Summary: One of the biggest challenges facing the Internal Revenue Service (IRS) is finding ways to reduce the income tax gap--the difference between income taxes owed and taxes voluntarily paid. This testimony makes several points. First, IRS estimates that taxpayers fail to voluntarily pay in excess of $100 billion annually in taxes due on income from legal sources. IRS information suggests that U.S. taxpayers voluntarily pay 83 percent of the income taxes they owe--87 percent after IRS audits and other efforts. Second, compliance varies among taxpayers. Wage earners report 97 percent of their wages, whereas self-employed persons who operate on a cash basis report just 11 percent of theirs. Third, IRS data show that compliance is highest where tax withholding exists, a little lower where there is information reporting to IRS, and much lower where there is neither. The complexity of tax rules may also influence the level of tax compliance. Finally, some of the tax gap may not be collectible at an acceptable cost. GAO believes that it is very important for IRS to invest agency resources in measuring noncompliance and use that information to balance the competing goals of (1) maximizing tax revenues, (2) promoting uniform compliance, and (3) minimizing taxpayer burden.
