented and encourage federal managers
to ask whether their programs are working as intended and, if not, what
can be done to achieve greater results.
[32] GAO, The Government Performance and Results Act: 1997
Governmentwide Implementation Will Be Uneven, GAO/GGD-97-109
(Washington, D.C.: June 2, 1997), and Results-Oriented Government: GPRA
Has Established a Solid Foundation for Achieving Greater Results, GAO-
04-38 (Washington, D.C.: Mar. 10, 2004).
[33] The Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. No. 105-206 (1998), specifically prohibits IRS from using its
records of tax enforcement results to evaluate employees or to impose
or suggest production quotas or goals with respect to such employees.
That restriction does not, however, prevent IRS from using its records
of tax enforcement results to examine whether its current enforcement
efforts are effective in deterring noncompliance and to in turn
establish long-term strategies and priorities for improvement.
[34] Internal Revenue Service, Taxpayer Advocate Service, National
Taxpayer Advocate 2004 Annual Report to Congress.
