Treasury Responds to Lawmaker's Request for Information on 'Tax Gap'

Thank you for your recent letter to Secretary Paulson regarding the Treasury Department's Comprehensive Strategy for Reducing the Tax Gap (the Treasury Strategy), released last September. Your letter requests additional information regarding the sources and amount of the tax gap. After consulting with the Office of Tax Policy, I want to provide you with the following response to your letter.

As described in the Treasury Strategy, in February 2006 the IRS released an updated compliance estimate showing that in 2001, the difference between the amount of tax that taxpayers should pay under existing law and the amount they pay on time was $345 billion in 2001. After taking into account late payments and recoveries from IRS enforcement activities, this estimate was reduced to $290 billion. The IRS's updated compliance estimates were derived from an analysis of individual audits conducted as part of the National Research Program (NRP). Elements of the recently updated compliance estimate other than those relating individual taxpayers, including corporate and most employment taxes, were based on old research data. The IRS is currently working to complete the next phase of the NRP, which will provide updated information on compliance by electing small business corporations (S corporations). The IRS is also planning to update the NRP research on individual tax compliance by implementing more routine examinations of a smaller number of individual taxpayers in order to ensure that our compliance estimates are as up to date as possible. Once the results of these additional studies become available, we will provide them to your office.

One of the more important elements of the Treasury Strategy is a multi-year commitment to research. Following through on this commitment will ensure that we have the best information available before taking administrative steps or making legislative recommendations to improve compliance. The President's Fiscal Year 2008 Budget request to Congress recognizes the importance of research. Specifically, the Budget requests an additional $41 million in funding for the IRS to improve compliance estimates and measures. The Budget also requests an additional $5 million in funding to research the effect of taxpayer service on compliance. Our ability to continue to make progress in this area will depend, in part, on Congress providing the additional research funding requested in the President's Budget so that we may follow through on the commitment to research.

Thank you for your letter on this important matter.