Incomplete, unreliable, or understated estimates; risk assessments that  may not accurately assess the risk of improper payment; and  noncompliance with criteria listed in federal law hinder the government’s  ability to understand the scope of the issue. We have reported on a  number of strategies, including implementing preventive and detective  controls and addressing open recommendations, that can help agencies  reduce improper payments. In fiscal year 2014, agencies reported improper payment estimates  totaling $124.7 billion, a significant increase—almost $19 billion—from the  prior year’s estimate of $105.8 billion. The estimated improper  payments for fiscal year 2014 were attributable to 124 programs spread  among 22 agencies. Additional Efforts Are Needed to Reduce Medicare, Medicaid, and Earned Income Tax Credit Improper Payments

Improper payment estimates for the Medicare, Medicaid, and Earned  Income Tax Credit (EITC) programs accounted for more than 75 percent  of the fiscal year 2014 improper payment estimate, as shown in figure 2. Over the past several years, we made numerous recommendations that if  effectively implemented, could improve program management, help  reduce improper payments in these programs, and help improve the  government’s fiscal position. Strengthening verification of providers and suppliers. For  example, CMS issued guidance to improve corrective actions taken by  states. We have previously recommended matters for congressional  consideration or executive actions that if effectively implemented, could  help reduce EITC improper payments as well as the tax gap, as  discussed later in this statement. Recent Legislation and Guidance Have Focused Attention on Estimating and Reducing Improper Payments and Identifying Root Causes, Including Fraud

			Recent Legislation and Guidance Related to Improper Payments

The Improper Payments Elimination and Recovery Improvement Act of  2012 (IPERIA) is the latest in a series of laws Congress has passed to  address improper payments. In our report on the Fiscal Year 2014 Financial Report of the  United States Government, we continued to report a material weakness in  internal control related to improper payments because the federal  government is unable to determine the full extent to which improper  payments occur and reasonably assure that appropriate actions are taken  to reduce them. Specifically, two federal  agencies did not report estimated improper payment amounts for four  risk-susceptible programs. To determine the full extent of improper payments government-wide and  to more effectively recover and reduce them, as we reported in March  2015, continued agency attention is needed to (1) identify programs  susceptible to improper payments, (2) develop reliable improper payment  estimation methodologies, (3) report on improper payments as required,  and (4) implement effective corrective actions based on root cause  analysis. Absent such continued efforts, the federal government cannot  be assured that taxpayer funds are adequately safeguarded. Need to Address a Significant Tax Gap

The tax gap has been a persistent problem for decades. Key Factors Contributing to the Tax Gap Include Limited Third-party Information Reporting, Resource Trade-offs, and Complexities in the Tax Code

Our past work has found that three important factors contributing to the  tax gap are the extent to which income is reported to IRS by third parties,  IRS’s resource trade-offs, and tax code complexity. The extent to which  individual taxpayers accurately report their income is correlated to the  extent to which their income is reported to them and IRS (or taxes on  that income are withheld) by third parties. 4). Accelerating W-2 filing deadlines  could help IRS reduce improper EITC payments and help close the  tax gap. IRS could use return on investment data  to allocate its enforcement resources and potentially increase  revenues. Ensuring high-quality services is a  necessary foundation for voluntary compliance, as it can help taxpayers  who wish to comply with tax laws but do not understand their obligations. Telephone services. Online services. In 2014, we suggested that  Congress consider expanding the mandate for partnerships and  corporations to electronically file their tax returns, as this could help  IRS reduce return processing costs, select the most productive tax  returns to examine, and examine fewer compliant taxpayers. A broader opportunity to address the  tax gap involves simplifying the Internal Revenue Code, as complexity  can cause taxpayer confusion and provide opportunities to hide willful  noncompliance. Reducing the tax  gap will require multiple strategies and long-term changes in IRS’s  operations and systems. With outlays for major programs, such as Medicare and Medicaid,  expected to increase over the next few years, it is critical that actions are  taken to reduce improper payments and minimize the tax gap. Tax Gap: Sources of Noncompliance and Strategies to Reduce It.
Why GAO Did This Study

The federal government continues to face an unsustainable long-term fiscal path. Changing this path will require difficult fiscal policy decisions to alter both long-term federal spending and revenue. In the near term, executive branch agencies and Congress can take action to improve the government's fiscal position by addressing two long-standing issues—improper payments and the tax gap. Over time, these issues involve amounts near or exceeding $1 trillion.
Over the past decade, GAO has highlighted the issue of improper payments—defined by statute as payments that should not have been made or that were made in an incorrect amount (including overpayments and underpayments). GAO has reported for several years that the federal government is unable to determine the full extent to which improper payments occur and reasonably assure that actions are taken to reduce them.
The tax gap is the difference between taxes owed and those paid on time, as a result of taxpayers underreporting their tax liability, underpaying taxes, or not filing tax returns. Reducing the tax gap could provide additional revenue.
This statement discusses (1) actions needed to address improper payments government-wide and (2) strategies to reduce the tax gap. It is based on GAO's recent work on improper payments, agency financial reports and inspectors general reports, and prior reports on the tax gap, including those with open recommendations or matters for congressional consideration that could potentially help reduce the tax gap.

What GAO Found

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 increase was primarily due to the Medicare, Medicaid, and Earned Income Tax Credit programs, which account for over 75 percent of the government-wide improper payment estimate. Federal spending in Medicare and Medicaid is expected to significantly increase, so it is critical that actions are taken to reduce improper payments in these programs. Moreover, for fiscal year 2014, federal entities reported estimated error rates for 10 risk-susceptible programs that exceeded 10 percent. Recent laws and guidance have focused attention on improper payments, but incomplete or understated estimates and noncompliance with criteria listed in federal law hinder the government's ability to assess the full extent of improper payments and implement strategies to reduce them. For example, for fiscal year 2014, 2 federal agencies did not report improper payment estimates for 4 risk-susceptible programs, and 5 programs with improper payment estimates greater than $1 billion were noncompliant with federal requirements for 3 consecutive years. Identifying root causes of improper payments can help agencies target corrective actions, and GAO has made numerous recommendations that could help reduce improper payments. For example, strengthening verification of Medicare providers and suppliers could help reduce improper payments. GAO has stated that continued agency attention is needed to (1) identify susceptible programs, (2) develop reliable estimation methodologies, (3) report as required, and (4) implement effective corrective actions based on root cause analysis. Absent such continued efforts, the federal government cannot be assured that taxpayer funds are adequately safeguarded.
Addressing the estimated $385 billion net tax gap will require strategies on multiple fronts. Key factors that contribute to the tax gap include limited third-party reporting, resource trade-offs, and tax code complexity. For example, the extent to which individual taxpayers accurately report their income is correlated to the extent to which the income is reported to them and the Internal Revenue Service (IRS) by third parties. Where there is little or no information reporting, such as with business income, taxpayers tend to significantly misreport their income. GAO has many open recommendations to reduce the tax gap. For example, GAO recommended in 2012 that IRS use return on investment data to reallocate its enforcement resources and potentially increase revenues. Since 2011, GAO also recommended improvements to telephone and online services to help IRS deliver high-quality services to taxpayers who wish to comply with tax laws but do not understand their obligations. Other strategies GAO has suggested would require legislative actions, such as accelerating W-2 filing deadlines. Additionally, requiring partnerships and corporations to electronically file tax returns could help IRS reduce return processing costs and focus its examinations more on noncompliant taxpayers. Further, a broader opportunity to address the tax gap involves simplifying the Internal Revenue Code, as complexity can cause taxpayer confusion and provide opportunities to hide willful noncompliance.