Of the money collected annually by the federal government to administer and run the country, the biggest piece of that pie comes from taxes collected by the IRS. For the most part, that money comes from taxpayers who voluntarily comply with tax laws. But the amount of taxes owed and not voluntarily paid over to the IRS is significant.
Why is the GAO reporting on the IRS? The GAO is a congressional watchdog that examines federal programs and agencies. In the past, the GAO has made recommendations about the IRS Dirty Dozen list, and this GAO report provides recommendations as well.
According to the GAO report, the gross tax gap (the amount of tax owed to the government that is not voluntarily paid) represented about 15 percent of estimated taxes owed for 2022, the most recent year for which statistics are available. The GAO estimates that roughly 17 to 43 percent of the dollars that make up that tax gap are lost to tax fraud, based on its own estimates, which may differ from IRS calculations.
Tax fraud involves intentional wrongdoing, while other forms of tax noncompliance may result from mistakes or negligence. In its report, the GAO also outlines three types of common tax fraud, including the following:
Tax evasion: This includes willfully underreporting income, claiming false deductions or expenses, and engaging in other schemes intended to evade taxes owed.
Identity theft: Often run by large criminal enterprises, theft of personally identifying information allows fraudsters to file false tax returns, claim a tax refund, and collect before the IRS or the taxpayer identifies the tax crime.
Fraudulent tax returns: Tax preparer fraud can involve preparers who knowingly falsify information on tax returns. Sometimes the client is aware that their preparer is creating false deductions or expenses, and sometimes not.
For additional background on how criminal tax fraud differs from mistakes or negligence, see our guide, Will I Be Charged with Criminal Tax Fraud?
Overall, the GAO makes two recommendations to assist the current IRS efforts in reducing the amount of money lost each year to tax fraud. The GAO suggests the IRS develop and document an anti-fraud strategy and that the IRS create an agency-wide anti-fraud entity to coordinate and integrate efforts to reduce tax fraud. The IRS has “partially agreed with both recommendations.” We’ll see what that looks like going forward.
If you have concerns about compliance risks or a criminal tax investigation, contact Robert J. Fedor, Esq., L.L.C. at 440-250-9709. The firm advises individuals and businesses on matters involving tax fraud, tax controversy, and related enforcement actions. We serve clients domestically and internationally from our offices in Cleveland and Chicago.