IRS uses such compliance data, along with other data and  assumptions, to estimate the dollar amount of taxes not paid accurately  and on time. Scope and Methodology

To provide information on the estimated amount that each major type of  noncompliance contributed to the 2001 tax gap, we reviewed IRS’s tax gap  estimate for 2001. IRS Lacks Approved Plans to Regularly Measure Compliance, Including Underreporting Which Accounts for the Largest Portion of the Tax Gap

IRS estimates that underreporting of taxes accounted for about $250  billion to $292 billion of the $312 billion to $353 billion tax gap for 2001,  while underpayment and nonfiling accounted for about $32 billion and $30  billion, respectively. IRS is taking some steps designed to improve portions of  its compliance measurement efforts and its preliminary tax gap estimate  and plans to release a revised tax gap estimate by the end of 2005. Although IRS is  developing a system intended to capture better examination data, IRS does  not have firm or specific plans to develop better data on the reasons for  noncompliance, even though the lack of such data makes it harder to  decide whether it should address specific areas of noncompliance through  nonenforcement efforts, such as designing clearer forms or publications,  or enforcement efforts. IRS Has Concerns with Its Data on Reasons for Noncompliance

IRS has concerns with its data on the unintentional and intentional  reasons for noncompliance. In many of these  cases, it is difficult for examiners to determine a taxpayer’s intent– whether the noncompliance is unintentional or intentional. IRS also  collected reason data through NRP. IRS’s Approach to Reducing the Tax Gap Focuses on Service and Enforcement but Lacks Long-term, Quantitative Compliance Goals and Measures That Are Consistent with Results-Oriented Management Principles

IRS approaches tax gap reduction through improving service to taxpayers  and enforcing tax laws and has established two broad strategic goals and  related key efforts that are intended to support this approach. However,  IRS has not established long-term, quantitative compliance goals and  regularly collected data to track progress in reducing the tax gap, which  would complement its current important compliance efforts. Goal 1—Improve Taxpayer Service—is intended to promote voluntary  compliance. However, although IRS has recently proposed a schedule for future NRP  studies, it has no approved plans to repeat this study or periodically  measure compliance across the various components of the tax gap. Although it may  not be feasible or necessary to measure compliance for all components of  the tax gap at the same frequency or with the same level of investment,  where practical methodologies exist, periodic measurements should be  taken. Nevertheless, given the difficulty of consistently  determining why taxpayers are noncompliant, sustained research on these  reasons also would be needed to develop a better understanding. Having compliance goals,  coupled with recently collected NRP data, would provide a solid base  upon which IRS can develop a more strategic, results-oriented approach to  reducing the tax gap.
Why GAO Did This Study

According to the Internal Revenue Service (IRS), a gap arises each year between what taxpayers pay accurately and on time in taxes and what they should pay under the law. The tax gap is composed of underreporting of tax liabilities on tax returns, underpaying of taxes due from filed returns, and nonfiling of required tax returns altogether or on time. GAO was asked to provide information on (1) the estimated amount that each major type of noncompliance contributed to the 2001 tax gap and IRS's views on the certainty of its tax gap estimates, (2) reasons why noncompliance occurs, and (3) IRS's approach to reducing the tax gap and whether the approach incorporates established results-oriented planning principles.

What GAO Found

IRS estimates that underreporting of taxes accounted for about $250 billion to $292 billion of the $312 billion to $353 billion tax gap for 2001, while underpayment and nonfiling accounted for about $32 billion and $30 billion, respectively. Although IRS has collected recent compliance data, it still has concerns with some outdated methodologies and data used to estimate the tax gap. IRS is taking laudable steps intended to improve the estimate, which it plans to revise by the end of 2005. IRS has also developed a proposed schedule of compliance studies, but it has no approved plans to periodically measure compliance for the tax gap components. While it may not be feasible or necessary to measure compliance for all components at the same frequency or level of investment, periodic compliance studies would support a more data-driven and risk-based approach to reducing the tax gap. IRS recently began to capture data on the reasons why taxpayers are noncompliant. However, IRS has concerns about the data, such as examiners assigning the same reason for noncompliance regardless of situation. Also, it is often difficult for examiners to determine a taxpayer's intent--whether the noncompliance is unintentional or intentional. Collecting better data on reasons can help IRS focus its activities on taxpayer service or enforcement. Although IRS is developing a system intended to capture better examination data, IRS does not have firm or specific plans to develop better reason data. IRS approaches tax gap reduction through improving taxpayer service and enforcing tax laws and has two broad strategic goals and related key efforts that are intended to support this approach. However, IRS has not established long-term, quantitative compliance goals and regularly collected data to track its progress, which would complement its current, important compliance efforts. Establishing clear goals and measuring progress towards them would be consistent with results-oriented management principles. IRS has begun to consider additional goals, but it is not yet clear if they will be compliance related. Long-term, quantitative compliance goals, coupled with updated compliance data, would provide a solid base upon which to develop a more strategic, results-oriented approach to reducing the tax gap.