The U.S. Government Accountability Office (GAO) has suggested measures to reduce the tax gap and improve fiscal benefits, even with a small reduction in the gap between what is owed and what is paid. According to a GAO “snapshot” report released on February 27, 2023, Internal Revenue Service data for the years 2014-2016 revealed that taxpayers owed $3.3 trillion in taxes but paid only $2.8 trillion. GAO analysis found that underreporting ($398 billion), underpayment ($59 billion), and nonfiling ($39 billion) contributed to the gap.
The report identified various factors that contribute to the tax gap, including limited third-party information reporting, low audit rates, complex tax codes, and abusive tax shelters. The report, however, did not quantify the impact of these factors on the tax gap.
The GAO recommends a multi-faceted approach to address the causes of tax noncompliance. The IRS should set measurable goals to reduce the tax gap, improve third-party information reporting, digitize taxpayer returns to enable enforcement programs, and facilitate the reporting of preparers and promoters involved in abusive tax schemes. Congress should also grant the IRS explicit authority to establish professional requirements for paid preparers, expand third-party reporting on real estate, broaden the IRS’s authority to correct discrepancies between taxpayer-reported information and other government-collected data, and mandate the inclusion of scannable codes in paper returns to allow for digital processing.
Although the GAO did not provide an estimate of the fiscal benefits that could result from even a slight reduction in the tax gap, it emphasizes the need for multiple measures to address tax noncompliance effectively.