Enforcement of Tax Laws - High Risk Issue
Addressing the tax gap—the difference between taxes owed and those paid on time—could help improve the government’s fiscal position.
Enforcing tax laws helps the Internal Revenue Service (IRS) collect revenue from noncompliant taxpayers and, perhaps more importantly, promotes voluntary compliance by giving taxpayers confidence that others are paying their fair share. However, every year, taxpayers fail to pay hundreds of billions of dollars in taxes. This tax gap—the difference between tax amounts that taxpayers should pay and what they actually pay voluntarily and on time—has been a persistent problem for decades.
How big is the tax gap?
In 2016, IRS estimated that taxpayers voluntarily and timely paid about 81.7 percent of the taxes they should have for tax years 2008 to 2010, resulting in an average annual tax gap of $458 billion for those years. IRS estimated that through late payments and enforcement actions, it will collect an additional $52 billion annually for tax years 2008 to 2010.
The rest—$406 billion per year for those years—may never be collected.
Figure: IRS's Annual Average Tax Gap Estimate for Tax Years 2008-2010
The tax gap arises when taxpayers, whether intentionally or inadvertently, fail to accurately report tax liabilities on tax returns (underreporting), fail to pay taxes due from filed returns (underpayment), or fail to file a required tax return altogether or on time (nonfiling). The tax gap is spread across the five types of taxes that IRS administers—individual income, corporate income, employment, estate, and excise taxes.
The latest gross tax gap estimate has increased from past estimates, in nominal terms. However, when adjusted for inflation (using fiscal year 2016 dollars), the 2008-2010 estimate is slightly lower than the 2006 estimate. Differences in tax gap estimates across years may be the result of
- changes in taxpayer behavior (voluntary compliance),
- IRS enforcement activities,
- new tax gap components and updated methods for estimating the tax gap,
- changes in economic activity, or
- changes in tax law and administration.
The overall voluntary compliance rate—the percentage of owed tax for a given year that is paid voluntarily and timely—has decreased slightly over time.
Figure: Tax Gap Comparison, Tax Year 2001 to Tax Years 2008-2010
Note: This graphic does not include excise taxes, which accounted for less than 0.2 percent of each gross tax gap estimate. When the gross tax gap figures are inflated to fiscal year 2016 dollars, the figures are $460 billion in 2001, $530 billion in 2006, and $509 billion in 2008-2010.
aThe 2008-2010 tax gap estimate is an average of all 3 years.
What accounts for the largest part of the tax gap?
Underreporting accounted for most of the tax gap estimate for tax years 2008-2010, making up 84 percent of the entire estimated gross tax gap. Individual income taxes made up the largest portion of underreporting, followed by employment taxes and corporation income taxes.
Figure: Estimated Average Annual Gross Tax Gap by Type of Noncompliance and Tax (Tax Years 2008-2010)
Note: Data may not sum to totals because of rounding. Individual income tax includes individual business income tax. Estate tax underreporting noncompliance is not shown in this graphic because it represents less than one-half percent of total underreporting noncompliance. Excise tax is not shown in this graphic because IRS does not have excise tax underreporting noncompliance or nonfiling noncompliance estimates, and its estimate for excise tax underpayment noncompliance represents less than one-half percent of total underpayment noncompliance. In addition, IRS does not have a corporation income tax estimate for nonfiling noncompliance.
Individual taxpayers more accurately report their income on tax returns if the income is also reported to them and to IRS by third parties. For example, financial institutions generally report interest and dividends to taxpayers and IRS on information returns. According to 2008-2010 IRS data, individual taxpayers accurately reported most of their income from interest and dividends on their own tax returns. In contrast, taxpayers misreported over half of those types of income for which there is little or no third-party information reporting, such as business income. Likewise, for types of income with third-party information reporting, IRS can use automated processes to address noncompliance. For items with little to no third-party information reporting, IRS has to rely on more resource-intensive methods, such as correspondence or face-to-face examinations, to address noncompliance.
Figure: Effect of Third-Party Information Reporting on Net Misreporting Percentage, Tax Years 2008-2010
Note: Net misreporting percentage is the sum of the net misreported amount divided by the absolute values (over or underreported) of the amounts that should have reported, expressed as a percentage.
aIRS receives information from third parties that it uses to verify income or deduction amounts that taxpayers report on their tax returns. IRS categorized various line items on the individual income tax return into 4 different groupings of third-party reporting in IRS Publication 5161, Estimation of the Underreporting Tax Gap for Tax years 2008-2010: Methodology Research, Analysis and Statistics Technical Paper, September 2016. However, IRS did not provide a scale to define the differences between substantial, some, and little or no third party information reporting.
How can the tax gap be reduced?
Given that the tax gap has been persistent and dispersed across different types of taxes and taxpayers, coupled with tax code complexity and a globalizing economy, reducing the tax gap will not likely be achieved through a single solution. Rather, IRS must attack the tax gap on multiple fronts and with multiple strategies, such as:
- continuing to develop and implement a long-term strategy to address the efficiency of its programs, processes, and structure amidst an uncertain budget environment;
- determining resource allocation strategies for its enforcement efforts;
- collecting more data on noncompliance;
- assessing the performance of its information technology (IT) investments;
- strengthening referral/whistleblower programs; and
- enhancing taxpayer services.
Further, reducing the tax gap may also require targeted legislative actions, such as:
- enhancing and expanding third-party information reporting,
- enhancing electronic filing,
- expanding math error authority,
- regulating paid preparers, and
- simplifying and reforming the tax code.
For more information on efforts to reduce the tax gap, see the enforcement of tax laws area of the High Risk list.
GAO-18-39: Published: Oct 31, 2017. Publicly Released: Nov 30, 2017.
According to IRS estimates, taxpayers collectively pay a bit more than 80% of the taxes they owe. This difference between the taxes people and businesses owe and what they pay on time is known as the tax gap, which IRS estimated to be $458 billion, on average, for 2008-2010. IRS used to set specific, numeric goals for improving taxpayer compliance, but has moved away from that approach. Officials...
GAO-17-371: Published: Apr 18, 2017. Publicly Released: May 18, 2017.
The IRS uses its National Research Program to study tax compliance issues. The program recently completed a study on employment tax returns filed between 2008 and 2010, but the IRS has not made plans to analyze the results of this study. We looked at the study results and found that noncompliance in reporting taxable wages most frequently involved how workers were classified (and whether employer...
GAO-16-20: Published: Oct 29, 2015. Publicly Released: Nov 30, 2015.
The Internal Revenue Service (IRS) Whistleblower Office (WO) is responsible for processing thousands of tax whistleblower claims annually for two related whistleblower programs: for claims of $2 million or less, the 7623(a) program, and for claims over $2 million, the 7623(b) program. The whistleblower claim review process takes several years to complete, and GAO found that the WO is not using ava...
GAO-16-92T: Published: Oct 1, 2015. Publicly Released: Oct 1, 2015.
A number of strategies, including implementing preventive controls and addressing GAO's prior recommendations, can help agencies reduce improper payments, which have been a persistent, government-wide issue. The improper payment estimate, attributable to 124 programs across 22 agencies in fiscal year 2014, was $124.7 billion, up from $105.8 billion in fiscal year 2013. The almost $19 billion incre...
GAO-14-467T: Published: Apr 8, 2014. Publicly Released: Apr 8, 2014.
The Internal Revenue Service's (IRS) authority to regulate the practice of representatives before IRS is limited to certain preparers, such as attorneys and certified public accountants. Unenrolled preparers—those generally not subject to IRS regulation—accounted for 55 percent of all preparers as of March 2014. In 2010, IRS initiated steps to regulate unenrolled preparers through testing and...
GAO-18-299SP: Published: Jun 21, 2018. Publicly Released: Jun 21, 2018.
This report provides an update on the nation's fiscal health as of the end of fiscal year 2017, and describes its likely fiscal future if policies don’t change. Among its findings: The federal government’s current fiscal path is unsustainable. Publicly held debt was 76 percent of GDP at the end of fiscal year 2017 and it will surpass its historical high of 106 percent within 14 to 22 years. ...
GAO-17-604T: Published: Jun 21, 2017. Publicly Released: Jun 21, 2017.
In fiscal year 2016 GAO’s work resulted in a return of $112 for every dollar invested in GAO, generating over $63 billion in financial benefits to the federal government. Implementation of GAO’s recommendations led to 1,234 program and operational improvements across the federal government including many important contributions to enacted budget, appropriations and authorization legislation. G...
GAO-17-579T: Published: May 3, 2017. Publicly Released: May 3, 2017.
The Comptroller General testified before Congress about the federal government's unsustainable long-term fiscal outlook—the growing imbalance between revenues (money collected) and spending (driven by health care, Social Security, and net interest on the debt). A plan is needed to put the nation on a sustainable long-term fiscal path. But in the near-term, Congress and executive branch agencies...
GAO-17-237SP: Published: Jan 17, 2017. Publicly Released: Jan 17, 2017.
The federal government is on an unsustainable fiscal path. Federal spending continues to outpace revenue—by $587 billion in 2016—and, absent policy changes, the structural gap between revenues and spending puts the federal government on an unsustainable long-term fiscal path. Federal policymakers face economic, security, and social challenges requiring difficult policy choices, but a long-te...
GAO-16-541T: Published: Apr 6, 2016. Publicly Released: Apr 6, 2016.
The Financial Report of the U.S. Government ( Financial Report ) provides important information to the Congress, federal agencies, and the public, including the government's financial condition and the reliability of data used to help support budget and financial decisions. While significant progress has been made in improving federal financial management over the past 20 years, material weaknesse...
GAO-16-459R: Published: Mar 8, 2016. Publicly Released: Apr 7, 2016.
The Internal Revenue Service’s (IRS) fiscal year 2016 appropriation increased by $290 million to $11.2 billion over fiscal year 2015 but is about $900 million (7 percent) lower than fiscal year 2011. IRS allocated the funds across 3 appropriation accounts: Taxpayer Services ($176.8 million), Operations Support ($108.2 million), and Enforcement ($4.9 million). For fiscal year 2017, the President...
GAO-16-155: Published: Feb 23, 2016. Publicly Released: Mar 24, 2016.
Information referrals from the public alleging tax noncompliance must be submitted on paper forms by mail to the Internal Revenue Service (IRS). These referrals are manually screened by clerical staff and routed by mail to units across IRS for further action, as shown in the figure.Process for Screening and Routing Information Referrals for Further ReviewIneffective internal controls undercut IRS...
GAO-16-102: Published: Dec 17, 2015. Publicly Released: Jan 13, 2016.
Three offices in the Internal Revenue Service's (IRS) Wage and Investment division (W&I) are responsible for selecting returns for audit. Most returns are selected via computer systems that automatically send notices to taxpayers based on certain criteria, such as the validity of dependents. W&I program officials annually review the criteria and apply updates to the following filing season's retur...
GAO-16-103: Published: Dec 16, 2015. Publicly Released: Jan 13, 2016.
The Small Business/Self-Employed (SB/SE) division of the Internal Revenue Service (IRS) uses over 30 methods, called workstreams, to identify and review tax returns that may merit an audit. These returns were initially identified through seven sources which include referrals; computer programs that run filters, rules, or algorithms to identify potentially noncompliant taxpayers; and related return...
GAO-15-754T: Published: Jul 22, 2015. Publicly Released: Jul 22, 2015.
According to estimates produced by government tax researchers using 2010 taxpayer data, small businesses (defined in the research as individuals or entities with substantive business activity but with less than $10 million in total income and deductions) make up 99 percent of all businesses. Approximately 69 percent of small businesses (about 16 million) are individual taxpayers who report busines...