TAX GAP - Sources of Noncompliance and Strategies to Reduce It

Noncompliance cannot be attributed to a single source, but is found with a variety of taxes and categories of taxpayers, a Government Accountability Office (GAO) official said in congressional testimony on April 19. (GAO-12-651T).

While individual income tax accounts comprise the largest segment of the tax gap, corporate income tax and employment tax are also "significant," said James White, director of strategic issues for GAO.

In addition, misreporting by individuals-involving business income, non-business income, deductions and credits-is noteworthy, he said. "Much of this misreporting can be attributed to sole proprietors underreporting receipts or over-reporting expenses," White said. "Unlike wage and some investment income, sole proprietors' income is not subject to withholding and only a portion is reported to IRS by third parties," he added.

The gross tax gap is the difference between the estimated amount taxpayers owe and the amount they voluntarily and timely pay for a tax year. It was $450 billion for tax year 2006. The net tax gap, which takes into account revenue collected through enforcement actions and late payments, was $385 billion. Multiple approaches must be taken to reduce the tax gap, White said, including the following: enhancing information reporting by third parties to IRS; ensuring high-quality services to taxpayers; devoting additional resources to enforcement; expanding compliance checks before IRS issues refunds; leveraging external resources, such as paid tax return preparers and whistleblowers; modernizing information systems; and simplifying the Code. For more of White's testimony.

IRS must overcome "institutional impediments" to effectively deal with the tax gap, J. Russell George, the Treasury inspector general for tax administration, said in testimony before a panel of the House Oversight and Government Reform Committee on April 19.

George found problems with IRS's estimate that it would eventually collect, via enforced and other late payments, an estimated $65 billion due for tax year 2006 when the estimated gross tax gap was $450 billion. "Both types of payments were estimated using IRS data of prior revenue and late payments received," he said. "However, the IRS does not have good data on the amounts that are paid late without enforcement efforts, and amounts to be collected in future years were estimated using data on payment patterns from earlier years." For more of George's testimony.