Using Data from the Internal Revenue Service's National Research Program to Identify Potential Opportunities to Reduce the Tax Gap

GAO-07-423R Published: Mar 15, 2007. Publicly Released: Apr 19, 2007.
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The Internal Revenue Service (IRS) most recently estimated that the gross tax gap--the difference between what taxpayers pay in taxes voluntarily and on time and what they should pay under the law--reached $345 billion for tax year 2001. The tax gap arises when taxpayers fail to comply with their individual income, corporate income, employment, estate, or excise tax obligations through (1) underreporting of tax liabilities on tax returns; (2) underpayment of taxes due from filed returns; or (3) nonfiling, which refers to the failure to file a required tax return altogether or on time. IRS's tax gap estimates are based on a variety of data sources. Recently, IRS studied individual taxpayer compliance through the National Research Program (NRP), and used the resulting compliance data to estimate the tax gap for individual income tax underreporting and the portion of employment tax underreporting attributed to self-employment taxes for tax year 2001. NRP, which involved reviewing around 46,000 individual tax returns, has yielded very important new information on taxpayer compliance for the first time since IRS's previous compliance measurement study was undertaken for tax year 1988. Compliance measurement studies such as NRP have the potential to identify ways to improve taxpayer compliance, which could in turn reduce the tax gap and improve the nation's fiscal stability. For example, each 1 percent reduction in the net tax gap would likely yield around $3 billion annually. Given its potential to improve individual taxpayer compliance, you asked us to review the results of the 2001 NRP study. In response, we agreed to identify (1) specific areas of individual taxpayer noncompliance that are promising targets for additional research to improve reporting compliance, and (2) opportunities, if any, found through the course of our work to improve future NRP studies.

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Recommendations for Executive Action

Agency Affected Recommendation Status
Internal Revenue Service To ensure that IRS maximizes its return on investment from future NRP studies, IRS should develop a plan for capturing complete NRP examination case files that (1) determines the most cost effective means for capturing information electronically and (2) lays out a schedule for when it will begin to capture information electronically.
Closed – Implemented
IRS completed a study of capturing electronic information for National Research Program (NRP) examination cases in December 2008. For the tax year 2006 NRP study of individual tax returns, IRS recommended that examiners complete workpapers electronically, and mandated electronic workpapers for the tax year 2007 study. In a December 2008 document, IRS said that it will require all IRS developed documentation to be in electronic form, but will not scan taxpayer-provided documentation. We consider IRS to have substantially implemented this recommendation with these requirements.

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