Mistake or Fraud? What the GAO's New $304 Billion Estimate Means for Taxpayers

On September 25, 2026, the U.S. Government Accountability Office released a report titled "Tax Fraud: The Federal Government Loses an Estimated $116 Billion to $304 Billion Annually." It is the first comprehensive federal estimate of how much revenue is lost to tax fraud each year, as opposed to honest mistakes or ordinary noncompliance.

The headline number will get attention in Washington. For taxpayers and their advisors, the more useful question is what the report says about where IRS enforcement is likely headed.

The Numbers

GAO estimates annual federal tax fraud losses at $116 billion to $304 billion, based on data from 2018 through 2024. Applied to tax year 2022, that is roughly 2% to 6% of all federal tax owed.

Put another way, against a 2022 total tax liability of about $4.6 trillion and a gross tax gap of about $696 billion, fraud may account for 17% to 43% of the tax gap.

GAO built the estimate from three sources of data:

• IRS cases of actual and potential fraud;

• The portion of the tax gap attributable to potential fraud; and

• Tax evasion from the "shadow economy," meaning economic activity deliberately hidden from the government.

GAO ran these inputs through a Monte Carlo simulation. The low end of the range comes from IRS case data and tax-gap fraud; the high end comes from a separate estimate of shadow-economy evasion. GAO acknowledges that the figures are "inherently uncertain" but says they reflect the best available evidence and methods.

Fraud Is Not the Same as a Mistake

GAO defines fraud as a "willful misrepresentation to obtain something of value". That distinction matters, and it is where the IRS pushed back.

In the IRS's formal response, IRS CEO Frank Bisignano wrote that the report "does not sufficiently distinguish fraud with broader taxpayer noncompliance," noting that underreported income or inaccurate reporting "do not necessarily meet the legal threshold for fraud." GAO disagreed. It said its estimate excludes non-fraud noncompliance and uses a definition consistent with the IRS's own.

This is more than a technical argument. Under the tax law, the line between negligence and fraud has major consequences:

• Penalties. An accuracy-related penalty for negligence or substantial understatement is generally 20% of the underpayment (IRC § 6662). The civil fraud penalty is 75% (IRC § 6663).

• Statute of limitations. The IRS normally has three years to assess additional tax. When a return is fraudulent, there is no limitations period at all (IRC § 6501(c)(1)).

• Criminal exposure. Willful evasion can be prosecuted under IRC § 7201, and willfully filing a false return under § 7206(1).

• Burden of proof. The IRS must prove civil fraud by clear and convincing evidence (IRC § 7454(a)). That is a higher bar than it faces for ordinary deficiencies.

A report that puts a large dollar figure on "fraud" adds to the political pressure to treat questionable positions as more than honest error. Taxpayers with a legitimate explanation for a reporting problem should make sure that explanation is documented early.

What the IRS Does Today

The report credits the IRS with real results. Its Return Review Program, an automated system that screens individual returns for identity theft and refund fraud, stopped about $88 billion in invalid and potentially fraudulent refunds from 2018 through 2024. Over the same period, the IRS closed more than 4.8 million audits recommending an average of $24.9 billion a year in additional tax. That figure covers all types of noncompliance, not just fraud.

GAO also found that IRS auditors are trained to spot fraud indicators during routine exams. When they do, the case can lead to civil penalties, a criminal investigation, or referral for prosecution.

The report gives one example: a Georgia man who filed two 2021 returns under different Social Security numbers, claimed losses from a supposed gold-mining business in Ghana, and received a refund of more than $3.3 million. He was sentenced in January 2026 to 14 years and seven months in prison.

What GAO Recommends

GAO's main criticism is organizational. The IRS assesses fraud risk routinely but has no antifraud strategy and no designated antifraud entity to manage fraud risk "in a strategic and coordinated manner". GAO made two recommendations to the Commissioner:

1. Develop and document an antifraud strategy, either agency-wide or within operating divisions.

2. Designate an entity to coordinate and oversee fraud risk management.

The IRS partially agreed with both. It said it would "consider developing an agency wide antifraud strategy" and that its Chief Tax Compliance Officer already serves as the coordinating entity. GAO called that designation "a positive step" but said the IRS still needs to document that office's full responsibilities.

The report has also entered the IRS funding debate. Rep. Richard Neal, the ranking Democrat on the House Ways and Means Committee, cited it as evidence that the IRS needs staffing and enforcement funding.

Practical Takeaways

• Expect more fraud-focused screening, not less. GAO designed the estimate to help Congress and the IRS weigh the cost of new controls against the losses they would prevent. More automated filters usually mean more legitimate returns get flagged along with fraudulent ones.

• Refund claims deserve extra care. Large refunds, amended returns, and claims driven by business losses or credits draw the most scrutiny. Keep documentation ready before you file.

• Protect your identity. An IRS Identity Protection PIN blocks anyone else from filing a return under your Social Security number. You can request one through the IRS website.

• Correct problems before the IRS finds them. If a past return has an error, fixing it voluntarily is almost always better than waiting for an exam. That applies with extra force to unreported foreign accounts, offshore income, and cash-business receipts, which sit close to the "shadow economy" GAO is measuring.

• If an examiner raises fraud, get counsel right away. Fraud referrals change the stakes: higher penalties, no statute of limitations, and possible criminal exposure. How you answer the first questions can shape the rest of the case.

Bottom Line

GAO's estimate is a range built on imperfect data, and the IRS disputes parts of it. Still, it gives Congress a concrete number to point to at a time when IRS funding and enforcement priorities are being debated. Taxpayers should read it as a sign that fraud detection will stay a priority. The best protection remains accurate reporting, good records, and prompt correction of past errors.

Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

This post is for general information only and is not legal or tax advice. The application of these rules depends on the specific facts. Please contact us to discuss your situation.

Marini & Associates, PA Recognized in Chambers Florida Spotlight Guide 2027 for Tax Law

Marini & Associates, PA is proud to announce that the firm has been ranked in the Chambers Florida Spotlight Guide 2027 for Tax Law, an honor that distinguishes the firm as one of Florida’s leading tax law practices and a credible alternative to Big Law.

Chambers, the world’s leading legal ranking and insights intelligence company, has spent over 30 years identifying and ranking exceptional legal talent through an unparalleled research methodology. Its rankings are based on independent and impartial market analysis, assessing law firms and lawyers across more than 200 jurisdictions worldwide. 

“This recognition reflects our unwavering commitment to delivering sophisticated tax law solutions and exceptional client service,” said Ronal A. Marini, Managing Partner of Marini & Associates, PA.

 “We take pride in offering clients the expertise and strategic capabilities that rival the largest firms, while providing the personalized attention that sets us apart.”

The Chambers Florida Spotlight Guide highlights law firms that embody excellence, leadership, and innovation within their fields. Being selected in this prestigious guide underscores Marini & Associates, PA’s reputation for results-driven legal counsel in complex tax matters, including IRS disputes, international tax compliance, estate planning, and corporate tax strategies.

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IRS Targets "Tax-Aware" ETF and Fund Strategies in Notice 2026-62

On September 28, 2026, Treasury and the IRS released Notice 2026-62, which identifies a group of investment fund strategies they believe produce tax results "inconsistent with the purpose and proper application" of the Internal Revenue Code . At the same time, the IRS issued Revenue Ruling 2026-20. That ruling treats one of the most heavily marketed strategies, the so-called "Section 351 ETF conversion," as a taxable exchange.

The notice is not a final rule. It is a warning. It describes the transactions, asks for comments by October 28, 2026, and says that future guidance could include regulations, revenue rulings, or designating the transactions as listed transactions or transactions of interest. Any such guidance could apply retroactively . The IRS also says it may challenge these strategies on examination under existing law, including judicial doctrines .

If you have invested in, sponsor, or advise on any of the funds described below, now is the time to review your position.

Why ETFs Are at the Center

Most of the strategies rely on Section 852(b)(6). Under that rule, a regulated investment company (RIC) does not recognize gain when it distributes appreciated property to redeem shares at a shareholder's demand . ETFs use this rule every day. When an "authorized participant" redeems a creation unit, the ETF can hand over low-basis securities without triggering gain. This is a big reason ETFs are more tax-efficient than traditional mutual funds .

The IRS is not challenging ordinary ETF creation and redemption activity. The notice expressly says it does not address those routine distributions . The concern is that the redemption mechanism is being used "not simply to operate an ETF in the normal course," but to eliminate income or gain that Subchapter M and other Code provisions expect to be taxed .

The Strategies Under Scrutiny:

1. Section 351 ETF Conversions (See Rev. Rul. 2026-20)

In this strategy, investors transfer diversified portfolios of appreciated stock to a newly formed ETF and claim tax-free treatment under Section 351. Soon after, as part of the plan, the ETF issues creation units to an authorized participant for cash or "on-thesis" securities. It then redeems those units with the investor's original securities. The result is that the investor ends up owning a fund with a materially different portfolio, without recognizing any built-in gain .

Rev. Rul. 2026-20 applies substance-over-form and step-transaction principles and treats the ETF as a mere conduit. The investor is treated as making a taxable exchange under Section 1001 with the authorized participant, so Section 351 does not apply to the securities used to redeem the authorized participant assets.law360news+1. The ruling does not state an effective date or offer transition relief. 

The notice does carve out ordinary ETF "seeding." A Section 351 transfer of assets that fit the ETF's investment thesis, and that the fund expects to keep, is not covered .

2. Partnership "Exchange Fund" Variations

Investors whose holdings are too concentrated to qualify as a diversified portfolio under Section 351(e) have been offered a different path. They first contribute appreciated stock to a partnership that holds at least 20% non-securities assets, which is meant to avoid "investment company" status under Section 721(b). The partnership then carries out a Section 351 conversion . Treasury and the IRS are considering guidance that would deny nonrecognition to these contributions or recharacterize them .

3. Box Spread Funds

Some ETFs build returns similar to Treasury bills using "box spreads," which combine four options that together produce a short-term interest rate return. Before the gain options expire, the fund distributes them to redeem creation units. Shareholders receive no current dividends and instead recognize capital gain only when they sell . A related version pairs the box spread with a straddle, distributes only the gain leg, and deducts the loss leg .

4. Record Date Strategies

A "parent" ETF that holds other index ETFs can redeem out the acquired ETF shares just before a dividend record date and replace them with a different ETF tracking the same index. The parent ETF takes the position that it never recognizes the dividend income, even though its economic exposure stays essentially the same .

5. RIC Income Test Avoidance

To qualify as a RIC, a fund must get at least 90% of its gross income from qualifying sources under Section 851(b)(2). Some ETFs that hold commodities or digital assets, directly or through grantor trusts, distribute appreciated non-qualifying assets through redemptions. They then take the position that the unrecognized gain does not count against the income test . Commentators note that this piece could affect certain commodity and crypto fund structures.

"Tax-Aware" Funds: Manufacturing Capital Gain and Ordinary Loss

Section 3 of the notice moves beyond ETFs. It addresses "tax-aware" partnerships and separately managed accounts that use technical rules to pair capital gains (taxed at lower rates or deferred) with ordinary losses that offset wages or other ordinary income . The IRS says labeling a strategy "tax-aware" is not a problem in itself, and it recognizes traditional tax-loss harvesting as legitimate . The strategies it flags are:

• Mixed-character identified straddles. These pair a Section 988 foreign currency forward (ordinary) with an offsetting Section 1256 futures contract (60/40 capital), or an equity index swap with an index future. The futures leg is always terminated first, so gains come out capital and losses come out ordinary .

• Hindsight Section 988(a)(1)(B) elections. The fund enters into same-day currency forwards and elects capital treatment only for the winners after the trading day ends, leaving the losers ordinary .

• Selective NPC terminations. The fund terminates appreciated short-term swaps just before a scheduled payment to claim capital treatment under Section 1234A, but holds losing swaps to maturity to claim ordinary expense .

What Taxpayers and Advisors Should Do Now

• Inventory exposure. Find clients who took part in a Section 351 ETF conversion or an exchange fund feeding one, or who hold interests in box spread, fund-of-ETF, commodity/digital asset, or "tax-aware" long-short vehicles.

• Revisit the reporting positions. Rev. Rul. 2026-20 sets out the IRS's view of current law. Clients who treated a conversion as tax-free should evaluate whether they need to amend, disclose, or take other protective steps, especially for years that are still open.

• Watch for listed transaction status. If any of these strategies becomes a listed transaction or transaction of interest, participants and material advisors could face Form 8886 and Form 8918 disclosure duties and significant penalties for failing to comply.

• Get the documentation from sponsors. Ask fund sponsors for their tax opinions, their descriptions of how redemptions are handled, and whether the fund plans to change its structure.

• Consider commenting. Sponsors and industry groups that believe their products are legitimately different from the transactions described have until October 28, 2026 to say so .

The Bottom Line

Notice 2026-62 shows that Treasury and the IRS are paying close attention to fund structures that turn Section 852(b)(6) and similar technical rules into tools for eliminating or recharacterizing income. The Section 351 ETF conversion has already been ruled a taxable exchange. The other strategies are clearly on the path to further guidance, possible listed transaction designation, and examination. Taxpayers who used these products should talk with their tax advisor before the next filing season.

Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

This post is for general information only and is not legal or tax advice. The application of these rules depends on the specific facts. Please contact us to discuss your situation.

---

References

1. Internal Revenue Service, Notice 2026-62, Guidance and Other Actions Being Considered Regarding Certain Potentially Abusive Investment Fund Strategies Involving Financial Products (Sept. 28, 2026). https://www.irs.gov/pub/irs-drop/n-26-62.pdf (also available at https://assets.law360news.com/2530000/2530914/n-26-62.pdf)

2. Internal Revenue Service, Rev. Rul. 2026-20, Determination of Amount of and Recognition of Gain or Loss (Sept. 28, 2026). https://www.irs.gov/pub/irs-drop/rr-26-20.pdf

3. KPMG TaxNewsFlash, "Rev. Rul. 2026-20 and Notice 2026-62: Potentially abusive transactions involving investment funds" (Sept. 28, 2026). https://kpmg.com/us/en/taxnewsflash/news/2026/09/tnf-rev-rul-2026-20-and-notice-2026-62-potentially-abusive-transactions-involving-investment-funds.html

4. Mitrade, "The IRS May Be Coming for Crypto ETFs Next: Which Funds Are at Risk?" (Sept. 28, 2026). https://www.mitrade.com/ae-en/insights/news/live-news/article-3-2122030-20260929

5. Internal Revenue Code §§ 311(b), 351(e), 721(b), 851(b)(2), 852(b)(6), 988(a)(1), 1092(a)(2), 1234A, 1256; Treas. Reg. §§ 1.351-1(c), 1.446-3.

Tax Court: A Corporate Offer-in-Compromise Can Cap the Owner's Trust Fund Penalty

Business owners in a cash crunch often make the same choice: keep the crew paid, keep the unions satisfied, keep the doors open, and deal with the IRS later. A recent Tax Court decision, Amodio v. Commissioner, T.C. Memo. 2026-96 (Sept. 28, 2026), confirms that this choice still makes the owner personally liable for the trust fund recovery penalty. But the decision also contains welcome news for responsible persons: once the IRS accepted the corporation's offer-in-compromise, the court held that the IRS could not collect more from the owner than the corporation still owed after the compromise.

The Facts

Thomas Amodio, a former carpenter, organized Creative Solutions, Inc. ("Creative") in 2002 to provide construction services focused on retail display cases and millwork installation. Creative was a union shop. It owed union-scale wages and union benefits for employees who belonged to trade unions in the New York/New Jersey area.

In 2015 and 2016, a slow-paying major client and union demands created a cash-flow problem. To ease it, Creative's office manager and its third-party payroll company stopped paying over the employment taxes. Amodio did not make that decision, and he learned about the failure only afterward.

The IRS assessed trust fund recovery penalties (TFRPs) against Amodio for the quarters ended December 31, 2015, and June 30, September 30, and December 31, 2016. Some of those periods had been paid, so only the quarters ended December 31, 2015, and December 31, 2016, were still before the court.

On July 28, 2020, Creative and the IRS entered into an offer-in-compromise. It satisfied Creative's employment tax liabilities, in whole or in part, for several periods, including the two quarters at issue. Even so, the IRS issued a Notice of Determination on April 4, 2022, sustaining a levy to collect Amodio's remaining TFRPs. Amodio then filed a collection due process (CDP) petition under section 6330(d).

Issue One: Willfulness

Section 6672(a) imposes a penalty on any person who is required to collect, truthfully account for, and pay over tax and who "willfully fails" to do so.[^7] Amodio admitted he was a responsible "person." He argued only that he had not acted willfully.[^8] Because this was a CDP case in which he challenged the underlying liability, the court reviewed the issue de novo and placed the burden of proof on Amodio.

The court applied the familiar standard: willfulness is "a voluntary, conscious and intentional failure" to collect, account for, and pay over employment taxes. It is shown when a responsible person, after learning of unpaid employment taxes, uses unencumbered corporate funds for other purposes.

Amodio's facts met that standard. After he learned of the delinquencies, he kept Creative operating and paid other creditors, including employees' net wages and union benefits, instead of the overdue taxes. The court accepted that the pressure was real. If Creative had missed wage or benefit payments, the unions would have pulled their members off its jobsites. The court still rejected the defense, quoting the Second Circuit: "an employee to whom the corporate employer owes wages is simply another creditor."

It did not help Amodio that the original decision not to pay over the taxes was made by his office manager and payroll provider. His liability came from what he did after he found out.

Issue Two: The Corporation's Offer-in-Compromise

The second issue is the more significant one. The court described the TFRP as "derivative" of the employer's failure to pay. It treated the employer's employment tax liability and the responsible person's TFRP as joint and several, much like the liability on a married couple's joint income tax return. From that, the court drew a basic rule: the IRS may decide which jointly liable party to collect from, but it can collect a joint and several liability only once.

The record was "less than clear," but it appeared that Creative's offer-in-compromise had satisfied or extinguished its employment tax liabilities for the two quarters. If so, the court said, "common sense suggests" that Amodio's derivative TFRP liabilities for those quarters had been satisfied or extinguished too.

The IRS disagreed. It argued that it could still levy on the difference between Amodio's TFRP and Creative's liability as reduced by the offer. For support, it relied on the Internal Revenue Manual. IRM 5.8.4.22.1(2) (May 10, 2013), the version in effect during the periods at issue, provides that settling a corporation's liability through an offer-in-compromise does not eliminate a responsible person's TFRP, which may still be collected from that person. The current version, IRM 5.8.4.21.1(2) (Apr. 25, 2025), states that "[i]f the IRS enters into a compromise with an employer for a portion of the trust fund tax liability, the remainder of the trust fund taxes may still be collected from a responsible person."

The court was not persuaded. It noted that the parties agreed there was "scant authority" on the issue. It also rejected the IRS's argument that Mason v. Commissioner had "favorably" endorsed the IRM position. Mason mentioned the provision only in a footnote, after saying that the IRS's handling of the offers had "no direct bearing" on that case, and it described the IRM as IRS "policy," not legal authority. The court then held:

"There might be circumstances that 'may' support respondent's decision to collect from a responsible person a TFRP liability that exceeds a corporation's related employment tax liability that has been adjusted by an offer-in-compromise, but in the absence of a specific reason for doing so in this case we are more persuaded to proceed by applying common sense and the general principles that govern joint and several federal tax liabilities."

Under that holding, the IRS may proceed with the levy, but "only in amounts that do not exceed the amount of Creative's employment tax liability for each period in dispute, as adjusted by the offer-in-compromise."[^20] The record did not show how much of Creative's liability, if any, remained for each quarter, so the court ordered that decision be entered under Rule 155.

Practical Takeaways

1. Paying employees first is still willful. Amodio is another case holding that a responsible person who knows about unpaid trust fund taxes acts willfully by paying wages, union benefits, or other creditors with available funds. Good motives, union pressure, and keeping the business alive are not defenses. An owner who learns of a payroll tax problem should stop paying other creditors ahead of the IRS right away and get advice.

2. Delegation protects you only until you know. An office manager or payroll company may cause the first missed deposits. Once the owner learns of them, every later decision to pay someone else can be willful.

3. A corporate offer-in-compromise may now limit the owner's TFRP. Responsible persons, and their CDP representatives, should check whether the employer has an accepted offer covering the same periods. If it does, they should argue that the TFRP cannot be collected beyond the employer's liability as adjusted by the offer, and they should request a period-by-period reconciliation.

4. Note the limits of the holding. Amodio is a memorandum opinion by a Special Trial Judge. It is not binding precedent. The court also expressly left room for the IRS to collect more where it gives a "specific reason" for doing so. The IRM's position that an employer's offer reflects only what can be collected from the employer is a likely source of such reasons. The IRS may also reconsider how it frames future offers and TFRP determinations. Practitioners should expect the IRS to raise these issues in later cases.

5. Plan corporate and individual resolutions together. When negotiating an employer's offer, consider at the same time the TFRP exposure of every potentially responsible person. Document how the offer affects each tax period. Amodio ended in a Rule 155 computation partly because the record could not show the employer's remaining liability by period.

6. Use CDP to contest the liability when it is available. Amodio challenged the TFRP in his CDP case, and the court reviewed it de novo. It also found that the required supervisory approval under section 6751(b) had been obtained before assessment. Representatives should review that approval in every TFRP case.

Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

This post is for general information only and is not legal or tax advice. The application of these rules depends on the specific facts. Please contact us to discuss your situation.

Sources:

1. : Amodio v. Commissioner, T.C. Memo. 2026-96, slip op. at 4 (Sept. 28, 2026), available via Thomson Reuters Checkpoint; see also U.S. Tax Court docket no. 9959-22L (docket entry 50).
2. I.R.C. § 6672(a), 26 U.S.C. § 6672 (Cornell LII); Amodio, slip op. at 1 (citing Kalb v. United States, 505 F.2d 506, 510–11 (2d Cir. 1974), and Mason v. Commissioner, 132 T.C. 301, 321 (2009)).
3. IRM 5.8.4.21.1(2) (Apr. 25, 2025), Internal Revenue Service; Amodio, slip op. at 5 n.4.