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IRS' Efforts To Identify and Pursue Income Tax Nonfilers and Underreporters

Published: Jul 16, 1979. Publicly Released: Jul 16, 1979.
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Highlights

The Internal Revenue Service (IRS) is directing efforts toward estimating the extent of nonfiling and underreporting in the "subterranean economy" of unrecorded cash activity that escapes tax assessment. Unreported income secured through unrecorded transactions leaves no paper trail. IRS has four basic tools to detect nonfiling and underreporting: collections, document matching, audits, and criminal investigations. Of the 65 million individual taxpayers required to file returns in 1972, about 5 million did not, and IRS was able to catch about 12 percent of these nonfilers. The following occupations have the highest nonfiling rates: laborers (17 percent), service workers (16 percent), craftsmen (13 percent), and clerical workers (13 percent). Document matching is the most powerful tool used by IRS to detect underreporting. About 80 percent of the information documents received in 1978 are expected to be processed, and improvements are needed in this area. Although IRS considers the audit to be its most significant enforcement effort in detecting underreporters, GAO is concerned that the process used by IRS for selecting returns for audit is more deduction-oriented than income-oriented. About 9,000 detailed criminal investigations are made each year, but in 1978 only 1,414 individuals were convicted of fraud. In its financial plan for 1979, IRS allocated about $713 million, or 61 percent of the total $1.2 billion in compliance resources, to the audit program, 24 percent to collections, 11 percent to criminal investigations, and 4 percent to document matching. IRS should define target groups, measure the program impact for each group, and develop an overall well-integrated approach to the noncompliance problem.

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