Enforcement of Tax Laws - High Risk Issue
Addressing the tax gap—the difference between taxes owed and those paid on time—could help improve the government’s fiscal position.
Internal Revenue Service (IRS) enforcement of the tax laws helps collect revenue from noncompliant taxpayers and, perhaps more importantly, promotes voluntary compliance by giving taxpayers confidence that others are paying their fair share.
The tax gap has persisted for decades despite efforts by the Internal Revenue Service (IRS) and Congress to reduce it. IRS most recently estimated an average annual gross tax gap of $458 billion for 2008-2010. IRS eventually recovers part of the tax gap through enforcement actions and late payments; for 2008-2010, it estimated it would recover $52 billion, resulting in a net tax gap of $406 billion.
The tax gap arises when taxpayers, whether intentionally or inadvertently, fail to accurately report tax liabilities on tax returns (underreporting), pay taxes due from filed returns (underpayment), or file a required tax return altogether or on time (nonfiling). The tax gap is spread across the five types of taxes that IRS administers—individual income, corporate income, employment, estate, and excise taxes. As shown in the figure below, underreporting, particularly of individual income taxes, accounts for most of the tax gap.
Figure: Estimated Average Annual Gross Tax Gap by Type of Noncompliance and Tax (Tax Years 2008-2010)
Note: Individual income tax includes individual business income tax. Estate tax underreporting noncompliance is not shown in this graphic because it represents less than one-half percent of total underreporting noncompliance. Excise tax is not shown in this graphic because IRS does not have excise tax underreporting noncompliance or nonfiling noncompliance estimates, and its estimate for excise tax underpayment noncompliance represents less than one-half percent of total underpayment noncompliance. In addition, IRS does not have a corporation income tax estimate for nonfiling noncompliance.
Given that the tax gap has been persistent and dispersed across different types of taxes and taxpayers, coupled with tax code complexity and a globalizing economy, reducing the tax gap will not likely be achieved through a single solution. Rather, the tax gap must be attacked on multiple fronts and with multiple strategies, such as:
- enhancing and expanding information reporting by third parties;
- collecting more data on noncompliance;
- ensuring high-quality services to taxpayers;
- leveraging external stakeholders, such as whistleblowers;
- enhancing electronic filing;
- expanding math error authority;
- regulating paid preparers;
- developing a long-term strategy to enhance budget planning, such as determining the appropriate level and allocation of enforcement resources; and
- simplifying and reforming the tax code.
For more information on efforts to reduce the tax gap, see the enforcement of tax laws area of the High Risk list.
GAO-16-92T: Published: Oct 1, 2015. Publicly Released: Oct 1, 2015.
GAO-14-453: Published: May 14, 2014. Publicly Released: Jun 13, 2014.
GAO-14-467T: Published: Apr 8, 2014. Publicly Released: Apr 8, 2014.
GAO-13-151: Published: Dec 5, 2012. Publicly Released: Jan 4, 2013.
GAO-12-651T: Published: Apr 19, 2012. Publicly Released: Apr 19, 2012.
GAO-17-237SP: Published: Jan 17, 2017. Publicly Released: Jan 17, 2017.
GAO-16-541T: Published: Apr 6, 2016. Publicly Released: Apr 6, 2016.
GAO-16-459R: Published: Mar 8, 2016. Publicly Released: Apr 7, 2016.
GAO-16-155: Published: Feb 23, 2016. Publicly Released: Mar 24, 2016.
GAO-16-102: Published: Dec 17, 2015. Publicly Released: Jan 13, 2016.
GAO-16-103: Published: Dec 16, 2015. Publicly Released: Jan 13, 2016.
GAO-16-20: Published: Oct 29, 2015. Publicly Released: Nov 30, 2015.
GAO-15-754T: Published: Jul 22, 2015. Publicly Released: Jul 22, 2015.
GAO-15-513: Published: Jun 30, 2015. Publicly Released: Jul 22, 2015.
GAO-13-590T: Published: May 22, 2013. Publicly Released: May 22, 2013.