IT improvements key to trimming tax gap

A Comprehensive Strategy for Reducing the Tax Gap

Information technology will play a key role in helping the Internal Revenue Service close the $345 billion gap between the taxes that are due and those that the agency actually collects, according to a strategy report from the Treasury Department.

As a first step, the IRS must replace its antiquated account management systems, such as the Individual Master File database and the Integrated Data Retrieval System, according to the Sept. 26 report, “A Comprehensive Strategy for Reducing the Tax Gap.”

The agency also must provide better customer service at a lower cost through E-File and similar programs. And it could gain some efficiencies by investing in it technology infrastructure, making more resources available for compliance enforcement.

“Tax administration in the 21st century requires improved IRS information technology,” the report states.

The report adds that in President Bush’s fiscal 2008 budget, the IRS will have more details on specific planned steps to improve its IT.

To close the tax gap, Treasury said the IRS must address taxpayers’ intentional and accidental errors in reporting taxes, while targeting the sources of noncompliance.

In February, the IRS updated its compliance estimates, showing that the gross tax gap was $345 billion in 2001. The compliance rate was about 83.7 percent. Individual income tax reporting constitutes more than 70 percent of the gap, according to the report.

The IRS needs to bolster enforcement and combine it with a commitment to taxpayer service, the report states. Moreover, its policies must be sensitive to taxpayer rights while balancing it against overburdening taxpayers.

Treasury acknowledges that carrying out a strategy to reduce the tax gap will take time and that recognizing the expected benefits may take longer.

“The success of this comprehensive strategy will depend, in significant part, on IRS resources and the agency’s efficient and effective use of such resources,” the report states.

Along with IT improvements, the report states that the IRS must:

• Reduce opportunities for tax evasion;

• Commit to researching the sources of noncompliance;

• Improve document matching, examination and collection activities to detect fraud;

• Enhance taxpayer service;

• Simplify tax law; and

• Coordinate between with state and foreign governments as well as tax-related associations.