The Internal Revenue Service should strengthen its approach to evaluating a pilot project for matching federal and state taxpayer information before it extends the tax compliance project to 45 states next year, recommended a new report from the Government Accountability Office.

The State Reverse File Match Initiative is one of the IRS's data-sharing strategies to reduce the estimated $345 billion gross federal tax gap. SRFMI matches federal and state taxpayer data to identify noncompliant individuals and businesses who do not file tax returns or do not report all of their income.

The IRS's document-matching program has proven to be a cost-effective way of identifying underreported income, bringing in billions of dollars of tax revenue while boosting voluntary compliance.

The IRS is developing a plan for evaluating the data but does not currently have a documented plan even as it enters Phase III of the pilot program and is less than one year away from rolling out the pilot across the country. According to IRS officials, the pilot includes plans to evaluate the program results to make decisions about expanding data-sharing with states and using compliance data to assess whether SRFMI cases are more or less productive than other cases. The IRS has little documentation so far on its evaluation.

Based on concerns about whether the IRS is fully using data from state and local governments to reduce the tax gap, the GAO was asked to assess the IRS's plan for evaluating the effectiveness of the pilot taxpayer data-sharing program. The GAO recommends that the IRS develop an evaluation plan to accurately assess the pilot program's results. The IRS agreed with the GAO's recommendation.

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