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 timely. For tax year 2001, IRS estimated that it would eventually  recover about $55 billion for a net tax gap from $257 billion to $298 billion. Our capacity to address these and other  emerging needs and challenges will be predicated on when and how we  deal with our fiscal challenges—the long-term fiscal pressures we face are  daunting and unprecedented in the nation’s history. A Fundamental Review, Reexamination, and Reprioritization Is Needed

Confronting the nation’s fiscal challenge will require nothing less than a  fundamental review, reexamination, and reprioritization of all major  spending and tax policies and programs that may take a generation or more  to resolve. Tax law enforcement is a high-risk area in part because past declines in  IRS’s enforcement activities threatened to erode taxpayer compliance. However, IRS’s preliminary  compliance estimate based on NRP indicates that compliance has not  improved and may be worse than IRS originally estimated. As such,  sustained progress toward improving compliance is needed. Reducing  the tax gap will not likely be achieved through a single solution, but will  likely involve multiple strategies that include reducing tax code complexity,  providing quality services to taxpayers, and enhancing enforcement of the  tax laws through the use of tools such as tax withholding and information  reporting that increase the transparency of income and deductions to both  IRS and taxpayers. Also, as IRS moves forward in continuing to address  the tax gap, building and maintaining a base of information on the extent  of, and reasons for, noncompliance as well as defining desired changes in  the tax gap and measuring results of efforts to address it will be critical. Rather, the tax gap must be  attacked on multiple fronts and with multiple strategies on a sustained  basis. However, for any given set of tax  policies, IRS’s efforts to reduce the tax gap and ensure appropriate levels of  compliance will need to be based on a balanced approach of providing  service to taxpayers and enforcing the tax laws. Regular Compliance Measurement Can Support Informed Decisions to Reduce the Tax Gap, but IRS Lacks Firm Plans for Such Measurement

Regularly measuring compliance can offer many benefits, including helping  IRS identify new or major types of noncompliance, identify changes in tax  laws and regulations that may improve compliance, more effectively target  examinations of tax returns or other enforcement programs, understand  the effectiveness of its programs to promote and enforce compliance, and  determine its resource needs and allocations. A significant portion of IRS’s new tax gap estimate is based on recent  compliance data. IRS used data from NRP to update individual income tax  underreporting and the portion of individual employment tax  underreporting from self-employed individuals. IRS has concerns with the certainty of the overall tax gap estimate in part  because some areas of the estimate rely on old data and IRS has no  estimates for other areas of the tax gap. The  officials have not indicated how many goals will be related to improving  taxpayer compliance or whether they will be quantitative and results- oriented. Chairman Grassley, Senator Baucus, and Members of the Committee, this  concludes my testimony.
Why GAO Did This Study

The Internal Revenue Service's (IRS) recent estimate of the difference between what taxpayers timely and accurately paid in taxes and what they owed ranged from $312 billion to $353 billion for tax year 2001. IRS estimates it will eventually recover some of this tax gap, resulting in a net tax gap from $257 billion to $298 billion. The tax gap arises when taxpayers fail to comply with the tax laws by underreporting tax liabilities on tax returns; underpaying taxes due from filed returns; or "nonfiling," which refers to the failure to file a required tax return altogether or in a timely manner. The Chairman and Ranking Minority Member of the Senate Committee on Finance asked GAO to review a number of issues related to the tax gap. This testimony will address GAO's longstanding concerns regarding tax compliance; IRS's efforts to ensure compliance; and the significance of reducing the tax gap, including some steps that may assist with this challenging task. For context, this testimony will also address GAO's most recent simulations of the long-term fiscal outlook and the need for a fundamental reexamination of major spending and tax policies and priorities.

What GAO Found

Our nation's fiscal policy is on an unsustainable course. As long-term budget simulations by GAO, the Congressional Budget Office, and others show, over the long term we face a large and growing structural deficit due primarily to known demographic trends and rising health care costs. All simulations indicate that the long-term fiscal challenge is too big to be solved by economic growth alone or by making modest changes to existing spending and tax policies. Rather, a fundamental reexamination of major policies and priorities will be important to recapture our fiscal flexibility. Especially relevant to this committee will be deciding whether and how to change current tax policies and how to ensure that tax compliance is as high as practically possible. Tax law enforcement is one factor affecting compliance that has caused concern in the past, due in part to declines in IRS enforcement occupations, examinations, and other enforcement results. The recent turnaround in staffing and some enforcement results is good news, but IRS's recent compliance estimate indicates that compliance levels have not improved and may be worse than it originally estimated. Thus, sustained progress in improving compliance is needed. Reducing the tax gap would help improve fiscal sustainability, but will be challenging given persistent noncompliance. This task will not likely be achieved through a single solution. Rather, the tax gap must be attacked on multiple fronts and with multiple strategies over a sustained period of time, including reducing tax code complexity, providing quality services to taxpayers, enhancing enforcement of tax laws, and evaluating the success of IRS's efforts to promote compliance. Also important is obtaining current information on the extent of, and reasons for, noncompliance. IRS's 2001 tax gap estimate is based in part on recently collected compliance data for individual income tax underreporting. However, IRS does not have firm plans to obtain compliance data for other areas of the tax gap or again collect data on individual income tax underreporting. Finally, IRS lacks quantitative, long-term goals for improving taxpayer compliance, which would be consistent with results-oriented management.