Tax Administration

Taxpayers spend considerable time and money complying with federal income tax rules. Although much of this compliance burden is associated with the tax code, some of it is also linked to the actions of the Internal Revenue Service (IRS). Reliable estimates of the burdens imposed by such compliance could help Congress reduce those burdens and help IRS develop measures of its own performance, making better informed resource allocation decisions within the agency and meeting reporting requirements under the Paperwork Reduction Act. This report (1) describes IRS' overall strategy to improve its methodology for estimating compliance burden, (2) describes what IRS has done to implement its overall strategy and how IRS expects to improve its methodology, and (3) determines whether IRS expects that its new methodology will be able to measure the burden associated with the complex tax rules identified in IRS' forthcoming first annual report on tax complexity.

GAO noted that: (1) to improve its methodology for estimating compliance burden for all types of federal taxpayers, IRS is pursuing a multiphased strategy; (2) initially, IRS is focusing on taxpayers who have only wage and investment (W&I) income because they bear a large portion of the overall compliance burden and because their burden may be easiest to estimate; (3) later phases would develop estimates for other taxpayer groups, such as small businesses and the self-employed and large- and medium-sized businesses; (4) this incremental strategy should give IRS and its contractors the flexibility to incorporate lessons learned from early phases of the process into later efforts; (5) IRS has begun to implement its strategy by contracting for the development of two models that, when combined, should provide more reliable estimates of W&I taxpayers' prefiling, filing, and postfiling compliance burdens; (6) compared with IRS' current methodology, these models are designed to produce more comprehensive estimates of federal income tax compliance burdens and to provide IRS with a greater capacity to analyze the impact of tax law and administrative changes on those burdens; (7) as with all such modeling, the specific capabilities and precision of the new models will depend on the quality of the underlying data; (8) IRS expects that one of the new models, covering prefiling and filing activities, will provide some assistance in estimating burdens associated with the complex rules identified in IRS' forthcoming first annual report in tax complexity; (9) for some rules, the model may be able to show both the number of W&I taxpayers affected and the approximate size of their burdens; (10) for other rules, IRS expects that the model will only be able to show the potential number of taxpayers affected; and (11) the other model, which is to estimate postfiling burden, is in the early design stage, and its capabilities have not yet been determined.