Enforcement of Tax Laws

Why It's High Risk

Typically, about 84 percent of owed taxes are paid voluntarily and timely. The Internal Revenue Service (IRS) last estimated the resulting tax gap to be $345 billion for 2001. After late payments and IRS enforcement, the net tax gap was $290 billion. IRS enforcement of the tax laws is vital to ensuring that all owed taxes are paid, which in turn can promote voluntary compliance by giving taxpayers confidence that others are paying their fair share. GAO's high-risk area includes IRS's efforts to ensure payment both of unpaid taxes known to IRS and unpaid taxes IRS has not detected.

^ Back to topWhat We Found

GAO's recent work has identified areas where tax compliance is a problem:

• Business networks. Tax policy experts have raised concerns about taxpayers improperly structuring complex transactions among commonly held entities.
• Sole proprietor businesses. Sole proprietor businesses are among the most noncompliant taxpayers. A key reason is that, unlike other types of income, their income is often not subject to withholding or third party information reporting.
• Taxes on international income. IRS has designated compliance with international tax rules an enforcement priority. U.S. multinational corporations are shifting profits to low-tax jurisdictions.

Further, there are some specific compliance issues that need to be addressed by IRS and in some cases by legislative actions:

• Paid preparers. While helpful to many taxpayers, paid preparers submit many inaccurate tax returns. In 2010, IRS began implementing new regulations to increase oversight of paid preparers.
• Information reporting. Given that information reporting increases compliance, IRS should improve existing requirements and pursue opportunities for reporting of additional transactions.
• Civil tax penalties. Because of inflation, several civil tax penalties have eroded in value over time. Congress should consider requiring IRS to periodically adjust penalty amounts to account for decreases in value over time.
• Adequate information on noncompliance. IRS has committed to conducting annual compliance research studies for individual taxpayers and periodic studies on other segments of the taxpaying population. IRS plans to use these study data to update tax gap estimates and revise audit selection criteria.
• Answering taxpayers' tax law questions. High-quality service can contribute to compliance, especially for those who want to comply. While IRS's toll-free taxpayer service efforts continue to get high ratings in answering tax law questions accurately, taxpayers' ability to get through to IRS's telephone assistors has slipped.
• Math Error Authority. IRS has statutory authority to correct certain errors, such as calculation mistakes or omitted or inconsistent entries, during tax return processing, which avoids burdensome audits. Congress should consider expanding such authority so IRS can correct additional errors before taxpayers owe interest.

Because complex laws offer opportunities to hide noncompliance, simplifying the tax code also has the potential to help reduce the tax gap.

^ Back to topWhat Needs to Be Done

For IRS to improve its enforcement of tax laws, specific and targeted approaches are necessary. IRS must:

• Develop a strategy for ensuring compliance by business networks;
  Highlights of GAO-10-968 (PDF)
• Continue to perform compliance research on a regular basis and use the results to justify resource requests and target scarce enforcement resources;
  Highlights of GAO-07-719T (PDF)
• Explore using non-IRS data about business activity to better identify businesses that fail to file tax returns;
  Highlights of GAO-10-950 (PDF)
• Develop a focused strategy to improve compliance by sole proprietor businesses;
  Highlights of GAO-07-1014 (PDF)
• Assess compliance by third parties with existing information reporting requirements and the feasibility of using new sources for such reporting;
  Highlights of GAO-07-391T (PDF)   Highlights of GAO-09-238 (PDF)
• Improve the usefulness of existing information reporting, for example, by adding property addresses and other data to mortgage information reports;
  Highlights of GAO-09-769 (PDF)   Highlights of GAO-10-997 (PDF)
• Develop actual return on investments for enforcement programs and compare them to the return on investments originally projected for those programs;
  Highlights of GAO-09-754 (PDF)
• Increase electronic tax returns, and decrease paper, so all tax return data is in IRS's electronic systems and can be used to improve service and enforcement;
  Highlights of GAO-08-38 (PDF)
• Continue to make improvements to taxpayer service, such as improving refund timeliness; and
  Highlights of GAO-10-255 (PDF)
• Use the new paid preparer regulations to improve the services provided to taxpayers by paid preparers and the accuracy of the tax returns they prepare.
  Highlights of GAO-08-781 (PDF)

To assist IRS in reducing the tax gap, Congress should consider expanding IRS's legal authority, called math error authority, to correct taxpayer calculation mistakes or omitted or inconsistent entries during tax return processing before issuing refunds. Simplifying the tax code has the potential to improve compliance as well.

^ Back to topKey Reports

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