Protect the Integrity of the Tax System by Encouraging Compliance through Administering and Enforcing the Tax Code


The American tax system is based on voluntary compliance and supported by appropriate enforcement. As part of our efforts to close the tax gap,1 we will pursue innovative approaches to understand, detect and resolve potential noncompliance. We will use behavioral insights on how people process and react to information. This will inform how we design programs to encourage voluntary compliance.

One of the IRS’s key responsibilities is to ensure taxpayers comply with the tax law. We will develop innovative approaches to understand, detect and resolve potential noncompliance to keep taxpayer confidence in our tax system strong. Analyzing new tax laws and regularly assessing trends in noncompliance will enable a more proactive approach. We will respond to high-risk areas thoughtfully.

When noncompliance occurs, we’ll use behavioral insights and robust data analysis to address the noncompliance in the most appropriate way. This will include expanding self-correction options and early intervention treatments, allowing taxpayers and tax professionals to resolve errors quickly, without compounding issues over time. Enhancing our ability to select cases and implementing a new case management system will shorten the time from when an issue is detected to when it is resolved. Feedback throughout this process will help improve our deterrence, detection and treatment of compliance issues in the future.

We understand many taxpayers experience stress when learning they have a potential compliance issue that needs to be addressed. We will help taxpayers navigate the process of issue resolution, ensuring they’re aware of the Taxpayer Bill of Rights and the resources available to them. While working to help taxpayers who want to comply, we'll pursue those who intentionally violate the tax code.


The Tax Gap. The gross tax gap is the amount of true tax liability that is not paid voluntarily and timely. Taxpayers owe about $2.496 trillion each year, but they only pay $2.038 trillion on time. This results in a $458 billion tax gap.  This information reflects estimates from 2008-2010 data.


More information on the tax gap: https://www.irs.gov/newsroom/the-tax-gap

Objectives and Supporting Activities

  • Analyze the risk landscape continuously to determine priority compliance issues.
  • Create comprehensive strategies to prevent and address noncompliance in high-risk areas (e.g., Large Business & International's compliance campaigns).
  • Identify resource and skill needs to support high-priority risk areas and incorporate them into workforce planning.
  • Develop early-warning and notification systems to identify potential issues as they occur and engage taxpayers earlier in the process to resolve issues faster.
  • Review and refine risk-based filters to detect anomalies early.

The Early Interaction Initiative. The early interaction initiative expands the IRS Federal Tax Deposit Alert Program by issuing educational alerts to employers when they may be behind in depositing withheld payroll taxes. This has resulted in a $360 million annual increase in net payments and a $47 million annual decrease in penalties and interest for employers, based data for fiscal year 2017. This earlier contact with potentially non-compliant employers improves the likelihood that they will meet their payroll tax depositing requirements.

 

  • Assess taxpayer and tax professional compliance behavior to identify opportunities for early intervention treatments and other new approaches to compliance.
  • Test and analyze the effectiveness of various treatments on taxpayer and preparer compliance and burden.
  • Share insights from compliance efforts and testing across operating divisions for continuous improvement of issue routing.

Taxpayer Digital Communication (TDC) Program

The IRS launched the TDC program in 2017 to test the use of secure digital messaging. TDC enables taxpayers and tax professionals to interact with the IRS electronically, enabling the immediate exchange of information in place of more time-intensive mail correspondence.

The modern, digital communication channel will enable IRS employees to resolve taxpayer issues more efficiently-lowering communication costs, providing more transparency and certainty, reducing operational tasks, and increasing taxpayer satisfaction.

  • Share data and coordinate on cases within and across relevant business units.
  • Expand the Cyber Crimes Unit in response to the ongoing threat of virtual financial crimes.
  • Raise public awareness of the outcomes of IRS criminal investigations.

Measuring Success

Time to Start Compliance Resolution - This measures the percentage of total instances where IRS compliance enforcement divisions contact a noncompliant taxpayer within one year of receiving a taxpayer's return (or when a taxpayer should have filed their return, but may not have).

Trends and Challenges

Serving an Increasingly Complex Tax Base

The U.S. tax base is becoming more complex. Economic and demographic changes in our society have fundamentally changed the way citizens earn money and the way we live. U.S. workers earning income through contracting or freelancing is projected to increase as more workers pursue flexible arrangements or earn income through digital platforms and app-based business (the "gig economy").2 This shift in income sources requires the IRS to adapt its outreach and enforcement efforts. According to one assessment, in the gig economy, nearly one-third of those earning money through app-based platforms were unaware of their tax status as small-business owners.3 This likely affects the rate of voluntary tax compliance.

In addition to changes in employment trends, family structures and living habits are shifting. A record number of Americans live in multigenerational households, a dynamic that could affect a taxpayer's ability to claim deductions and credits accurately.4 This highlights the growing need for IRS to communicate eligibility requirements and verify compliance.

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Footnotes

1. The gross tax gap is the amount of true tax liability that is not paid voluntarily and timely.

2. Caroline Bruckner, "Shortchanged: The Tax Compliance Challenges of Small Business Operators Driving the On-Demand Platform Economy, "Kogod Tax Policy Center, 23 May 2016.

3. Ibid.

4. Pew Research Center, "Record 60.6 Million Americans live in Multigenerational Household, " 11 August 2016

Protect the Tax System Circle Infographic