GAO tax fraud estimate puts annual losses at up to $304 billion

A first-of-its-kind U.S. Government Accountability Office (GAO) report estimates annual federal tax fraud losses of between $116 billion and $304 billion and says the IRS needs a coordinated strategy for managing fraud risks.

The report, released Friday, said that tax fraud accounts for roughly 2% to 6% of taxes owed to the federal government.

The IRS partially agreed with the GAO’s recommendations to develop an antifraud strategy and designate an antifraud entity but pushed back on aspects of the report’s approach. IRS CEO Frank Bisignano said some forms of taxpayer noncompliance do not necessarily meet the legal threshold for fraud and disputed the GAO’s characterization of the agency’s fraud governance as fragmented.

The GAO developed the estimate using a statistical simulation that combined IRS fraud data, tax-gap information, and estimates of tax evasion in the shadow economy. The agency said the estimate is intended to improve understanding of the likely extent of tax fraud and is not designed to produce a precise measure.

Tax fraud includes activities such as tax evasion, return preparer fraud, and identity theft refund fraud. No comprehensive estimate of federal tax revenue lost to fraud previously existed, the GAO said.

The GAO said its estimate should not be confused with the tax gap, which measures broader taxpayer noncompliance and includes factors such as taxpayer errors. The GAO estimated that tax fraud would account for about 17% to 43% of the gross tax gap for tax year 2022. The IRS has estimated that taxpayers ultimately will fail to pay about $606 billion of the taxes owed for tax year 2022, known as the net tax gap.

Various IRS divisions undertake activities that help prevent, detect, and respond to fraud, the report said. For example, the Return Review Program — which screens tax returns for signs of identity theft and refund fraud — prevented, according to the IRS, about $88 billion in invalid and potentially fraudulent refund payments from 2018 through 2024, the report said.

The watchdog said that the IRS also uses audits, fraud development referrals, civil penalties, and criminal investigations in antifraud efforts. IRS auditors completed more than 4.8 million audits from 2018 through 2024 and recommended an average of $24.9 billion annually in additional tax assessments during that period, according to the report.

However, the GAO concluded that the agency has not developed an agencywide antifraud strategy and has not designated an antifraud entity responsible for coordinating fraud risk management activities across the organization. The IRS assesses fraud risks and has identified individual income tax fraud as one of its highest fraud risks but lacks a documented strategy explaining how existing and future controls will address those risks, the report said.

“Absent an antifraud strategy at any level, it is unclear which entities within IRS are responsible for managing tax fraud risks, how the agency plans to manage tax fraud risks, and its timeline for doing so,” the GAO said.

In its response, the IRS said it manages fraud risks across multiple divisions and that Jarod Koopman, the agency’s chief tax compliance officer, is responsible for coordinating division tax fraud initiatives, risk assessments, communications, and fraud awareness efforts. The IRS said it will continue documenting and expanding its efforts to combat tax fraud and will consider developing an agencywide antifraud strategy.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.