The Internal Revenue Service needs to improve or update the strategies it uses to estimate the federal tax gap, according to a recent report conducted by the Treasury Inspector General for Tax Administration.
The TIGTA analysis argued that the IRS needs to work on the comprehensiveness, accuracy, reliability, and timeliness of the tax gap estimate, particularly as lawmakers and government officials make key determinations about the state of the economy, existing tax law
and potential changes that should be made. The tax gap estimate - which is defined as the difference between taxes owed and taxes paid voluntarily and on time - is commonly factored into decisions about federal funding, making it critical that the IRS provide accurate and timely information. The agency's most recent gap estimate is $450 billion for tax year 2006.
"Measuring the tax gap is both complex and challenging," said Treasury Inspector General for Tax Administration J. Russell George. "However, I am concerned about the overall accuracy of the estimate."
The report highlighted several areas that were effectively included in the estimates, such as the informal economy and offshore accounts
. The former relates to areas of the economy that are not properly monitored or governed. The agency has attempted in recent months to impose more regulations on this potentially lucrative sector, and has introduced new laws regarding the reporting of tips and other cash transactions.
The IRS has also launched a comprehensive campaign to curb offshore tax evasion
and strengthen collection efforts. In addition to forging international agreements with foreign governments, the agency has expanded its Offshore Voluntary Disclosure Program and initiated several investigations into financial institutions believed to have aided Americans in hiding income from the IRS.
As the federal tax agency faces sizable budget cuts in several key areas of operations, it is unclear how it will respond to TIGTA's recommendations to update its tax gap estimate strategies.