Tax Administration

The Internal Revenue Service (IRS) generally responded to the concerns raised in GAO's 1994 report (GAO/GGD-95-39) that dealt with meeting milestones for starting Taxpayer Compliance Measurement Program (TCMP) audits, testing TCMP database components, developing data collection systems, and analyzing data. Because of uncertainties about its fiscal year 1996 budget, IRS delayed the start of its TCMP audits from October 1 to December 1, 1995. This delay turned out to be fortuitous because IRS had not completed testing all the tax return database or data collection systems for the TCMP. If the tests show that major changes must be made to the database or data collection systems, IRS may not meet its December 1 deadline for starting audits. There is still time for IRS to develop a research plan to enable the agency to analyze final TCMP results more quickly. IRS can begin now to formulate research questions and could also use preliminary TCMP data as they become available to develop other questions. Further delays must be avoided because the existing TCMP data are old, and, to GAO's knowledge, no other data sources exist that would allow IRS to develop formulas for selecting returns for audit. IRS is trying to develop a system that could be used for selecting returns, but this system will not be up and running for years. TCMP data could also be helpful in the design and administration of alternative tax systems. The value of the data would depend on how much of the current tax system would be retained under the new system.

GAO found that: (1) IRS has taken appropriate actions to correct the previously identified problems in the implementation of TCMP; (2) due to uncertainties about its fiscal year 1996 budget, IRS has delayed TCMP audits until December 1, 1995; (3) the audit delay will allow IRS to complete testing of TCMP database components and data collections systems; (4) the audits could be further delayed if the tests reveal additional problems; (5) IRS plans to collect data on partners, shareholders, and misclassified workers which should allow it to better measure compliance levels and TCMP audit results; (6) computerized auditor comments should make it easier for researchers to analyze TCMP results and allow IRS to collect data on other tax issues that are not a part of TCMP; (7) IRS still needs to develop a research plan that would allow it to more timely analyze TCMP data; (8) no alternative information sources exist that could help IRS better target its audits; (9) IRS is developing a new identification system for tax return audits, but it will not be available until after year 2000; and (10) TCMP could be useful in designing and administering a new tax system and identifying compliance trends.