United States Government Accountability Office

GAO Testimony 

Before the Committee on the Budget, 

House of Representatives 

TAX COMPLIANCE 

Multiple Approaches Are 

Needed to Reduce the Tax 

Gap 

Statement of Michael Brostek 

Director, Tax Issues 

Strategic Issues 

For Release on Delivery

Expected at 10:00 a.m. EST 

Friday, February 16, 2007

 

GAO-07-488T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-07-488T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Michael 

Brostek at (202) 512-9110 or 

brostekm@gao.gov. 

Highlights of GAO-07-488T, a testimony to 

the Committee on the Budget, House of 

Representatives 

February 16, 2007

TAX COMPLIANCE

Multiple Approaches Are Needed to 

Reduce the Tax Gap 

Multiple approaches are needed to reduce the tax gap. No single approach is

likely to fully and cost-effectively address noncompliance since, for example, 

it has multiple causes and spans different types of taxes and taxpayers. 

Simplifying or reforming the tax code, providing IRS more enforcement 

tools, and devoting additional resources to enforcement are three major 

approaches. Moreover, providing quality services to taxpayers is a 

necessary foundation for voluntary compliance. Such steps as periodically 

measuring noncompliance and its causes, setting tax gap reduction goals, 

optimizing the allocation of IRS’s resources, and leveraging technology to 

enhance IRS’s efficiency would also contribute to tax gap reduction. 

Simplifying the tax code or fundamental tax reform has the potential to 

reduce the tax gap by billions of dollars. IRS has estimated that errors in 

claiming tax credits and deductions for tax year 2001 contributed $32 billion 

to the tax gap. Thus, considerable potential exists. However, these

provisions serve purposes Congress has judged to be important and 

eliminating or consolidating them could be complicated. Fundamental tax 

reform would most likely result in a smaller tax gap if the new system has 

few, if any, exceptions (e.g., few tax preferences) and taxable transactions 

are transparent to tax administrators. These characteristics are difficult to 

achieve, and any tax system could be subject to noncompliance. 

Withholding and information reporting are particularly powerful tools to 

reduce the tax gap. They could help reduce the tax gap by billions of dollars, 

especially if they make underreported income transparent to IRS. These 

tools have led to high, sustained levels of taxpayer compliance and improved 

IRS resource allocation by helping IRS identify and prioritize its contacts 

with noncompliant taxpayers. As GAO previously suggested, reporting the 

cost, or basis, of securities sales is one option to improve taxpayers’ 

compliance. However, designing additional withholding and information 

reporting requirements may be challenging given that many types of income

are already subject to reporting, underreporting exists in many forms, and 

withholding and reporting requirements impose costs on third parties. 

Devoting additional resources to enforcement has the potential to help 

reduce the tax gap by billions of dollars. However, determining the 

appropriate level of IRS enforcement resources requires considering such 

factors as how well IRS uses its resources and the proper balance between 

taxpayer service and enforcement activities. If Congress provides IRS more

enforcement resources, the amount of tax gap reduction would depend on 

factors such as the size of budget increases and the indirect increase in 

taxpayers’ voluntary compliance resulting from expanded enforcement. The 

recent budget request for fiscal year 2008 proposes legislation and new 

initiatives to reduce the tax gap but expected dollar gains are modest. 

Further reductions likely would require many more such changes. 

The tax gap—the difference 

between the tax amounts taxpayers 

pay voluntarily and on time and 

what they should pay under the 

law—has been a long-standing

problem in spite of many efforts to 

reduce it. Most recently, the 

Internal Revenue Service (IRS)

estimated a gross tax gap for tax 

year 2001 of $345 billion and 

estimated it would recover $55 

billion of this gap, resulting in a net 

tax gap of $290 billion. When some

taxpayers fail to comply, the

burden of funding the nation’s 

commitments falls more heavily on 

compliant taxpayers. Reducing the 

tax gap would help improve the 

nation’s fiscal stability. For 

example, each 1 percent reduction 

in the net tax gap would likely yield

$3 billion annually. 

GAO was asked to discuss the tax 

gap, various approaches to reduce 

it, and what the proposed budget 

for fiscal year 2008 says about it. 

This testimony discusses the need

for taking multiple approaches and 

to what extent the tax gap could be

reduced through three overall 

approaches—simplifying or

reforming the tax system, providing

IRS with additional enforcement 

tools, and devoting additional 

resources to enforcement. This 

statement is based on prior GAO 

work.

What GAO Recommends

GAO is not making any new 

recommendations but highlights

areas for possible attention. 
Chairman Spratt, Mr. Ryan, Members of the Committee: 

I appreciate this opportunity to discuss the tax gap—the difference 

between what taxpayers pay in taxes voluntarily and on time and what 

they should pay under the law—and what is achievable in reducing the 

gap. Most recently, the Internal Revenue Service (IRS) estimated that for 

tax year 2001, taxpayers paid about 84 percent of the taxes that should 

have been paid on time under the law, resulting in an estimated gross tax 

gap of $345 billion. IRS estimated that it would eventually recover around 

$55 billion of the 2001 tax gap through late payments and IRS enforcement 

actions, leaving a net tax gap of $290 billion.1

 Because of taxpayer 

noncompliance, the burden of funding the nation’s commitments falls 

more heavily on taxpayers who willingly and accurately pay their taxes. 

Reducing the tax gap would help improve the nation’s fiscal stability. For 

example, based on IRS’s estimate, each 1 percent reduction in the net tax 

gap would likely yield nearly $3 billion annually. However, the tax gap has 

been a persistent problem in spite of a myriad of congressional and IRS 

efforts to reduce it, as the rate at which taxpayers voluntarily comply with 

our tax laws has changed little over the past three decades. Likewise, 

factors such as globalization and the ever-increasing complexity of the tax

code challenge IRS’s ability to administer the tax code. 

My remarks focus on what is achievable in reducing the tax gap through a

variety of approaches. First I will discuss the need for multiple approaches 

toward reducing the tax gap. Then I will discuss three specific tax gap 

reduction approaches: (1) simplifying or reforming the tax system; 

(2) providing IRS additional enforcement authority and tools, such as 

information reporting2

 and tax withholding,3 through changes to the tax 

laws; and (3) devoting additional resources to enforcement under the 

existing tax laws. My remarks are based on our previous work on a variety 

of issues, in particular, recent testimonies and a report on reducing the tax 

 1

Throughout this statement, references to the tax gap refer to the gross tax gap unless 

otherwise noted. 

2

Information reporting involves the filing of information returns with IRS and taxpayers 

that contain information on certain transactions, such as wage and salary information

employers report to employees and IRS through Form W-2. 

3

An example of tax withholding is when employers withhold taxes on the wages that 

employees earn and remit them to IRS. 

Page 1 GAO-07-488T 
gap.4

 These efforts were conducted in accordance with generally accepted 

government auditing standards. 

Let me begin by highlighting four major points: 

• Multiple approaches are needed to reduce the tax gap. No single approach

is likely to fully and cost-effectively address noncompliance since, for 

example, it has multiple causes and spans different types of taxes and 

taxpayers. Simplifying or reforming the tax code, providing IRS more 

enforcement tools, and devoting additional resources to enforcement are 

three major approaches discussed below, but providing quality services to

taxpayers also is a necessary foundation for voluntary compliance. Quality 

services can help taxpayers who wish to comply but do not understand 

their obligations, whereas enforcement actions may be needed for those 

who intentionally evade their tax obligations. Such steps as periodically 

measuring noncompliance and its causes, setting tax gap reduction goals,

considering the costs and benefits of initiatives to reduce the gap, 

evaluating the results of such initiatives undertaken, optimizing the 

allocation of IRS’s resources, and leveraging technology to enhance IRS’s 

efficiency would also contribute to tax gap reduction. 

• Simplifying the tax code or fundamental tax reform has the potential to 

reduce the tax gap by many billions of dollars. For example, IRS estimated 

that errors in claiming tax credits and deductions for tax year 2001 

contributed $32 billion to the tax gap. Reducing the number of such credits 

and deductions therefore has some direct potential to reduce the tax gap. 

However, these credits and deductions serve purposes Congress has 

judged to be important, and eliminating them likely would be complicated. 

Fundamental tax reform, such as shifting to a consumption tax system, 

would most likely result in a smaller tax gap if the new system has few, if 

any, exceptions (e.g., few or no tax preferences) and taxable transactions

 4

GAO, Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax Gap, 

GAO-07-391T (Washington, D.C.: Jan. 23, 2007); Tax Compliance: Opportunities Exist to 

Reduce the Tax Gap Using a Variety of Approaches, GAO-06-1000T (Washington, D.C.: 

July 26, 2006); Tax Gap: Making Significant Progress in Improving Tax Compliance 

Rests on Enhancing Current IRS Techniques and Adopting New Legislative Actions, 

GAO-06-453T (Washington, D.C.: Feb. 15, 2006); Tax Gap: Multiple Strategies, Better 

Compliance Data, and Long-Term Goals Are Needed to Improve Taxpayer Compliance, 

GAO-06-208T (Washington, D.C.: Oct. 26, 2005); Tax Compliance: Better Compliance Data 

and Long-term Goals Would Support a More Strategic IRS Approach to Reducing the Tax

Gap, GAO-05-753 (Washington, D.C.: July 18, 2005); and Tax Compliance: Reducing the 

Tax Gap Can Contribute to Fiscal Sustainability but Will Require a Variety of 

Strategies, GAO-05-527T (Washington, D.C.: Apr. 14, 2005). 

Page 2 GAO-07-488T 
are transparent to tax administrators. These characteristics are difficult to

achieve in any system, and any tax system could be subject to

noncompliance. 

• Providing IRS with more enforcement tools, particularly withholding and 

information reporting, also has the potential to reduce the tax gap by

billions of dollars, especially if those tools help IRS deal with the largest 

contributor to the tax gap—underreported income. Tax withholding and 

information reporting have been shown to lead to high, sustained levels of

taxpayer compliance because the income taxpayers earn is transparent to 

them and IRS. Also, using these tools can help IRS better allocate its 

resources by improving its ability to identify and prioritize noncompliant 

taxpayers to be contacted. For example, we found that having third parties 

report to taxpayers and IRS the cost, or basis, of stocks and mutual funds 

that taxpayers sell could help taxpayers improve their voluntary 

compliance and help IRS allocate its enforcement efforts concerning these

transactions. However, designing withholding or information reporting 

requirements to address underreporting may be challenging given that 

many types of income are already subject to such requirements, 

underreporting exists in many forms, and any requirements could impose 

costs and burdens on the third parties that withhold or report. 

• Devoting additional resources to enforcement has the potential to help 

reduce the tax gap by billions of dollars. However, determining the 

appropriate level of enforcement resources to provide IRS requires taking

into account factors such as how effectively and efficiently IRS is 

currently using its resources, how to strike the proper balance between 

IRS’s taxpayer service and enforcement activities, and competing federal

funding priorities. If Congress were to provide IRS more enforcement 

resources, the amount the tax gap could be reduced depends in part on 

factors such as the size of budget increases, how IRS manages any 

additional resources, and the indirect increase in taxpayers’ voluntary 

compliance resulting from expanded enforcement. Providing IRS with 

additional funding would enable it to contact millions of potentially 

noncompliant taxpayers it identifies but currently cannot contact given 

resource constraints. 

The administration’s budget request for fiscal year 2008 recognizes the 

need for multiple approaches to tax gap reduction. It offers 16 legislative 

proposals and hundreds of millions of dollars for new IRS initiatives to 

reduce the tax gap. Among other things, these proposals address taxpayer 

services as well as two other approaches—expanded information 

reporting and additional enforcement resources for IRS. Even with these 

efforts, however, the dollar amounts expected to be raised are quite small

Page 3 GAO-07-488T 
compared to the size of the tax gap. This underscores the likelihood that 

more significant reductions in the tax gap will require many additional 

actions under a multiple approaches strategy given the variety of taxes, 

taxpayers, and types of noncompliance that contribute to the tax gap. 

The tax gap is an estimate of the difference between the taxes—including 

individual income, corporate income, employment, estate, and excise 

taxes—that should have been paid voluntarily and on time and what was 

actually paid for a specific year. 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 on time.5

 IRS’s tax gap estimates for each type of

noncompliance include estimates for some or all of the five types of taxes 

that IRS administers. As shown in table 1, underreporting of tax liabilities 

accounted for most of the tax gap estimate for tax year 2001. 

Background 

Table 1: IRS’s Tax Year 2001 Gross Tax Gap Estimates by Type of Noncompliance and Type of Tax 

Dollars in billions 

Type of tax

Type of noncompliance

Individual 

income tax 

Corporate 

income tax Employment tax Estate tax Excise tax Total

Underreporting $197 $30 $54 $4 No estimate $285

Underpayment 23 2 5 2 $1 $34

Nonfiling 25 No estimate No estimate 2 No estimate $27

Total $244 $32 $59 $8 $1 $345

Source: IRS. 

Note: Figures may not sum to totals because of rounding. 

IRS has estimated the tax gap on multiple occasions, beginning in 1979,

relying on its Taxpayer Compliance Measurement Program (TCMP). IRS 

did not implement any TCMP studies after 1988 because of concerns about 

costs and burdens on taxpayers. Recognizing the need for current 

compliance data, in 2002 IRS implemented a new compliance study called

 5

Taxpayers who receive filing extensions, pay their full tax liability by payment due dates, 

and file returns prior to extension deadlines are considered to have filed on time. 

Page 4 GAO-07-488T 
the National Research Program (NRP) to produce such data for tax year 

2001 while minimizing taxpayer burden. 

IRS has concerns with the certainty of the tax gap estimate for tax year 

2001 in part because some areas of the estimate rely on old data, IRS has 

no estimates for other areas of the tax gap, and it is inherently difficult to

measure some types of noncompliance. IRS used data from NRP to 

estimate individual income tax underreporting and the portion of 

employment tax underreporting attributed to self-employed individuals. 

The underpayment segment of the tax gap is not an estimate, but rather 

represents the tax amounts that taxpayers reported on time but did not 

pay on time. Other areas of the estimate, such as corporate income tax and 

employer-withheld employment tax underreporting, rely on decades-old 

data. Also, IRS has no estimates for corporate income, employment, and 

excise tax nonfiling or for excise tax underreporting.6

 In addition, it is 

inherently difficult for IRS to observe and measure some types of 

underreporting or nonfiling, such as tracking cash payments that 

businesses make to their employees, as businesses and employees may not 

report these payments to IRS in order to avoid paying employment and 

income taxes, respectively.7

IRS’s overall approach to reducing the tax gap consists of improving 

service to taxpayers and enhancing enforcement of the tax laws. IRS seeks 

to improve voluntary compliance through efforts such as education and

outreach programs and tax form simplification. IRS uses its enforcement 

authority to ensure that taxpayers are reporting and paying the proper 

amounts of taxes through efforts such as examining tax returns and 

matching the amount of income taxpayers report on their tax returns to 

the income amounts reported on information returns it receives from third 

parties. IRS reports that it collected over $48 billion in fiscal year 2006 

from noncompliant taxpayers it identified through its various enforcement 

programs. 

In spite of IRS’s efforts to improve taxpayer compliance, the rate at which 

taxpayers pay their taxes voluntarily and on time has tended to range from

around 81 percent to around 84 percent over the past three decades. Any 

 6

For these types of noncompliance, IRS maintains that the data are either difficult to 

collect, imprecise, or unavailable. 

7

For a more detailed discussion about data sources and methodologies used in estimating 

the tax gap, see GAO-05-753. 

Page 5 GAO-07-488T 
significant reduction of the tax gap would likely depend on an

improvement in the level of taxpayer compliance.8

Congress has been encouraging IRS to develop an overall tax gap 

reduction plan or strategy that could include a mix of approaches like 

simplifying code provisions, increased enforcement, and reconsidering the 

level of resources devoted to enforcement. Some progress has been made

toward laying out the broad elements of a plan or strategy for reducing the 

tax gap. On September 26, 2006, the U.S. Department of the Treasury 

(Treasury), Office of Tax Policy, released “A Comprehensive Strategy for 

Reducing the Tax Gap.” However, the document generally does not 

identify specific steps that Treasury and IRS will undertake to reduce the 

tax gap, the related time frames for such steps, or explanations of how 

much the tax gap would be reduced. Furthermore, the document 

mentioned the importance of establishing benchmarks against which 

progress on each step under the strategy could be measured. It said that 

after the fiscal year 2008 budget request was released, Treasury and IRS 

would issue more details in March or April 2007 about the steps they 

would take to reduce opportunities for evasion and address the tax gap. 

The 2008 budget request issued on February 5, 2007, suggested 16 

legislative changes to expand or improve information reporting, improve 

compliance by businesses, strengthen tax administration, and expand 

penalties. It also proposed additional funding for new initiatives aimed at

reducing the tax gap. 

No single approach is likely to fully and cost-effectively address 

noncompliance and therefore multiple approaches are likely to be needed. 

The tax gap has multiple causes; spans five types of taxes; and is spread 

over several types of taxpayers including individuals, corporations, and 

partnerships. Thus, for example, while simplifying laws should help when

noncompliance is due to taxpayers’ confusion, enforcement may be 

needed for taxpayers who understand their obligations but decline to

fulfill them. Similarly, while devoting more resources to enforcement 

Multiple Approaches 

Are Needed to Reduce 

the Tax Gap 

 8

In some instances, the amount of the tax gap can change without a corresponding change 

in the level of compliance. For example, a reduction in marginal tax rates could result in a

smaller tax gap even if the level of compliance remains unchanged because the amount of 

taxes that should be paid has been reduced. The tax gap would also tend to increase over

time, even if the rate of taxpayer compliance remained unchanged, because of inflation. 

Page 6 GAO-07-488T 
should increase taxes assessed and collected, too great an enforcement 

presence likely would not be tolerated. 

Simplifying or reforming the tax code, providing IRS more enforcement 

tools, and devoting additional resources to enforcement are three major 

tax gap reduction approaches discussed in more detail below, but 

providing quality services to taxpayers plays an important role in 

improving compliance and reducing the tax gap. IRS taxpayer services 

include education and outreach programs, simplifying the tax process, and 

revising forms and publications to make them electronically accessible 

and more easily understood by diverse taxpayer communities. For 

example, if tax forms and instructions are unclear, taxpayers may be 

confused and make unintentional errors. Quality taxpayer services would 

also be a key consideration in implementing any of the approaches for tax 

gap reduction. For example, expanding enforcement efforts would 

increase interactions with taxpayers, requiring processes to efficiently

communicate with taxpayers. Also, changing tax laws and regulations 

would require educating taxpayers about the new requirements in a clear, 

timely, and accessible manner. In 2006, we reported that IRS improved its 

two most commonly used services—telephone and Web site assistance—

for the 2006 filing season.9

 Increased funding financed some of the 

improvements, but a significant portion has been financed internally by 

efficiencies gained from increased electronic filing of tax returns and 

other operational improvements. 

Although quality service helps taxpayers comply, showing a direct 

relationship between quality service and compliance levels is very 

challenging. As required by Congress, IRS is in the midst of a study that is 

to result in a 5-year plan for taxpayer service activities, which is to include 

long-term quantitative goals and to balance service and enforcement. Part 

of the study focuses on the effect of taxpayer service on compliance. A 

Phase I report was issued in April 2006 and a Phase II report should be 

completed in fiscal year 2007, which is to include, among other things, a 

multiyear plan for taxpayer service activities and improvement initiatives.

However, in deciding on the appropriate mix of approaches to use in 

reducing the tax gap, many factors or issues could affect strategic 

 9

GAO, Internal Revenue Service: Assessment of the Interim Results of the 2006 Filing 

Season and Fiscal Year 2007 Budget Request, GAO-06-499T (Washington, D.C.: Apr. 27, 

2006). 

Page 7 GAO-07-488T 
decisions. Among the broad factors to consider are the likely effectiveness 

of any approach, fairness, enforceability, and sustainability. Beyond these,

our work points to the importance of the following: 

• Measuring compliance levels periodically and setting long-term 

goals. A data-based plan is one key to closing the tax gap. To the extent 

that IRS can develop better compliance data, it can develop more effective

approaches for reducing the gap. Regularly measuring the magnitude of, 

and the reasons for, noncompliance provides insights on how to reduce 

the gap through potential changes to tax laws and IRS programs. In July 

2005, we recommended that IRS periodically measure tax compliance, 

identify reasons for noncompliance, and establish voluntary compliance 

goals.10 IRS agreed with the recommendations and established a voluntary 

tax compliance goal of 85 percent by 2009. Furthermore, we have 

identified alternative ways to measure compliance, including conducting 

examinations of small samples of tax returns over multiple years, instead 

of conducting examinations for a larger sample of returns for 1 tax year, to

allow IRS to track compliance trends annually. The administration’s fiscal

year 2008 budget proposal offers this idea by requesting funds to annually 

study compliance based on a smaller sample size than the 2001 NRP study. 

• Considering the costs and burdens. Any action to reduce the tax gap 

will create costs and burdens for IRS; taxpayers; and third parties, such as 

those who file information returns. For example, withholding and 

information reporting requirements impose some costs and burdens on 

those who track and report information. These costs and burdens need to

be reasonable in relation to the improvements expected to arise from new 

compliance strategies. 

• Evaluating the results. Evaluating the actions taken by IRS to reduce 

the tax gap would help maximize IRS’s effectiveness. Evaluations can be 

challenging because it is difficult to isolate the effects of IRS’s actions 

from other influences on taxpayers’ compliance. Our work has discussed 

how to address these challenges, for example by using research to link 

actions with the outputs and desired effects. 

• Optimizing resource allocation. Developing reliable measures of the 

return on investment for strategies to reduce the tax gap would help 

inform IRS resource allocation decisions. IRS has rough measures of 

return on investment based on the additional taxes it assesses. Developing

 10GAO-05-753. 

Page 8 GAO-07-488T 
such measures is difficult because of incomplete data on the costs of 

enforcement and collected revenues. Beyond direct revenues, IRS’s 

enforcement actions have indirect revenue effects, which are difficult to 

measure. However, indirect effects could far exceed direct revenue effects 

and would be important to consider in connection with continued 

development of return on investment measures. In general though, the 

effects of tax gap reduction by improving voluntary tax compliance can be

quite large. For example, if the estimated 83.7 percent voluntary 

compliance rate that produced a gross tax gap of $345 billion in tax year 

2001 had been 85 percent, this tax gap would have been about $28 billion 

less; if it had been 90 percent, the gap would have been about $133 billion 

less. 

• Leveraging technology. Better use of technology could help IRS be more 

efficient in reducing the tax gap. IRS is modernizing its technology, which

has paid off in terms of telephone service, resource allocation, electronic 

filing, and data analysis capability. However, this ongoing modernization 

will need strong management and prudent investments to maximize 

potential efficiencies. The administration’s fiscal year 2008 budget 

proposal requests additional funds under its Business Systems 

Modernization initiatives. 

Tax law simplification and reform both have the potential to reduce the 

tax gap by billions of dollars. The extent to which the tax gap would be 

reduced depends on which parts of the tax system would be simplified and 

in what manner, as well as how any reform of the tax system is designed 

and implemented. Neither approach, however, will eliminate the gap.

Further, changes in the tax laws and system to improve tax compliance 

could have unintended effects on other tax system objectives, such as 

those involving economic behavior or equity. 

Simplification has the potential to reduce the tax gap for at least three 

broad reasons. First, it could help taxpayers to comply voluntarily with 

more certainty, reducing inadvertent errors by those who want to comply

but are confused because of complexity. Second, it may limit 

opportunities for tax evasion, reducing intentional noncompliance by

taxpayers who can misuse the complex code provisions to hide their 

noncompliance or to achieve ends through tax shelters. Third, tax code

complexity may erode taxpayers’ willingness to comply voluntarily if they 

cannot understand its provisions or they see others taking advantage of 

complexity to intentionally underreport their taxes. 

Reducing the Tax Gap 

through Tax 

Simplification or Tax 

System Reform 

Depends on Their 

Design and May Have 

Effects Beyond Tax 

Compliance 

Page 9 GAO-07-488T 
Simplification could take multiple forms. One form would be to retain 

existing laws but make them simpler. For example, in our July 2005 

report11 on postsecondary tax preferences, we noted that the definition of 

a qualifying postsecondary education expense differed somewhat among 

some tax code provisions, for instance with some including the cost to 

purchase books and others not. Making definitions consistent across code 

provisions may reduce taxpayer errors. Although we cannot say the errors 

were due to these differences in definitions, in a limited study of paid 

preparer services to taxpayers, we found some preparers claiming 

unallowable expenses for books.12 Further, the Joint Committee on 

Taxation suggested that such dissimilar definitions may increase the 

likelihood of taxpayer errors and increase taxpayer frustration.13

Another tax code provision in which complexity may have contributed to 

the individual tax gap involves the earned income tax credit, for which IRS 

estimated a tax loss of up to about $10 billion for tax year 1999.14 Although 

some of this noncompliance may be intentional, we15 and the National 

Taxpayer Advocate16 have previously reported that confusion over the 

complex rules governing eligibility for claiming the credit could cause 

taxpayers to fail to comply inadvertently. The administration’s fiscal year 

2008 budget proposes legislative language to simplify eligibility 

requirements for the credit as well as to clarify the uniform definition of a 

qualifying child. 

Another form of simplification could be to broaden the tax base while 

reducing tax rates, which could minimize incentives for not complying. 

This base-broadening could include a review of whether existing tax 

 11GAO, Student Aid and Postsecondary Tax Preferences: Limited Research Exists on the

Effectiveness of Tools to Assist Students and Families through Title IV Student Aid and

Tax Preferences, GAO-05-684 (Washington, D.C.: July 29, 2005). 

12GAO, Paid Tax Return Preparers: In a Limited Study, Chain Preparers Made Serious

Errors, GAO-06-563T (Washington, D.C.: Apr. 4, 2006). 

13U.S. Congress, Joint Committee on Taxation, Study of the Overall State of the Federal

Tax System, vol. II, 125-6 (April 2001). 

14IRS measured the extent of noncompliance with the earned income tax credit in a study 

separate from NRP. 

15GAO-06-208T. 

16Internal Revenue Service, Taxpayer Advocate Service, National Taxpayer Advocate 2004 

Annual Report to Congress (Washington, D.C.: Dec. 31, 2004). 

Page 10 GAO-07-488T 
expenditures are achieving intended results at a reasonable cost in lost 

revenue and added burden and eliminating or consolidating those that are 

not. Among the many causes of tax code complexity is the growing 

number of preferential provisions in the code, defined in statute17 as tax 

expenditures, such as tax exemptions, exclusions, deductions, credits, and 

deferrals.18 The number of these tax expenditures has more than doubled 

from 67 in 1974 to 161 in 2006, and the sum of tax expenditure estimates 

rose to nearly $847 billion.19 Tax expenditures can contribute to the tax 

gap if taxpayers claim them improperly. For example, IRS’s recent tax gap 

estimate includes a $32 billion loss in individual income taxes for tax year 

2001 because of noncompliance with these provisions. Simplifying these 

provisions of the tax code would not likely yield $32 billion in revenue 

because even simplified provisions likely would have some associated 

noncompliance. Nevertheless, the estimate suggests that simplification 

could have important tax gap consequences, particularly if simplification 

also accounted for any noncompliance that arises because of complexity 

on the income side of the tax gap for individuals.

20

Despite the potential benefits that simplification may yield, these credits 

and deductions serve purposes that Congress has judged to be important 

to advance federal goals. Eliminating them or consolidating them likely 

would be complicated, and would likely create winners and losers. 

Elimination also could conflict with other objectives such as encouraging

certain economic activity or improving equity. 

Similar trade-offs exist with possible fundamental tax reforms that would 

move away from an income tax system to some other system, such as a 

consumption tax, national sales tax, or value added tax. Fundamental tax 

reform would most likely result in a smaller tax gap if the new system has 

few tax preferences or complex tax code provisions and if taxable 

 17The Congressional Budget and Impoundment Control Act of 1974, Pub. L. No. 93-344, § 3,

88 Stat. 299 (July 12, 1974) (codified at 2 U.S.C. § 622(3)). 

18GAO, Government Performance and Accountability: Tax Expenditures Represent a

Substantial Federal Commitment and Need to Be Reexamined, GAO-05-690 (Washington,

D.C.: Sept. 23, 2005). 

19Summing tax expenditure estimates does not take into account interactions between 

individual provisions. 

20The tax gap for underreported individual income taxes exceeded $150 billion for tax year 

2001. However, IRS does not have data on how much of this noncompliance arose because 

of complexity. 

Page 11 GAO-07-488T 
transactions are transparent. However, these characteristics are difficult 

to achieve in any system and experience suggests that simply adopting a 

fundamentally different tax system may not by itself eliminate any tax

gap.21 Any tax system could be subject to noncompliance, and its design 

and operation, including the types of tools made available to tax 

administrators, will affect the size of any corresponding tax gap. Further, 

the motivating forces behind tax reform likely include factors beyond tax

compliance, such as economic effectiveness, equity, and burden, which 

could in some cases carry greater weight in designing an alternative tax

system than ensuring the highest levels of compliance. 

Changing the tax laws to provide IRS with additional enforcement tools, 

such as expanded tax withholding and information reporting, could also 

reduce the tax gap by many billions of dollars, particularly with regard to

underreporting—the largest segment of the tax gap. Tax withholding 

promotes compliance because employers or other parties subtract taxes 

owed from a taxpayer’s income and remit them to IRS. Information 

reporting tends to lead to high levels of compliance because income 

taxpayers earn is transparent to them and IRS. In both cases, high levels of

compliance tend to be maintained over time. Also, withholding and 

information reporting help IRS to better identify noncompliant taxpayers 

and prioritize contacting them, which enables IRS to better allocate its 

resources. However, designing new withholding or information reporting 

requirements to address underreporting can be challenging given that 

many types of income are already subject to at least some form of 

withholding or information reporting, underreporting exists in varied 

forms, and the requirements could impose costs and burdens on third 

parties. 

Figure 1 shows how much voluntary reporting compliance improves for 

income subject to withholding or information reporting. Once withholding 

or information reporting requirements are in place for particular types of

income, compliance tends to remain high over time. For example, for 

wages and salaries, which are subject to tax withholding and substantial 

information reporting, the percentage of income that taxpayers misreport 

has consistently been measured at around 1 percent over time. 

Providing IRS with 

Additional 

Enforcement Tools 

Potentially Could 

Improve Compliance 

Significantly, but 

Identifying and 

Designing Such Tools 

Can Be Challenging 

 21For example, in a 2004 report, the National Audit Office in the United Kingdom reported

on the 15.7 percent gap for the value added tax, which was introduced three decades

earlier. 

Page 12 GAO-07-488T 
Figure 1: Individual Net Income Misreporting Categorized by the Extent of Income

Subject to Withholding and Information Reporting, Tax Year 2001 

In the past, we have identified a few specific areas where additional 

withholding or information reporting requirements could serve to improve 

compliance:

• Require more data on information returns dealing with capital 

gains income from securities sales. Recently, we reported that an 

estimated 36 percent of taxpayers misreported their capital gains or losses 

from the sale of securities, such as corporate stocks and mutual funds.22

Further, around half of the taxpayers who misreported did so because 

 22GAO, Capital Gains Tax Gap: Requiring Brokers to Report Securities Cost Basis Would

Improve Compliance if Related Challenges Are Addressed, GAO-06-603 (Washington, D.C.: 

June 13, 2006). 

Page 13 GAO-07-488T 
they failed to report the securities’ cost, or basis, sometimes because they

did not know the securities’ basis or failed to take certain events into 

account that required them to adjust the basis of their securities. When 

taxpayers sell securities like stock and mutual funds through brokers, the 

brokers are required to report information on the sale, including the 

amount of gross proceeds the taxpayer received; however, brokers are not 

required to report basis information for the sale of these securities. We 

found that requiring brokers to report basis information for securities 

sales could improve taxpayers’ compliance in reporting their securities 

gains and losses and help IRS identify noncompliant taxpayers. However, 

we were unable to estimate the extent to which a basis reporting 

requirement would reduce the capital gains tax gap because of limitations 

with the compliance data on capital gains and because neither IRS nor we 

know the portion of the capital gains tax gap attributed to securities sales. 

• Requiring tax withholding and more or better information return 

reporting on payments made to independent contractors. Past IRS 

data have shown that independent contractors report 97 percent of the 

income that appears on information returns, while contractors that do not

receive these returns report only 83 percent of income. We have also 

identified other options for improving information reporting for 

independent contractors, including increasing penalties for failing to file 

required information returns, lowering the $600 threshold for requiring 

such returns, and requiring businesses to report separately on their tax 

returns the total amount of payments to independent contractors.23

• Requiring information return reporting on payments made to 

corporations. Unlike payments made to sole proprietors, payments made 

to corporations for services are generally not required to be reported on 

information returns. IRS and GAO24 have contended that the lack of such a

requirement leads to lower levels of compliance for small corporations. 

Although Congress has required federal agencies to provide information 

returns on payments made to contractors since 1997,25 payments made by 

others to corporations are generally not covered by information returns. 

 23GAO, Tax Administration: Approaches for Improving Independent Contractor 

Compliance, GAO/GGD-92-108 (Washington, D.C.: July 23, 1992). 

24GAO, Tax Administration: Benefits of a Corporate Document Matching Program

Exceed the Costs, GAO/GGD-91-118 (Washington, D.C.: Sept. 27, 1991).

25Taxpayer Relief Act of 1997, Pub. L. No. 105-34 (1997). 

Page 14 GAO-07-488T 
Information reporting helps IRS to better allocate its resources to the 

extent that it helps IRS better identify noncompliant taxpayers and the 

potential for additional revenue that could be obtained by contacting these 

taxpayers. For example, IRS officials told us that receiving information on 

basis for taxpayers’ securities sales would allow IRS to determine more 

precisely taxpayers’ income for securities sales through its document 

matching programs and would allow it to identify which taxpayers who 

misreported securities income have the greatest potential for additional 

tax assessments. Similarly, IRS could use basis information to improve 

both aspects of its examination program—examinations of tax returns 

through correspondence and examinations of tax returns face to face with

the taxpayer. Currently, capital gains issues are too complex and time 

consuming for IRS to examine through correspondence. However, IRS 

officials told us that receiving cost basis information might enable IRS to 

examine noncompliant taxpayers through correspondence because it 

could productively select tax returns to examine. Also, having cost basis 

information could help IRS identify the best cases to examine face to face,

making the examinations more productive while simultaneously reducing 

the burden imposed on compliant taxpayers who otherwise would be 

selected for examination.

Withholding and information reporting lead to high levels of compliance. 

Designing new requirements to address underreporting would need to 

address the challenge that many types of income, including wages and 

salaries, dividend and interest income, and income from pensions and 

Social Security are already subject to withholding or substantial 

information reporting. Also, challenges arise in establishing new 

withholding or information reporting requirements for certain other types 

of income that are extensively underreported. Such underreporting may be

difficult to determine because of complex tax laws or transactions or the 

lack of a practical and reliable third-party source to provide information 

on the taxable income. 

Page 15 GAO-07-488T 
For example, while withholding or information reporting mechanisms on 

nonfarm sole proprietor and informal supplier income26 would likely 

improve their compliance, comprehensive mechanisms that are practical

and effective are difficult to identify. As shown in figure 1, this income is 

not subject to information reporting, and these taxpayers misreported 

about half of the income they earned for tax year 2001. Informal suppliers 

by definition receive income in an informal manner through services they

provide to a variety of individual citizens or small businesses. Whereas 

businesses may have the capacity to perform withholding and information 

reporting functions for their employees, it may be challenging to extend

withholding or information reporting responsibilities to the individual 

citizens that receive services, who may not have the resources or 

knowledge to comply with such requirements. 

Finally, implementing tax withholding and information reporting 

requirements generally imposes costs and burdens on the businesses that 

must implement them, and, in some cases, on taxpayers. For example, 

expanding information reporting on securities sales to include basis 

information will impose costs on the brokers who would track and report 

the information. Further, trying to close the entire tax gap with these 

enforcement tools could entail more intrusive recordkeeping or reporting 

than the public is willing to accept. 

The administration’s proposed budget for fiscal year 2008 has 16 legislative 

proposals on tax gap reduction of which 7 relate to expanded information 

reporting.27 Two of these proposals involve information reporting on 

payments to corporations and on the cost basis of security sales, which we 

discussed earlier in this section of the testimony. The administration also 

proposes requiring a certified tax identification number from 

 26Nonfarm proprietors are self-employed individuals other than farmers who should file 

Schedule C with their individual tax returns to report profits and losses from their 

businesses. Sole proprietors include those who provide services, such as doctors or

accountants; produce goods, such as manufacturers; and sell goods at fixed locations, such

as car dealers and grocers. Informal suppliers are sole proprietors who work alone or with

few workers and, by definition, operate in an informal manner. Informal suppliers include 

those who make home repairs, provide child care, or sell goods at roadside stands. These 

taxpayers should report business profits or losses on Schedule C. 

27In general, the other 9 proposals involve e-filing, clarifying employment tax liability for 

employee leasing companies and under collection due process procedures, sharing 

information related to the national directory of new hires and prison tax scams, making 

repeated and willful tax nonfiling a felony, and expanding IRS’s penalty authority in certain 

areas. 

Page 16 GAO-07-488T 
nonemployee service providers (contractors), increased information 

reporting for certain government payments for property and services, and

increased information return penalties. We have done past work related to

these proposals and suggested them as options for reducing the tax gap.28

The remaining 2 proposals would expand broker information reporting 

and require information reporting on merchant card payment 

reimbursements. 

The 7 proposals relating to information reporting account for virtually all

the revenue that the budget request’s 16 tax gap legislative proposals are 

projected to raise. The 16 proposals are expected to raise about $29 billion 

over 10 years, or about 1 percent per year of the 2001 net tax gap amount 

of $290 billion. About 98 percent of the $29 billion would come from the 

information reporting proposals. About 85 percent would come from 3 of 

them—those relating to payments to corporations, basis reporting on 

security sales, and merchant payment card reimbursements. 

Devoting more resources to enforcement has the potential to help reduce 

the tax gap by billions of dollars, as IRS would be able to expand its 

enforcement efforts to reach a greater number of potentially noncompliant 

taxpayers. However, determining the appropriate level of enforcement 

resources to provide IRS requires taking into account many factors, such 

as how effectively and efficiently IRS is currently using its resources, how 

to strike the proper balance between IRS’s taxpayer service and 

enforcement activities, and competing federal funding priorities. If 

Congress were to provide IRS more enforcement resources, the amount of 

the tax gap that could be reduced depends in part on the size of any 

increase in IRS’s budget, how IRS would manage any additional resources, 

and the indirect increase in taxpayers’ voluntary compliance that would 

likely result from expanded IRS enforcement. 

Devoting Additional 

Resources to 

Enforcement Likely

Could Reduce the Tax 

Gap, but to What 

Extent Is Difficult to 

Predict 

 28GAO/GGD-92-108; Tax Administration: Federal Agencies Should Report Service

Payments Made to Corporations, GAO/GGD-92-130 (Washington, D.C.: Sept. 22, 1992), and

Tax Gap: Many Actions Taken, but a Cohesive Compliance Strategy Needed, 

GAO/GGD-94-123 (Washington, D.C.: May 11, 1994). 

Page 17 GAO-07-488T 
Given resource constraints, IRS is unable to contact millions of additional 

taxpayers for whom it has evidence of potential noncompliance.29 With 

additional resources, IRS would be able to assess and collect additional 

taxes and further reduce the tax gap. In 2002, IRS estimated that a $2.2 

billion funding increase would allow it to take enforcement actions against 

potentially noncompliant taxpayers it identifies but cannot contact and 

would yield an estimated $30 billion in revenue.

30 For example, IRS 

estimated that it contacted about 3 million of the over 13 million taxpayers 

it identified as potentially noncompliant through its matching of tax 

returns to information returns. IRS estimated that contacting the 

additional 10 million potentially noncompliant taxpayers it identified, at a 

cost of about $230 million, could yield nearly $7 billion in potentially 

collectible revenue. We did not evaluate the accuracy of the estimate, and 

as will be discussed below, many factors suggest that it is difficult to 

estimate reliably net revenue increases that might come from additional 

enforcement efforts.31

Although additional enforcement funding has the potential to reduce the 

tax gap, the extent to which it would help depends on several factors. 

First, and perhaps most obviously, the amount of tax gap reduction would 

depend in part on the amount of additional resources. The degree to which 

revenues would increase from expanded enforcement depends on many 

variables, such as how quickly IRS can ramp up efforts, how well IRS 

selects the best cases to be worked, and how taxpayers react to 

enforcement efforts. Estimating those revenue increases would require 

assumptions about these and other variables. Because actual experience is 

likely to diverge from those assumptions, the actual revenue increases are 

likely to differ from the estimates. The lack of reliable key data 

compounds the difficulty of estimating the likely revenues. To the extent 

possible, obtaining better data on key variables would provide a better 

 29For examples, see GAO, Tax Administration: Impact of Compliance and Collection 

Program Declines on Taxpayers, GAO-02-674 (Washington, D.C.: May 22, 2002); High Risk 

Series: An Update, GAO-05-207 (Washington, D.C.: January 2005); and our tax gap products

cited earlier in this statement, GAO-06-1000T, GAO-06-453T, GAO-06-208T, GAO-05-753, and 

GAO-05-527T. 

30Commissioner of Internal Revenue Charles O. Rossotti, Report to the IRS Oversight 

Board: Assessment of IRS and the Tax System, October 2002. 

31The overall tax gap has many components. Thus, if the tax gap in a specific area is 

reduced either through congressional actions like simplifying provisions or through IRS 

actions, the size of the overall gap may not be reduced if other portions of the gap increase. 

Page 18 GAO-07-488T 
understanding of the likely results with any increased enforcement 

resources. 

With additional resources for enforcement, IRS would be able to assess 

and collect additional taxes, but the related tax gap reductions may not be 

immediate. If IRS uses the resources to hire more enforcement staff, the 

reductions may occur gradually as IRS is able to hire and train the staff. 

Also, several years can elapse after IRS assesses taxes before it actually 

collects these taxes. 

Similarly, the amounts of taxes actually collected can vary substantially 

from the related tax amounts assessed through enforcement actions by the 

type of tax or taxpayer involved. In a 1998 report, we found that 5 years 

after taxes were assessed against individual taxpayers with business 

income, 48 percent of the assessed taxes had been collected, whereas for 

the largest corporate taxpayers, 97 percent of assessed taxes had been

collected.

32

These various factors need to be taken into account in estimating revenue 

to be obtained from increased funding. In doing such estimates for its 

fiscal year 2007 budget, IRS accounted for several factors, including 

opportunity costs because of training, which draws experienced 

enforcement personnel away from the field; differences in average 

enforcement revenue obtained per full-time employee by enforcement 

activity; and differences in the types and complexity of cases worked by 

new hires and experienced hires. IRS forecasted that in the first year after 

expanding enforcement activities, the additional revenue to be collected is

less than half the amount to be collected in later years. This example 

underscores the logic that if IRS is to receive a relatively large funding 

increase, it likely would be better to provide it in small but steady 

amounts. 

The amount of tax gap reduction likely to be achieved from any budget

increase also depends on how well IRS can use information about 

noncompliance to manage the additional resources. Because IRS does not 

have compliance data for some segments of the tax gap and others are 

based on old data, IRS cannot easily track the extent to which compliance 

is improving or declining. IRS also has concerns with its information on 

 32GAO, Tax Administration: IRS Measures Could Provide a More Balanced Picture of

Audit Results and Costs, GAO/GGD-98-128 (Washington, D.C.: June 23, 1998). 

Page 19 GAO-07-488T 
whether taxpayers unintentionally or intentionally fail to comply with the 

tax laws. Knowing the reasons for taxpayer noncompliance can help IRS 

decide whether its efforts to address specific areas of noncompliance 

should focus on nonenforcement activities, such as improved forms or 

publications, or enforcement activities to pursue intentional 

noncompliance. To the extent that compliance data are outdated and IRS 

does not know the reason for taxpayer noncompliance, IRS may be less 

able to target resources efficiently to achieve the greatest tax gap 

reduction at the least taxpayer burden. 

IRS has taken important steps to better ensure efficient allocation and use.

For example, the NRP study has provided better data on which taxpayers 

are most likely to be noncompliant. IRS is using the data to improve its 

audit selection processes in hopes of reducing the number of audits that 

result in no change, which should reduce unnecessary burden on 

compliant taxpayers and increase enforcement staff productivity (as 

measured by direct enforcement revenue). 

As part of an effort to make the best use of its enforcement resources, IRS 

has developed rough measures of return on investment in terms of tax 

revenue that it assesses from uncovering noncompliance. Generally, IRS 

cites an average return on investment for enforcement of 4:1, that is, IRS 

estimates that it collects $4 in revenue for every $1 of funding. Where IRS 

has developed return on investment estimates for specific programs, it 

finds substantial variation depending on the type of enforcement action.

For instance, the ratio of estimated tax revenue gains to additional 

spending for pursuing known individual tax debts through phone calls is 

13:1, versus a ratio of 32:1 for matching the amount of income taxpayers 

report on their tax returns to the income amounts reported on information 

returns. In addition to returns on investment estimates being rough, IRS 

lacks information on the incremental returns on investment from pursuing

the “next best case” for some enforcement programs. It is the marginal 

revenue gain from these cases that matters in estimating the direct 

revenue from expanded enforcement. Developing such measures is 

difficult because of incomplete information on all the costs and all the tax 

revenue ultimately collected from specific enforcement efforts. Because 

IRS’s current estimates of the revenue effects of additional funding are 

imprecise, the actual revenue that might be gained from expanding 

different enforcement efforts is subject to uncertainty. 

Given the variation in estimated returns on investment for different types 

of IRS compliance efforts, the amount of tax gap reduction that may be 

achieved from an increase in IRS’s resources would depend on how IRS 

Page 20 GAO-07-488T 
allocates the increase. Although it might be tempting to allocate resources 

heavily toward areas with the highest estimated return, allocation 

decisions must take into account diverse and difficult issues. For instance, 

although one enforcement activity may have a high estimated return, that 

return may drop off quickly as IRS works its way through potential 

noncompliance cases. In addition, IRS dedicates examination resources 

across all types of taxpayers so that all taxpayers receive some signal that 

noncompliance is being addressed. Further, issues of fairness can arise if 

IRS focuses its efforts only on particular groups of taxpayers. 

Beyond direct tax revenue collection, expanded enforcement efforts could 

reduce the tax gap even more, as widespread agreement exists that IRS 

enforcement programs have an indirect effect through increases in 

voluntary tax compliance.33 The precise magnitude of the indirect effects 

of enforcement is not known with a high level of confidence given 

challenges in measuring compliance; developing reasonable assumptions 

about taxpayer behavior; and accounting for factors outside of IRS’s 

actions that can affect taxpayer compliance, such as changes in tax law. 

However, several research studies have offered insights to help better 

understand the indirect effects of IRS enforcement on voluntary tax 

compliance and show that they could exceed the direct effect of revenue

obtained.34

As table 2 shows, the administration’s budget request for fiscal year 2008 

proposes additional revenue-producing initiatives, legislative proposals, 

and non-revenue-producing initiatives. The revenue-producing initiatives 

generally would fund additional staff to enforce tax laws; the legislative 

proposals include, for example, new information return requirements that 

 33Two types of indirect effect are (1) the increase in voluntary compliance in the larger 

population resulting from examinations or other enforcement and nonenforcement actions

on targeted taxpayers, and (2) the increase in voluntary compliance of the targeted 

taxpayer in subsequent years. 

34Economists have estimated the indirect effect of an examination on voluntary compliance 

to range from 6 to 12 times the amount of proposed tax adjustments. See Alan H. Plumley,

The Determinants of Individual Income Tax Compliance: Estimating The Impacts of 

Tax Policy, Enforcement, and IRS Responsiveness, Publication 1916 (Rev. 11-96) 

(Washington, D.C.: November 1996), 2, 35-36; Jeffrey A. Dubin, Michael J. Graetz, and Louis 

L. Wilde, “The Effect of Audit Rates on the Federal Individual Income Tax, 1977-1986,” 

National Tax Journal, vol. 43 (1990), 395, 396, 405; and Jeffrey A. Dubin, “Criminal 

Investigation Enforcement Activities and Taxpayer Noncompliance” (paper written for the

IRS Research Conference, June 2004), http://www.irs.gov/pub/irs-soi/04dubin.pdf 

(downloaded July 1, 2005). 

Page 21 GAO-07-488T 
would increase revenue; and the non-revenue-producing initiatives 

generally would fund infrastructure and Business Systems Modernization 

changes to support IRS operations. 

Table 2: Cost and Estimated Revenue of IRS Tax Gap Proposals for Fiscal Years 2008 through 2010 

Dollars in millions 

Cost of proposal Estimated revenue from proposal

Type of proposal

Fiscal year 

2008 

Fiscal year 

2009

Fiscal year 

2010

Fiscal year 

2008 

Fiscal year 

2009

Fiscal year 

2010

Revenue-producing initiatives $198 $163 $163 $317 $526 $699

Legislative proposals 23 23 23 378 1,171 1,898

Non-revenue-producing 

initiatives 

188 168 168 0 0 0

Total $410 $355 $355 $695 $1,697 $2,597

Source: GAO (analysis); IRS and Department of the Treasury (data).

Note: Figures may not sum to totals because of rounding. Data are from IRS and from Treasury’s 

February 2007 General Explanations of the Administration’s Fiscal Year 2008 Revenue Proposals. 

Over the 3 years, the requested funding decreases while the estimated 

resulting revenue increases. About $410 million is requested for fiscal year 

2008 to fund all of these initiatives, which are estimated to bring in about

$695 million in increased revenue that year. The estimated cost for the 

initiatives declines to $355 million in fiscal years 2009 and 2010 and the 

projected revenues increase to about $2.6 billion in 2010. Costs decline 

due to start up costs applying only in fiscal year 2008. Revenues increase 

in part due to improved annual returns from the hiring, training, and 

deployment of additional staff, but more so due to the phase in of the 

legislative proposals, particularly the information reporting requirements. 

The legislative proposals alone are estimated to produce $1.9 billion of the 

$2.6 billion total additional revenues expected to come from the 

administration’s budget proposals in fiscal year 2010. The revenue effects 

of the revenue-producing initiatives exclude the likely deterrent effect

from IRS enforcement programs as well as any improvement in voluntary 

compliance due to improved taxpayer services. 

The revenues expected from these initiatives are small compared to the 

estimated $290 billion net tax gap for tax year 2001. For instance, all of the 

revenue-producing initiatives coming largely from additional enforcement 

staffing are expected to yield about $699 million in fiscal year 2010, or 

about one-quarter of 1 percent of the tax year 2001 net tax gap. In 2010, the 

total estimated increased revenues from both the revenue-producing and 

Page 22 GAO-07-488T 
legislative initiatives, or about $2.6 billion, is about 0.9 percent of the 2001 

net tax gap.

When taxpayers do not pay all of their taxes, honest taxpayers carry a 

greater burden to fund government programs and the nation is less able to

address its long-term fiscal challenges. Thus, reducing the tax gap is 

important, even though closing the entire tax gap is neither feasible nor 

desirable because of costs and intrusiveness. All of the approaches I have

discussed have the potential to reduce the tax gap alone or in

combination, and no single approach is clearly and always superior to the

others. As a result, IRS needs a strategy to attack the tax gap on multiple 

fronts with multiple approaches. The various proposals in the 

administration’s budget request raise modest dollar amounts compared to 

the size of the tax gap. This underscores the likelihood that a wide variety

of efforts will be needed to make significant progress in addressing the tax

gap. We look forward to seeing the administration’s expanded outline of 

steps it will be taking. 

Mr. Chairman and Members of the Committee, this concludes my 

testimony. I would be happy to answer any question you may have at this 

time. 

For further information on this testimony, please contact Michael Brostek 

on (202) 512-9110 or brostekm@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this testimony. Individuals making key contributions to this testimony 

include Thomas Short, Assistant Director; Jeffrey Arkin; Elizabeth Fan; 

Ronald Jones; Lawrence Korb; and Ellen Rominger. 

Concluding 

Observations 

Contact and 

Acknowledgments 

Page 23 GAO-07-488T (450570) 
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER