Taxpayer Compliance: Reducing the Income Tax Gap

GAO discussed the income tax gap. GAO noted that: (1) taxpayers voluntarily pay 83 percent of the taxes they owe and 87 percent after Internal Revenue Service (IRS) audits; (2) although the compliance level is relatively high, tax compliance is not uniform among groups of taxpayers; (3) IRS estimates that wage earners report 97 percent of their wages, self-employed report 36 percent of their income, and self-employed individuals who operate on a cash basis report 11 percent of their income; (4) compliance is highest where there is tax withholding, slightly lower where there is information reporting to IRS, and much lower where there is neither; (5) the complexity of tax rules influences the level of tax compliance; (6) collection of some of the tax gap may not be feasible because of unreasonable costs or recordkeeping requirements; and (7) IRS must measure compliance with the tax law and use such information to focus its resources effectively.