Measuring What Isn’t There: Optimizing Nonfiler Treatments and Strategies

Dec 17, 2018

The Internal Revenue Code of the United States requires taxpayers to: (1) file timely tax returns; (2) report accurate information on those returns; and (3) pay their tax obligations. Voluntary compliance with these requirements is essential to our nation’s fiscal viability, but sustained budget cuts at the IRS put this compliance at risk.

The IRS reports that the “tax gap” (the amount of true tax liability that is not paid voluntarily and timely) has increased to over $450 billion each year, and more than $30 billion of this tax gap relates to nonfilers” (individuals who fail to file a tax return). Moreover, a recent ProPublica report notes that the IRS has largely discontinued its compliance efforts for nonfilers, with only 362 thousand new nonfiler investigations started in 2017—a decrease of 85% from the 2.4 million investigations started in 2011. The Treasury Inspector General for Tax Administration (TIGTA) estimates that this reduced enforcement of nonfiler cases has led to additional losses of at least $3 billion per year.

Historically, the IRS has used a variety of programs and methods to promote filing compliance—ranging from taxpayer education, to case examination, to enforcement and collection. As the IRS’s budget shrinks, the efficiency of these nonfiler programs becomes even more important. ASR Analytics is helping the IRS to enhance nonfiler program effectiveness through the use of data science and analytics methods, such as the use of graph analytics to identify networks of related nonfilers. ASR is also helping the Service to promote voluntary filing compliance through the use ofbehavioral nudges”, using methods that are described in the IRS’s Behavioral Insights Toolkit.

ASR is using similar methods to strengthen tax compliance programs at the state level. For example, ASR’s behavioral analyses have been enacted at both the federal and state level to locate patterns of activity that indicate tax evasion and support follow-up investigative process decisions. Optimization models are implemented to properly assess the amount a non-filing taxpayer would be required to pay, reducing adjustments, lessening workload, and increasing taxpayers willingness to pay.

As the tax administration environment continues to evolve, ASR Analytics will continue to develop innovative analytic solutions that improve outcomes, promote compliance, and support effective and fair application of tax law at both the Federal and state level.