Tax compliance is relatively high when the agency can match data from third parties (such as information on W-2 forms supplied by employers and financial institutions) to income tax returns and notify taxpayers of discrepancies. The net misreporting rate for income that is subject to third-party reporting is less than 5 percent. In contrast, the IRS in many cases cannot verify other forms of income, such as that from self-employment (including net income from nonfarm proprietors and farmers) because most third-party data are not independently reported to the IRS and resources for audits are limited. 10 The findings suggest that penalties matter—but.
