Tax Administration

As part of its fiscal year 1995 appropriation, the Internal Revenue Service (IRS) received more than $400 million to fund various compliance initiatives. IRS originally estimated that these initiatives would generate $9.2 billion in additional revenue over five years, with $331 million projected for fiscal year 1995. Before the start of fiscal year 1995, IRS revised that estimate upward, projecting a return on investment of $9.6 billion in five years, with about $728 million coming in fiscal year 1995. IRS, responding to concerns raised in earlier GAO reports, developed a new methodology to estimate the results of the fiscal year 1995 compliance initiatives. Using that formula, IRS estimated that its base enforcement programs had generated $30,628 million in fiscal year 1995 and that the fiscal year 1995 initiatives had generated another $803.3 million in additional enforcement revenue that year. GAO found that this methodology is a significant improvement over past methodologies. However, the methodology relies on productivity assumptions that are not based on empirical data and could cause an initiative's results to be overstated or understated. GAO's analysis found that a change in the assumptions could have a significant effect on the initiative's reported results of $803.3 million.

GAO noted that: (1) IRS could not compile actual revenue results from the FY 1995 compliance initiatives because the Enforcement Revenue Information System (ERIS) only provides information on the total amount of revenue collected as a result of enforcement activities and because other systems, such as those that track IRS staffing, also do not account separately for base enforcement activities and initiative activities; (2) therefore, IRS developed a new methodology to allocate FY 1995 enforcement revenues between base programs and the initiatives; (3) IRS' new methodology: (a) accounted for the opportunity costs associated with moving experienced staff off-line to train new staff; (b) provided that no staff or revenue would be allocated to the initiatives until planned staffing for base programs had been achieved; and (c) improved the Compliance Initiatives Report's usefulness to Congress by including total staffing and total revenue for the various enforcement programs, allocated between base and initiatives, along with explanations for variances between the results anticipated when the initiatives were approved and the estimated final results; (4) although the methodology used for the FY 1995 initiatives is an improvement over previous methodologies, the results of that methodology are estimates that are sensitive to assumptions embedded in the methodology about the productivity of new staff and more experienced staff; (5) those assumptions were based on the judgments of IRS managers rather than empirical data; (6) GAO does not know what the correct assumptions are, but GAO's sensitivity analyses showed that a change in productivity rates could have a significant effect on the reported results; (7) in considering IRS' estimates of the FY 1995 compliance initiatives, there are two other caveats that are relevant; (8) the fact that the initiatives generated a certain amount of revenue in FY 1995 does not necessarily mean that IRS collected more enforcement revenue in FY 1995 than it did in FY 1994 but only that IRS collected more enforcement revenue in FY 1995 than it had estimated it would collect without the initiatives; (9) in fact, the amount of enforcement revenue IRS reported collecting in FY 1995 was less than that reported for FY 1994; and (10) because, the estimates of revenue attributable to the compliance initiatives depended on various assumptions, including how IRS decided to allocate staff, the results in FY 1995 are not necessarily indicative of what other compliance initiatives would generate in their first year.