The Tax Gap

GAO discussed the gap between the amount of income taxes that individuals and businesses owed and the amount that they voluntarily paid. GAO noted that the Internal Revenue Service's (IRS) most recent estimate showed: (1) a tax gap of $84.9 billion for tax year 1987, with individuals owing $63.5 billion, large and medium corporations owing about $16 billion, and small corporations owing about $5 billion; and (2) unreported income for individuals totalling $48.3 billion. GAO also found that the most recent IRS tax gap estimate: (1) relied on existing data, some of which was old; (2) assumed that compliance rates would remain constant; (3) included taxes that IRS examiners typically recommended but did not assess after successful appeals; (4) excluded any estimate of illegal source income; and (5) included some types of taxable income which were very difficult to accurately estimate. GAO believes that IRS should take additional steps to close the tax gap, including: (1) establishing a business information returns program; (2) consistently applying tip income detection methods; and (3) implementing a district-level program to monitor civil actions on closed criminal cases.