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GAO Report Notes IRS Lag in Addressing Tax Gap

By:
S.J. Steinhardt
Published Date:
Nov 29, 2022

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A new Government Accountability Office (GAO) report has faulted the IRS for not implementing certain recommendations for addressing the tax gap and combatting identity theft refund fraud.

The tax gap—the difference between taxes owed and taxes paid on time—was $428 billion, on average, for tax years 2014-2016, according to the report.

“The tax gap has been a persistent problem for decades, and enforcement of tax laws has been on GAO’s High Risk List since its inception in 1990,” the report noted. This list, “updated at the start of each new Congress, [is] of programs and operations that are vulnerable to waste, fraud, abuse, or mismanagement, or in need of transformation.”

Congress provided the IRS with $79.4 billion through the Inflation Reduction Act of 2022, $45.6 billion of which is to be spent on tax enforcement.

The GAO faulted the IRS for lacking “a subsidiary ledger for unpaid tax assessments that would allow it to produce reliable, useful, and timely information with which to manage and report externally” and “IRS control deficiencies [that] led to errors in taxpayer records and delays in recording taxpayer information, payments, and other activities” in its Fiscal Years 2021 and 2020 audits. Those two internal control issues “affected IRS’s management of unpaid tax assessments,” it read.

The Inflation Reduction Act also earmarked $4.8 billion for modernization of the tax collection agency’s business systems. Its “financial systems currently cannot report the balances of the various categories of unpaid assessments, including gross taxes receivables, without significant inaccuracies,” the report pointed out. “Instead, IRS uses a complex and labor-intensive statistical estimation process to compensate for system limitations and errors in taxpayer accounts to annually derive these figures.”

The report noted that “[a]lthough IRS has made progress to address the enforcement of tax laws high-risk area, it remains on GAO’s list because of continuing risks and challenges.” The GAO’s preliminary analysis also showed 146 open IRS recommendations related to this high-risk area and 176 open recommendations overall. Those include multiple recommendations for improving taxpayer services, reducing tax fraud and improper payments, improving oversight of cybersecurity practices of third-party providers, enhancing information reporting, improving audit effectiveness, and enhancing strategic human capital management.

“Fully implementing these recommendations could significantly improve IRS’s operations,” the report stated.