In response to requests from Congress, the Government Accountability Office has released a new report outlining a trio of approaches that would reduce the tax gap.
While the report doesn’t break any new ground, the GAO says that the highlighted approaches -- simplifying or reforming the tax system, providing the Internal Revenue Service with additional enforcement tools and devoting additional resources to enforcement -- could all have a significant effect on reducing the gap. But the report, which is based on prior GAO work, also lays out the significant obstacles any approach would face before actual implementation.
Most recently, the IRS estimated a gross tax gap for the 2001 tax year of $345 billion, estimating that it would eventually recover $55 billion of that gap. Each 1 percent reduction in the net tax gap would yield about $3 billion annually.
The GAO says that no one approach is likely to fully, and cost-effectively, address noncompliance across the board, as the gap has multiple causes and spans different types of taxes and taxpayers.
The office said that simplifying the tax code, or passing fundamental tax reform, could potentially reduce the tax gap by billions. For the 2001 year, the IRS has estimated that errors in claiming tax credits and deductions contributed $32 billion to the tax gap along. However, the report notes, “these provisions serve purposes Congress has judged to be important and eliminating or consolidating them could be complicated.”
The report also suggested upping the current withholding and information reporting requirements, but also said that many types of income are already subject to reporting, underreporting exists in many forms, and withholding and reporting requirements impose costs on third parties.
Finally, the report said that increasing enforcement efforts could have a major effect, but that determining the appropriate level of enforcement resources requires taking into account factors such as how well the agency uses its resources, the proper balance between taxpayer service and enforcement activities, and competing federal funding priorities.
The full report is available at www.gao.gov/new.items/d07391t.pdf.
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