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United States Government Accountability Office: 
GAO: 

Testimony: 

Before the Committee on Finance, U.S. Senate: 

For Release on Delivery: 
Expected at 10:00 a.m. EDT:
Tuesday, June 28, 2011: 

Tax Gap: 

Complexity and Taxpayer Compliance: 

Statement of Michael Brostek:
Director, Tax Issues:
Strategic Issues: 

GAO-11-747T: 

GAO Highlights: 

Highlights of GAO-11-747T, testimony before the Committee on Finance, 
U.S. Senate. 

Why GAO Did This Study: 

Taxes are necessary because they fund the services provided by 
government. Several years ago, the Internal Revenue Service (IRS) 
estimated that the gross tax gap-—the difference between taxes owed 
and taxes paid on time-—was $345 billion for 2001. In the face of 
large and growing deficits, it is important to seek out potential 
causes and solutions to the tax gap. 

Achieving high levels of voluntary compliance is made more challenging 
as the tax code expands. Tax expenditures-—preferential provisions in 
the code such as exemptions, exclusions, deductions, credits, and 
deferral of tax liability—-have expanded the tax code, more than 
doubling in number since 1974. 

GAO’s statement focuses on four key areas: (1) how complexity adds to 
taxpayer burden and economic efficiency costs; (2) how complexities in 
reporting income contribute to the tax gap; (3) how tax expenditures 
add complexity and contribute to the tax gap; and (4) possible 
strategies for addressing the tax gap. The statement is based largely 
on GAO’s previous work conducted on tax compliance issues affecting 
individual taxpayers from 2005 through 2011. 

What GAO Found: 

The federal tax system contains complex rules. These rules may be 
necessary, for example, to ensure proper measurement of income, target 
benefits to specific taxpayers, and address areas of noncompliance. 
However, these complex rules also impose a wide range of 
recordkeeping, planning, computational, and filing requirements upon 
businesses and individuals. Complying with these requirements costs 
taxpayers time and money. In 2005 GAO reviewed existing studies and 
reported that even using the lowest available compliance cost 
estimates for the personal and corporate income tax, combined 
compliance costs would total $107 billion (roughly 1 percent of gross 
domestic product) per year; other studies estimate costs 1.5 times as 
large. Economic efficiency costs, which are reductions in economic 
well-being caused by changes in behavior due to taxes, are estimated 
to be even larger. 

Although many taxpayers have simple forms of income, others do not—-
especially those who receive income from capital gains, rents, self-
employment, and other sources-—and they may be required to do 
complicated calculations and keep detailed records. This complexity 
can engender errors and underpaid taxes. For example, GAO has 
documented millions of taxpayer errors in following complex rules for 
determining taxpayers’ “basis”—-generally the taxpayer’s investment in 
a property—-in securities they sold or corporations they own. 

Tax expenditures add to tax code complexity in part because they 
require taxpayers to learn about, determine their eligibility for, and 
choose between tax expenditures that have similar purposes. Tax 
expenditures also complicate tax planning, as taxpayers must predict 
their own future circumstances as well as future tax rules to make the 
best choice among provisions. Taxpayer errors contribute to the tax 
gap. For example, in 2001 taxpayers underreported $6.3 billion in net 
income due to misreported Individual Retirement Arrangement (IRA) 
distributions. But taxpayers also may underclaim benefits to which 
they are entitled. According to GAO’s past analysis, of tax filers who 
appeared to be eligible for a higher-education tax credit or tuition 
deduction in tax year 2005, about 19 percent, representing about 
412,000 returns, failed to claim any of them. 

No single approach is likely to fully and cost-effectively address the 
tax gap, but several strategies could improve taxpayer compliance. 
These strategies could require actions by Congress or IRS. For 
example, Congress can simplify the tax code by eliminating some tax 
expenditures and by making definitions more consistent across the tax 
code. IRS and Congress could take steps to enhance information 
reporting by third parties or expand compliance checking before 
refunds are issued. 

What GAO Recommends: 

GAO does not make any new recommendations in this testimony. 

View [hyperlink, http://www.gao.gov/products/GAO-11-747T] or key 
components. For more information, contact Michael Brostek at (202) 512-
9110 or brostekm@gao.gov. 

[End of section] 

Chairman Baucus, Ranking Member Hatch, and Members of the Committee, 

I am pleased to be here today to discuss complexity in the tax code, 
taxpayer burden, and steps to improve compliance. Taxes are necessary 
because they fund the services provided by government. Complexity, and 
the lack of transparency that it can create, exacerbate doubts about 
the current tax system's fairness. Public confidence in the nation's 
tax laws and tax administration is critical because we rely heavily on 
a system of voluntary compliance. If taxpayers do not have confidence 
in the tax system or do not believe that it is easy to understand and 
treats everyone fairly, then voluntary compliance is likely to decline. 

The current tax system is widely viewed as complex, thereby reducing 
the ability of individuals to understand and comply with tax laws. 
According to a 2010 report by the National Taxpayer Advocate, the tax 
code has grown so long that it has become challenging even to figure 
out how long it is. Important sources of tax code complexity are 
income documentation requirements and tax expenditure rules, which I 
will discuss in more detail later in my statement. 

Several years ago, the Internal Revenue Service (IRS) estimated that 
the gross tax gap--the difference between taxes owed and taxes paid on 
time--was $345 billion in 2001. We have said in past testimonies that 
there are no easy fixes to this problem. But in the face of large and 
growing structural deficits, it is nevertheless important that the 
government continues to seek out potential causes and solutions. This 
is in keeping with another theme that we have emphasized: that 
fundamental reexamination of government programs, policies, and 
priorities is necessary to assure that they match the needs of the 
21st century. While we do not know the extent to which tax code 
complexity contributes to the tax gap, this hearing is an important 
step as Congress considers the role played by tax code complexity in 
either contributing to the tax gap or impeding progress towards 
solutions. 

My statement today will cover (1) how complexity adds to taxpayer 
burden and economic efficiency costs; (2) how complexities in 
reporting income contribute to the tax gap; (3) how tax expenditures 
[Footnote 1] add complexity and contribute to the tax gap; and (4) 
possible strategies for addressing the tax gap. It is based mostly on 
our work from 2005 through 2011 on tax compliance issues affecting 
individual taxpayers. Those performance audits were conducted in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provided a reasonable basis for our 
findings and conclusions based on our audit objectives. 

We have also updated our analyses from our previous work on the number 
and sum of tax expenditure provisions.[Footnote 2] To determine the 
reliability of this data, we reviewed related documentation and tested 
data for obvious errors. We determined that the data were sufficiently 
reliable for the purposes of this testimony. 

Background: 

Tax Gap: 

The gross tax gap is an estimate of the difference between the taxes-- 
including individual income, corporate income, employment, estate, and 
excise taxes--that should have been paid voluntarily and on time and 
what was actually paid for a specific year.[Footnote 3] Of the 
estimated $345 billion tax gap for tax year 2001, IRS estimated that 
it would eventually recover about $55 billion of that through late 
payments and enforcement actions, for a net tax gap of $290 billion. 
The estimate is an aggregate of estimates for the three primary types 
of noncompliance: (1) underreporting of tax liabilities on tax 
returns; (2) underpayment of taxes due from filed returns; and (3) 
nonfiling, which refers to the failure to file a required tax return 
altogether or on time.[Footnote 4] We have made many recommendations 
over time that could address the tax gap.[Footnote 5] 

IRS's tax gap estimates for each type of noncompliance include 
estimates for some or all of the five types of taxes that IRS 
administers. Underreporting of tax liabilities can occur when a 
taxpayer underreports income earned or overclaims deductions from 
income. As shown in table 1, underreporting of tax liabilities-- 
particularly for the individual income tax--accounted for most of the 
tax gap estimate for tax year 2001. We have encouraged regular tax gap 
measurements, and IRS officials have indicated that they will be 
updating their tax gap estimates later in 2011 or early 2012. We 
believe that these estimates are important to gauge progress in 
addressing the tax gap and because analyzing the data used to estimate 
it can help identify ways to improve tax compliance. 

Table 1: IRS's Tax Year 2001 Gross Tax Gap Estimates by Type of 
Noncompliance and Type of Tax: 

Type of noncompliance: Underreporting; 
Type of tax: 
Individual income tax: $197 billion; 
Corporate income tax: $30 billion; 
Employment tax: $54 billion; 
Estate tax: $4 billion; 
Excise tax: No estimate; 
Total: $285 billion. 

Type of noncompliance: Underpayment; 
Type of tax: 
Individual income tax: $23 billion; 
Corporate income tax: $2 billion; 
Employment tax: $5 billion; 
Estate tax: $2 billion; 
Excise tax: $1 billion; 
Total: $34 billion. 

Type of noncompliance: Nonfiling; 
Type of tax: 
Individual income tax: $25 billion; 
Corporate income tax: No estimate; 
Employment tax: No estimate; 
Estate tax: $2 billion; 
Excise tax: No estimate; 
Total: $27 billion. 

Type of noncompliance: Total; 
Type of tax: 
Individual income tax: $244 billion; 
Corporate income tax: $32 billion; 
Employment tax: $59 billion; 
Estate tax: $8 billion; 
Excise tax: $1 billion; 
Total: $345 billion. 

Source: IRS. 

Note: Some figures do not sum to totals because of rounding. 

[End of table] 

Taxpayers who underreported the amount of individual income tax they 
owed represented an estimated $197 billion of the 2001 tax gap, and 
$165 billion of that amount was due to individual tax filers 
underreporting their income. As shown in table 2, underreporting of 
individuals' business income and nonbusiness income accounted for $109 
billion and $56 billion, respectively, of the 2001 tax gap. 

Table 2: Components of the Tax Gap for Individual Income Tax 
Underreporting, Tax Year 2001: 

Type of income or offset: Business income; 
Tax gap amount: $109 billion; 
Net misreporting percentage: 43%. 

Type of income or offset: Nonbusiness income; 
Tax gap amount: $56 billion; 
Net misreporting percentage: 4%. 

Type of income or offset: Credits; 
Tax gap amount: 17 billion; 
Net misreporting percentage: 26%. 

Type of income or offset: Deductions; 
Tax gap amount: $14 billion; 
Net misreporting percentage: 5%. 

Type of income or offset: Exemptions; 
Tax gap amount: $4 billion; 
Net misreporting percentage: 5%. 

Type of income or offset: Adjustments; 
Tax gap amount: -$3 billion; 
Net misreporting percentage: -21%. 

Type of income or offset: Total; 
Tax gap amount: $197 billion; 
Net misreporting percentage: 18%. 

Source: IRS. 

Note: Figures may not sum to totals because of rounding. Net 
misreporting percentage is the net amount misreported on a given line 
item or category expressed as a percentage of the sum of the absolute 
values of the amounts that should have been reported for that item or 
category. 

[End of table] 

IRS has concerns with the certainty of the tax gap estimate for tax 
year 2001 in part because some areas of the 2001 estimate rely on data 
originally gathered in the 1970s and 1980s. IRS has no estimates for 
other areas of the tax gap, and it is inherently difficult to measure 
some types of noncompliance.[Footnote 6] Some analysts believe the 
2001 estimate likely underestimated the tax gap and that in absolute 
dollars it is likely larger now than in 2001. 

IRS's overall approach to reducing the tax gap consists of improving 
service to taxpayers and enhancing enforcement of the tax laws. IRS 
seeks to improve voluntary compliance through efforts such as 
education and outreach programs and tax form simplification. It also 
uses its enforcement authority to ensure that taxpayers are reporting 
and paying the proper amounts of taxes through efforts such as 
examining tax returns and matching the amount of income taxpayers 
report on their tax returns to the income amounts reported on 
information returns[Footnote 7] it receives from third parties. In 
spite of IRS's efforts to improve taxpayer compliance, the rate at 
which taxpayers pay their taxes voluntarily and on time has tended to 
range from around 81 percent to around 84 percent over the past three 
decades. 

Tax Expenditures: 

The sum of the estimated revenue loss due to tax expenditures was over 
$1 trillion in 2010.[Footnote 8] Tax expenditures are often aimed at 
policy goals similar to those of federal spending programs. Existing 
tax expenditures, for example, help students and families finance 
higher education and provide incentives for people to save for 
retirement. Because tax expenditures result in forgone revenue for the 
government, they have a significant effect on overall tax rates--all 
else equal, for any given level of revenue, tax expenditures mean that 
overall tax rates must be higher than a tax system with no tax 
expenditures. In 2005, we recommended that the federal government take 
several steps to ensure greater transparency of and accountability for 
tax expenditures by reporting better information on tax expenditure 
performance and more fully incorporating tax expenditures into federal 
performance management and budget review processes.[Footnote 9] 

Complexity Can Have Value, but Adds to Compliance and Efficiency Costs: 

The federal tax system contains complex rules. These rules may be 
necessary, for example, to ensure proper measurement of income, target 
benefits to specific taxpayers, and address areas of noncompliance. 
However, these complex rules also impose a wide range of record 
keeping, planning, computational, and filing requirements upon 
businesses and individuals. Complying with these requirements costs 
taxpayers time and money. As shown in figure 1, these costs to 
taxpayers are above and beyond what they pay to the government in 
taxes. 

Figure 1: Compliance Burden Is One Cost Taxpayers Face in Complying 
with the Tax System: 

[Refer to PDF for image: illustration] 

Tax liability: 
plus: 
Compliance burden: 
plus: 
Efficiency costs: 
equals: 
Total cost of a tax to a taxpayer. 

The compliance burden, or the time and resources required to comply 
with the tax laws—-including out of pocket costs, are a second type of 
cost that taxes impose on taxpayers. 

Source: GAO. 

[End of figure] 

Estimating total compliance costs is difficult because neither the 
government nor taxpayers maintain regular accounts of these costs, and 
federal tax requirements often overlap with record keeping and 
reporting that taxpayers do for other purposes. Although available 
estimates are uncertain, taken together, they suggest that total 
compliance costs are large. For example, in 2005 we reviewed existing 
studies and reported that even using the lowest available compliance 
cost estimates for the personal and corporate income tax, combined 
compliance costs would total $107 billion (roughly 1 percent of gross 
domestic product [GDP]) per year; other studies estimate costs 1.5 
times as large.[Footnote 10] 

The tax system also results in economic efficiency costs, which are 
reductions in economic well-being caused by changes in behavior due to 
taxes, government benefits, monopolies, and other forces that 
interfere in the market. Efficiency costs can take the form of lost 
output or consumption opportunities. For example, economists generally 
agree that the favorable tax treatment of owner-occupied housing 
distorts investment in the economy, resulting in too much investment 
in housing and too little business investment. Estimating efficiency 
costs associated with the tax system is challenging because it has 
extensive and diverse effects on behavior. In fact, in a 2005 report, 
we found no comprehensive estimates of the efficiency costs of the 
current federal tax system.[Footnote 11] The two most comprehensive 
studies we found suggest that these costs are large--on the order of 
magnitude of 2 to 5 percent of GDP each year (as of the mid-1990s). 
However, the actual efficiency costs of the current tax system may not 
fall within this range because of uncertainty surrounding taxpayers' 
behavioral responses, changes in the tax code and the economy since 
the mid-1990s, and the fact that the two studies did not cover the 
full scope of efficiency costs. 

Tax software and the use of paid tax return preparers may mitigate the 
need for taxpayers to understand complexities of the tax code. In 
2010, IRS processed about 137 million returns. As we have previously 
reported, about 90 percent of returns are prepared by individual 
taxpayers or paid preparers using professional or commercial software. 
Software companies and paid preparers often act as surrogate tax 
administrators in that they keep abreast of tax law changes. A 
participant at the 2007 Joint Forum on Tax Compliance stated that 
taxpayers receiving assistance in preparing their individual tax 
returns, either from paid preparers or tax preparation software, are 
somewhat insulated from tax code complexity.[Footnote 12] 

However, while many paid tax preparers help taxpayers by using their 
expertise to help ensure that complex laws are understood, others may 
introduce their own mistakes. For example, in a limited investigation 
in 2006, all 19 of the tax return preparers who prepared returns for 
our undercover investigators produced errors, some with substantial 
consequences.[Footnote 13] IRS's review of 2001 tax returns also found 
that tax returns prepared by paid preparers contained a significant 
level of errors. IRS audits of returns prepared by a paid preparer 
showed a higher error rate--56 percent--than audits of returns 
prepared by the taxpayer--47 percent. 

Complexities in Reporting Income Contribute to the Tax Gap by 
Providing Opportunities for Taxpayers to Misreport: 

Income measurement is straightforward for a large proportion of the 
individual taxpayer population: those who earn only labor and interest 
income and capital income within a retirement account generally have 
their income reported to them (and to the IRS) by the source of the 
income. However, substantial numbers of taxpayers who receive income 
from capital gains, rents, self-employment, and other sources often 
deal with complex tax laws, complicated calculations, and detailed 
record keeping. While complexities lead some taxpayers to make 
mistakes when reporting their income, some misreporting is due to 
intentional acts of tax evasion. 

For example, IRS studies show that the majority of capital asset 
transactions and capital gains and losses were for securities 
transactions such as sales of corporate stock, mutual funds, bonds, 
options, and capital gain distributions from mutual funds. Taxpayers 
are required to report securities transactions on their federal income 
tax returns. To accurately report securities sales, the taxpayer must 
have records of the dates they acquired and sold the asset; sales 
price, or gross proceeds from the sale; cost or other basis of the 
sold asset; and resulting gains or losses.[Footnote 14] They must 
report this information separately for short-term transactions and 
long-term transactions. Further, before taxpayers can determine any 
gains or losses from securities sales, they must determine if and how 
the original cost basis of the securities must be adjusted to reflect 
certain events, such as stock splits, nontaxable dividends, or 
nondividend distributions. 

Complex income-reporting requirements for securities transactions may 
contribute to taxpayers' misreporting their income. In 2006, we 
estimated that 8.4 million of the estimated 21.9 million taxpayers 
with securities transactions misreported their gains or losses for tax 
year 2001.[Footnote 15] A greater estimated percentage of taxpayers 
misreported gains or losses from securities sales (36 percent) than 
capital gain distributions from mutual funds (13 percent), and most of 
the misreported securities transactions exceeded $1,000 of capital 
gain or loss.[Footnote 16] This may be because taxpayers must 
determine the taxable portion of securities sales' income whereas they 
need only add up their capital gain distributions. Furthermore, about 
half of these taxpayers who misreported failed to accurately report 
the securities' basis, sometimes because they did not know the basis 
or failed to adjust the basis appropriately. Although we were not able 
to estimate the capital gains tax gap for securities, we were able to 
determine the direction of the misreporting. For securities sales, an 
estimated 64 percent of taxpayers underreported their income from 
securities (i.e., they understated gains or overstated losses) 
compared to an estimated 33 percent of taxpayers who overreported 
income (i.e., they overstated gains or understated losses).[Footnote 
17] For both underreported and overreported income, some taxpayers 
misreported over $400,000 in gains or losses. 

Small businesses--which include sole proprietorships and S 
corporations, among other entities--are subject to multiple layers of 
filing, reporting, and deposit requirements. These requirements 
reflect IRS's administration of a variety of tax and other policies, 
including income, employment, and excise taxes, as well as pension and 
other employee benefit programs. In considering the number of 
requirements, it is important to note that the requirements reflect 
many decisions and compromises made by Congress and administrations to 
accomplish their policy goals, including those that may benefit small 
businesses and other taxpayers. 

Sole proprietors face significant complexities in reporting income. 
This complexity may contribute to the estimated $68 billion of the tax 
gap caused by sole proprietors underreporting their net business 
income, which can stem either from understated receipts or overstated 
expenses. For example, sole proprietors report their business-related 
profit or loss on their individual income tax return, and they can use 
their losses to offset other categories of income on their returns in 
the year that they incur the loss. Identifying which of a sole 
proprietor's payments qualify as business expenses and the amount to 
be deducted can be complex. For example, two types of payments--costs 
of goods sold and capital improvements--must be distinguished from 
other types of payments because they are treated differently under tax 
rules.[Footnote 18] Expenses that are used partly for business and 
personal purposes can be deducted only to the extent they are used for 
business. 

Individual taxpayers who are shareholders in S corporations may also 
experience difficulty because of complexity in income measurement. An 
S corporation is a federal business type that provides tax benefits 
and limited liability protection to shareholders. S corporations are 
not generally taxed at the entity level: income, losses, and deduction 
items pass through to the individual shareholders' income tax returns, 
and the shareholders are taxed on any net income. S corporations are 
to provide their shareholders and IRS with information on the 
allocation of income, losses, and other items. 

As we have previously reported, one source of complexity for S 
corporation shareholders may arise when calculating basis--their 
ownership share of the corporation--in order to claim losses and 
deductions to offset other earned income.[Footnote 19] Shareholders 
generally can only claim losses and deductions up to the amount of 
basis the shareholder has in the S corporation's stock and debt. 
[Footnote 20] While the S corporation is required to send shareholders 
some information that can be used to calculate basis, S corporations 
are not required to report any basis calculations to shareholders. IRS 
officials and S corporation stakeholder representatives told us that 
calculating and tracking basis was one of the biggest challenges in 
complying with S corporation rules. In 2009, we recommended that 
Congress require S corporations to calculate shareholder's stock and 
debt basis as completely as possible and report the calculation to 
shareholders and IRS.[Footnote 21] In an analysis of IRS's annual 
examinations of individual tax returns that closed for fiscal years 
2006 through 2008, we found the amount of the misreported losses that 
exceeded basis limitations was over $10 million, or about $21,600 per 
taxpayer. 

Tax Expenditures Add Complexity and Contribute to the Tax Gap by 
Providing Opportunities for Taxpayers to Make Mistakes or Evade Taxes: 

The growing number of tax expenditures is among the causes of tax code 
complexity. Between 1974 and 2010, tax expenditures reported by the 
Department of the Treasury more than doubled in overall number from 67 
to 173. Tax expenditures are an important means the government uses to 
address a wide variety of social objectives, from supporting 
educational attainment, to providing low-income housing, to ensuring 
retirement income, and many others. However, tax expenditures add to 
tax code complexity in part because they require taxpayers to learn 
about, determine their eligibility for, and choose between tax 
expenditures that have similar purposes. Tax expenditures also 
complicate tax planning, as taxpayers must predict their own future 
circumstances as well as future tax rules to make the best choice 
among provisions. 

Savings incentives within the tax code illustrate how tax expenditures 
add to complexity. While the tax code includes numerous types of 
savings incentives--including those for healthcare and higher 
education--my statement will focus on retirement savings as a key 
example. Taxpayers can choose between traditional Individual 
Retirement Arrangements (IRA) and Roth IRAs for retirement savings. 
[Footnote 22] Although the tax rules for distributions diverge for 
traditional and Roth IRAs, taxpayers may not know that a 10 percent 
early withdrawal penalty, with some exceptions, applies to both IRA 
types. Taxpayers also get confused over which IRA early withdrawals 
are not subject to penalties, in part because the exceptions differ 
for employer pension plans. Additionally, both types of IRAs have 
rules governing eligibility to contribute, and contributions to each 
are subject to an annual limit. However, taxpayers may not understand 
that the annual contribution limit applies across traditional IRAs and 
Roth IRAs in combination, which may lead them to overcontribute. With 
regard to record-keeping burden, taxpayers with traditional or Roth 
IRAs must track the total amount of contributions in a given year and 
reasons for distributions to accurately report this information on 
their tax returns. Frequent changes to IRA rules (such as increasing 
contribution limits and allowing workers to tap IRA assets for certain 
nonretirement purposes without an early withdrawal penalty) have also 
made tax planning more difficult for taxpayers. 

As we reported in 2008, IRS research and enforcement data show that--
in the aggregate--many taxpayers misreported millions of dollars in 
traditional IRA contributions and distributions on their tax returns. 
[Footnote 23] We reported that in tax year 2001 the following occurred: 

* Of the taxpayers who made deductible traditional IRA contributions, 
an estimated 14.8 percent[Footnote 24] (554,657 taxpayers)[Footnote 
25] did not accurately report the IRA deduction on their individual 
tax returns--10.4 percent overstated their deductible contributions 
(that is, exceeded the applicable limit) and 4.4 percent underreported 
their deductible contributions (that is, reported less on their 
returns than they actually could deduct).[Footnote 26] The understated 
net income due to these misreported traditional IRA contribution 
deductions was $392 million,[Footnote 27] including both taxpayers who 
either overstated or understated their contribution deductions to a 
traditional IRA. 

* Of the taxpayers who had taxable traditional IRA distributions, an 
estimated 14.6 percent[Footnote 28] (1.5 million taxpayers)[Footnote 
29] misreported withdrawals from their traditional IRA distributions-- 
13.7 percent understated (that is, reported an amount less than what 
the taxpayer withdrew) and 0.9 percent overstated IRA distributions 
(that is, reported an amount greater than what the taxpayer 
withdrew).[Footnote 30] The underreported net income due to 
misreported IRA distributions was $6.3 billion,[Footnote 31] including 
taxpayers who failed to report early distributions and the associated 
tax. 

Taxpayers also make costly mistakes when choosing higher-education tax 
incentives. In a 2008 testimony, we reported that among tax filers who 
appeared to be eligible for a tax credit or tuition deduction in tax 
year 2005, about 19 percent, representing about 412,000 returns, 
failed to claim any of them.[Footnote 32] The amount by which these 
tax filers failed to reduce their tax averaged $219; 10 percent of 
this group could have reduced their tax liability by over $500. In 
total, including both those who failed to claim a tax credit or 
tuition deduction and those who chose a credit or a deduction that did 
not maximize their benefit, we found that in 2005, 28 percent, or 
nearly 601,000 tax filers, did not maximize their potential tax 
benefit. 

Some tax expenditures also provide taxpayers who intend to evade taxes 
with opportunities to do so. For example, the Treasury Inspector 
General for Tax Administration (TIGTA) reported in 2011 that the First-
time Homebuyer Credit (FTHBC) and the subsequent changes made to the 
credit have confused taxpayers and allowed individuals to make 
fraudulent claims for the refundable credit.[Footnote 33] For example, 
TIGTA reported many taxpayers claiming the credit appeared not to be 
first-time homebuyers because tax information indicated they had owned 
homes within 3 years prior to their new home purchase. The 2008 FTHBC 
provided taxpayers a refundable credit of up to $7,500 that must be 
repaid in $500 increments each year over 15 years beginning in the 
2011 filing season.[Footnote 34] According to recent IRS data, the 
total amount to be repaid by taxpayers is $7 billion. The American 
Recovery and Reinvestment Act of 2009 increased the maximum FTHBC 
credit to $8,000, with no payback required unless the home ceases to 
be the taxpayer's principal residence within 3 years. In 2009, we 
testified that IRS faced significant challenges in determining if 
taxpayers were complying with the numerous conditions for the 
credit.[Footnote 35] For example, to determine eligibility, IRS had to 
verify that taxpayers had not owned a house in the previous 3 years 
and verify the closing date on home purchases. Other challenges 
included enforcing the $500 per year payback provision in the 2008 
credit. 

Strategies to Reduce the Tax Gap Present Challenges and Trade-offs: 

Multiple approaches are needed to reduce the tax gap. No single 
approach is likely to fully and cost-effectively address noncompliance 
since the noncompliance has multiple causes and spans different types 
of taxes and taxpayers. While the tax gap will remain a challenge into 
the future, the following strategies could help. These strategies 
could require actions by Congress or IRS. 

Enhancing Information Reporting: 

Enhancing information reporting can reduce complexity for taxpayers. 
It can also reduce the opportunities available for taxpayers to evade 
taxes by, for example, underreporting business income or filing 
fraudulent claims for tax credits. Generally, new requirements on 
third parties to submit information returns would require statutory 
changes, whereas improvements to existing information-reporting forms 
may be done administratively by IRS. 

The extent to which individual taxpayers accurately report the income 
they earn has been shown to be related to the extent to which the 
income is reported to them and IRS by third parties or taxes on the 
income are withheld. For example, employers report most wages, 
salaries, and tip compensation to employees and IRS through Form W-2. 
Also, banks and other financial institutions provide information 
returns (Forms 1099) to account holders and IRS showing the taxpayers' 
annual income from some types of investments. Findings from IRS's 
study of individual tax compliance indicate that nearly 99 percent of 
these types of income are accurately reported on individual tax 
returns. For types of income for which there is little or no 
information reporting, individual taxpayers tend to misreport over 
half of their income. 

One area where improved information reporting could help is higher- 
education expenses. Eligible educational institutions are required to 
report information on qualified tuition and related expenses for 
higher education to both taxpayers and IRS so that taxpayers can 
determine the amount of educational tax benefits that can be claimed. 
[Footnote 36] However, the information currently reported by 
educational institutions on tuition statements sent to IRS and 
taxpayers (on Form 1098-T) may be confusing for taxpayers who use the 
form to prepare their tax returns and not very useful to IRS. IRS 
requires institutions to report on Form 1098-T either the (1) amount 
of payments received, or (2) amount billed for qualified expenses. IRS 
officials stated that most institutions report the amount billed and 
do not report payments. However, the amount billed may not equal the 
amount that can be claimed as a credit.[Footnote 37] In order to 
reduce taxpayer confusion and enhance compliance with the eligibility 
requirements for higher-education benefits, in 2009 we recommended 
that IRS revise Form 1098-T to improve the usefulness of information 
on qualifying education expenses.[Footnote 38] 

Another area where improved information reporting could improve 
compliance is rental income. In 2008, we estimated that at least 53 
percent of individual taxpayers with rental real estate misreported 
their rental real estate activities for tax year 2001, resulting in an 
estimated $12.4 billion of net misreported income.[Footnote 39] IRS 
enforcement officials cited limited information reporting as a major 
challenge in ensuring compliance because without third-party 
information reporting, it is difficult for IRS to systematically 
detect taxpayers who fail to report any rent or determine whether the 
rent and expense amounts taxpayers report are accurate. In 2008, we 
recommended that IRS require third parties to report mortgaged 
property addresses to help IRS identify who may have misreported their 
rental real estate activity, but IRS did not adopt our recommendation 
because of third-party burden and a lack of an IRS compliance program 
to use such information. We made a similar recommendation in a 2009 
report, which IRS is still evaluating as of December 2010.[Footnote 40] 

While information reporting reduces the complexity of reporting income 
for individual taxpayers, this tool can create costs for the third 
parties responsible for reporting the income to the taxpayer and IRS. 
For example, we previously reported that expanding information 
reporting on securities sales to include basic information would 
involve challenges for brokers and the IRS.[Footnote 41] In 
particular, brokers would bear costs and burdens--even as taxpayers' 
costs and burdens decrease somewhat--and many issues would arise about 
how to calculate adjusted basis, which securities would be covered, 
and how information would be transferred among brokers. 

In some cases it is difficult to identify third parties for whom a 
reporting requirement could be enforced without an undue burden on 
both the third parties and IRS. In a 2009 report, we found that a 
major reason why little information reporting on sole proprietor 
expenses exists is because of the difficulty identifying third 
parties.[Footnote 42] For example, there is no third party who could 
verify the business use of cars or trucks by sole proprietors. 

Ensuring High-Quality Services to Taxpayers: 

Ensuring high-quality services is a necessary foundation for voluntary 
compliance, so action by IRS to improve the quality of services 
provided to taxpayers would be beneficial. High-quality services can 
help taxpayers who wish to comply but do not understand their 
obligations. IRS taxpayer services include education and outreach 
programs, simplifying the tax process, and revising forms and 
publications to make them electronically accessible and more easily 
understood by diverse taxpayer communities. For example, if tax forms 
and instructions are unclear, taxpayers may be confused and make 
unintentional errors. Ensuring high-quality taxpayer services would 
also be a key consideration in implementing any of the approaches for 
tax gap reduction. For example, expanding enforcement efforts would 
increase interactions with taxpayers, requiring processes to 
efficiently communicate with taxpayers. Changing tax laws and 
regulations would also require educating taxpayers about the new 
requirements in a clear, timely, and accessible manner. For example, 
we previously reported that while taxpayers' access to telephone 
assistance in tax year 2009 was better than the previous year, it 
remained lower than in 2007, in part because of calls about tax law 
changes.[Footnote 43] Despite heavy call volume, the accuracy of IRS 
responses to taxpayers' questions remained above 90 percent. 

Simplifying the Tax Code or Fundamental Tax Reform: 

Congressional efforts to simplify the tax code and otherwise alter 
current tax policies may help reduce the tax gap by making it easier 
for individuals and businesses to understand and voluntarily comply 
with their tax obligations. One way to simplify the tax code is to 
eliminate or combine tax expenditures, thereby helping reduce 
taxpayers' unintentional errors and limiting opportunities for tax 
evasion. As we have previously testified, the Government Performance 
and Results Act (GPRA) Modernization Act of 2010 (GPRAMA)[Footnote 44] 
could help inform reexamination or restructuring efforts and lead to 
more efficient and economical executive-branch service delivery in 
overlapping program areas. The act is intended to identify the various 
agencies and federal activities--including spending programs, 
regulations, and tax expenditures--that contribute to crosscutting 
outcomes.[Footnote 45] 

While simplification can have benefits, it can also have drawbacks. 
Eliminating tax expenditures would reduce the incentives for the 
activities that were encouraged. Also, in 2005, we stated that changes 
to the tax system can create winners and losers.[Footnote 46] The 
government may attempt to mitigate large gains and losses by 
implementing transition rules. Deciding if transition relief is 
necessary involves how to trade off between equity, efficiency, 
simplicity, transparency, and administrability. 

Similar trade-offs exist with possible fundamental tax reforms that 
would move away from an income tax system to some other system, such 
as a consumption tax, national sales tax, or value-added tax. 
Fundamental tax reform would most likely result in a smaller tax gap 
if the new system has few tax preferences or complex tax code 
provisions and if taxable transactions are transparent. However, these 
characteristics are difficult to achieve in any system and experience 
suggests that simply adopting a fundamentally different tax system, 
whatever the economic merits, may not by itself eliminate any tax gap. 
For example, in 2008, we reported that some available data indicate a 
value-added tax may be less expensive to administer than an income 
tax. However, we found that like other systems, even a simple value-
added tax--one that exempts few goods or services--has compliance 
risks and, largely as a consequence, generates administrative costs 
and compliance burden.[Footnote 47] Similar to other taxes, adding 
complexity through exemptions or reduced rates for some goods or 
services generally decreases revenue and increases compliance risks 
because of the incentive to misclassify purchases and sales. Such 
complexity also increases the record-keeping burden on businesses and 
increases the government resources devoted to enforcement. 

Any tax system could be subject to noncompliance, and its design and 
operation, including the types of tools made available to tax 
administrators, will affect the size of any corresponding tax gap. 
Further, the motivating forces behind tax reform include factors 
beyond tax compliance, such as economic effectiveness, equity, and 
burden, which could in some cases carry greater weight in designing an 
alternative tax system than ensuring the highest levels of compliance. 

Policymakers may find it useful to compare any proposed changes to the 
tax code based on a set of widely accepted criteria for assessing 
alternative tax proposals. These criteria include the equity, or 
fairness, of the tax system; the economic efficiency, or neutrality, 
of the system; and the simplicity, transparency, and administrability 
of the system. These criteria can sometimes conflict, and the weight 
one places on each criterion will vary among individuals. Our 
publication, Understanding the Tax Reform Debate: Background, 
Criteria, and Questions, may be useful in guiding policymakers as they 
consider tax reform proposals.[Footnote 48] 

Devoting Additional Resources to Enforcement: 

Devoting additional resources to enforcement has the potential to help 
reduce the tax gap by billions of dollars. However, determining the 
appropriate level of enforcement resources to provide IRS requires 
taking into account factors such as how effectively and efficiently 
IRS is currently using its resources, how to strike the proper balance 
between IRS's taxpayer service and enforcement activities, and 
competing federal funding priorities. If Congress were to provide IRS 
more enforcement resources, the amount that the tax gap could be 
reduced depends in part on factors such as the size of budget 
increases, how IRS manages any additional resources, and the indirect 
increase in taxpayers' voluntary compliance resulting from expanded 
enforcement. Providing IRS with additional funding would enable it to 
contact millions of potentially noncompliant taxpayers it currently 
identifies but cannot contact given resource constraints. 

However, devoting additional resources to enforcement will not 
completely close the tax gap. For example, in a 2009 report, we 
reported that IRS's compliance programs focused on sole proprietors' 
underreporting of income addressed only a small portion of sole 
proprietor expense noncompliance.[Footnote 49] Despite investing 
nearly a quarter of all revenue agent time in 2008, IRS was able to 
examine (audit) about 1 percent of estimated noncompliant sole 
proprietors. These exams are costly and yielded less revenue than 
exams of other categories of taxpayers, in part because most sole 
proprietorships are small in terms of receipts. 

Expanding Compliance Checks Before IRS Issues Refunds: 

IRS could reduce the tax gap by expanding compliance checks before 
issuing refunds to taxpayers. In April 2011, the Commissioner of 
Internal Revenue talked about a long-term vision to increase 
compliance activities before refunds are sent to taxpayers. In one 
example, IRS is exploring a requirement that third parties send 
information returns to IRS and taxpayers at the same time as opposed 
to the current requirement that some information returns go to 
taxpayers before going to IRS. The intent is to move to matching those 
information returns to tax returns during tax return processing. IRS 
currently matches data provided on over 2 billion information returns 
to tax returns only after the normal filing season. Matching during 
the filing season would allow IRS to detect and correct errors before 
it sends taxpayers their refunds, thereby avoiding the costs of trying 
to recover funds from taxpayers later.[Footnote 50] This approach 
could also allow IRS to use its enforcement resources on other 
significant compliance problems. However, the Commissioner made clear 
that his vision for more prerefund compliance checks will take 
considerable time to implement. One prerequisite would be a major 
reworking of some fundamental IRS computer systems. To the extent that 
implementing this vision would require additional budgetary resources 
or changes in tax policies, Congress would play a key role. 

Using Consistent Definitions: 

If Congress changed the law to include more consistent definitions 
across tax provisions, then taxpayers could more easily understand and 
comply with their obligations. Higher-education tax preferences 
provide an example of inconsistent definitions for qualified education 
expenses. What tax filers are allowed to claim as a qualified higher- 
education expense varies between some of the various savings and 
credit provisions in the tax code. For example, while Coverdell 
education savings accounts and qualified tuition programs under 
section 529 of the Internal Revenue Code permit tax filers to include 
room and board as qualified expenses if the student is enrolled at 
least half time, the American Opportunity Credit and the Lifetime 
Learning Credit do not. These dissimilar definitions require that tax 
filers keep track of expenses separately, applying some expenses to 
some tax preferences, but not others. 

There are no easy solutions to the tax gap, but addressing the tax gap 
is as important as ever before in the face of the nation's fiscal 
challenges. Innovative thinking and the combined efforts of IRS and 
Congress will be needed now and in the years to come. 

Chairman Baucus, Ranking Member Hatch, and Members of the Committee, 
this completes my prepared statement. I would be happy to respond to 
any questions you may have at this time. 

Contact and Acknowledgments: 

For further information on this testimony, please contact Michael 
Brostek at (202) 512-9110 or brostekm@gao.gov. In addition to the 
individual named above, David Lewis, Assistant Director; Shannon 
Finnegan, analyst-in-charge; Sandra Beattie; Amy Bowser; Barbara 
Lancaster; John Mingus; Erika Navarro; Melanie Papasian; and Jonathan 
Stehle made key contributions to this report. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this statement. 

[End of section] 

Footnotes: 

[1] Tax expenditures are preferential provisions in the tax code, such 
as exemptions and exclusions of income from taxation, deductions, 
credits, deferral of tax liability, and preferential tax rates. 
Deciding whether an individual provision should be characterized as a 
tax expenditure is a matter of judgment, and disagreements about 
classification stem from different views about what should be included 
in the income tax base. As a practical matter, the term tax 
expenditure has been used in the federal budget for over three 
decades, and the tax expenditure concept--while not precisely defined--
is a valid representation of one tool that the federal government uses 
to allocate resources. The home mortgage interest deduction and the 
Earned Income Tax Credit are examples of tax expenditures. 

[2] GAO, Government Performance and Accountability: Tax Expenditures 
Represent a Substantial Federal Commitment and Need to Be Reexamined, 
[hyperlink, http://www.gao.gov/products/GAO-05-690] (Washington, D.C.: 
Sept. 23, 2005). 

[3] Throughout this statement, references to the tax gap refer to the 
gross tax gap unless otherwise noted. 

[4] Taxpayers who receive filing extensions, pay their full tax 
liability by payment due dates, and file returns prior to extension 
deadlines are considered to have filed on time. 

[5] For a summary of key outstanding recommendations, see GAO, 
Opportunities to Reduce Potential Duplication in Government Programs, 
Save Tax Dollars, and Enhance Revenue, [hyperlink, 
http://www.gao.gov/products/GAO-11-318SP] (Washington, D.C.: Mar. 1, 
2011). 

[6] For a more detailed discussion about data sources and 
methodologies used in estimating the tax gap, see GAO, Tax Compliance: 
Better Compliance Data and Long-term Goals Would Support a More 
Strategic IRS Approach to Reducing the Tax Gap, [hyperlink, 
http://www.gao.gov/products/GAO-05-753] (Washington, D.C.: July 18, 
2005). 

[7] An information return is a tax document businesses and some 
individuals are required to file to report certain business 
transactions to the IRS. The requirement to file information returns 
is mandated by the IRS and associated regulations. 

[8] Sums of tax expenditure estimates are useful for gauging the 
magnitude of tax spending, but need to be interpreted carefully 
because they do not take into account possible interactions between 
the individual tax code provisions. These estimates are based on data 
from the President's Fiscal Year 2012 Budget Request's list of tax 
expenditures, which is based upon current tax law enacted as of 
September 30, 2010. On December 17, 2010, the Tax Relief, Unemployment 
Insurance Reauthorization, and Job Creation Act of 2010 not only 
extended many tax expenditure provisions, but also extended income tax 
rates for the years 2011-12, thus affecting the estimates of many tax 
expenditures. 

[9] As of May 2011, this recommendation has not been implemented. 

[10] GAO, Tax Policy: Summary of Estimates of the Costs of the Federal 
Tax System, [hyperlink, http://www.gao.gov/products/GAO-05-878] 
(Washington, D.C.: Aug. 26, 2005). 

[11] [hyperlink, http://www.gao.gov/products/GAO-05-878]. 

[12] GAO, Highlights of the Joint Forum on Tax Compliance: Options for 
Improvement and Their Budgetary Potential, [hyperlink, 
http://www.gao.gov/products/GAO-08-703SP] (Washington, D.C.: June 
2008). GAO, the Congressional Budget Office, and the Joint Committee 
on Taxation convened the Joint Forum on Tax Compliance. 

[13] GAO, Paid Tax Return Preparers: In a Limited Study, Chain 
Preparers Made Serious Errors, [hyperlink, 
http://www.gao.gov/products/GAO-06-563T] (Washington, D.C.: Apr. 4, 
2006). Our findings cannot be generalized to the entire retail tax 
preparation community. 

[14] Basis is generally the amount of a taxpayer's investment in a 
property for tax purposes. 

[15] GAO, Capital Gains Tax Gap: Requiring Brokers to Report 
Securities Cost Basis Would Improve Compliance if Related Challenges 
Are Addressed, [hyperlink, http://www.gao.gov/products/GAO-06-603] 
(Washington, D.C.: June 13, 2006). We are 95 percent confident that 
from 7.3 million to 9.5 million taxpayers misreported securities 
transactions and from 20.3 million to 23.5 million taxpayers had 
securities transactions. 

[16] Percentage estimates have sampling errors of (+/-) 7 percent or 
less. 

[17] Figures do not sum to 100 percent because some taxpayers 
misreported securities sales in a way that had no effect on the amount 
of income from the sales, for example in cases where taxpayers only 
misreported the securities' holding periods. Estimates have sampling 
errors of (+/-) 9 percent or less. 

[18] To identify the cost of goods sold, businesses that manufacture 
or resell merchandise must follow tax rules that require valuing their 
inventory at the beginning and end of the tax year. Payments for 
capital improvements, such as start-up costs, business assets, and 
improvements, usually are not fully deducted in the current tax year 
but instead must be depreciated over a multiyear period. 

[19] GAO, Tax Gap: Actions Needed to Address Noncompliance with S 
Corporation Tax Rules, [hyperlink, 
http://www.gao.gov/products/GAO-10-195] (Washington, D.C.: Dec. 15, 
2009). 

[20] Stock basis begins with the shareholder's initial capital 
contribution to the S corporation or the initial cost of the stock 
purchased. That amount may increase or decrease each year. An income 
item will increase stock basis; a loss, deduction, or nondividend 
distribution will decrease stock basis, based on certain ordering 
rules. For losses and deductions that exceed a shareholder's stock 
basis, the shareholder is allowed to deduct the excess up to the 
shareholder's debt basis, which is created by loans that the 
shareholder personally made to the S corporation. 

[21] As of December 2010, no action has been taken. 

[22] The traditional IRA allows tax deferral on investment earnings 
until retirement distribution with an up-front tax deduction from 
taxable income for contributions by eligible taxpayers, and retirement 
distributions are taxable. In contrast, the Roth IRA allows 
nondeductible, after-tax contributions for eligible taxpayers, and 
retirement distributions, including investment earnings, are generally 
tax-free. 

[23] GAO, Individual Retirement Accounts: Additional IRS Actions Could 
Help Taxpayers Facing Challenges in Complying with Key Tax Rules, 
[hyperlink, http://www.gao.gov/products/GAO-08-654] (Washington, D.C.: 
Aug. 14, 2008). 

[24] We are 95 percent confident that from 11.8 percent to 17.8 
percent did not accurately report their traditional IRA deductions. 

[25] Estimate has a margin of error of less than or equal to (+/-) 
124,057. 

[26] We are 95 percent confident that from 7.9 percent to 13.3 percent 
overstated their traditional IRA deductions. We are 95 percent 
confident that from 2.8 percent to 6.5 percent understated their 
traditional IRA deductions. 

[27] Estimate has a margin of error of less than or equal to (+/-) 
$192 million. 

[28] We are 95 percent confident that from 12.7 percent to 16.6 
percent did not accurately report their traditional IRA distributions. 

[29] Estimate has a margin of error of less than or equal to (+/-) 
220,026. 

[30] We are 95 percent confident that from 11.8 percent to 15.7 
percent underreported their traditional IRA distributions. We are 95 
percent confident that from 0.5 percent to 1.4 percent overreported 
their traditional IRA distributions. 

[31] Estimate has a margin of error of less than or equal to (+/-) 
$2.2 billion. 

[32] GAO, Higher Education: Multiple Higher Education Tax Incentives 
Create Opportunities for Taxpayers to Make Costly Mistakes, 
[hyperlink, http://www.gao.gov/products/GAO-08-717T] (Washington, 
D.C.: May 1, 2008). 

[33] Treasury Inspector General for Tax Administration, Recovery Act: 
Administration of the First-Time Homebuyer Credit Indicates a Need for 
Improved Controls Over Refundable Credits, 2011-41-035 (Washington, 
D.C.: Mar. 31, 2011). 

[34] The FTHBC is a refundable tax credit, meaning that it is paid out 
even if there is no tax liability or the credit exceeds the amount of 
any tax due. 

[35] GAO, First-Time Homebuyer Tax Credit: Taxpayers' Use of the 
Credit and Implementation and Compliance Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-10-166T] (Washington, D.C.: Oct. 22, 
2009). 

[36] 26 U.S.C. § 6050S. Qualified expenses are tuition and fees a 
student must pay to be enrolled at or attend an eligible educational 
institution, and other course-related fees and expenses only if the 
fees and expenses must be paid to the institution as a condition of 
enrollment or attendance. 

[37] Currently, educational institutions are required to report 
information on the form 1098-T for qualified tuition expenses as well 
as information on the institution itself and the student. These 
requirements include, for example, reporting name, address, and 
taxpayer identification number (TIN) of the institution; name, 
address, and TIN of the student; and amount of payments received or 
the amount billed for qualified expenses during the calendar year. 

[38] GAO, 2009 Tax Filing Season: IRS Met Many 2009 Goals, but 
Telephone Access Remained Low, and Taxpayer Service and Enforcement 
Could Be Improved, [hyperlink, http://www.gao.gov/products/GAO-10-225] 
(Washington, D.C.: Dec. 10, 2009). In December 2010, IRS agreed to 
consider the feasibility of using Form 1098-T information in 
conjunction with its examination program. 

[39] GAO, Tax Gap: Actions That Could Improve Rental Real Estate 
Reporting Compliance, [hyperlink, 
http://www.gao.gov/products/GAO-08-956] (Washington, D.C.: Aug. 28, 
2008). 

[40] We recommended that IRS require third parties to provide 
information on the address of a home securing a mortgage, among other 
items. GAO, Home Mortgage Interest Deduction: Despite Challenges 
Presented by Complex Tax Rules, IRS Could Enhance Enforcement and 
Guidance, [hyperlink, http://www.gao.gov/products/GAO-09-769] 
(Washington, D.C.: July 29, 2009). 

[41] [hyperlink, http://www.gao.gov/products/GAO-06-603]. We reported 
that, among other things, Congress may wish to consider requiring 
brokers to report to both taxpayers and IRS the adjusted basis of 
securities that taxpayers sell. Congress included a provision 
requiring brokers to report basis information to IRS and taxpayers in 
the Energy Improvement and Extension Act of 2008. The provision took 
effect on January 1, 2011, and the Joint Committee on Taxation 
estimated the provision is expected to raise $6.7 billion in revenue 
through 2018. 

[42] GAO, Tax Gap: Sole Proprietor Loss Deductions Could Improve 
Compliance but Would Also Limit Some Legitimate Losses, [hyperlink, 
http://www.gao.gov/products/GAO-09-815] (Washington, D.C.: Sept. 10, 
2009). 

[43] [hyperlink, http://www.gao.gov/products/GAO-10-225]. 

[44] Pub. L. No. 111-352, 124 Stat. 3866 (Jan. 4, 2011). GPRAMA amends 
the Government Performance and Results Act of 1993, Pub. L. No. 103-
62, 107 Stat. 285 (Aug. 3, 1993). 

[45] GAO, Government Performance: GPRA Modernization Act Provides 
Opportunities to Help Address Fiscal, Performance, and Management 
Challenges, [hyperlink, http://www.gao.gov/products/GAO-11-466T] 
(Washington, D.C.: Mar. 16, 2011). 

[46] GAO, Understanding the Tax Reform Debate: Background, Criteria, & 
Questions, [hyperlink, http://www.gao.gov/products/GAO-05-1009SP] 
(Washington, D.C.: September 2005). 

[47] GAO, Value-Added Taxes: Lessons Learned from Other Countries on 
Compliance Risks, Administrative Costs, Compliance Burden, and 
Transition, [hyperlink, http://www.gao.gov/products/GAO-08-566] 
(Washington, D.C.: Apr. 4, 2008). The value-added tax is a consumption 
tax that is widely used around the world. A value-added tax is levied 
on the difference between a business's sales and its purchases of 
goods and services. Typically, a business calculates the tax due on 
its sales, subtracts a credit for taxes paid on its purchases, and 
remits the difference to the government. 

[48] [hyperlink, http://www.gao.gov/products/GAO-05-1009SP]. 

[49] [hyperlink, http://www.gao.gov/products/GAO-09-815]. 

[50] GAO, Taxpayer Account Strategy: IRS Should Finish Defining 
Benefits and Improve Cost Estimates, [hyperlink, 
http://www.gao.gov/products/GAO-11-168] (Washington, D.C.: Mar. 24, 
2011). 

[End of section] 

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