Testimony 

Before the Subcommittee on Federal Financial 

Management, Government Information, and 

International Security, Committee on Homeland 

Security and Governmental Affairs, U. S. Senate 

United States Government Accountability Office

GAO 

For Release on Delivery 

Expected at 2:30 p.m. EDT 

Wednesday, October 26, 2005 TAX GAP

Multiple Strategies, Better 

Compliance Data, and LongTerm Goals Are Needed to 

Improve Taxpayer 

Compliance 

Statement of Michael Brostek, Director 

Strategic Issues 

GAO-06-208T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-06-208T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Michael 

Brostek at (202) 512-9110 or 

brostekm@gao.gov. 

Highlights of GAO-06-208T, a testimony 

before the Subcommittee on Federal 

Financial Management, Government 

Information, and International Security, 

Committee on Homeland Security and 

Governmental Affairs, U.S. Senate 

October 26, 2005

TAX GAP

Multiple Strategies, Better Compliance 

Data, and Long-term Goals Are Needed to 

Improve Taxpayer Compliance 

IRS’s recent estimate of the tax gap in 2001 ranged from $312 billion to $353 

billion. IRS estimates it will eventually recover some of this tax gap, 

resulting in a net tax gap of $257 billion to $298 billion. Reducing the tax gap 

will be challenging given persistent levels of noncompliance. Still, given its 

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

substantial returns, which could improve the government’s fiscal position. 

For example, based on IRS’s most recent estimate, each 1 percent reduction 

in the net tax gap would likely yield more than $2.5 billion annually. Thus, a 

10 percent to 20 percent reduction of the net tax gap would translate into 

from $25 billion to $50 billion or more in additional revenue annually. 

The tax gap must be attacked on multiple fronts and with multiple strategies 

over a sustained period of time. These strategies could include simplifying 

the tax code, providing quality service to taxpayers, and enhancing 

enforcement of tax laws by using tools such as tax withholding and 

information reporting. 

Regularly measuring compliance is also critical to IRS’s ability to reduce the 

tax gap. A significant part of IRS’s tax gap estimate is based on recently 

collected data on individual income tax reporting compliance. However, 

other areas of the tax gap rely on old data and outdated methodologies. IRS 

does not have approved plans, with one exception, to collect more current 

compliance data covering the various components of the tax gap. 

Although it can be challenging to develop, data on the reasons why 

taxpayers do not comply with the tax laws could help IRS more effectively 

tailor its efforts to reduce noncompliance. IRS has begun to capture data on 

the reasons for noncompliance, but it has concerns with the data. Although 

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

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

noncompliance. 

IRS’s strategies for reducing the tax gap involve improving taxpayer service 

and enforcing tax laws, but do not have a clear focus on quantitative longterm goals or results measurement. Establishing clear goals and measuring 

progress toward them would be consistent with results-oriented 

management principles and would provide IRS with a solid base upon which 

to develop a more strategic approach to reducing the tax gap. 

Long-term budget simulations by 

GAO and others show that we face 

large and growing structural 

deficits due primarily to known 

demographic trends and rising 

health care costs. Reducing the 

annual tax gap—the difference 

between what taxpayers timely and 

accurately pay in taxes and what 

they should pay under the law—

could help the nation cope with 

these long-term fiscal challenges. 

The tax gap arises through the 

underreporting of tax liabilities, 

underpayment of taxes due or 

“nonfiling” of required tax returns. 

This testimony discusses the 

findings of GAO’s recent tax gap 

report. It addresses the significance 

of reducing the tax gap, measuring 

the extent of the tax gap, collecting 

data on reasons why 

noncompliance occurs, and the 

Internal Revenue Service’s (IRS) 

strategies for reducing the tax gap. 

What GAO Recommends

GAO’s July 2005 report 

recommended 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 on voluntary compliance 

levels, starting with individual 

income tax underreporting and 

total tax underpayment. 

In commenting on a draft of the 

report, IRS agreed with GAO’s 

recommendations. 
Page 1 GAO-06-208T 

Mr. Chairman and Members of the Subcommittee: 

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

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

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

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

the Internal Revenue Service (IRS) estimated a gross tax gap from $312 

billion to $353 billion for tax year 2001.1

 IRS estimated that it would 

eventually recover some of this amount through late payments and IRS 

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

$257 billion to $298 billion.2

 The tax gap arises when taxpayers 

intentionally or unintentionally fail to comply with the tax laws. Their 

failure to pay taxes increases the burden of funding the nation’s 

commitments on those taxpayers who voluntarily pay their taxes. 

Mr. Chairman, as I know you and the Comptroller General have discussed 

in the past, confronting the nation’s long-term fiscal challenge will require 

nothing less than a fundamental review, reexamination, and 

reprioritization of all major spending and tax policies and programs that 

may take a generation or more to resolve. Simply put, our nation’s fiscal 

policy is on an imprudent and unsustainable course. Long-term budget 

simulations by GAO, the Congressional Budget Office (CBO), and others 

show that over the long term we face large and growing structural deficits 

due primarily to known demographic trends and rising health care costs. 

Continuing on this unsustainable fiscal path will gradually erode, if not 

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

national security. Our current path also will increasingly constrain our 

ability to address emerging and unexpected budgetary needs and increase 

the burdens that will be faced by our children, grandchildren, and future 

generations. While our long-term fiscal imbalance cannot be eliminated 

with a single strategy, reducing the tax gap should be one part of a broader 

effort to repair the nation’s fiscal health. 

My remarks are based on our previous work on a variety of issues, in 

particular the Comptroller General’s recent testimony and our report on 

 1

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

as ranges. 

2

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

otherwise noted. 
Page 2 GAO-06-208T 

reducing the tax gap.3 These efforts were conducted in accordance with 

generally accepted government auditing standards. 

Let me begin by highlighting four major points: 

• Reducing the current tax gap would contribute to our fiscal sustainability 

while simultaneously improving fairness for those citizens who fully and 

timely meet their tax obligations but must be done with multiple strategies 

over a sustained period. 

• Regularly measuring the extent and nature of noncompliance is critical to 

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

tax law, but IRS does not have approved plans, with one exception, for 

obtaining and maintaining more current compliance data covering the 

various components of the tax gap beyond tax year 2001. 

• Collecting data on the reasons why noncompliance occurs can help IRS 

more effectively tailor its efforts to improve compliance. However, IRS has 

no specific plans to gather better data than it already collects. 

• Finally, IRS’s strategies for improving compliance do not have the clear 

focus on quantitative long-term goals and results measurement that are 

associated with high-performing organizations and that are incorporated 

into the statutory management framework Congress has adopted. 

In our July 2005 report on reducing the tax gap, we made 

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 an initial 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 Internal Revenue 

agreed with our recommendations, highlighted challenges associated with 

 3

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), 

and Tax Compliance: Better Compliance Data and Long-term Goals Would Support a 

More Strategic IRS Approach to Reducing the Tax Gap, GAO-05-753 (Washington, D.C.: 

July 18, 2005). 
Page 3 GAO-06-208T 

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

recommendation. 

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

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

taxes—that should have been timely and accurately paid and what was 

actually paid for a specific year. The estimate is an aggregate of estimates 

for the three primary types of noncompliance: (1) underreporting of tax 

liabilities on tax returns; (2) underpayment of taxes due from filed returns; 

and (3) nonfiling, which refers to the failure to file a required tax return 

altogether or timely.4

 Estimates for each type of noncompliance include 

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

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

compliance—the degree to which taxpayers fully and timely complied 

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

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

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

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

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

$312 billion to $353 billion. 

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

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

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

costs and burdens on taxpayers.5

 Recognizing the need for current 

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

the National Research Program (NRP) to produce such data for tax year 

2001 while minimizing taxpayer burden.6

IRS has a strategic planning process through which it supports decisions 

about strategic goals, program development, and resource allocation. 

 4

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

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

5

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

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

6

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

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

Background 
Page 4 GAO-06-208T 

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

agencies are to develop strategic plans as the foundation for resultsoriented management. 

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

yield substantial returns, which could improve the government’s fiscal 

position. For example, based on IRS’s most recent estimate, each 1 

percent reduction in the net tax gap would likely yield more than $2.5 

billion annually. Thus, a 10 percent to 20 percent reduction of the net tax 

gap would translate into from $25 billion to $50 billion or more in 

additional revenue annually.8

However, reducing the tax gap will be challenging given persistent levels 

of noncompliance.9

 The tax gap must be attacked on multiple fronts and 

with multiple strategies on a sustained basis. For example, efforts to 

simplify the tax code and otherwise alter current tax policies may help 

reduce the tax gap by making it easier for individuals and businesses to 

understand and voluntarily comply with their tax obligations.10 For 

instance, the multiple tax preferences for education assistance might 

increase taxpayers’ burden in understanding and complying with the rules 

associated with these options. In our July 2005 report on postsecondary 

tax preferences, we found that hundreds of thousands of taxpayers do not 

appear to make optimal decisions when selecting education-related tax 

 7

Pub. L. No. 103-62 (1993). 

8

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

level of taxpayer compliance. In some instances, the amount of the tax gap can change 

without a corresponding change in the level of compliance. For example, a reduction in 

marginal tax rates could result in a smaller tax gap simply because the amount of tax that 

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

9

Recognizing these challenges, we have long been concerned about tax noncompliance 

and IRS’s efforts to address it. Since 1990, we have had various aspects of tax 

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

consolidating two prior high-risk areas into one—Enforcement of Tax Laws. See GAO, 

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

10GAO’s report, Understanding the Tax Reform Debate, discusses a number of topics, such 

as the growing complexity of the current tax system, that tax experts have identified as 

those that should be considered when evaluating tax policy. See GAO, Understanding the 

Tax Reform Debate: Background, Criteria, & Questions, GAO-05-1009SP (Washington, 

D.C.: Sept. 2005). 

Reducing the Tax Gap 

Could Improve the 

Nation’s Fiscal 

Position but Will 

Require Multiple 

Strategies 
Page 5 GAO-06-208T 

preferences.11 One explanation of these taxpayers’ choices may be the 

complexity of postsecondary tax preferences, which experts have 

commonly identified as difficult for tax filers to use. Also, simplification 

may reduce opportunities for tax evasion through vehicles such as abusive 

tax shelters. However, for any given set of tax policies, IRS’s efforts to 

reduce the tax gap and ensure appropriate levels of compliance will need 

to be based on a balanced approach of providing service to taxpayers and 

enforcing the tax laws. 

Providing quality services to taxpayers is an important part of any overall 

strategy to improve compliance and thereby reduce the tax gap. One 

method of improving compliance through service is to educate taxpayers 

about confusing or commonly misunderstood tax requirements.12 For 

example, if the forms and instructions taxpayers use to prepare their taxes 

are not clear, taxpayers may be confused and make unintentional errors. 

One method to ensure that forms and instructions are sufficiently clear is 

to test them before use. However, we reported in 2003 that IRS had tested 

revisions to only five individual forms and instructions from July 1997 

through June 2002, although hundreds of forms and instructions had been 

revised in 2001 alone.13

In terms of enforcement, IRS will need to use multiple strategies and 

techniques to find noncompliant taxpayers and bring them into 

compliance. In particular, as figure 1 shows, a pair of tools have been 

shown to lower levels of noncompliance: withholding tax from payments 

to taxpayers and having third parties report information to IRS and the 

taxpayers on income paid to taxpayers. For example, banks and other 

financial institutions provide information returns (Forms 1099) to account 

holders and IRS showing the taxpayers’ annual income from some types of 

investments. Similarly, most wages, salaries, and tip compensation are 

reported by employers to employees and IRS through Form W-2. 

Preliminary findings from NRP indicate that more than 98.5 percent of 

these types of income are accurately reported on individual returns. 

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

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

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

12GAO/T-GGD-97-35. 

13GAO, Tax Administration: IRS Should Reassess the Level of Resources for Testing 

Forms and Instructions, GAO-03-486 (Washington, D.C.: Apr. 11, 2003). 
Page 6 GAO-06-208T 

Figure 1: Taxpayer Noncompliance Categorized by Amount of Withholding and 

Information Reporting, 1992 

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

withholding or information reporting requirements could serve to improve 

compliance:14

• Requiring tax withholding and more or better information return reporting 

by organizations that make payments to independent contractors for 

services provided.15

 14GAO, Tax Gap: Many Actions Taken, but a Cohesive Compliance Strategy Needed, 

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

15GAO, Tax Administration: Approaches for Improving Independent Contractor 

Compliance, GAO/GGD-92-108 (Washington, D.C.: July 23, 1992). 
Page 7 GAO-06-208T 

• Requiring information return reporting on payments made to corporations 

for services provided. 

• Require that information returns dealing with capital gain income report 

the purchase price, or other cost basis data, as well as the sales price for 

stocks and bonds. 

Although withholding and information returns are highly effective in 

encouraging compliance, such additional requirements generally impose 

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

continued examination of opportunities to expand information reporting 

and tax withholding has the potential to increase the transparency of the 

tax system and the level of compliance. 

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

techniques being used to promote compliance are evaluated to ensure that 

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

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

procedures designed to reduce noncompliance with the Earned Income 

Tax Credit16—but misses other opportunities. For example, we reported in 

2002 that the effectiveness of the Federal Tax Deposit Alert program—a 

program that since 1972 has been intended to reduce delinquencies in 

paying employment taxes—could not be evaluated because IRS had no 

system to track contacts IRS made with delinquent employers.17

 16GAO, Earned Income Credit: Qualifying Child Certification Test Appears Justified, but 

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

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

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

Dec. 30, 2004). 

17GAO, Tax Administration: IRS’s Efforts to Improve Compliance With Employment Tax 

Requirements Should Be Evaluated, GAO-02-92 (Washington, D.C.: Jan. 15, 2002). 
Page 8 GAO-06-208T 

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.18 For example, by analyzing 

1979 and 1982 TCMP data, IRS identified significant noncompliance with 

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

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

taxpayers claimed about 5 million fewer dependents on their returns than 

would have been expected without the change in law. 

Tax compliance data are also useful outside of IRS. Other federal agencies 

and offices use compliance data for tax policy analysis, revenue 

estimating, and research. Further, the longer the time between compliance 

measurement surveys, the less useful they become given changes in the 

economy and tax law.19 Without current compliance data, IRS has limited 

capability to determine key areas of noncompliance to address and actions 

to take to maximize the use of its limited resources. 

Using its recently collected compliance data, IRS has estimated that 

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), as 

indicated in table 1. 

 18GAO, Tax Administration: IRS’ Plans to Measure Tax Compliance Can Be Improved, 

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

19GAO/GGD-93-52. 

Regular Compliance 

Measurement Can 

Support Informed 

Decisions to Reduce 

the Tax Gap, but IRS 

Lacks Approved Plans 

for Such 

Measurement 

Underreporting Accounted 

for Most of the Tax Gap 

Estimate 
Page 9 GAO-06-208T 

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. 

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,20 informal supplier,21 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).22

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 

 20Sole 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. 

21Informal 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. 

22GAO-05-753. 
Page 10 GAO-06-208T 

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

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

Underreported self-employment23 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). 

IRS has concerns with the certainty of the overall tax gap estimate in part 

because some areas of the estimate rely on old data and outdated 

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

estimate underreporting of corporate income taxes and employer-withheld 

employment taxes. IRS has no estimates for other areas of the tax gap, 

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

excise tax underreporting. For these types of noncompliance, IRS 

maintains that the data are either difficult to collect, imprecise, or 

unavailable. In addition, it is inherently difficult for IRS to observe and 

measure some types of underreporting or nonfiling, such as tracking cash 

payments that businesses make to their employees, as businesses and 

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

employment and income taxes, respectively.24

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

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

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

estimate will incorporate new methodologies, including those for 

estimating overall individual income tax underreporting as well as for the 

portion attributable to self-employed individuals who operate businesses 

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

IRS has begun a compliance measurement study that will allow IRS to 

 23As 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. 

24For a more detailed discussion about data sources and methodologies used in estimating 

the tax gap, see GAO-05-753. 

IRS Plans to Issue a 

Revised Tax Gap Estimate, 

but Has No Approved 

Plans to Regularly Collect 

Compliance Data 
Page 11 GAO-06-208T 

update underreporting estimates involving S corporations.25 This study, 

which IRS began in July 2005, is scheduled to take 2 to 3 years to 

complete. Because individual taxpayers may be recipients of income (or 

losses) from S corporations, this study could affect IRS’s estimates for the 

underreporting gap for individual income tax. 

Beyond this study of S corporations, IRS has no approved plans to 

periodically collect more or better compliance data over the long term. 

Also, IRS has indicated that given its current research priorities, it would 

not begin another NRP study of individual income tax returns before 2008, 

and would not complete such a study until at least 2010. When IRS initially 

proposed the tax year 2001 NRP study, it had planned to study individual 

income tax underreporting on a 3-year cycle. 

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

compliance data because of the associated costs and burdens. Taxpayers 

whose returns are examined through compliance studies such as NRP 

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

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

resources to examine randomly selected returns, which are more likely to 

include returns from compliant taxpayers and less likely to produce 

additional tax assessments compared to traditional examinations. One IRS 

official also emphasized that IRS has fewer resources than in the past to 

conduct examinations as well as compliance studies. 

Although the costs and burdens of compliance measurement are legitimate 

concerns, we believe compliance studies to be good investments.26 The 

lack of firm plans to continually obtain fresh compliance data is troubling 

because the frequency of data collection can have a large impact on the 

quality and utility of compliance data. Any plans for obtaining and 

maintaining reasonably current information on compliance levels for all 

portions of the tax gap would need to take into account costs, burdens, 

and compliance risks in determining which areas of compliance to 

measure and the scope and frequency of such measurement. 

 25S corporations, as well as partnerships, are businesses commonly referred to as flowthrough entities as they do not generally pay taxes on income. Instead, they distribute net 

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

required to report net income or losses on their individual tax returns and pay any 

applicable taxes. According to an IRS research official, IRS expects to conduct a 

compliance measurement study of partnerships at a later date. 

26GAO/GGD-93-52. 
Page 12 GAO-06-208T 

Data on whether taxpayers are unintentionally or intentionally 

noncompliant with specific tax provisions are critical to IRS for deciding 

whether its efforts to address specific areas of noncompliance should 

focus on nonenforcement activities, such as improved forms or 

publications, or enforcement activities to pursue intentional 

noncompliance. 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 qualifying child 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. Recognizing the benefits of better compliance data, we, as well 

as the National Taxpayer Advocate, have urged IRS to consider performing 

additional research into causes of noncompliance.27

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

during its operational examinations of tax returns. 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: 

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

data on reasons for noncompliance, were being entered into the database. 

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

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

examiners close examinations without assigning a reason for 

noncompliance or by assigning the same reason to all instances of 

noncompliance, regardless of the situation. 

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

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

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

2004); and GAO, Tax Research: IRS Has Made Progress but Major Challenges Remain, 

GAO/GGD-96-109 (Washington, D.C.: June 5, 1996). 

Knowing the Reasons 

for Noncompliance 

Could Help Guide 

Compliance Efforts, 

but IRS Has Concerns 

with Its Data on 

These Reasons 
Page 13 GAO-06-208T 

• 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. 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 data on reasons for 

noncompliance and that they plan to consider such enhancements. If IRS 

enhances the data on reasons for noncompliance, it will be important to 

consider factors such as how complete and reliable such data need to be, 

and whether to collect the data for all types of noncompliance or for all 

examinations (as opposed to a targeted random sample). 

Focusing on outcome-oriented goals and establishing measures to assess 

the actual results of a program compared to its intended purpose can help 

agencies improve performance and stakeholders determine whether 

programs have produced desired results. Furthermore, setting long-term, 

quantitative goals would be consistent with results-oriented management 

principles that are associated with high-performing organizations and 

incorporated into the statutory management framework Congress has 

adopted through GPRA. As such, establishing long-term, quantitative 

compliance goals coupled with periodic measurements of compliance 

levels offers several benefits for IRS. These benefits include providing a 

better basis for determining to what extent its various service and 

enforcement efforts contribute to compliance, considering new strategies 

to improve compliance over time,28 and promoting strategic and 

 28For example, IRS’s progress toward the goal of having 80 percent of all individual tax 

returns electronically filed by 2007 has required enhancement of its technology, 

development of software to support electronic filing, education of taxpayers and 

practitioners, and other steps that could not be completed in a short time frame. Congress 

established this electronic filing goal in the IRS Restructuring and Reform Act of 1998, Pub. 

L. No. 105-206 (1998). 

Long-term, 

Quantitative Goals for 

Improving Taxpayers’ 

Compliance Would Be 

Consistent with 

Results-Oriented 

Management 
Page 14 GAO-06-208T 

disciplined management decisions that target areas most in need of 

improvement. 

IRS’s strategies for improving compliance, which involve improving 

taxpayer service and enhancing enforcement of the tax laws, generally 

lack a clear focus on long-term, quantitative goals and results 

measurement. In response to a President’s Management Agenda29 initiative 

to better integrate budget and performance information, IRS officials said 

that they are considering various long-term goals for the agency. However, 

IRS has not yet set a time frame for publicly releasing the goals or 

indicated how many goals will be related to improving taxpayer 

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

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. 

Like other agencies,30 IRS faces challenges in implementing a resultsoriented management approach. For example, 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.31 However, 

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

rates, periodic measurements of compliance levels can indicate the extent 

to which compliance is improving or declining and provide a basis for 

reexamining existing programs and triggering corrective actions if 

necessary. Moreover, having completed the NRP review of individual 

 29The 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. 

30GAO, The Government Performance and Results Act: 1997 Governmentwide 

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

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

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

31As discussed in our July 2005 tax gap report, several research studies have offered 

insights to better understand the direct and indirect effects of IRS’s activities on tax 

revenue and voluntary compliance. Indirect effects arise when voluntary compliance 

increases in the larger population or in subsequent years due to examinations, or other 

enforcement and service actions, on targeted taxpayers. 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. 
Page 15 GAO-06-208T 

income tax underreporting, IRS now has an improved foundation for 

setting a goal or goals for improving taxpayers’ compliance. 

Reducing the tax gap is one approach that would help address the looming 

fiscal challenges facing the nation. While our long term-fiscal imbalance is 

too large to be eliminated by one strategy, reducing the tax gap can ease 

the difficult decisions that are needed. Toward that end, in our July 2005 

report on reducing the tax gap, we made recommendations to IRS to 

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 an initial 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 Internal Revenue agreed with 

our recommendations, highlighted challenges associated with them, and 

commented on various steps IRS would take to implement each 

recommendation. 

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

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

time. 

For further information on this testimony, please contact Michael Brostek 

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

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

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

Concluding 

Observations 

Contact and 

Acknowledgments 

(450452) 
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