Joint Working Paper 

of the

Congressional Budget Office

and the 

Staff of the Joint Committee on Taxation

Factors Affecting Revenue Estimates of 

Tax Compliance Proposals

Janet Holtzblatt

Congressional Budget Office

janet.holtzblatt@cbo.gov

Jamie McGuire

Joint Committee on Taxation

jamie.mcguire@jct.gov

November 2016

CBO Working Paper 2016-05

JCX-90-16

To enhance the transparency of the work of the Congressional Budget Office and to encourage 

external review of it, CBO’s working paper series includes both papers that provide technical 

descriptions of official CBO analyses and papers that represent original, independent research by 

CBO analysts. Papers in this series are available at http://go.usa.gov/ULE. 

This work embodies work undertaken for the staff of the Joint Committee on Taxation, but as 

members of both parties and both houses of Congress comprise the Joint Committee on 

Taxation, this work should not be construed to represent the position of any member of the 

Committee.

The authors wish to thank Thomas Barthold, Mark Booth, Howard Gleckman, Teri Gullo, 

Jeffrey Kling, Emily Lin, John McClelland, Sam Papenfuss, Mary-Helen Risler, Bernard 

Schmitt, David Splinter, Robert Sunshine, Eric Toder, and Michael Udell for helpful comments 

and suggestions.
Abstract

This paper examines various factors that affect estimates made by the Congressional Budget 

Office and the staff of the Joint Committee on Taxation of the budgetary savings from tax 

compliance proposals. Affecting the current law baseline, against which proposed changes are 

measured, are the size of the tax gap and the amount of Internal Revenue Service (IRS) 

resources. Other considerations that affect the revenue estimates for either appropriation 

proposals or changes to the tax code include the distinction between detection and deterrence, the 

budget scorekeeping guidelines, and the constraints faced by the IRS when trying to obtain a 

higher return on investment from new initiatives than from the activities allowed under current 

law. In addition to those common considerations, there are factors unique to proposals to 

increase funding and to those that would expand the IRS’s enforcement tools allowed under the 

tax code. Those unique factors are illustrated by two examples—first, the Administration’s 

proposal to increase funding for IRS enforcement actions that was included in its fiscal year 

2016 budget submission and second, legislation enacted in 2016 to reduce identity fraud in the 

tax system.
1

From calendar years 2008 through 2010, the average annual tax gap—the difference between the 

total amount of federal taxes that taxpayers should have paid on or before the due date and the 

amount they actually paid on time—was $458 billion, according to estimates by the Internal 

Revenue Service (IRS).1 From the perspective of many commentators, closing the tax gap would 

help reduce the budget deficit, which totaled $587 billion in fiscal year 2016. (Unless otherwise 

indicated, all years referred to in this paper are federal fiscal years, which run from October 1 to 

September 30 and are designated by the calendar year in which they end.)

However, savings from compliance initiatives might not reduce the deficit as much as some 

commentators would hope.

2 The effects on both the deficit and the tax gap would be affected by 

the IRS’s ability to implement those initiatives given the agency’s available resources and 

taxpayers’ ability to adjust their behavior to continue evading taxes. Some proposals—such as 

those that would simplify the tax code or establish safe harbors—could increase the deficit even 

while reducing noncompliance. Budget scorekeeping guidelines also constrain the amount of 

savings that the Congressional Budget Office and the staff of the Joint Committee on Taxation 

(JCT) include in their estimates of the budgetary effects of compliance initiatives contained in 

legislative proposals.

Responsibility for estimating the revenue effects of compliance initiatives generally falls to CBO

when changes to the IRS’s appropriations are being considered and to JCT when proposals 

involve changes to the Internal Revenue Code. The two agencies often coordinate, in part 

because of the links between changes to the IRS’s authority and its resources.

This paper examines the various factors that affect the two organizations’ estimates of the 

budgetary savings from compliance proposals. Affecting the current law baseline, against which 

proposed changes are measured, are the size of the tax gap and the amount of IRS resources. 

Other considerations that affect the revenue estimates for either appropriations proposals or 

changes to the tax code include the distinction between detection and deterrence, the budget 

scorekeeping guidelines, and the constraints faced by the IRS when trying to obtain a higher

return on investment from new initiatives than from the activities allowed under current law. In 

addition to those common considerations, there are factors unique to proposals to increase 

funding and to those that would expand the IRS’s enforcement tools allowed under the tax code.

Those unique factors are illustrated by two examples—first, the Administration’s proposal to 

increase funding for IRS enforcement actions that was included in its fiscal year 2016 budget 

submission and second, legislation enacted in 2016 to reduce identity fraud in the tax system.

 1 Internal Revenue Service, Tax Gap Estimates for Tax Years 2008–2010 (April 2016), 

www.irs.gov/PUP/newsroom/tax%20gap%20estimates%20for%202008%20through%202010.pdf. 2 See, for example, Seth Hanlon, “Budget Bullets: The Tax Gap: A Big Part of Deficit Reduction Is Making Sure 

People and Corporations Pay the Taxes They Owe” (blog entry, July 13, 2011), 

www.americanprogress.org/issues/general/news/2011/07/13/9958/budget-bullets-the-tax-gap/.
2

Tax Gap

The tax gap includes shortfalls in individual income taxes, corporate income taxes, employment 

taxes, estate taxes, and excise taxes. The IRS periodically conducts studies to estimate the size of 

the tax gap. Those studies use data generated by the IRS’s National Research Program (NRP) 

and other sources. Findings from the most recent study covered the period from calendar years

2008 through 2010 and were released in April 2016.

Size of the Tax Gap

The IRS estimates that the annual gross tax gap, on average, was $458 billion from calendar 

years 2008 through 2010 (see Table 1). In some instances, taxpayers eventually paid some or all 

of the amounts that they owed to the IRS—either voluntarily but after the due date or as a result 

of the IRS’s enforcement activities. The annual net tax gap—after accounting for those late 

payments and enforcement—was $406 billion, on average. Adjusted for inflation, the gross and 

net tax gaps were, respectively, $504 billion and $447 billion in 2016 dollars.

3 With total tax 

liabilities of $2.5 trillion per calendar year, on average, during that three-year period, the 

voluntary compliance rate was 81.7 percent and the net compliance rate was 83.7 percent.4

In its analysis, the IRS examined the sources of the gross tax gap by type of tax, by category of 

error, and by degree of independent verification. The findings were similar to those in past 

reports: 

• The largest source of the tax gap was the individual income tax, followed by employment 

taxes and the corporate income tax. Those were also the three largest sources of federal 

revenues, ranked in the same order of magnitude.

• Underreporting of individual income tax liabilities was the largest component of the tax 

gap. About 16 percent of the gross tax gap was attributed to unfiled tax returns and 

underpayment of tax liabilities.

• Compliance was greatest for sources of income—such as wages and salaries—that are 

reported by employers and other payers to the IRS and for which taxes are also withheld 

by third parties. Noncompliance was greatest for income and tax preferences—including 

self-employment income—for which third-party information is not separately reported to 

the IRS and is very difficult to obtain. 

Both gross and net compliance rates fell relative to those in the previous compliance study of 

2006 tax returns—by 1.4 and 1.8 percentage points, respectively. The two studies were 

conducted at very different points in the business cycle—near the peak of the cycle for the 2006 

study and in the midst of a severe recession during the most recent study—which suggests a 

relationship between the state of the economy and tax compliance. However, the IRS attributes 

most of the decline in the estimates of compliance rates to changes in its methodology and 

 3 Dollar amounts were adjusted to remove the effects of inflation using the price index for personal consumption 

expenditures.

4 The voluntary compliance rate is the amount of tax voluntarily paid on time divided by total actual tax liability. 

The net compliance rate is the amount of tax paid, after accounting for late payments and enforcement, divided by 

total actual tax liability.
3

Table 1.

Gross and Net Tax Gaps, Selected Calendar Years

Billions of Dollars

Gross Tax Gap Net Tax Gap 

Current 

Dollars

2016 

Dollars 

Voluntary 

Compliance 

Rate 

(Percent)

Current 

Dollars 

2016 

Dollars 

Net 

Compliance 

Rate 

(Percent)

2001 345 451 83.7 290 379 86.3

2006 450 526 83.1 385 450 85.5

2008 to 2010 458 504 81.7 406 447 83.7

Source: Internal Revenue Service, Tax Gap Estimates for Tax Years 2008–2010 

(April 2016), 

www.irs.gov/PUP/newsroom/tax%20gap%20estimates%20for%202008%20through%202010.pdf;

and Internal Revenue Service, Tax Gap Map for Tax Year 2001 (February 2007),

www.irs.gov/pub/irs-utl/tax_gap_update_070212.pdf.

Amounts were adjusted to 2016 levels by using the price index for personal consumption expenditures.

inclusion of new tax gap components. As a result, the IRS does not find substantial evidence of 

an increase in noncompliance. Notably, the noncompliance rate is little changed from the rate in 

a similar study of 2001 tax returns.

Methodology

Measuring noncompliance presents challenges that the IRS’s studies cannot fully overcome.5 As 

a result, there probably are errors—in both directions—in the estimation of the tax gap.

Data Sources. The IRS researchers used several different types of data to estimate the 

components of the tax gap. For the major component of the tax gap—underreporting of 

individual income taxes—the IRS collected information each year from examinations of a 

random sample of about 13,000 taxpayers under the NRP. The main advantage of a random 

sample was that it included individuals who would not normally have been selected for a regular 

IRS audit—thus providing the IRS both with more information on compliant taxpayers as well as 

on noncompliant taxpayers who would not be identified through the existing IRS detection tools. 

 5 Brief discussions of the methodology used in the studies are found in Internal Revenue Service, Federal Tax 

Compliance Research: Tax Gap Estimates for Tax Years 2008–2010, Publication 1415 (May 2016), 

www.irs.gov/pub/irs-soi/p1415.pdf; Internal Revenue Service, Tax Year 2006 Tax Gap Estimate—Summary of 

Estimation Methods (January 2012), www.irs.gov/pub/newsroom/summary_of_methods_tax_gap_2006.pdf; Charles 

Bennett, “Preliminary Results of the National Research Program’s Reporting Compliance Study of Tax Year 2001 

Individual Returns,” in Justin Dalton and Beth Kliss, eds., Proceedings of the 2005 IRS Research Conference (IRS 

Research Bulletin, 2006), pp. 3–14, www.irs.gov/pub/irs-soi/05bennett.pdf; and Alan Plumley, Preliminary Update 

of the Tax Year 2001 Individual Income Tax Underreporting Gap Estimates, in Justin Dalton and Beth Kliss, eds., 

Proceedings of the 2005 IRS Research Conference (IRS Research Bulletin, 2006), pp. 15–25, www.irs.gov/pub/irssoi/05plumley.pdf.
4

Some of that advantage, however, was mitigated by the extent of communication with taxpayers. 

For the most complicated returns (for example, where self-employment income was reported),

the IRS conducted a full-scale audit, requiring either an in-office interview or a field audit 

(possibly at the taxpayer’s workplace) with an examiner or revenue agent reviewing most of the 

return. In many other cases, however, the IRS identified only a few questionable items on the tax 

return—such as a claim for a tax credit—and sent taxpayers a letter requesting documentation 

supporting their claim; no office visit was required. In the simplest cases, the IRS compared the 

taxpayers’ returns to information available from third parties and did not contact the taxpayers at 

all. Varying the degree of taxpayer interaction with the complexity of the return markedly 

reduced the study’s cost to the IRS as well as the burden imposed on taxpayers—especially those 

who were compliant and who would not typically be selected for an audit.

6 However, some 

errors—both overpayments and underpayments—would not have been detected through reliance 

solely on third-party information and correspondence audits. Relying only on information from 

third parties, for example, the IRS probably did not observe when taxpayers would have owed 

less than they paid if they had itemized their deductions rather than used the standard deduction 

or if they had not claimed tax credits for which they were eligible.

Estimates of other sources of noncompliance were based either on administrative data or the 

findings of earlier studies. For example, the IRS used administrative data from operational audits 

to estimate underreporting of corporate income taxes; unlike the examination of individuals, 

those companies were not selected randomly. Various econometric techniques are used to adjust 

for the statistical bias resulting from use of a nonrandom sample, but the IRS notes that there is 

considerable uncertainty about those results because of data limitations. Yet another approach 

was used to determine underreporting of payroll taxes (other than self-employment income 

taxes). In the absence of more recent audit data, the IRS applied estimated compliance rates from 

a study released in 1993 to the reported taxes over the calendar year 2008–2010 period. In both 

of those cases, the findings provide an incomplete picture of current compliance behavior.

Complexity. Some sources of noncompliance are not easily observable because of the 

complexity of the tax code. For example, income from partnerships and S corporations is passed 

through to the owners, who are then responsible for paying the taxes owed on that income. To 

some extent, the IRS can detect underreporting of that income by matching the amounts reported 

by taxpayers on their tax returns with the totals reported by the business to both taxpayers and 

the IRS on information returns (K-1s). More challenging is determining the extent to which 

taxpayers’ underreporting of income is a result of receiving erroneous information from the 

firms.

7

Tax evasion can also be masked through networks of entities that are linked—either because one 

taxpayer is the majority owner in each business or because the businesses share common partners 

 6 Earlier IRS compliance studies—referred to as the Taxpayer Compliance Measurement Program (TCMP)—were 

based on comprehensive in-office audits of a random sample of taxpayers. In those audits, taxpayers were required 

to provide documentation in support of every item on the tax return. The last TCMP examined tax returns from 

1988. Public opposition to the TCMP grew because of concerns about the burden imposed on taxpayers in the 

sample. The IRS canceled its plans to conduct another TCMP in 1995. The less burdensome NRP replaced the 

TCMP, beginning with the 2001 study. 7 Government Accountability Office, Partnership and S Corporations: IRS Needs to Improve Information to 

Address Tax Noncompliance, GAO-14-453 (May 2014), www.gao.gov/products/GAO-14-453.
5

or shareholders. Networks can consist of corporations, flow-through firms, sole proprietorships, 

and tax-exempt entities. The complicated structure of such networks makes it difficult to track 

income and payments between related entities—especially when IRS researchers focused

separately on the different components of the tax system.8

Auditors’ Skills. Not all auditors are equal in their ability to detect noncompliance, particularly 

on each line of the tax form. Some may be hindered by the lack of available information to verify 

taxpayers’ claims. To correct for errors not detected by some auditors, the IRS employs 

“detection controlled estimation.”9 An underlying premise of that method is that the best auditors 

are the ones who identify the greatest amount of noncompliance, and the results of other audits 

should be adjusted upward to reflect what those superior auditors would have identified if they 

had conducted the audits themselves. To the extent that some of the auditors with the largest 

yields are also the most aggressive, however, it is possible that their assessments would be 

successfully challenged by taxpayers.

Taxpayers’ Intent. One question unanswered by the NRP was the motives underlying the errors 

that taxpayers made. The auditors did not probe into the reasons that taxpayers claimed the 

wrong amounts, although such information could be beneficial in designing strategies to combat 

noncompliance. For example, simplifying the tax code may be a less costly way to achieve 

greater compliance than audits, if the source of the error is taxpayer confusion rather than 

fraudulent intent. 

Using data from past compliance studies, some researchers have applied econometric techniques 

to distinguish between intentional and unintentional errors by claimants of the earned income tax 

credit (EITC), beginning with the premise that a correlation between the size of the credit and 

noncompliance suggests errors are intentional. Those studies found that about 30 percent of 

EITC errors were intentional, with the remaining errors either unintentional or due to other 

unobserved factors (such as unobserved variations in expected penalties).

10 Tax legislation in the 

1990s aimed at reducing EITC errors typically combined expansion of IRS enforcement tools

with provisions aimed at simplifying the rules applicable to the tax credit.

11

Taxpayers’ Disputes With the IRS. As a result of an audit, examiners may recommend that 

taxpayers be assessed additional taxes. But taxpayers can challenge the auditors’ 

recommendations. From calendar years 2008 through 2010, taxpayers disagreed with the IRS on

 8 Government Accountability Office, Tax Gap: IRS Can Improve Efforts to Address Tax Evasion by Networks of 

Businesses and Related Entities, GAO-10-968 (September 2010), www.gao.gov/assets/320/310175.pdf. 9 Jonathan Feinstein, “Statistical Analysis of Compliance Using NRP Data: Detection Controlled Methods” 

(presentation at the IRS Research Conference, Washington, D.C., June 2, 2004), www.irs.gov/pub/irssoi/12feinst.pdf. 10 Janet McCubbin, “EITC Noncompliance: The Determinants of the Misreporting of Children,” National Tax 

Journal, vol. 53, no. 4 (December 2000), pp. 1135–1164, www.ntanet.org/NTJ/53/4/ntj-v53n04p1135-64-eitcnoncompliance-determinants-misreporting.html; and Jeffrey Liebman, “Who Are the Ineligible EITC Recipients?” 

National Tax Journal, vol. 53, no. 4 (December 2000), pp. 1165–1186, 

www.ntanet.org/NTJ/53/4/ntj-v53n04p1165-86-who-are-ineligible-eitc.html. 11 Janet Holtzblatt and Janet McCubbin, “Issues Affecting Low-Income Filers,” in Henry J. Aaron and Joel Slemrod, 

eds., The Crisis in Tax Administration (Brookings Institution Press, 2004), pp. 148–200.
6

about half of the recommended additional taxes.12 To some extent, taxpayers were able to 

successfully challenge the IRS and have their assessments reduced. Because the audits do not 

detect all errors, however, the amount ultimately does not reflect the theoretical notion of “true 

tax liability.” Therefore, the tax gap is based on the auditors’ recommendations—not the final 

resolution between the IRS and the taxpayer.

IRS Funding

From 2001 through 2009, funding for the IRS hovered around $12.2 billion, measured in 2016

dollars (see Figure 1). But the relative stability of the tax gap estimates over that period and the 

IRS’s budget is probably a coincidence. The IRS faced different challenges at various points 

during that period, largely as a consequence of tax legislation enacted in 2001, 2003, 2008, and 

2009.13 For example, the IRS was required to temporarily pay out refundable tax credits within 

months of passage of tax acts in 2001, 2003, and 2008; no such requirement was in force in the 

other years in which compliance studies were conducted. Typically, such provisions would not 

take effect until the year following enactment, giving the IRS more time to develop the systems 

necessary to support the payment of a new tax credit to millions of taxpayers.

Measured in 2016 dollars, the agency’s funding climbed to $13.2 billion in 2010, but by 2016, 

the IRS’s appropriations had fallen to $11.2 billion—15 percent below the 2010 amount. The 

biggest cutbacks were in enforcement, although that activity still receives the largest share of the 

IRS’s budget: In 2016, more than 40 percent of the funds were allocated to enforcement 

activities, including investigations, examinations, and collections. About one-third of funding 

was for operations support, and nearly all of the remaining appropriation financed taxpayer 

services such as taxpayer assistance programs (see Figure 2).

Without more recent estimates of the tax gap, the relationship between the drop in IRS 

appropriations and compliance is not observable. With less money, the IRS cut the audit rate 

(from 0.9 percent in 2010 to 0.7 percent in 2015 for most types of tax returns and from 1.1 

percent to 0.8 percent for just individual income tax returns) and answered fewer phone calls 

from taxpayers seeking help with their tax returns (from 72 million in 2010 to 56 million in 

2015).14 Plus, the IRS picked up more responsibilities following enactment of the Foreign 

Account Tax Compliance Act (FATCA) and the Affordable Care Act (ACA) in 2010; those 

included the processing of reports of foreign financial assets under FATCA, the administration of 

new tax credits for health insurance coverage, and the enforcement of health coverage 

mandates.15

 12 Internal Revenue Service, Data Book (various years), Table 10, www.irs.gov/uac/soi-tax-stats-prior-year-irs-databooks. 13 Public Laws 107-16, 108-27, 110-185, and 111-5. 14 Internal Revenue Service, Data Book (various years), Table 9a, www.irs.gov/uac/enforcement-examinations, and 

Table 19, www.irs.gov/uac/taxpayer-assistance. 15 Beginning in 2013, FATCA (Public Law 111-147) requires certain individuals to report foreign financial assets in 

excess of specified thresholds. Those thresholds range from $50,000 for an unmarried filer living in the United 

States to $400,000 for a married couple filing a joint return and living abroad. Eventually, some entities will face 

similar reporting requirements. As a result of the ACA (Public Law 111-148), the IRS is providing tax credits to 
7

Figure 1.

Appropriations for the Internal Revenue Service, 2000 to 2016

Billions of Dollars 

Source: Congressional Budget Office.

Amounts were adjusted to 2016 levels by using the price index for personal consumption expenditures.

As part of its responsibilities for estimating the current-law budget baseline, CBO projects the 

IRS’s budget over the next decade. Funding for all discretionary programs, including the IRS’s 

budget, is set each year by appropriations. CBO does not make any assumptions regarding 

whether the Congress will continue to cut IRS funding. Section 257 of the Balanced Budget and 

Emergency Deficit Control Act of 1985 requires CBO to project future funding for discretionary 

programs solely by applying inflation rates to the most recently enacted appropriations.16 Under 

those assumptions, the IRS’s total funding is projected to rise to $15.5 billion (in current dollars) 

by 2026. 

 

individuals and small businesses as well as enforcing insurance coverage requirements faced by individuals and 

large employers.

16 The law further specifies the type of indexes to be used to adjust for inflation—the employment cost index for 

personnel costs and the gross domestic product chain-type price index for all other discretionary appropriations.

10

11

12

13

14

15

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
8

Figure 2. 

Appropriations for the Internal Revenue Service, by Budget Activity, 2016

Percent

Enforcement

Operations Support

Taxpayer Services

Business Systems Modernization

21

43

33

3

Source: Congressional Budget Office.

One challenge in forecasting the IRS’s future resources, however, is the caps specified in the 

Budget Control Act of 2011 for defense and nondefense discretionary budget authority.17 CBO’s 

projections of total outlays account for the constraints imposed by those caps, including the 

reductions in the caps that are required under the law’s automatic enforcement procedures. Those 

caps remain at about the 2016 level in both 2017 and 2018 and then rise by about 2.5 percent per 

year from 2019 through 2021. For years after 2021, total appropriations for programs that are 

constrained by the caps are assumed to grow with inflation from the amounts projected for 2021.

Funding for the IRS is subject to those caps, but CBO does not allocate the effects of the caps to

specific programs in its baseline estimates.

 17 Public Law 112-25, as enacted and later amended.
9

Common Considerations for Estimating the Revenue Effects of 

Compliance Proposals

To a large extent, both CBO and JCT take into account the same considerations when estimating 

the revenue effects of compliance proposals—whether the proposals would provide more 

funding or expand the IRS’s statutory authority. Those common considerations include the 

components of compliance savings, the budget scorekeeping guidelines for estimating the 

budgetary effects of legislative changes, and the IRS’s goals for tax enforcement and the 

constraints the agency faces.

Components of Compliance Savings

Compliance effects of legislative proposals are divided into two components: the detection of 

erroneous items on tax returns and the deterrence of noncompliant behavior. The two are related: 

Greater detection of noncompliant behavior will, to some extent, spur greater voluntary 

compliance. Over time, however, taxpayers may find new ways to evade taxes.

Detection and Deterrence. The effects of improvements in detection are direct: An increase in 

funding of compliance activities or an enhancement in enforcement tools can prevent more 

erroneous refunds from being paid out and enable the IRS to collect additional unpaid taxes. The 

increased revenues are observable, even if estimators must control for other changes occurring at 

the same time. The deterrence effects—the improvement in taxpayers’ compliance behavior in 

response to increased audits or enhanced enforcement tools—are indirect and more difficult to 

measure, although past experience and academic studies can provide useful insight.

Both JCT and CBO take into account detection effects in their estimates of compliance 

proposals. However, only JCT includes deterrence effects in its estimates of compliance 

initiatives included in the tax code. The deterrence effects of increases in IRS appropriations are 

more uncertain than changes to the tax code—especially because appropriations are annual, and 

funding for an initiative may not extend to future years. 

Learning Curves. Both taxpayers and the IRS learn from experience and modify their behavior

over time. Observing where the IRS has concentrated its enforcement tools will cause some 

taxpayers to adopt new methods of tax evasion. Observing how taxpayers adjust their behavior 

will spur the IRS to adjust its enforcement detection tools to the extent allowed under the tax 

code.18 Estimators make a judgment regarding the timing of adjustments by taxpayers and the 

IRS.

Budget Scorekeeping Guidelines

Over time, the House and Senate Budget Committees, CBO, and the Office of Management and 

Budget developed scorekeeping guidelines. Those guidelines were formalized in the conference 

 18 Janet McCubbin, Optimal Tax Enforcement: A Review of the Literature and Practical Implications, Working 

Paper 90 (Office of Tax Analysis, December 2004), www.treasury.gov/resource-center/tax-policy/taxanalysis/Documents/WP-90.pdf.
10

report for the Balanced Budget Act of 1997. The guidelines are updated upon agreement by the 

House and Senate Budget Committees, CBO, and the Office of Management and Budget. The 

purpose of those guidelines is to ensure consistent budgetary treatment across programs and over 

time.19

Two guidelines are especially relevant to CBO’s and JCT’s estimates of compliance legislation. 

First, scorekeeping Rule 3 states the following: 

Revenues, entitlements and other mandatory programs (including offsetting receipts) will 

be scored at current law levels . . . unless Congressional action modifies the authorizing 

legislation. 

The second relevant guideline is scorekeeping Rule 14, which states:

No increase in receipts or decrease in direct spending will be scored as a result of 

provisions of a law that provides direct spending for administrative or program 

management activities.

Rules 3 and 14 were adopted in part to avoid situations where hoped-for but quite uncertain 

savings are used to offset near-term certain spending increases or revenue decreases in the same 

legislation.

Those two rules substantially limit the extent to which CBO and JCT would include savings 

from a tax compliance initiative in their estimates of the budgetary effects. Giving the IRS 

additional funding in an appropriations bill to obtain and match information returns from third 

parties to tax returns, for example, would potentially increase compliance—both directly by

enabling the IRS to better identify noncompliance through independent sources and indirectly by 

encouraging people to comply. CBO’s estimate of the bill’s cost would include the additional 

funding for the reporting and matching initiative. Under Rules 3 and 14, however, CBO would 

exclude any revenue increases from the new initiative in its estimates of the bill’s total costs.

Nonetheless, to the extent possible, CBO and JCT provide the Congress with information on 

revenue savings from compliance proposals. First, even though CBO and JCT would not include 

revenue effects in their estimates of a change in IRS appropriations or other legislation providing 

funding for the IRS, they still may provide the Congress with an estimate of a “nonscorable” 

effect that is not added to their estimate of the total costs. Second, the scorekeeping rules do not 

apply to CBO’s baseline budget projections or to CBO’s and JCT’s estimates of the President’s 

budget submission. If an appropriations bill or another bill containing increased funding for IRS 

enforcement was enacted, CBO would include the revenue effects in its next estimate of the 

budget deficit under current law. Additionally, the President’s budget has often contained 

compliance initiatives—including “program integrity” proposals to increase IRS funding—and 

 19 Government Publishing Office, Conference Report to the Balanced Budget Act of 1997 (pp. 1007–1014 of H. 

Rept. 105-217, which became Public Law 105-33), www.gpo.gov/fdsys/pkg/CRPT-105hrpt217/pdf/CRPT105hrpt217.pdf; and Office of Management and Budget, Preparation, Submission, and Execution of the Budget,

Circular A-11 (2015), “Appendix A:Scorekeeping Guidelines,”

www.whitehouse.gov/sites/default/files/omb/assets/a11_current_year/app_a.pdf.
11

CBO and JCT have added the revenue effects of those proposals in their analysis of the 

President’s budget released every spring. 

The IRS’s Goals and Constraints

In its estimates of compliance proposals, both CBO and JCT start with the same premise: The 

IRS allocates its existing resources and statutory tools to the activities that yield a higher return 

on investment than other activities allowed under current law—subject, however, to two

constraints. The first constraint—consistent with the budget scorekeeping guidelines—is that the 

IRS is limited by the scope of its statutory authority. A second constraint is the availability of 

resources to the IRS—including the access to up-to-date technology and the number and skills of 

staff. CBO’s and JCT’s revenue estimates will reflect each organization’s judgment regarding 

the state of the IRS’s infrastructure and its impact on the timing and scope of implementation. A 

related consideration is the ability of both the IRS and taxpayers to adjust to a new initiative. 

That ability will depend, in part, on the extent to which the IRS can shift its resources and the 

complexity of new spending initiatives or changes to the tax code.

Technology. The IRS’s ability to adjust to legislative changes is closely linked to the state of its 

computers and the long-term challenges of the IRS’s computer modernization program. A 2016 

report from the Government Accountability Office found that the IRS’s individual master file 

and business master file still rely on computer programming language developed more than 50

years ago. That outdated language is increasingly difficult to write and maintain.20 Integration of 

new legislation into old computer systems will, to some extent, slow implementation.

But beyond computer modernization, legislation that imposes new—and sometimes—unfamiliar 

responsibilities often requires establishment of new systems. Both FATCA and the ACA were 

enacted in 2010, but most of the major provisions in those laws did not become effective for 

several years to allow time for the IRS and firms to build the information infrastructure 

necessary to operate new systems. Such statutory deadlines would be reflected in the estimates of 

legislation. Although those two laws were largely implemented as scheduled (see the exception,

below), estimators generally consider the extent to which similar deadlines in other tax laws will 

be met successfully.

Another consideration is the timing of the enactment of tax legislation. Often, tax legislation is 

not enacted until December or the start of the following year. The American Taxpayer Relief Act

(ATRA), for example, was enacted on January 2, 2013, but extended many provisions that had 

expired on December 31st and contained other new provisions that were effective on January 

1st

.

21 For the IRS, updating and developing tax forms and rewriting and testing computer 

programs to reflect legislation enacted in late November or December for the following tax year

coincides with the ongoing testing of their systems for the upcoming filing season; enactment at 

the beginning of the tax year means that changes to the forms and computer programs must occur 

during the busiest period of the year. As a consequence, the IRS may delay the beginning of the 

filing season for some, if not all, taxpayers or put a temporary hold on the processing of certain 

 20 Government Accountability Office, Information Technology: Federal Agencies Need to Address Aging Legacy 

Systems, GAO-16-468 (May 2016), www.gao.gov/assets/680/677436.pdf. 21 Public Law 112-240.
12

returns. Estimators consider the likelihood of such delays and their impact on reporting and on 

taxpayers’ making use of the provisions affected by the legislation. Those effects are 

compounded by delays in the issuance of guidance by the IRS.

Staff. With new responsibilities, the IRS may require additional staff or the reallocation of 

personnel. Either action probably requires on-the-job training. The extent of new training will 

slow full implementation of a new law or targeted appropriations, which affect the timing of 

CBO’s and JCT’s estimates of savings. 

Recent trends in the IRS’s staffing also affect revenue estimates of compliance initiatives. Along 

with the decline in the IRS’s appropriations, the number of the agency’s employees has fallen 

over the past two decades—from 113,931 in 1995 to 79,890 in 2015.

22 The IRS’s staff has also 

aged—with more than half of its employees over the age of 50 in 2015 and a quarter eligible to 

retire in 2016.

23 In the short term, the aging of the IRS’s workforce is probably associated with 

an increase in productivity and an ability to adapt to new responsibilities because of the 

experience of the older workers. Replacing the retired workers with younger staff, however, will

initially result in a loss of institutional knowledge, additional training costs, and a reduction in 

productivity—all factors that reduce savings relative to a scenario where the majority of the 

workforce is experienced. As the new hires gain experience and skills over time, productivity is 

generally anticipated to rise.

Flexibility. Legislation can enable the IRS to shift resources from one activity to another with a 

higher return from the same amount of funding. For example, when the IRS finds an error on a 

tax return, it generally must either accept the return or file a notice of deficiency, which starts the 

audit process and consumes resources. However, if the error falls within the IRS’s mathematical 

or clerical error authority, the IRS can correct the error without starting an audit. Expanding that 

authority potentially yields a higher return than more labor-intensive audits, even if fewer dollars 

are gained per return—largely because the IRS can detect many more erroneous refunds and 

prevent them from being paid out at far less cost per return than would be the case with audits. 

However, the people who are highly skilled auditors are generally not the same people who can 

write new programming language or build the large-scale data sets necessary to detect erroneous 

claims during the processing of returns. That lack of flexibility may reduce the estimates of 

savings, at least in the short term.

Complexity. The complexity of a provision affects its implementation. The ACA, for example,

requires employers with 50 or more full-time employees to make an employer shared 

responsibility payment to the IRS if (1) they did not offer minimum essential health insurance to 

95 percent of their full-time employees or (2) at least one of their employees received a premium 

tax credit for purchasing health insurance through the health insurance exchanges. To enable the 

IRS to administer those requirements, employers must report to the IRS information each year on 

the health insurance coverage offered to their full-time workers. Confusion and concern by 

employers about the administration of those provisions—especially the new reporting 

requirements—caused the IRS to delay implementation of the employer responsibility payments 

 22 Internal Revenue Service, Data Book (various years), Table 30, www.irs.gov/uac/irs-budget-and-workforce. 23 John A. Koskinen, Commissioner, Internal Revenue Service (speech to the National Press Club, Washington, 

D.C., March 31, 2015), www.irs.gov/uac/newsroom/commissioner-koskinen-speech-before-the-national-press-club.
13

for a year to allow additional time to discuss with taxpayers ways to simplify those rules.24 That 

transition relief was extended for another year for employers with fewer than 100 employees.25

Implementation of provisions can be delayed by lags in the release of regulations, rules, notices, 

and other types of guidance from the IRS.

26 To the extent that estimators can anticipate such 

delays, projected savings from initiatives can be slowed.

Specific Issues in Estimating the Revenue Effects of IRS 

Appropriations

Nearly everything that the IRS does can be characterized as a way to improve compliance:

• Customer service—such as answering taxpayers’ questions over the telephone, through 

the IRS website, or in person at Taxpayer Assistance Centers—can help taxpayers avoid 

errors on their tax returns that can result in either underpayments or overpayments.

• Increasing enforcement—through expansions of information reporting, audits, criminal 

investigations, and collection—would lead to improvements in detection and deterrence.

• Computer modernization would support expansions of customer service and enforcement.

Despite the potential contributions of each of those activities to compliance, CBO estimates the 

revenue savings only from expansions of enforcement. Improvements in compliance as a result 

of customer service or computer modernization are not easily observed and thus difficult to 

measure.

Methodology 

As a starting point in its analysis of requests for more funding of IRS enforcement activities, 

CBO generally relies on the IRS’s estimates of the return on investments (ROIs) for specific 

types of initiatives. Those ROIs are estimated by economists in the IRS Office of Research who 

have access to detailed confidential data found in the Enforcement Revenue Information System 

(ERIS), which is part of the IRS’s Compliance Data Warehouse. ERIS tracks the amount and 

timing of revenue from all the IRS’s enforcement functions, along with the number of hours 

spent on cases, where available. The estimates are limited to the direct effects of enforcement 

activities that result in collections of unpaid taxes; they do not include the effects of other actions

(such as math error procedures) that prevent erroneous refunds from being paid or the 

improvements in compliance associated with deterrence. For any given set of initiatives in a 

particular year, the IRS forecasts that revenues will be collected over a 10-year period. The 

 24 Internal Revenue Service, Transition Relief for 2014 Under Section 6055 (Section 6055 Information Reporting), 

6056 (Section 6056 Information Reporting) and 4980H (Employer Shared Responsibility Provisions), “Notice 2013-

45,” www.irs.gov/pub/irs-drop/n-13-45.pdf. 25 Internal Revenue Service, “Shared Responsibility for Employers Regarding Health Coverage,” Federal Register, 

vol. 79, no. 8543 (February 12, 2014), www.federalregister.gov/articles/2014/02/12/2014-03082/sharedresponsibility-for-employers-regarding-health-coverage. 26 The IRS provides other types of guidance to taxpayers through various documents and publications. For more 

information of those forms of IRS guidance, see Internal Revenue Service, Understanding IRS Guidance—A Brief 

Primer (July 2016), www.irs.gov/uac/understanding-irs-guidance-a-brief-primer.
14

collection ratios are derived from past initiatives, with collection data from the most recent

initiatives given a greater weight than data from initiatives implemented further in the past.

The IRS’s measures of ROI for new initiatives are derived from the average savings per dollar of 

funding for similar existing activities. When estimating the revenue savings from a new 

initiative, however, the appropriate measure is not the average ROI but the marginal ROI—that 

is, the additional amount of revenues received from an additional dollar of funding. The IRS 

makes one adjustment to the average rates to move the ROIs closer to being marginal measures: 

That adjustment is made to the first three years of an initiative and reflects the amount of time it 

takes to hire and train new staff. 

In CBO’s judgment, the IRS’s estimates of ROIs do not account for other factors that affect the 

marginal estimates of ROIs from compliance initiatives. In the past, CBO has adjusted the ROIs 

to account for changes in the composition of the caseload over time, taxpayers’ adjustments to 

their evasion methods, and the IRS’s modifications to its detection algorithms in response to 

taxpayers’ adoption of new forms of noncompliance. 

Example: IRS Program Integrity Proposal in the President’s Budget for 2016

The caps on discretionary spending are automatically adjusted to accommodate additional 

appropriations for certain program integrity (compliance) initiatives for the IRS and various 

government transfer programs. In recent years, the Administration has included program 

integrity proposals in its budgets. CBO previously released a description of its analysis of the 

Administration’s proposal for an IRS program integrity initiative in its fiscal year 2012 budget.27

The President’s 2016 budget included a program integrity proposal that would have increased 

funding of IRS enforcement initiatives by $421 million in 2016 (see Table 2). Those funds would 

have been used to finance 10 new initiatives, five of which—at a total cost of $333 million in 

2016—were expected to raise immediate and measurable revenues:

• Increase audit coverage ($151 million) by hiring more field employees; boosting 

coverage of employment tax returns and estate and gift tax returns; expanding 

examinations; improving document matching programs; and extending support activities.

• Enhance collection coverage ($123 million) by addressing growing inventories resulting 

from past reductions in staff; increasing coverage of employment tax cases among 

business taxpayers; improving service to taxpayers in delinquencies; and extending 

support activities.

• Address international and offshore compliance issues ($41 million) by expanding 

coverage of entities with undisclosed offshore accounts to ensure their compliance with 

required U.S. tax reporting.

 27 Congressional Budget Office, Additional Information on the Program Integrity Initiative for the Internal Revenue 

Service in the President’s Budgetary Proposals for Fiscal Year 2012 (June 23, 2011), 

www.cbo.gov/sites/default/files/112th-congress-2011-2012/reports/06-23-additional_info_program_integrity.pdf.
15

• Improve audit coverage of large partnerships ($16 million) by increasing the number of 

agents with specialized knowledge of partnership law and strengthening enforcement 

activities related to flow-through entities.

• Prevent identity theft and refund fraud ($3 million) by providing staffing and advanced 

technologies to handle the increased workload associated with identity theft and refund 

fraud.

In addition to the $421 million for IRS enforcement initiatives, the proposal to lift the cap in 

2016 also included $5 million for enforcement activities at the Alcohol and Tobacco Tax and 

Trade Bureau and $241 million to fund investments in IRS infrastructure. The President 

proposed to continue the 2016 initiatives over the 10-year budget window.

For the IRS’s enforcement activities proposed to begin in 2016, CBO projected the same initial 

return on investment as estimated by the Administration for the first three years of an initiative. 

In the first year, the estimated returns on investments were under $3 for each $1 of additional 

funding for most of the IRS’s enforcement initiatives; however, the ROI was as low as $1 to $1

for the international tax initiative and as high as $9 to $1 for the initiative to prevent identity theft

and refund fraud (see Table 2). The overall ROI for the 2016 initiative (including the provisions 

that were not expected to raise revenue) was estimated to be $2 to $1 in 2016 and was projected 

to rise to $6 to $1 by 2018, when full implementation was expected (see Table 3). For later years, 

CBO estimated a lower return on investment than the Administration expected. CBO projected 

that the return on added spending would decline over time as taxpayers shifted to other lessdetectible forms of tax evasion, causing revenue collections to fall. Thus, the ROI for the 2016 

initiative was estimated to fall by 19 percent from the 2018 rate by the end of the decade. 

The 2016 budget also increased discretionary spending by additional amounts through 2020 to 

fund other new IRS enforcement initiatives. The Administration, however, did not provide any 

details on those future initiatives. In CBO’s judgment, the IRS was anticipated to tackle the areas 

of noncompliance with the highest ROI first (that is, begin with the “low-hanging fruit”). Thus, 

CBO estimated that the ROIs on the 2017 initiative would be lower than the rates for the 2016 

initiative. In each of the following three years, the ROIs would continue to fall as the IRS dealt 

with increasingly more difficult areas of noncompliance. Because the IRS would not be able to 

maintain the same return as spending was ramped up, the return on investment for the 2020 

initiative was 25 percent lower in the first year, compared with the 2016 initiative, according to 

CBO’s estimates (see Figure 3). When fully implemented in the third year, the ROI for the 2020 

initiative was estimated to be 28 percent lower than the comparable rate for the 2016 initiative.

The combined effect of the initiatives over the 2016–2020 period would be a ramping up of 

spending on tax administration by nearly $19 billion over the 2016–2025 period. CBO estimated 

that the Administration’s request would yield $55 billion in additional revenues over that latter 
16

Table 2.

Components of Proposed Funding Increase for Enforcement Initiatives and Returns on 

Investments, 2016

Millions of Dollars

2016 IRS Enforcement Initiative Cost in 2016

Revenue 

in 2016

Return on $1 

of Investment 

(Dollars)

Increase Audit Coverage 150.7 397.5 2.6

Enhance Collection Coverage 122.8 345.9 2.8

Address International and Offshore Compliance 

Issues 40.7 49.3 1.2

Improve Audit Coverage of Large Partnerships 16.2 44.5 2.7

Prevent Identity Theft and Refund Fraud 2.7 24.2 9.0

Other Initiatives 87.5 0 0

 Total Cost 420.6 861.4 n.a.

Average Return on $1 of Investment n.a. n.a. 2.0

Source: Internal Revenue Service, Budget in Brief (February 2015), 

www.irs.gov/PUP/newsroom/IRS%20Budget%20in%20Brief%20FY%202016.pdf.

n.a. = not applicable.

period. That estimate does not include collections resulting from those initiatives but not 

received by the IRS until after 2025. The estimate of $55 billion in additional revenues also does 

not include any potential effects on voluntary tax compliance from the proposed sustained 

increases in enforcement spending. Without additional specification of the policies, especially 

beyond 2016, CBO had no basis for estimating such effects. (The Administration also did not 

include such effects in its estimate presented in the budget.) On net, after accounting for the 

increased spending, the initiative would have reduced the deficit by nearly $37 billion over the 

10-year budget window.

The estimated increases in revenues represented the cumulative impact over time of 

appropriations for IRS enforcement activities in the amounts proposed in the President’s budget. 

But those appropriations would be enacted one year at a time. Therefore, even if the added 

funding was provided for 2016, CBO’s revenue baseline for the 2016–2025 period would not 

immediately change by the $55 billion estimated but rather would increase in steps as the 

additional investment provided by each year’s appropriation was accounted for—assuming no 

new information was later identified that would change the estimated effects. 
17

Table 3. 

Components of Proposed Funding Increase for Enforcement Initiatives and Returns on 

Investments, 2018

Millions of Dollars

2016 IRS Enforcement Initiative

Cost in 

2018

Revenue in 

2018

Return on $1 

of Investment 

(Dollars)

Increase Audit Coverage 158.5

 

1,266.7 8.0

Enhance Collection Coverage 131.2

 

1,179.7 9.0

Address International and Offshore 

Compliance Issues 43.1 159.6 3.7

Improve Audit Coverage of Large 

Partnerships 16.9 129.1 7.6

Prevent Identity Theft and Refund Fraud 3.1 63.8 20.6

Other Initiatives 81.8 0 0

 Total Cost 434.6

 

2,798.9 n.a.

Average Return on $1 of Investment n.a. n.a. 6.4

Source: Internal Revenue Service, Budget in Brief (February 2015), 

www.irs.gov/PUP/newsroom/IRS%20Budget%20in%20Brief%20FY%202016.pdf.

n.a. = not applicable.

Estimating the Effects of Legislative Changes

The types of compliance proposals analyzed by JCT can be classified into four broad types. As 

data can be scarce and the IRS’s response uncertain, JCT follows a set of principles to 

consistently estimate these proposals.

Types of Legislative Proposals

Proposals to reduce noncompliance include simplification of the tax code, new enforcement 

tools, new statutory authority, and mandates requiring the IRS to use its existing authority.
18

Figure 3.

Return on $1 of Investment From Proposed Funding Increases for the Internal Revenue 

Service’s Enforcement Initiatives, 2016 to 2025

Dollars

Source: Congressional Budget Office.

Simplification. Some simplification proposals, such as providing safe harbors for businesses or 

extending eligibility for a deduction or credit, might simultaneously reduce taxpayer errors but 

increase the deficit. Allowing small corporations to make estimated payments based on the prior 

year’s tax reduces errors in having to estimate the current year’s tax and would be expected to 

result in lower estimated payments. Legislation in 1991 eliminated the support test and 

household maintenance test from the eligibility criteria for the EITC, and subsequent legislation 

in 2004 extended those changes to other child-related tax preferences.28 Those simplification 

provisions reduce noncompliance by expanding eligibility for those preferences to many people 

whose claims were erroneous under prior law.

New Enforcement Tools. Information reporting is a tool that JCT has scored as raising 

significant revenue over the last decade, with prominent present-law examples including 

reporting on payment card and third-party payment transactions and basis reporting on publicly

traded securities.29 Other new tools include allowing the IRS to exchange information with other 

federal agencies, state and local governments, prisons, and even agencies in foreign countries.

 28 Public Law 101-508 and Public Law 108-311.

29 Public Law 110-289, section 3091, and Public Law 110-343, section 403, respectively.

0

1

2

3

4

5

6

7

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

2016 Enforcement Initiatives

2020 Enforcement Initiatives
19

New Authority. Statutory authority is important in determining how efficiently the IRS can act 

on information gained from enforcement tools. As described above, mathematical or clerical 

error authority allows the IRS to correct certain errors without an audit. Examples of 

mathematical or clerical errors include computational errors shown on returns, certain entries 

exceeding statutory limits, and omissions of required taxpayer identification numbers for 

claiming certain credits. The Administration’s proposed expansion of math error authority to 

include “correctable errors,” such as information reported by taxpayers on a tax return not 

matching information received by the Social Security Administration and shared with the IRS, 

but not within the IRS’s current math error authority to correct, is an example of new authority.30

Changes to deficiency procedures and increases in penalties are other examples.

Mandate Use of Existing Authority. Some proposals mandate the IRS to undertake a specific 

activity that it is already within its authority. As discussed in detail below, a recent legislative 

change requiring the IRS to delay payment of certain refunds is an example.

Methodology

As described above, JCT assumes that the IRS generally allocates its resources to maximize

revenues. In addition, when estimating compliance proposals, JCT assumes that the IRS’s

resources are fixed. Thus, for example, if a new tool or new authority is less efficient than 

existing tools or authority, JCT does not score it as raising revenues. If a provision requires the 

IRS to do something new that diverts funds from more efficient uses, JCT scores it as losing 

revenues.

Data related to compliance proposals can be scarce, but several sources are frequently useful. 

When estimating the revenue effect of an information reporting proposal, JCT is often guided by

the IRS’s reports on the tax gap. JCT combines that information with its projections for how 

much income is covered by the proposal and its estimates of the effective tax rates on that 

income. For proposals related to penalties, JCT is informed by the data found in ERIS. Studies 

done by the Government Accountability Office (GAO), the Treasury Inspector General for Tax

Administration, and outside experts (such as academic economists) are often helpful for a variety 

of compliance estimates.

Example: Legislation to Reduce Identify Fraud by Accelerating Reporting 

Requirements

The Consolidated Appropriations Act, 2016, accelerated the filing dates of W-2s and Forms 

1099-MISC related to nonemployee compensation to January 31, from March 31 for electronic 

submission and February 28 or 29 for paper submission. The law also requires the IRS to hold 

refunds to claimants of the EITC or the additional child tax credit (ACTC) until February 15.31

 30 For a more complete description of the Administration’s proposed expansion of math error authority, see “Provide 

the IRS with Greater Flexibility to Address Correctable Errors” in Department of the Treasury, General 

Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals (February 2016), pp. 225–226,

www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf. 31 Public Law 114-113, division Q, section 201.
20

The first part is a new tool. The second part requires the IRS to do something that it already has 

authority to do. Both parts take effect beginning in the 2017 filing season.

In estimating the effects of that provision, JCT focused primarily on the potential of the 

provision to raise revenues by reducing refund fraud related to identity theft. Under prior law, the 

IRS did not match information from W-2s and Forms 1099-MISC until July or later.32 At that 

point, the IRS used information reporting to detect tax fraud related to identity theft. By July, 

however, most refunds of withholding and payments of refundable tax credits had been paid. 

JCT does not have access to information on the detection methods used by the IRS, but given the 

IRS’s demonstrated ability to detect fraudulent returns in the post-filing season, receiving 

information returns earlier, in JCT’s judgment, should allow increased detection of fraud before 

paying refunds.

JCT’s quantitative starting point for the revenue estimate was the IRS’s estimate that it had paid 

$5.8 billion in refunds associated with identity theft during the 2013 filing season, as reported by 

GAO.33 Using the Automated Underreporter (AUR) program, which matches information returns 

to tax returns and thus is likely to involve W-2 or Form 1099-MISC, the IRS identified $3 billion 

in erroneous refunds. Another $2.8 billion in identity theft was detected before the start of the 

AUR program by another IRS filter that flags when more than one person files a return with the 

same Social Security number. Some of that fraud probably would have been identified later by 

the AUR program if it had not been flagged at the duplicate return stage, so JCT factored that 

into its estimate.

In GAO’s view, the IRS’s estimate of erroneous refunds due to identity fraud was highly 

uncertain. For example, GAO cites a sensitivity analysis done by the IRS that suggests that the 

AUR component could be as high as $78 billion or as low as $120 million. JCT was unable to 

find more granular information before estimating the provision.34 Despite the uncertainty 

described above, JCT used the IRS’s $5.8 billion estimate to produce a baseline for fraudulent 

refunds that were identified as being paid out. From there, JCT estimated the amount of revenue 

savings from detection and deterrence.

JCT estimated that some of the effect would come from the IRS using information from W-2s 

and Forms 1099-MISC to detect fraudulent returns filed by identity thieves. JCT assumed that 

the IRS would incorporate earlier receipt of the information into its fraud filters but that 

implementation would take several years until the IRS determined from filing season experience 

how to optimally use that earlier receipt of the information. The estimate of revenue savings was 

 32 See Figure 1 in Government Accountability Office, Identity Theft: Additional Actions Could Help IRS Combat the 

Large, Evolving Threat of Refund Fraud, GAO-14-633 (September 2014), www.gao.gov/products/GAO-14-633. 33 Government Accountability Office, Identity Theft and Tax Fraud: Enhanced Authentication Could Combat 

Refund Fraud, but IRS Lacks an Estimate of Costs, Benefits, and Risks, GAO-15-119 (January 2015), 

www.gao.gov/products/GAO-15-119. 34 After the provision became law, GAO testified that the IRS used a new methodology to estimate the amount of 

refunds associated with identity theft that was paid in 2014. With that new approach, the IRS’s estimate for 2014—

$3.1 billion—was just over half of its 2013 estimate. See Government Accountability Office, Tax Filing: IRS Needs 

a Comprehensive Customer Service Strategy and Needs to Better Combat Identity Theft Refund Fraud and Protect 

Taxpayer Data, GAO-16-578T (April 2016), www.gao.gov/products/GAO-16-578T.
21

also constrained by the fact that the IRS had not received additional funds to implement the new 

system. The estimated revenue effect is therefore phased in over several years.

One key factor that JCT believed could have a large revenue effect was whether the IRS would 

change how quickly it pays refunds (apart from the mandated delay in EITC and ACTC refunds). 

Although the tax code allows the IRS to delay refunds until 45 days after April 15 without 

paying interest, the IRS’s goal is to issue refunds quickly.35 The earlier receipt of information 

returns appears to increase the benefit to the IRS of delaying refunds, but JCT was conservative 

in estimating to what extent the IRS might pay some refunds less quickly.

Nonetheless, there should be some effect, as the IRS procedure when it suspects identity theft is 

less resource-intensive than its procedures for auditing noncompliant returns from legitimate 

taxpayers. If the IRS suspects that a return was not filed by the true taxpayer, it is not subject to 

the usual rules involving notice of deficiency. Instead, it can simply deny a refund if the filer 

cannot verify his or her identity.

In addition to considering how the IRS might change its behavior in response to the provision, 

JCT also thought about how people engaging in identity fraud might change their behavior. If 

those filers believe that the IRS is unlikely to hold refunds until it can match the accelerated 

information returns to tax returns, they have an incentive to file returns earlier in the filing 

season, before information from W-2s and Forms 1099-MISC is integrated into fraud filters. 

Moreover, as the provision requires that the IRS delay paying refunds to EITC and ACTC 

claimants, JCT assumed that identity thieves would have some incentive to avoid claiming those 

credits in the event that claiming them would result in the IRS’s making use of the required delay 

to catch the fraud by matching information returns. Finally, identity thieves would have more 

incentive to avoid using identities that have W-2s or Forms 1099-MISC associated with them.

JCT considered that the provision might also have effects unrelated to identity fraud, such as 

reducing EITC or ACTC overpayments. Recent research provides evidence that under current 

law, some taxpayers overclaimed income to maximize refundable credits, especially starting in 

the mid-2000s.

36 To the extent that taxpayers are claiming wage income beyond what is shown 

on their W-2s, the provision might allow the IRS to detect overclaimed credits before paying 

refunds. However, unlike with identity theft, in the absence of the proposed expanded math error 

authority mentioned above, the IRS would have to file a notice of deficiency to deny a claim. As 

it is unlikely that the efficiency of such an audit would exceed the audit that it would replace, 

JCT did not include revenues from that effect in its estimate.

Combining all of the factors described above, JCT estimated that the provision would increase 

revenues by $779 million over the 2016–2025 period.37 The estimated revenue effects were 

relatively small, though increasing, from 2017 (when the provision will take effect) through 

 35 See GAO-14-633, p. 5. 36 Jacob A. Mortenson and Andrew Whitten, “Bunching to Maximize Tax Credits: Evidence from Kinks in the U.S. 

Tax Schedule” (August 29, 2016), http://ssrn.com/abstract=2719859. 37 See Line II.1 in Joint Committee on Taxation, Estimated Budget Effects of Division Q to the Senate Amendment to 

H.R. 2029, Rules Committee Print 114-40, The “Protecting Americans from Tax Hikes Act of 2015,” JCX-143-15 

(December 16, 2015).
22

2019, reached a steady state in 2020 (when JCT assumed it would be fully implemented), and 

grew thereafter with CBO’s projection of nominal gross domestic product.

What Information Would Be Useful to CBO’s and JCT’s

Estimators?

Revenue estimating is challenging, and analysts will always benefit from more data, more 

administrative details, and more research. To estimate the effects of compliance proposals, CBO 

and JCT would benefit especially from more information regarding the IRS’s estimates of the tax 

gap and returns on investment, the IRS’s enforcement actions, and taxpayers’ compliance 

behavior.

Tax Gap

More information about the measurement and sources of the tax gap would provide insight into 

the baseline for noncompliance. Additional details on the methodology used in the most recent 

NRP study would allow CBO and JCT to better evaluate the findings from that research. The 

current studies categorize errors by the degree of third-party verification applied to certain types 

of income or tax provisions—but more information on the amount of the tax gap related to 

specific types of income or tax provisions could inform the choice of parameters when 

estimating the effects of tax compliance proposals.

Returns on Investment

Through ERIS, the IRS has access to detailed information on their workforce’s productivity for 

particular types of enforcement actions, and their economists rely on that data to generate ROIs.

To some extent, the IRS has been able to share information on the factors that go into those 

estimates, but allowing CBO and JCT more access to its models would enable the Congressional 

estimators to test the sensitivity of ROIs to changes in the IRS’s resources and the composition 

of its proposals.

A more difficult challenge for the IRS would be to expand its analysis of ROIs to include other 

types of IRS activities. Although the focus of its estimates is on actions that result in additional 

assessments of taxes owed to the IRS, the results of another type of enforcement action—the 

prevention of erroneous refunds—are not measured in the ROIs. An even more difficult 

expansion would be to examine the relationship between changes in taxpayer services and 

revenues—but that would probably be a long-term project requiring extensive analysis.

A third set of challenges involves the estimation of marginal ROIs. The return from an additional 

dollar of funding is likely to differ from the average ROI based on past funding. CBO adjusts the 
23

average ROIs estimated by the IRS to account for changes in the effectiveness of initiatives as 

funding increases, but more insight into the marginal effects would be useful. 38

Details of IRS Enforcement Activities—Current and Future

As with the ERIS data, the IRS is forthcoming with CBO and JCT regarding its current 

enforcement activities—but its willingness to share information is (understandably) tempered 

with caution about providing sensitive information that if more widely known could undermine 

its compliance strategies. Still, more information about the anticipated implementation of newly 

proposed initiatives would aid CBO and JCT in their estimation of those proposals. The most 

striking examples are the proposed program integrity initiatives beyond the first fiscal year. In 

their recent proposals, the Administration has provided an amount of funding for those future 

year initiatives and an expected ROI but left it to the Congressional analysts to make 

assumptions regarding the components of the proposal. 

Another key question is the length of time that the IRS anticipates it would take to implement a 

new initiative or to use new statutory authority. Related questions concern the response time for 

taxpayers and the IRS and probably require more research: First, how long does it take taxpayers 

to learn that the IRS has new tools and to find new ways to evade taxes? And second, how long 

does it take the IRS to identify those new methods of evasion and shut those channels down with 

existing authority and resources?

 38 In a recent study, researchers estimated marginal revenue/cost curves for several categories of correspondence 

audits. See Ronald Hodge and others, “Estimating Marginal Revenue/Cost Curves for Correspondence Audits,” in 

Alan Plumley, ed., Proceedings of the 2015 IRS Research Conference (IRS Research Bulletin, 2016), pp. 3–16.