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GAO Recommends Ways to Close the Tax Gap

S.J. Steinhardt
Published Date:
Mar 1, 2023

The tax gap—the difference between tax amounts that taxpayers should have paid and what they actually paid voluntarily and on time—is estimated to be $496 billion per year for tax years 2014-2016. A new report by the Government Accountability Office (GAO) recommends ways to close it.

“The tax gap is a complex problem that requires a multipart solution,” the report says. “A small reduction in the gap could yield major fiscal benefits to the federal government.”

Underreporting of tax liabilities makes up 80 percent, or $398 billion, of the gross tax gap, the GAO noted. Twelve percent, or $59 billion, is due to underpayment of taxes due and 8 percent ($39. billion) is due to the nonfiling of tax returns.  Individual underreporting alone represents more than half (56 percent) of the gross tax gap.

Several other issues contribute to the tax gap, the report found, including limited third-party information reporting, declines in audit rates, taxpayer service, tax code complexity, and abusive tax shelters, in particular.

The decline in audit rates was due to reduced staffing caused by decreased funding, the report says, citing the IRS.

The report faults the IRS for not having clear performance goals for improvements in the taxpayer experience and says that it should offer additional free-filing options. It also says that the complexity of the tax code may contribute to the tax gap by imposing record-keeping, planning, computing and filing requirements on taxpayers that can lead to errors and underpaid or overpaid taxes. This complexity may be compounded when taxpayers work in the gig economy—they may find it difficult to calculate their taxes.

“The tax gap has multiple causes and spans different types of taxes and taxpayers,” the report states. “So, multiple strategies are needed to reduce it.”

In addition to re-establishing specific quantitative goals to reduce the tax gap and documenting a plan to for using data to update compliance strategies, the GAO recommends that the IRS expand third-party information reporting; digitize taxpayer-provided paper return information; and amend its annual “Dirty Dozen” tax scammers list to tell taxpayers how to refer information to the IRS on those involved in abusive tax schemes.

The report also recommends that Congress consider a number of steps to aid in the effort to close the gap, such as granting the IRS the explicit authority to establish professional requirements for paid preparers to help increase the accuracy of tax returns; expanding third-party information reporting for certain payments that rental real estate owners make to service providers; providing the IRS with expanded authority—with appropriate safeguards—to correct errors and discrepancies between what the taxpayer reported and other government information; and requiring that returns prepared electronically but filed on paper include a scannable code.

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