What Happens When People Don’t Pay Their Taxes?

It’s almost the last day to file your taxes this year—for most people, they are due April 17. Some taxpayers have filed already, and some will be racing to get that last-minute postmark on their returns. Some taxpayers make mistakes on their taxes. Others don’t file on time, or at all, even though they should. Today’s WatchBlog takes a look at why some people don’t pay their taxes and what the government can do about it.

Taxes can be tricky—but some people cheat

There are many opportunities for a taxpayer to make a mistake when navigating the process of filling out a tax return. Whether taxpayers make honest errors or try to cheat by understating their taxable income, not paying what they owe, or not filing a tax return on time (or at all), these are all considered to be noncompliance.

Noncompliance contributes to the annual tax gap, which is the difference between what taxpayers should have paid and what they actually paid each year. In 2016, IRS estimated an average gap of $458 billion each year from 2008 to 2010. IRS expects to eventually collect part of this through late payments and enforcement activities, but the rest—an average of $406 billion per year for those years—will never be collected.

How does the government deal with it?

IRS tries to make it easier for taxpayers to comply with the tax laws through delivering high-quality and timely service. While IRS has struggled in recent years to answer taxpayer telephone calls and timely respond to letters, it has begun to improve its service. IRS also began matching income and other information that taxpayers report on their return against what their employers report to IRS before issuing refunds. This has helped IRS catch taxpayers’ mistakes or attempts to cheat before issuing refunds, saving about $65 million.

IRS also enforces the law by auditing taxpayers to ensure that the taxes owed are paid. Check out our blog that describes how IRS selects returns for audits.

There’s more that IRS could do to attack the tax gap on multiple fronts, such as:

• Using tax gap and other data to develop a comprehensive strategy to address noncompliance with tax requirements;
• Providing better customer service (by phone, mail, and online) to help with tax prep;
• Assessing benefits and costs of holding refunds until IRS can verify income;
• Improving management of information technology systems and investments; and
• Improve the risk assessment of audit selection.

Reducing the tax gap may also require targeted legislative actions, including:

• Enhancing and expanding third-party information reporting (for example, business’s reporting of payments to nonemployees);
• Enhancing electronic filing;
• Expanding IRS’s authority to correct some tax return errors during processing;
• Lowering the e-file threshold for W-2s; and
• Regulating paid preparers.

For more information, check out our key issue page on enforcement of tax laws.

• Comments on GAO’s WatchBlog? Contact blog@gao.gov.