Fiscal Outlook: Addressing Improper Payments and the Tax Gap Would Improve the Government's Fiscal Position
Published: 2015-10-01T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The federal government continues to face an unsustainable long-term fiscal path. Changing this path will require difficult fiscal policy decisions to alter both long-term federal spending and revenue. In the near term, executive branch agencies and Congress can take action to improve the government's fiscal position by addressing two long-standing issues—improper payments and the tax gap. Over time, these issues involve amounts near or exceeding $1 trillion.
Over the past decade, GAO has highlighted the issue of improper payments—defined by statute as payments that should not have been made or that were made in an incorrect amount (including overpayments and underpayments). GAO has reported for several years that the federal government is unable to determine the full extent to which improper payments occur and reasonably assure that actions are taken to reduce them.
The tax gap is the difference between taxes owed and those paid on time, as a result of taxpayers underreporting their tax liability, underpaying taxes, or not filing tax returns. Reducing the tax gap could provide additional revenue.
This statement discusses (1) actions needed to address improper payments government-wide and (2) strategies to reduce the tax gap. It is based on GAO's recent work on improper payments, agency financial reports and inspectors general reports, and prior reports on the tax gap, including those with open recommendations or matters for congressional consideration that could potentially help reduce the tax gap.
section_title: What GAO Found
paragraphs: A number of strategies, including implementing preventive controls and addressing GAO's prior recommendations, can help agencies reduce improper payments, which have been a persistent, government-wide issue. The improper payment estimate, attributable to 124 programs across 22 agencies in fiscal year 2014, was $124.7 billion, up from $105.8 billion in fiscal year 2013. The almost $19 billion increase was primarily due to the Medicare, Medicaid, and Earned Income Tax Credit programs, which account for over 75 percent of the government-wide improper payment estimate. Federal spending in Medicare and Medicaid is expected to significantly increase, so it is critical that actions are taken to reduce improper payments in these programs. Moreover, for fiscal year 2014, federal entities reported estimated error rates for 10 risk-susceptible programs that exceeded 10 percent. Recent laws and guidance have focused attention on improper payments, but incomplete or understated estimates and noncompliance with criteria listed in federal law hinder the government's ability to assess the full extent of improper payments and implement strategies to reduce them. For example, for fiscal year 2014, 2 federal agencies did not report improper payment estimates for 4 risk-susceptible programs, and 5 programs with improper payment estimates greater than $1 billion were noncompliant with federal requirements for 3 consecutive years. Identifying root causes of improper payments can help agencies target corrective actions, and GAO has made numerous recommendations that could help reduce improper payments. For example, strengthening verification of Medicare providers and suppliers could help reduce improper payments. GAO has stated that continued agency attention is needed to (1) identify susceptible programs, (2) develop reliable estimation methodologies, (3) report as required, and (4) implement effective corrective actions based on root cause analysis. Absent such continued efforts, the federal government cannot be assured that taxpayer funds are adequately safeguarded.
Addressing the estimated $385 billion net tax gap will require strategies on multiple fronts. Key factors that contribute to the tax gap include limited third-party reporting, resource trade-offs, and tax code complexity. For example, the extent to which individual taxpayers accurately report their income is correlated to the extent to which the income is reported to them and the Internal Revenue Service (IRS) by third parties. Where there is little or no information reporting, such as with business income, taxpayers tend to significantly misreport their income. GAO has many open recommendations to reduce the tax gap. For example, GAO recommended in 2012 that IRS use return on investment data to reallocate its enforcement resources and potentially increase revenues. Since 2011, GAO also recommended improvements to telephone and online services to help IRS deliver high-quality services to taxpayers who wish to comply with tax laws but do not understand their obligations. Other strategies GAO has suggested would require legislative actions, such as accelerating W-2 filing deadlines. Additionally, requiring partnerships and corporations to electronically file tax returns could help IRS reduce return processing costs and focus its examinations more on noncompliant taxpayers. Further, a broader opportunity to address the tax gap involves simplifying the Internal Revenue Code, as complexity can cause taxpayer confusion and provide opportunities to hide willful noncompliance.

section_title: Letter
paragraphs: Many difficult, major fiscal policy decisions are required to both determine  the government’s short-term financing and address fundamental  structural issues that are currently putting our nation on a long-term,  unsustainable fiscal path. In the near term, however, there are significant  ongoing management challenges that if successfully addressed, can  contribute to improving the government’s fiscal position. They involve  reducing billions of dollars in improper payments and tackling a  multibillion-dollar tax gap—the difference between taxes owed and taxes  paid on time, as a result of taxpayers underreporting their tax liability,  underpaying taxes, or not filing tax returns.
Over time, each of these areas involves amounts near or exceeding $1  trillion. Last year alone, improper payments government-wide were  estimated to be more than $124 billion, and the latest estimate for the  annual net tax gap is $385 billion. My statement today delineates the  nature and scope of these management challenges, as well as the related  recommendations we have made over the past several years to improve  the government’s performance in these areas—both recommendations to  the relevant agencies and matters for congressional consideration.
An improper payment is defined by statute as any payment that should  not have been made or that was made in an incorrect amount (including  overpayments and underpayments) under statutory, contractual,  administrative, or other legally applicable requirements. Among other  things, it includes payment to an ineligible recipient, payment for an  ineligible good or service, and any duplicate payment. Reducing  improper payments is critical to safeguarding federal funds and could help  achieve cost savings and improve the government’s fiscal position.  However, as we have reported for several years in our annual audit of the  Financial Report of the United States Government, the federal  government is unable to determine the full extent to which improper  payments occur and reasonably assure that appropriate actions are taken  to reduce them. Likewise, reducing the tax gap would raise revenue that  could be put toward a host of purposes, but there are no easy fixes to this  problem. Rather, the tax gap must be attacked on multiple fronts and with  multiple strategies over a sustained period. In the face of large and  growing structural deficits, it will be especially important to understand the  causes of tax noncompliance today and continue to develop new  approaches to minimize it.
My testimony today describes (1) actions needed to address government- wide improper payments and (2) strategies to reduce the tax gap. My  comments are primarily based on our recent work on improper payments  and analysis of agency financial reports and inspectors general (OIG)  reports, as well as our prior reports on the tax gap and several other  reports with open recommendations or matters for congressional  consideration that could help reduce the tax gap. The products cited  throughout this statement include detailed explanations of the methods  used to conduct our work. We conducted the work on which this  statement is based in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient and appropriate evidence to provide a  reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions.
subsections: section_title: Actions Needed to Address Improper Payments
paragraphs: Improper payments have consistently been a government-wide issue  despite efforts to reduce them and identify root causes, including fraud.  Incomplete, unreliable, or understated estimates; risk assessments that  may not accurately assess the risk of improper payment; and  noncompliance with criteria listed in federal law hinder the government’s  ability to understand the scope of the issue. We have reported on a  number of strategies, including implementing preventive and detective  controls and addressing open recommendations, that can help agencies  reduce improper payments.
subsections: section_title: Improper Payments Remain a Significant, Pervasive Government- Wide Issue
paragraphs: Improper payments remain a significant and pervasive government-wide  issue. Since fiscal year 2003—when certain agencies began reporting  improper payments as required by the Improper Payments Information  Act of 2002 (IPIA)—cumulative improper payment estimates have totaled  almost $1 trillion, as shown in figure 1.
In fiscal year 2014, agencies reported improper payment estimates  totaling $124.7 billion, a significant increase—almost $19 billion—from the  prior year’s estimate of $105.8 billion. For fiscal year 2014, overpayments  accounted for approximately 90 percent of the improper payment  estimate, according to www.paymentaccuracy.gov, with underpayments  accounting for the remaining 10 percent. The estimated improper  payments for fiscal year 2014 were attributable to 124 programs spread  among 22 agencies. Agencies reported improper payment estimates  exceeding $1 billion for each of 12 different programs, which cumulatively  accounted for $115.6 billion, or approximately 93 percent of the fiscal  year 2014 government-wide estimate (see app. I).
The estimated government-wide error rate increased from fiscal year  2013 to fiscal year 2014 (from 4.0 percent of program outlays to 4.5  percent). Programs with the highest reported error rates for fiscal year  2014 included the Earned Income Tax Credit (27.2 percent), School  Breakfast (25.6 percent), and Farm Security and Rural Investment Act  Programs (23.1 percent).
section_title: Additional Efforts Are Needed to Reduce Medicare, Medicaid, and Earned Income Tax Credit Improper Payments
paragraphs: Improper payment estimates for the Medicare, Medicaid, and Earned  Income Tax Credit (EITC) programs accounted for more than 75 percent  of the fiscal year 2014 improper payment estimate, as shown in figure 2.
The increase in the 2014 government-wide improper payment estimate is  attributed primarily to increases in estimated error rates in three major  programs: Medicare Fee-for-Service, Medicaid, and EITC. Based on  HHS’s fiscal year 2014 agency financial report, federal spending in  Medicare and Medicaid is expected to significantly increase—on average,  by 8.6 percent per year over the next 3 years. Consequently, it is critical  that actions are taken to reduce improper payments in these programs.  Over the past several years, we made numerous recommendations that if  effectively implemented, could improve program management, help  reduce improper payments in these programs, and help improve the  government’s fiscal position.
subsections: section_title: Medicare
paragraphs: In fiscal year 2014, Medicare financed health services for approximately  54 million elderly and disabled beneficiaries at a cost of $603 billion and  reported an estimated $60 billion in improper payments. Medicare  spending generally has grown faster than the economy, and in the  coming years, continued growth in the number of Medicare beneficiaries  and in program spending will create increased challenges for the federal  government. The Centers for Medicare & Medicaid Services (CMS),  which administers Medicare, has demonstrated a strong commitment to  reducing improper payments, particularly through its dedicated Center for  Program Integrity. For example, CMS centralized the development and  implementation of automated edits for national coverage policies— prepayment controls used to deny Medicare claims that should not be  paid—to help ensure greater consistency in paying only those claims that  align with national policies. In response to our recommendations, CMS  has also taken steps to reduce differences among postpayment review  contractor requirements when possible and has improved automated  edits that assess all services provided to the same beneficiary by the  same provider on the same day, so providers cannot avoid claim denials  by billing for services on multiple claim lines or multiple claims.  Additionally, in March 2014, CMS awarded a contract to a Federal Bureau  of Investigation-approved contractor that will enable the agency to  conduct fingerprint-based criminal history checks of high-risk providers  and suppliers.
Nevertheless, in our February 2015 update to our high-risk series, we  reported that while CMS has demonstrated efforts to reduce improper  payments in the Medicare program, estimated improper payment rates  have remained unacceptably high. For fiscal year 2014, the Department  of Health and Human Services (HHS) reported an estimated error rate of  12.7 percent for Medicare Fee-for-Service. Some components of this  estimate—such as durable medical equipment and home health claims— have estimated error rates in excess of 50 percent, meaning that most  payments for these items and services were estimated to be improper.  Fully exercising its authority related to strengthening its provider and  supplier enrollment provisions and addressing our other open  recommendations related to prepayment and postpayment claims review  activities would help CMS achieve reductions in Medicare improper  payments. The following are examples of actions that could help reduce  Medicare improper payments.
Improving use of automated edits. To help ensure that payments  are made properly, CMS uses controls called edits that are  programmed into claims processing systems to compare claims data  with Medicare requirements in order to approve or deny claims or flag  them for further review. In November 2012, we reported that use of  prepayment edits saved Medicare at least $1.76 billion in fiscal year  2010, but savings could have been greater if prepayment edits had  been more widely used. To promote greater use of effective  prepayment edits and better ensure that payments are made properly,  we recommended that CMS (1) improve the data collected about local  prepayment edits to enable CMS to identify the most effective edits  and the local coverage policies on which they are based and (2)  require Medicare administrative contractors to share information about  the underlying policies and savings related to their most effective  edits. CMS concurred with both recommendations and has begun to  take steps to implement them.
Monitoring postpayment claims reviews. CMS uses four types of  contractors to conduct postpayment claims reviews to identify  improper payments. In July 2013, we found that although  postpayment claims reviews involved the same general process  regardless of which type of contractor conducted them, CMS had  different requirements for many aspects of the process across the four  contractor types. Some of these differences might impede efficiency  and effectiveness of claims reviews by increasing administrative  burden for providers. Furthermore, in July 2014, we reported that  CMS did not have reliable data or provide sufficient oversight and  guidance to measure and fully prevent inappropriate duplication of  reviews. We recommended that CMS monitor the database used to  track recovery audit activities to ensure that all data were submitted,  accurate, and complete. CMS concurred with the recommendation  and said it would seek contract modifications to add quality assurance  performance metrics related to the completeness and timeliness of  data.
Removing Social Security numbers from Medicare cards. The  identification number on Medicare beneficiaries’ cards includes as one  component the Social Security number of the beneficiary (or other  eligible person’s, such as a spouse). This introduces risks that  beneficiaries’ personal information could be obtained and used to  commit identity theft. In September 2013, we reported that CMS had  not taken steps to select and implement a technical solution for  removing Social Security numbers from Medicare cards. To better  position the agency to efficiently and cost-effectively identify, design,  develop, and implement a solution to address this issue, we  recommended that CMS direct the initiation of an information  technology project for identifying, developing, and implementing  changes that would have to be made to CMS’s affected systems.
Consistent with our recommendation, when the Medicare Access and  CHIP Reauthorization Act of 2015 was enacted into law in April 2015,  it included a provision requiring and providing funding for the  Secretary of Health and Human Services, in consultation with the  Commissioner of Social Security, to establish cost-effective  procedures to ensure that a Social Security account number (or  derivative thereof) is not displayed, coded, or embedded on Medicare  beneficiary cards and that any identifier displayed on such cards is not  identifiable as a Social Security account number (or derivative  thereof). As of July 2015, CMS had started the Social Security  Number Removal Initiative in response to the law and was in the  process of establishing a program management organization to  continue the planning and execution of the initiative.
Implementing actions authorized by the Patient Protection and  Affordable Care Act (PPACA). In addition to provisions to expand  health insurance coverage, PPACA provides CMS with certain  authorities to combat fraud, waste, and abuse in Medicare. We  reported in our February 2015 update to our high-risk series that CMS  should fully exercise its PPACA authority related to strengthening its  provider and supplier enrollment provisions. For example, CMS  should require surety bonds—a three-party agreement in which a  company, known as a surety, agrees to compensate the bondholder if  the bond purchaser fails to keep a specified promise—for certain at- risk providers and suppliers.
Strengthening verification of providers and suppliers. As we  reported in June 2015, we estimated that about 22 percent of  Medicare providers’ and suppliers’ practice location addresses were  potentially ineligible. For example, we identified 46 instances out of  a generalizable sample of 496 addresses in which practice location  addresses were inside a mailing store similar to a UPS Store. We also  identified other locations that were potentially ineligible, including  vacant addresses and unrelated establishments. In addition, we found  147 out of about 1.3 million physicians listed as eligible to bill  Medicare who, as of March 2013, had received a final adverse action  from a state medical board for crimes against persons, financial  crimes, and other types of felonies but were either not revoked from  the Medicare program until months after the adverse action or never  removed. We recommended that CMS modify the software integrated  into the provider enrollment database to include specific flags to help  identify potentially questionable practice location addresses, revise  guidance for verifying practice locations, and collect additional license  information. CMS agreed with our recommendations to modify its  software and collect license information but did not agree to revise its  guidance for verifying practice location addresses.
section_title: Medicaid
paragraphs: In fiscal year 2014, the federal share of estimated Medicaid outlays was  $304 billion, and HHS reported approximately $17.5 billion in estimated  Medicaid improper payments. The size and diversity of the Medicaid  program make it particularly vulnerable to improper payments, including  payments made for people not eligible for Medicaid or for services not  actually provided. CMS has an important role in overseeing and  supporting state efforts to reduce and recover improper payments and  has demonstrated some leadership commitment in this area. For  example, CMS issued guidance to improve corrective actions taken by  states. CMS also established the Medicaid Integrity Institute, which  provides training and technical assistance to states on approaches to  prevent improper payments and guidance on program integrity issues.
In our February 2015 high-risk update, we reported that while CMS had  taken these positive steps in recent years, in several areas, CMS had still  to address issues and recommendations that had not been fully  implemented. These issues include implementing effective program  integrity processes for managed care, ensuring clear reporting of  overpayment recoveries, and refocusing program integrity efforts on  approaches that are cost-effective. The following are actions that we  recommended CMS take to help reduce Medicaid improper payments  and improve program integrity.
Improving third-party liability efforts. Congress generally  established Medicaid as the health care payer of last resort, meaning  that if enrollees have another source of health care coverage—such  as private insurance—that source should pay, to the extent of its  liability, before Medicaid does. This is referred to as third-party  liability. However, there are known challenges to ensuring that  Medicaid is the payer of last resort. For example, states have reported  challenges obtaining out-of-state coverage data from private insurers.  Without such data, it is difficult for states to reliably identify or recover  payments from liable private insurers not licensed in the state. While  CMS has issued guidance to states, in January 2015 we  recommended additional actions that could help to improve cost- saving efforts in this area, such as (1) monitoring and sharing  information on third-party liability efforts and challenges across all  states and (2) providing guidance to states on oversight of third-party  liability efforts related to Medicaid managed care plans. HHS agreed  with our recommendations and in May 2015 reported that CMS has  begun developing a work plan to implement the recommendations.
Increasing oversight of managed care. Most Medicaid beneficiaries  receive services through a managed care system, and Medicaid  managed care expenditures have been growing at a faster rate than  fee-for-service expenditures. In May 2014, we reported that most  state and federal program integrity officials we interviewed told us that  they did not closely examine managed care payments, focusing on  fee-for-service claims instead. HHS agreed with our  recommendation to update Medicaid managed care guidance on  program integrity practices and effective handling of managed care  organization recoveries. On June 1, 2015, the agency issued a  proposed rule to revise program integrity policies, including policy  measures that we have recommended. Among other measures, the  rule, if finalized, would require states to conduct audits of managed  care organizations’ service utilization and financial data every 3 years  and standardize the treatment of recovered overpayments by plans.
Strengthening program integrity. In November 2012, we reported  that CMS could do more to eliminate duplication and improve  efficiency of its Medicaid integrity efforts. Since then, CMS has  taken positive steps to oversee program integrity efforts in Medicaid,  including reconfiguring its approach in 2013 to reduce duplicate  reviewing and auditing of states’ claims and improve efficiencies in its  audits, redesigning its comprehensive reviews of states’ program  integrity activities toward a more targeted risk assessment approach,  and increasing its efforts to hold states accountable for reliably  reporting program integrity recoveries. However, CMS has not  strengthened its efforts to calculate return on investment (ROI) for its  program integrity efforts, as we recommended in November 2012. In  January 2015, CMS officials confirmed that the agency is developing  a methodology for measuring and calculating a single ROI that  reflects the Center for Program Integrity’s initiatives for both Medicare  and Medicaid, and they expect to have their methodology finalized  later this year. We will assess the finalized ROI methodology when it  is available.
section_title: Earned Income Tax Credit
paragraphs: In fiscal year 2014, the Internal Revenue Service (IRS) reported program  payments of $65.2 billion for EITC. IRS estimated that 27.2 percent, or  $17.7 billion, of these program payments were improper. The estimated  improper payment rate for EITC has remained relatively unchanged since  fiscal year 2003 (the first year IRS had to report estimates of these  payments to Congress), but the amount of improper EITC payments  increased from an estimated $10.5 billion in fiscal year 2003 to nearly $18  billion in fiscal year 2014 because of growth in the EITC program overall.
The persistent problems with improper EITC payments—which we have  highlighted for years—are one reason we continue to designate IRS  enforcement of tax laws as a high-risk area. As we have reported, a root  cause of EITC noncompliance is that eligibility is determined by taxpayers  themselves or their tax return preparers and that IRS’s ability to verify  eligibility before issuing refunds is limited.
The Department of the Treasury (Treasury) divides EITC improper  payments into two categories: authentication and verification.  Authentication errors include errors associated with IRS’s inability to  validate qualifying child requirements, taxpayers’ filing status, and EITC  claims associated with complex or nontraditional living situations.  Verification errors relate to IRS’s inability to identify individuals improperly  reporting income to claim EITC amounts to which they are not entitled.  Verification errors include underreporting and overreporting of income by  wage earners as well as taxpayers who report that they are self- employed. Although the EITC program has been modified a number of  times since its enactment in 1975 to reduce complexity and help improve  the program’s administration, complexity has remained a key factor  contributing to improper payments in the program.
IRS has undertaken a number of compliance and enforcement activities  to reduce EITC improper payments, and Treasury reported in its fiscal  year 2014 agency financial report that it protected an estimated $3.5  billion in federal revenue in fiscal year 2014. Among other things, IRS  uses audits to help identify EITC improper payments, and in June 2014,  we reported that about 45 percent of correspondence audits (audits done  by mail) that closed in fiscal year 2013 focused on EITC issues. IRS has  reported that tax returns with EITC claims were twice as likely to be  audited as other tax returns. However, we found that the effectiveness of  these audits may be limited because since 2011 there have been regular  backlogs in the audits, which have resulted in delays in responding to  taxpayer responses and inquiries. We also found that unclear  correspondence generated additional work for IRS, such as telephone  calls to IRS examiners. These issues have imposed burdens on  taxpayers and costs for IRS. IRS acknowledged these concerns and has  initiated several programs to address EITC improper payments, such as  increasing outreach and education to taxpayers and tax return preparers.
Legislative action and significant changes in IRS compliance processes  likely would be necessary to make any meaningful reduction in improper  payments. We have previously recommended matters for congressional  consideration or executive actions that if effectively implemented, could  help reduce EITC improper payments as well as the tax gap, as  discussed later in this statement.
section_title: Recent Legislation and Guidance Have Focused Attention on Estimating and Reducing Improper Payments and Identifying Root Causes, Including Fraud
subsections: section_title: Recent Legislation and Guidance Related to Improper Payments
paragraphs: The Improper Payments Elimination and Recovery Improvement Act of  2012 (IPERIA) is the latest in a series of laws Congress has passed to  address improper payments. IPERIA directs the Office of Management  and Budget (OMB) to annually identify a list of high-priority programs for  greater levels of oversight and review, including establishing annual  targets and semiannual or quarterly actions for reducing improper  payments. Previously, the Improper Payments Elimination and Recovery  Act of 2010 (IPERA) established a requirement for agency OIGs to report  annually on agencies’ compliance with specific criteria contained in  IPERA, including publishing estimates and corrective action plans for  programs deemed to be susceptible to significant improper payments and  reporting gross improper payment rates of less than 10 percent.
IPERIA also enacted into law a Do Not Pay initiative, which is a web- based, centralized data-matching service that allows agencies to review  multiple databases to help determine a recipient’s award or payment  eligibility prior to making payments. Similarly, the Digital Accountability  and Transparency Act of 2014 (DATA Act) calls on Treasury to establish  a data analysis center, or to expand an existing service, to provide data,  analytic tools, and data management techniques for preventing or  reducing improper payments. As we have previously stated, effective  implementation of the DATA Act and the use of data analytic tools could  help agencies to prevent, detect, and reduce improper payments.
In addition to these legislative initiatives, OMB has continued to play a  key role in the oversight of government-wide improper payments. OMB  has established guidance for federal agencies on reporting, reducing, and  recovering improper payments as required by IPIA, as amended, and on  protecting privacy while reducing improper payments with the Do Not Pay  initiative.
section_title: Root Causes of Improper Payments
paragraphs: According to OMB’s guidance in effect for fiscal year 2014, agencies were  required to classify the root causes of estimated improper payments into  three general categories for reporting purposes. As we previously  reported, detailed analysis of the root causes of improper payments can  help agencies to identify and implement targeted corrective actions. The  categories are (1) administrative and documentation errors, including  errors caused by absence of supporting documentation necessary to  verify the accuracy of a payment or by incorrect processing of payments  by an agency; (2) authentication and medical necessity errors, including  those caused by inability to authenticate eligibility criteria or providing a  service that was not medically necessary; and (3) verification errors,  including those caused by failure or inability to verify recipient information,  such as income or work status, or beneficiaries failing to report correct  information to an agency. Examples of root causes of improper payments  that agencies identified for fiscal year 2014 include the following:
Administrative and documentation errors. The Small Business  Administration identified loan processing and disbursement staff that  did not consistently follow guidance in standard operating procedures  and policy memos for determining loan eligibility as a root cause of  improper payments in its Disaster Loan program.
Authentication and medical necessity errors. HHS reported a root  cause of Medicare Fee-for-Service improper payments as inpatient  hospital claims for short stays that were determined not to be  medically necessary in an inpatient setting and should have been  billed as outpatient.
Verification errors. For EITC, Treasury identified misreporting of  income by wage earners as one of the root causes of improper  payments. Likewise, the Social Security Administration reported that  unreported financial accounts and wages were a source of  Supplemental Security Income improper payments.
The three categories for reporting root causes of errors were very  general, and in July 2014 we reported that a more detailed analysis could  help agencies to identify and implement more effective preventive and  detective controls and corrective actions in the various programs.  OMB’s guidance in effect for fiscal year 2015 directs agencies to report  on the causes of improper payments using more detailed categories than  those previously required, such as program design issues or  administrative errors at the federal, state, or local agency level. OMB  requested that the four agencies with the largest high-priority programs  implement the revised guidance early―by April 30, 2015―using fiscal  year 2014 information. This included developing comprehensive  corrective action plans for each program that describe root causes and  establish critical path milestones to meet improper payment reductions;  identifying improper payments using the new, more detailed categories  outlined in the guidance; and developing plans to provide reasonable  assurance that internal controls over improper payments are in place and  are working effectively. Each of the four agencies submitted a letter to  OMB describing its efforts to implement the guidance early. While the  revised guidance—and efforts to implement it early—may help agencies  to reduce improper payments, it is too soon to determine its impact.
section_title: Fraud
paragraphs: Fraud is one specific type of improper payment and is particularly difficult  to identify and estimate. Fraud involves obtaining something of value  through willful misrepresentation. Whether an act is fraudulent is  determined through the judicial or other adjudicative system. According to  OMB guidance, agencies should refer matters involving possible  fraudulent activities to the appropriate parties, such as the relevant Office  of the Inspector General (OIG) or the Department of Justice (DOJ).
There are known cases in which improper payments are directly  attributable to fraud. Further, a lack of sufficient supporting documentation  may mask the true causes of improper payments—including fraud. When  payments lack the appropriate supporting documentation, their validity  cannot be determined. It is possible that these payments were for valid  purposes, but it is also possible that the lack of documentation could  conceal fraudulent activities. For fiscal year 2014, HHS cited  documentation errors as a major contributor to improper payments in  certain components of its Medicare Fee-for-Service program, such as  durable medical equipment and home health claims.
We have found these areas to be vulnerable to fraud in our past work,  and recent cases continue to raise concern in these areas. For  example, in June 2015, DOJ announced charges against 243 individuals  for approximately $712 million in false Medicare billing related to various  health care fraud-related crimes nationwide. According to DOJ, the  individuals charged included 46 doctors, nurses, and other licensed  medical professionals, and in many cases, the alleged fraud included  various medical treatments and services—such as home health care,  psychotherapy, physical and occupational therapy, durable medical  equipment, and prescription drug treatments—that were medically  unnecessary or never performed. Likewise, in 2012, 7 individuals were  arrested and indicted on charges related to their alleged participation in a  scheme that involved fraudulent claims of nearly $375 million for home  health services that were either not provided or not medically necessary.
For fiscal year 2014, HHS and DOJ reported that the federal government  won or negotiated over $2.3 billion in health care fraud judgments and  settlements through the Health Care Fraud and Abuse Control (HCFAC)  program. In fiscal year 2014, DOJ opened 924 new criminal health care  fraud investigations, and HHS OIG investigations resulted in 867 criminal  actions and 529 civil actions. Table 1 lists other examples of fraud in  various programs.
Additionally, we have recently reported on cases of potential fraud in  various programs.
As we reported in August 2014, we identified 28 cases of potential  fraud related to Supplemental Nutrition Assistance Program benefits  (food stamps). Over 30 days, we detected 28 postings from one  popular e-commerce website that advertised the potential sale of food  stamp benefits in exchange for cash, services, and goods—including  places to live, vehicles, cooking and cleaning services, phones, and  beer. We recommended that the Department of Agriculture take steps  to improve antifraud efforts, such as reassessing federal financial  incentives for cost-effective state activities and issuing guidance to  enhance the consistency of state reporting on these efforts.
In December 2014, we reported approximately $39 million of  Hurricane Sandy assistance as at risk for potential fraud or improper  payments. Among other issues, these cases included instances in  which Social Security numbers were not valid or were used by  multiple recipients, rental assistance was received while the recipient  was incarcerated, and duplicate payments were not flagged by the  Federal Emergency Management Agency (FEMA). We recommended  that FEMA assess the cost and feasibility of obtaining additional  data—such as the Social Security Administration’s full death file or  data necessary to verify self-reported information on private  homeowner’s insurance—to help identify potentially fraudulent or  improper applications for assistance.
As we reported in May 2015, we found thousands of Medicaid  beneficiaries and hundreds of providers involved in potential improper  or fraudulent payments in four selected states (Arizona, Florida,  Michigan, and New Jersey) during fiscal year 2011, which at the time  of our study was the most recent year for which reliable data were  available. For example, people using the identities of about 200  deceased beneficiaries received about $9.6 million in Medicaid  benefits subsequent to the beneficiaries’ deaths, and about 90  providers had suspended or revoked licenses in the state where they  performed Medicaid services yet received a combined total of at least  $2.8 million from those states. We recommended that CMS issue  guidance for screening beneficiaries who are deceased and supply  more-complete data for screening Medicaid providers. HHS concurred  with both of the recommendations and stated it would provide state- specific guidance to address them.
While fraud can be more difficult to address than other types of improper  payments, implementing strategies to reduce improper payments in  general may also help to reduce opportunities for fraud. In July 2015, we  issued A Framework for Managing Fraud Risks in Federal Programs  (Framework). The Framework identifies a comprehensive set of leading  practices that serve as a guide for program managers to use when  developing or enhancing efforts to combat fraud in a strategic, risk-based  manner. Minimizing fraud risks in federal agency programs can help  reduce improper payments and enhance program integrity. The leading  practices described in the Framework include control activities to prevent,  detect, and respond to fraud, with an emphasis on prevention, as well as  structures and environmental factors that influence or help managers  achieve their objective to mitigate fraud risks. In addition, the Framework  calls for management to conduct monitoring and incorporate feedback on  an ongoing basis. As the steward of taxpayer dollars, federal managers  have the ultimate responsibility in overseeing how hundreds of billions of  dollars are spent annually. Thus, they are well positioned to use these  practices, while considering the related fraud risks as well as the  associated costs and benefits of implementing the practices, to help  ensure that taxpayer resources are spent efficiently and effectively.
section_title: Unreliable Estimates and Agency Noncompliance Hinder Efforts to Understand Causes and Extent of the Issue
paragraphs: While there are positive steps being taken toward estimating and  reducing improper payments, agencies continue to face challenges in  these areas. In our report on the Fiscal Year 2014 Financial Report of the  United States Government, we continued to report a material weakness in  internal control related to improper payments because the federal  government is unable to determine the full extent to which improper  payments occur and reasonably assure that appropriate actions are taken  to reduce them. Challenges include risk assessments that may not  accurately assess the risk of improper payment, risk-susceptible  programs that did not report improper payment estimates, estimation  methodologies that may not produce reliable estimates, and  noncompliance with legislative requirements.
subsections: section_title: Potentially Inaccurate Risk Assessments
paragraphs: Agencies are required to conduct their own risk assessments to  determine which of their programs are susceptible to significant improper  payments and then estimate improper payments for these susceptible  programs. However, issues related to certain agencies’ risk assessments  have been identified, which calls into question whether these agencies  are actually identifying all programs that are susceptible to significant  improper payments.
We reported in December 2014 that the Department of Energy’s  (DOE) improper payment risk assessments did not always include a  clear basis for risk determinations and did not fully evaluate other  relevant risk factors, such as deficiencies in key controls for  preventing and detecting improper payments. For example, some  assessments we reviewed did not contain enough information for us  to determine how the entities responsible for making payments on  behalf of the department arrived at their risk determinations, raising  questions about who at the agency was responsible for reviewing and  approving risk assessments for consistency. In another example,  agency officials told us that contract audits were not always performed  in a timely manner, which introduces a risk that improper payments  will also not be identified in a timely manner. DOE’s risk assessment  guidance did not require that programs consider risk factors related to  internal control deficiencies, such as untimely contract audits. DOE  concurred with our recommendations to improve its risk assessments,  including revising guidance on how programs are to address risk  factors and directing programs to consider other risk factors likely to  contribute to improper payments.
In April 2015, the Treasury Inspector General for Tax Administration  (TIGTA) continued to report that IRS’s risk assessment process did  not provide a valid assessment of improper payments in certain IRS  programs and did not adequately address specific risks commonly  associated with verifying refundable credit claims. For example,  while IRS designated the Additional Child Tax Credit program as low  risk, TIGTA estimated that fiscal year 2013 improper payments in this  program were from 25.2 percent to 30.5 percent, or $5.9 billion to $7.1  billion.
section_title: Programs That Do Not Report Improper Payment Estimates
paragraphs: We found that not all agencies had developed improper payment  estimates for all of the programs and activities they identified as  susceptible to significant improper payments. Specifically, two federal  agencies did not report estimated improper payment amounts for four  risk-susceptible programs. For example, HHS did not report an improper  payment estimate in fiscal year 2014 for its Temporary Assistance for  Needy Families (TANF) program, which had program outlays of about  $16.3 billion and, according to HHS’s fiscal year 2014 agency financial  report, is considered susceptible to significant improper payments by  OMB. HHS cited statutory limitations for its state-administered TANF  program as prohibiting it from requiring states to participate in developing  an improper payment estimate for the program. In its March 2012 report  on the department’s compliance with improper payment reporting, HHS’s  OIG recommended that the department develop an improper payment  estimate for the TANF program and, if necessary, seek statutory authority  to require state participation in such a measurement.
section_title: Potentially Unreliable or Understated Estimates
paragraphs: While some programs did not report estimates, improper payment  estimates for certain programs may be unreliable. For example, because  of long-standing financial management weaknesses, the Department of  Defense (DOD) reported in its fiscal year 2014 agency financial report  that it could not demonstrate that all payments subject to improper  payment estimation requirements were included in the populations of  payments for review. Therefore, its improper payment estimates,  including the estimate for its Defense Finance and Accounting Service  (DFAS) Commercial Pay program, may not be reliable. We previously  reported that the foundation of reliable statistical sampling estimates is a  complete, accurate, and valid population from which to sample. While  DFAS Commercial Pay’s improper payment estimate is low, its program  outlays are significant—approximately $305 billion for fiscal year 2014.  Consequently, a small change in the program’s estimated error rate could  result in a significant change in the dollar value of its improper payment  estimate.
Further, flexibility in how agencies are permitted to implement improper  payment estimation requirements can contribute to inconsistent or  understated estimates. For example, in February 2015, we reported that  DOD uses a methodology for estimating TRICARE improper payments  that is less comprehensive than the methodology CMS used for  Medicare. Though the programs are similar in that they pay providers on  a fee-for-service basis and depend on contractors to process and pay  claims, TRICARE’s methodology does not examine the underlying  medical record documentation to discern whether each sampled payment  was supported or whether the services provided were medically  necessary. On the other hand, Medicare’s methodology more completely  identifies improper payments beyond those resulting from claim  processing errors, such as those related to provider noncompliance with  coding, billing, and payment rules. As a result, the estimated improper  payment error rates for TRICARE and Medicare are not comparable, and  TRICARE’s error rate is likely understated. In addition, corrective  actions for TRICARE improper payments do not address issues related to  medical necessity errors—a significant contributor to Medicare improper  payments. We recommended that DOD implement a more  comprehensive TRICARE improper payment methodology and develop  more robust corrective action plans that address the underlying causes of  improper payments. DOD concurred with our recommendations and  identified steps needed to implement them.
section_title: Noncompliance with Criteria in IPERA
paragraphs: In August 2015, we analyzed agency financial reports and OIG reports for  fiscal years 2012 through 2014 and identified five programs with improper  payment estimates greater than $1 billion that have been noncompliant  with at least one of the six criteria listed in IPERA for 3 consecutive years,  as shown in table 2. These five programs account for $75.9 billion, or 61  percent of the fiscal year 2014 government-wide reported improper  payment estimate.
According to IPERA, if a program is found to be noncompliant  in a fiscal year, the agency must submit a plan to Congress describing  the actions that the agency will take to bring the program into  compliance; for 2 consecutive fiscal years, and if OMB determines that additional  funding would help the agency improve, the agency and OMB may  take steps to transfer or request additional funding for intensified  compliance efforts; and  for 3 consecutive years, the agency must submit to Congress a  reauthorization proposal for each noncompliant program or activity or  any proposed statutory changes the agency deems necessary to  bring the program or activity into compliance.
Congressional oversight is important to help ensure that agencies and  OMB effectively implement these requirements.
section_title: Strategies for Reducing Improper Payments Include Preventive and Detective Controls and Commitment to Implementing Required Actions
paragraphs: We have previously reported a number of strategies that can help  agencies in reducing improper payments. After identifying and analyzing  the root causes of improper payments, implementing effective preventive  and detective controls that address those root causes could help advance  the federal government’s efforts to reduce improper payments. In  addition, the level of importance federal agencies and the administration  place on the efforts to implement the requirements established by IPERA  and other laws and related guidance will be a key factor in determining  their overall effectiveness in reducing improper payments and ensuring  that federal funds are used efficiently and for their intended purposes.
Implementing strong preventive controls can serve as the frontline  defense against improper payments. Proactively preventing improper  payments increases public confidence in the administration of benefit  programs and avoids the difficulties associated with the “pay and chase”  aspects of recovering overpayments. The following are examples of  preventive strategies, some of which are currently under way.
Up-front eligibility validation through data sharing. Data sharing  allows entities that make payments—to contractors, vendors,  participants in benefit programs, and others—to compare information  from different sources to help ensure that payments are appropriate.  One example of data sharing is agencies’ use of Social Security death  data to guard against improper payments to deceased individuals or  those who use deceased individuals’ identities.
Predictive analytic technologies. The Small Business Jobs Act of  2010 requires CMS to use predictive modeling and other analytic  techniques—known as predictive analytic technologies—both to  identify and to prevent improper payments under the Medicare Fee- for-Service program. Through analysis of provider networks, billing  patterns, and beneficiary utilization patterns, unusual or suspicious  patterns or abnormalities can be identified and used to prioritize  investigation of suspicious transactions.
Program design review and refinement. Improper payments may  be caused by specific aspects of a given program, providing agencies  with opportunities to address improper payments through improved  program design. For example, to the extent that provider enrollment  and eligibility verification problems are identified as a significant root  cause in a specific program, agencies may look to establish enhanced  controls in this area. Further, exploring whether certain complex or  inconsistent program requirements—such as eligibility criteria and  requirements for provider enrollment—contribute to improper  payments may lend insight to developing effective strategies for  enhancing compliance and may identify opportunities for streamlining  or changing eligibility or other program requirements.
Although strong preventive controls remain the frontline defense against  improper payments, effective detection techniques can help to quickly  identify and recover those overpayments that do occur. Detection  activities play a significant role not only in identifying improper payments  but also in providing data on why these payments were made and, in turn,  highlighting areas that need strengthened preventive controls. Further,  strong detective controls can act as a deterrent to those intentionally  trying to obtain overpayments. The following are examples of key  detection techniques.
Data mining. Data mining is a computer-based control activity that  analyzes diverse data for relationships that have not previously been  discovered. Data mining allows an organization to efficiently query a  financial system to identify potential improper payments, such as  multiple payments for the same invoice to the same recipient on the  same date, or to the same address. In another example, in May 2015,  we reported that the Department of Transportation’s federal transit  benefit program established procedures for conducting debit card  transaction data mining, including reviews of debit card transactions to  identify potential misuse or irregular activity, such as the purchase of  nontransit items. Similarly, we have found that if GAO had direct  access to the National Directory of New Hires, which includes wage  and employment information, from HHS, this would facilitate the  identification of possible improper payments in a variety of federal  programs across the federal government.
Recovery auditing. Recovery auditing is used to identify and recover  overpayments. IPERA requires agencies to conduct recovery audits, if  cost-effective, for each program or activity that expends $1 million or  more annually. In its fiscal year 2014 agency financial report, HHS  reported that the Medicare Fee-for-Service recovery audit program  identified approximately $1.9 billion and recovered $2.4 billion in  overpayments by the end of the fiscal year. The amount collected is  higher than the amount identified because it includes overpayments  collected in fiscal year 2014 that were identified in previous years.
To determine the full extent of improper payments government-wide and  to more effectively recover and reduce them, as we reported in March  2015, continued agency attention is needed to (1) identify programs  susceptible to improper payments, (2) develop reliable improper payment  estimation methodologies, (3) report on improper payments as required,  and (4) implement effective corrective actions based on root cause  analysis. For example, as previously stated, agencies with programs  that have been noncompliant with criteria in IPERA must take certain  actions to bring the programs into compliance. These actions could  improve transparency and accountability for agency management of  improper payments and provide an opportunity for congressional  oversight. We have also reported that agency top management needs to  provide greater attention to ensure compliance with the provisions of  federal improper payment laws and related guidance, especially the  issues identified in the OIG reports, to help reduce improper payments  and ensure that federal funds are used efficiently and for their intended  purposes. Absent such continued efforts, the federal government cannot  be assured that taxpayer funds are adequately safeguarded. Likewise,  implementing recommendations we have previously made to address  sources of improper payments in the three programs with the largest  estimates—Medicare, Medicaid, and EITC—could significantly contribute  to reducing improper payments overall.
section_title: Need to Address a Significant Tax Gap
paragraphs: The tax gap has been a persistent problem for decades. In January 2012,  IRS estimated that the gross tax gap was $450 billion in tax year 2006  (the most current estimate available). From 2001 to 2006, IRS  estimated that the gross tax gap increased by $105 billion. However,  according to IRS during this period the percentage of taxes owed and  paid on time remained relatively constant—just over 83 percent. IRS  estimated that it would eventually recover about $65 billion of the gross  tax gap through late payments and enforcement actions, leaving an  annual estimated net tax gap of about $385 billion.
In the face of large and growing structural deficits, it is especially  important to understand the causes of tax noncompliance and continue to  develop new approaches to minimize noncompliance. The sheer size of  the net tax gap—equivalent to roughly one-third of total federal  discretionary spending—is reason enough to renew efforts to address its  root causes. In addition to its effects on the deficit, tax noncompliance— intentional or not—could discourage compliant taxpayers and undermines  the integrity of the tax system and the public’s confidence in it. This  confidence is critical because the U.S. tax system relies heavily on  voluntary compliance. If confidence declines, voluntary compliance is  likely to decline as well. As we have previously testified, there are no easy  fixes to reducing the tax gap. Rather, the tax gap must be attacked on  multiple fronts and with multiple strategies over a sustained period.
subsections: section_title: Underreporting Is the Biggest Source of the Tax Gap
paragraphs: The tax gap is spread across different types of taxpayer noncompliance  and five types of taxes that IRS administers: individual income, corporate  income, employment, estate, and excise taxes. The tax gap arises when  taxpayers do not report their full tax liability on filed tax returns  (underreporting), do not pay the full amount of taxes reported on filed  returns (underpayment), or do not file a required tax return (nonfiling). As  shown in figure 3, underreporting accounts for the largest portion of the  tax gap—$376 billion of the $450 billion tax gap for tax year 2006.  Underreporting of tax liabilities can occur when taxpayers report earning  less income than they actually earned or report greater tax deductions,  credits, or other tax benefits than they were entitled to claim. Individual  income tax underreporting accounted for most—about $235 billion—of  the underreporting tax gap estimate for tax year 2006. Of that amount,  IRS reported that over half—$122 billion—comes from individuals’  business income, including income from (1) sole proprietorships (persons  who own unincorporated businesses by themselves), (2) partnerships (a  group of two or more individuals or entities, such as corporations or other  partnerships, that carry on a business), and (3) S-corporations  (corporations meeting certain requirements that elect to be taxed under  subchapter S of the Internal Revenue Code).
section_title: Reducing the Tax Gap Would Help Improve the Government’s Fiscal Position and Promote Taxpayer Confidence
paragraphs: As we have previously reported, completely closing the tax gap is not  feasible as it would entail more intrusive enforcement and more  burdensome recordkeeping or reporting than the public is willing to  accept, and more resources than IRS is able to commit. However, given  the size of the gross tax gap, which is larger than the interest the United  States paid on its debt in fiscal year 2014 ($430 billion), even modest  reductions would yield significant financial benefits and help improve the  government’s fiscal position. For example, just a 1 percent reduction in  the 2006 net tax gap would recover about $3.8 billion more in revenue  legally owed for just that one year. For illustrative purposes, this amount  of revenue could fund nearly 90 percent of the legislative branch, or over half the judicial branch, or  the entire National Park Service, or the combined operations of the U.S. Census Bureau ($1.1 billion), the  Small Business Administration ($0.9 billion), the Smithsonian ($0.8  billion), the Library of Congress ($0.6 billion) and the National  Archives ($0.4 billion).
Even when unintentional, tax noncompliance could discourage compliant  taxpayers and undermines the integrity of the tax system and the public’s  confidence in it. For example, consider two taxpayers with similar tax  situations—one who pays the full amount of tax due and the other who  does not. The one who does not pay taxes is not meeting his or her  obligation to fund government services and, in effect, shifts the fiscal  burden to those who do pay. Also, IRS devotes resources to attempt to  collect taxes due from the noncompliant taxpayer, resources that could be  used for other purposes.
Likewise, noncompliance can create an unfair competitive advantage  between businesses, as those that do not pay tax debts are avoiding  costs that tax-compliant businesses are incurring. For instance, our past  investigations identified instances in which federal contractors with tax  debts won awards based on price differentials over tax compliant  contractors. We made several recommendations to address the issue of  federal contractors that do not pay their tax debts, most of which were  implemented.
section_title: Key Factors Contributing to the Tax Gap Include Limited Third-party Information Reporting, Resource Trade-offs, and Complexities in the Tax Code
paragraphs: Our past work has found that three important factors contributing to the  tax gap are the extent to which income is reported to IRS by third parties,  IRS’s resource trade-offs, and tax code complexity.
Limited third-party information reporting. The extent to which  individual taxpayers accurately report their income is correlated to the  extent to which their income is reported to them and IRS (or taxes on  that income are withheld) by third parties. For example, according to  2006 IRS data, for types of income for which there is little or no third- party information reporting, such as business income, over half of  these types of income were misreported (see fig. 4). In contrast,  employers report most wages and salaries to employees and IRS  through Forms W-2 (Wage and Tax Statement). As shown below,  nearly 99 percent of these types of income were accurately reported  on individual tax returns. Similarly, banks and other financial  institutions provide information returns (Forms 1099) to account  holders and IRS showing taxpayers’ annual income from some types  of investments, and over 90 percent of these types of income were  accurately reported.
Resource trade-offs. Since fiscal year 2010, IRS’s annual  appropriations have declined by $1.2 billion, and since fiscal year  2009, staffing has fallen by about 11,000 full-time equivalent  employees. At the same time, the agency’s workload has increased  because of a surge in identity-related refund fraud and the  implementation of key provisions of PPACA, among other reasons. As  a result of this imbalance, for example, IRS decreased its individual  examination (or audit) coverage rate by 20 percent from fiscal years  2013 to 2015. Reducing examinations can reduce revenues collected  through such enforcement action and may indirectly reduce voluntary  compliance.
Tax code complexity. The federal tax system contains complex rules  that may be necessary to appropriately target tax policy goals, such  as providing benefits to specific groups of taxpayers. However, this  complexity imposes a wide range of recordkeeping, planning,  computing, and filing requirements upon taxpayers. For example,  taxpayers who receive income from rents, self-employment, and other  sources may be required to make complicated calculations and keep  detailed records. This complexity can engender errors and underpaid  taxes. Complexity, and the lack of transparency that it can create, can  also exacerbate doubts about the tax system’s integrity.
Tax expenditures—tax credits, deductions, exclusions, exemptions,  deferrals, and preferential tax rates estimated by Treasury to reduce tax  revenue by about $1.2 trillion in fiscal year 2014—can add to tax code  complexity in part because they require taxpayers to learn about,  determine their eligibility for, and choose between tax expenditures that  may have similar purposes. For example, as we reported in 2012, about  14 percent of filers in 2009 (1.5 million of almost 11 million eligible  returns) failed to claim an education credit or deduction for which they  appear eligible. This complexity may be acceptable if tax expenditures  achieve their intended purposes. However, in many cases, their  effectiveness is questionable or unknown. We have recommended  greater scrutiny of tax expenditures since 1994, as periodic reviews could  help determine how well specific tax expenditures achieve their goals and  how their benefits and costs (including complexity) compare to those of  other programs with similar goals.
By tracking changes in tax laws, paid tax return preparers and tax  software developers may help taxpayers navigate the complexities of the  tax code. However, some paid preparers may introduce their own  mistakes. For example, in a limited study in 2014, we found that 7 of 19  preparers who completed returns for our undercover investigators made  errors with substantial tax consequences. Likewise, using IRS data, we  estimated that 60 percent of returns prepared by preparers contained  errors.
section_title: Multiple Strategies Are Needed to Reduce the Tax Gap
paragraphs: IRS’s overall approach to reducing the tax gap consists of improving  services to taxpayers and enhancing enforcement of the tax laws. In spite  of these efforts, the percentage at which taxpayers pay their taxes  voluntarily and on time has remained constant over the past three  decades. Our past work has demonstrated that no single approach will  fully and cost-effectively address noncompliance since the problem has  multiple causes and spans different types of taxes and taxpayers. In light  of these challenges, the following strategies could help reduce the tax  gap and are generally reflected in recommendations we have made to  IRS that have not yet been implemented (see table 3) and matters for  congressional consideration. A summary of these recommendations and  matters for congressional consideration follows.
Information reporting is a powerful tool that reduces tax evasion, helps  taxpayers comply voluntarily, and increases IRS’s enforcement  capabilities. Generally, new requirements on third parties to submit  information returns would require statutory changes. We have also  identified the following improvements that IRS could make to existing  forms and better ways to use them.
Education payment information. We previously recommended that  IRS revise Form 1098-T (Tuition Statement) on which educational  institutions are required to report to IRS information on qualified tuition  and related expenses for higher education. Taxpayers can also use  this information to determine the amount of educational tax benefits  they can claim on their tax return. IRS allows institutions to report  either the amount paid or the amount billed for qualified expenses.  IRS officials stated that most institutions report the amount billed and  do not report the actual amount paid. The amount billed may be  different than from the amount that can be claimed as a credit. For  example, the amount billed may not account for all scholarships or  grants the student received. In such cases, the Form 1098-T may  overstate the amount that can be claimed as a credit, confusing  taxpayers. Conversely, if institutions are not providing information on  other eligible items, such as books or equipment, taxpayers might be  understating their claims. In order to reduce taxpayer confusion and  enhance compliance with the requirements, we recommended that  IRS revise the form. The administration has sought legislative  authority to require reporting of amounts paid. Legislation enacted in  June 2015 only allows a taxpayer to claim a credit or deduction for  education expenses if he or she received a Form 1098-T from an  educational institution. The Joint Committee on Taxation estimates  that this requirement will raise approximately $576 million through  2025 by reducing erroneous claims by taxpayers without valid Forms  1098-T. However, without a requirement for institutions to report  amounts paid, taxpayers may remain confused by the information  reported to them, and IRS may miss an opportunity to make use of a  low-cost, less intrusive tool that could help ensure compliance.
Automated matching. Taking greater advantage of automated  processes could enhance some IRS enforcement programs. For  example, IRS does not routinely match the K-1 information return—on  which partnerships and S corporations report income distributed to  partners or shareholders—to income information on tax returns for  partners and shareholders that are themselves partnerships and S  corporations. Matching such information could provide another tool for  detecting noncompliance by these types of entities. In 2014, we  recommended that IRS test the feasibility of such matching. IRS  reported that it understands the objective of this recommendation and,  at such time that resources are available to enhance capabilities, it  would consider the proposed methodology of advanced testing. These  resource limitations are precisely why we believe that IRS needs to  take action to develop better information for making decisions on how  to allocate existing resources.
Accelerating W-2 filing deadlines. Accelerating W-2 filing deadlines  could help IRS reduce improper EITC payments and help close the  tax gap. Specifically, IRS has reported that a common EITC error is  misreporting income; however, the timing of deadlines for filing Forms  W-2 poses a challenge for enforcement. Rather than holding refunds  until all compliance checks can be completed, IRS issues most  refunds months before receiving and matching information returns,  such as the W-2 to tax returns. As a result, IRS’s “pay and chase”  compliance model tries to recover bad refunds and unpaid taxes after  matching information and pursuing discrepancies. If IRS had access  to W-2 data earlier, it could match such information to taxpayer  returns to identify discrepancies with EITC claims and potentially  collect additional taxes. Moreover, earlier matching could help IRS  prevent issuing billions of dollars of potentially fraudulent refunds  because of identity theft.
Treasury recently proposed to Congress that the due date for filing  information returns with IRS, including the Form W-2, be moved to  January 31 to facilitate the use of earnings information in the detection  of noncompliance. Because any change to filing deadlines could  impose burdens on employers and taxpayers as well as create  additional costs to IRS for systems and process changes, Congress  and other stakeholders would need information on this impact to fully  assess any potential changes. For example, the deadline change  could involve upgrades to IRS’s information technology systems;  logistical challenges coordinating with other agencies, such as the  Social Security Administration; and regulatory and policy changes,  such as delaying refunds and the start of the filing season.
In August 2014, we recommended that IRS estimate the costs and  benefits of accelerating W-2 deadlines and options to implement pre- refund matching using W-2 data as a method to combat the billions of  dollars lost to identity refund fraud, allowing the agency more  opportunity to match employers’ and taxpayers’ information. In  November 2014, IRS reported that it had convened a working group  of internal stakeholders and subject matter experts to identify the  costs and benefits of accelerating Form W-2 deadlines. As of July  2015, the working group had drafted a document that is currently  under review by other agencies, including Treasury and the Social  Security Administration. In September 2015, the Senate Committee  on Finance scheduled a committee markup of a bill to prevent identity  theft and tax refund fraud, including a provision to modify due dates  for filing Forms W-2. The Joint Committee on Taxation estimated that  the provision would raise $151 million in revenue through fiscal year  2025.
subsections: section_title: Developing a Long-Term Strategy to Enhance Budget Planning
paragraphs: A long-term strategy that includes a fundamental reexamination of IRS’s  operations, programs, and organizational structure could help it operate  more effectively and efficiently in an environment of budget uncertainty.  IRS has taken some interim steps, but they are not sufficient to stem  performance declines.
Return on investment data. IRS could use return on investment data  to allocate its enforcement resources and potentially increase  revenues. In 2012, we found that IRS was spending most of its  enforcement resources on examinations of taxpayers with less than  $200,000 in positive income, even though direct revenue return on  investment was highest for examinations of taxpayers with $200,000  or more in positive income. Therefore, we recommended that IRS  conduct a cost-benefit analysis across different enforcement  programs and cases within programs to determine whether to  reallocate its enforcement resources each year. We demonstrated  how a relatively small hypothetical shift in resources could potentially  increase direct revenue by $1 billion annually (as long as the average  ratio of direct revenue to cost for each category of returns did not  change), without significant negative effects on voluntary compliance.  Resource reallocation can also affect tax collections indirectly by  influencing the voluntary compliance of nonexamined taxpayers.
Similarly, in a 2009 report, we found that IRS was able to examine  only about 1 percent of estimated noncompliant sole proprietors in  2008 even though it had invested nearly a quarter of all revenue agent  time toward this purpose. We found that not only are these  examinations burdensome for businesses, they are also costly for IRS  and yield less revenue than examinations of other categories of  taxpayers, in part because most sole proprietorships have low receipt  amounts.
IRS officials reported they have developed a methodology for  estimating marginal direct revenue and costs for selected workload  categories within their correspondence examination program. They  are working to apply this methodology to other categories within that  program and to other forms of examinations; however, they expect  that effort will be much more complex and time-consuming. As of July  2015, officials do not yet have a timeline for full implementation.
Strategic planning. In June 2014, we reported that IRS’s strategic  plan did not address budget uncertainty, although there are reasons  to believe that funding will be constrained for the foreseeable future.  We recommended that IRS reexamine programs, related processes,  and organizational structures to determine whether they are  effectively and efficiently achieving the IRS mission, and streamline or  consolidate management or operational processes and functions to  make them more cost-effective. IRS agreed with our recommendation  and is taking steps to implement it; for example, according to IRS  officials, a new process was developed for building the fiscal year  2017 budget request, which included determining IRS-wide priorities.
Reassessing the level of resources devoted to enforcement.
Additional resources for enforcement would enable IRS to contact  millions of potentially noncompliant taxpayers it identifies but cannot  contact because of budget constraints. Since fiscal year 2010, IRS’s  enforcement resources have declined by more than 10 percent, from  $5.5 billion to $4.9 billion in fiscal year 2015. To determine the  appropriate level of enforcement resources, we have previously  reported that policymakers would need to consider how to balance  taxpayer service and enforcement activities and how effectively and  efficiently IRS currently uses its resources.
Modernizing information technology. IRS relies on information  systems in many aspects of its operations from taxpayer service to  compliance and enforcement. Therefore, investing resources to  modernize IRS’s information systems is an important step toward  improving taxpayer compliance. For example, in fiscal year 2009, IRS  began funding the Information Reporting and Document Matching  (IRDM) program in part to implement two new information reporting  requirements focused on merchant card payments and securities  basis reporting. IRDM also established a new matching program to  identify underreported business income and expanded IRS’s ability to  use information returns to improve voluntary compliance and accurate  reporting of income. Under IRDM, IRS built or enhanced several  information systems to sort, match, identify, and manage returns that  are likely sources of revenue that IRS could not have easily identified  using its existing matching system. IRS has other modernization  efforts underway, such as its Customer Account Data Engine 2  investment, which enables daily tax processing and is intended to  provide faster refunds to taxpayers, more timely account updates, and  faster issuance of taxpayer notices. We have ongoing work to  determine the progress of such modernization efforts, and plan to  issue a report associated with this work in the spring of 2016.
section_title: Collecting More Data on Noncompliance
paragraphs: A critical step toward reducing the tax gap is to understand the sources  and nature of taxpayer noncompliance. We have long encouraged  regularly measuring tax noncompliance as well as estimating the tax gap,  in part because analyzing the data used to determine the estimate can  help identify ways to improve IRS’s efforts and increase compliance. IRS  continues to measure the extent of taxpayer noncompliance. However,  our work has found that IRS does not adequately measure the effect of  some specific components of its compliance programs, such as the  following:
Correspondence examinations. IRS does not have information to  determine how its program of examining individual tax returns via  correspondence affects the agency’s broader strategic goals for  compliance, taxpayer burden, and cost. Thus, it is not possible to tell  whether the program is performing better or worse from one year to  the next. In 2014, we made several recommendations related to  monitoring program performance. IRS officials said they will review  current documentation and ensure that they establish correspondence  audit program objectives and measures and clearly link them to the  overall IRS goals and objectives. Officials also said they will update  official guidance as warranted and plan to implement this  recommendation by March 2016.
Partnerships and S-corporations. In 2014, we found that the full  extent of partnership and S-corporation income misreporting is  unknown, and that IRS examinations and automated document  matching have not been effective at finding most of the estimated  misreported income. Further, IRS does not know how income  misreporting by partnerships affects taxes paid by partners. We  recommended, among other things, that IRS (1) develop a strategy to  improve its information on the extent and nature of partnership  misreporting and (2) use the information to potentially improve how it  selects partnership returns to examine. IRS has developed a strategy,  which would involve a multi-year examination effort to collect audit  data from a representative, statistical sample of partnerships. In  September 2015, IRS officials stated that they were beginning a  discussion about implementing the proposed strategy, and therefore  do not yet have a timeline for implementation. Without this  information, IRS is unable to make fully informed, data-based  decisions on examination selection.
Compliance Assurance Process (CAP). IRS does not fully assess  the savings it achieves from its CAP—through which large corporate  taxpayers and IRS agree on how to report tax issues before tax  returns are filed. In 2013, we recommended that IRS track savings  from CAP and develop a plan for reinvesting any savings to help  ensure the program is meeting its goals. In response to our  recommendation, IRS has taken steps to track savings by analyzing  and comparing the workload inventory of account coordinators who  handle CAP cases against team coordinators who handle non-CAP  cases. However, as of September 2015, IRS has not shown how such  a workload comparison demonstrated savings from CAP or developed  a plan for reinvesting any savings. Without a plan for tracking savings  and using the savings to increase examination coverage, IRS cannot  be assured that the savings are effectively invested in either CAP or  non-CAP taxpayers with high compliance risk.
Tax gap estimates. IRS issued its last detailed study of the tax gap in  January 2012, which used tax year 2006 data. According to IRS  officials, the next tax gap update is scheduled to be released in  December 2015, at the earliest. Without more compliance information,  IRS does not have reliable data about its compliance results to fully  inform decisions about allocating examination resources across  different types of businesses.
section_title: Ensuring High-Quality Services to Taxpayers
paragraphs: IRS provides taxpayers an array of services by telephone, by  correspondence, and online. Ensuring high-quality services is a  necessary foundation for voluntary compliance, as it can help taxpayers  who wish to comply with tax laws but do not understand their obligations.  However, in recent years IRS has struggled to maintain or improve  services in the following areas.
Telephone services. In fiscal year 2014, taxpayers had to wait an  average of about 20 minutes to speak with someone at IRS, more  than twice as long as they did in fiscal year 2009, when the average  wait time was about 9 minutes. Wait times have increased in part  because IRS devoted fewer full-time equivalent employees to  answering telephones and because the average time assisting  taxpayers with their questions has increased. In December 2014, we  recommended that IRS benchmark its telephone service measures to  the best in the business. IRS disagreed with this recommendation,  noting in February 2015 that it is difficult to identify comparable  organizations with a size or scope similar to that of IRS. We disagree  that IRS’s telephone operations cannot be compared to others. IRS  previously benchmarked its telephone level of service measure to  both private and public sector organizations, which allowed it to  identify options for modifying that measure. IRS uses more than one  measure (i.e., level of service) to fully evaluate its telephone  performance, and benchmarking all of these measures alongside  each other to the best in the business could help inform Congress  about resources needed to improve the level of service provided to  taxpayers in a budget constrained environment. Accordingly, we  believe this recommendation remains valid and should be  implemented.
Online services. Taxpayers benefit from online services because  they can research large amounts of tax guidance, the services are  available 24 hours a day, and there is no waiting to speak to a  telephone representative. While IRS’s website provides some basic  tools to request personalized information, such as the status of  refunds, the website does not give taxpayers interactive personal  account access. The National Taxpayer Advocate, the Electronic Tax  Administration Advisory Committee, and others have all  recommended that IRS provide taxpayers with online access to their  accounts, including ways to resolve compliance problems. In  December 2011 and April 2013, we recommended that IRS develop a  long-term strategy to improve web services.
As of July 2015, IRS reported that it is integrating online services as a  key component of its new Service on Demand (SOD) strategy, which  aims to deliver service improvements across different taxpayer  interactions, such as individual account assistance, refunds, identity  theft, and billings and payments. However, the SOD strategy does not  include specific goals, performance metrics, or implementation time  frames. A comprehensive long-term strategy for online services that  includes these characteristics—whether or not it is incorporated into a  broader strategy such as SOD—would help ensure that IRS is  maximizing the benefit to taxpayers from this investment and reduce  costs in other areas, such as IRS’s telephone operations. Further, it  could address procedures to better protect online accessible data,  which are especially important after the data breach discovered in  May 2015 in which individuals used IRS’s online services to gain  access to information from over 330,000 taxpayers. Thus, we believe  this recommendation remains valid and should be implemented.
section_title: Leveraging Stakeholders
paragraphs: Another way IRS may be able to reduce the tax gap is by leveraging  stakeholders. Given the complexities in the tax code, taxpayers and IRS  can benefit from the expertise of tax return preparers and information  shared by foreign governments and whistleblowers.
Paid tax return preparers. Over half of all taxpayers rely on the  expertise of a paid preparer to provide advice and help them meet  their tax obligations. IRS regards paid preparers as a critical link  between taxpayers and the government. Consequently, paid  preparers are in a position to have a significant impact on the federal  government’s ability to collect revenue and minimize the tax gap. We  have previously reported that for IRS to improve its enforcement of tax  laws, it must continue to seek ways to leverage paid preparers to  improve tax compliance.
Foreign governments. Information from foreign governments is also  important to help improve tax compliance. Increasingly, tax authorities  around the world are exchanging information with other countries to  administer and enforce the tax laws of their respective countries.  Under the Foreign Account Tax Compliance Act, for example, U.S.  financial institutions and other entities are required to withhold a  portion of certain payments made to foreign financial institutions, if  those institutions have not entered into an agreement with IRS to  report U.S. account holders’ details to IRS. We have previously  reported that it is particularly important that the United States  continues to develop and maintain cooperative relationships with  other countries to help ensure that U.S. taxpayers comply with U.S.  tax laws.
Whistleblowers. Whistleblowers provide IRS information on  suspected noncompliance. They have the potential to help IRS collect  billions in tax revenue that may otherwise go uncollected. Since IRS  expanded its whistleblower program in 2007, it has collected over $1  billion because of whistleblower claims. We have ongoing work for  this committee that focuses on improving IRS’s communication with  whistleblowers and the timeliness of claims processing, among other  things, which could help IRS recover more unpaid tax revenues.
section_title: Considering Legislative Action
paragraphs: Given that the tax gap has been a persistent issue, we have previously  reported that reducing it will require targeted legislative actions, including  the following:
Additional third-party information reporting. As noted earlier,  taxpayers are much more likely to report their income accurately when  the income is also reported to IRS by a third party. In 2008 and 2009,  we suggested Congress consider expanding third-party information  reporting to include payments for services to rental real estate owners  and payments for services provided by corporations, respectively.  In 2010, the Joint Committee on Taxation estimated potential revenue  increases for a 10-year period to be $2.5 billion for third-party  information reporting of rental real estate service payments and $3.4  billion for third-party information reporting of service payments to  corporations. Congress enacted a more expansive regime in 2010,  covering reporting of payments for goods as well as services, and  subsequently repealed these provisions. A more narrow extension of  reporting requirements of payments for services provided by  corporations and for services provided to rental real estate owners  remains an important option for improving compliance.
Enhanced electronic filing. Requiring additional taxpayers to  electronically file tax and information returns could help IRS improve  compliance in a resource-efficient way. For example, partnerships  with more than 100 partners and corporations with assets of $10  million or more that file at least 250 returns during the calendar year  must electronically file their returns. In 2014, we suggested that  Congress consider expanding the mandate for partnerships and  corporations to electronically file their tax returns, as this could help  IRS reduce return processing costs, select the most productive tax  returns to examine, and examine fewer compliant taxpayers.
Math error authority. IRS has the authority to correct calculation  errors and check for other obvious noncompliance such as claims  above income and credit limits. Treasury has proposed expanding  IRS’s “math error” authority to “correctible error” authority to permit it  to correct errors in cases where information provided by the taxpayer  does not match information in government databases, among other  things. Expanding such authority—which we have suggested  Congress consider with appropriate safeguards—could help IRS  correct additional errors and avoid burdensome audits and taxpayer  penalties. In March 2015, the Joint Committee on Taxation  estimated that more flexible correctible error authority could raise  $133 million through 2025.
Paid preparer regulation. Establishing requirements for paid tax  return preparers could improve the accuracy of the tax returns they  prepare. Oregon began regulating preparers in the 1970s and  requires testing among other requirements. In August 2008, we found  that the odds that a return filed by an Oregon paid preparer was  accurate were 72 percent higher than the odds for a comparable  return filed by a paid preparer in the rest of the country. In August  2014, IRS reported that 68 percent of all tax returns claiming the EITC  in tax years 2006 and 2007 were prepared by paid tax preparers— most of whom were not subject to any IRS regulation—and that from  43 to 50 percent of the returns overclaimed the credit. Similarly, in  our undercover visits in 2014 to randomly selected tax preparers, a  sample that cannot be generalized, we found errors in EITC claims  and non-Form W-2 income reporting (for example, cash tips) resulting  in significant overstatement of refunds. Establishing requirements  for paid tax return preparers could improve the accuracy of the tax  returns they prepare, not just returns claiming EITC. In 2014, we  suggested Congress consider granting IRS the authority to regulate  paid tax preparers, if it agrees that significant paid preparer errors  exist. In September 2015, the Senate Committee on Finance  scheduled a committee markup of a bill to introduce legislation that  would regulate all paid tax return preparers, which the Joint  Committee on Taxation estimated would raise $135 million in revenue  through fiscal year 2025.
Tax reform and simplification. A broader opportunity to address the  tax gap involves simplifying the Internal Revenue Code, as complexity  can cause taxpayer confusion and provide opportunities to hide willful  noncompliance. Fundamental tax reform could result in a smaller tax  gap if the new system has fewer tax preferences or complex tax code  provisions; such reform could reduce IRS’s enforcement challenges  and increase public confidence in the tax system. Short of  fundamental reform, targeted simplification opportunities also exist.  Amending the tax code to make definitions more consistent across tax  provisions could help taxpayers more easily understand and comply  with their obligations and get the maximum tax benefit for their  situations. For example, there are several provisions in the tax code  benefiting taxpayers’ educational expenses, but the definition of what  qualifies as a higher-education expense varies between these tax  expenditures.
There are no easy solutions to addressing the tax gap. Reducing the tax  gap will require multiple strategies and long-term changes in IRS’s  operations and systems. Such changes are as important as ever given  the nation’s fiscal challenges and require the combined efforts of  Congress and IRS. Implementing our recommendations and legislative  options could increase revenues and promote savings, leading to greater  fiscal stability.
With outlays for major programs, such as Medicare and Medicaid,  expected to increase over the next few years, it is critical that actions are  taken to reduce improper payments and minimize the tax gap. There is  considerable opportunity to improve the government’s fiscal position  without detrimentally affecting the valuable programs that serve our  citizens. For this reason, we will continue to assist Congress by focusing  attention on issues related to improper payments and the tax gap.
Chairman Hatch, Ranking Member Wyden, and Members of the  Committee, this completes my prepared statement. I would be pleased to  answer questions that you may have at this time.
section_title: GAO Contacts
paragraphs: For further information on improper payment issues, please contact Beryl  H. Davis, Director, Financial Management and Assurance, who may be  reached at (202) 512-2623 or davisbh@gao.gov. For information on tax  gap issues, please contact James R. McTigue, Jr., Director, Strategic  Issues, who may be reached at (202) 512-9110 or mctiguej@gao.gov, or  Jessica Lucas-Judy, Acting Director, Strategic Issues, who may be  reached at (202) 512-9110 or lucasjudyj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs offices may be  found on the last page of this statement.
section_title: Appendix I: Programs with Improper Payment Estimates Exceeding $1 Billion in Fiscal Year 2014
paragraphs: Agency  Department of Health and Human  Services (HHS)
Estimated dollars  (in millions)
Estimated error rate  (percentage of outlays)
Social Security Administration  (SSA)
Department of Agriculture (USDA)
section_title: Appendix II: Programs with Estimated Improper Payment Error Rates Exceeding 10 Percent in Fiscal Year 2014
paragraphs: Fiscal year 2014 reported improper payment estimates  Estimated dollars  (in millions)
Estimated error rate  (percentage of outlays)
Department of Agriculture  (USDA)
Department of Health and  Human Services (HHS)
section_title: Related GAO Products
paragraphs: A Framework for Managing Fraud Risks in Federal Programs.  GAO-15-593SP. Washington, D.C.: July 2015.
Improper Payments: Government-Wide Estimates and Use of Death Data  to Help Prevent Payments to Deceased Individuals. GAO-15-482T.  Washington, D.C.: March 16, 2015.
Government Efficiency and Effectiveness: Opportunities to Reduce  Fragmentation, Overlap, Duplication, and Improper Payments and  Achieve Other Financial Benefits. GAO-15-440T. Washington, D.C.:  March 4, 2015.
Financial Audit: U.S. Government’s Fiscal Years 2014 and 2013  Consolidated Financial Statements. GAO-15-341R. Washington, D.C.:  February 26, 2015.
High-Risk Series: An Update. GAO-15-290. Washington, D.C.: February  11, 2015.
Improper Payments: TRICARE Measurement and Reduction Efforts  Could Benefit from Adopting Medical Record Reviews. GAO-15-269.  Washington, D.C.: February 18, 2015.
Improper Payments: DOE’s Risk Assessments Should Be Strengthened.  GAO-15-36. Washington, D.C.: December 23, 2014.
Improper Payments: Government-Wide Estimates and Reduction  Strategies. GAO-14-737T. Washington, D.C.: July 9, 2014.
Tax Gap: Sources of Noncompliance and Strategies to Reduce It.  GAO-12-651T. Washington, D.C.: April 19, 2012.
Tax Gap: Complexity and Taxpayer Compliance. GAO-11-747T.  Washington, D.C.: June 28, 2011.
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