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Tax Compliance: Better Compliance Data and Long-term Goals Would Support a More Strategic IRS Approach to Reducing the Tax Gap

GAO-05-753 Published: Jul 18, 2005. Publicly Released: Aug 17, 2005.
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Highlights

According to the Internal Revenue Service (IRS), a gap arises each year between what taxpayers pay accurately and on time in taxes and what they should pay under the law. The tax gap is composed of underreporting of tax liabilities on tax returns, underpaying of taxes due from filed returns, and nonfiling of required tax returns altogether or on time. GAO was asked to provide information on (1) the estimated amount that each major type of noncompliance contributed to the 2001 tax gap and IRS's views on the certainty of its tax gap estimates, (2) reasons why noncompliance occurs, and (3) IRS's approach to reducing the tax gap and whether the approach incorporates established results-oriented planning principles.

Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Internal Revenue Service To establish a stronger foundation for improving IRS's efforts to reduce the tax gap, the Commissioner of Internal Revenue should develop plans to periodically measure tax compliance for areas that have been previously measured, such as for individual income tax underreporting, and study ways to cost effectively measure compliance for other components of the tax gap that have not been measured, such as for excise tax and large corporations. Those plans and that study should take into account risk management factors such as the amount the component contributes to the gap, changes that may have affected compliance levels since a measurement was last taken, and the cost of measuring compliance.
Closed – Implemented
In June 2007, Internal Revenue Service (IRS) officials announced plans to launch a new National Research Program (NRP) reporting compliance study for individual taxpayers that will provide updated and more accurate audit selection tools and support efforts to reduce the nation's tax gap. According to IRS, the latest NRP study will be the first of an ongoing series of annual individual studies using a multi-year rolling methodology. The study will start in October 2007 and examine about 13,000 randomly selected tax year 2006 individual returns. Also, according to IRS, it updated its audit selection system, which will enable the agency to audit more efficiently by improving the detection of underreported income and overstated deductions and credits while auditing fewer taxpayers with accurate tax returns. In addition to the NRP for individuals, IRS is in the final stages of a compliance research project examining reporting compliance of S corporations. This research encompasses approximately 5,000 returns filed for tax years 2003 and 2004. Since the income and expense items for S corporations flow through to individual shareholders, this study will also help refine the tax gap estimates for individual income tax.
Internal Revenue Service To establish a stronger foundation for improving IRS's efforts to reduce the tax gap, the Commissioner of Internal Revenue should take steps to ensure that IRS regularly collects complete, accurate, and consistent data, to the extent possible, on the reasons taxpayers are noncompliant and that sufficient broader research is undertaken to continue learning about the reasons why noncompliance occurs.
Closed – Implemented
IRS improved the reason codes for the new individual reporting compliance study for tax year 2006. IRS eliminated some codes that were not useful, expanded the coding to make the reasons more precise, better trained the auditors on how to use the codes, and allowed auditors to select a code for intentional noncompliance without asserting a penalty. IRS also believes that doing a smaller individual NRP study annually, using the same auditors from year to year, will lead to better/more consistent use of the new reason codes and thus better data. Finally, IRS updated auditors' desktop tools, which it hopes will facilitate use of the reason codes. IRS plans to check the status of the initial data output on closed NRP audits, including the use of the reason codes, during November 2008 to see whether the data on reasons are better than they were for the 2001 NRP study, and plans to create a preliminary database for the whole study by winter 2009.
Internal Revenue Service To establish a stronger foundation for improving IRS's efforts to reduce the tax gap, the Commissioner of Internal Revenue should establish a long-term, quantitative voluntary compliance goal for individual income tax underreporting and for tax underpayment, as well as for other areas of noncompliance as data become available.
Closed – Implemented
Although not specifically targeted at individual income tax underreporting and underpayment, IRS has established a voluntary compliance rate goal of 85 percent by 2009 and has published this goal in the Administration's FY2007 budget request.

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Topics

Data collectionIncome taxesNoncompliancePersonal income taxesPolicy evaluationStrategic planningTax administrationTax evasionTax nonpaymentTax returnsTax violationsTaxpayersVoluntary compliance