GAO Tax Fraud Report Highlights Gaps in IRS Fraud Risk Management

The United States Government Accountability Office (GAO) released a report titled TAX FRAUD: The Federal Government Loses an Estimated $116 Billion to $304 Billion Annually. The report is noteworthy for several reasons. First, the GAO study attempts to estimate the amount of fraud in the tax gap through use of available data and analytical methods. The Internal Revenue Service (IRS) periodically publishes statistics on the tax gap, the difference between taxes due for a tax year and the amount paid voluntarily and timely. The study discusses the 2022 tax year which estimates total tax owed to the US government of $4.6 trillion and a compliance rate of 85%, or $3.9 trillion paid voluntarily and on time. The IRS projected tax gap of 15%, approximately $696 billion, is comprised of the following:

The GAO’s analysis estimates that 2% to 6%, or $116 to $304 billion annually, of total tax owed goes uncollected due to fraudulent activity.

GAO Recommendation to Combat Fraud

Although the GAO report identifies roles, responsibilities and measures within various IRS operating divisions and support functions to identify and address noncompliance and fraud, it recommends the IRS develop and document an antifraud strategy and designate an antifraud entity.

The GAO incorporated the Fraud Risk Framework as a model for the IRS to utilize in developing and implementing an effective anti-fraud strategy. The report describes the IRS approach to fraud risk management as being ad hoc and managed disparately by operating divisions. Each division assesses fraud risks consistent with leading practices but has not implemented a strategy to mitigate fraud risks in a coordinated manner. Although the IRS conducts a biannual risk assessment, the Office of the Chief Risk and Control Officer acknowledged the IRS does not have an anti-fraud strategy, and ownership of programs and mitigation remains siloed within each division. The report argues that a coordinated anti-fraud strategy would enable the IRS to take a strategic approach to mitigating existing and identifying emerging fraud risks.

The GAO report also suggests the IRS implement a designated anti-fraud entity to undertake, manage, and coordinate antifraud initiatives across operating divisions. While the IRS’s Office of the Chief Risk and Control Officer handles the risk assessment process, no entity within the IRS manages other responsibilities such as – serving as the repository of knowledge on fraud risks and controls, managing the fraud risk assessment process, and leading or assisting with trainings and other fraud-awareness activities.

IRS Response

In the IRS’s response from Chief Executive Officer Frank J. Bisignano, it disagrees with several of the GAO findings and argues the report does not accurately distinguish between fraud (occurring as the result of intentional acts) and other civil noncompliance (resulting from errors or omissions). The letter also highlights additional methodologies employed to identify potential noncompliance. While the letter commits to strengthening its tax fraud risk management, the tone of the letter indicates the IRS feels comfortable with its current fraud risk strategy.

Analysis

The GAO study was significant for its attempt to identify the amount of the projected tax gap attributable to fraud. With the US tax system based on voluntary compliance, uncovering metrics to identify the nature of noncompliance will better assist the IRS in designing and staffing its enforcement programs. As the GAO report highlights, for Fiscal Year 2024, the largest source of US government revenue was tax revenue collected by the IRS, which comprised 86% of total revenue. With the IRS playing such a pivotal role in funding the operations of the US Government, decreasing fraud and increasing voluntary compliance in the tax system will greatly impact the overall US economy.

What’s not addressed in the GAO report and deserves discussion is the return on investment (ROI) of IRS enforcement activities. In studies and data released by the IRS and Congressional Budget Office, enforcement initiatives have historically been estimated to return roughly $5 to $9 for every $1 invested. With this data, as well as the proposed improvements outlined in the GAO report, Congress should evaluate IRS funding and IRS leadership, and administration officials should reconsider utilizing key IRS assets and personnel for non-mission-critical assignments such as immigration enforcement and local policing.

Address Fraud Risk Before It Becomes a Costly Problem

As regulators continue to focus on fraud detection and enforcement, organizations must be prepared to identify potential risks, strengthen internal controls and respond to issues proactively. Withum’s Forensic and Valuation Services (FVS) professionals help organizations investigate fraud concerns, assess vulnerabilities and support compliance efforts with practical, data-driven insights. Whether you’re evaluating potential misconduct, strengthening fraud prevention measures or responding to regulatory scrutiny, our team can help.