Tax Gap
Complexity and Taxpayer Compliance
Gao ID: GAO-11-747T June 28, 2011
Taxes are necessary because they fund the services provided by government. Several years ago, the Internal Revenue Service (IRS) estimated that the gross tax gap--the difference between taxes owed and taxes paid on time--was $345 billion for 2001. In the face of large and growing deficits, it is important to seek out potential causes and solutions to the tax gap. Achieving high levels of voluntary compliance is made more challenging as the tax code expands. Tax expenditures--preferential provisions in the code such as exemptions, exclusions, deductions, credits, and deferral of tax liability--have expanded the tax code, more than doubling in number since 1974. GAO's statement focuses on four key areas: (1) how complexity adds to taxpayer burden and economic efficiency costs; (2) how complexities in reporting income contribute to the tax gap; (3) how tax expenditures add complexity and contribute to the tax gap; and (4) possible strategies for addressing the tax gap. The statement is based largely on GAO's previous work conducted on tax compliance issues affecting individual taxpayers from 2005 through 2011.
The federal tax system contains complex rules. These rules may be necessary, for example, to ensure proper measurement of income, target benefits to specific taxpayers, and address areas of noncompliance. However, these complex rules also impose a wide range of recordkeeping, planning, computational, and filing requirements upon businesses and individuals. Complying with these requirements costs taxpayers time and money. In 2005 GAO reviewed existing studies and reported that even using the lowest available compliance cost estimates for the personal and corporate income tax, combined compliance costs would total $107 billion (roughly 1 percent of gross domestic product) per year; other studies estimate costs 1.5 times as large. Economic efficiency costs, which are reductions in economic well-being caused by changes in behavior due to taxes, are estimated to be even larger. Although many taxpayers have simple forms of income, others do not--especially those who receive income from capital gains, rents, self-employment, and other sources--and they may be required to do complicated calculations and keep detailed records. This complexity can engender errors and underpaid taxes. For example, GAO has documented millions of taxpayer errors in following complex rules for determining taxpayers' "basis"--generally the taxpayer's investment in a property--in securities they sold or corporations they own. Tax expenditures add to tax code complexity in part because they require taxpayers to learn about, determine their eligibility for, and choose between tax expenditures that have similar purposes. Tax expenditures also complicate tax planning, as taxpayers must predict their own future circumstances as well as future tax rules to make the best choice among provisions. Taxpayer errors contribute to the tax gap. For example, in 2001 taxpayers underreported $6.3 billion in net income due to misreported Individual Retirement Arrangement (IRA) distributions. But taxpayers also may underclaim benefits to which they are entitled. According to GAO's past analysis, of tax filers who appeared to be eligible for a higher-education tax credit or tuition deduction in tax year 2005, about 19 percent, representing about 412,000 returns, failed to claim any of them. No single approach is likely to fully and cost-effectively address the tax gap, but several strategies could improve taxpayer compliance. These strategies could require actions by Congress or IRS. For example, Congress can simplify the tax code by eliminating some tax expenditures and by making definitions more consistent across the tax code. IRS and Congress could take steps to enhance information reporting by third parties or expand compliance checking before refunds are issued. GAO does not make any new recommendations in this testimony.
GAO-11-747T, Tax Gap: Complexity and Taxpayer Compliance
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United States Government Accountability Office:
GAO:
Testimony:
Before the Committee on Finance, U.S. Senate:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Tuesday, June 28, 2011:
Tax Gap:
Complexity and Taxpayer Compliance:
Statement of Michael Brostek:
Director, Tax Issues:
Strategic Issues:
GAO-11-747T:
GAO Highlights:
Highlights of GAO-11-747T, testimony before the Committee on Finance,
U.S. Senate.
Why GAO Did This Study:
Taxes are necessary because they fund the services provided by
government. Several years ago, the Internal Revenue Service (IRS)
estimated that the gross tax gap-”the difference between taxes owed
and taxes paid on time-”was $345 billion for 2001. In the face of
large and growing deficits, it is important to seek out potential
causes and solutions to the tax gap.
Achieving high levels of voluntary compliance is made more challenging
as the tax code expands. Tax expenditures-”preferential provisions in
the code such as exemptions, exclusions, deductions, credits, and
deferral of tax liability”-have expanded the tax code, more than
doubling in number since 1974.
GAO‘s statement focuses on four key areas: (1) how complexity adds to
taxpayer burden and economic efficiency costs; (2) how complexities in
reporting income contribute to the tax gap; (3) how tax expenditures
add complexity and contribute to the tax gap; and (4) possible
strategies for addressing the tax gap. The statement is based largely
on GAO‘s previous work conducted on tax compliance issues affecting
individual taxpayers from 2005 through 2011.
What GAO Found:
The federal tax system contains complex rules. These rules may be
necessary, for example, to ensure proper measurement of income, target
benefits to specific taxpayers, and address areas of noncompliance.
However, these complex rules also impose a wide range of
recordkeeping, planning, computational, and filing requirements upon
businesses and individuals. Complying with these requirements costs
taxpayers time and money. In 2005 GAO reviewed existing studies and
reported that even using the lowest available compliance cost
estimates for the personal and corporate income tax, combined
compliance costs would total $107 billion (roughly 1 percent of gross
domestic product) per year; other studies estimate costs 1.5 times as
large. Economic efficiency costs, which are reductions in economic
well-being caused by changes in behavior due to taxes, are estimated
to be even larger.
Although many taxpayers have simple forms of income, others do not”-
especially those who receive income from capital gains, rents, self-
employment, and other sources-”and they may be required to do
complicated calculations and keep detailed records. This complexity
can engender errors and underpaid taxes. For example, GAO has
documented millions of taxpayer errors in following complex rules for
determining taxpayers‘ ’basis“”-generally the taxpayer‘s investment in
a property”-in securities they sold or corporations they own.
Tax expenditures add to tax code complexity in part because they
require taxpayers to learn about, determine their eligibility for, and
choose between tax expenditures that have similar purposes. Tax
expenditures also complicate tax planning, as taxpayers must predict
their own future circumstances as well as future tax rules to make the
best choice among provisions. Taxpayer errors contribute to the tax
gap. For example, in 2001 taxpayers underreported $6.3 billion in net
income due to misreported Individual Retirement Arrangement (IRA)
distributions. But taxpayers also may underclaim benefits to which
they are entitled. According to GAO‘s past analysis, of tax filers who
appeared to be eligible for a higher-education tax credit or tuition
deduction in tax year 2005, about 19 percent, representing about
412,000 returns, failed to claim any of them.
No single approach is likely to fully and cost-effectively address the
tax gap, but several strategies could improve taxpayer compliance.
These strategies could require actions by Congress or IRS. For
example, Congress can simplify the tax code by eliminating some tax
expenditures and by making definitions more consistent across the tax
code. IRS and Congress could take steps to enhance information
reporting by third parties or expand compliance checking before
refunds are issued.
What GAO Recommends:
GAO does not make any new recommendations in this testimony.
View [hyperlink, http://www.gao.gov/products/GAO-11-747T] or key
components. For more information, contact Michael Brostek at (202) 512-
9110 or brostekm@gao.gov.
[End of section]
Chairman Baucus, Ranking Member Hatch, and Members of the Committee,
I am pleased to be here today to discuss complexity in the tax code,
taxpayer burden, and steps to improve compliance. Taxes are necessary
because they fund the services provided by government. Complexity, and
the lack of transparency that it can create, exacerbate doubts about
the current tax system's fairness. Public confidence in the nation's
tax laws and tax administration is critical because we rely heavily on
a system of voluntary compliance. If taxpayers do not have confidence
in the tax system or do not believe that it is easy to understand and
treats everyone fairly, then voluntary compliance is likely to decline.
The current tax system is widely viewed as complex, thereby reducing
the ability of individuals to understand and comply with tax laws.
According to a 2010 report by the National Taxpayer Advocate, the tax
code has grown so long that it has become challenging even to figure
out how long it is. Important sources of tax code complexity are
income documentation requirements and tax expenditure rules, which I
will discuss in more detail later in my statement.
Several years ago, the Internal Revenue Service (IRS) estimated that
the gross tax gap--the difference between taxes owed and taxes paid on
time--was $345 billion in 2001. We have said in past testimonies that
there are no easy fixes to this problem. But in the face of large and
growing structural deficits, it is nevertheless important that the
government continues to seek out potential causes and solutions. This
is in keeping with another theme that we have emphasized: that
fundamental reexamination of government programs, policies, and
priorities is necessary to assure that they match the needs of the
21st century. While we do not know the extent to which tax code
complexity contributes to the tax gap, this hearing is an important
step as Congress considers the role played by tax code complexity in
either contributing to the tax gap or impeding progress towards
solutions.
My statement today will cover (1) how complexity adds to taxpayer
burden and economic efficiency costs; (2) how complexities in
reporting income contribute to the tax gap; (3) how tax expenditures
[Footnote 1] add complexity and contribute to the tax gap; and (4)
possible strategies for addressing the tax gap. It is based mostly on
our work from 2005 through 2011 on tax compliance issues affecting
individual taxpayers. Those performance audits were conducted in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provided a reasonable basis for our
findings and conclusions based on our audit objectives.
We have also updated our analyses from our previous work on the number
and sum of tax expenditure provisions.[Footnote 2] To determine the
reliability of this data, we reviewed related documentation and tested
data for obvious errors. We determined that the data were sufficiently
reliable for the purposes of this testimony.
Background:
Tax Gap:
The gross 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 paid voluntarily and on time and
what was actually paid for a specific year.[Footnote 3] Of the
estimated $345 billion tax gap for tax year 2001, IRS estimated that
it would eventually recover about $55 billion of that through late
payments and enforcement actions, for a net tax gap of $290 billion.
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 on time.[Footnote 4] We have made many recommendations
over time that could address the tax gap.[Footnote 5]
IRS's tax gap estimates for each type of noncompliance include
estimates for some or all of the five types of taxes that IRS
administers. Underreporting of tax liabilities can occur when a
taxpayer underreports income earned or overclaims deductions from
income. As shown in table 1, underreporting of tax liabilities--
particularly for the individual income tax--accounted for most of the
tax gap estimate for tax year 2001. We have encouraged regular tax gap
measurements, and IRS officials have indicated that they will be
updating their tax gap estimates later in 2011 or early 2012. We
believe that these estimates are important to gauge progress in
addressing the tax gap and because analyzing the data used to estimate
it can help identify ways to improve tax compliance.
Table 1: IRS's Tax Year 2001 Gross Tax Gap Estimates by Type of
Noncompliance and Type of Tax:
Type of noncompliance: Underreporting;
Type of tax:
Individual income tax: $197 billion;
Corporate income tax: $30 billion;
Employment tax: $54 billion;
Estate tax: $4 billion;
Excise tax: No estimate;
Total: $285 billion.
Type of noncompliance: Underpayment;
Type of tax:
Individual income tax: $23 billion;
Corporate income tax: $2 billion;
Employment tax: $5 billion;
Estate tax: $2 billion;
Excise tax: $1 billion;
Total: $34 billion.
Type of noncompliance: Nonfiling;
Type of tax:
Individual income tax: $25 billion;
Corporate income tax: No estimate;
Employment tax: No estimate;
Estate tax: $2 billion;
Excise tax: No estimate;
Total: $27 billion.
Type of noncompliance: Total;
Type of tax:
Individual income tax: $244 billion;
Corporate income tax: $32 billion;
Employment tax: $59 billion;
Estate tax: $8 billion;
Excise tax: $1 billion;
Total: $345 billion.
Source: IRS.
Note: Some figures do not sum to totals because of rounding.
[End of table]
Taxpayers who underreported the amount of individual income tax they
owed represented an estimated $197 billion of the 2001 tax gap, and
$165 billion of that amount was due to individual tax filers
underreporting their income. As shown in table 2, underreporting of
individuals' business income and nonbusiness income accounted for $109
billion and $56 billion, respectively, of the 2001 tax gap.
Table 2: Components of the Tax Gap for Individual Income Tax
Underreporting, Tax Year 2001:
Type of income or offset: Business income;
Tax gap amount: $109 billion;
Net misreporting percentage: 43%.
Type of income or offset: Nonbusiness income;
Tax gap amount: $56 billion;
Net misreporting percentage: 4%.
Type of income or offset: Credits;
Tax gap amount: 17 billion;
Net misreporting percentage: 26%.
Type of income or offset: Deductions;
Tax gap amount: $14 billion;
Net misreporting percentage: 5%.
Type of income or offset: Exemptions;
Tax gap amount: $4 billion;
Net misreporting percentage: 5%.
Type of income or offset: Adjustments;
Tax gap amount: -$3 billion;
Net misreporting percentage: -21%.
Type of income or offset: Total;
Tax gap amount: $197 billion;
Net misreporting percentage: 18%.
Source: IRS.
Note: Figures may not sum to totals because of rounding. Net
misreporting percentage is the net amount misreported on a given line
item or category expressed as a percentage of the sum of the absolute
values of the amounts that should have been reported for that item or
category.
[End of table]
IRS has concerns with the certainty of the tax gap estimate for tax
year 2001 in part because some areas of the 2001 estimate rely on data
originally gathered in the 1970s and 1980s. IRS has no estimates for
other areas of the tax gap, and it is inherently difficult to measure
some types of noncompliance.[Footnote 6] Some analysts believe the
2001 estimate likely underestimated the tax gap and that in absolute
dollars it is likely larger now than in 2001.
IRS's overall approach to reducing the tax gap consists of improving
service to taxpayers and enhancing enforcement of the tax laws. IRS
seeks to improve voluntary compliance through efforts such as
education and outreach programs and tax form simplification. It also
uses its enforcement authority to ensure that taxpayers are reporting
and paying the proper amounts of taxes through efforts such as
examining tax returns and matching the amount of income taxpayers
report on their tax returns to the income amounts reported on
information returns[Footnote 7] it receives from third parties. In
spite of IRS's efforts to improve taxpayer compliance, the rate at
which taxpayers pay their taxes voluntarily and on time has tended to
range from around 81 percent to around 84 percent over the past three
decades.
Tax Expenditures:
The sum of the estimated revenue loss due to tax expenditures was over
$1 trillion in 2010.[Footnote 8] Tax expenditures are often aimed at
policy goals similar to those of federal spending programs. Existing
tax expenditures, for example, help students and families finance
higher education and provide incentives for people to save for
retirement. Because tax expenditures result in forgone revenue for the
government, they have a significant effect on overall tax rates--all
else equal, for any given level of revenue, tax expenditures mean that
overall tax rates must be higher than a tax system with no tax
expenditures. In 2005, we recommended that the federal government take
several steps to ensure greater transparency of and accountability for
tax expenditures by reporting better information on tax expenditure
performance and more fully incorporating tax expenditures into federal
performance management and budget review processes.[Footnote 9]
Complexity Can Have Value, but Adds to Compliance and Efficiency Costs:
The federal tax system contains complex rules. These rules may be
necessary, for example, to ensure proper measurement of income, target
benefits to specific taxpayers, and address areas of noncompliance.
However, these complex rules also impose a wide range of record
keeping, planning, computational, and filing requirements upon
businesses and individuals. Complying with these requirements costs
taxpayers time and money. As shown in figure 1, these costs to
taxpayers are above and beyond what they pay to the government in
taxes.
Figure 1: Compliance Burden Is One Cost Taxpayers Face in Complying
with the Tax System:
[Refer to PDF for image: illustration]
Tax liability:
plus:
Compliance burden:
plus:
Efficiency costs:
equals:
Total cost of a tax to a taxpayer.
The compliance burden, or the time and resources required to comply
with the tax laws”-including out of pocket costs, are a second type of
cost that taxes impose on taxpayers.
Source: GAO.
[End of figure]
Estimating total compliance costs is difficult because neither the
government nor taxpayers maintain regular accounts of these costs, and
federal tax requirements often overlap with record keeping and
reporting that taxpayers do for other purposes. Although available
estimates are uncertain, taken together, they suggest that total
compliance costs are large. For example, in 2005 we reviewed existing
studies and reported that even using the lowest available compliance
cost estimates for the personal and corporate income tax, combined
compliance costs would total $107 billion (roughly 1 percent of gross
domestic product [GDP]) per year; other studies estimate costs 1.5
times as large.[Footnote 10]
The tax system also results in economic efficiency costs, which are
reductions in economic well-being caused by changes in behavior due to
taxes, government benefits, monopolies, and other forces that
interfere in the market. Efficiency costs can take the form of lost
output or consumption opportunities. For example, economists generally
agree that the favorable tax treatment of owner-occupied housing
distorts investment in the economy, resulting in too much investment
in housing and too little business investment. Estimating efficiency
costs associated with the tax system is challenging because it has
extensive and diverse effects on behavior. In fact, in a 2005 report,
we found no comprehensive estimates of the efficiency costs of the
current federal tax system.[Footnote 11] The two most comprehensive
studies we found suggest that these costs are large--on the order of
magnitude of 2 to 5 percent of GDP each year (as of the mid-1990s).
However, the actual efficiency costs of the current tax system may not
fall within this range because of uncertainty surrounding taxpayers'
behavioral responses, changes in the tax code and the economy since
the mid-1990s, and the fact that the two studies did not cover the
full scope of efficiency costs.
Tax software and the use of paid tax return preparers may mitigate the
need for taxpayers to understand complexities of the tax code. In
2010, IRS processed about 137 million returns. As we have previously
reported, about 90 percent of returns are prepared by individual
taxpayers or paid preparers using professional or commercial software.
Software companies and paid preparers often act as surrogate tax
administrators in that they keep abreast of tax law changes. A
participant at the 2007 Joint Forum on Tax Compliance stated that
taxpayers receiving assistance in preparing their individual tax
returns, either from paid preparers or tax preparation software, are
somewhat insulated from tax code complexity.[Footnote 12]
However, while many paid tax preparers help taxpayers by using their
expertise to help ensure that complex laws are understood, others may
introduce their own mistakes. For example, in a limited investigation
in 2006, all 19 of the tax return preparers who prepared returns for
our undercover investigators produced errors, some with substantial
consequences.[Footnote 13] IRS's review of 2001 tax returns also found
that tax returns prepared by paid preparers contained a significant
level of errors. IRS audits of returns prepared by a paid preparer
showed a higher error rate--56 percent--than audits of returns
prepared by the taxpayer--47 percent.
Complexities in Reporting Income Contribute to the Tax Gap by
Providing Opportunities for Taxpayers to Misreport:
Income measurement is straightforward for a large proportion of the
individual taxpayer population: those who earn only labor and interest
income and capital income within a retirement account generally have
their income reported to them (and to the IRS) by the source of the
income. However, substantial numbers of taxpayers who receive income
from capital gains, rents, self-employment, and other sources often
deal with complex tax laws, complicated calculations, and detailed
record keeping. While complexities lead some taxpayers to make
mistakes when reporting their income, some misreporting is due to
intentional acts of tax evasion.
For example, IRS studies show that the majority of capital asset
transactions and capital gains and losses were for securities
transactions such as sales of corporate stock, mutual funds, bonds,
options, and capital gain distributions from mutual funds. Taxpayers
are required to report securities transactions on their federal income
tax returns. To accurately report securities sales, the taxpayer must
have records of the dates they acquired and sold the asset; sales
price, or gross proceeds from the sale; cost or other basis of the
sold asset; and resulting gains or losses.[Footnote 14] They must
report this information separately for short-term transactions and
long-term transactions. Further, before taxpayers can determine any
gains or losses from securities sales, they must determine if and how
the original cost basis of the securities must be adjusted to reflect
certain events, such as stock splits, nontaxable dividends, or
nondividend distributions.
Complex income-reporting requirements for securities transactions may
contribute to taxpayers' misreporting their income. In 2006, we
estimated that 8.4 million of the estimated 21.9 million taxpayers
with securities transactions misreported their gains or losses for tax
year 2001.[Footnote 15] A greater estimated percentage of taxpayers
misreported gains or losses from securities sales (36 percent) than
capital gain distributions from mutual funds (13 percent), and most of
the misreported securities transactions exceeded $1,000 of capital
gain or loss.[Footnote 16] This may be because taxpayers must
determine the taxable portion of securities sales' income whereas they
need only add up their capital gain distributions. Furthermore, about
half of these taxpayers who misreported failed to accurately report
the securities' basis, sometimes because they did not know the basis
or failed to adjust the basis appropriately. Although we were not able
to estimate the capital gains tax gap for securities, we were able to
determine the direction of the misreporting. For securities sales, an
estimated 64 percent of taxpayers underreported their income from
securities (i.e., they understated gains or overstated losses)
compared to an estimated 33 percent of taxpayers who overreported
income (i.e., they overstated gains or understated losses).[Footnote
17] For both underreported and overreported income, some taxpayers
misreported over $400,000 in gains or losses.
Small businesses--which include sole proprietorships and S
corporations, among other entities--are subject to multiple layers of
filing, reporting, and deposit requirements. These requirements
reflect IRS's administration of a variety of tax and other policies,
including income, employment, and excise taxes, as well as pension and
other employee benefit programs. In considering the number of
requirements, it is important to note that the requirements reflect
many decisions and compromises made by Congress and administrations to
accomplish their policy goals, including those that may benefit small
businesses and other taxpayers.
Sole proprietors face significant complexities in reporting income.
This complexity may contribute to the estimated $68 billion of the tax
gap caused by sole proprietors underreporting their net business
income, which can stem either from understated receipts or overstated
expenses. For example, sole proprietors report their business-related
profit or loss on their individual income tax return, and they can use
their losses to offset other categories of income on their returns in
the year that they incur the loss. Identifying which of a sole
proprietor's payments qualify as business expenses and the amount to
be deducted can be complex. For example, two types of payments--costs
of goods sold and capital improvements--must be distinguished from
other types of payments because they are treated differently under tax
rules.[Footnote 18] Expenses that are used partly for business and
personal purposes can be deducted only to the extent they are used for
business.
Individual taxpayers who are shareholders in S corporations may also
experience difficulty because of complexity in income measurement. An
S corporation is a federal business type that provides tax benefits
and limited liability protection to shareholders. S corporations are
not generally taxed at the entity level: income, losses, and deduction
items pass through to the individual shareholders' income tax returns,
and the shareholders are taxed on any net income. S corporations are
to provide their shareholders and IRS with information on the
allocation of income, losses, and other items.
As we have previously reported, one source of complexity for S
corporation shareholders may arise when calculating basis--their
ownership share of the corporation--in order to claim losses and
deductions to offset other earned income.[Footnote 19] Shareholders
generally can only claim losses and deductions up to the amount of
basis the shareholder has in the S corporation's stock and debt.
[Footnote 20] While the S corporation is required to send shareholders
some information that can be used to calculate basis, S corporations
are not required to report any basis calculations to shareholders. IRS
officials and S corporation stakeholder representatives told us that
calculating and tracking basis was one of the biggest challenges in
complying with S corporation rules. In 2009, we recommended that
Congress require S corporations to calculate shareholder's stock and
debt basis as completely as possible and report the calculation to
shareholders and IRS.[Footnote 21] In an analysis of IRS's annual
examinations of individual tax returns that closed for fiscal years
2006 through 2008, we found the amount of the misreported losses that
exceeded basis limitations was over $10 million, or about $21,600 per
taxpayer.
Tax Expenditures Add Complexity and Contribute to the Tax Gap by
Providing Opportunities for Taxpayers to Make Mistakes or Evade Taxes:
The growing number of tax expenditures is among the causes of tax code
complexity. Between 1974 and 2010, tax expenditures reported by the
Department of the Treasury more than doubled in overall number from 67
to 173. Tax expenditures are an important means the government uses to
address a wide variety of social objectives, from supporting
educational attainment, to providing low-income housing, to ensuring
retirement income, and many others. However, tax expenditures add to
tax code complexity in part because they require taxpayers to learn
about, determine their eligibility for, and choose between tax
expenditures that have similar purposes. Tax expenditures also
complicate tax planning, as taxpayers must predict their own future
circumstances as well as future tax rules to make the best choice
among provisions.
Savings incentives within the tax code illustrate how tax expenditures
add to complexity. While the tax code includes numerous types of
savings incentives--including those for healthcare and higher
education--my statement will focus on retirement savings as a key
example. Taxpayers can choose between traditional Individual
Retirement Arrangements (IRA) and Roth IRAs for retirement savings.
[Footnote 22] Although the tax rules for distributions diverge for
traditional and Roth IRAs, taxpayers may not know that a 10 percent
early withdrawal penalty, with some exceptions, applies to both IRA
types. Taxpayers also get confused over which IRA early withdrawals
are not subject to penalties, in part because the exceptions differ
for employer pension plans. Additionally, both types of IRAs have
rules governing eligibility to contribute, and contributions to each
are subject to an annual limit. However, taxpayers may not understand
that the annual contribution limit applies across traditional IRAs and
Roth IRAs in combination, which may lead them to overcontribute. With
regard to record-keeping burden, taxpayers with traditional or Roth
IRAs must track the total amount of contributions in a given year and
reasons for distributions to accurately report this information on
their tax returns. Frequent changes to IRA rules (such as increasing
contribution limits and allowing workers to tap IRA assets for certain
nonretirement purposes without an early withdrawal penalty) have also
made tax planning more difficult for taxpayers.
As we reported in 2008, IRS research and enforcement data show that--
in the aggregate--many taxpayers misreported millions of dollars in
traditional IRA contributions and distributions on their tax returns.
[Footnote 23] We reported that in tax year 2001 the following occurred:
* Of the taxpayers who made deductible traditional IRA contributions,
an estimated 14.8 percent[Footnote 24] (554,657 taxpayers)[Footnote
25] did not accurately report the IRA deduction on their individual
tax returns--10.4 percent overstated their deductible contributions
(that is, exceeded the applicable limit) and 4.4 percent underreported
their deductible contributions (that is, reported less on their
returns than they actually could deduct).[Footnote 26] The understated
net income due to these misreported traditional IRA contribution
deductions was $392 million,[Footnote 27] including both taxpayers who
either overstated or understated their contribution deductions to a
traditional IRA.
* Of the taxpayers who had taxable traditional IRA distributions, an
estimated 14.6 percent[Footnote 28] (1.5 million taxpayers)[Footnote
29] misreported withdrawals from their traditional IRA distributions--
13.7 percent understated (that is, reported an amount less than what
the taxpayer withdrew) and 0.9 percent overstated IRA distributions
(that is, reported an amount greater than what the taxpayer
withdrew).[Footnote 30] The underreported net income due to
misreported IRA distributions was $6.3 billion,[Footnote 31] including
taxpayers who failed to report early distributions and the associated
tax.
Taxpayers also make costly mistakes when choosing higher-education tax
incentives. In a 2008 testimony, we reported that among tax filers who
appeared to be eligible for a tax credit or tuition deduction in tax
year 2005, about 19 percent, representing about 412,000 returns,
failed to claim any of them.[Footnote 32] The amount by which these
tax filers failed to reduce their tax averaged $219; 10 percent of
this group could have reduced their tax liability by over $500. In
total, including both those who failed to claim a tax credit or
tuition deduction and those who chose a credit or a deduction that did
not maximize their benefit, we found that in 2005, 28 percent, or
nearly 601,000 tax filers, did not maximize their potential tax
benefit.
Some tax expenditures also provide taxpayers who intend to evade taxes
with opportunities to do so. For example, the Treasury Inspector
General for Tax Administration (TIGTA) reported in 2011 that the First-
time Homebuyer Credit (FTHBC) and the subsequent changes made to the
credit have confused taxpayers and allowed individuals to make
fraudulent claims for the refundable credit.[Footnote 33] For example,
TIGTA reported many taxpayers claiming the credit appeared not to be
first-time homebuyers because tax information indicated they had owned
homes within 3 years prior to their new home purchase. The 2008 FTHBC
provided taxpayers a refundable credit of up to $7,500 that must be
repaid in $500 increments each year over 15 years beginning in the
2011 filing season.[Footnote 34] According to recent IRS data, the
total amount to be repaid by taxpayers is $7 billion. The American
Recovery and Reinvestment Act of 2009 increased the maximum FTHBC
credit to $8,000, with no payback required unless the home ceases to
be the taxpayer's principal residence within 3 years. In 2009, we
testified that IRS faced significant challenges in determining if
taxpayers were complying with the numerous conditions for the
credit.[Footnote 35] For example, to determine eligibility, IRS had to
verify that taxpayers had not owned a house in the previous 3 years
and verify the closing date on home purchases. Other challenges
included enforcing the $500 per year payback provision in the 2008
credit.
Strategies to Reduce the Tax Gap Present Challenges and Trade-offs:
Multiple approaches are needed to reduce the tax gap. No single
approach is likely to fully and cost-effectively address noncompliance
since the noncompliance has multiple causes and spans different types
of taxes and taxpayers. While the tax gap will remain a challenge into
the future, the following strategies could help. These strategies
could require actions by Congress or IRS.
Enhancing Information Reporting:
Enhancing information reporting can reduce complexity for taxpayers.
It can also reduce the opportunities available for taxpayers to evade
taxes by, for example, underreporting business income or filing
fraudulent claims for tax credits. Generally, new requirements on
third parties to submit information returns would require statutory
changes, whereas improvements to existing information-reporting forms
may be done administratively by IRS.
The extent to which individual taxpayers accurately report the income
they earn has been shown to be related to the extent to which the
income is reported to them and IRS by third parties or taxes on the
income are withheld. For example, employers report most wages,
salaries, and tip compensation to employees and IRS through Form W-2.
Also, 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. Findings from IRS's
study of individual tax compliance indicate that nearly 99 percent of
these types of income are accurately reported on individual tax
returns. For types of income for which there is little or no
information reporting, individual taxpayers tend to misreport over
half of their income.
One area where improved information reporting could help is higher-
education expenses. Eligible educational institutions are required to
report information on qualified tuition and related expenses for
higher education to both taxpayers and IRS so that taxpayers can
determine the amount of educational tax benefits that can be claimed.
[Footnote 36] However, the information currently reported by
educational institutions on tuition statements sent to IRS and
taxpayers (on Form 1098-T) may be confusing for taxpayers who use the
form to prepare their tax returns and not very useful to IRS. IRS
requires institutions to report on Form 1098-T either the (1) amount
of payments received, or (2) amount billed for qualified expenses. IRS
officials stated that most institutions report the amount billed and
do not report payments. However, the amount billed may not equal the
amount that can be claimed as a credit.[Footnote 37] In order to
reduce taxpayer confusion and enhance compliance with the eligibility
requirements for higher-education benefits, in 2009 we recommended
that IRS revise Form 1098-T to improve the usefulness of information
on qualifying education expenses.[Footnote 38]
Another area where improved information reporting could improve
compliance is rental income. In 2008, we estimated that at least 53
percent of individual taxpayers with rental real estate misreported
their rental real estate activities for tax year 2001, resulting in an
estimated $12.4 billion of net misreported income.[Footnote 39] IRS
enforcement officials cited limited information reporting as a major
challenge in ensuring compliance because without third-party
information reporting, it is difficult for IRS to systematically
detect taxpayers who fail to report any rent or determine whether the
rent and expense amounts taxpayers report are accurate. In 2008, we
recommended that IRS require third parties to report mortgaged
property addresses to help IRS identify who may have misreported their
rental real estate activity, but IRS did not adopt our recommendation
because of third-party burden and a lack of an IRS compliance program
to use such information. We made a similar recommendation in a 2009
report, which IRS is still evaluating as of December 2010.[Footnote 40]
While information reporting reduces the complexity of reporting income
for individual taxpayers, this tool can create costs for the third
parties responsible for reporting the income to the taxpayer and IRS.
For example, we previously reported that expanding information
reporting on securities sales to include basic information would
involve challenges for brokers and the IRS.[Footnote 41] In
particular, brokers would bear costs and burdens--even as taxpayers'
costs and burdens decrease somewhat--and many issues would arise about
how to calculate adjusted basis, which securities would be covered,
and how information would be transferred among brokers.
In some cases it is difficult to identify third parties for whom a
reporting requirement could be enforced without an undue burden on
both the third parties and IRS. In a 2009 report, we found that a
major reason why little information reporting on sole proprietor
expenses exists is because of the difficulty identifying third
parties.[Footnote 42] For example, there is no third party who could
verify the business use of cars or trucks by sole proprietors.
Ensuring High-Quality Services to Taxpayers:
Ensuring high-quality services is a necessary foundation for voluntary
compliance, so action by IRS to improve the quality of services
provided to taxpayers would be beneficial. High-quality services can
help taxpayers who wish to comply but do not understand their
obligations. IRS taxpayer services include education and outreach
programs, simplifying the tax process, and revising forms and
publications to make them electronically accessible and more easily
understood by diverse taxpayer communities. For example, if tax forms
and instructions are unclear, taxpayers may be confused and make
unintentional errors. Ensuring high-quality taxpayer services would
also be a key consideration in implementing any of the approaches for
tax gap reduction. For example, expanding enforcement efforts would
increase interactions with taxpayers, requiring processes to
efficiently communicate with taxpayers. Changing tax laws and
regulations would also require educating taxpayers about the new
requirements in a clear, timely, and accessible manner. For example,
we previously reported that while taxpayers' access to telephone
assistance in tax year 2009 was better than the previous year, it
remained lower than in 2007, in part because of calls about tax law
changes.[Footnote 43] Despite heavy call volume, the accuracy of IRS
responses to taxpayers' questions remained above 90 percent.
Simplifying the Tax Code or Fundamental Tax Reform:
Congressional 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 businesses to understand and voluntarily comply
with their tax obligations. One way to simplify the tax code is to
eliminate or combine tax expenditures, thereby helping reduce
taxpayers' unintentional errors and limiting opportunities for tax
evasion. As we have previously testified, the Government Performance
and Results Act (GPRA) Modernization Act of 2010 (GPRAMA)[Footnote 44]
could help inform reexamination or restructuring efforts and lead to
more efficient and economical executive-branch service delivery in
overlapping program areas. The act is intended to identify the various
agencies and federal activities--including spending programs,
regulations, and tax expenditures--that contribute to crosscutting
outcomes.[Footnote 45]
While simplification can have benefits, it can also have drawbacks.
Eliminating tax expenditures would reduce the incentives for the
activities that were encouraged. Also, in 2005, we stated that changes
to the tax system can create winners and losers.[Footnote 46] The
government may attempt to mitigate large gains and losses by
implementing transition rules. Deciding if transition relief is
necessary involves how to trade off between equity, efficiency,
simplicity, transparency, and administrability.
Similar trade-offs exist with possible fundamental tax reforms that
would move away from an income tax system to some other system, such
as a consumption tax, national sales tax, or value-added tax.
Fundamental tax reform would most likely result in a smaller tax gap
if the new system has few tax preferences or complex tax code
provisions and if taxable transactions are transparent. However, these
characteristics are difficult to achieve in any system and experience
suggests that simply adopting a fundamentally different tax system,
whatever the economic merits, may not by itself eliminate any tax gap.
For example, in 2008, we reported that some available data indicate a
value-added tax may be less expensive to administer than an income
tax. However, we found that like other systems, even a simple value-
added tax--one that exempts few goods or services--has compliance
risks and, largely as a consequence, generates administrative costs
and compliance burden.[Footnote 47] Similar to other taxes, adding
complexity through exemptions or reduced rates for some goods or
services generally decreases revenue and increases compliance risks
because of the incentive to misclassify purchases and sales. Such
complexity also increases the record-keeping burden on businesses and
increases the government resources devoted to enforcement.
Any tax system could be subject to noncompliance, and its design and
operation, including the types of tools made available to tax
administrators, will affect the size of any corresponding tax gap.
Further, the motivating forces behind tax reform include factors
beyond tax compliance, such as economic effectiveness, equity, and
burden, which could in some cases carry greater weight in designing an
alternative tax system than ensuring the highest levels of compliance.
Policymakers may find it useful to compare any proposed changes to the
tax code based on a set of widely accepted criteria for assessing
alternative tax proposals. These criteria include the equity, or
fairness, of the tax system; the economic efficiency, or neutrality,
of the system; and the simplicity, transparency, and administrability
of the system. These criteria can sometimes conflict, and the weight
one places on each criterion will vary among individuals. Our
publication, Understanding the Tax Reform Debate: Background,
Criteria, and Questions, may be useful in guiding policymakers as they
consider tax reform proposals.[Footnote 48]
Devoting Additional Resources to Enforcement:
Devoting additional resources to enforcement has the potential to help
reduce the tax gap by billions of dollars. However, determining the
appropriate level of enforcement resources to provide IRS requires
taking into account factors such as how effectively and efficiently
IRS is currently using its resources, how to strike the proper balance
between IRS's taxpayer service and enforcement activities, and
competing federal funding priorities. If Congress were to provide IRS
more enforcement resources, the amount that the tax gap could be
reduced depends in part on factors such as the size of budget
increases, how IRS manages any additional resources, and the indirect
increase in taxpayers' voluntary compliance resulting from expanded
enforcement. Providing IRS with additional funding would enable it to
contact millions of potentially noncompliant taxpayers it currently
identifies but cannot contact given resource constraints.
However, devoting additional resources to enforcement will not
completely close the tax gap. For example, in a 2009 report, we
reported that IRS's compliance programs focused on sole proprietors'
underreporting of income addressed only a small portion of sole
proprietor expense noncompliance.[Footnote 49] Despite investing
nearly a quarter of all revenue agent time in 2008, IRS was able to
examine (audit) about 1 percent of estimated noncompliant sole
proprietors. These exams are costly and yielded less revenue than
exams of other categories of taxpayers, in part because most sole
proprietorships are small in terms of receipts.
Expanding Compliance Checks Before IRS Issues Refunds:
IRS could reduce the tax gap by expanding compliance checks before
issuing refunds to taxpayers. In April 2011, the Commissioner of
Internal Revenue talked about a long-term vision to increase
compliance activities before refunds are sent to taxpayers. In one
example, IRS is exploring a requirement that third parties send
information returns to IRS and taxpayers at the same time as opposed
to the current requirement that some information returns go to
taxpayers before going to IRS. The intent is to move to matching those
information returns to tax returns during tax return processing. IRS
currently matches data provided on over 2 billion information returns
to tax returns only after the normal filing season. Matching during
the filing season would allow IRS to detect and correct errors before
it sends taxpayers their refunds, thereby avoiding the costs of trying
to recover funds from taxpayers later.[Footnote 50] This approach
could also allow IRS to use its enforcement resources on other
significant compliance problems. However, the Commissioner made clear
that his vision for more prerefund compliance checks will take
considerable time to implement. One prerequisite would be a major
reworking of some fundamental IRS computer systems. To the extent that
implementing this vision would require additional budgetary resources
or changes in tax policies, Congress would play a key role.
Using Consistent Definitions:
If Congress changed the law to include more consistent definitions
across tax provisions, then taxpayers could more easily understand and
comply with their obligations. Higher-education tax preferences
provide an example of inconsistent definitions for qualified education
expenses. What tax filers are allowed to claim as a qualified higher-
education expense varies between some of the various savings and
credit provisions in the tax code. For example, while Coverdell
education savings accounts and qualified tuition programs under
section 529 of the Internal Revenue Code permit tax filers to include
room and board as qualified expenses if the student is enrolled at
least half time, the American Opportunity Credit and the Lifetime
Learning Credit do not. These dissimilar definitions require that tax
filers keep track of expenses separately, applying some expenses to
some tax preferences, but not others.
There are no easy solutions to the tax gap, but addressing the tax gap
is as important as ever before in the face of the nation's fiscal
challenges. Innovative thinking and the combined efforts of IRS and
Congress will be needed now and in the years to come.
Chairman Baucus, Ranking Member Hatch, and Members of the Committee,
this completes my prepared statement. I would be happy to respond to
any questions you may have at this time.
Contact and Acknowledgments:
For further information on this testimony, please contact Michael
Brostek at (202) 512-9110 or brostekm@gao.gov. In addition to the
individual named above, David Lewis, Assistant Director; Shannon
Finnegan, analyst-in-charge; Sandra Beattie; Amy Bowser; Barbara
Lancaster; John Mingus; Erika Navarro; Melanie Papasian; and Jonathan
Stehle made key contributions to this report. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this statement.
[End of section]
Footnotes:
[1] Tax expenditures are preferential provisions in the tax code, such
as exemptions and exclusions of income from taxation, deductions,
credits, deferral of tax liability, and preferential tax rates.
Deciding whether an individual provision should be characterized as a
tax expenditure is a matter of judgment, and disagreements about
classification stem from different views about what should be included
in the income tax base. As a practical matter, the term tax
expenditure has been used in the federal budget for over three
decades, and the tax expenditure concept--while not precisely defined--
is a valid representation of one tool that the federal government uses
to allocate resources. The home mortgage interest deduction and the
Earned Income Tax Credit are examples of tax expenditures.
[2] GAO, Government Performance and Accountability: Tax Expenditures
Represent a Substantial Federal Commitment and Need to Be Reexamined,
[hyperlink, http://www.gao.gov/products/GAO-05-690] (Washington, D.C.:
Sept. 23, 2005).
[3] Throughout this statement, references to the tax gap refer to the
gross tax gap unless otherwise noted.
[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 on time.
[5] For a summary of key outstanding recommendations, see GAO,
Opportunities to Reduce Potential Duplication in Government Programs,
Save Tax Dollars, and Enhance Revenue, [hyperlink,
http://www.gao.gov/products/GAO-11-318SP] (Washington, D.C.: Mar. 1,
2011).
[6] For a more detailed discussion about data sources and
methodologies used in estimating the tax gap, see GAO, Tax Compliance:
Better Compliance Data and Long-term Goals Would Support a More
Strategic IRS Approach to Reducing the Tax Gap, [hyperlink,
http://www.gao.gov/products/GAO-05-753] (Washington, D.C.: July 18,
2005).
[7] An information return is a tax document businesses and some
individuals are required to file to report certain business
transactions to the IRS. The requirement to file information returns
is mandated by the IRS and associated regulations.
[8] Sums of tax expenditure estimates are useful for gauging the
magnitude of tax spending, but need to be interpreted carefully
because they do not take into account possible interactions between
the individual tax code provisions. These estimates are based on data
from the President's Fiscal Year 2012 Budget Request's list of tax
expenditures, which is based upon current tax law enacted as of
September 30, 2010. On December 17, 2010, the Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act of 2010 not only
extended many tax expenditure provisions, but also extended income tax
rates for the years 2011-12, thus affecting the estimates of many tax
expenditures.
[9] As of May 2011, this recommendation has not been implemented.
[10] GAO, Tax Policy: Summary of Estimates of the Costs of the Federal
Tax System, [hyperlink, http://www.gao.gov/products/GAO-05-878]
(Washington, D.C.: Aug. 26, 2005).
[11] [hyperlink, http://www.gao.gov/products/GAO-05-878].
[12] GAO, Highlights of the Joint Forum on Tax Compliance: Options for
Improvement and Their Budgetary Potential, [hyperlink,
http://www.gao.gov/products/GAO-08-703SP] (Washington, D.C.: June
2008). GAO, the Congressional Budget Office, and the Joint Committee
on Taxation convened the Joint Forum on Tax Compliance.
[13] GAO, Paid Tax Return Preparers: In a Limited Study, Chain
Preparers Made Serious Errors, [hyperlink,
http://www.gao.gov/products/GAO-06-563T] (Washington, D.C.: Apr. 4,
2006). Our findings cannot be generalized to the entire retail tax
preparation community.
[14] Basis is generally the amount of a taxpayer's investment in a
property for tax purposes.
[15] GAO, Capital Gains Tax Gap: Requiring Brokers to Report
Securities Cost Basis Would Improve Compliance if Related Challenges
Are Addressed, [hyperlink, http://www.gao.gov/products/GAO-06-603]
(Washington, D.C.: June 13, 2006). We are 95 percent confident that
from 7.3 million to 9.5 million taxpayers misreported securities
transactions and from 20.3 million to 23.5 million taxpayers had
securities transactions.
[16] Percentage estimates have sampling errors of (+/-) 7 percent or
less.
[17] Figures do not sum to 100 percent because some taxpayers
misreported securities sales in a way that had no effect on the amount
of income from the sales, for example in cases where taxpayers only
misreported the securities' holding periods. Estimates have sampling
errors of (+/-) 9 percent or less.
[18] To identify the cost of goods sold, businesses that manufacture
or resell merchandise must follow tax rules that require valuing their
inventory at the beginning and end of the tax year. Payments for
capital improvements, such as start-up costs, business assets, and
improvements, usually are not fully deducted in the current tax year
but instead must be depreciated over a multiyear period.
[19] GAO, Tax Gap: Actions Needed to Address Noncompliance with S
Corporation Tax Rules, [hyperlink,
http://www.gao.gov/products/GAO-10-195] (Washington, D.C.: Dec. 15,
2009).
[20] Stock basis begins with the shareholder's initial capital
contribution to the S corporation or the initial cost of the stock
purchased. That amount may increase or decrease each year. An income
item will increase stock basis; a loss, deduction, or nondividend
distribution will decrease stock basis, based on certain ordering
rules. For losses and deductions that exceed a shareholder's stock
basis, the shareholder is allowed to deduct the excess up to the
shareholder's debt basis, which is created by loans that the
shareholder personally made to the S corporation.
[21] As of December 2010, no action has been taken.
[22] The traditional IRA allows tax deferral on investment earnings
until retirement distribution with an up-front tax deduction from
taxable income for contributions by eligible taxpayers, and retirement
distributions are taxable. In contrast, the Roth IRA allows
nondeductible, after-tax contributions for eligible taxpayers, and
retirement distributions, including investment earnings, are generally
tax-free.
[23] GAO, Individual Retirement Accounts: Additional IRS Actions Could
Help Taxpayers Facing Challenges in Complying with Key Tax Rules,
[hyperlink, http://www.gao.gov/products/GAO-08-654] (Washington, D.C.:
Aug. 14, 2008).
[24] We are 95 percent confident that from 11.8 percent to 17.8
percent did not accurately report their traditional IRA deductions.
[25] Estimate has a margin of error of less than or equal to (+/-)
124,057.
[26] We are 95 percent confident that from 7.9 percent to 13.3 percent
overstated their traditional IRA deductions. We are 95 percent
confident that from 2.8 percent to 6.5 percent understated their
traditional IRA deductions.
[27] Estimate has a margin of error of less than or equal to (+/-)
$192 million.
[28] We are 95 percent confident that from 12.7 percent to 16.6
percent did not accurately report their traditional IRA distributions.
[29] Estimate has a margin of error of less than or equal to (+/-)
220,026.
[30] We are 95 percent confident that from 11.8 percent to 15.7
percent underreported their traditional IRA distributions. We are 95
percent confident that from 0.5 percent to 1.4 percent overreported
their traditional IRA distributions.
[31] Estimate has a margin of error of less than or equal to (+/-)
$2.2 billion.
[32] GAO, Higher Education: Multiple Higher Education Tax Incentives
Create Opportunities for Taxpayers to Make Costly Mistakes,
[hyperlink, http://www.gao.gov/products/GAO-08-717T] (Washington,
D.C.: May 1, 2008).
[33] Treasury Inspector General for Tax Administration, Recovery Act:
Administration of the First-Time Homebuyer Credit Indicates a Need for
Improved Controls Over Refundable Credits, 2011-41-035 (Washington,
D.C.: Mar. 31, 2011).
[34] The FTHBC is a refundable tax credit, meaning that it is paid out
even if there is no tax liability or the credit exceeds the amount of
any tax due.
[35] GAO, First-Time Homebuyer Tax Credit: Taxpayers' Use of the
Credit and Implementation and Compliance Challenges, [hyperlink,
http://www.gao.gov/products/GAO-10-166T] (Washington, D.C.: Oct. 22,
2009).
[36] 26 U.S.C. § 6050S. Qualified expenses are tuition and fees a
student must pay to be enrolled at or attend an eligible educational
institution, and other course-related fees and expenses only if the
fees and expenses must be paid to the institution as a condition of
enrollment or attendance.
[37] Currently, educational institutions are required to report
information on the form 1098-T for qualified tuition expenses as well
as information on the institution itself and the student. These
requirements include, for example, reporting name, address, and
taxpayer identification number (TIN) of the institution; name,
address, and TIN of the student; and amount of payments received or
the amount billed for qualified expenses during the calendar year.
[38] GAO, 2009 Tax Filing Season: IRS Met Many 2009 Goals, but
Telephone Access Remained Low, and Taxpayer Service and Enforcement
Could Be Improved, [hyperlink, http://www.gao.gov/products/GAO-10-225]
(Washington, D.C.: Dec. 10, 2009). In December 2010, IRS agreed to
consider the feasibility of using Form 1098-T information in
conjunction with its examination program.
[39] GAO, Tax Gap: Actions That Could Improve Rental Real Estate
Reporting Compliance, [hyperlink,
http://www.gao.gov/products/GAO-08-956] (Washington, D.C.: Aug. 28,
2008).
[40] We recommended that IRS require third parties to provide
information on the address of a home securing a mortgage, among other
items. GAO, Home Mortgage Interest Deduction: Despite Challenges
Presented by Complex Tax Rules, IRS Could Enhance Enforcement and
Guidance, [hyperlink, http://www.gao.gov/products/GAO-09-769]
(Washington, D.C.: July 29, 2009).
[41] [hyperlink, http://www.gao.gov/products/GAO-06-603]. We reported
that, among other things, Congress may wish to consider requiring
brokers to report to both taxpayers and IRS the adjusted basis of
securities that taxpayers sell. Congress included a provision
requiring brokers to report basis information to IRS and taxpayers in
the Energy Improvement and Extension Act of 2008. The provision took
effect on January 1, 2011, and the Joint Committee on Taxation
estimated the provision is expected to raise $6.7 billion in revenue
through 2018.
[42] GAO, Tax Gap: Sole Proprietor Loss Deductions Could Improve
Compliance but Would Also Limit Some Legitimate Losses, [hyperlink,
http://www.gao.gov/products/GAO-09-815] (Washington, D.C.: Sept. 10,
2009).
[43] [hyperlink, http://www.gao.gov/products/GAO-10-225].
[44] Pub. L. No. 111-352, 124 Stat. 3866 (Jan. 4, 2011). GPRAMA amends
the Government Performance and Results Act of 1993, Pub. L. No. 103-
62, 107 Stat. 285 (Aug. 3, 1993).
[45] GAO, Government Performance: GPRA Modernization Act Provides
Opportunities to Help Address Fiscal, Performance, and Management
Challenges, [hyperlink, http://www.gao.gov/products/GAO-11-466T]
(Washington, D.C.: Mar. 16, 2011).
[46] GAO, Understanding the Tax Reform Debate: Background, Criteria, &
Questions, [hyperlink, http://www.gao.gov/products/GAO-05-1009SP]
(Washington, D.C.: September 2005).
[47] GAO, Value-Added Taxes: Lessons Learned from Other Countries on
Compliance Risks, Administrative Costs, Compliance Burden, and
Transition, [hyperlink, http://www.gao.gov/products/GAO-08-566]
(Washington, D.C.: Apr. 4, 2008). The value-added tax is a consumption
tax that is widely used around the world. A value-added tax is levied
on the difference between a business's sales and its purchases of
goods and services. Typically, a business calculates the tax due on
its sales, subtracts a credit for taxes paid on its purchases, and
remits the difference to the government.
[48] [hyperlink, http://www.gao.gov/products/GAO-05-1009SP].
[49] [hyperlink, http://www.gao.gov/products/GAO-09-815].
[50] GAO, Taxpayer Account Strategy: IRS Should Finish Defining
Benefits and Improve Cost Estimates, [hyperlink,
http://www.gao.gov/products/GAO-11-168] (Washington, D.C.: Mar. 24,
2011).
[End of section]
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