Summary: Internal Revenue Service (IRS) data suggest that taxpayers ultimately pay about 87 percent of the taxes they owe, a compliance level that translates into a "tax gap" of billions of dollars. IRS estimates show that voluntary compliance in reporting income varies across groups of individuals. For example, wage earners report 99 percent of their wages, while self-employed workers who operate informally on a cash basis report just 19 percent of their income on tax returns. IRS data also show that compliance is highest under tax withholding, a little lower without withholding but with information reporting to IRS, and much lower when neither system is in place. Other factors, such as complex tax laws, can also influence the level of compliance. IRS faces many challenges in reducing the income tax gap. Closing some of the "tax gap" might entail unacceptable costs, such as overly intrusive record-keeping requirements or more resources than IRS can commit. Thus, IRS needs to know as much as possible about current compliance with the tax laws and use that information to focus its resources in a cost-effective way.
