The Internal Revenue Service is making progress on devising a strategy to narrow the tax gap, but significant challenges remain, according to a new report by the Treasury Department's inspector general.

The tax gap, the difference between what taxpayers are supposed to pay and what is actually paid, is estimated to be about $345 billion. At 83.7 percent, the United States has one of the highest tax compliance rates in the world, but each percentage point of noncompliance costs the federal government approximately $21 billion in lost revenue.

The IRS outlined a seven-prong strategy in August 2007 for reducing the tax gap. Among the IRS's goals were increasing the amount of information reporting by taxpayers, adding more research programs and modernizing the agency's business systems.

The Treasury Inspector General for Tax Administration said in its report that the current IRS strategy is significantly more comprehensive and detailed than the IRS's previous efforts, but still depends on too many variables. "While we are encouraged by the development of a detailed strategy to reduce the tax gap, long-term success will depend on the IRS's ability to address several risk factors, some of which are beyond its control," said TIGTA Inspector General J. Russell George in a statement.

TIGTA found the IRS's strategic plan largely depended on receiving funding for additional compliance resources, along with Congress enacting legislative changes. Sizable efficiency gains in taxpayer service and compliance resources also depend on the successful implementation of information technology enhancements and the IRS's ability to manage other risks.

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