GAO

United States Government Accountability Office

A

Testimony

Before the Committee on Finance, U.S. Senate

For Release on Delivery

Expected at 10:00 a.m. EDT

Thursday, April 14, 2005

TAX COMPLIANCE

Reducing the Tax Gap Can 

Contribute to Fiscal 

Sustainability but Will 

Require a Variety of 

Strategies

Statement of David M. Walker

Comptroller General of the United States

GAO-05-527T
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-527T.

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and methodology, click on the link above. 

For more information, contact Michael 

Brostek on (202) 512-9110 or 

brostekm@gao.gov. 

Highlights of GAO-05-527T, a testimony to 

the Committee on Finance, U.S. Senate 

April 14, 2005

TAX COMPLIANCE

Reducing the Tax Gap Can Contribute to 

Fiscal Sustainability but Will Require a 

Variety of Strategies 

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. 

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 

Corporate 

income Employment Estate Excise Total

Underreporting $150-$187 $30 $66-$71 $4 

No 

estimate $250-$292

Underpayment 19 2 7 2 1 $32

Nonfiling 28

No 

estimate

No 

estimate 2 

No 

estimate $30

Total $198-$234 $32 $73-$78 $8 $1 $312-$353

Source: IRS. 

Note: Figures may not sum to totals due to rounding. 

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 Recommends

GAO is not making any new 

recommendations but discusses 

some past recommendations and 

highlights some new areas for 

possible attention. 
Page 1 GAO-05-527T 

Chairman Grassley, Senator Baucus, and Members of the Committee: 

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

between what taxpayers timely and accurately pay in taxes and what they 

should pay under the law—and how reducing that gap can help the nation 

cope with its large and growing long-term fiscal challenges. Most recently, 

the Internal Revenue Service (IRS) estimated a gross tax gap from 

$312 billion to $353 billion for tax year 2001.1

 IRS estimated that it would 

eventually recover some of this amount through late payments and IRS 

enforcement actions, resulting in an estimated “net” tax gap for 2001 from 

$257 billion to $298 billion.2

 The tax gap arises when taxpayers fail to 

comply with the tax laws, either intentionally or unintentionally. As a 

result of their noncompliance, the burden of funding the nation’s 

commitments, including funding growing budget deficits, falls more heavily 

on taxpayers who voluntarily pay their taxes. In addition, IRS expends 

substantial resources enforcing and explaining tax laws, with the goals of 

increasing compliance and reducing the tax gap. 

For context in considering the tax gap, I will first provide the committee 

with the results of our most recent simulations of the long-term fiscal 

outlook. I will also discuss briefly the need for a fundamental 

reexamination of major spending and tax policies and priorities that will be 

important to recapturing our fiscal flexibility and updating our programs 

and priorities to respond to emerging social, economic, and security 

challenges. Next, I will discuss our long-standing concerns regarding tax 

compliance and IRS’s efforts to ensure compliance. Finally, I will discuss 

the significance of reducing the tax gap and a number of issues related to 

this challenging task, including various means to potentially improve 

compliance, measuring the extent of the tax gap, IRS’s understanding of the 

reasons why taxpayers are noncompliant, and IRS’s plans and strategies for 

reducing the gap. My remarks are based on our previous reports on a 

variety of issues as well as work we are performing for this committee on 

the tax gap, which we will address in greater detail in a forthcoming report, 

and will be performed under generally accepted government auditing 

standards.

1

IRS’s most recent estimates of the tax gap are preliminary, and as such, IRS presents them 

as ranges.

2

Throughout this report, references to the tax gap refer to the gross tax gap unless otherwise 

noted. 
Page 2 GAO-05-527T 

Let me begin by highlighting several major points:

• The overall picture on the long-term fiscal outlook is not news to this 

committee. Simply put, our nation’s fiscal policy is on an imprudent and 

unsustainable course. In addition, our long-term fiscal gap grew much 

larger in fiscal year 2004. Long-term budget simulations by GAO, the 

Congressional Budget Office (CBO), and others show that over the long 

term we face large and growing structural deficits due primarily to 

known demographic trends and rising health care costs. Continuing on 

this unsustainable fiscal path will gradually erode, if not suddenly 

damage, our economy, our standard of living, and ultimately our 

national security. Our current path also will increasingly constrain our 

ability to address emerging and unexpected budgetary needs and 

increase the burdens that will be faced by our children, grandchildren, 

and future generations.

• Regardless of the assumptions used, 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 spending and 

tax policies and priorities will be important to recapturing our fiscal 

flexibility and updating our programs and priorities to respond to 

emerging social, economic, and security challenges. Ultimately, this 

reexamination will need to entail a national discussion about what 

Americans want from their government and how much they are willing 

to pay for those things. Especially relevant to this committee will be 

determining whether and how to change our current tax policies—

including the type of tax base, the degree of progressivity in our tax 

system, or the extent of tax preferences in our system—and how to 

ensure that compliance with any tax system we may choose is as high as 

practically possible.

• We have long been concerned about tax noncompliance and IRS’s 

efforts to address it. Since 1990 we have had various aspects of tax 

noncompliance on our high-risk list, and this year we have affirmed our 

broad concern by consolidating two prior high-risk areas into one—

Enforcement of Tax Laws. Tax law enforcement is a high-risk area in 

part because past declines in IRS’s enforcement activities threatened to 

erode taxpayer compliance. Declines in key IRS enforcement 

occupations and examinations and other enforcement results reinforce 
Page 3 GAO-05-527T 

the need to focus greater attention on tax compliance.3 The turnaround 

that has begun in staffing and some enforcement results is good news. 

However, IRS’s preliminary new compliance estimate indicates that 

compliance has not improved and may be worse than IRS originally 

estimated. Therefore, sustained progress in improving compliance is 

needed. 

• Reducing the current tax gap would contribute to our fiscal 

sustainability while simultaneously improving fairness for those citizens 

who fully and timely meet their tax obligations. Although closing the 

entire tax gap is not practical, even modest reductions will have very 

significant financial benefits—each 1 percent reduction in the tax gap 

that we could achieve would likely generate more than $2.5 billion in 

revenue annually to help reduce deficits and/or fund our most pressing 

national priorities. Reducing the tax gap will be a challenging task given 

persistent levels of noncompliance and 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. These strategies could include efforts to simplify the tax code, 

provide quality services to taxpayers, and utilize enforcement tools such 

as tax withholding and information reporting. 

• Regularly measuring the extent and nature of noncompliance is critical 

to effective efforts to reduce the tax gap given changes in the economy 

and tax law. A significant portion of IRS’s preliminary tax gap estimate 

for 2001 is based on recently collected compliance data on individual 

income tax reporting, which accounts for nearly 50 percent of the tax 

gap. However, for some areas of the tax gap, the estimate relies on 

outdated data and methodologies, including data from the 1970s and 

1980s used to estimate corporate income tax underreporting and some 

employment tax underreporting. IRS does not have firm plans for 

obtaining more contemporary information on compliance for these 

areas of the tax gap or again measuring individual income reporting 

compliance. Further, IRS has missed opportunities to develop a better 

understanding of why taxpayers were noncompliant, which can guide 

IRS in determining what tools and techniques to use to address 

noncompliance. Finally, IRS’s strategies for improving compliance do 

not have the clear focus on quantitative long-term goals and results 

3

GAO, Internal Revenue Service: Assessment of Fiscal Year 2006 Budget Request and the 

Interim Results of the 2005 Filing Season, GAO-05-416T (Washington, D.C.: Apr. 14, 2005).
Page 4 GAO-05-527T 

measurement that are associated with high-performing organizations 

and that are incorporated into statutory management framework 

Congress has adopted.

Background 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 timely and accurately paid 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 timely.4

 Estimates for each type of noncompliance include 

estimates for some or all of the five types of taxes that IRS administers.

IRS develops its tax gap estimates by measuring the rate of taxpayer 

compliance—the degree to which taxpayers fully and timely complied with 

their tax obligations. That rate is then used, along with other data and 

assumptions, to estimate the dollar amount of taxes not timely and 

accurately paid. For instance, IRS recently estimated that for tax year 

2001, from 83.4 percent to 85 percent of owed taxes were paid voluntarily 

and timely, which translated into an estimate gross tax gap from 

$312 billion to $353 billion in taxes not paid that should have been. IRS also 

estimates the amount of the unpaid taxes that it will recover through 

enforcement and other actions and subtracts that to estimate the net 

annual tax gap. 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. 

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

IRS’s earlier tax gap estimates relied on the Taxpayer Compliance 

Measurement Program (TCMP), through which IRS periodically performed 

line-by-line examinations of randomly selected tax returns. TCMP started 

with tax year 1963 and examined individual returns most frequently—

generally every 3 years—through tax year 1988. IRS contacted all 

taxpayers selected for TCMP studies. IRS did not implement any TCMP 

4

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 timely.
Page 5 GAO-05-527T 

studies after 1988 because of concerns about costs and burdens on 

taxpayers.5

 

Recognizing the need for current compliance data, in 2002 IRS 

implemented a new compliance study called the National Research 

Program (NRP) to produce such data while minimizing taxpayer burden.6

 

Under NRP, a program that we have encouraged, IRS recently completed its 

initial review of about 46,000 randomly selected individual tax returns from 

tax year 2001. Unlike with TCMP studies, IRS did not need to contact 

taxpayers for every tax return selected under NRP; handled some taxpayer 

contacts through correspondence, as opposed to face-to-face 

examinations; and during face-to-face examinations, generally only asked 

taxpayers to explain information that it was otherwise unable to verify 

through IRS and third-party databases. 

IRS has a strategic planning process through which it supports decisions 

about strategic goals, program development, and resource allocation. 

Under the Government Performance and Results Act of 1993 (GPRA),7

agencies are to develop strategic plans as the foundation for resultsoriented management. GPRA requires that agency strategic plans identify 

long-term goals, outline strategies to achieve the goals, and describe how 

program evaluations were used to establish or revise the goals. GPRA 

requires federal agencies to establish measures to determine the results of 

their activities.

Long-term Fiscal 

Challenge Provides 

Impetus to Reexamine 

Tax Policies and 

Compliance 

The nation is facing a range of important new forces that are already 

working to reshape American society, our place in the world, and the role 

of the federal government. 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. As this committee is 

well aware, the size and trend of our projected longer-term deficits means 

that the nation cannot ignore the resulting fiscal pressures—it is not a 

5

GAO, Tax Administration: Status of IRS’ Efforts to Develop Measures of Voluntary 

Compliance, GAO-01-535 (Washington, D.C.: June 18, 2001).

6

GAO, Tax Administration: New Compliance Research Effort Is on Track, but Important 

Work Remains, GAO-02-769 (Washington, D.C.: June 27, 2002). 

7

Pub. L. No. 103-62 (1993).
Page 6 GAO-05-527T 

matter of whether the nation deals with the fiscal gap, but when and how. 

Unless we take effective and timely action, our near-term and longer-term 

deficits present the prospect of chronic and seemingly perpetual budget 

shortfalls and constraints becoming a fact of life for years to come. Not 

only would continuing deficits eat away at the capacity of everything the 

government does, but they will erode our ability to address the wide range 

of emerging needs and demands competing for a share of a shrinking 

budget pie. 

Our long-term simulations illustrate the magnitude of the fiscal challenges 

we will face in the future. Figures 1 and 2 present these simulations under 

two different sets of assumptions. In the first, we begin with CBO's 

January 2005 baseline—-constructed according to the statutory 

requirements for that baseline.8

 Consistent with these requirements, 

discretionary spending is assumed to grow with inflation for the first 

10 years and tax cuts scheduled to expire are assumed to expire. After 

2015, discretionary spending is assumed to grow with the economy, and 

revenue is held constant as a share of gross domestic product (GDP) at the 

2015 level. In the second figure, two assumptions are changed: (1) 

discretionary spending is assumed to grow with the economy after 2005 

rather than merely with inflation and (2) all temporary tax cuts are 

extended. For both simulations, Social Security and Medicare spending is 

based on the 2005 Trustees' intermediate projections, and we assume that 

benefits continue to be paid in full after the trust funds are exhausted.

8

Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2006 to 

2015 (Washington, D.C.: January 2005). 
Page 7 GAO-05-527T 

Figure 1: Composition of Spending as a Share of GDP under Baseline Extended

Note: In addition to the expiration of tax cuts, revenue as a share of GDP increases through 2015 due 

to (1) real bracket creep, (2) more taxpayers becoming subject to the Alternative Minimum Tax (AMT), 

and (3) increased revenue from tax-deferred retirement accounts. After 2015, revenue as a share of 

GDP is held constant.

0

10

20

30

40

50

2004 2015 2030 2040

Fiscal year

Percent of GDP

Net interest

Social Security

Medicare and Medicaid

All other spending

Source: GAO’s March 2005 analysis.

Revenue
Page 8 GAO-05-527T 

Figure 2: Composition of Spending as a Share of GDP Assuming Discretionary 

Spending Grows with GDP after 2005 and All Expiring Tax Provisions Are Extended

Note: Although expiring tax provisions are extended, revenue as a share of GDP increases through 

2015 due to (1) real bracket creep, (2) more taxpayers becoming subject to the AMT, and (3) increased 

revenue from tax-deferred retirement accounts. After 2015, revenue as a share of GDP is held 

constant.

As both these simulations illustrate, absent policy changes on the spending 

or revenue side of the budget, the growth in spending on federal retirement 

and health entitlements will encumber an escalating share of the 

government's resources. Indeed, when we assume that recent tax 

reductions are made permanent and discretionary spending keeps pace 

with the economy, our long-term simulations suggest that by 2040 federal 

revenues may be adequate to pay little more than interest on the federal 

debt. Neither slowing the growth in discretionary spending nor allowing 

the tax provisions to expire—nor both together—would eliminate the 

imbalance. Although revenues will be part of the debate about our fiscal 

future, assuming no further borrowing, making no changes to Social 

Security, Medicare, Medicaid, and other drivers of the long-term fiscal gap 

would require at least a doubling of taxes, and that seems highly 

0

10

20

30

40

50

2004 2015 2030 2040

Fiscal year

Percent of GDP

Net interest

Social Security

Medicare and Medicaid

All other spending

Source: GAO’s March 2005 analysis.

Revenue
Page 9 GAO-05-527T 

implausible. Such significant tax increases would also likely have an 

adverse effect on economic growth and disposable income available to 

Americans. Accordingly, substantive reform of Social Security and our 

major health programs remains critical to recapturing our future fiscal 

flexibility.

Although considerable uncertainty surrounds long-term budget 

projections, we know two things for certain: the population is aging and the 

baby boom generation is approaching retirement age. The aging 

population and rising health care spending will have significant 

implications not only for the budget but also the economy as a whole. 

Figure 3 shows the total future draw on the economy represented by Social 

Security, Medicare, and Medicaid. Under the 2005 Trustees' intermediate 

estimates and CBO's long-term Medicaid estimates, spending for these 

entitlement programs combined will grow to 15.2 percent of GDP in 2030 

from today's 8.5 percent. It is clear that taken together Social Security, 

Medicare, and Medicaid represent an unsustainable burden on future 

generations.
Page 10 GAO-05-527T 

Figure 3: Social Security, Medicare, and Medicaid Spending as a Percent of GDP

Notes: Social Security and Medicare projections based on the intermediate assumptions of the 2005 

Trustees' Reports. Medicaid projections based on CBO's January 2005 short-term Medicaid estimates 

and CBO's December 2003 long-term Medicaid projections under mid-range assumptions.

Early action to change these programs would yield the highest fiscal 

dividends for the federal budget and would provide a longer period for 

prospective beneficiaries to make adjustments in their own planning. 

Waiting to build economic resources and reform future claims entails risks. 

First, we lose an important window during which today's relatively large 

workforce can increase saving and enhance productivity, two elements 

critical to growing the future economy. We also lose the opportunity to 

reduce the burden of interest in the federal budget, thereby creating a 

legacy of higher debt as well as elderly entitlement spending for the 

relatively smaller workforce of the future. Most critically, we risk losing 

the opportunity to phase in changes gradually so that all can make the 

adjustments needed in private and public plans to accommodate this 

historic shift. Unfortunately, the long-range challenge has become more 

difficult, and the window of opportunity to address the entitlement 

challenge is narrowing.

0

5

10

15

20

25

30

2000 2010 2020 2030 2040 2050 2060 2070 2080

Social Security

Medicaid

Medicare

Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security Administration, Office of the Actuary, 

Centers for Medicare and Medicaid Services, and the Congressional Budget Office.

Percent of GDP
Page 11 GAO-05-527T 

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. Traditional incremental approaches to budgeting will need to 

give way to more fundamental and periodic reexaminations of the base of 

government. Many, if not most, current federal programs and policies were 

designed decades ago to respond to trends and challenges that existed at 

the time of their creation. If government is to respond effectively to 21st

century trends, it cannot accept what it does, how it does it, who does it, 

and how it gets financed as “given.” Not only do outmoded commitments, 

operations, choices of tools, management structures, and tax programs and 

policies constitute a burden on future generations, but they also erode the 

government's capacity to align itself with the needs and demands of the 21st

century.

Reexamining the base of government will be a challenging task, and we at 

GAO believe we have an obligation to assist and support Congress in this 

endeavor. To that end, we recently issued a report9

 that provides examples 

of the kinds of difficult choices the nation faces with regard to 

discretionary spending; mandatory spending, including entitlements; as 

well as tax policies and compliance activities. Regarding tax policy, a 

debate is under way about the future of our tax system that is partly about 

whether the goals for the nation's tax system can be best achieved using 

the current structure or a fundamentally reformed tax structure. The 

debate is also motivated by increasing globalization, the growing 

complexity of our tax system, and the growing use of tax preferences 

whose aggregate revenue loss has exceeded all discretionary spending in 

5 of the past 10 years. 

Although outside the scope of this hearing, today's pressing tax challenges 

raise important questions. For example: 

• Given our current tax system, what tax rate structure is more likely to 

raise sufficient revenue to fund government and satisfy the public's 

perception of fairness?

9

GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, GAO05-325SP (Washington, D.C.: Feb. 2005).
Page 12 GAO-05-527T 

• Which tax preferences need to be reconsidered because they fail to 

achieve the objectives intended by the Congress, their costs outweigh 

their benefits, they duplicate other programs, or other more cost 

effective means exist for achieving their objectives?

• Should the basis of the existing system be changed from an income to a 

consumption base? Would such a change help respond to challenges 

posed by demographic, economic, and technological changes? How 

would such a change affect savings and work incentives? How would 

reforms address such issues as the impact on state and local tax systems 

and the distribution of burden across the nation's taxpayers?

Regarding compliance with our tax laws, the success of our tax system 

hinges greatly on the public's perception of its fairness and 

understandability. Compliance is influenced not only by the effectiveness 

of IRS's enforcement efforts but also by Americans' attitudes about the tax 

system and their government. A recent survey indicated that about 

12 percent of respondents say it is acceptable to cheat on their taxes. 

Furthermore, the complexity of, and frequent revisions to, the tax system 

make it more difficult and costly for taxpayers who want to comply to do 

so and for IRS to explain and enforce tax laws. Complexity also creates a 

fertile ground for those intentionally seeking to evade taxes and often trips 

others into unintentional noncompliance. The lack of transparency also 

fuels disrespect for the tax system and the government. Thus, a crucial 

challenge for reexamination will be to determine how we can best 

strengthen enforcement of existing laws to give taxpayers confidence that 

their friends, neighbors, and business competitors are paying their fair 

share.

Enforcement of Tax Laws Is 

on GAO’s High-Risk List

We have long been concerned about tax noncompliance and IRS efforts to 

address it. Collection of unpaid taxes was included in our first high-risk 

series report in 1990, with a focus on the backlog of uncollected debts 

owed by taxpayers. In 1995, we added Filing Fraud as a separate high-risk 

area, narrowing the focus of that high-risk area in 2001 to Earned Income 

Credit Noncompliance because of the particularly high incidence of fraud 

and other forms of noncompliance in that program. We expanded our 

concern about the Collection of Unpaid Taxes in our 2001 high-risk report 

to include not only unpaid taxes (including tax evasion and unintentional 

noncompliance) known to IRS, but also the broader enforcement issue of 

unpaid taxes that IRS has not detected. In our high-risk update that we 
Page 13 GAO-05-527T 

issued in January,10 we consolidated these areas into a single high-risk 

area—Enforcement of the Tax Laws—because we believe the focus of 

concern on the enforcement of tax laws is not confined to any one segment 

of the taxpaying population or any single tax provision.

Tax law enforcement is a high-risk area in part because past declines in 

IRS’s enforcement activities threatened to erode taxpayer compliance. In 

recent years, the resources IRS has been able to dedicate to enforcing the 

tax laws have declined. For example, the number of revenue agents (those 

who examine complex returns), revenue officers (those who perform field 

collection work), and special agents (those who perform criminal 

investigations) decreased over 21 percent from 1998 through 2003. 

However, IRS achieved some staffing gains in 2004 and expects modest 

gains in 2005. IRS’s proposal for fiscal year 2006, if funded and 

implemented as planned, would return enforcement staffing in these 

occupations to their highest levels since 1999.11 

Concurrently, IRS's enforcement workload—measured by the number of 

taxpayer returns filed—has continually increased. For example, from 1997 

through 2003, the number of individual income tax returns filed increased 

by about 8 percent. Over the same period, returns for high income 

individuals grew by about 81 percent.12 Due to their income levels, IRS 

believes that these individuals present a particular compliance risk. In light 

of declines in enforcement staffing and the increasing number of returns 

filed, nearly every indicator of IRS's coverage of its enforcement workload 

has declined in recent years. Although in some cases workload coverage 

has begun to increase, overall IRS's coverage of known workload is 

considerably lower than it was just a few years ago. Figure 4 shows the 

trend in examination rates—the proportion of tax returns that IRS 

examines each year—for field, correspondence, and total examinations 

since 1995. Field examinations involve face-to-face examinations and 

correspondence examinations are typically less comprehensive and 

complex, involving communication through written notices. IRS 

experienced steep declines in examination rates from 1995 to 1999, but the 

10GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January 2005).

11GAO-05-416T.

12High income individual taxpayers are those reporting $100,000 or more of “total positive 

income,” which is, in general, the sum of all positive amounts shown for the various sources 

of income reported on individual tax returns and thus excludes net losses. 
Page 14 GAO-05-527T 

examination rate has slowly increased since 2000. However, as the figure 

shows, the increase in total examination rates of individual filers has been 

driven mostly by correspondence examinations, while more complex field 

examinations continue to decline. 

Figure 4: Examination Rate for Individual Income Tax Returns, Fiscal Years 1995-

2004

On the collection front, IRS’s use of enforcement sanctions, such as liens, 

levies, and seizures, dropped precipitously during the mid- and late 1990s. 

In fiscal year 2000, IRS’s use of these three sanctions was at 38 percent, 

7 percent, and 1 percent, respectively, of fiscal year 1996 levels. However, 

beginning in fiscal year 2001, IRS’s use of liens and levies began to 

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Total

Correspondence

Field

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Examination rate

Fiscal year

Source: GAO analysis of IRS data.
Page 15 GAO-05-527T 

increase.13 By fiscal year 2004, IRS’s use of liens, levies, and seizures 

reached 71 percent, 65 percent, and 4 percent of 1996 levels, respectively. 

Further, IRS's workload has grown ever more complex as the tax code has 

grown more complex. IRS is challenged to administer and explain each 

new provision, thus absorbing resources that otherwise might be used to 

enforce the tax laws. Concurrently, other areas of particularly serious 

noncompliance have gained the attention of IRS and Congress, such as 

abusive tax shelters and schemes employed by businesses and wealthy 

individuals that often involve complex transactions that may span national 

boundaries. Given the broad declines in IRS's enforcement workforce, 

IRS's decreased ability to follow up on suspected noncompliance, and the 

emergence of sophisticated evasion concerns, IRS is challenged in 

attempting to ensure that taxpayers fulfill their obligations. 

IRS is working to further improve its enforcement efforts. In addition to 

recent favorable trends in enforcement staffing, correspondence 

examinations, and the use of some enforcement sanctions, IRS has recently 

made progress with respect to abusive tax shelters through a number of 

initiatives and recent settlement offers that have resulted in billions of 

dollars in collected taxes, interest, and penalties. In addition, IRS is 

developing a centralized cost accounting system, in part to obtain better 

cost and benefit information on compliance activities, and is modernizing 

the technology that underpins many core business processes. It has also 

redesigned some compliance and collections processes and plans 

additional redesigns as technology improves. Finally, the recently 

completed NRP study of individual taxpayers not only gives us a 

benchmark of the status of taxpayers’ compliance but also gives IRS a 

better basis to target its enforcement efforts. 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. 

13We made a number of recommendations to improve and expand IRS’s levy efforts. See 

GAO, Tax Administration: IRS’s Levy of Federal Payments Could Generate Millions of 

Dollars, GAO/GGD-00-65 (Washington, D.C.: Apr. 7, 2000), and Tax Administration: 

Millions of Dollars Could Be Collected if IRS Levied More Federal Payments, GAO-01-711

(Washington, D.C.: July 20, 2001).
Page 16 GAO-05-527T 

Multiple Service and 

Enforcement 

Strategies, Periodic 

Compliance 

Measurement, and A 

Results-Oriented 

Compliance Approach 

May Help IRS Reduce 

the Tax Gap 

Reducing the tax gap would be a step toward improving our fiscal 

sustainability while simultaneously enhancing fairness for those citizens 

who meet their tax obligations. That said, reducing the tax gap is a 

challenging task, and closing the entire tax gap is not practical. 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. 

Reducing the Tax Gap Could 

Have a Positive Fiscal 

Impact but Will Require 

Multiple Strategies

Given its size, even small or moderate reductions in the net tax gap could 

yield substantial returns. For example, based on IRS’s most recent 

estimate, each 1 percent reduction in the net tax gap would likely yield 

more than $2.5 billion annually. Thus, a 10 percent to 20 percent reduction 

of the net tax gap would translate into from $25 billion to $50 billion or 

more in additional revenue annually.14

Although reducing the tax gap may be an attractive means to improve the 

nation’s fiscal position, achieving this end will be a challenging task given 

persistent levels of noncompliance. IRS has made efforts to reduce the tax 

gap since the early 1980s; yet the tax gap is still large—although without 

these efforts it could be even larger. Also, IRS is challenged in reducing the 

tax gap because the tax gap is spread across the five different types of 

taxes that IRS administers, and a substantial portion of the tax gap is 

attributed to taxpayers who are not subject to withholding or information 

reporting requirements. Moreover, as we have reported in the past,15

closing the entire tax gap may not be feasible nor desirable, as it could 

14Any significant reduction of the tax gap would likely depend on an improvement in the 

level of taxpayer compliance. 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 simply because the amount of tax that 

should be paid has been reduced, even if the level of compliance remains unchanged. 

15GAO, Taxpayer Compliance: Analyzing the Nature of the Income Tax Gap, GAO/T-GGD97-35 (Washington, D.C.: Jan. 9, 1997).
Page 17 GAO-05-527T 

entail more intrusive recordkeeping or reporting than the public is willing 

to accept or more resources than IRS is able to commit.

Although much of the tax gap that IRS currently recovers is through 

enforcement actions, a sole focus on enforcement will not likely be 

sufficient to further reduce the net tax gap. Rather, the tax gap must be 

attacked on multiple fronts and with multiple strategies on a sustained 

basis. For example, efforts to simplify the tax code and otherwise alter 

current tax policies may help reduce the tax gap by making it easier for 

individuals and business to understand and voluntarily comply with their 

tax obligations. For instance, reducing the multiple tax preferences for 

retirement savings or education assistance might ease taxpayers’ burden in 

understanding and complying with the rules associated with these options. 

Also, simplification may reduce opportunities for tax evasion through 

vehicles such as abusive tax shelters. 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.

Furthermore, providing quality services to taxpayers is an important part of 

any overall strategy to improve compliance and thereby reduce the tax gap. 

As we have reported in the past,16 one method of improving compliance 

through service is to educate taxpayers about confusing or commonly 

misunderstood tax requirements. For example, if the forms and 

instructions taxpayers use to prepare their taxes are not clear, taxpayers 

may be confused and make unintentional errors. One method to ensure 

that forms and instructions are sufficiently clear is to test them before use. 

However, we reported in 2003 that IRS had tested revisions to only five 

individual forms and instructions from July 1997 through June 2002, 

although hundreds of forms and instructions had been revised in 2001 

alone.17 

Finally, in terms of enforcement, IRS will need to use multiple strategies 

and techniques to find noncompliant taxpayers and bring them into 

compliance. However, a pair of tools has been shown to lead to high levels 

of compliance: withholding tax from payments to taxpayers and having 

16GAO/T-GGD-97-35.

17GAO, Tax Administration: IRS Should Reassess the Level of Resources for Testing Forms 

and Instructions, GAO-03-486 (Washington, D.C.: Apr. 11, 2003).
Page 18 GAO-05-527T 

third parties report information to IRS and the taxpayers on income paid to 

taxpayers. For example, banks and other financial institutions provide 

information returns (Forms 1099) to account holders and IRS showing the 

taxpayers’ annual income from some types of investments. Similarly, most 

wages, salaries, and tip compensation are reported by employers to 

employees and IRS through Form W-2. Preliminary findings from NRP 

indicate that more than 98.5 percent of these types of income are 

accurately reported on individual returns.

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

withholding or information reporting requirements could serve to improve 

compliance:18

• 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 separately report on their tax 

returns the total amount of payments to independent contractors.19

• 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 GAO 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 

1997,20 payments made by others to corporations are generally not 

covered by information returns.

18GAO, Tax Gap: Many Actions Taken, but a Cohesive Compliance Strategy Needed, 

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

19GAO, Tax Administration: Approaches for Improving Independent Contractor 

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

20Taxpayer Relief Act of 1997, Pub. L. No. 105-34 (1997).
Page 19 GAO-05-527T 

• Require more data on information returns dealing with capital 

gain income. Past IRS studies have indicated that much of the 

noncompliance associated with capital gains is a result of taxpayers 

overstating an asset’s “basis,” the amount of money originally paid for 

the asset. Currently, financial institutions are required to report the 

sales prices, but not the purchase prices, of stocks and bonds on 

information returns. Without information on purchase prices, IRS 

cannot use efficient and effective computer-matching programs to 

check for compliance and must use much more costly means to 

examine taxpayer returns in order to verify capital gain income.

Although withholding and information returns are highly effective in 

encouraging compliance, such additional requirements generally impose 

costs and burdens on the businesses that must implement them. However, 

continued reexamination of opportunities to expand information reporting 

and tax withholding could increase the transparency of the tax system. 

Such reexamination could be especially relevant toward improving 

compliance in areas that are particularly complex or challenging to 

administer, such as noncash charitable contributions or net income and 

losses passed through from “flow-through” entities such as S corporations 

and partnerships to their shareholders and partners.21

Finally, making progress on closing the tax gap requires that the tools and 

techniques being used to promote compliance are evaluated to ensure that 

they actually are effective. IRS evaluates some of its efforts to assess how 

well they work, perhaps most notably its current effort to test new 

procedures designed to reduce noncompliance with the Earned Income 

Tax Credit,22 but misses other opportunities. For example, the lack of 

testing for forms and instructions mentioned earlier is one instance where 

improved evaluation would be worthwhile. We also reported in 2002 that 

the effectiveness of the Federal Tax Deposit Alert program—a program 

that since 1972 has been intended to reduce delinquencies in paying 

21Partnerships and S corporations are businesses commonly referred to as flow-through 

entities, as they do not generally pay taxes on income. Instead, they distribute net income 

and losses to partners, shareholders, and beneficiaries, who are subsequently required to 

report net income or losses on their individual tax returns and pay any applicable taxes.

22GAO, Earned Income Credit: Qualifying Child Certification Test Appears Justified, but 

Evaluation Plan Is Incomplete, GAO-03-794 (Washington, D.C.: Sept. 30, 2003), and Earned 

Income Tax Credit: Implementation of Three New Tests Proceeded Smoothly, But Tests 

and Evaluation Plans Were Not Fully Documented, GAO-05-92 (Washington, D.C.: Dec. 30, 

2004).
Page 20 GAO-05-527T 

employment taxes—could not be evaluated because IRS had no system to 

track contacts IRS made with delinquent employers.23 The availability of 

current compliance information should enhance IRS’s ability to evaluate 

the success of its efforts to promote compliance.

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. For example, by analyzing 

1979 and 1982 TCMP data, IRS identified significant noncompliance with 

the number of dependents claimed on tax returns and justified a legislative 

change to address the noncompliance. As a result, for tax year 1987 

taxpayers claimed about 5 million fewer dependents on their returns than 

would have been expected without the change in law. In addition, tax 

compliance data are useful outside of IRS for tax policy analysis, revenue 

estimating, and research. 

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.24 Completion of NRP is a 

substantial achievement—as table 1 indicates, underreporting of individual 

income taxes represented about half of the tax gap for 2001 (the estimate 

ranges from $150 billion to $187 billion out of a gross tax gap estimate that 

ranges from $312 billion to $353 billion). Also, from $51 billion to 

$56 billion of the $66 billion to $71 billion in estimated underreported 

employment tax was due to self-employment tax underreporting. IRS used 

current, actual data from its Master Files to calculate the underpayment 

segment of the tax gap. 

23GAO, Tax Administration: IRS’s Efforts to Improve Compliance With Employment Tax 

Requirements Should Be Evaluated, GAO-02-92 (Washington, D.C.: Jan. 15, 2002).

24Self-employed individuals are required to calculate and remit Social Security and Medicare 

taxes to the U.S. Treasury each quarter, while employers generally withhold these taxes 

from their employees’ wages, match these amounts, and are required to remit these 

withholdings to Treasury at least quarterly. 
Page 21 GAO-05-527T 

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

and Type of Tax

Source: IRS.

Note: Figures may not sum to totals due to rounding. 

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. IRS does not have estimates for 

corporate income, employment, and excise tax nonfiling or for excise tax 

underreporting. For these types of noncompliance, IRS maintains that the 

data are either difficult to collect, imprecise, or unavailable. IRS has not 

recently collected compliance data for the remaining segments of the tax 

gap. For example, IRS used data from the 1970s and 1980s to estimate 

underreporting of corporate income taxes and employer-withheld 

employment taxes. 

IRS is taking several steps that could improve the tax gap estimate for tax 

year 2001. IRS plans to further analyze the preliminary results from NRP 

and expects to publish a revised estimate by the end of 2005. The revised 

estimate will incorporate new methodologies, including those for 

estimating overall individual income tax underreporting as well as for the 

portion attributable to self-employed individuals who operate businesses 

informally, and for estimating individual income tax nonfiling. In addition, 

IRS research officials have proposed a compliance measurement study that 

will allow IRS to update underreporting estimates involving flow-through 

entities. This study, which IRS intends to begin in fiscal year 2006, would 

take 2 to 3 years to complete. Because either individual taxpayers or 

corporations may be recipients of income (or losses) from flow-through 

entities, this study could affect IRS’s estimates for the underreporting gap 

for individual and corporate income tax. 

Dollars in billions

Type of tax

Type of 

noncompliance

Individual

income tax

Corporate

income tax

Employment

tax

Estate

tax

Excise

tax Total

Underreporting $150-$187 $30 $66-$71 $4 No

estimate

$250-$292

Underpayment 19 2 7 2 1 $32

Nonfiling 28 No estimate No estimate 2 No

estimate

 $30

Total $198-$234 $32 $73-$78 $8 $1 $312-$353
Page 22 GAO-05-527T 

While these data and methodology updates could improve the tax gap 

estimates, IRS has no documented plans to periodically collect more or 

better compliance data over the long term. Other than the proposed study 

of flow-through entities, IRS does not have plans to collect compliance data 

for other segments of the tax gap. Also, IRS has indicated that given its 

current research priorities, it would not begin another NRP study of 

individual income tax returns before 2008, if at all, and would not complete 

such a study until at least 2010. When IRS initially proposed the NRP study, 

it had planned to study individual income tax underreporting on a 3-year 

cycle.

According to IRS officials, IRS has not committed to regularly collecting 

compliance data because of the associated costs and burdens. Taxpayers 

whose returns are examined through compliance studies such as NRP bear 

costs in terms of time and money. Also, IRS incurs costs, including direct 

costs and opportunity costs—revenue that IRS potentially forgoes by using 

its resources to examine randomly selected returns, which may include 

returns from compliant taxpayers, as opposed to traditional examinations 

that focus on taxpayer returns that likely contain noncompliance and may 

more consistently produce additional tax assessments. 

Although the costs and burdens of compliance measurement are legitimate 

concerns, as we have reported in the past, we believe compliance studies to 

be good investments.25 Without current compliance data, IRS is less able to 

determine key areas of noncompliance to address and actions to take to 

maximize the use of its limited resources. The lack of firm plans to 

continually obtain fresh compliance data is troubling because the 

frequency of data collection can have a large impact on the quality and 

utility of compliance data. As we have reported in the past, the longer the 

time between compliance measurement surveys, the less useful they 

become given changes in the economy and tax law.26

In designing the NRP study, IRS balanced the costs, burdens, and 

compliance risk of studying that area of the tax gap. Any plans for 

obtaining and maintaining reasonably current information on compliance 

levels for all portions of the tax gap would similarly need to take into 

25GAO, Tax Administration: IRS’ Plans to Measure Tax Compliance Can Be Improved, 

GAO/GGD-93-52 (Washington, D.C.: Apr. 5, 1993).

26GAO/GGD-93-52.
Page 23 GAO-05-527T 

account costs, burdens, and compliance risks in determining which areas 

of compliance to measure and the scope and frequency of such 

measurement. 

Knowing the Reasons for 

Noncompliance Could Help 

Guide Compliance Efforts, 

but IRS Has Concerns with 

Its Data on These Reasons

Data on whether taxpayers are unintentionally or intentionally 

noncompliant with specific tax provisions are critical to IRS for deciding 

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. Recognizing 

such benefits, the National Taxpayer Advocate has urged IRS to consider 

performing additional research into causes of noncompliance.27 We have 

also reported in the past28 that rigorous research of the causes of 

noncompliance seems intuitive.

IRS collects data on the reasons for noncompliance for specific tax issues 

during its examinations of tax returns, including those reviewed for NRP. 

However, IRS has a number of concerns with the data:

• The database is incomplete as not all examiners have been sending 

information on the results, including reasons, of closed examinations to 

be entered into the database. 

• IRS has not tested the adequacy of the controls for data entry or the 

reliability of the data being collected. IRS has found instances where 

examiners close examinations without assigning a reason for 

noncompliance or by assigning the same reason to all instances of 

noncompliance, regardless of the situation.

• IRS has not trained all examiners to deal with the subjectivity of 

determining reasons to ensure consistent understanding of the reason 

categories. 

27Testimony of Nina E. Olson, National Taxpayer Advocate, before the Senate Committee on 

Finance, July 21, 2004, and Internal Revenue Service, Taxpayer Advocate Service, National 

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

28GAO, Tax Research: IRS Has Made Progress but Major Challenges Remain, GAO/GGD-96-

109 (Washington, D.C.: June 5, 1996).
Page 24 GAO-05-527T 

• The data are not representative of the population of noncompliant 

taxpayers because the examined tax returns were not selected 

randomly. 

As IRS continues to collect data on the reasons for noncompliance in the 

future, it will be important to take these concerns into account. 

Additionally, as with its efforts to measure compliance, it will be important 

for IRS to consider the costs and burden of obtaining data on the reasons 

for noncompliance.

Long-term, Quantitative 

Goals for Improving 

Taxpayers’ Compliance 

Would Be Consistent with 

Results-Oriented 

Management

Focusing on outcome-oriented goals and establishing measures to assess 

the actual results, effects, or impact of a program or activity compared to 

its intended purpose can help agencies improve performance and 

stakeholders determine whether programs have produced desired results. 

As such, establishing long-term, quantitative compliance goals offers 

several benefits for IRS. Perhaps most important, compliance goals 

coupled with periodic measurements of compliance levels would provide 

IRS with a better basis for determining to what extent its various service 

and enforcement efforts contribute to compliance. Additionally, long-term, 

quantitative goals may help IRS consider new strategies to improve 

compliance, especially since these strategies could take several years to 

implement. For example, IRS’s progress toward the goal of having 

80 percent of all individual tax returns electronically filed by 200729 has 

required enhancement of its technology, development of software to 

support electronic filing, education of taxpayers and practitioners, and 

other steps that could not be completed in a short time frame. Focusing on 

intended results can also promote strategic and disciplined management 

decisions that are more likely to be effective because managers who use 

fact-based performance analysis are better able to target areas most in 

need of improvement and select appropriate interventions. Likewise, 

agency accountability can be enhanced when both agency management 

and external stakeholders such as Congress can readily measure an 

agency’s progress toward meeting its goals. Finally, setting long-term, 

quantitative goals would be consistent with results-oriented management 

principles that are associated with high-performing organizations and 

incorporated into the statutory management framework Congress has 

adopted through GPRA. 

29Congress established this electronic filing goal in the IRS Restructuring and Reform Act of 

1998, Pub. L. No. 105-206 (1998).
Page 25 GAO-05-527T 

IRS’s strategies for improving compliance generally lack a clear focus on 

long-term, quantitative goals and results measurement. Although IRS has 

established broad qualitative goals and strategies for improving taxpayer 

service and enhancing enforcement of the tax laws, it has not specified by 

how much it hopes these strategies will improve compliance. IRS has also 

identified measures, such as compliance rates for tax reporting, filing, and 

payment as well as the percentage of Americans who think it is acceptable 

to cheat on their taxes,30 which are intended to gauge the progress of its 

strategies toward its broad goals. However, IRS does not always collect 

recent data to update these measures and has not established quantitative 

goals against which to compare the measures. In response to a President's 

Management Agenda31 initiative to better integrate budget and performance 

information, IRS officials said that they are considering various long-term 

goals for the agency. These goals are to be released by May 2005. The 

officials have not indicated how many goals will be related to improving 

taxpayer compliance or whether they will be quantitative and resultsoriented.

Not unlike other agencies,32 IRS faces challenges in implementing a resultsoriented management approach, such as identifying and collecting the 

necessary data to make informed judgments about what goals to set and to 

subsequently measure its progress in reaching such goals. However, having 

completed the NRP review of income underreporting by individuals, IRS 

now has an improved foundation for setting a goal or goals for improving 

30Other measures for enhancing enforcement are (1) the percentage of priority guidance list 

items published (percentage of tax issues IRS will address through regulations, notices, and 

other forms of guidance) and (2) average cycle time between receipt and completion of an 

audit case.

31The President's Management Agenda is intended to help the federal government become 

more results-oriented and encourage federal managers to ask whether their programs are 

working as intended and, if not, what can be done to achieve greater results.

32GAO, The Government Performance and Results Act: 1997 Governmentwide 

Implementation Will Be Uneven, GAO/GGD-97-109 (Washington, D.C.: June 2, 1997), and 

Results-Oriented Government: GPRA Has Established a Solid Foundation for Achieving 

Greater Results, GAO-04-38 (Washington, D.C.: Mar. 10, 2004).
Page 26 GAO-05-527T 

taxpayers’ compliance.33 Nevertheless, measuring progress toward any 

goals that may be set could be challenging. For example, IRS researchers 

have found it difficult to determine the extent to which its enforcement 

actions deter noncompliance or its services improve compliance among 

taxpayers who want to comply. Measuring these effects is complicated in 

part because many factors outside of IRS’s actions can affect compliance. 

However, as the National Taxpayer Advocate’s 2004 annual report to 

Congress34 pointed out, current and existing data on noncompliance may 

help IRS better understand and address this challenge. Furthermore, even 

if IRS is unable to show that its actions directly affected compliance rates, 

periodic measurements of compliance levels can indicate the extent to 

which compliance is improving or declining and provide a basis for 

reexamining existing programs and triggering corrective actions if 

necessary.

Concluding 

Observations

The nation is currently on an imprudent and unsustainable fiscal path that 

threatens our future. If we act now to address the looming fiscal 

challenges facing the nation, the lives of our children and grandchildren 

will be measurably better than if we wait. Nevertheless, the decisions we 

must make will not be easy. They involve difficult choices about the role of 

government in our lives and our economy. Acting now will impose 

sacrifices, but today we have more options with less severe consequences 

than if we wait.

Reducing the tax gap is one option that would help. While our long termfiscal imbalance is too large to be eliminated by one strategy, reducing the 

tax gap can ease the difficult decisions that are needed. But, regardless of 

the contribution that a reduced tax gap can make to easing our long-term 

challenges, we need to make concerted efforts to address the tax gap 

because it is fundamentally unfair and threatens Americans’ trust in their 

33The Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206 

(1998), specifically prohibits IRS from using its records of tax enforcement results to 

evaluate employees or to impose or suggest production quotas or goals with respect to such 

employees. That restriction does not, however, prevent IRS from using its records of tax 

enforcement results to examine whether its current enforcement efforts are effective in 

deterring noncompliance and to in turn establish long-term strategies and priorities for 

improvement.

34Internal Revenue Service, Taxpayer Advocate Service, National Taxpayer Advocate 2004 

Annual Report to Congress.
Page 27 GAO-05-527T 

government. The tax gap is both a measure of the burden and frustration of 

taxpayers who want to comply but are tripped by tax code complexity and 

of willful tax cheating by a minority who want the benefits of government 

services without paying their fair share.

Chairman Grassley, Senator Baucus, and Members of the Committee, this 

concludes my testimony. At the request of the committee, in the near 

future, we will issue a report that addresses the tax gap in greater detail 

and, as appropriate, may make recommendations related to the topics 

covered in my statement. We look forward to continuing to support the 

committee’s oversight of the tax gap and related issues. I would be happy 

to answer any questions you may have at this time.

Contact and 

Acknowledgments

For further information on this testimony, please contact Michael Brostek 

on (202) 512-9110 or brostekm@gao.gov. Individuals making key 

contributions to this testimony include Jeff Arkin, Elizabeth Fan, Shannon 

Groff, George Guttman, Michael Rose, and Tom Short.

(450330)
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