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Internal Revenue Service: Challenges Remain in Combating Abusive Tax Schemes

GAO-04-50 Published: Nov 19, 2003. Publicly Released: Dec 19, 2003.
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Highlights

Abusive tax avoidance schemes could threaten our tax system's integrity and fairness if honest taxpayers believe that significant numbers of individuals are not paying their fair share of taxes. Abusive schemes encompass such distortions of the tax system as falsely describing the law (saying, for example, that the income tax is unconstitutional), misrepresenting facts (for instance, promoting the deduction of personal expenses as business expenses), or using trusts or offshore bank accounts to hide income. As agreed, this report focuses on three objectives. They are to (1) describe the nature and scope of abusive tax avoidance schemes as determined by the Internal Revenue Service (IRS), (2) describe IRS's strategy to combat these schemes and the performance goals and measures IRS uses to track its major effort related to them, and (3) describe how IRS determined the amount and source of staff resources to be devoted to these schemes in the IRS operating division most directly affected.

Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Internal Revenue Service The Commissioner of Internal Revenue should document the support underlying future IRS estimates of the size of the abusive scheme problem when IRS prepares the estimates.
Closed – Implemented
In our November 2003 report on abusive tax avoidance schemes, we found that IRS had data on 131,000 participants linked to abusive schemes and estimated several hundred thousand others likely were engaged in abusive schemes, but lacked documentation on the basis for the estimate. We recommended IRS document the support underlying future estimates of the size of the abusive scheme problem. IRS began a project after agreeing in its comment letter to GAO that it needed to document the basis for the underlying estimates of the abusive scheme problem, and that it would establish a methodology for doing so. In June 2006, IRS issued a report forecasting the potential population of promoters and participants in abusive tax avoidance transactions and documenting its methodology. As of January 2007, IRS officials said the Service has no further plans to update the study. Documentation can help policymakers judge the appropriateness of IRS resources and strategy in combating the high-priority abusive scheme problem.

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Topics

FraudInternal controlsInvestigations by federal agenciesPerformance measuresStrategic planningTax administrationTax evasionTax violationsTaxesTaxpayers