Enforcement of Tax Laws
The Internal Revenue Service (IRS) continues to demonstrate top leadership support for improving tax compliance and addressing the tax gap. However, IRS’s capacity to implement new initiatives, carry out ongoing enforcement and taxpayer service programs, and combat identity theft (IDT) refund fraud under an uncertain budgetary environment remains a challenge. Enforcement of the tax laws helps fund the U.S. government. IRS enforcement collects revenue from noncompliant taxpayers and, perhaps more importantly, promotes voluntary compliance by giving taxpayers confidence that others are paying their fair share. In 2016, IRS estimated that the average annual gross tax gap—the difference between taxes owed and taxes paid on time—was $458 billion for tax years 2008-2010. IRS is able to recover a portion of the tax gap. In 2016, IRS estimated that it will eventually collect $52 billion of the tax gap through enforcement actions and late payments, leaving an annual estimated net tax gap of $406 billion for tax years 2008-2010.
In 2015, we expanded the enforcement of tax laws high-risk area to include IRS’s efforts to address tax refund fraud due to IDT, which occurs when an identity thief files a fraudulent tax return using a legitimate taxpayer’s identifying information and claims a refund. According to IRS, it estimates that at least $14.5 billion in IDT tax refund fraud was attempted in tax year 2015, of which it prevented at least $12.3 billion (85 percent). Of the amount attempted, IRS estimated that at least $2.2 billion (15 percent) was paid.
 Because of the difficulties in estimating the amount of undetectable fraud, the actual amount could differ from these estimates.
As previously mentioned, IRS continues to demonstrate top leadership support for improving tax compliance and addressing the tax gap. For example, it continues to research the extent and causes of taxpayer noncompliance, and released an updated tax gap estimate in April 2016. The agency has also taken steps to address IDT refund fraud, such as increasing the number of staff and resources dedicated to combating this issue. IRS has now partially met the criterion for capacity with respect to combating IDT refund fraud. But as also cited above, IRS’s capacity to implement new initiatives, carry out ongoing enforcement and taxpayer service programs, and combat IDT refund fraud under an uncertain budgetary environment remains a challenge. Annual appropriations increased by $290 million between fiscal years 2015 ($10.9 billion) and 2016 ($11.2 billion), but remain about $900 million (about 7 percent) below fiscal year 2011 levels ($12.1 billion).
IRS continues to take actions toward meeting three other criteria for removal from our High-Risk List: developing a corrective action plan, monitoring, and demonstrating progress. For example, IRS’s strategic plan includes general approaches to make voluntary compliance easier for taxpayers. IRS also has a strategic plan that identifies refund fraud and IDT as challenges facing the nation’s tax system over the next several years. However, IRS has not yet implemented some of our recommendations highlighted in the 2015 high-risk report that could help it improve its corrective action plan, such as better measuring return-on-investment (ROI), better leveraging automated processes, and improving enforcement data. Also, for some compliance initiatives, such as those related to the Foreign Account Tax Compliance Act or the Patient Protection and Affordable Care Act (PPACA), IRS will need to continue to focus on measuring results and the effect of these initiatives on the tax gap.
While IRS has developed research efforts to assess its IDT defense effectiveness, the agency needs to do more to demonstrate progress. Due in part to substantial methodological changes used to estimate the amount of IDT refund fraud prevented, year over year comparisons in IRS’s estimates of IDT refund fraud prevented and paid are not comparable. In addition, the agency has yet to address key weaknesses in authenticating taxpayers. While IRS is taking steps to improve authentication, it will still be vulnerable until it completes and uses the results of its analysis of costs, benefits, and risk to inform decision-making.
Although more needs to be done, Congress and IRS have taken steps to implement a number of our recommendations that have resulted in benefits. For example, Congress passed legislation targeted at further strengthening tax law enforcement, including the Tax Equity and Fiscal Responsibility Act (TEFRA), which will improve the efficiency of partnership audits. Congress also passed legislation that will increase tax compliance through improved third-party reporting requirements, strengthened controls over higher education tax benefits to reduce inaccurate claims, and provided IRS with authority to correct errors related to the First-Time Home Buyer’s Credit. IRS and congressional actions based on our work in this area resulted in a total financial savings of approximately $7.8 billion between 2011 and 2016 and an estimated $12.5 billion in additional revenue over the next 8 years.
Enforcing Tax Laws
IRS should implement our open recommendations, especially those that focus on improving audit effectiveness, taxpayer services, and resource investment decision making and oversight. Specifically, IRS should:
- continue to develop and implement a long-term strategy to address operations amidst an uncertain budget environment;
- determine resource allocation strategies for its enforcement efforts such as large partnership audits;
- assess the performance of its information technology (IT) investments as well as improve its IT security and online web services;
- develop a strategy for better identifying partnership noncompliance and assessing the effectiveness of exam selection;
- strengthen referral programs so whistleblowers and other stakeholders can more easily submit information to IRS about tax noncompliance; and
- enhance taxpayer services by developing a long-term strategy for providing web-based services to taxpayers, and improve telephone service by establishing a customer service standard and identifying resources needed to achieve that standard.
IDT Refund Fraud
With regard to IDT refund fraud, IRS should implement our open recommendations, including
- identifying and addressing authentication risks associated with the Taxpayer Protection Program;
- estimating and documenting the costs, benefits, and risks of possible options for taxpayer authentication; and
- improving third-party partnership programs.
Congressional Actions Needed
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. 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 that, for a 10-year period, tax compliance could potentially increase by $2.5 billion if third parties reported rental real estate service payments, and $3.4 billion if third parties reported 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.
- Enhanced electronic filing. Requiring additional taxpayers to electronically file tax and information returns could help IRS improve compliance efficiently. Current law requires entities that file more than 250 returns during a year or partnerships with more than 100 partners to file electronically. 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.
Increased electronic filing would also allow IRS to obtain timely, accurate data from a significant number of additional employers, and could further enhance the benefits IRS could obtain from the accelerated Wage and Tax Statement (W-2) deadline and prerefund W-2 matching. Treasury has requested authority to reduce the current 250-return threshold for employers electronically filing information returns. In 2014, we suggested that Congress consider authorizing Treasury to lower the threshold for electronic filing of W-2s from 250 returns annually to between 5 to 10 returns, as appropriate.
- Math error authority. Providing IRS with correctible authority with appropriate safeguards to permit it to correct errors in cases where information provided by the taxpayer does not match information in government databases, among other things, could help IRS correct additional errors and avoid burdensome audits and taxpayer penalties. Congress enacted legislation in December 2015 that expands the circumstances in which IRS may use math error authority in some situations for selected refundable tax credits. While expanding math error authority is consistent with what we have previously suggested, we had suggested that math error authority be authorized on a broader basis with appropriate controls rather than on a piecemeal basis, and that controls may be needed to ensure that this authority is used properly. Our prior work identified potential controls, such as requiring IRS to report on its use of math error authority.
- Paid preparer regulation. Establishing requirements for paid tax return preparers could improve the accuracy of the tax returns they prepare. In 2014, we suggested Congress consider granting IRS the authority to regulate paid tax preparers, if it agrees that significant paid preparer errors exist. The Joint Committee on Taxation estimated that legislation to regulate paid preparers would increase tax compliance by $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 confuse taxpayers 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 define terms more consistently 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.
 26 U.S.C. § 6011(e)(2).
 Pub. L. No. 114-113, div. Q, title II, §§ 203(e), 208(b), 129 Stat. 2242, 3080, 3084 (Dec. 18, 2015).
GAO-16-475: Published: May 27, 2016. Publicly Released: Jun 27, 2016.
The Earned Income Tax Credit (EITC), the Additional Child Tax Credit (ACTC), and the American Opportunity Tax Credit (AOTC) provide tax benefits to millions of taxpayers—many of whom are low-income—who are working, raising children, or pursuing higher education. These credits are refundable in that, in addition to offsetting tax liability, any excess credit over the tax liability is refunded t...
GAO-16-508: Published: May 24, 2016. Publicly Released: Jun 23, 2016.
Taxpayer Protection Program (TPP). While the Internal Revenue Service (IRS) has made efforts to strengthen TPP—a program to authenticate the identities of suspicious tax return filers and prevent identity theft (IDT) refund fraud—fraudsters are still able to pass through and obtain fraudulent refunds. TPP authenticates taxpayers by asking questions only a real taxpayer should know; however, fr...
GAO-16-155: Published: Feb 23, 2016. Publicly Released: Mar 24, 2016.
Information referrals from the public alleging tax noncompliance must be submitted on paper forms by mail to the Internal Revenue Service (IRS). These referrals are manually screened by clerical staff and routed by mail to units across IRS for further action, as shown in the figure.Process for Screening and Routing Information Referrals for Further ReviewIneffective internal controls undercut IRS...
GAO-16-151: Published: Dec 16, 2015. Publicly Released: Jan 14, 2016.
The Internal Revenue Service (IRS) provided the lowest level of telephone service during fiscal year 2015 compared to prior years, with only 38 percent of callers who wanted to speak with an IRS assistor able to reach one. This lower level of service occurred despite lower demand from callers seeking live assistance, which has fallen by 6 percent since 2010 to about 51 million callers in 2015. Ove...
GAO-16-20: Published: Oct 29, 2015. Publicly Released: Nov 30, 2015.
The Internal Revenue Service (IRS) Whistleblower Office (WO) is responsible for processing thousands of tax whistleblower claims annually for two related whistleblower programs: for claims of $2 million or less, the 7623(a) program, and for claims over $2 million, the 7623(b) program. The whistleblower claim review process takes several years to complete, and GAO found that the WO is not using ava...
GAO-15-513: Published: Jun 30, 2015. Publicly Released: Jul 22, 2015.
According to estimates produced by government tax researchers using 2010 taxpayer data, small businesses (defined in the research as individuals or entities with substantive business activity but with less than $10 million in total income and deductions) make up 99 percent of all businesses. Approximately 69 percent of small businesses (about 16 million) are individual taxpayers who report busines...
GAO-15-119: Published: Jan 20, 2015. Publicly Released: Feb 19, 2015.
Identity Theft (IDT) Refund Fraud Cost Estimates. The Internal Revenue Service's (IRS) fraud estimates met several GAO Cost Guide best practices, such as documenting data sources and detailing calculations. However, the estimates do not reflect the uncertainty inherent in measuring IDT refund fraud because they are presented as point estimates. Best practices suggest that agencies assess the effec...
GAO-14-732: Published: Sep 18, 2014. Publicly Released: Sep 18, 2014.
The number of large partnerships has more than tripled to 10,099 from tax year 2002 to 2011. Almost two-thirds of large partnerships had more than 1,000 direct and indirect partners, had six or more tiers and/or self reported being in the finance and insurance sector, with many being investment funds.The Internal Revenue Service (IRS) audits few large partnerships. Most audits resulted in no chang...
GAO-14-633: Published: Aug 20, 2014. Publicly Released: Sep 22, 2014.
Based on preliminary analysis, the Internal Revenue Service (IRS) estimates it paid $5.2 billion in fraudulent identity theft (IDT) refunds in filing season 2013, while preventing $24.2 billion (based on what it could detect). The full extent is unknown because of the challenges inherent in detecting IDT refund fraud.IDT refund fraud takes advantage of IRS's “look-back” compliance model. Under...
GAO-14-479: Published: Jun 5, 2014. Publicly Released: Jul 7, 2014.
The notices the Internal Revenue Service (IRS) sends during correspondence audits have misled taxpayers by providing unrealistic time frames on when IRS would respond to their correspondence. For example, notices stated that IRS would respond within 30 to 45 days when it has consistently taken several months to do so. Further, as of early 2014, IRS data show that it had not responded timely to mor...
GAO-14-453: Published: May 14, 2014. Publicly Released: Jun 13, 2014.
The full extent of partnership and S corporation income misreporting is unknown. The Internal Revenue Service's (IRS) last study of S corporations, using 2003-2004 data, estimated that these entities annually misreported about 15 percent (an average of $55 billion for 2003 and 2004) of their income. IRS does not have a similar study for partnerships. Using IRS data and the study results, GAO deriv...