GAO-11-318SP: General government: Using return on investment information to better target IRS enforcement could reduce the tax gap; for example, a 1 percent reduction would increase tax revenues by $3 billion

General government

Using return on investment information to better target IRS enforcement could reduce the tax gap; for example, a 1 percent reduction would increase tax revenues by $3 billion

Why Area Is Important

Taxpayers paid more than $2.3 trillion in federal taxes in fiscal year 2009. However, the Internal Revenue Service (IRS) estimates that taxpayers failed to pay an additional $290 billion (based on a 2001 estimate—the most recent available). Experts believe the current tax gap, or the difference between the amount of taxes owed and the amount paid voluntarily and timely, may be larger. IRS seeks to allocate its approximately $12 billion budget over several service and enforcement programs to maximize taxpayer compliance. IRS taxpayer services range from telephone, Web site, and in-person assistance to collaboration with paid tax preparers and tax software companies. Enforcement includes audits, a variety of computerized checks, as well as efforts targeting specific industries or types of taxpayers, such as those with offshore bank accounts. However, IRS has little information about either the relative effectiveness or costs of its service and enforcement programs. IRS has begun to estimate return on investment (ROI), which compares revenues collected as a result of such enforcement actions with the cost of collecting them, but use of ROI has been limited.

What GAO Found

Increasing IRS's use of ROI and similar information, including developing actual ROI information after an enforcement program is implemented and comparing it to IRS's initial revenue projections, would provide a powerful tool for Congress and other budget decision makers, by identifying both cost savings within IRS and opportunities to cost-effectively reallocate resources to improve compliance and thereby bring in additional revenue for the federal government.

Beginning in fiscal year 2008, IRS has provided ROI information about the projected costs and potential revenues of new enforcement initiatives in its budget justification. For example, in its fiscal year 2011 justification, IRS reported that its proposed new initiatives would cost $237 million and increase revenue collected from noncompliant taxpayers by a projected $2 billion. However, IRS provides projected ROI information for only its new enforcement initiatives—accounting for less than 2 percent of the IRS's fiscal year 2011 budget request. Further, although guidance from the Office of Management and Budget (OMB), GAO, and the Government Performance and Results Act of 1993 suggest the use of ROI information, IRS does not provide projected ROI information for any of its existing enforcement or service programs that would continue to be funded under the budget request. IRS also does not estimate the ROI actually realized by its programs.

Citing GAO's June 2009 ROI recommendation in its fiscal year 2011 committee report, the Senate Committee on Appropriations directed IRS to provide detailed information about actual costs, revenues, and ROI for its new enforcement initiatives. IRS officials have been considering options to collect actual ROI data to compare with projections, however, actual ROI data have as yet to be produced. ROI information is challenging to develop and should be supplemented with information on compliance costs for taxpayers and others. Further, it is difficult to isolate the effects of a particular program on taxpayer compliance and IRS lacks some data needed to make complete ROI estimates. However, even limited ROI information could help identify programs that are not justifying their cost or opportunities to reallocate resources to programs that have larger tax compliance and revenue impact per dollar spent.

Similarly, IRS's fiscal year 2011 budget justification included 24 legislative proposals from the Department of the Treasury aimed at reducing the tax gap and generating nearly $26 billion in additional revenue over the next 10 years. For example, two legislative proposals suggest increased information reporting requirements, which are estimated to result in more than $12 million in revenues, but there were no estimates of the upfront costs of these proposals, such as the cost of purchasing or modernizing information technology or training staff or increased costs to the private sector. OMB guidance suggest that agencies should provide estimates of the implementation costs associated with any proposed legislation in their budget justifications, but IRS has provided no such estimates for its proposals. As a result, it is difficult to determine whether the potential benefits of IRS's legislative proposals are worth the costs, or how long it will take for the agency to recoup any initial investments.

Actions Needed

To help Congress and other budget decision makers better determine whether IRS's resources could be reallocated to collect more revenue and identify possible cost savings, and building on earlier recommendations, GAO believes that IRS should continue to increase its use of ROI information. IRS recognizes that this will require additional research to identify the impacts of specific programs including the effect on voluntary compliance by taxpayers. Once actual ROI statistics are developed for programs, and supplemented with compliance cost information, IRS could then compare results across programs. Actual ROI information could also be compared to initial ROI projections for a program to determine whether the anticipated results were actually achieved. The potential for cost savings and increased revenue that could result from more use of ROI information is significant. For example, if more effective utilization of IRS's existing resources reduced the tax gap by 1 percent, the additional tax revenue would be about $3 billion.

Also, as GAO has previously recommended, IRS should also coordinate with the Department of the Treasury to provide Congress with preliminary cost estimates or descriptions of resource needs for legislative proposals in future budget justifications. Even though many of the 24 legislative proposals IRS submitted to Congress in its fiscal year 2011 budget justification are conceptual—and therefore developing precise cost estimates for them may be difficult—providing approximate costs or other information such as whether the proposal would involve significant systems, staff, or training expenses could help Congress evaluate the proposals. Without such information, Congress is left at a disadvantage when weighing the costs and benefits of competing proposals aimed at increasing the amount of federal tax revenue collected.

Framework for Analysis

The information contained in this analysis is based on the related GAO products listed under the "Related GAO Products" tab and additional work following up on the recommendations from those products.

Area Contact

For additional information about this area, contact James White at (202) 512-9110 or whitej@gao.gov.

Related GAO Products

Internal Revenue Service:

Assessment of Budget Justification for Fiscal Year 2011 Identified Opportunities to Enhance Transparency
GAO-10-687R:
Published: May 26, 2010. Publicly Released: May 26, 2010.

Tax Administration:

Opportunities Exist for IRS to Enhance Taxpayer Service and Enforcement for the 2010 Filing Season
GAO-09-1026:
Published: Sep 23, 2009. Publicly Released: Oct 16, 2009.

Internal Revenue Service:

Review of the Fiscal Year 2010 Budget Request
GAO-09-754:
Published: Jun 3, 2009. Publicly Released: Jun 4, 2009.

Internal Revenue Service:

Fiscal Year 2009 Budget Request and Interim Performance Results of IRS's 2008 Tax Filing Season
GAO-08-567:
Published: Mar 13, 2008. Publicly Released: Mar 13, 2008.