Further Research Into Noncompliance Is Needed To Reduce Growing Tax Losses

Gao ID: GGD-82-34 July 23, 1982

The federal government is losing billions of dollars in tax revenues annually because individuals are not complying with U.S. tax laws. There is a growing trend toward disregard for the principle of voluntary tax compliance, a trend which the Internal Revenue Service (IRS) estimates increased tax revenue losses from $12 billion in 1976 to at least $20 billion in 1980.

GAO found that IRS needs more complete information and insight on what makes people willing to comply. Such data are essential to determine the most cost-effective strategy in combating unreported income, the most serious problem confronted by IRS. Until IRS has better compliance data, it should place more emphasis on increasing the tax revenue yield from its various programs. IRS relies on the examination of tax returns as its primary strategy for stimulating compliance, and it has allocated more than one-half of its compliance resources to the examination program. However, the examination program has not stemmed the decline in voluntary compliance. GAO found that the actual effect of the examination program on voluntary compliance is, at best, unclear. The most severe compliance problem involves unreported income, which accounts for almost three-fourths of the estimated tax revenue lost through taxpayer noncompliance. Recent IRS studies of the unreported income problem indicate that even its most intensive examinations were only detecting about 25 percent of the income not reported by those persons audited. Obviously, IRS needs to find out which of its various compliance programs can be brought to bear in dealing with this problem. Allocating resources to obtain maximum revenues would also increase tax revenue in the examination program.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Johnny C. Finch Team: General Accounting Office: General Government Division Phone: (202) 512-7824


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