Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax Gap Page: 3 of 27
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Chairman Spratt, Mr. Ryan, Members of the Committee:
I appreciate this opportunity to discuss the tax gap-the difference
between what taxpayers pay in taxes voluntarily and on time and what
they should pay under the law-and what is achievable in reducing the
gap. Most recently, the Internal Revenue Service (IRS) estimated that for
tax year 2001, taxpayers paid about 84 percent of the taxes that should
have been paid on time under the law, resulting in an estimated gross tax
gap of $345 billion. IRS estimated that it would eventually recover around
$55 billion of the 2001 tax gap through late payments and IRS enforcement
actions, leaving a net tax gap of $290 billion.' Because of taxpayer
noncompliance, the burden of funding the nation's commitments falls
more heavily on taxpayers who willingly and accurately pay their taxes.
Reducing the tax gap would help improve the nation's fiscal stability. For
example, based on IRS's estimate, each 1 percent reduction in the net tax
gap would likely yield nearly $3 billion annually. However, the tax gap has
been a persistent problem in spite of a myriad of congressional and IRS
efforts to reduce it, as the rate at which taxpayers voluntarily comply with
our tax laws has changed little over the past three decades. Likewise,
factors such as globalization and the ever-increasing complexity of the tax
code challenge IRS's ability to administer the tax code.
My remarks focus on what is achievable in reducing the tax gap through a
variety of approaches. First I will discuss the need for multiple approaches
toward reducing the tax gap. Then I will discuss three specific tax gap
reduction approaches: (1) simplifying or reforming the tax system;
(2) providing IRS additional enforcement authority and tools, such as
information reporting2 and tax withholding,3 through changes to the tax
laws; and (3) devoting additional resources to enforcement under the
existing tax laws. My remarks are based on our previous work on a variety
of issues, in particular, recent testimonies and a report on reducing the tax
1Throughout this statement, references to the tax gap refer to the gross tax gap unless
2Information reporting involves the filing of information returns with IRS and taxpayers
that contain information on certain transactions, such as wage and salary information
employers report to employees and IRS through Form W-2.
3An example of tax withholding is when employers withhold taxes on the wages that
employees earn and remit them to IRS.
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United States. Government Accountability Office. Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax Gap, text, February 16, 2007; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc291643/m1/3/: accessed January 17, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.