a

GAO

United States Government Accountability Office

Report to the Committee on Finance, 

U.S. Senate

July 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
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-753.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Mike Brostek at 

(202) 512-9110 or brostekm@gao.gov. 

Highlights of GAO-05-753, a report to the 

Committee on Finance, U.S. Senate 

July 2005

TAX COMPLIANCE

Better Compliance Data and Long-term 

Goals Would Support a More Strategic 

IRS Approach to Reducing the Tax Gap 

IRS estimates that underreporting of taxes accounted for about $250 billion 

to $292 billion of the $312 billion to $353 billion tax gap for 2001, while 

underpayment and nonfiling accounted for about $32 billion and $30 billion, 

respectively. Although IRS has collected recent compliance data, it still has 

concerns with some outdated methodologies and data used to estimate the 

tax gap. IRS is taking laudable steps intended to improve the estimate, which 

it plans to revise by the end of 2005. IRS has also developed a proposed 

schedule of compliance studies, but it has no approved plans to periodically 

measure compliance for the tax gap components. While it may not be 

feasible or necessary to measure compliance for all components at the same 

frequency or level of investment, periodic compliance studies would support 

a more data-driven and risk-based approach to reducing the tax gap. 

IRS recently began to capture data on the reasons why taxpayers are 

noncompliant. However, IRS has concerns about the data, such as examiners 

assigning the same reason for noncompliance regardless of situation. Also, it 

is often difficult for examiners to determine a taxpayer’s intent—whether 

the noncompliance is unintentional or intentional. Collecting better data on 

reasons can help IRS focus its activities on taxpayer service or enforcement. 

Although IRS is developing a system intended to capture better examination 

data, IRS does not have firm or specific plans to develop better reason data. 

IRS approaches tax gap reduction through improving taxpayer service and 

enforcing tax laws and has two broad strategic goals and related key efforts 

that are intended to support this approach. However, IRS has not established 

long-term, quantitative compliance goals and regularly collected data to 

track its progress, which would complement its current, important 

compliance efforts. Establishing clear goals and measuring progress towards 

them would be consistent with results-oriented management principles. IRS 

has begun to consider additional goals, but it is not yet clear if they will be 

compliance related. Long-term, quantitative compliance goals, coupled with 

updated compliance data, would provide a solid base upon which to develop 

a more strategic, results-oriented approach to reducing the tax gap. 

IRS’s Preliminary 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. 

According to the Internal Revenue 

Service (IRS), a gap arises each 

year between what taxpayers pay 

accurately and on time in taxes and 

what they should pay under the 

law. The tax gap is composed of 

underreporting of tax liabilities on 

tax returns, underpaying of taxes 

due from filed returns, and 

nonfiling of required tax returns 

altogether or on time. 

GAO was asked to provide 

information on (1) the estimated 

amount that each major type of 

noncompliance contributed to the 

2001 tax gap and IRS’s views on the 

certainty of its tax gap estimates, 

(2) reasons why noncompliance 

occurs, and (3) IRS’s approach to 

reducing the tax gap and whether 

the approach incorporates 

established results-oriented 

planning principles. 

What GAO Recommends

GAO recommends that IRS develop 

plans to periodically measure tax 

compliance with a focus on 

individual income tax 

underreporting; take steps to 

improve IRS data on the reasons 

taxpayers are not complying; and 

establish long-term, quantitative 

goals on the voluntary compliance 

levels, starting with individual 

income tax underreporting and 

total tax underpayment. 

In commenting on a draft of this 

report, IRS agreed with our 

recommendations. 
Page i GAO-05-753 Tax Compliance 

Letter 1

Results in Brief 3 

Background 4 

Scope and Methodology 6 

IRS Lacks Approved Plans to Regularly Measure Compliance, 

Including Underreporting Which Accounts for the Largest 

Portion of the Tax Gap 7 

IRS Has Concerns with Its Data on Reasons for Noncompliance but 

Does Not Have Firm or Specific Plans to Develop Better Data 17 

IRS’s Approach to Reducing the Tax Gap Focuses on Service and 

Enforcement but Lacks Long-term, Quantitative Compliance 

Goals and Measures That Are Consistent with Results-Oriented 

Management Principles 20 

Conclusions 26 

Recommendations for Executive Action 27 

Agency Comments and Our Evaluation 28 

Appendix I IRS Compliance Measurement Surveys 30 

Appendix II Detailed Tax Gap Estimates, Data Sources, and 

Level of Certainty 32 

Appendix III IRS Key Efforts to Reduce the Tax Gap 34 

Appendix IV Comments from the Internal Revenue Service 35 

Appendix V GAO Contact and Staff Acknowledgments 39 

Tables 

Table 1: IRS’s Preliminary Tax Year 2001 Gross Tax Gap Estimates 

by Type of Noncompliance and Type of Tax 7 

Contents 
Page ii GAO-05-753 Tax Compliance 

Table 2: Data Sources for IRS’s Preliminary Tax Year 2001 Tax Gap 

Estimates by Type of Noncompliance and Type of Tax, and 

IRS’s Level of Certainty in the Estimates 10 

Table 3: Types of Surveys by Return Type and Year 30 

Table 4: IRS’s Preliminary Tax Year 2001 Gross Tax Gap Estimates, 

Data Sources, and Level of Certainty by Tax Gap 

Component and Type of Tax 32 

Abbreviations 

DCE detection controlled estimation 

EITC Earned Income Tax Credit 

GAO Government Accountability Office 

GPRA Government Performance and Results Act of 1993 

IRS Internal Revenue Service 

NRP National Research Program 

SOI Statistics of Income 

TCMP Taxpayer Compliance Measurement Program 

TY Tax Year 

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Page 1 GAO-05-753 Tax Compliance 

July 18, 2005 

The Honorable Charles Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 

The federal tax system relies on taxpayers to voluntarily comply with the 

tax laws. However, a gap arises each year between what taxpayers pay 

accurately and on time in taxes and what they should pay under the law. 

Recognizing the need for current compliance data to update the tax gap 

estimate, the Internal Revenue Service (IRS) implemented a new 

compliance study in 2002 called the National Research Program (NRP) to 

produce such data for tax year 2001 while reducing taxpayer burden.1

 NRP 

is a significant achievement and its data should be valuable in improving 

IRS operations and for other uses. 

Incorporating preliminary results from NRP, IRS recently estimated a 

“gross” tax gap from $312 billion to $353 billion for tax year 2001.2

 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.3

 The tax gap estimate is 

an aggregate of estimates for the three primary types of noncompliance:4

(1) underreporting of tax liabilities on tax returns; (2) underpaying of 

taxes due from filed returns; and (3) nonfiling, which refers to the failure 

to file a required tax return altogether or on time. 

 1

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

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

2

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

as ranges. 

3

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

otherwise noted. 

4

Estimates for each type of noncompliance include estimates for some or all of the five 

types of taxes that IRS administers—individual income, corporate income, employment, 

estate, and excise taxes. Throughout this report, references to the tax gap estimate refer to 

the aggregate estimate, unless otherwise noted. 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-05-753 Tax Compliance 

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. 

Given your concern over the burden that the tax gap places on both the 

taxpayers who voluntarily pay their taxes and the federal budget, we 

testified before the Senate Committee on Finance on April 14, 2005, on a 

number of tax-gap-related issues.5

 As you requested, this report elaborates 

on the testimony by providing additional information on (1) the estimated 

amount that each major type of noncompliance contributed to the 2001 tax 

gap and IRS’s views on the certainty of its tax gap estimates, (2) reasons 

why the noncompliance occurs, and (3) IRS’s approach to reducing the tax 

gap and whether the approach incorporates established results-oriented 

planning principles. 

To provide information on the estimated amount that each type of 

noncompliance contributed to the 2001 tax gap, we reviewed IRS’s tax gap 

estimates for 2001. To determine IRS’s views on the certainty of its tax gap 

estimates, we reviewed IRS studies and interviewed IRS research officials 

about tax gap estimation. We reviewed IRS, academic, and our prior work 

and interviewed IRS officials in an attempt to identify the various reasons 

for taxpayer noncompliance. To determine IRS’s approach to reducing the 

tax gap and whether the approach incorporates established resultsoriented planning principles, we examined IRS’s strategic and 

performance plans and interviewed IRS officials. We asked IRS to identify 

its key efforts to reduce the tax gap as well as the related rationales, goals, 

and results. Using what we learned about IRS’s approach, we determined 

the extent to which the approach incorporated selected planning 

principles consistent with the Government Performance and Results Act 

of 1993 (GPRA).6

 We conducted our review from June 2004 through May 

2005 in accordance with generally accepted government auditing 

standards. 

 5

GAO, 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). 

6

Pub. L. No. 103-62 (1993).
Page 3 GAO-05-753 Tax Compliance 

For the 2001 gross tax gap estimate of about $312 billion to $353 billion, 

IRS estimated in March 2005 that underreporting accounted for about $250 

billion to $292 billion while underpayment and nonfiling accounted for 

about $32 billion and $30 billion, respectively. The actual tax gap could be 

higher or lower due to various factors that affect IRS’s certainty of the 

estimate. For example, due to a lack of reliable data, IRS’s estimate does 

not include some types of noncompliance, such as corporate income tax 

nonfiling. Also, IRS is concerned with some of the outdated data and 

methodologies used to estimate the tax gap. Finally, it is difficult for IRS to 

identify and measure noncompliance, such as underreported income, 

when IRS has little or no information from third parties about payments 

made or taxes withheld. IRS is taking some steps, such as updating the 

data and methodology for estimating individual income tax 

underreporting, that IRS intends to use to revise the preliminary tax gap 

estimate during 2005. While IRS has proposed a schedule for NRP studies 

over the next several years, it has no approved plans to regularly measure 

tax compliance, the results of which it could use to update the tax gap 

estimate, identify new or growing areas of noncompliance, and make 

informed decisions about resource allocations to address noncompliance. 

IRS has concerns about its data on the reasons why taxpayers do not 

comply with tax laws. Taxpayer noncompliance can be unintentional or 

intentional in various ways. For example, taxpayers might unintentionally 

err on their tax returns because they misunderstand the laws or guidance 

explaining compliance requirements, or improperly omit income from 

their returns based on poor advice from tax practitioners. Alternatively, 

taxpayers may intentionally omit income from their tax returns to evade 

taxes. IRS captures data on the various unintentional and intentional 

reasons for noncompliance during examinations of tax returns. IRS is 

concerned with the reliability of the data since, for example, some 

examiners have assigned the same reason for all noncompliance, 

regardless of the situation. Also, determining taxpayer intent—whether the 

noncompliance is unintentional or intentional—can be difficult. Although 

IRS is developing a system intended to capture better examination data, 

IRS has no firm or specific plans to develop better data on the reasons 

why taxpayers do not comply, through steps such as improved data entry 

controls and examiner training. Without such data, it is more difficult for 

IRS to decide whether its efforts to address specific areas of 

noncompliance should focus on nonenforcement activities, such as 

improved forms or publications, or enforcement activities. 

IRS’s approach to reducing the tax gap includes improving taxpayer 

service to increase voluntary compliance and enhancing enforcement of 

Results in Brief 
Page 4 GAO-05-753 Tax Compliance 

tax laws by detecting and addressing noncompliance, but does not 

incorporate some steps consistent with results-oriented management. To 

support this approach, IRS has established two broad strategic goals and 

identified over 40 related key efforts, which include using direct 

enforcement actions to address high-income nonfilers and using analytical 

models to pursue higher priority collection cases. However, IRS has not 

established long-term, quantitative compliance goals and regularly 

collected data to track progress in reducing the tax gap, which would 

complement its current, important compliance efforts. Establishing longterm, quantitative compliance goals and measuring progress towards them 

offer several benefits to both IRS and external stakeholders and would be 

consistent with the performance management principles set forth in 

GPRA. Although IRS faces challenges in implementing a results-oriented 

management approach to reducing the tax gap, IRS’s recently collected 

compliance data provide an improved foundation for setting compliance 

goals and reexamining programs intended to reduce the tax gap. 

We are making recommendations that IRS develop plans to periodically 

measure tax compliance, take steps to improve its data on the reasons 

why taxpayers do not comply, and establish long-term, quantitative goals 

for voluntary compliance levels with a focus on individual income tax 

underreporting and total tax underpayment. Taken together, these steps 

can help IRS build a foundation to understand how its taxpayer service 

and enforcement efforts affect compliance, improve the efforts, and make 

progress on reducing the tax gap. The Commissioner of Interval Revenue 

agreed with our recommendations, highlighted challenges associated with 

them, and commented on various steps IRS would take to implement each 

recommendation. 

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

compliance—the degree to which taxpayers fully complied with their tax 

obligations. IRS uses such compliance data, along with other data and 

assumptions, to estimate the dollar amount of taxes not paid accurately 

and on time. For tax year 2001, IRS estimated that from 83.4 percent to 85 

percent of owed taxes were paid voluntarily and on time, and that from 

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

IRS also estimates the amount of the gross tax gap 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 

Background 
Page 5 GAO-05-753 Tax Compliance 

eventually recover about $55 billion for a net tax gap from $257 billion to 

$298 billion. As we have reported in the past,7

 closing the entire gap may 

not be feasible since it could entail more intrusive recordkeeping or 

reporting than the public is willing to accept or more resources than IRS is 

able to commit. However, given the size of the tax gap, even modest 

reductions would yield very significant financial benefits. 

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 

studies after 1988 because of concerns about costs and burdens on 

taxpayers.8

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 (see app. I for a list of conducted TCMP and NRP 

surveys). Unlike with TCMP studies, IRS did not need to contact taxpayers 

for every tax return selected under NRP, handled some taxpayer contacts 

through correspondence rather than face-to-face examinations, and 

generally only asked taxpayers to explain information that it was 

otherwise unable to verify through IRS and third-party databases. In 

addition, unlike operational examinations, NRP examinations were 

randomly selected and used to measure compliance rather than target 

suspected noncompliance. 

IRS has a strategic planning process through which it supports decisions 

about strategic goals, program development, and resource allocation. 

Under GPRA,9

 agencies are to develop strategic plans as the foundation for 

results-oriented 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 

 7

GAO, Taxpayer Compliance: Analyzing the Nature of the Income Tax Gap, 

GAO/T-GGD-97-35 (Washington, D.C.: Jan. 9, 1997). 

8

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

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

9

Pub. L. No. 103-62 (1993).
Page 6 GAO-05-753 Tax Compliance 

goals. GPRA requires federal agencies to establish measures to determine 

the results of their activities. 

To provide information on the estimated amount that each major type of 

noncompliance contributed to the 2001 tax gap, we reviewed IRS’s tax gap 

estimate for 2001. To determine IRS’s views on the certainty of its 

estimate, we reviewed IRS studies about tax gap estimation and 

interviewed IRS research officials to understand the data and 

methodologies used. We also spoke with IRS officials regarding planned 

changes to the data sources and estimation methodologies for the tax gap 

estimate. We determined that the tax gap estimates presented in this 

report are sufficiently reliable for the specific purposes of our 

engagement, particularly since IRS already has publicly released its tax 

gap estimates and disclosed their weaknesses. These purposes include 

discussing the major tax gap components and the orders of magnitude for 

various components, IRS’s concerns about the certainty of its estimates, 

and our recommendations on IRS’s compliance data and efforts. 

We reviewed IRS, academic, and our own reports and interviewed IRS 

officials to identify the various reasons for noncompliance. We talked with 

IRS officials to determine the extent and reliability of data and coding on 

the reasons for noncompliance, and reviewed IRS’s Examination 

Operational Automation Database, which is a database of tax return 

examination results that includes examiners’ determinations of the 

reasons for any noncompliance. We also talked with IRS officials to 

determine any plans to develop better data on reasons for noncompliance. 

To determine IRS’s approach to reducing the tax gap and whether the 

approach incorporates established results-oriented planning principles, we 

reviewed IRS strategic and performance plans and interviewed IRS 

strategic planning officials at the agency and operating division levels. We 

asked IRS to identify its key efforts to reduce the tax gap as well as the 

related rationales, goals, and results. As part of our work on whether the 

approach incorporates established results-oriented planning principles, we 

used what we learned about IRS’s approach to determine the extent to 

which it incorporated selected planning principles consistent with GPRA’s 

requirements. For purposes of this review, we focused on elements of 

results-oriented planning that, previously, we found common to leading 

organizations successfully pursuing results-oriented management–defining 

Scope and 

Methodology 
Page 7 GAO-05-753 Tax Compliance 

desired results, measuring performance, and using performance 

information to support agency missions.10

IRS estimates that underreporting of taxes accounted for about $250 

billion to $292 billion of the $312 billion to $353 billion tax gap for 2001, 

while underpayment and nonfiling accounted for about $32 billion and $30 

billion, respectively. The actual tax gap could be higher or lower due to 

various factors that affect the certainty of the estimate, such as old 

compliance data. IRS is taking some steps designed to improve portions of 

its compliance measurement efforts and its preliminary tax gap estimate 

and plans to release a revised tax gap estimate by the end of 2005. While 

IRS has proposed a schedule for NRP studies over the next several years, 

IRS has no approved plans to regularly measure tax compliance, which it 

could use to update the tax gap estimate and guide its compliance efforts. 

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). 

Table 1: IRS’s Preliminary 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 $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. 

 10GAO, Executive Guide: Effectively Implementing the Government Performance and 

Results Act, GAO/GGD-96-118 (Washington, D.C.: June 1996). 

IRS Lacks Approved 

Plans to Regularly 

Measure Compliance, 

Including 

Underreporting Which 

Accounts for the 

Largest Portion of the 

Tax Gap 

Underreporting Accounted 

for Most of the Tax Gap 

Estimate 
Page 8 GAO-05-753 Tax Compliance 

Within the underreporting estimate, IRS attributed about $150 billion to 

$187 billion, or about 50 percent of the total tax gap, to individual income 

tax underreporting, including underreporting of business income, such as 

sole proprietor,11 informal supplier,12 and farm income (about $83 billion to 

$99 billion); nonbusiness income, such as wages, interest and capital gains 

(about $42 billion to $57 billion); overstated income adjustments, 

deductions, and exemptions (about $14 billion to $16 billion); and 

overstated credits (about $11 billion to $14 billion). Underreporting of 

corporate income tax contributed an estimated $30 billion, or about 10 

percent, to the 2001 tax gap, which included both small corporations 

(those reporting assets of $10 million or less) and large corporations 

(those reporting assets of over $10 million). (For a more detailed table of 

IRS’s estimates for the various components of the 2001 tax gap, see app. 

II). 

Employment tax underreporting accounted for an estimated $66 billion to 

$71 billion, or about 20 percent, of the 2001 tax gap and included several 

taxes that must be paid by self-employed individuals and employers. Selfemployed individuals are generally required to calculate and remit Social 

Security and Medicare taxes to the U.S. Treasury each quarter. Employers 

are required to withhold these taxes from their employees’ wages, match 

these amounts, and remit withholdings to Treasury at least quarterly. 

Underreported self-employment13 and employer-withheld employment 

taxes respectively contributed an estimated $51 billion to $56 billion and 

$14 billion to IRS’s tax gap estimate. The employment tax underreporting 

estimate also includes underreporting of federal unemployment taxes 

(about $1 billion). 

 11Sole proprietors are self-employed individuals who should file a Schedule C with their 

individual tax return to report profits and losses from their business. 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. 

12Informal 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 a Schedule C. 

13As employment taxes and income taxes for self-employed taxpayers are largely assessed 

on the same income, self-employed individuals who underreport their income consequently 

underreport the employment tax due on that income. 
Page 9 GAO-05-753 Tax Compliance 

Although a significant portion of IRS’s new tax gap estimate is based on 

recent compliance data, IRS has concerns with the certainty of the overall 

tax gap estimate in part because of incomplete and old data, outdated 

methodologies, and measurement difficulties. Table 2 shows IRS’s 

certainty level in the estimates, as well as the underlying data sources.14

 14 For a discussion of the data sources IRS used to estimate the tax gap, see Internal 

Revenue Service, Understanding the Tax Gap, FS-2005-14 (March 2004), 

http://www.irs.gov/newsroom/article/0,,id=137246,00.html (downloaded Mar. 30, 2005); 

Internal Revenue Service, Federal Tax Compliance Research: Individual Income Tax Gap 

Estimates for 1985, 1988, and 1992, Publication 1415 (Rev. 4-96) (Washington, D.C.: Apr. 

1996); and Robert E. Brown and Mark J. Mazur, IRS’s Comprehensive Approach to 

Compliance Measurement (Washington, D.C.: June 2003), http://www.irs.gov/pub/irssoi/mazur.pdf (downloaded June 6, 2005). 

IRS’s 2001 Tax Gap 

Estimate Is Inexact Due to 

Incomplete and Old Data, 

Outdated Methodologies, 

and Inherent Measurement 

Difficulties 
Page 10 GAO-05-753 Tax Compliance 

Table 2: Data Sources for IRS’s Preliminary Tax Year 2001 Tax Gap Estimates by Type of Noncompliance and Type of Tax, 

and IRS’s Level of Certainty in the Estimates 

Type of noncompliance and 

type of tax Estimate data source(s) 

IRS certainty 

level 

Underreporting —c

Individual income tax • Tax Year (TY) 2001 NRP Survey 

• TY 1988 and earlier TCMP studies 

• 1981, 1985-6 University of Michigan surveys on informal suppliers 

• 1984 University of Illinois study on tip income 

—c

Corporate income tax • TY 1977 and 1980 TCMP surveys (only for small corporations) 

• Operational examinations (only for mid-sized and large corporations) – 

averaged over 3 years in the mid-1980s 

• TY 1982 TCMP study of unrelated business income tax of tax-exempt 

organizations 

• TY 1975 TCMP study on fiduciaries 

Weaker 

Employment tax • TY 2001 NRP Survey 

• TY 1984 withholding noncompliance study 

• 1981 and 1985-6 University of Michigan surveys on informal suppliers 

• 1984 University of Illinois study on tip income 

—c

Estate tax • IRS’s Statistics of Income (SOI) program data for filed estate tax returns for 

TY 1992 

Reasonable 

Excise tax • No estimate Not applicable 

Underpayment (all types of 

tax)a

• IRS Master File Actual figures 

NonfilingbReasonable 

Individual income tax • TY 1988 Nonfiler (TCMP) Reasonable 

Corporate income tax • No estimate Not applicable 

Employment tax • No estimate Not applicable 

Estate tax • 2 University of Michigan longitudinal surveys (begun in 1992 and 1993 and 

interviews participants every 2 years) 

• TY 1992 IRS’s SOI 

Reasonable 

Excise tax • No estimate Not applicable 

Source: IRS. 

a

 Unlike the other components of the 2001 tax gap, the underpayment component is not an estimate, 

but rather represents the tax amounts that taxpayers reported on time, but did not pay on time. 

b

 IRS’s nonfiler estimate for individual income tax is net of amounts of true tax liability that are paid on 

time (e.g., through withholding). Refunds that are due to nonfilers do not reduce the nonfiling gap, 

since they are not associated with a tax liability. 

c

 These estimates are based on more recent NRP data, but IRS has not finalized the certainty level 

for these estimates because it has not yet completed its assessment of the quality of the NRP data. 
Page 11 GAO-05-753 Tax Compliance 

As table 2 shows, IRS’s estimate for the 2001 tax gap does not include 

estimates of excise tax underreporting and nonfiling. According to IRS, the 

reason for this omission is that numerous federal excise taxes, many of 

which have specific exclusions or varying applications, complicate excise 

tax computations. Further, data on excise tax transactions are typically 

maintained at the state level and are often incomplete. Also, according to 

an IRS research official, the estimate does not include corporate income 

tax and employment tax nonfiling because IRS lacks good, representative 

data for corporate and employment tax nonfilers. Further, data from IRS’s 

operational programs to identify nonfilers exclude those whom IRS does 

not know about and do not include the full tax liability of nonfilers whom 

IRS has identified. 

The 2001 tax gap estimate also does not include any estimates for taxes 

due from illegal source income, as the magnitude of such income is 

difficult to estimate.15 Moreover, the federal government seeks to eliminate 

most illegal activities altogether, rather than derive revenue from these 

activities.16

Old data also contribute to IRS’s “weaker” level of certainty for certain 

segments of the underreporting portion of its 2001 tax gap estimate. For 

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

underreporting of corporate income taxes and employer-withheld 

employment taxes. For large corporate income tax underreporting, IRS 

based its estimate on the amount of tax recommended from operational 

examinations rather than the tax ultimately assessed as part of the total 

tax liability. According to IRS officials, IRS relies on the amount of tax 

recommended because it is difficult to determine the true tax liability of 

large corporations due to complex and ambiguous tax laws that create 

opportunities for differing interpretations and that complicate the 

determination. These officials further stated that because these 

examinations are not randomly selected and are not focused on identifying 

all tax noncompliance, the estimate produced from the examination data 

is not representative of the tax gap for all large corporations. They also 

explained that due to these complexities and the costs and burdens of 

collecting complete and accurate data, IRS has not systematically 

measured large corporation tax compliance through statistically valid 

 15Illegal source income may include drugs, illegal gambling, prostitution, etc. 

16IRS’s Criminal Investigation division pursues illegal activities that have tax consequences, 

but does not measure the revenue generated by the cases it pursues. 

Tax Gap Estimate Is 

Incomplete 

Estimates for Some 

Components of the Tax Gap 

Are Based on Old Data 
Page 12 GAO-05-753 Tax Compliance 

studies, even though the officials acknowledged that such studies would 

be useful in estimating the related tax gap.17

Further, some methodologies IRS used to estimate the tax gap are based 

on older data and contribute to the uncertainty surrounding the tax gap 

estimate. For example, because IRS knew that it would not detect all 

underreporting noncompliance, IRS multiplied the detected amounts of 

underreporting to help calculate a total estimate for underreported 

individual income tax. IRS officials explained that they used a number of 

“multipliers,” including one derived from the 1976 TCMP study of 

individual tax returns, which was before IRS expanded and improved its 

computer matching programs to better detect various types of 

underreported income.18 In addition, IRS estimated individual income tax 

nonfiling based on the assumption that the relationship between individual 

income nonfiling and underreporting has been constant since the 1988 

TCMP survey was conducted. 

Finally, it is inherently difficult for IRS to observe and measure some types 

of underreporting or nonfiling. For example, underreporting of income or 

nonfiling of tax returns by informal suppliers can be hard for IRS to detect 

because the tax laws generally do not require third parties to withhold 

income tax or file information returns on payments made to informal 

suppliers, as are required with other types of individuals such as wage 

earners. Similarly, academic studies have discussed the difficulty in 

tracking cash payments that businesses make to their employees, as 

businesses may not report these payments to IRS in order to avoid paying 

employment taxes and employees may not report these payments on their 

income tax return to avoid paying income taxes. 

 17GAO, Tax Administration: Compliance Measures and Audits of Large Corporations 

Need Improvement, GAO/GGD-94-70 (Washington, D.C.: Sept. 1, 1994); Tax 

Administration: Factors Affecting Results from Audits of Large Corporations, 

GAO/GGD-97-62 (Washington, D.C.: Apr. 17, 1997); 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). 

18IRS’s computer matching programs use third-party information documents to verify 

information reported on tax returns. IRS established the multiplier by comparing the 

amount of income detected through TCMP examinations conducted without information 

documents and matching the income detected with the aid of these tools. 

Tax Gap Estimates Are 

Affected by Outdated 

Methodologies 

Tax Gap Is Inherently Difficult 

to Estimate 
Page 13 GAO-05-753 Tax Compliance 

IRS is taking several steps that could improve the preliminary tax gap 

estimate for tax year 2001. IRS intends to publish a revised tax gap 

estimate by the end of 2005 based on the results of these steps. 

For example, IRS officials stated that IRS plans to further analyze the 

preliminary NRP results in an attempt to improve the certainty of the 

estimate. NRP is a significant achievement and its data should be valuable 

in improving IRS operations and for other uses. However, those officials 

added that because IRS is still assessing the quality of the NRP data, it has 

not yet finalized the certainty levels for the preliminary estimates for 

individual income tax and self-employment tax underreporting. Likewise, 

we cannot yet be certain about the quality of the NRP data collected 

because IRS is still assessing the data. 

IRS plans to implement three changes to its estimation methodology for its 

revised tax gap estimate. Although it is too soon to know whether these 

changes will improve the estimate, IRS expects that the changes will help 

address known methodological weaknesses. According to IRS, these 

changes include the following: 

• IRS plans to replace the multiplier it derived in the 1970s and used to 

estimate individual income tax underreporting. IRS is developing a new 

methodology, known as detection controlled estimation (DCE). DCE is a 

regression-based model that will use 2001 NRP data and control for 

variables that could affect the amount of underreporting detected.19

• IRS plans to develop a new technique as well as replace the data from the 

1981 and 1985-1986 University of Michigan surveys to estimate the 

individual income tax underreporting portion of the tax gap attributable to 

informal suppliers. 

• IRS intends to update its estimate of individual income tax nonfiling, 

which is currently based on 1988 nonfiler TCMP data, by using “Exact 

Match” data provided by the U.S. Census Bureau.20 Census will match data 

from its Current Population Survey against the IRS Master Files to identify 

the extent of nonfiling by individual taxpayers. The Census data to be 

provided to IRS will be aggregated and not contain information on specific 

individuals. 

 19 By fall 2005, IRS plans to have determined which variables to include in the DCE model. 

20IRS has used “Exact Match” data for past tax gap estimates. 

IRS Plans to Issue a 

Revised Tax Gap Estimate 

but Has No Approved 

Plans to Regularly Collect 

Compliance Data 
Page 14 GAO-05-753 Tax Compliance 

In addition, IRS research officials are planning a compliance measurement 

study that will allow IRS to update underreporting estimates involving 

flow-through entities. This study, which IRS intends to begin in October 

2005, would take 2 to 3 years to complete. Because individual taxpayers or 

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

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

individual and corporate income tax. 

While these data and methodology updates could improve the tax gap 

estimates, IRS has no approved plans to periodically collect more and 

better compliance data over the long term beyond the study of flowthrough entities. IRS Research officials said that they recently proposed a 

schedule for additional NRP studies over the next several years. However, 

these officials also said this proposal is under consideration but has not 

been finalized. IRS has indicated that given its current research priorities, 

it could not begin another NRP study of individual income tax returns 

before 2008, at the earliest, and would not complete such a study until at 

least 2010. 

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 (or revenue that IRS potentially forgoes 

by examining randomly selected returns, which are more likely to include 

returns from compliant taxpayers than returns selected because they are 

likely to contain noncompliance that would produce additional tax 

assessments). 

Regularly measuring compliance can offer many benefits, including 

helping IRS identify new or growing types of noncompliance, identify 

changes in tax laws and regulations that may improve compliance, more 

effectively target examinations of tax returns, understand the 

effectiveness of its programs to promote and enforce compliance, and 

determine its resource needs and allocations.21 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, 

 21GAO, Tax Administration: IRS’ Plans to Measure Tax Compliance Can Be Improved, 

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

Regularly Measuring 

Compliance Can Be 

Beneficial, but 

Determining the 

Frequency of 

Measurement Involves 

Considering Several 

Factors 
Page 15 GAO-05-753 Tax Compliance 

taxpayers claimed about 5 million fewer dependents on their returns than 

would have been expected without the change in law. 

Tax compliance data are useful outside of IRS as well. Other federal 

agencies and offices use compliance data for tax policy analysis, revenue 

estimating, and research. For example, the Department of Commerce’s 

Bureau of Economic Analysis had used TCMP data to adjust its national 

income and product accounts.22 Additionally, state tax authorities have 

used IRS compliance data to develop state compliance programs and 

estimate state tax gaps. Also, policy makers in the executive branch and 

Congress can use the results from compliance measurement studies to 

help decide on appropriate funding levels for IRS. 

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.23 According to IRS, without current compliance 

data, it has limited capability to determine key areas of noncompliance to 

address and actions to take to maximize the use of its limited resources. 

For example, the formulas that IRS creates from compliance data to select 

returns for examination have enabled IRS to focus examination resources 

on noncompliant returns rather than burdening compliant taxpayers. 

When IRS updated the formulas in the early 1990s with compliance data 

from the 1988 TCMP, IRS selected a lower percentage of compliant tax 

returns for examination. However, after 3 years of using formulas based 

on the 1988 data, the percentage of compliant tax returns examined 

increased each year through 1998, placing additional burdens on 

compliant taxpayers and leaving less time for IRS to examine 

noncompliant returns that resulted in an additional tax assessment. 

Historically, IRS has varied how frequently it measured compliance for 

particular types of taxpayers and taxes. As appendix I shows, the period 

between measurements of individual income tax reporting compliance, 

which consistently has accounted for the largest portion of the tax gap, 

never exceeded 4 years between 1963 and 1988. In planning the 2001 NRP 

to measure individual income tax compliance, IRS envisioned doing the 

NRP on a 3-year cycle. Appendix I also shows that IRS measured 

compliance less frequently for other types of taxpayers and taxes, such as 

 22 These accounts include measures of personal income that are used to allocate funds for a 

number of federal programs. 

23GAO/GGD-93-52. 
Page 16 GAO-05-753 Tax Compliance 

for small corporation income taxes, and that IRS never measured 

compliance for large corporations or for excise taxes. 

Although regularly measuring tax compliance can be beneficial, how often 

measurements should be made is a judgment that depends on many 

potential criteria including (1) the amount that a particular type of 

noncompliance is thought to contribute to the tax gap, (2) whether IRS has 

reason to believe that compliance may have changed (e.g., due to tax law 

changes), and (3) costs, particularly when IRS officials said that resources 

to conduct operational examinations are already limited. Using these 

criteria, IRS would likely vary the frequency of compliance measurement 

studies. Based on these criteria as well as our previous reports,24 decisions 

about compliance measurement would also be affected by the following 

factors. 

• Precision. The costs and benefits of measuring compliance can vary with 

how precisely IRS wishes to measure compliance to achieve an intended 

use (e.g., tax gap estimation or examination return selection). Obtaining 

more precise and more detailed compliance data for more detailed 

populations of taxpayers or tax issues (e.g., types of income or 

deductions) would likely be more costly but potentially more useful. 

• Capacity. Each compliance measurement study requires having enough 

resources such as staffing, training, tools, and systems to capture the data. 

Regular compliance measurement through smaller efforts targeted at 

particular types of taxpayers or taxes and sampling designs that collect 

data across consecutive tax years rather than for one year could help 

reduce costs and sustain long-term compliance measurement. 

 24GAO/GGD-93-52; GAO, Tax Compliance: Status of the Tax Year 1994 Compliance 

Measurement Program, GAO/GGD-95-39 (Washington, D.C.: Dec. 30, 1994); and GAO, Tax 

Administration: Alternative Strategies to Obtain Compliance Data, GAO/GGD-96-89

(Washington, D.C.: Apr. 26, 1996). 
Page 17 GAO-05-753 Tax Compliance 

Several factors concern IRS about its data on the reasons for 

noncompliance, which can be unintentional or intentional. Although IRS is 

developing a system intended to capture better examination data, IRS does 

not have firm or specific plans to develop better data on the reasons for 

noncompliance, even though the lack of such data makes it harder to 

decide whether it should address specific areas of noncompliance through 

nonenforcement efforts, such as designing clearer forms or publications, 

or enforcement efforts. 

IRS has concerns with its data on the unintentional and intentional 

reasons for noncompliance. Various types of unintentional or intentional 

reasons could explain why taxpayers fail to comply with the tax laws.25

Unintentional reasons can include being unaware of recordkeeping 

requirements, accidentally entering an item on the wrong line of a tax 

return, or following inaccurate advice from a tax practitioner. Intentional 

reasons for noncompliance can include intentionally omitting income from 

a tax return or interpreting vague tax laws to evade tax liability. 

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

during its operational examinations of tax returns.26 In many of these 

cases, it is difficult for examiners to determine a taxpayer’s intent–

whether the noncompliance is unintentional or intentional. Unless the 

evidence clearly points to the reason, the examiner would have to make 

subjective judgments about why the noncompliance occurred. IRS has a 

number of other concerns with the data: 

 25Academic research on the reasons for taxpayer noncompliance is fairly limited. That 

research includes a “typology of noncompliance,” developed by Robert Kidder and Craig 

McEwen, to describe the various categories of noncompliance. These categories include 

procedural (failure to follow rules on which forms to file); taxpayer laziness; classic tax 

cheating; brokered (involves use of a tax preparer); symbolic (due to perceived unfairness 

in the tax laws); and social (based on the extent that taxpayers believe others are 

complying with the law). See Robert Kidder and Craig McEwen, “Taxpaying Behavior in 

Social Context: A Tentative Typology of Tax Compliance and Noncompliance,” in Jeffrey A. 

Roth and John T. Scholz, Eds. Taxpayer Compliance, Volume 2: Social Science 

Perspectives (Philadelphia, Pa.: University of Pennsylvania Press, 1989). 

26 IRS also collected reason data in NRP, but we did not determine to what extent IRS’s 

concerns about the reason data from operational examinations also applied to NRP data. 

IRS Has Concerns 

with Its Data on 

Reasons for 

Noncompliance but 

Does Not Have Firm 

or Specific Plans to 

Develop Better Data 

IRS Has Concerns with Its 

Data on Reasons for 

Noncompliance 
Page 18 GAO-05-753 Tax Compliance 

• The database is incomplete because not all examination results, including 

data on reasons for noncompliance, were being entered into the 

database.27

• 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.28

• IRS has not trained all examiners to ensure consistent understanding and 

use of the various codes to indicate the reason for noncompliance. 

• The data do not represent the population of noncompliant taxpayers but 

rather only those who had their tax returns examined. 

According to IRS officials, the agency does not have firm or specific plans 

to develop better data on the reasons for noncompliance. One official 

explained that IRS decided not to improve the consistency of its current 

reason data because it is devoting its limited resources to other efforts, 

such as developing the Examination Desktop Support System (EDSS). 

Although this system is intended to allow examiners to capture better 

examination data, specific system features have not yet been identified to 

improve examiners’ selection of reason codes. IRS officials said that the 

system could be enhanced in the future to improve the reason data and 

that they plan to consider such enhancements. 

As the National Taxpayer Advocate recently testified,29 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 

 27 In October 2004, IRS started implementing a system to improve case processing and data 

capture, particularly for adjusted tax amounts. 

28 An IRS official said that managers are to review the accuracy of the data entry of 

examination results but that they do not know the extent to which managers actually 

review the entry of reason data. 

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

on Finance, April 14, 2005. 

IRS Does Not Have Firm or 

Specific Plans to Develop 

Better Data on Reasons for 

Noncompliance, which 

Could Help IRS’s Efforts to 

Address Tax 

Noncompliance 
Page 19 GAO-05-753 Tax Compliance 

activities to pursue intentional noncompliance. For example, taxpayers 

may unintentionally claim the Earned Income Tax Credit (EITC) because 

they do not understand the child residency requirements for this credit 

(i.e., a dependent must live with the taxpayer for more than half of the 

year). This type of unintentional noncompliance may require IRS to more 

clearly explain the EITC requirements within related forms and 

publications. However, other taxpayers may file false EITC claims with the 

intent of evading tax liability, which may suggest a strategy that relies on 

IRS’s enforcement programs and tools. Similar situations could exist for 

other tax code provisions. 

If IRS is to develop better data on the reasons for noncompliance, it will be 

important for IRS to consider factors in data collection such as the 

following. 

• Data reliability. To minimize examiner subjectivity and ensure that the 

data are complete and accurate, IRS would need to refine the reason 

categories, provide adequate training, establish system and data entry 

controls, and provide supervisory oversight. 

• Scope. IRS would need to decide whether the reason categories are to be 

captured for selected types of noncompliance or all types of 

noncompliance. 

• Examination selection. IRS currently collects reason data annually 

through hundreds of thousands of operational examinations. IRS also 

collected reason data through NRP. In the future, IRS would need to 

decide whether to collect reason data (1) during all operational 

examinations, (2) for a statistical sample of operational examinations, or 

(3) for examinations performed through periodic compliance studies such 

as NRP. Collecting data for a sample of examinations or through periodic 

compliance studies might be done with a smaller cadre of examiners 

specially trained and overseen to maximize consistency of decisions about 

the reasons why taxpayers are noncompliant. Also, data from samples of 

examinations could be used to generalize reasons for noncompliance for 

all examinations, and data from compliance studies of all taxpayers could 

be used to generalize these reasons for the population of taxpayers. 

Our past reports30 have supported the concept of rigorously researching 

the causes of noncompliance. Recognizing the benefits of better 

 30GAO, Tax Research: IRS Has Made Progress but Major Challenges Remain, 

GAO/GGD-96-109 (Washington, D.C.: June 5, 1996). 
Page 20 GAO-05-753 Tax Compliance 

compliance data, the National Taxpayer Advocate has also urged IRS to 

consider performing additional research into causes of noncompliance.31

IRS approaches tax gap reduction through improving service to taxpayers 

and enforcing tax laws and has established two broad strategic goals and 

related key efforts that are intended to support this approach. However, 

IRS has not established long-term, quantitative compliance goals and 

regularly collected data to track progress in reducing the tax gap, which 

would complement its current important compliance efforts. Establishing 

clear compliance goals and measuring progress towards them benefits 

both IRS and external stakeholders and are consistent with the resultsoriented performance management principles set forth in GPRA. Although 

IRS has lacked such data in the past and faces other challenges, NRP and 

EITC data provide an improved base for setting compliance goals and 

reexamining existing programs intended to reduce the tax gap. 

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

service to taxpayers and enhancing enforcement of the tax laws. Through 

efforts such as education and outreach programs, IRS seeks to improve 

voluntary compliance with the tax system by helping people understand 

their tax obligations. In addition, IRS attempts to simplify the tax process, 

such as by revising forms and publications to make them more easily 

understood by diverse taxpayer communities and electronically 

accessible. In conjunction with taxpayer service, IRS uses its enforcement 

authority to ensure that taxpayers are reporting and paying the proper 

amount of taxes. Through efforts such as examining tax returns and 

collaborating with state governments to share leads on abusive tax 

avoidance transactions, IRS seeks to detect and deter noncompliance. 

 31Testimony 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). 

IRS’s Approach to 

Reducing the Tax Gap 

Focuses on Service 

and Enforcement but 

Lacks Long-term, 

Quantitative 

Compliance Goals 

and Measures That 

Are Consistent with 

Results-Oriented 

Management 

Principles 

IRS Approaches Tax Gap 

Reduction through Broad 

Goals and Numerous 

Efforts to Improve 

Taxpayer Service and 

Enforce Tax Laws 
Page 21 GAO-05-753 Tax Compliance 

Two of IRS’s three strategic goals, along with their associated objectives 

and strategies, are intended to directly support this approach.32

• Goal 1—Improve Taxpayer Service—is intended to promote voluntary 

compliance. This goal has three objectives (1) improve service options for 

the tax paying public (2) facilitate participation in the tax system by all 

sectors of the public and (3) simplify the tax process. 

• Goal 2—Enhance Enforcement of the Tax Law—is intended to ensure, 

through IRS’s enforcement authority, that taxpayers are meeting their tax 

obligations. The four objectives for this goal are (1) discourage and deter 

noncompliance with emphasis on corrosive activity by corporations, highincome individual taxpayers, and other contributors to the tax gap; (2) 

ensure that attorneys, accountants, and other tax practitioners adhere to 

professional standards and follow the law; (3) detect and deter domestic 

and off-shore-based tax and financial criminal activity; and (4) deter abuse 

within tax-exempt and governmental entities and misuse of such entities 

by third parties for tax avoidance or other unintended purposes. To 

achieve these objectives, IRS has 15 strategies, such as “re-examine and 

adjust audit processes to target likely areas of noncompliance.” 

In addition to these goals, IRS’s service and enforcement efforts outlined 

in its strategic plan are also intended to support tax gap reduction. IRS’s 

strategic plan mentions over 60 service and enforcement efforts targeted 

at improving taxpayer compliance. Because the plan did not prioritize 

these efforts, we asked IRS officials to identify the key efforts in reducing 

the tax gap. In response, IRS provided over 40 key efforts. Enforcement 

efforts included pursuing high income nonfilers (taxpayers with income 

over $100,000 who have not filed a tax return) through direct enforcement 

actions and identifying higher priority collection cases through analytical 

models. Service, or nonenforcement, efforts included a taxpayer education 

program on tip reporting. (See app. III for a summary of the key efforts 

provided.) 

 32 Modernization objectives and strategies under Strategic Goal 3 are intended to support 

tax gap reduction by helping IRS manage its employee and technology resources effectively 

and efficiently. Because this goal helps IRS meet its service and enforcement goals, this 

report does not discuss the goal separately. 
Page 22 GAO-05-753 Tax Compliance 

IRS has developed a strategic planning and budgeting process33 to help the 

agency comply with GPRA requirements. However, IRS’s strategies for 

improving compliance generally lack a clear focus on long-term, 

quantitative goals and results measurement. IRS has established broad 

qualitative goals and strategies for improving taxpayer service and 

enhancing enforcement of the tax laws. 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,34 which are intended to gauge the progress of its strategies toward 

its broad goals. However, IRS does not collect recent data to update all of 

these compliance measures and has not established quantitative goals 

against which to compare the measures and judge any progress made 

through its compliance strategies. 

Although IRS has not focused on quantitative, results-oriented goals for 

improving voluntary compliance, IRS has established many output-related 

goals and measures that track activity level, such as the number of 

taxpayers contacted, collection cases closed, or returns examined. In 

contrast, IRS has fewer outcome-related goals and measures that track 

results, such as refund timeliness or examination quality. 

In the past, IRS had set a long-term goal of improving overall compliance 

to 90 percent by 2001. This goal was to be achieved through a research 

approach rooted in IRS’s Compliance 2000 philosophy.35 The Compliance 

2000 philosophy envisioned using nonenforcement efforts to correct 

unintentional noncompliance and reserving enforcement efforts for 

 33IRS implemented a new strategic planning, budgeting, and performance management 

process during fiscal year 2000. The process begins with the operating divisions preparing 

strategic assessments. After receipt and review of the strategic assessments, the 

commissioner provides detailed guidance to the operating divisions for developing their 

strategy and program plans. These plans are then incorporated into an IRS-wide 

performance plan (which sets out measurable objectives such as the number of audits to 

be done). These plans are, in turn, incorporated into IRS’s budget justification (which sets 

out its resource requests to Congress). The remaining steps involve allocating resources 

across IRS divisions and programs and monitoring division adherence to the planning and 

budgeting decisions. 

34Other 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. 

35GAO/GGD-96-109; GAO, Tax Administration: Compliance 2000—A Worthy Idea that 

Needs Effective Implementation, GAO/T-GGD-92-48 (Washington, D.C.: June 3, 1992). 

IRS’s Tax Gap Reduction 

Approach Does Not 

Establish Long-term, 

Quantitative Compliance 

Goals or Regular Data 

Collection to Measure 

Progress 
Page 23 GAO-05-753 Tax Compliance 

intentional noncompliance. To carry out this philosophy, in the early 

1990s, IRS initiated many research projects across IRS’s 63 district offices 

to identify noncompliant market segments, root causes for the 

noncompliance, and innovative ways to improve compliance. However, 

the lack of objective compliance data, among other factors, limited the 

success of this approach. Recently, external stakeholders, such as the IRS 

Oversight Board, have supported the concept of setting a numeric, longterm goal for increasing the voluntary compliance rate. 

In response to a President’s Management Agenda36 initiative to better 

integrate budget and performance information, IRS officials said that they 

are considering various long-term goals for the agency. IRS has not yet set 

a time frame for publicly releasing the goals.37 Nor have IRS officials 

indicated whether any goals will be related to improving taxpayer 

compliance or whether they will be quantitative and results-oriented. 

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, long-term, quantitative compliance goals offer several benefits for 

IRS, as discussed below. 

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 200738 has required enhancement of its technology, 

 36The 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. 

37 According to IRS officials, developing long-term, results-oriented goals is a complex 

process that requires sustained management commitment. These factors contribute to 

IRS’s uncertainty about when it will publicly release its goals. 

38Congress established this electronic filing goal in the IRS Restructuring and Reform Act of 

1998, Pub. L. No. 105-206 (1998). 

Long-term, Quantitative 

Compliance Goals and 

Measures Are Beneficial 

and Consistent with 

Results-Oriented 

Management Principles 
Page 24 GAO-05-753 Tax Compliance 

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 assess 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 highperforming organizations and incorporated into the statutory management 

framework Congress has adopted through GPRA. 

Not unlike other agencies we have reported on in the past,39 IRS faces 

challenges in implementing a results-oriented 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 its goals. However, having completed the NRP review 

of income underreporting by individuals, IRS now has an improved 

foundation for setting goals for improving taxpayers’ compliance.40

IRS’s effort to address noncompliance with the EITC provides an example 

of how a more data-driven planning approach can help IRS become more 

results-oriented over time.41 IRS’s most recent EITC compliance study 

estimated that between $8.5 billion and $9.9 billion, or between 27 percent 

and 32 percent, respectively, of the EITC claims filed for tax year 1999 

should not have been paid. Following the release of this study, a task force 

 39GAO, Results-Oriented Government: GPRA Has Established a Solid Foundation for 

Achieving Greater Results, GAO-04-38 (Washington, D.C.: Mar. 10, 2004). 

40The 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. 

41 GAO, Earned Income Tax Credit: Implementation of Three New Tests Proceeded 

Smoothly, but Tests and Implementation Plans Were Not Fully Documented, GAO-05-92

(Washington, D.C.: Dec. 30, 2004). 

Updated Compliance Data 

Provide Opportunities for 

IRS to Establish a More 

Results-Oriented Tax Gap 

Reduction Approach 
Page 25 GAO-05-753 Tax Compliance 

of IRS and Treasury officials determined the three leading types of errors 

that accounted for about $7 billion annually in overclaims. On the basis of 

compliance data and other research, IRS started an initiative to improve 

service, fairness, and compliance and designed specific corrective actions 

targeting the three types of errors. IRS is evaluating these actions to 

determine their effectiveness at reducing the overclaim rate in each of the 

three errors. Because IRS targeted its EITC effort based on data on the 

sources and extent of taxpayer errors, it was better able to determine what 

actions to take and how well, using systematic data collection and 

program evaluation, the effort is meeting its intended purpose. 

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. 

Although widespread agreement exists that IRS enforcement programs 

generally increase voluntary tax compliance, challenges such as collecting 

reliable compliance data, 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, make it 

difficult to estimate the effect of IRS’s enforcement and service activities. 

Even if IRS is unable to empirically estimate the extent to which 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. 

Recently, several research studies have offered insights to better 

understand the direct tax revenue effects of IRS’s activities as well as the 

indirect effects on voluntary tax compliance.42 IRS researchers have 

 42 Two 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. Economists have estimated the indirect effect of an 

examination on voluntary compliance to range between 6 and 12 times the amount of the 

proposed adjustment. 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.: Nov. 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,” 43 National Tax Journal, (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 26 GAO-05-753 Tax Compliance 

hypothesized that the indirect effect of an examination varies among 

taxpayer segments. Further, a recent study concluded that criminal 

investigations have positive direct and indirect tax effects. Although these 

studies generally indicate that IRS activities have positive tax effects, the 

magnitude of these effects is not yet known with a high level of confidence 

given compliance measurement challenges, as mentioned earlier. 

According to IRS, these studies serve as a valuable baseline for further 

research, but it has not yet determined how it will use these studies to 

make operational decisions. 

As discussed in our recent testimony on the tax gap before the Senate 

Committee on Finance, and underscored by IRS, periodic tax compliance 

measurement is critically important to IRS’s ability to estimate the tax gap 

and design compliance programs intended to reduce the tax gap. Without 

current, reliable compliance data, it can be difficult for IRS to monitor 

trends or identify new types of noncompliance, determine its compliance 

resource needs and how to allocate such resources, and justify budget and 

staffing requests to policy makers in Congress and the executive branch. 

Consequently, completion of NRP, which covered the largest portion of 

the tax gap and was designed and implemented with an eye to reducing 

the costs and burdens of data collection, is a substantial achievement. 

However, although IRS has recently proposed a schedule for future NRP 

studies, it has no approved plans to repeat this study or periodically 

measure compliance across the various components of the tax gap. Doing 

periodic compliance studies in areas that have previously been measured, 

such as individual income tax underreporting, would provide valuable 

information to support a more data-driven and risk-based approach 

towards improving compliance and reducing the tax gap. Although it may 

not be feasible or necessary to measure compliance for all components of 

the tax gap at the same frequency or with the same level of investment, 

where practical methodologies exist, periodic measurements should be 

taken. Where practical methodologies do not yet exist, such as for excise 

tax or for large corporations, looking for ways to overcome challenging 

compliance measurement difficulties would be worthwhile. 

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 do not wish to pay their fair share to 

support government programs. As such, collecting data on the reasons 

why noncompliance occurs can help IRS more effectively tailor its efforts 

to improve compliance. It can be difficult for IRS examiners to 

consistently determine the reasons why taxpayers have failed to comply 

Conclusions 
Page 27 GAO-05-753 Tax Compliance 

with the tax laws. However, IRS has no specific plans to address this issue 

and, as a result, is missing opportunities to gather better data than it 

already collects. Certain immediate steps, like improving reason codes, 

better training examiners in applying the codes, and possibly reducing the 

number of examiners who would be responsible for making judgments on 

the reasons taxpayers are noncompliant may improve the data IRS 

currently collects. Nevertheless, given the difficulty of consistently 

determining why taxpayers are noncompliant, sustained research on these 

reasons also would be needed to develop a better understanding. 

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. Without long-term, quantitative 

voluntary compliance goals and related performance measures, it will be 

more difficult for IRS to determine the success of its strategies, adjust its 

approach when necessary, and remain focused on results, especially since 

factors that affect compliance change over time. Having compliance goals, 

coupled with recently collected NRP data, would provide a solid base 

upon which IRS can develop a more strategic, results-oriented approach to 

reducing the tax gap. 

Taken together, these steps—periodically measuring compliance, 

determining the reason taxpayers are noncompliant, and setting resultsoriented long-term goals—can help IRS build a foundation to understand 

how its taxpayer service and enforcement efforts affect compliance, 

improve its efforts, and make progress on reducing the tax gap. 

To establish a stronger foundation for improving IRS’s efforts to reduce 

the tax gap, the Commissioner of Internal Revenue should do the 

following. 

• Develop plans to periodically measure tax compliance for areas that have 

been previously measured, such as for individual income tax 

underreporting, and study ways to cost effectively measure compliance for 

other components of the tax gap that have not been measured, such as for 

excise tax and large corporations. Those plans and that study should take 

into account risk management factors such as the amount the component 

contributes to the gap, changes that may have affected compliance levels 

since a measurement was last taken, and the cost of measuring 

compliance. 

Recommendations for 

Executive Action 
Page 28 GAO-05-753 Tax Compliance 

• Take steps to ensure that IRS regularly collects complete, accurate, and 

consistent data, to the extent possible, on the reasons taxpayers are 

noncompliant and that sufficient broader research is undertaken to 

continue learning about the reasons why noncompliance occurs. 

• Establish a long-term, quantitative voluntary compliance goal for 

individual income tax underreporting and for tax underpayment, as well as 

for other areas of noncompliance as data become available. 

The Commissioner of Internal Revenue provided written comments on a 

draft of this report in a letter dated July 6, 2005, which is reprinted in 

appendix IV. In the letter, the Commissioner agreed with our 

recommendations. In response to the recommendation that IRS develop 

plans to periodically measure tax compliance, the Commissioner 

recognized the need for and value of developing and regularly updating 

compliance measures for various taxpayer populations and said that IRS 

will continue to consult with stakeholders to develop and refine its 

compliance measurement plans. In response to our recommendation that 

IRS take steps to regularly collect complete, accurate, and consistent data 

on the reasons for noncompliance, the Commissioner agreed that a better 

understanding of taxpayer noncompliant behavior would be useful in 

shaping strategic priorities and defining efforts to improve compliance. He 

further said that the operating divisions will continue to partner with the 

IRS research community to identify and better understand specific reasons 

for noncompliance and that IRS will ensure that auditors are trained to 

properly apply reason codes in the new report-writing system IRS is 

developing. In response to the recommendation that IRS develop longterm quantitative compliance goals, the Commissioner agreed with the 

concept of developing such goals and discussed factors that make goalsetting challenging. We appreciate IRS’s current actions related to our 

recommendations and recognize the challenges involved in balancing a 

number of complex issues related to obtaining and using tax compliance 

data. 

As agreed with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from its 

issue date. At that time, we will send copies to the Chairman and Ranking 

Minority Member, House Committee on Ways and Means; the Secretary of 

the Treasury; the Commissioner of Internal Revenue; the Director, Office 

of Management and Budget; and other interested parties. We will make 

Agency Comments 

and Our Evaluation 
Page 29 GAO-05-753 Tax Compliance 

copies available to others on request. In addition, the report will be 

available at no charge on the GAO Web site at http://www.gao.gov/. 

If you or your staff have any questions, please contact me at (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 report. 

Key contributors to this report are listed in appendix V. 

Michael Brostek 

Director, Tax Issues 

Strategic Issues 
Appendix I: IRS Compliance Measurement 

Surveys 

Page 30 GAO-05-753 Tax Compliance 

The following table summarizes the Internal Revenue Service’s (IRS) 

efforts to measure voluntary compliance using TCMP surveys and the 

National Research Program (NRP) survey of individual income tax returns 

for tax year 2001. Years provided for individual income tax surveys refer to 

tax years. Years provided for surveys for all other types of tax refer to 

return processing years. 

Table 3: Types of Surveys by Return Type and Year 

Return type Year Sample size

Individual income tax 1963 92,000

 1965 50,000

 1969 53,000

 1971 26,000

 1973 55,000

 1976 50,000

 1979 55,000

 1982 50,000

 1985 50,000

 1988 54,000

 2001 46,000

Small corporations 1969 16,000

 1973 20,000

 1978 33,000

 1981 33,000

 1988 19,000

Estate returns 1971 4,600

Exempt organization returns 1974 11,400

 1979 20,000

 1988 3,000

Fiduciary returns 1975 8,900

Employee plan returns 1982 18,000

Partnership returns 1982 27,000

S corporation returns 1985 10,000

Delinquent returns—non farm business 1963 27,000

 1966 114,000

 1969 70,000

Delinquent returns—individual 1979 25,000

 1988 25,000

Appendix I: IRS Compliance Measurement 

Surveys 
Appendix I: IRS Compliance Measurement 

Surveys 

Page 31 GAO-05-753 Tax Compliance 

Return type Year Sample size

Surveys of delinquent accounts 1963 178,000

 1964 166,000

 1969 1,800,000

 1970 1,800,000

 1971 1,800,000

 1981 1,800,000

 1984 1,800,000

Source: GAO, Tax Administration: IRS’ Plans to Measure Tax Compliance Can Be Improved, GAO/GGD-93-52 (Washington, D.C.: 

Apr. 5, 1993); IRS, Understanding the Tax Gap, FS-2005-14, (March 2005). 
Appendix II: Detailed Tax Gap Estimates, 

Data Sources, and Level of Certainty 

Page 32 GAO-05-753 Tax Compliance 

The following table shows estimates for the various portions of the 

preliminary 2001 tax gap, the sources, including the age, of the data the 

Internal Revenue Service (IRS) used for these estimates, IRS’s level of 

certainty for each estimate, and areas for which IRS could not develop an 

estimate because of insufficient data. 

Table 4: IRS’s Preliminary Tax Year 2001 Gross Tax Gap Estimates, Data Sources, and Level of Certainty by Tax Gap 

Component and Type of Tax 

Tax gap component & 

type of tax 

Estimate 

dollars 

(in billions) Estimate data source(s) IRS certainty level 

Underreporting $250-$292 —c

Individual income tax $150-$187 • Tax Year (TY) 2001 National Research Program (NRP) 

• TY 1988 and earlier TCMP studies 

• 1981 and 1985-6 University of Michigan surveys of 

consumers (informal suppliers) 

• 1984 University of Illinois study of restaurants and other 

eating places (tip income) 

—c

Business income $83-$99 —c

Non-business income $42-$57 —c

Adjustments, 

deductions, 

exemptions 

$14-$16 —c

Credits $11-$14 —c

Corporation income tax $30 Weaker 

Large corporations $25 • Operational audits averaged over 1984, 1985, & 1986 

• TY 1982 TCMP study of unrelated business income tax of 

tax-exempt organizations 

• TY 1975 TCMP study on fiduciaries 

Weaker 

Small corporations $5 • TY 1977 and 1980 TCMP surveys Weaker 

Employment tax $66-$71 —c

Self-Employment tax $51-$56 • TY 2001 NRP 

• TY 1984 withholding noncompliance study 

• 1981 and 1985-6 University of Michigan surveys on informal 

suppliers 

—c

Employer-withheld 

employment tax 

(FICA) 

$14 • 1984 University of Illinois study on tip income 

• TY 1984 withholding noncompliance study 

Weaker 

Unemployment tax $1 • 1984 University of Illinois study on tip income 

• TY 1984 withholding noncompliance study 

Weaker 

Estate tax $4 • IRS’s Statistics of Income (SOI) associated with filed estate 

tax returns for TY 1992 

Reasonable 

Excise tax no estimate N/A N/A 

Appendix II: Detailed Tax Gap Estimates, 

Data Sources, and Level of Certainty 
Appendix II: Detailed Tax Gap Estimates, 

Data Sources, and Level of Certainty 

Page 33 GAO-05-753 Tax Compliance 

Tax gap component & 

type of tax 

Estimate 

dollars 

(in billions) Estimate data source(s) IRS certainty level 

Underpaymenta$31.7 IRS Master File Actual 

Individual income tax $19.4 IRS Master File Actual 

Corporation income tax $2.3 IRS Master File Actual 

Employment tax $7.2 IRS Master File Actual 

Estate tax $2.3 IRS Master File Actual 

Excise tax $0.5 IRS Master File Actual 

Nonfilingb$30 Reasonable 

Individual income tax $28 • TY 1988 Nonfiler TCMP Reasonable 

Corporation income tax no estimate N/A N/A 

Employment tax no estimate N/A N/A 

Estate tax $2 • 2 University of Michigan longitudinal surveys (begun in 1992 

and 1993 and interviews participants every 2 years) 

• TY 1992 IRS’s SOI 

Reasonable 

Excise tax no estimate N/A N/A 

Total $312-$353 

Source: IRS. 

Notes: Figures may not sum to totals due to rounding. N/A = not available. 

a

 Unlike the other components of the 2001 tax gap, the underpayment component is not an estimate, 

but rather represents the tax amounts that taxpayers reported on time, but did not pay on time. 

b

 IRS’s nonfiler estimate for individual income tax is net of amounts of true tax liability that are paid on 

time (e.g., through withholding). However, refunds that are due to nonfilers do not reduce the nonfiling 

gap, since they are not associated with a tax liability. 

c

 These estimates are based on more recent NRP data, but IRS has not finalized the certainty level 

for these estimates because it has not yet completed its assessment of the quality of the NRP data. 
Appendix III: IRS Key Efforts to 

Reduce the Tax Gap 

Page 34 GAO-05-753 Tax Compliance 

The Internal Revenue Service’s (IRS) strategic plan outlines, but does not 

prioritize, service and enforcement efforts to improve compliance. 

Therefore, we asked IRS officials to identify IRS’s key efforts to reduce the 

tax gap. IRS’s divisions provided lists that totaled 47 efforts, which are 

described in the following examples. 

The Small Business/Self-Employed Division identified 15 efforts such as 

models to identify higher priority collection cases to pursue, a computer 

matching program to identify underreported income, initiatives on high 

income nonfilers, attempts to improve tip income reporting, and efforts to 

identify abusive tax avoidance transactions. 

The Wage and Investment Division identified 7 efforts including various 

initiatives on tax collection, Earned Income Tax Credit, and using private 

contractors to collect certain types of tax debts. 

The Large and Mid-Sized Business Division identified 5 efforts such as 

identifying compliance risks, starting examinations sooner and doing them 

faster, and improving the treatment of abusive tax avoidance transactions. 

The Tax Exempt and Government Entities Division identified 8 efforts 

including abusive tax avoidance transactions in employee plans, abuses in 

tax-exempt bond financing, pension plan noncompliance, and abuses by 

credit counseling organizations. 

The Criminal Investigation Division identified 12 efforts including those 

involving questionable refunds, nonfilers, employment tax evasion, 

corporation fraud, and offshore abusive tax schemes. 

Appendix III: IRS Key Efforts to Reduce the 

Tax Gap 
Appendix IV: Comments from the Internal 

Revenue Service 

Page 35 GAO-05-753 Tax Compliance 

Appendix IV: Comments from the Internal 

Revenue Service 
Appendix IV: Comments from the Internal 

Revenue Service 

Page 36 GAO-05-753 Tax Compliance 
Appendix IV: Comments from the Internal 

Revenue Service 

Page 37 GAO-05-753 Tax Compliance 
Appendix IV: Comments from the Internal 

Revenue Service 

Page 38 GAO-05-753 Tax Compliance 
Page 39 GAO-05-753 Tax Compliance 

Michael Brostek, (202) 512-9110 

In addition to the contact named above, Jeff Arkin, Ralph Block, Elizabeth 

Curda, Elizabeth Fan, Evan Gilman, Shannon Groff, George Guttman, 

Michael Rose, Sam Scrutchins, and Tom Short made key contributions to 

ithis report. 

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Acknowledgments 

(450412) 
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