Summary: Recommendations are given for help in long-range planning by the Internal Revenue Service (IRS) or other executive branch agencies in solving the "underground economy" problem. It is important that the level of IRS' audit activity should not decline. IRS may need to change its current compliance strategy and reallocate its resources, thereby putting additional compliance resources into the document matching program as opposed to the audit or collection programs. IRS should also periodically update its estimates of the extent to which an underground economy exists and refine its data so that trends can be developed, pockets of noncompliance isolated, and resource allocation decisions made. IRS needs a better defined national criminal enforcement strategy. IRS and the Treasury Department want more income types subject to withholding and have advocated a withholding system for interest and dividends. They have recently asked Congress to authorize withholding at source a percentage of payments made to independent contractors. Opponents of this suggestion have argued that IRS should instead make full use of the document matching tool; GAO, however, believes that withholding at source is the best way to ensure the continued strength of the voluntary tax assessment system. More research needs to be done to determine who underreporters and nonfilers are, what type of income they are receiving, and why people do not pay all of their taxes. It is suggested that reform of the tax laws and a simplification of the Code should help to reduce the antipathy and reluctance of some taxpayers to report all or part of their income.
