Tax Administration

More than 123 million taxpayers filed income tax returns in 1998. For most, this was the end of their interaction with the Internal Revenue Service (IRS) for the year. However, IRS audits about one percent of taxpayers with respect to the tax liability reported on their returns. IRS also uses several types of nonaudit contacts to notify millions of additional taxpayers about potential errors in their reported tax liability. IRS has provided little information publicly on these nonaudit contacts. This report discusses the major types of nonaudit contacts with taxpayers: the math error program, underreporter program, and notices sent to taxpayers about duplicate social security numbers and potential errors on self-employment taxes.

GAO noted that: (1) during 1998, IRS contacted almost 11 million taxpayers through at least one of the nonaudit or audit contact programs; (2) about 6 million contacts were made through the math error program, which is designed to correct arithmetic and other errors, such as incorrect social security numbers; (3) about 2 million contacts were made through the underreporter program, which is designed to match income data reported on information returns by payers, such as employers and banks, to income reported by taxpayers on tax returns; (4) about 2 million contacts were made through two types of soft notices; (5) about 1 million contacts were made through audits, which involve examinations of taxpayer books and records for one or more income, deduction, credit, or other tax issue on the tax return; (6) the timing of the types of contacts varies; (7) a number of reasons can explain the different starting times for each type of contact; (8) these contacts also vary in how taxpayers are to respond; (9) math error and soft notice contacts do not ask taxpayers to respond by providing additional information; (10) both underreporter and audit contacts usually ask taxpayers to provide information about the reported tax liability and to eventually either agree or disagree with any changes to it; (11) depending on the type of contact, taxpayers have different ways to dispute any changes to their tax liability; (12) IRS collects some data on nonaudit contacts, such as caseload and the amount of tax change, to help administer the programs; (13) IRS does not regularly collect data that could be used to identify ways to improve taxpayer compliance and service; (14) IRS does not always collect data on why taxpayers did not comply or whether they repeated their noncompliance in the future; (15) without such data, IRS cannot know the areas in which taxpayers need clarification or how well the programs are meeting the goals of improving compliance and serving taxpayers; and (16) IRS officials said that such data has not been collected because of problems in their information systems and questions about the cost-effectiveness of collecting the data for all types of contacts.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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