Why It Matters

The federal government is losing between $116 billion and $304 billion every year due to tax fraud, a new Government Accountability Office (GAO) report, published Sept. 25, estimated. The scale of the problem is not in dispute—the GAO's estimate was built using a probabilistic simulation method designed to account for the inherent uncertainties in fraud estimation, drawing on IRS data from 2018 through 2024, as well as academic literature and other external sources.

Three categories of data informed the estimate: IRS cases of confirmed and potential fraud, potential fraud embedded in the tax gap, and tax evasion tied to the shadow economy, meaning economic activity purposefully hidden from the government.

The GAO noted that its estimate could help Congress and agency officials understand the potential scale and scope of tax fraud loss and inform decisions about the costs and benefits of implementing new controls to prevent, detect, and respond to fraud. According to a Sept. 25 Washington Times report on the GAO findings, the IRS "lacks a fraud coordinator" and "doesn't even have an antifraud strategy," framing the findings in terms of the government's broader vulnerability to fraud.

The Big Picture

Tax fraud, as defined in the report, includes people or businesses intentionally failing to pay or deliberately underpaying taxes owed, as well as criminals using stolen identity information to obtain fraudulent refunds. Tax fraud is a significant and growing problem that costs the government billions of dollars each year.

Its Return Review Program screens individual tax returns for characteristics indicative of fraud, and according to the IRS, the program prevented $88 billion in invalid and potentially fraudulent tax refund payments from 2018 through 2024. Tax return audits also play a role: the IRS trains auditors to recognize fraud indicators and may respond through civil penalties, criminal investigation, or referral for prosecution.

The agency routinely assesses fraud risks consistent with leading practices, but has not developed an antifraud strategy or designated an antifraud entity to coordinate and oversee fraud risk management activities across the agency.

GAO made two recommendations to the Commissioner of Internal Revenue: develop and document an agency-wide antifraud strategy, and designate an antifraud entity responsible for coordinating and overseeing fraud risk management activities across the agency. The IRS partially agreed with both recommendations, but both remain open, and as of the report's release, actions to satisfy the intent of either recommendation have not been taken or planned.

The GAO said it continues to believe the agency should develop an antifraud strategy and designate an antifraud entity.

The Bottom Line

The GAO's position is that designating an antifraud entity and building a documented strategy would help the IRS better mitigate the billions of dollars lost each year. With both recommendations still open and the IRS only partially on board, the gap between the agency's existing fraud-detection tools and a coordinated, strategy-driven approach remains unresolved. Congress now has a concrete, data-backed estimate of the potential scale of annual tax fraud loss, along with two specific, unimplemented recommendations, as it weighs future decisions about IRS resources and fraud risk management oversight.

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