IRS  estimated that taxpayers should have paid an average of about $2.5  trillion dollars per year in federal taxes for tax years 2008 to 2010. The tax gap estimate is an aggregate estimate of the five types of taxes  that IRS administers—individual income, corporation income,  employment, estate, and excise taxes. For each tax type, IRS attempts  to estimate the tax gap based on three types of noncompliance: (1)  underreporting of tax liabilities on timely filed tax returns; (2)  underpayment of taxes due from timely filed returns; and (3) nonfiling,  when a taxpayer fails to file a required tax return altogether or on time. IRS Has Confidence in Most Aspects of the Tax Gap Estimate and Is Taking Steps to Improve It

IRS officials stated IRS believes the tax gap estimates are sufficiently  reliable for the intended purpose of providing a snapshot of tax  compliance as a whole. IRS Lacks Specific Quantitative Goals to Improve Voluntary Compliance

IRS previously set or acknowledged quantitative goals to improve  voluntary compliance. However, IRS has since moved away from that  approach. IRS has moved away from specific numeric goals to improve compliance  because it now believes there are limited benefits to them. Although IRS may not have full control over all of the factors that affect  voluntary compliance, it does have an impact on taxpayer’s compliance  through its service and enforcement programs. However, IRS officials did not provide us more recent documents that  describe its current efforts to study compliance or show how it plans to  use NRP data to update compliance strategies. The Internal Revenue Manual section on the NRP states that IRS needs  to measure taxpayer compliance with federal income tax laws along with  contributing factors so that customer-focused programs and services can  be enhanced or developed and so that compliance information and tools  can be improved. However, without a strategy  that provides an overall picture of how NRP data are used, it may be  difficult for Congress and other decision makers to understand the merits  of what they are being asked to fund. Further, without developing and  documenting a strategy for incorporating the results of NRP data, IRS  risks not fully leveraging the compliance data it collects or not allocating  enforcement resources in the most cost-effective manner. IRS disagreed with our recommendation that it re-establish long-term,  quantitative goals for improving voluntary compliance. IRS agreed with our recommendation that it develop and document a  strategy that outlines how IRS will use National Research Program data  to update compliance strategies that could help address the tax gap. Appendix I: Objectives, Scope, and Methodology

Our objectives were to determine (1) the main drivers of the tax gap; (2)  the Internal Revenue Service’s (IRS) confidence in the tax gap estimates;  (3) IRS goals, if any, for reducing the tax gap; and (4) the extent to which  IRS uses tax gap estimates and underlying data to develop strategies and  actions to reduce the tax gap. To determine the main drivers of the tax gap and IRS’s confidence in the  estimates, we reviewed IRS’s tax gap estimates and underlying data; IRS  technical papers and reports; third-party reviews of the data; and past  GAO and Treasury Inspector General for Tax Administration reports on  the 2001, 2006, and 2008–2010 tax gap estimates. To show additional detail on aspects of compliance using the same data  upon which the individual income tax underreporting tax gap estimates  are based, we examined IRS’s tax gap estimates for tax years 2008– 2010 and the underlying data from its National Research Program (NRP)  study of individual income tax returns.
Why GAO Did This Study

The tax gap—the difference between tax amounts that taxpayers should have paid and what they actually paid—has been a persistent problem for decades. The tax gap estimate is an aggregate estimate of the five types of taxes that IRS administers—individual income, corporation income, employment, estate, and excise taxes. For each tax type, IRS attempts to estimate the tax gap based on three types of noncompliance: (1) underreporting of tax liabilities on timely filed tax returns; (2) underpayment of taxes due from timely filed returns; and (3) nonfiling, when a taxpayer fails to file a required tax return altogether or on time.
GAO was asked to review IRS's tax gap estimate for tax years 2008 to 2010. This report provides information on (1) the main drivers of the tax gap; (2) IRS's confidence in the tax gap estimates; (3) IRS's goals, if any, for reducing the tax gap; and (4) the extent to which IRS uses tax gap estimates and underlying data to develop strategies to reduce the tax gap. GAO reviewed IRS tax gap data and reports and interviewed IRS officials.

What GAO Found

The Internal Revenue Service's (IRS) latest tax gap estimate found that taxpayers voluntarily and timely paid about 81.7 percent of the taxes they should have paid for tax years 2008-2010.
As with past estimates, underreporting of individual income taxes accounted for the largest portion of the 2008-2010 tax gap. IRS believes the tax gap estimates are sufficiently reliable to provide a snapshot of tax compliance as a whole because much of the estimates are based on the most current data available, such as from IRS's National Research Program (NRP).
IRS previously set or acknowledged goals to improve voluntary compliance. However, IRS has since moved away from that approach. IRS officials now believe there are limited benefits to establishing goals because IRS cannot control all aspects of compliance and updated methodologies may cause fluctuations in the estimates. IRS does, however, have an impact on taxpayers' compliance through its service and enforcement programs. Without long-term, quantitative goals for improving voluntary compliance, it will be difficult for IRS to determine the success of its compliance efforts and adjust its approaches.
The Internal Revenue Manual states IRS needs to measure taxpayer compliance and other factors so compliance information and tools can be improved. IRS uses tax gap data to study compliance behaviors and update computer formulas designed to identify tax returns with a high likelihood of noncompliance. Yet IRS has not documented a comprehensive strategy that shows how it intends to use NRP data to update compliance strategies. Officials said the uses of NRP are widely known from general documentation about NRP. Without developing and documenting a strategy for using the NRP data to update compliance strategies, IRS may not fully leverage the compliance data or allocate enforcement resources in the most cost-effective manner, and it may be difficult for Congress and others to understand the merits of what they are being asked to fund.

What GAO Recommends

GAO recommends that IRS re-establish goals for improving voluntary compliance and develop and document a strategy that outlines how it will use its data to update compliance strategies to address the tax gap. IRS disagreed with GAO's recommendation on establishing goals and agreed with the recommendation on compliance strategies. GAO continues to believe that goals are essential for results-oriented management.