Tax Administration
IRS Should Continue to Expand Reporting on Its Enforcement Efforts Gao ID: GAO-03-378 January 31, 2003Reported declines in the rate at which the Internal Revenue Service (IRS) audits (also referred to as "examines") individual income tax returns have raised concerns that taxpayers may have a false perception of the true level of IRS's tax enforcement efforts. In addition, many observers are concerned these reported declines may reduce taxpayers' motivation to voluntarily pay their taxes. Because of these concerns, GAO was asked to review a number of issues surrounding IRS's enforcement efforts. GAO determined the trends in the percent of returns filed that are audited (contact rate) compared with similar data on taxpayer contacts through other enforcement programs for fiscal years 1993 through 2002. In addition, GAO reviewed whether IRS's reporting on its enforcement programs should be expanded.
IRS's often-cited audit rate has been declining for several years, as shown below. However, the audit rate portrays only a portion of IRS's efforts to enforce tax laws and not all of those efforts have been declining. For IRS's three nonaudit enforcement programs, the contact rates in 2002 compared to 1993, after year to year variations, declined for one, essentially remained the same for one, and significantly increased for one--math error. A complete math error contact trend is unavailable because IRS did not capture one type of data on a substantial number of contacts prior to 1997. For years where complete data are available, IRS has not included all math errors in external reports. IRS officials agreed that all types of errors are identified under the same math error authority and should be similarly counted and reported. IRS annually reports extensive data on audits but only limited, or no, data on its other enforcement programs. This limited reporting does not provide policymakers or taxpayers information on the full extent of IRS's enforcement efforts. To the extent that taxpayers do, as is widely believed, take the level of enforcement into account when self-reporting their tax obligations, the audit rate alone may mislead them. IRS officials believe that more reporting is desirable and intend to report readily available, but incomplete, information on nonaudit programs in future reports.
RecommendationsOur 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.
Director: Team: Phone:GAO-03-378, Tax Administration: IRS Should Continue to Expand Reporting on Its Enforcement Efforts
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United States General Accounting Office:
GAO:
Report to the Chairman, Subcommittee on Oversight, Committee on Ways and
Means, House of Representatives:
January 2003:
Tax Administration:
IRS Should Continue to Expand Reporting on Its Enforcement Efforts:
GAO-03-378:
GAO Highlights:
Highlights of GAO-03-378, a report to the Subcommittee on Oversight,
Committee on Ways and Means, U.S. House of Representatives:
Why GAO Did This Study:
Reported declines in the rate at which the Internal Revenue Service
(IRS) audits (also referred to as ’examines“) individual income tax
returns have raised concerns that taxpayers may have a false perception
of the true level of IRS‘s tax enforcement efforts. In addition, many
observers are concerned these reported declines may reduce taxpayers‘
motivation to voluntarily pay their taxes.
Because of these concerns, GAO was asked to review a number of issues
surrounding IRS‘s enforcement efforts. GAO determined the trends in the
percent of returns filed that are audited (contact rate) compared with
similar data on taxpayer contacts through other enforcement programs
for fiscal years 1993 through 2002. In addition, GAO reviewed whether
IRS‘s reporting on its enforcement programs should be expanded.
What GAO Found:
IRS‘s often-cited audit rate has been declining for several years, as
shown below. However, the audit rate portrays only a portion of IRS‘s
efforts to enforce tax laws and not all of those efforts have been
declining. For IRS‘s three nonaudit enforcement programs, the contact
rates in 2002 compared to 1993, after year to year variations, declined
for one, essentially remained the same for one, and significantly
increased for one”math error. A complete math error contact trend is
unavailable because IRS did not capture one type of data on a
substantial number of contacts prior to 1997. For years where complete
data are available, IRS has not included all math errors in external
reports. IRS officials agreed that all types of errors are identified
under the same math error authority and should be similarly counted and
reported.
IRS annually reports extensive data on audits but only limited, or no,
data on its other enforcement programs. This limited reporting does not
provide policymakers or taxpayers information on the full extent of
IRS‘s enforcement efforts. To the extent that taxpayers do, as is
widely believed, take the level of enforcement into account when self-
reporting their tax obligations, the audit rate alone may mislead them.
IRS officials believe that more reporting is desirable and intend to
report readily available, but incomplete, information on nonaudit
programs in future reports.
Figure: IRS Enforcement Program Contact Rates, Fiscal Years 1993
through 2002:
[See PDF for image]
This figure is a multiple line graph depicting IRS Enforcement Program
Contact Rates, Fiscal Years 1993 through 2002. The vertical axis of the
graph represents Rate (percent) from 0 to 8. The horizontal axis of the
graph represents years from 1993 to 2002. Five contact rates are
depicted on the graph: Math error; Math error (revised); Nonfiler;
Document matching; and Audits.
Source: GAO analysis of IRS data.
Note: Data for revised math error contacts is not available for fiscal
years 1993 to 1996. The revised math error line above includes all math
error contacts by IRS for the relevant years.
[End of figure]
What GAO Recommends:
GAO recommends that IRS determine whether future reporting on its other
enforcement programs can be more complete and comparable to reporting
on audits. GAO also recommends that IRS correct underreporting of math
error contacts.
In commenting on a draft of this report, IRS agreed with our
recommendations. It has already begun to identify additional data to
report on its enforcement programs.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-378].
To view the full report, including the scope and methodology, click on
the link above. For more information, contact Michael Brostek at (202)
512-9110 or BrostekM@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Scope and Methodology:
Similarities and Differences among IRS Enforcement Programs Depend on
the Type of Audit:
Enforcement Program Contact Rates Did Not Follow Consistent Patterns:
Limited Evidence Suggests IRS Enforcement Programs Do Increase
Compliance; No Measures Available on Enforcement Program Burden;
IRS‘s Public Reporting on Its Enforcement Programs Is Incomplete:
Conclusions:
Recommendations to the Acting Commissioner of Internal Revenue:
Agency Comments:
Appendix I: Development of the Math Error Program:
Appendix II: Use of Information Returns and Document Matching at IRS:
Appendix III: Individual Audit and Other Enforcement Program Data:
Appendix IV: Soft Notices and Voluntary Compliance Agreements:
Appendix V: Comments from the Commissioner of Internal Revenue:
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Operational Dimensions of IRS Enforcement Contacts:
Table 2: Data Published on IRS Enforcement Programs for Individual
Taxpayers, Fiscal Year 2001:
Table 3: Legislative Authority on Math Error Provisions for Individual
Tax Returns:
Table 4: Major Legislation Affecting the Information Returns Program:
Table 5: Major Types of Information Returns Filed for Tax Years 1983
and 2000:
Table 6: Number and Rates of Individual Audit and Other Enforcement
Contacts, Fiscal Years 1993 through 2002:
Table 7: Number and Rates of Individual Audit and Document Matching
Contacts by Income Level, Fiscal Years 1993 through 2002:
Table 8: Number and Rates of Individual Audits by Type of Audit and
Income Level, Fiscal Years 1993 Through 2002:
Table 9: Average Direct Staff Hours by Type of Audit and For Document
Matching Cases, Fiscal Years 1993 through 2002:
Figures:
Figure 1: Average Direct Staff Hours by Type of Audit and for Document
Matching Cases, Fiscal Years 1993 through 2002:
Figure 2: IRS Enforcement Contact Rates, Fiscal Years 1993 through
2002:
Figure 3: IRS Individual Audit and Document Matching Contact Rates by
Income Level, Fiscal Years 1993 through 2002:
Figure 4: Individual Audit and Other Enforcement Contacts, Fiscal Years
1993 through 2002:
Figure 5: Number of Individual Audit and Document Matching Contacts by
Income Level, Fiscal Years 1993 through 2002:
Abbreviations:
EmTRAC: Employer-designed Tip Reporting Alternative Commitment:
GAO: General Accounting Office:
IRC: Internal Revenue Code:
IRS: Internal Revenue Service:
MSA: Medical Savings Accounts:
NRP: National Research Program:
RRA: IRS Restructuring and Reform Act of 1998:
SSA: Social Security Administration:
TIN: Tax Identification Numbers:
TRAC: Tip Reporting Alternative Commitment:
TRDA: Tip Rate Determination Agreement:
[End of section]
United States General Accounting Office:
Washington, DC 20548:
January 31, 2003:
The Honorable Amo Houghton:
Chairman, Subcommittee on Oversight:
Committee on Ways and Means:
House of Representatives:
Dear Mr. Chairman:
The United States tax system is based on self-reporting and voluntary
compliance by taxpayers. The Internal Revenue Service (IRS) uses various
enforcement programs to check the accuracy of tax returns and contacts
taxpayers if problems are found. IRS makes the contacts through four
major enforcement programs that have existed for many years.
* Math Error Program: While tax returns are being processed, this
program uses IRS computers to identify and generate notices to contact
taxpayers about obvious errors such as mathematical errors, omitted or
inconsistent data, or other inconsistencies on the basis of other data
reported on the return or to IRS. These errors must be corrected to
process a tax return.
* Document Matching Program: This program matches information on
selected tax issues (usually income) reported on tax returns by
individual taxpayers and reported on information returns by employers,
banks, and other payers of income. Document matching also matches
information returns (schedule K-1) filed by pass-through entities”such
as partnerships, trusts and S-corporations”to individual tax returns.
IRS may contact taxpayers about any reporting discrepancies.
* Nonfiler Program: This program identifies and contacts potential
nonfilers of tax returns by using data from information returns and
previously filed income tax returns. The contacts can ask for the
missing return or offer an IRS-generated return to substitute for the
missing return.
* Audit Program: Also referred to as ’examination,“ under this program,
an IRS auditor checks compliance in reporting income, deductions,
credits and other issues on tax returns, as well as in paying the
correct tax liability. Audit contacts can be made through
correspondence or in face-to-face meetings with taxpayers at an IRS
office or a taxpayer location.
Widely reported substantial declines in the rate at which IRS audits
income tax returns have triggered concern that the declines could reduce
taxpayers‘ motivation to voluntarily pay their taxes. Many view IRS‘s
enforcement programs as critical support to our voluntary system”they
help provide taxpayers with confidence that their friends, neighbors,
and business competitors are paying their share of taxes.
Because of your concerns that the declining audit rate may give
taxpayers a misleading perception of the true level of IRS‘s tax
enforcement efforts and encourage some taxpayers not to comply, you
requested that we review a number of issues related to how IRS enforces
tax laws and publicly reports on those efforts. This report:
* compares IRS‘s enforcement programs in terms of their legal authority,
and operational characteristics (including IRS staff time), and
describes what is known about taxpayer perceptions of the enforcement
programs;
* summarizes enforcement contact trends overall and by taxpayer income
and their causes from 1993 to 2002;
* determines what IRS knows about the effect of its enforcement programs
on individual taxpayer compliance and the burdens taxpayers experience
when contacted under the programs;
* assesses whether and, if so, how IRS should expand reporting on its
enforcement programs.
To address these objectives, our work included interviewing IRS
officials and reviewing documents on the similarities and differences
across IRS enforcement programs. To identify trends in IRS‘s
enforcement programs including trends by taxpayer income levels, we
analyzed IRS data from fiscal years 1993 through 2002.[Footnote 1] To
analyze impacts on taxpayers, and tradeoffs of reporting more data
about the enforcement programs, we interviewed IRS officials and
reviewed any available research on how the programs affect individual
taxpayers‘ compliance and burden. (See our scope and methodology
section for details on our approach.) In addition, you asked us to
analyze trends in the number of contacts by the specific programs.
Appendix III provides this information.
Results in Brief:
Whether audits and other enforcement programs vary from each other
depends on a number of factors. With regard to legal characteristics,
audits and other enforcement programs are all authorized to contact
taxpayers about apparent noncompliance and to determine and adjust
taxpayers‘ tax liability. However, audits have the broadest authority to
detect possible noncompliance, significant powers to obtain information,
and the most restrictions on how IRS is to interact with taxpayers. With
regard to operational characteristics, the extent to which audits are
operationally similar to or different from other enforcement programs
varies depending on the type of audit. In general, audits done in
taxpayer locations and IRS offices are not similar operationally to
other enforcement programs. Audits done through correspondence with the
taxpayer, while still different, are more operationally similar to the
other programs. IRS officials were unaware of any research on whether
taxpayers perceive differences among IRS‘s enforcement programs.
However, looking at audits and other enforcement programs from the
taxpayers‘ perspective, IRS officials and officials we interviewed who
represent taxpayers believe that taxpayers may not perceive distinctions
among many of the enforcement programs.
In fiscal years 1993 through 2002, the enforcement program contact rates
often did not follow consistent patterns from one program to another or
from year to year within programs.[Footnote 2] Comparing just fiscal
years 1993 to 2002, the contact rates for the audit and document
matching programs dropped 38 percent and 45 percent, respectively,
while the nonfiler program contact rates stayed about the same. Only
the math error program had a contact rate significantly higher in 2002
than in 1993. However, this growth covers only a portion of math error
contacts because data on one type of math error contact does not exist
for years before 1997, and have not been reported by IRS as math
errors. These unreported math error contacts total about 2 million
annually. IRS officials agreed that these other contacts should be
counted and reported as math errors. Excluding these contacts, the math
error contact rate was 33 percent higher in 2002 than in 1993. For
individuals, audit rates for taxpayers in higher and middle-income
ranges were significantly lower in 2002 than in 1993, while the rate
for the lowest income range was virtually the same in 2002 and 1993.
Document matching program contact rates ended significantly lower in
2002 than 1993 for taxpayers in all three income ranges. Income data
for the contact rates in the math error and nonfiler programs were not
available.
The divergent trends among the enforcement programs in their contacts
with taxpayers are attributable to several factors, including statutory
changes that expanded the types of issues IRS could address with
nonaudit programs, declines in IRS enforcement staffing, and priorities
in using staff. For example, the rise in math error contacts is at
least partly attributable to a 1996 statutory change that enabled IRS
to check hundreds of thousands of missing or invalid social security
numbers through the math error program rather than audits. Declines in
the audit program are generally attributable to statutory changes that
reduced the availability of IRS staff to do audits and increased the
time needed to do audits. In addition, declines in the number of staff
assigned to work enforcement cases coupled with the priority IRS gives
to staffing the math error program”because such errors must be resolved
before tax returns can be processed”have contributed to declines in
contacts with taxpayers in the audit, nonfiler, and document matching
programs.
IRS has limited evidence on the effects of its enforcement programs on
taxpayer compliance and no evidence on the burdens taxpayers experience
when contacted under the programs. Although widespread agreement exists
that enforcement programs are critical to ensuring voluntary
compliance, IRS officials only identified one study that attempted to
measure the effect of individual enforcement programs on compliance.
This IRS study, using various data for 1982 through 1991, estimated
that the audit and document matching programs had some positive effects
on whether taxpayers filed returns and reported relevant information.
No measures are available on the burdens placed on individual taxpayers
due to IRS‘s enforcement contacts and IRS does not currently plan to
start any studies to measure these burdens.
IRS‘s annual public reporting on its enforcement programs for individual
taxpayers does not provide a complete perspective on its efforts to
enforce the tax laws. IRS annually reports extensive data on audits but
limited or no data on other enforcement programs. This limited reporting
does not provide policymakers or taxpayers information on the full
extent of IRS‘s enforcement efforts. To the extent policymakers and
taxpayers focus on audits due to IRS‘s limited reporting, they may not
understand that long-term declines in the audit rate are in part due to
the movement of some tax issues from audits into other enforcement
programs, and that these programs contact far more taxpayers about
compliance issues than does the audit program. Of two options for
expanding reporting that we identified, reporting more data on each
enforcement program would avoid several disadvantages of combined
reporting under an expanded definition of an audit. Expanding the
definition of an audit would combine some enforcement activities that
are so disparate”such as audits conducted at taxpayer locations of
complex issues versus simple corrections of inadvertent math
errors”that the consolidated reporting could be misleading. IRS
officials plan to expand public reporting for fiscal year 2002 on IRS‘s
major enforcement programs to the extent that data are available and
cost effective to extract. They do not plan to determine whether IRS
can cost effectively develop additional data to enable future reporting
to more completely represent program results and to facilitate program
comparisons.
We are recommending that IRS determine whether data can be cost
effectively developed to make future reporting on its other enforcement
programs more complete and comparable to reporting on audits. We also
recommend that IRS correct underreporting of math error contacts. In
commenting on a draft of our report, IRS agreed with our
recommendations and has already begun to identify additional data to
report on its enforcement programs.
Background:
Each year, IRS screens all individual tax returns and selects a small
percentage in which to contact taxpayers about potential noncompliance.
Prior to doing automated checks of tax returns, IRS had relied on its
audit program to contact taxpayers about apparent inaccuracies in
reporting income, deductions, and other issues on their tax returns.
For example, to verify interest income or dependent exemptions claimed
by taxpayers, IRS auditors had to contact taxpayers, request and review
documentation. Thus, if IRS audited the returns of 5 percent of all
taxpayers, it could at most check on the accuracy of interest income
for 5 percent of taxpayers.
Since the 1970s, IRS‘s ability to verify some items on individual
returns expanded as IRS‘s capacity to use automated processes grew and
as Congress enacted laws requiring third parties (like banks, mortgage
finance firms, etc.) to provide information returns to taxpayers and
IRS on income paid. These steps enabled IRS to more universally and
efficiently check taxpayer compliance for those tax issues covered by
information returns. For example, with the initiation of information
returns for interest income and the development of IRS‘s automated
capacity, IRS began to check whether every taxpayer for whom it had
received an applicable information return had accurately reported that
interest on their tax return.
As a result, for some wage earners who claim no deductions, IRS can
review the accuracy of all, or nearly all, items reported on their tax
return to the extent that third parties correctly filed all information
returns. In these cases, IRS effectively receives information that
should be in taxpayers ’books and records“ and no longer needs to use
auditors to obtain such information from taxpayers‘ records for these
selected issues.
Concurrent with these expansions in IRS‘s ability to check the accuracy
of certain issues on taxpayers‘ returns, the number of taxpayer returns
that IRS audited began to decline. For example, between fiscal years
1981 and 1992, the number of document matching contacts rose from 1.2
million to 3.8 million and the number of audits dropped from 2.5
million to 1.1 million.
Several GAO reports have discussed IRS audits, other enforcement
contacts, and taxpayer burden as follows:
* In 1996, we reported that audit rates fell from 1988 to 1993 and then
rose to a high of 1.67 percent in 1995.[Footnote 3] In 2001, we
reported that audit rates had steadily dropped from 1996 to 2000,
declining to 0.49 percent.[Footnote 4]
* During 2000, we reported that IRS made almost 10 million nonaudit
contacts of taxpayers in 1998 through about 6 million math error
notices, 2 million document matching notices, and 2 million soft
notices. We recommended that IRS analyze the data collected for each of
the three major nonaudit contact programs to improve taxpayer
compliance and taxpayer service.[Footnote 5]
* During 2000, we reported on IRS‘s efforts to estimate taxpayer
compliance burden for prefiling, filing, and postfiling activities. We
found that IRS was developing two models that, when combined, should
provide more reliable estimates of compliance burden for wage earners.
[Footnote 6]
Scope and Methodology:
To compare audit and other enforcement programs, we obtained
information on their legal and operational characteristics. For legal
authority, we reviewed the Internal Revenue Code (IRC) and IRS
documents. For program operations, we reviewed IRS documents and
interviewed responsible IRS officials to understand how each program
works. For the average time spent on each type of contact, we analyzed
available IRS data for fiscal years 1993 through 2002. For how taxpayers
perceive IRS‘s enforcement programs, we interviewed IRS officials;
reviewed tax research studies and press articles; and contacted four
large national organizations representing attorneys, certified public
accountants, enrolled agents, and tax preparers, as well as the largest
tax return preparation firm, and IRS‘s national taxpayer advocate.
To summarize trends in the number and rate of individual taxpayer audits
and other enforcement contacts in total and by taxpayer income, we
analyzed available IRS data from fiscal year 1993 to fiscal year 2002 on
each type of contact. To compute the audit contact rate, we used IRS‘s
method, which equals the proportion of IRS audits closed in a fiscal
year compared with returns filed in the previous calendar year. IRS has
not stated a method for computing math error, document matching, and
nonfiler rates. For the document matching and nonfiler programs, we
compared the proportion of notices sent in a fiscal year to return
filings in the previous year because these contacts generally occur in
the year after a return is filed. For the math error program, we based
the contact rate on the proportion of math error notices to the returns
filed in that year because the notices are sent to taxpayers as IRS
processes tax returns. For the math error, document matching, and
nonfiler programs, we based the contact rate on the number of initial
notices sent to taxpayers rather than closures because (1) it is the
broadest measure of IRS‘s enforcement efforts with taxpayers and (2)
the math error and document matching programs usually conclude the
contact with the taxpayer within a few months after the initial notice
is sent. Nonfiler contacts can take considerably longer to close,
making it difficult to know which tax year to use in computing a
contact rate. We used the number of initial notices so that the
nonfiler program could be measured on a consistent basis with the
document matching and math error programs. To understand the reasons
for the trends, we analyzed our previously issued reports and IRS
reports and interviewed IRS staff for each enforcement program.
To determine how audit and other enforcement programs affect individual
taxpayer compliance and burden, we obtained and reviewed available data
such as IRS studies and reports, our previous reports, and other
research. We also interviewed responsible IRS officials.
To assess whether IRS should expand reporting on its enforcement
efforts, we analyzed the types of enforcement data already publicly
reported on an annual basis by IRS. We also analyzed the tradeoffs for
two options we identified”expanding the definition of audit to include
the other enforcement programs and reporting more data on each program.
We used much of the information from the previous objectives and
interviews with IRS officials.
For all objectives, our work focused on the four major enforcement
programs identified by IRS”math error, document matching, nonfiler, and
audit. We attempted to verify the completeness and accuracy of IRS‘s
data but could not reconcile all differences given time constraints. As
a result, we either did not report some data or disclosed limitations
in the data being reported. Further, in analyzing audit and document
matching rates by income level, we did not adjust the income levels for
the effects of inflation over the 1993 to 2002 period because detailed
data on taxpayer income was not available during the timeframes for the
assignment. All data used in the report are final except for the number
of tax returns filed in 2002. Because this number is preliminary, the
final math error contact rate for fiscal year 2002 may differ somewhat
from what we report. In addition, you asked us to analyze two newer IRS
efforts”voluntary compliance agreements and soft notices. Appendix IV
describes the two newer efforts.
We did our work at IRS‘s national office in Washington, D.C., and
offices in New Carrolton, Maryland, and Atlanta, Georgia, between
August 2002 and December 2002 in accordance with generally accepted
government accounting standards. We requested comments on a draft of
this report from IRS (see app. V).
Similarities and Differences among IRS Enforcement Programs Depend on
the Type of Audit:
Whether audits and other enforcement programs vary from each other
depends on a number of factors. With regard to legal characteristics,
audits and other enforcement programs are all authorized to contact
taxpayers about apparent noncompliance and to determine and adjust
taxpayers‘ tax liability. However, audits have the broadest authority to
detect possible noncompliance, significant powers to obtain information,
and the most restrictions on how IRS is to interact with taxpayers. With
regard to operational characteristics, the extent to which audits are
operationally similar to or different from other enforcement programs
varies depending on the type of audit. Audits done in taxpayer locations
and IRS offices are not similar operationally to other enforcement
programs and audits done through correspondence with the taxpayer,
while still different, are more operationally similar to some of the
other programs. IRS officials were unaware of any research on whether
taxpayers perceive differences among IRS‘s enforcement programs.
However, looking at audits and other enforcement programs from the
taxpayers‘ perspective, IRS officials and officials we interviewed who
represent taxpayers believe that taxpayers may not perceive distinctions
among many of the enforcement programs.
Legal Characteristics: Audits Have the Broadest Scope, Significant
Powers to Obtain Information, and the Most Detailed Restrictions:
In a general sense, the IRC provisions for enforcement are similar in
that they authorize IRS to contact taxpayers about apparent
noncompliance and to determine and adjust taxpayers‘ tax liability.
However, the IRC provisions grant IRS the authority to review all
matters that may affect a taxpayer‘s tax liabilities under audits but
only certain specified tax issues under other enforcement programs. The
IRC also establishes more rules”including significant powers to obtain
information as well as restrictions on those powers”that govern the
nature of audit contacts with taxpayers than for the other programs.
The IRC does not explicitly limit the tax issues to be covered by an
audit, unlike for the other enforcement programs. Under the authority
of section 7602, audits can cover any issue on a tax return, including
those that the other programs cover.[Footnote 7] In contrast, the IRC
specifies the scope of legal authority for the three other enforcement
programs. For example, after five statutory expansions since 1976, math
error authority[Footnote 8] now covers 11 tax issues (see app. I).
Document matching”which grew primarily through the 1980s as Congress
authorized more information reporting”now covers over 20 types of
individual income as well as certain tax credits and deductions (see
app. II). [Footnote 9] The IRC also specifically authorizes the
nonfiler program to pursue unfiled tax returns that should have been
filed.[Footnote 10]
The IRC also establishes more rules governing IRS‘s contacts with
individual taxpayers under the audit program than it does for the math
error, document matching, and nonfiler programs. These rules give IRS
significant powers to obtain information needed to determine an
individual‘s tax liabilities when doing an audit and, in turn, places
restrictions on the use of those powers. If resolving issues raised
under the other enforcement programs requires that IRS auditors become
involved, the contacts with taxpayers become audits subject to these
greater powers and restrictions. For example, if a taxpayer who
receives a math error notice files a claim for IRS to abate the tax
assessment, IRS could audit that claim. Similarly, if a taxpayer
responds to a document matching notice with materials that cannot be
readily and immediately used to settle the discrepancy, the case could
be referred to audit staff.
The greater powers that IRS has under audit compared with the other
programs include the authority to examine books and records and take
testimony for purposes of determining the tax liability of a tax
return. IRS also has the power to use a summons to compel taxpayers and
third parties to provide books and records, and to enter premises to
examine objects subject to taxation.[Footnote 11]
Given these greater powers, the law also places more restrictions on
audits to protect taxpayer rights.[Footnote 12] For example, the law
restricts IRS from doing unnecessary audits or generally doing more
than one inspection of taxpayers‘ books for each tax year. The law also
governs the time and place of an audit and burden of proof on IRS. In
addition, the Internal Revenue Service Restructuring and Reform Act
(RRA) of 1998 (P.L. 105-206) added several requirements, such as
informing taxpayers of their rights during audits.[Footnote 13]
On the other hand, RRA also added a provision that creates a legal
similarity for all four enforcement programs because it affects any IRS
employee, including those making audit or nonaudit contacts. Section
1203 of RRA lays out the conditions under which any IRS employee is to
be fired for any of 10 specific acts or omissions. Many of these
conditions involve contacts with taxpayers”such as harassing taxpayers
or taxpayer representatives, violating their civil rights, or
threatening to audit a taxpayer for personal gain. These restrictions
were intended to protect taxpayers in their interactions with IRS.
Another legal provision creates a similarity between audits and two of
the three other programs. Except for the math error program, when IRS
proposes a change in taxpayers‘ liabilities, it is required to send a
notice[Footnote 14] informing taxpayers of their rights, such as the
right to appeal additional taxes that IRS proposes. The IRC does not
provide taxpayers a right to appeal assessments created under math
error authority because that authority generally applies to obvious
errors made by taxpayers on their returns. However, IRS informs
taxpayers receiving a math error notice that they may file a claim to
ask IRS to abate (reduce) the tax assessment if they believe IRS erred.
Operational Characteristics: Audits at IRS Offices or Taxpayer
Locations Differ the Most from Other Enforcement Programs:
The extent to which audits are operationally similar to or different
from other enforcement programs varies depending on the type of audit.
Compared with other enforcement programs, audits done in taxpayers‘
locations or IRS offices are more likely to deal with multiple and
complex issues, require more skill and judgment by IRS employees,
require a greater number of interactions with taxpayers, and take more
IRS staff time. Correspondence audits also tend to differ from other
enforcement programs in these operational characteristics but to a
lesser degree, and in some cases correspondence audits and document
matching contacts with taxpayers can be very similar in these
characteristics. Table 1 provides an overview of key operational
dimensions across the enforcement programs.
Table 1: Operational Dimensions of IRS Enforcement Contacts:
Contact: Audits;
What triggers the contact:
* computer analysis of potentially noncompliant returns;
* referrals from inside or outside IRS;
* projects on specific areas of known noncompliance;
How many contacts occur between IRS and the taxpayer: likely requires
multiple exchanges via notices/letters, telephone, and/or face-to-face
meetings;
How much skill and judgment is required by IRS staff: skilled review of
simpler issues and more sophisticated analysis of complex issues;
When is the initial contact sent to the taxpayer: usually within 1 year
after the return is filed but may occur later as long as IRS finishes
the audit within 3 years after the return is filed.
Contact: Document Matching;
What triggers the contact: computer identification of error based on
information received from third parties on income paid;
How many contacts occur between IRS and the taxpayer: one notice from
IRS and possible exchanges via letters or telephone;
How much skill and judgment is required by IRS staff: some
skill/judgment;
When is the initial contact sent to the taxpayer: within 1 year after
the return was filed.
Contact: Non-filer;
What triggers the contact:
* computer identification of those who did not file or who stopped
filing;
* referrals from inside or outside IRS;
How many contacts occur between IRS and the taxpayer: one notice from
IRS and probable exchanges via letters, telephone, or meetings;
How much skill and judgment is required by IRS staff: some
skill/judgment;
When is the initial contact sent to the taxpayer: usually within 1 year
after the return was to be filed.
Contact: Math Error;
What triggers the contact: computer identification of error using
taxpayer information on their tax returns or forms;
How many contacts occur between IRS and the taxpayer: one notice from
IRS;
How much skill and judgment is required by IRS staff: little
skill/judgment;
When is the initial contact sent to the taxpayer: as part of the initial
processing for the tax return.
Source: GAO analysis.
Note: Of the three types of audits, the simplest usually covers one to
two tax issues handled by a lower-graded auditor and correspondence.
More complex audits are done by meeting with taxpayers in IRS field
offices. The most complex audits are done through field visits to
taxpayer locations.
[End of table]
Reviewing these operational dimensions helps highlight similarities and
differences across the four types of enforcement.
* Contact triggers: All enforcement contacts use computers to identify a
potential compliance issue. However, audits are more likely to be
triggered by other means such as a special compliance project or
referrals from inside or outside of IRS.
* Number of contacts: Once any potential compliance issues are found,
the fewest contacts with taxpayers to resolve the issues are likely
under the math error and document matching programs because they have
relatively simple issues. Correspondence audits might need more than
one contact, depending on the complexity of the issue(s) being audited
and taxpayers‘ responses. The number of contacts in the nonfiler
program can vary depending on whether taxpayers respond to an IRS
notice by filing a return, or explaining why a return was not
required.[Footnote 15] Some may not respond, possibly leading IRS to
send a second notice or create a substitute return and send it to that
taxpayer. Audits at IRS offices or taxpayer locations are likely to
have the most contacts with taxpayers through meetings, notices, or the
telephone because they tend to cover several, more complex issues.
* IRS staff skill and judgment: Audit contacts”especially those done in
IRS offices or in taxpayer locations”require the most staff skill and
judgment to analyze taxpayers‘ testimony and books and records. Being
more automated and usually dealing with simpler issues, other
enforcement programs rely on less staff skill and judgment. Document
matching staff might have to analyze taxpayers‘ explanations for why
they do not owe more tax but are to refer the case to the audit program
if an explanation requires detailed analysis or includes books and
records. The nonfiler program requires limited skill and judgment when
automated processes send the notices or generate substitute returns.
More skill and judgment is required when IRS staff manually create
substitute returns or when taxpayers respond to a notice by saying that
they do not have to file a return.
* Timing of initial contact: Math error contacts are made as the return
is being processed and identify errors that must be corrected to finish
processing the return. Document matching and nonfiler contacts usually
occur within 1 year after the return is filed or is to be filed. Audits
usually start within 1 year after a return is filed but can start later
as long as IRS finishes the audit within 3 years after the return is
filed. Another operational characteristic is the average time spent by
IRS staff. Figure 1 shows that audits use more staff time per case than
document matching contacts.[Footnote 16] For fiscal years 1993 through
2002, the staff time ranged from roughly an hour per document matching
case to up to 30 hours per field audit. (see Table 9 in app. III for
details.) IRS does not separately track the time spent on math errors
from the rest of the returns filing process or on nonfilers from other
work done by collection staff.
Figure 1: Average Direct Staff Hours by Type of Audit and for Document
Matching Cases, Fiscal Years 1993 through 2002:
[See PDF for image]
This figure is a multiple line graph depicting the average direct staff
hours by type of audit and for document matching cases, fiscal years
1993 through 2002. The vertical axis of the graph represents Hours from
0 to 35. The horizontal axis of the graph represents years from 1993 to
2002. Four types of audits are depicted by lines: Field audit; Office
audit; Correspondence audit; and Document matching.
Source: GAO analysis of IRS data.
Note: Fiscal year 2002 data are estimated.
[End of table]
Looking across all of these operational dimensions in general, audits
that take place in IRS offices or in taxpayer locations differ the most
from other enforcement programs. They differ primarily because they are
more likely to deal with multiple complex tax issues, require more
skill and judgment by IRS employees, require a greater number of
interactions with taxpayers, and take more IRS staff time. Although
correspondence audits do differ from other enforcement programs on
these characteristics, they do not differ as much from other
enforcement programs as do the audits in IRS field offices or taxpayer
locations. The closest similarity between correspondence audits and the
other programs is with the document matching program. In comparison to
the document matching program, correspondence audits in some cases may
deal with about the same number of issues, have the same number of
interactions with taxpayers, and require similar skill, judgment, and
time on the part of IRS staff. Correspondence audits are less similar
to contacts under the math error and nonfiler programs than to document
matching. Math error contacts deal with straightforward issues that
must be corrected as a return is processed as opposed to contacting the
taxpayer up to one year later about issues in the return. Nonfiler
contacts deal with taxpayers who have not filed a return at all as
opposed to seeking to correct issues related to a filed return.
In addition to the four major enforcement programs, starting in the mid-
1990s, IRS created two new programs intended to help individual
taxpayers file accurate tax returns. IRS sends so-called ’soft notices“
on duplicate claims for dependent exemptions and missing self-employment
tax reporting. The soft notices do not require taxpayers to take action
but are intended to educate them about the potential errors and
encourage them to correct their returns, if necessary. The other new
program is the voluntary compliance agreements program. These
agreements are negotiated with certain employers with the goal of
increasing their employees‘ compliance in reporting tip income. As
discussed in appendix IV, while these programs attempt to improve
compliance, they have significant differences from the four major
enforcement programs and IRS has little data on their use. However, IRS
was able to provide us with data that it sent taxpayers 1.2 million
soft notices on duplicate dependent claims in 2002.
No Research Identifies Whether Taxpayers Perceive Distinctions in
Enforcement Programs but Officials Believe That Distinctions May Not Be
Made:
IRS officials were not aware of any research, and our search of the tax
literature and press did not uncover research, on whether taxpayers
perceive distinctions between audits and other enforcement programs. Of
the four major enforcement program contacts, IRS officials said that
they could see how some taxpayers might view two types of contacts”
document matching and correspondence audits”as similar in that both
tend to cover one or two tax issues that are fairly simple, contact
taxpayers through the mail, and give taxpayers the same appeal rights.
Otherwise, these officials did not see how taxpayers could view the
enforcement contacts as similar, especially the math error contacts.
Although they had not surveyed taxpayers, officials we interviewed from
six groups that represent taxpayers or help prepare their tax returns
believed that many individuals perceive no distinction among the
programs. For example, one representative attributed this to the
conclusion that taxpayers view all IRS notices as stating the same
thing”that the taxpayer owes more taxes.
Enforcement Program Contact Rates Did Not Follow Consistent Patterns:
From fiscal years 1993 through 2002, the rates for the four enforcement
programs often did not follow consistent patterns from one program to
another or from year to year within programs. Comparing just 1993 with
2002, the contact rates for two programs”audits and document
matching”were significantly lower, the rate for math errors was
significantly higher, and the rate for nonfilers was essentially the
same. By taxpayer income level, the audit rate for higher and middle
income taxpayers generally declined over the 10-year period”with the
sharpest declines for higher income taxpayers. The rate for the lowest
income taxpayers increased sharply between 1993 and 1995 and then
generally fell, ending virtually the same as in 1993. The document
matching contact rate by income class followed very similar patterns
with the rates for all income levels dropping over the 10-year period.
The enforcement contacts increased or decreased because of several
reasons, including statutory changes, staffing declines, and priorities
in the use of staff among the programs.
Enforcement Program Contact Rates Varied from Program to Program and
Often from Year to Year within Programs:
As figure 2 shows, the math error program contact rates rose or fell
from year to year; however, it‘s the only enforcement program that had a
significantly higher contact rate in fiscal year 2002 than in 1993.
This is true even without counting certain math error contacts for
which IRS lacks data over the 10-year period. Using only the math error
count, which is consistent throughout the 10 years, the math error
contact rate rose 33 percent (from 3.59 percent to 4.79 percent).
Document matching contact rates went down and up at various times but
ended 45 percent lower (from 2.37 percent to 1.30 percent) in 2002
compared to 1993. The nonfiler rates also went up and down but ended in
2002 about where they were in 1993. Comparing 1993 to 2002, the audit
contact rate dropped 38 percent (from 0.92 percent to 0.57 percent),
even though it rose significantly between 1993 and 1995. Over the 10
years, the math error rate exceeded the rate for each of the three
other programs, and the audit rate was the lowest rate, except in
fiscal years 1995, 1996, and 1997. The trends in the number of contacts
in all four programs generally follow the trends in the rates. Appendix
III provides details about the contact numbers and rates for all four
programs.
Figure 2: IRS Enforcement Program Contact Rates, Fiscal Years 1993
through 2002:
[See PDF for image]
This figure is a multiple line graph depicting IRS Enforcement Program
Contact Rates, Fiscal Years 1993 through 2002. The vertical axis of the
graph represents Rate (percent) from 0 to 8. The horizontal axis of the
graph represents years from 1993 to 2002. Five contact rates are
depicted on the graph: Math error; Math error (revised); Nonfiler;
Document matching; and Audits.
Source: GAO analysis of IRS data.
Notes: The math error (revised) line includes math error contacts from
masterfile notices that IRS‘s reports had excluded. Data on such math
errors were not available prior to fiscal year 1997. The figure does
not include additional contacts for math errors related to the rate
reduction credit during 2002.
Fiscal year 2002 data is estimated.
[End of figure]
The trend line in Figure 2 shows a revised math error contact rate that
includes masterfile[Footnote 17] notices IRS had been sending
throughout this period but had not been reporting as math errors. In
data made publicly available on math error contacts,[Footnote 18] IRS
had excluded roughly 2 million masterfile math error contacts annually
for fiscal years 1997 through 2002.[Footnote 19] When included, the
math error contact rate increases (e.g., from 4.97 percent to 6.5
percent in 1997). These math error contacts arise from IRS‘s match of
filed tax returns to its masterfile accounts to identify tax returns
that misreport taxes already paid such as in previous years or
estimated tax payments. IRS officials said that the masterfile errors
were not reported as math errors because they are identified through a
different process at a later time compared to other math errors during
the processing of tax returns. In our discussions, these officials
agreed that both types of errors are identified under the same math
error authority, are indistinguishable to taxpayers being contacted,
and should be similarly counted and reported.
IRS also did not include in its published report about 8 million
notices sent in fiscal year 2002 to correct errors in tax returns
reporting the rate reduction credit.[Footnote 20] If these notices had
been included, the math error contact rate would have nearly doubled to
12.5 percent. The Economic Growth and Tax Relief Reconciliation Act of
2001 authorized tax rate reductions as well as an advance tax refund,
called the rate reduction credit. Because the rate reduction credit
applied for only 1 year, this error is unlikely to recur according to
IRS officials. As a result, we did not include this information in
figure 2.
Audit and Document Matching Contact Rates Across Income Levels Have
Generally Declined:
Figure 3 shows that the contact rates generally declined in the audit
and document matching programs for all taxpayer income levels between
fiscal years 1993 and 2002. For the math error and nonfiler programs,
data on contact rates by income level were not available, and IRS
officials said that it would take some time and effort to develop math
error and nonfiler contact rates by income levels. (See table 7 in app.
III for details on contact rates by income levels.)
Figure 3: IRS Individual Audit and Document Matching Contact Rates by
Income Level, Fiscal Years 1993 through 2002:
[See PDF for image]
This figure contains two multiple line graphs depicting IRS Individual
Audit and Document Matching Contact Rates by Income Level, Fiscal Years
1993 through 2002. The vertical axis of the graphs represent Audit
rates from 0 to 5 percent (first graph) and Document matching rates
from 0 to 5 percent(second graph). The horizontal axis of both graphs
represents years from 1993 to 2002. Lines depicting the following three
income levels are represented on each graph: $200,000 and over; $25,000
to under $100,000; and Under $25,000.
Source: GAO analysis of IRS data.
Note: Data by income level for the math error and nonfiler programs are
not available.
[End of figure]
As figure 3 shows, because the audit contact rate declined (from 3.89
percent to 0.86 percent) for higher income (more than $100,000)
individuals and remained virtually the same (from 0.77 percent to 0.78
percent) for the lowest income (less than $25,000) individuals between
fiscal years 1993 and 2002, the rates for the highest and lowest income
individuals essentially converged in 2001 and 2002. Over the same time,
the document matching contact rate generally declined for all three
income groups with fairly similar year-to-year patterns and with higher
income individuals being contacted at the higher rate.
Statutory Changes, Fewer Staff, and Resource Priorities Explain Trends
in Math Error, and Other Enforcement Contact rates:
The divergent trends between the growing rate of math error contacts and
the declining or relatively stable rates for the other enforcement
programs can be attributed to how the programs have been affected by
statutory changes, fewer enforcement staff, and priorities for using
available staff. Math error contacts grew over the fiscal year 1993
through 2002 period in part because Congress expanded the types of tax
issues covered by the math error authority. For example, in 1996,
Congress gave IRS authority to shift a number of earned income tax
credit issues from its audit program to its math error program in that
year. As a result, in 1997, IRS shifted over 700,000 cases involving
missing or invalid social security numbers (SSN) on tax returns from
the audit program to the math error program. Under this and other
statutory expansions, IRS was making hundreds of thousands of math
error contacts with taxpayers by 2002 that were not made in 1993.
A second statutory change played a role in the diverging trends among
the enforcement programs. In RRA, Congress took steps to better ensure
that taxpayer rights were protected by revising certain audit
processes, such as informing taxpayers about their rights and generally
how they were selected for audit. According to IRS officials, the
changes contributed to the decline in audits because IRS auditors had
to spend more time to handle nonaudit duties, to be trained in new
procedures and taxpayers‘ enhanced rights, and to do new tasks.
[Footnote 21] Those changes contributed to reductions in the number of
audits that each auditor completed, meaning they were less productive
in closing audit cases.
Finally, declines in enforcement staffing and priorities for using
staff also contributed to trends in enforcement program contacts. IRS
has reported that from 1993 to 2001, enforcement staffing levels
declined about 24 percent. These staffing declines affected not only
the audit program but also the document matching and nonfiler programs
because those programs require that IRS staff screen most notices
before they are sent and follow up when taxpayers respond to
notices.[Footnote 22] Given declining staff resources, IRS has
restricted the number of notices sent when it finds probable
noncompliance under the document matching and nonfiler programs. In
contrast, IRS allocated enough resources over this period to the math
error program to continue sending these notices. IRS officials said
that IRS must resolve math errors to process tax returns and adjust the
tax liability so that taxpayers are in compliance.[Footnote 23]
Limited Evidence Suggests IRS Enforcement Programs Do Increase
Compliance; No Measures Available on Enforcement Program Burden:
Although widespread agreement exists that enforcement programs help
ensure voluntary tax compliance, evidence is limited about the degree to
which enforcement overall or by type of program affects taxpayer
compliance. No studies are available that measure the burdens that
taxpayers experience when contacted under IRS‘s enforcement programs.
Over the years, many tax practitioners and academics have suggested that
enforcement programs are critical for ensuring voluntary compliance.
However, measuring the effects of enforcement programs on compliance
is a difficult task. IRS officials identified only one study that
attempted to estimate the effects of its enforcement programs on
compliance; no more recent work is underway or planned to measure these
effects. Relying on an econometric analysis of taxpayer behavior”using
various assumptions, IRS and non-IRS data for 1982 through 1991, and
alternative measures of compliance”this IRS study estimated the effects
of various IRS programs across the general taxpayer population. The
study suggested that audits had a positive impact on compliance in
reporting information on tax returns and that document matching had a
positive effect on compliance in filing required returns. We did not
have time to analyze the reasonableness of the study‘s approach,
assumptions, and results.
To obtain current information on taxpayers‘ compliance in filing tax
returns and reporting correctly on them, IRS developed its National
Research Program (NRP).[Footnote 24] This program is designed to yield
reliable estimates of the compliance levels of individual taxpayers
while addressing concerns about the burden such a measurement program
can impose on taxpayers. NRP‘s design was completed in fiscal year
2002, and IRS will be auditing taxpayers‘ returns under the program
during fiscal year 2003.[Footnote 25] IRS plans to use the NRP results
to update tools to select individual tax returns for audit, to allocate
resources, to estimate the impacts of legislative and administrative
changes on voluntary compliance and tax revenue, and to identify
potential ways to improve voluntary compliance. Although NRP should
yield useful data, it was not designed to measure the effect that each
major enforcement program could have on voluntary compliance.
In addition, IRS has been working to produce more comprehensive
estimates of burden that individual taxpayers face in meeting their tax
obligations. IRS developed a system in 1984 for estimating the burdens
taxpayers face in filing IRS forms, and began efforts during the 1990s
to create a better model for estimating such compliance burdens. IRS
recently announced that the new burden model is ready to be tested and
likely will replace the old model during fiscal year 2003. Although the
model should provide better estimates of individual taxpayer burdens in
completing and filing tax returns, it is not designed to estimate the
postfiling burdens related to IRS‘s enforcement efforts. IRS expects to
model these postfiling burdens but does not yet know when that phase of
its burden estimation project will begin.
IRS‘s Public Reporting on Its Enforcement Programs Is Incomplete:
IRS‘s public reporting on its enforcement programs for individual
taxpayers does not provide a complete perspective on its efforts to
enforce tax laws because that reporting heavily focuses on audits. IRS‘s
audit rate is often cited in the press and is often the focus of
congressional and other debates concerning how well IRS is enforcing
the tax laws. However, over time the audit rate has become increasingly
less complete as a measure of IRS‘s efforts to enforce tax laws because
IRS‘s other enforcement programs have expanded their coverage of issues
once covered under audits.
At least two options exist for expanding reporting: changing the
definition of audits to include other enforcement efforts and reporting
more data on each enforcement program separately. The second option
would achieve more complete and balanced reporting without incurring
some of the disadvantages that could come from expanding the definition
of audits. IRS officials plan to expand public reporting for fiscal
year 2002 on IRS‘s major enforcement programs to the extent that data
are available and cost effective to extract.
Limited Public Reporting on IRS‘s Enforcement Programs:
IRS publishes extensive data on audits but only limited data on other
enforcement programs in its Data Book.[Footnote 26] Table 2 summarizes
the data annually published on the enforcement programs involving
individual taxpayers.
Table 2: Data Published on IRS Enforcement Programs for Individual
Taxpayers, Fiscal Year 2001:
Enforcement program: Audit;
IRS published data: Number and/or rate of audits by:
* type of tax (e.g., individual income, gift);
* type of return filed (e.g., Form 1040, Form 1040A);
* taxpayer income class;
* type of audit (e.g., field, correspondence);
* type of auditor (e.g., tax auditor, revenue agent);
* whether the tax liability changed;
* total and average amount of recommended additional tax;
* whether taxpayers agreed with the recommended tax change;
Selected data on audits:
* resulting in tax refunds;
* preventing tax refunds on the basis of taxpayers‘ efforts to recoup
taxes previously assessed or paid.
Enforcement program: Document Matching;
IRS published data:
* number of information returns received;
* number of taxpayer contacts;
* amount of additional tax assessed.
Enforcement program: Nonfiler;
IRS published data:
* number of taxpayer delinquency investigations completed;
* number of initial nonfiler notices sent;
* additional assessments for the substitute for returns program.
Enforcement program: Math error;
IRS published data: No data are published.
Source: IRS Data Book, fiscal year 2001.
[End of table]
As shown, IRS publishes no data on IRS‘s math error program”which
affects millions of individual taxpayers annually. Compared with audits,
public reporting on the document matching and nonfiler programs is much
more limited. IRS officials said that IRS publicly reports more data on
audits because IRS has had a separate audit case-tracking system for
many years that produces such data. Also, they said that requests to
publicly report more data on the other programs had not been made.
IRS has not changed Data Book reporting on its enforcement programs to
keep up with changes in its enforcement programs over the years. With
its focus on audits, the reporting may lead others to focus on audits
and thereby to have an incomplete understanding of IRS‘s enforcement
efforts. For example, trends in the audit rate alone are difficult to
use to assess IRS‘s enforcement presence because that rate does not
measure the same phenomenon today as it did earlier. Even within the 10-
year period we reviewed, some of the tax issues that formerly had been
checked only under the audit program migrated into the other
enforcement programs. This type of migration was more pronounced in the
1980s as the document matching program expanded substantially.
Although the scope of what IRS does under audits has changed
considerably over the past few decades, and even within the past 10
years, the audit rate remains an often-cited statistic when Congress
and others consider how well IRS is enforcing the tax laws. For
instance, during annual oversight hearings on IRS‘s performance,
members of Congress often raise questions about changes in the audit
rate. Over the past several years, these hearings have included
concerns about the declining audit rate and its possible affect on
taxpayers‘ compliance. The IRS Commissioner also expressed concern
about the decline in audits. However, the Commissioner said that he did
not believe the audit rate needed to increase to the same level as a
number of years ago because IRS has other programs to enforce the tax
laws that were not available, or as broad in scope, in past years.
To the extent that IRS‘s audit rate is the major source of information
available to taxpayers on IRS‘s enforcement efforts, the public cannot
be fully aware of the extent to which IRS enforces tax laws and thus may
misjudge the chances that noncompliance is likely to be detected.
Taxpayers who are aware only of the audit rate would not be aware that
IRS often contacts more taxpayers under each of its other enforcement
programs”and IRS always contacts far more taxpayers in these other
programs combined”than it does under the audit program. As discussed
earlier, although the degree to which enforcement encourages voluntary
compliance is difficult to measure, it is widely believed that public
knowledge about enforcement efforts helps prompt higher levels of
voluntary compliance. Although he did not specifically cite possible
increases in voluntary compliance, in a letter issued in March 2001,
the IRS Commissioner said that only focusing on audits substantially
understates IRS‘s capacity to find errors.[Footnote 27]
While greater awareness of the scope of IRS‘s efforts to enforce the tax
law may encourage compliance, it could also increase taxpayers‘
awareness of the trends in these efforts. It is not clear how taxpayers
would interpret and react to the differing trends among IRS‘s
enforcement programs. For the period from 1993 through 2002, trends in
IRS‘s individual enforcement programs often varied from year to year as
well as between the programs. Therefore, the compliance signals to
taxpayers from publicizing data on the trends in these other programs
probably would be different”and more mixed”than the signal they receive
based exclusively on the audit rate.
In addition, awareness of the fuller range of IRS‘s enforcement efforts
may not affect compliance of all groups of taxpayers equally. This
could occur, for example, when the contact rates under the enforcement
programs differ, as they do under the audit and document matching
programs for different income groups. Further, to the extent that
taxpayers know that IRS can only understand their tax situation through
a traditional audit, their compliance might be less affected by fuller
reporting on IRS‘s other enforcement efforts. The IRS Commissioner has
said that the decline in the traditional audit rate is of concern in
part because a growing portion of taxpayers and a growing amount of
income is not well identified through such programs as document
matching and nonfiler.
Expanding Public Reporting on Enforcement Programs Does Not Require
Redefining Audits:
Of two options we identified for expanding public reporting on IRS‘s
enforcement efforts, providing data on each major program separately
avoids certain disadvantages of aggregating data into one broad audit
program. After we discussed the tradeoffs of these options with IRS
officials, they said they plan to expand public reporting for each of
the nonaudit enforcement programs.
One option for expanding reporting on IRS‘s enforcement programs would
be to define all of IRS‘s enforcement programs to be audits for
statistical reporting. If the programs were all defined to be audits,
IRS might report a consolidated ’audit rate“ that would represent all
of IRS‘s contacts with taxpayers. Consolidated reporting might also be
done on such things as the additional tax revenues identified through
the contacts and the staff time invested by IRS.
This option could have several advantages. For instance, it would
provide for more complete reporting on IRS‘s overall enforcement
efforts in a single ’rate.“ Another advantage to expanding the
definition of an audit is that the major enforcement programs have an
overall similarity in what they intend to achieve. Moreover, some
document matching and math error checks now cover some tax issues that
had been covered under audit authority. Thus, because audits do not
measure the same thing over time, expanding the definition would create
a more consistent measure of the extent to which IRS is enforcing tax
laws.
However, combining all enforcement programs under one definition poses
a number of potential disadvantages. For example, IRS‘s legal authority
and operational rules, as well as taxpayers‘ rights, vary across
enforcement programs. If all enforcement programs were called audits,
IRS staff and taxpayers could become confused about the rights and
restrictions that govern contacts with taxpayers. Labeling all
enforcement programs as audits might confuse taxpayers about whether
IRS could examine their books and records for a specific tax year (an
action taken under IRS‘s current audit authority) if they had already
been contacted under document matching and/or math error programs.
If all enforcement programs were called audits and aggregate reporting
was done, IRS would face a challenge in ensuring that taxpayers and
others are not misled. For example, a single audit rate would cover the
range from intense audits covering multiple tax issues to the
correction of simple math errors arising from inadvertent
miscalculations by taxpayers. Given the higher number of math errors
being detected by IRS over time, if taxpayers interpreted a revised
audit rate as representing the former rather than the latter situation,
they would be misled about IRS‘s true level of tax return scrutiny.
Another challenge for IRS would be in reporting audit results like tax
dollars assessed and time spent per audit. Considerable variability
already exists in these results for audit”e.g., field audits take
significantly more staff hours than correspondence audits. These
differences would be more extreme under a consolidated audit reporting
system that included document matching, nonfiler, and math error
contacts. Finally, the IRS would need to account for potential double
counting because taxpayers can be contacted through more than one
enforcement program for the same return. [Footnote 28]
In addition, labeling all IRS enforcement programs as audits might
suggest that the programs are in some sense substitutable in detecting
noncompliance and encouraging voluntary compliance. Although the
document matching and nonfiler programs do replace part of what had
previously been done by auditors, these programs do not completely
substitute for audits. Math error program contacts are even less of a
substitute for audit. Combining all of these efforts suggests an
equivalence”one math error contact with a taxpayer is equivalent to a
complex, intense audit of a taxpayer books and records”that is not
correct. Therefore, if audits dropped even further than they have in
recent years, but math error contacts rose even faster, some might
assume that IRS is doing better at enforcing tax laws while others
might disagree.
Because of such disadvantages, IRS officials said that they do not favor
changing the audit definition to include the other enforcement programs
at this time. Specifically, they said any changes would create
confusion about IRS‘s enforcement activities and could distort any
comparisons because the programs significantly differ.
Instead of expanding the audit definition, IRS has already expressed
support for greater reporting on the full range of IRS‘s enforcement
efforts. For example, in 2001, the IRS Commissioner stated that IRS‘s
goal is to make public reporting on nonaudit enforcement efforts as
informative and meaningful as possible.[Footnote 29] This approach
generally avoids the disadvantages associated with reporting IRS‘s
enforcement efforts under one consolidated, redefined audit program. At
the same time, it would provide more complete reporting to the public.
In December 2002, IRS officials told us that they plan to try to report
more data on other enforcement programs to the extent that the data are
available and cost-effective to extract. Officials expect that this
expanded reporting will begin with the fiscal year 2003 Data Book if
the necessary statistical tables cannot be produced in time for the
2002 edition that is to be published in early calendar year 2003. The
expanded information will also be available on the IRS Web site.
These officials said that they would attempt to report the number of
cases closed, the staff time expended, and the tax amounts adjusted for
document matching and for the automated substitute for return program
(ASFR) component of the nonfiler program. For document matching, IRS
plans to account for not only the cases in which taxpayers were
contacted but also in which IRS staff resolved the apparent income
discrepancy without contacting taxpayers. For ASFR, IRS is planning to
adjust the data for cases in which IRS abated the additional tax
amounts assessed after taxpayers later filed a tax return. For both
programs, IRS officials said that reporting the data by the taxpayer‘s
level of income is doubtful. For math errors, IRS officials said that
they could report the number of notices, staff time, and tax amounts
assessed but that reporting other data is questionable either because
the data are not collected or are difficult or costly to extract. IRS
has no plans to analyze whether changes could be made to cost-
effectively extract or collect other data to facilitate understanding
of and comparisons among these nonaudit enforcement programs.
Conclusions:
Although research is not conclusive about the extent to which taxpayers
comply with the law based on their perception of whether noncompliance
will be caught, it is widely believed that those perceptions do
contribute to the overall level of compliance by taxpayers. On the
basis of this belief, observers in Congress and elsewhere have been
concerned as IRS‘s oft cited audit rate has declined in recent years.
To an unknown, but real extent, the long-term decline in the audit rate
is attributable to the movement of some tax issues from IRS‘s audit
program into its other enforcement programs. This movement has been
facilitated by changes in technology, and has enabled IRS, for some tax
issues, to more universally check whether taxpayers have accurately
reported their tax liabilities. Although much of the movement of IRS‘s
audits into other programs occurred during the 1970s and 1980s, this
trend continued during the fiscal year 1993 through 2002 period.
Given these changes in IRS‘s enforcement operations, policymakers in
Congress and elsewhere, as well as taxpayers, would be better informed
about the scope of IRS‘s efforts to enforce tax laws if IRS were to
expand its annual public reporting to include the full range of its
enforcement programs. Toward this end, some interest has been expressed
in having IRS report a new audit rate that would aggregate IRS‘s various
enforcement programs into a total, revised audit rate. Although such a
measure would attempt to provide a more comprehensive picture of IRS‘s
overall effort to detect compliance problems, the advantages of doing so
do not clearly outweigh potential disadvantages. For instance, expanding
the definition of an audit would package enforcement activities that
are so disparate that the consolidated reporting could be misleading.
However, policymakers and taxpayers could be better informed about of
the extent of IRS‘s efforts to enforce the tax laws without combining
data on all of IRS‘s enforcement programs into one set of aggregate
measures. IRS‘s commissioner set fuller reporting of IRS‘s enforcement
efforts as an IRS goal, and IRS officials plan to move to fuller
reporting of enforcement program results, perhaps as early as in the
2002 IRS Data Book, which will be published in early calendar year
2003. IRS officials expect that this expanded reporting will use only
readily available data on the enforcement programs.
Because the document matching, math error, and nonfiler programs now
cover many tax issues formerly covered by audits and they annually
contact far more taxpayers than audits, expanded reporting on these
programs, using readily available data, is an appropriate first step.
However, the readily available data for the nonaudit programs is
incomplete compared to data reported on audits. For example, the data do
not cover all nonfiler contacts or the results of the programs by
taxpayer income. IRS has no plans to determine whether it could cost-
effectively extract or collect additional data in order to more
completely present program results, and facilitate comparisons across
the programs or with any new programs, as they evolve.
In the case of the math error program, total data that includes math
errors identified during initial processing of tax returns as well as
errors found in comparing tax return data to data in IRS‘s masterfiles
should be reported. Excluding data on math errors found in comparing
returns to IRS‘s masterfiles materially understates the volume of math
error contacts with taxpayers.
Recommendations to the Acting Commissioner of Internal Revenue:
The Acting Commissioner of Internal Revenue should:
* determine whether additional data on each nonaudit program can be cost
effectively extracted or collected to make future annual reporting on
enforcement programs more complete and comparable;
* provide information on all types of math error contacts when
publishing data on IRS‘s math error program.
Agency Comments:
The Acting Commissioner of Internal Revenue provided written comments
on a draft of this report in a January 27, 2003, letter, which is
reprinted in appendix V. The Commissioner agreed with our
recommendations. We are heartened that IRS has already begun to
identify additional data to report on its enforcement programs. Given
the differing nature of IRS‘s enforcement programs, we encourage IRS to
provide information that is as comparable as possible among the
programs.
As arranged with your office, we plan no further distribution of this
report until 30 days from the date of its issue, unless you publicly
announce its contents earlier. After that period we will send copies to
the Chairman and Ranking Minority Member, House Committee on Ways and
Means; and Chairman and Ranking Minority Member, Senate Committee on
Finance. We will also send copies to the Acting Secretary of the
Treasury; Acting Commissioner of Internal Revenue; the Director, Office
of Management and Budget; and other interested parties. Copies of this
report will be made available to others on request. In addition, the
report will be made available at no charge on the GAO Web site at
[hyperlink, http://http://www.gao.gov].
If you have any questions, please contact me or Tom Short on (202) 512-
9110. Key contributors to this report are acknowledged in appendix VI.
Sincerely yours,
Signed by:
Michael Brostek:
Director, Tax Issues:
[End of section]
Appendix I: Development of the Math Error Program:
As early as the first codification of the Internal Revenue law in 1939,
Congress granted IRS ’math error“ authority so that IRS does not have to
provide the taxpayer with a statutory notice of deficiency[Footnote 30]
for math errors. In general, these are errors that must be corrected
for IRS to process the tax return. A 1976 statutory revision defined
the authority to include not only mathematical errors but other obvious
errors such as omissions of data needed to substantiate an item on a
return. In the 1990s, Congress extended the authority five times to
help determine eligibility for certain tax exemptions and credits.
Table 3 summarizes the legislative authority on math error provisions
for individual tax returns.
Table 3: Legislative Authority on Math Error Provisions for Individual
Tax Returns:
Basis of Authority: Internal Revenue Code;
Provision: Provided a basic ’math error“ exception to the deficiency
procedures whereby the Service could notify a taxpayer that on account
of a mathematical error an amount of tax in excess of that shown on the
return was due without first sending a notice of deficiency, which
gives the taxpayer the right to judicial review;
Year: As early as 1939.
Basis of Authority: Tax Reform Act of 1976 (P.L. 94-455);
Provision: Expanded the definition of math errors to include (1) an
error in addition, subtraction, multiplication, or division shown on
the return; (2) incorrect use of an IRS table if the error is apparent
from the existence of other information on the return; (3) inconsistent
entries on the return; (4) an omission of information required to be
supplied on the return in order to substantiate an item on that return;
and; (5) entry of a deduction or credit item in an amount which exceeds
a statutory limit which is either (a) a specified monetary amount or
(b) a percentage, ratio, or fraction if the items entering into the
application of that limit appear on that return;
Year: 1976.
Basis of Authority: Small Business Job Protection Act of 1996 (P.L. 104-
188);
Provision: Extended math error authority to the omission of a correct
Taxpayer Identification Number (TIN) required for the dependent care
credit or the deduction for personal exemptions;
Year: 1996.
Basis of Authority: Personal Responsibility and Work Opportunity
Reconciliation Act of 1996 (P.L. 104-193);
Provision: Extended math error authority to the omission of a TIN for
the earned income tax credit;
Year: 1996.
Basis of Authority: Taxpayer Relief Act of 1997 (P.L. 105-34);
Provision: Extended math error authority to the omissions of correct
TINs for the child tax credit and the higher education tuition tax
credit, and to information required for the earned income tax credit for
taxpayers who previously made improper claims;
Year: 1997.
Basis of Authority: Tax and Trade Relief Extension Act (1999
Appropriations Act (P.L. 105-277));
Provision: Extended math error authority to the inclusion of a TIN on a
return which allows IRS to determine ineligibility for the dependent
care credit, child tax credit, or earned income tax credit on the basis
of the statutory age restrictions of those credits;
Year: 1999.
Basis of Authority: Economic Growth and Tax Reconciliation Act of 2001
(P.L. 107-16);
Provision: Extended math error authority to include an entry on a
return claiming the earned income tax credit when, according to the
Federal Registry of Child Support Orders, the taxpayer is not the
custodial parent of the child being claimed. This provision, effective
January 1, 2004, includes a sunset provision of December 31, 2010;
Year: 2001.
Source: GAO analysis of legislation.
[End of table]
According to IRS officials, math error authority applies to obvious
errors where most taxpayers do not dispute IRS‘s decisions. However, if
taxpayers do disagree with the changes in taxes assessed, they can
request an abatement (reduction) of the additional taxes. The math
error process also generates lower administrative and other costs
because it is highly automated and requires little contact with
taxpayers, according to IRS officials.
[End of section]
Appendix II: Use of Information Returns and Document Matching at IRS:
IRS has endorsed the concept of matching information returns to income
tax returns for the purpose of identifying unreported income since the
1960s. Prior to the 1960s, employers had reported on wages paid to
employees by the name of the employee. To facilitate matching, Congress
required a TIN”generally a social security number for individual
taxpayers”that is unique to each taxpayer, unlike a name. IRS and those
filing information returns (i.e., payers of income) need accurate TINs
for the system to work well. [Footnote 31] Filing of information
returns on magnetic media or other electronic means combined with
greater IRS computer capacity also has facilitated the matching
process.
In 1962, Congress recognized that underreporting of nonwage income,
such as interest and dividend income, was a serious problem. To correct
it, Congress required information reporting on interest and dividend
income. Congress substantially expanded information reporting
requirements during the 1980s and added a few requirements during the
1990s. Table 4 lists each major statute expanding information returns
authority.
Table 4: Major Legislation Affecting the Information Returns Program:
Statute: Public Law 87-397 (enacted 1961);
Description: Required taxpayers to provide IRS and payers of income
with a TIN and established penalties for failure to do so.
Statute: Revenue Act of 1962 (P.L. 87-834);
Description: Required information returns reporting for interest and
dividend income. Required payers to furnish copies of the information
returns to those receiving interest and dividend income.
Statute: Combined Old-Age, Survivors, and Disability Insurance-Income
Tax Reporting Amendments of 1975 (P.L. 94-202);
Description: Directed IRS and Social Security Administration (SSA) to
implement an annual wage reporting system, which enhanced IRS‘s machine
processing efficiency because SSA had the equipment and capacity, which
IRS did not, to process a large volume of Forms W-2.
Statute: The Economic Recovery Tax Act of 1981 (P.L. 97-34);
Description: Expanded the requirement that payers furnish all types of
information returns to the taxpayer receiving a payment. Increased the
penalties for failure to provide copies of such returns to the taxpayer
and to IRS.
Statute: The Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-
248);
Description: Expanded information reporting to include state and local
income tax refunds, and proceeds from brokers and barter exchanges.
Mandated 10 percent withholding on interest, dividends, patronage
dividends, and original issue discount. Expanded and increased
penalties for failure to (1) file information returns, (2) provide
copies to payees, and (3) provide a payer or payee TIN. Required backup
withholding at a 15 percent rate in some instances where a payee failed
to provide a correct TIN to a payer. Authorized the Secretary of the
Treasury to prescribe regulations to define which returns are to be
filed on magnetic media.
Statute: Interest and Dividend Tax Compliance Act of 1983 (P.L. 98-67);
Description: Repealed the mandatory withholding requirements of the Tax
Equity and Fiscal Responsibility Act of 1982. Expanded and revised
backup withholding to include a 20 percent rate if (1) the payee does
not furnish the payer with a TIN, (2) IRS notifies the payer that the
TIN is incorrect, (3) the payee underreports interest or dividend
income and IRS notifies the payer, or (4) the payee does not properly
certify that he or she is not subject to backup withholding for
interest and dividend income and that the TIN provided to the payer is
correct. Strengthened TIN and failure to file penalties. Expanded the
magnetic media filing requirements.
Statute: Tax Reform Act of 1984 (P.L. 98-369);
Description: Required information reporting for foreclosures and
abandonments of property which secure indebtedness and for mortgage
interest. Provided penalties for failure to file and furnish such
information returns.
Statute: Tax Reform Act of 1986 (P.L. 99-514);
Description: Required real estate brokers to file an information return
on any real estate transactions. Required federal executive agencies to
file information returns on persons receiving contracts from them.
Required persons making royalty payments aggregating $10 or more during
any calendar year to file information returns on such payments and
provide a copy of such return to the taxpayer who receives such
royalties. Required TINs for dependents claimed on tax returns.
Increased maximum penalties for failure to file information returns and
to provide copies to taxpayers from $50,000 to $100,000. Added penalty
for including incorrect information or for omitting required
information on information returns.
Statute: Technical Corrections to Tax Reform Act of 1986 (P.L. 100-
647);
Description: Required that information returns filed by partnerships
having tax-exempt partners to include reporting of unrelated business
taxable income.
Statute: Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239);
Description: Imposed a uniform penalty of $50 per offense to a maximum
of $250,000 per year on any person who fails to file timely and correct
information returns, and to a maximum of $100,000 per year on any
person who fails to (1) furnish correct payee statements or (2) meet
other requirements.
Statute: Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66);
Description: Required certain financial entities (such as Federal
Deposit Insurance Corporation, Resolution Trust Corporation, and
National Credit Union Administration) to file information returns on
discharges of indebtedness of $600 or more.
Statute: Health Insurance Portability and Accountability Act of 1996
(P.L. 104-191);
Description: Established Medical Savings Accounts (MSAs). Required
information returns for MSAs. Provided penalties for failure to
file/furnish the returns.
Statute: Tax Relief Extension Act of 1999 (P.L. 106-170);
Description: Required information reporting for indebtedness discharged
by any organization for which a significant trade or business is the
lending of money.
Source: GAO analysis.
[End of table]
IRS did not perform extensive document matching until 1974 when IRS
established a program to match information returns against tax return
data to identify potential income underreporting. Even so, IRS used
labor intensive, paper-driven methods. For example, clerks had to
manually create case files for each potential underreporter, and IRS
staff had to review the case files to determine if income was
underreported. Clerks entered the results of these file reviews into
systems, which generated notices to taxpayers. In 1987, IRS began to
automate the document matching process. At that time IRS established
the Automated Underreporter Program that allows access to computerized
information, reducing the need for hard copy documents and clerks, and
enabling a faster response to taxpayer inquiries.
By tax year 2000, almost 1.5 billion information returns were filed with
IRS. Table 5 lists the major types of information returns filed for
1983 and 2000.[Footnote 32]
Table 5: Major Types of Information Returns Filed for Tax Years 1983
and 2000:
Form Number: 1098;
Title: Mortgage Interest Statement;
Source: Banks and Mortgage Companies;
Information Returns Filed (millions) 1983: [A];
Information Returns Filed (millions) 2000: 80.2.
Form Number: 10198-E;
Title: Student Loan Interest Statement;
Source: Educational Institutions and Financial Institutions;
Information Returns Filed (millions) 1983: [A];
Information Returns Filed (millions) 2000: 9.6.
Form Number: 1098-T;
Title: Tuition Payments Statement;
Source: Educational Institutions;
Information Returns Filed (millions) 1983: [A];
Information Returns Filed (millions) 2000: 19.8.
Form Number: 1099-A;
Title: Acquisition or Abandonment of Secured Property;
Source: Various Entities;
Information Returns Filed (millions) 1983: [A];
Information Returns Filed (millions) 2000: 0.4.
Form Number: 1099-B;
Title: Proceeds from Broker and Barter Exchange Transactions;
Source: Brokers;
Information Returns Filed (millions) 1983: 10.0;
Information Returns Filed (millions) 2000: 329.4.
Form Number: 1099-C;
Title: Cancellation of Debt;
Source: Various Entities;
Information Returns Filed (millions) 1983: [A];
Information Returns Filed (millions) 2000: 0.8.
Form Number: 1099-G;
Title: Certain Government and Qualified State Tuition Program Payments;
Source: State Governments;
Information Returns Filed (millions) 1983: 36.0;
Information Returns Filed (millions) 2000: 63.7.
Form Number: 1099-DIV;
Title: Dividends and Distribution;
Source: Brokers, Corporations;
Information Returns Filed (millions) 1983: 82.0;
Information Returns Filed (millions) 2000: 130.6.
Form Number: 1099-INT;
Title: Interest Income;
Source: Banks;
Information Returns Filed (millions) 1983: 296.0;
Information Returns Filed (millions) 2000: 261.1.
Form Number: 1099-MISC;
Title: Miscellaneous Income;
Source: Various Entities;
Information Returns Filed (millions) 1983: 39.0;
Information Returns Filed (millions) 2000: 77.7.
Form Number: 1099-OID;
Title: Original Issue Discount;
Source: Banks, Corporations, and Other Financial Institutions;
Information Returns Filed (millions) 1983: 2.0;
Information Returns Filed (millions) 2000: 4.8.
Form Number: 1099-PATR;
Title: Taxable Distributions Received from Cooperatives;
Source: Cooperatives;
Information Returns Filed (millions) 1983: 2.0;
Information Returns Filed (millions) 2000: 1.6.
Form Number: 1099-R;
Title: Distributions from Pensions, Annuities, Retirement or Profit-
sharing Plans, IRAs, Insurance Contracts, Etc.
Source: Various Entities;
Information Returns Filed (millions) 1983: 6.0;
Information Returns Filed (millions) 2000: 65.8.
Form Number: 1099-S;
Title: Proceeds from Real Estate Transactions;
Source: Various Entities;
Information Returns Filed (millions) 1983: [A];
Information Returns Filed (millions) 2000: 2.9.
Form Number: 1099-SSA;
Title: Social Security Benefits;
Source: Social Security Administration;
Information Returns Filed (millions) 1983: [A];
Information Returns Filed (millions) 2000: 48.4
Form Number: 1099-RRB;
Title: Railroad Retirement Benefits;
Source: Railroad Retirement Board;
Information Returns Filed (millions) 1983: [A];
Information Returns Filed (millions) 2000: 0.6.
Form Number: 5498;
Title: IRA Contribution Information;
Source: Banks, Brokers, and Insurance Companies;
Information Returns Filed (millions) 1983: 18.0;
Information Returns Filed (millions) 2000: 94.9.
Form Number: 5498-MSA;
Title: Medical Savings Accounts or Medicare Plus Choice MSA
Information;
Source: Trustees or custodians of MSAs or Medicare Plus Choice MSAs;
Information Returns Filed (millions) 1983: [A];
Information Returns Filed (millions) 2000: 0.1.
Form Number: CTR;
Title: Currency Transaction Report;
Source: Financial Institutions and Shareholders and Beneficiaries;
Information Returns Filed (millions) 1983: [A];
Information Returns Filed (millions) 2000: 14.4.
Form Number: K-1;
Title: Partner‘s Share of Income, Credits, Deductions, Etc.
Source: Partnerships;
Information Returns Filed (millions) 1983: 15.0;
Information Returns Filed (millions) 2000: 19.1.
Form Number: W-2;
Title: Wage and Tax Statement;
Source: Employers;
Information Returns Filed (millions) 1983: 165.0;
Information Returns Filed (millions) 2000: 247.2.
Form Number: W-2G;
Title: Certain Gambling Winnings;
Source: Gaming Establishments;
Information Returns Filed (millions) 1983: 1.0;
Information Returns Filed (millions) 2000: 5.8.
Form Number: W-2P;
Title: Annuities, Pensions, Retired Pay, or IRA Payments;
Source: Various Entities;
Information Returns Filed (millions) 1983: 18.0;
Information Returns Filed (millions) 2000: N/A.
Form Number: Other;
Title: Various;
Source: Various Entities;
Information Returns Filed (millions) 1983: 1.0;
Information Returns Filed (millions) 2000: 1.7.
Total:
Information Returns Filed (millions) 1983: 691.0;
Information Returns Filed (millions) 2000: 1,480.6.
Source: IRS and Statement of Johnny C. Finch, Senior Associate
Director, General Government Division, GAO, Before the Subcommittee on
Commerce, Consumer, and Monetary Affairs, Committee on Government
Operations, House of Representatives, on IRS‘ Information Returns
Matching Program, April 29, 1986.
[A] Information return not required for tax year 1983.
[End of table]
In 2002, IRS re-instituted matching[Footnote 33] of income reported by
flow-through entities such as trusts, partnerships, and S-corporations
on Schedule K-1 to income reported on tax returns by the related
partners and beneficiaries. Schedule K-1 shows the income distributed
to partners and beneficiaries, who receive a copy as well as IRS.
According to IRS, information provided on Schedule K-1 is important for
determining whether recipients of flow-through income have properly
reported that income on their tax returns. IRS expects the matching of
Schedule K-1 data to increase accurate reporting of trust income on
future tax returns by providing information that IRS can use to detect
possible unreported income and to induce taxpayers to voluntarily
comply. Under K-1 matching, IRS sent 69,097 notices to taxpayers in
2002 for tax year 2000. In most cases, the taxpayers did not owe
additional tax for various reasons (e.g., taxpayers reported the income
differently than expected). IRS does not yet have complete results from
this new matching program. IRS officials told us that K-1 matching has
been suspended for one year to analyze the matching criteria and
results.
[End of section]
Appendix III: Individual Audit and Other Enforcement Program Data:
Table 6: Number and Rates of Individual Audit and Other Enforcement
Contacts, Fiscal Years 1993 through 2002:
Audit contacts: Field audits;
1993: 250,712;
1994: 364,016;
1995: 338,605;
1996: 252,430;
1997: 209,781;
1998: 168,054;
1999: 124,518;
2000: 91,586;
2001: 77,950;
2002: 88,896.
Audit contacts: Office audits;
1993: 505,539;
1994: 456,216;
1995: 458,880;
1996: 509,434;
1997: 505,834;
1998: 383,366;
1999: 235,625;
2000: 145,975;
2001: 115,971;
2002: 111,695.
Audit contacts: Correspondence audits;
1993: 302,715;
1994: 405,475;
1995: 1,121,952;
1996: 1,179,696;
1997: 803,628;
1998: 625,021;
1999: 715,789;
2000: 366,657;
2001: 529,241;
2002: 538,779.
Audit contacts: Revenue officer examiner audits;
1993: [A];
1994: [A];
1995: [A];
1996: [A];
1997: [A];
1998: 16,339;
1999: 24,341;
2000: 13,547;
2001: 8,594;
2002: 4,543.
Audit contacts: Total audits;
1993: 1,058,966;
1994: 1,225,707;
1995: 1,919,437;
1996: 1,941,560;
1997: 1,519,243;
1998: 1,192,780;
1999: 1,100,273;
2000: 617,765;
2001: 731,756;
2002: 743,913.
Returns filed (previous calendar year):
1993: 114,718,900;
1994: 113,754,400;
1995: 114,683,400;
1996: 116,059,700;
1997: 118,362,600;
1998: 120,342,400;
1999: 122,546,900;
2000: 124,887,100;
2001: 127,097,400;
2002: 129,948,400.
Audit rate:
1993: 0.92;
1994: 1.08;
1995: 1.67;
1996: 1.67;
1997: 1.28;
1998: 0.99;
1999: 0.90;
2000: 0.49;
2001: 0.58;
2002: 0.57.
Other enforcement contacts: Math errors;
1993: 4,088,000;
1994: 4,059,000;
1995: 6,102,000;
1996: 4,750,771;
1997: 5,983,944;
1998: 5,668,906;
1999: 6,552,290;
2000: 5,751,462;
2001: 6,082,967;
2002: 6,265,455.
Other enforcement contacts: Math errors (masterfile notices);
1993: [B];
1994: [B];
1995: [B];
1996: [B];
1997: 1,834,232;
1998: 1,894,170;
1999: 1,965,405;
2000: 2,010,514;
2001: 2,026,802;
2002: 2,061,830.
Other enforcement contacts: Math errors (revised);
1993: [C];
1994: [C];
1995: [C];
1996: [C];
1997: 7,818,176;
1998: 7,563,076;
1999: 8,517,695;
2000: 7,761,976;
2001: 8,109,769;
2002: 8,327,285.
Other enforcement contacts: Document matching;
1993: 2,723,830;
1994: 2,645,075;
1995: 2,711,086;
1996: 1,930,326;
1997: 931,354;
1998: 1,726,098;
1999: 1,770,695;
2000: 1,353,545;
2001: 1,161,901;
2002: 1,687,800.
Other enforcement contacts: Nonfiler;
1993: 1,603,969;
1994: 1,931,781;
1995: 1,756,325;
1996: 1,302,432;
1997: 1,917,212;
1998: 2,313,633;
1999: 1,890,794;
2000: 1,251,375;
2001: 1,371,401;
2002: 1,882,475.
Math error rate:
1993: 3.59;
1994: 3.54;
1995: 5.26;
1996: 4.01;
1997: 4.97;
1998: 4.63;
1999: 5.25;
2000: 4.53;
2001: 4.68;
2002: 4.79.
Math error rate (revised):
1993: [D];
1994: [D];
1995: [D];
1996: [D];
1997: 6.50;
1998: 6.17;
1999: 6.82;
2000: 6.11;
2001: 6.24;
2002: 6.36.
Document matching rate:
1993: 2.37;
1994: 2.33;
1995: 2.36;
1996: 1.66;
1997: 0.79;
1998: 1.43;
1999: 1.44;
2000: 1.08;
2001: 0.91;
2002: 1.30.
Nonfiler rate:
1993: 1.40;
1994: 1.70;
1995: 1.53;
1996: 1.12;
1997: 1.62;
1998: 1.92;
1999: 1.54;
2000: 1.00;
2001: 1.08;
2002: 1.45.
Source: GAO analysis of IRS data.
Note: To compute individual audit and other enforcement rates, we used
two methods. We used IRS‘s method for computing audit rates, which
equals the proportion of IRS audits closed in a fiscal year as compared
to returns filed in the previous calendar year. For example, as shown
in the table above, the audit rate for 1993 is computed by dividing
total audits (1,058,966) by the number of returns filed in the previous
calendar year (114,718,900) to compute the audit rate (0.92). IRS has
not stated a method for computing math error, document matching, and
nonfiler rates. For the document matching and nonfiler programs, we
used the IRS audit rate method because document matching and nonfiler
contacts generally occur in the year after a return is filed. For the
math error program, we compared the math errors notices to the returns
filed in that year because identifying math errors is part of IRS‘
returns processing system. For example, the math error rate for
1993 is computed by dividing the number of math errors (4,088,000) by
the number of returns filed in 1993 (113,754,400) to compute the math
error rate (3.59). Note: IRS estimates that the number of returns filed
in 2002 is about 130,905,000. Final data for fiscal year 2002 were not
available at the time of publication of this report. We used the
estimate of 130,905,000 returns filed to compute the math error rate
and the math error rate (revised) for fiscal year 2002.
[A] IRS did not publish data on revenue officer examiner audits prior
to 1998.
[B] Data for math error masterfile notices do not exist prior to fiscal
year 1997.
[C] The number of math error (revised) contacts are the same as the
number of math error contacts for fiscal years 1993 through 1996
because data for the number of masterfile notices does not exist for
these years.
[D] The math error (revised) contact rate is the same as the math error
contact rate for fiscal years 1993 through 1996 because data for the
number of masterfile notices does not exist for these years.
[End of table]
Figure 4: Individual Audit and Other Enforcement Contacts, Fiscal Years
1993 through 2002:
This figure is a multiple line graph depicting Individual Audit and
Other Enforcement Contacts, Fiscal Years 1993 through 2002. The
vertical axis of the graph represents Contacts from 0 to 9,000. The
horizontal axis of the graph represents years from 1993 to 2002. Five
contact rates are depicted on the graph: Math error; Math error
(revised); Nonfiler; Document matching; and Audits.
Source: GAO analysis of IRS data.
The absolute number of contacts with taxpayers under the four
enforcement programs follows the same general year-to-year and overall
pattern as for contact rates. Similarly, as with the contact rates, the
number of audits and the number of document matching contacts were
lower (30 and 38 percent, respectively) in fiscal year 2002 than in
1993. The number of nonfiler contacts also was somewhat higher (17
percent) in 2002 than in 1993 and the number of math error contacts”not
counting math errors identified from masterfile comparisons”was
significantly higher (53 percent) in 2002 than in 1993.
Table 7: Number and Rates of Individual Audit and Document Matching
Contacts by Income Level, Fiscal Years 1993 through 2002:
Audit contacts: $100,000 and over;
1993: 204,079;
1994: 172,483;
1995: 179,871;
1996: 210,032;
1997: 200,070;
1998: 164,314;
1999: 128,398;
2000: 99,547;
2001: 91,550;
2002: 112,266.
Audit contacts: $25,000 to under $100,000;
1993: 361,787;
1994: 347,200;
1995: 510,764;
1996: 552,011;
1997: 423,548;
1998: 349,378;
1999: 226,261;
2000: 148,306;
2001: 157,296;
2002: 183,847.
Audit contacts: Under $25,000;
1993: 493,100;
1994: 706,024;
1995: 1,228,802;
1996: 1,179,503;
1997: 895,625;
1998: 679,088;
1999: 745,614;
2000: 369,912;
2001: 482,910;
2002: 447,800.
Document matching contacts: $100,000 and over;
1993: 213,070;
1994: 263,287;
1995: 285,767;
1996: 238,330;
1997: 131,348;
1998: 228,934;
1999: 231,482;
2000: 208,839;
2001: 218,981;
2002: 275,088.
Document matching contacts: $25,000 to under $100,000;
1993: 1,337,067;
1994: 1,378,983;
1995: 1,339,480;
1996: 914,540;
1997: 469,761;
1998: 863,408;
1999: 891,237;
2000: 674,154;
2001: 597,034;
2002: 786,172.
Document matching contacts: Under $25,000;
1993: 1,173,693;
1994: 1,002,805;
1995: 1,085,839;
1996: 777,456;
1997: 330,449;
1998: 633,756;
1999: 647,976;
2000: 470,552;
2001: 345,886;
2002: 429,879.
Returns filed: $100,000 and over;
1993: 5,240,200;
1994: 5,635,300;
1995: 6,058,100;
1996: 6,546,700;
1997: 7,301,900;
1998: 8,156,600;
1999: 9,178,000;
2000: 10,368,600;
2001: 11,610,500;
2002: 13,020,183.
Returns filed: $25,000 to under $100,000;
1993: 45,333,900;
1994: 45,640,000;
1995: 46,506,400;
1996: 47,865,000;
1997: 49,805,300;
1998: 51,389,100;
1999: 53,389,200;
2000: 55,729,700;
2001: 57,268,000;
2002: 59,216,431.
Returns filed: Under $25,000;
1993: 64,144,800;
1994: 62,479,100;
1995: 62,118,900;
1996: 61,648,000;
1997: 61,255,400;
1998: 60,796,700;
1999: 59,979,700;
2000: 58,788,800;
2001: 58,218,900;
2002: 57,208,333.
Audit rate: $100,000 and over;
1993: 3.89;
1994: 3.06;
1995: 2.97;
1996: 3.21;
1997: 2.74;
1998: 2.01;
1999: 1.40;
2000: 0.96;
2001: 0.79;
2002: 0.86.
Audit rate: $25,000 to under $100,000;
1993: 0.80;
1994: 0.76;
1995: 1.10;
1996: 1.15;
1997: 0.85;
1998: 0.68;
1999: 0.42;
2000: 0.27;
2001: 0.27;
2002: 0.31.
Audit rate: Under $25,000;
1993: 0.77;
1994: 1.13;
1995: 1.98;
1996: 1.91;
1997: 1.46;
1998: 1.21;
1999: 1.24;
2000: 0.63;
2001: 0.83;
2002: 0.78.
Document matching rate: $100,000 and over;
1993: 4.07;
1994: 4.67;
1995: 4.72;
1996: 3.64;
1997: 1.80;
1998: 2.81;
1999: 2.52;
2000: 2.01;
2001: 1.89;
2002: 2.11.
Document matching rate: $25,000 to under $100,000;
1993: 2.95;
1994: 3.02;
1995: 2.88;
1996: 1.91;
1997: 0.94;
1998: 1.68;
1999: 1.67;
2000: 1.21;
2001: 1.04;
2002: 1.33.
Document matching rate: Under $25,000;
1993: 1.83;
1994: 1.61;
1995: 1.75;
1996: 1.26;
1997: 0.54;
1998: 1.04;
1999: 1.08;
2000: 0.80;
2001: 0.59;
2002: 0.75.
Source: GAO analysis of IRS data.
Notes: Returns filed consists of previous calendar year data. Number of
returns filed in 2002 (calendar year 2001 data) is estimated.
[End of table]
Figure 5: Number of Individual Audit and Document Matching Contacts by
Income Level, Fiscal Years 1993 through 2002:
[See PDF for image]
This figure contains two multiple line graphs depicting the number of
individual audit and document matching contacts by income level, fiscal
years 1993 through 2002. The vertical axis of the graphs represent
Audits from 0 to 1,400,000 (first graph) and Document matching from 0
to 1,600,000 (second graph). The horizontal axis of both graphs
represents years from 1993 to 2002. Lines depicting the following three
income levels are represented on each graph: $200,000 and over; $25,000
to under $100,000; and Under $25,000.
Source: GAO analysis of IRS data.
Note: Fiscal year 2002 data is estimated.
[End of figure]
The absolute number of audits by income group generally follows the
same year-to-year and overall pattern, as do the contact rates for the
income groups. However, the change in the number of audits conducted in
fiscal year 1993 compared to 2002 is not as dramatic for the upper and
middle-income groups as was the change in their audit rates. The number
of audits for the higher income group declined by 45 percent between
1993 and 2002 while the rate at which this group was audited declined
78 percent. The number of audits of the middle-income group declined 49
percent, while the rate at which this group was audited declined 61
percent. The rate at which these groups were audited fell more than did
the absolute number of audits because the number of taxpayers in each
group expanded over the 10-year period. Higher income taxpayers grew in
numbers by 148 percent between 1993 and 2002 and middle-income
taxpayers grew by 31 percent.
As with the absolute number of audits by income group, the number of
document matching contacts by income group generally follows the same
year-to-year and overall pattern as do the document matching contact
rates. However, comparisons of the number of document matching contacts
in fiscal year 1993 to those in 2002 differ substantially from
comparisons of document matching contact rates for those years for one
income group”the higher income taxpayers. The number of document
matching contacts with the higher income taxpayers increased by 29
percent between 1993 and 2002, whereas the contact rate for this group
fell by 48 percent. The percentage changes in numbers and rates of
contacts for the other two groups were more similar. Middle-income
document matching contacts fell 41 percent between fiscal year 1993 and
2001 while their document matching contact rate declined 55 percent.
Lowest income taxpayer document matching contacts fell 63 percent,
while their contact rate declined 59 percent.
Table 8: Number and Rates of Individual Audits by Type of Audit and
Income Level, Fiscal Years 1993 through 2002:
Field audits: Under $25,000;
1993: 80,881;
1994: 189,748;
1995: 161,800;
1996: 85,153;
1997: 49,053;
1998: 35,891;
1999: 26,228;
2000: 21,433;
2001: 16,784;
2002: 15,480.
Field audits: $25,000 to under $100,000;
1993: 82,731;
1994: 98,393;
1995: 100,501;
1996: 80,509;
1997: 66,558;
1998: 49,891;
1999: 35,540;
2000: 28,666;
2001: 26,159;
2002: 33,093.
Field audits: $100,000 and over;
1993: 87,100;
1994: 75,875;
1995: 76,304;
1996: 86,768;
1997: 94,170;
1998: 82,272;
1999: 62,750;
2000: 41,487;
2001: 35,007;
2002: 40,323.
Office audits: Under $25,000;
1993: 248,704;
1994: 244,952;
1995: 250,656;
1996: 238,561;
1997: 231,944;
1998: 171,918;
1999: 95,308;
2000: 57,017;
2001: 42,016;
2002: 31,192.
Office audits: $25,000 to under $100,000;
1993: 201,924;
1994: 167,594;
1995: 171,438;
1996: 221,207;
1997: 223,646;
1998: 170,341;
1999: 109,696;
2000: 68,740;
2001: 54,526;
2002: 56,509.
Office audits: $100,000 and over;
1993: 54,911;
1994: 43,670;
1995: 36,786;
1996: 49,652;
1997: 50,244;
1998: 41,107;
1999: 30,621;
2000: 20,218;
2001: 19,429;
2002: 23,994.
Correspondence audits: Under $25,000;
1993: 163,515;
1994: 271,324;
1995: 816,346;
1996: 855,789;
1997: 614,628;
1998: 460,795;
1999: 608,154;
2000: 284,981;
2001: 420,346;
2002: 399,175.
Correspondence audits: $25,000 to under $100,000;
1993: 77,132;
1994: 81,213;
1995: 238,825;
1996: 250,295;
1997: 133,344;
1998: 124,451;
1999: 73,996;
2000: 45,346;
2001: 73,189;
2002: 92,293.
Correspondence audits: $100,000 and over;
1993: 62,068;
1994: 52,938;
1995: 66,781;
1996: 73,612;
1997: 55,656;
1998: 39,775;
1999: 33,639;
2000: 36,330;
2001: 35,706;
2002: 47,311.
Returns filed: Under $25,000;
1993: 64,144,800;
1994: 62,479,100;
1995: 62,118,900;
1996: 61,648,000;
1997: 61,255,400;
1998: 60,796,700;
1999: 59,979,700;
2000: 58,788,800;
2001: 58,218,900;
2002: 57,208,333.
Returns filed: $25,000 to under $100,000;
1993: 45,333,900;
1994: 45,640,000;
1995: 46,506,400;
1996: 47,865,000;
1997: 49,805,300;
1998: 51,389,100;
1999: 53,389,200;
2000: 55,729,700;
2001: 57,268,000;
2002: 59,216,431.
Returns filed: $100,000 and over;
1993: 5,240,200;
1994: 5,635,300;
1995: 6,058,100;
1996: 6,546,700;
1997: 7,301,900;
1998: 8,156,600;
1999: 9,178,000;
2000: 10,368,600;
2001: 11,610,500;
2002: 13,020,183.
Field audit rate: Under $25,000;
1993: 0.13;
1994: 0.30;
1995: 0.26;
1996: 0.14;
1997: 0.08;
1998: 0.06;
1999: 0.04;
2000: 0.04;
2001: 0.03;
2002: 0.03.
Field audit rate: $25,000 to < $100,000:
1993: 0.18;
1994: 0.22;
1995: 0.22;
1996: 0.17;
1997: 0.13;
1998: 0.10;
1999: 0.07;
2000: 0.05;
2001: 0.05;
2002: 0.06.
Field audit rate: $100,000 and over;
1993: 1.66;
1994: 1.35;
1995: 1.26;
1996: 1.33;
1997: 1.29;
1998: 1.01;
1999: 0.68;
2000: 0.40;
2001: 0.30;
2002: 0.31.
Office audit rate: Under $25,000;
1993: 0.39;
1994: 0.39;
1995: 0.40;
1996: 0.39;
1997: 0.38;
1998: 0.28;
1999: 0.16;
2000: 0.10;
2001: 0.07;
2002: 0.05.
Office audit rate: $25,000 to < $100,000;
1993: 0.45;
1994: 0.37;
1995: 0.37;
1996: 0.46;
1997: 0.45;
1998: 0.33;
1999: 0.21;
2000: 0.12;
2001: 0.10;
2002: 0.10.
Office audit rate: $100,000 and over:
1993: 1.05;
1994: 0.77;
1995: 0.61;
1996: 0.76;
1997: 0.69;
1998: 0.50;
1999: 0.33;
2000: 0.19;
2001: 0.17;
2002: 0.18.
Correspondence audit rate: Under $25,000;
1993: 0.25;
1994: 0.43;
1995: 1.31;
1996: 1.39;
1997: 1.00;
1998: 0.76;
1999: 1.01;
2000: 0.48;
2001: 0.72;
2002: 0.70.
Correspondence audit rate: $25,000 to < $100,000:
1993: 0.17;
1994: 0.18;
1995: 0.51;
1996: 0.52;
1997: 0.27;
1998: 0.24;
1999: 0.14;
2000: 0.08;
2001: 0.13;
2002: 0.16.
Correspondence audit rate: $100,000 and over;
1993: 1.18;
1994: 0.94;
1995: 1.10;
1996: 1.12;
1997: 0.76;
1998: 0.49;
1999: 0.37;
2000: 0.35;
2001: 0.31;
2002: 0.36.
Source: GAO analysis of IRS data.
Note: Revenue officer examiner audits are not included. See table 6.
[End of table]
Table 9: Average Direct Staff Hours by Type of Audit and For Document
Matching Cases, Fiscal Years 1993 through 2002:
Program: Field audit;
1993: 17.81;
1994: 12.69;
1995: 13.99;
1996: 20.21;
1997: 21.84;
1998: 22.08;
1999: 24.84;
2000: 27.64;
2001: 30.83;
2002: 28.87.
Program: Office audit;
1993: 4.47;
1994: 4.51;
1995: 4.27;
1996: 4.56;
1997: 4.34;
1998: 4.49;
1999: 5.66;
2000: 7.09;
2001: 8.91;
2002: 9.37.
Program: Correspondence audit;
1993: 1.43;
1994: 1.15;
1995: 0.74;
1996: 0.73;
1997: 0.83;
1998: 0.91;
1999: 1.08;
2000: 1.80;
2001: 1.79;
2002: 1.71.
Program: Document matching;
1993: 0.80;
1994: 0.81;
1995: 1.09;
1996: 0.98;
1997: 0.53;
1998: 0.52;
1999: 0.57;
2000: 0.61;
2001: 0.57;
2002: 0.61.
Source: GAO analysis of IRS data.
Note: Revenue officer examiner audits are not included. See table 6.
[End of table]
[End of section]
Appendix IV: Soft Notices and Voluntary Compliance Agreements:
In addition to the four major enforcement programs, IRS started two
programs in the mid-1990s to help ensure that taxpayers file timely and
accurate returns, and to minimize the need for enforcement.
Through the soft notice program, IRS has been sending notices for
apparent errors on two tax issues”duplicate claims for one allowable
dependent exemption and unfiled self-employment tax returns. IRS uses
soft notices when it has information to indicate that some taxpayer made
an error but not enough information to know for sure, such as which
taxpayer overclaimed a dependent. Soft notices are intended to stimulate
taxpayers to correct the error without IRS having to invest audit time.
In addition, IRS uses the voluntary compliance agreements program to
address known compliance problems in reporting tip income. To improve
compliance of employees in industries where tip income is a part of
wages, IRS had been auditing the tax returns of tipped employees, which
burdened the employees and employers as well as IRS. To minimize these
burdens while also addressing the compliance problems, IRS began to
explore new methods to achieve voluntary compliance by tipped
employees, such as voluntary compliance agreements. IRS has negotiated
three types of agreements with certain employers (e.g., restaurants) to
improve compliance by their individual employees in reporting tip
income. These three types of agreements follow.
* The Tip Rate Determination Agreement (TRDA) requires that IRS and the
business agree upon a tip rate for various occupations in the business
and that at least 75 percent of employees in the business agree to
report at that rate on their income tax return.
* The Tip Reporting Alternative Commitment (TRAC) does not require a tip
rate to be determined, but does require that the business create written
statements to record employee tips and send the statements to IRS. This
agreement covers all employees and requires that the business educate
employees about their obligation to report their tip income.
* The Employer-designed Tip Reporting Alternative Commitment Agreement
(EmTRAC) requires that businesses establish tip reporting procedures
and prepare a statement on a regular basis (no less than monthly) to
reflect all tips for each employee. The business must establish an
education program to train employees about their obligation to report
tip income.
In general, these two programs are similar to the four major enforcement
programs in that they attempt to correct noncompliance. They differ
because, rather than enforcing the tax laws, both attempt to reduce the
need for enforcement. In sum, their differences tend to outnumber their
similarities, as discussed below.
Similar to the four enforcement programs, IRS sends soft notices to
inform taxpayers of potential errors. However, the soft notice does not
require taxpayers to take any action, and IRS takes no action to verify
the error or assess tax. Instead, the notice asks taxpayers to examine
the potential error and file an amended return if they confirm the
error. Also, the notice informs taxpayers that IRS will monitor these
types of errors and might contact them if they do not alter their
reporting in the future.
The similarity between the voluntary compliance agreements and the
other enforcement programs is that they attempt to correct
noncompliance. Unlike the other programs, these agreements occur
before a return is filed and do not involve sending any notices to
taxpayers. IRS believes that these agreements enhance voluntary
compliance so that IRS can avoid the need to take enforcement action and
assess additional taxes after a return is filed. IRS assures the
businesses that IRS will not audit their books and records as long as
they abide by the agreement. However, IRS may still audit the books and
records of a tipped employee and report any changes to the business.
IRS officials said that current procedures require follow-up to check
adherence to these agreements, but the officials were not sure about
the extent to which this has been occurring.
IRS has limited data for the soft notice and voluntary compliance
agreement programs, as follows.
* In 2002, IRS sent 1.2 million soft notices to taxpayers on duplicate
dependent claims on 2001 tax returns; in 1998, IRS sent 1.6 million soft
notices on these duplicate claims and on self-employment tax for 1996
and 1997 returns.[Footnote 34] This involved 329,000 notices sent to
taxpayers who reported self-employment income but had not filed a
schedule SE or paid self-employment tax. IRS did not provide data on
these notices for any later years.
* Through 2001, TRDAs and TRACs covered 48,348 establishments in the
casino, beauty, and food and beverage industries. IRS did not have data
on the number of individual taxpayers covered by these agreements
because the agreements are made with employers rather than directly
with the individual taxpayers.
[End of section]
Appendix V: Comments from the Commissioner of Internal Revenue:
[As part of its comments, IRS included an enclosure that provided
additional data on nonaudit contacts. We did not include this enclosure
as part of IRS's written comments because the data provided did not
materially affect our conclusions and recommendations].
Commissioner:
Department Of The Treasury:
Internal Revenue Service:
Washington, DC 20224:
January 27, 2003:
Mr. Michael Brostek:
Director, Tax Issues:
United States General Accounting Office:
Washington, D.C. 20548:
Dear Mr. Brostek:
Thank you for the opportunity to review and comment on your draft
report entitled "Tax Administration: IRS Should Continue to Expand
Reporting on Its Enforcement Efforts." I agree with both
recommendations to the extent we can cost effectively provide
informative and meaningful data. I believe that expanded reporting will
clarify the nature of IRS enforcement efforts, which consist of a wide
variety of actions, ranging from correction of simple errors on a tax
return to extensive corporate examinations.
We will address your recommendations as follows:
* Determine whether additional data on each non-audit program can be
cost effectively extracted and collected to make future annual
reporting on enforcement program more complete and comparable. We will
look for a cost effective manner to capture data for non-audit programs
in the manner described in the report, which would be similar to that
traditionally published as audit information.
* When publishing data on IRS' math error program, provide information
on all types of math error contact.
We will include all math error contacts when reporting math error
program statistics and have adjusted our reporting criteria accordingly.
I plan to assign the responsibility for implementing the
recommendations to the Small Business/Self-Employed Division, Wage and
Investment Division, and the Office of Tax Administration Coordination.
We have already taken steps to expand reporting of non-audit program
information that is currently available. Enclosed is additional data
for 2002, which will be published on the IRS Website and in the 2002
IRS Data Book. Please note we have separated the Automated
Underreporter Program into two categories. The first is when IRS
personnel screen tax returns, cannot resolve discrepancies, and must
contact the taxpayer. The second is when IRS personnel screen tax
returns and resolve discrepancies. The screening process eliminated
many taxpayer contacts and reduced burden on 1.1 million taxpayers in
2002.
If you have any questions, your staff may contact Gary Doniger, Acting
Deputy Director, Office of Tax Administration Coordination at (202) 927-
4800 or Joseph R. Brimacombe, Director, Compliance Policy, Small
Business/Self-Employed Division at (202) 283-2200.
Sincerely,
Signed by:
Bob Wenzel:
Acting Commissioner:
Enclosure:
[End of section]
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Michael Brostek, (202) 512-9110:
Tom Short, (202) 512-9110:
Staff Acknowledgments:
In addition to those named above Susan Baker, Grace Coleman, Susan
Conlon, Brendan Culley, Michele Fejfar, Leon Green, Marshall Hamlett,
Shirley Jones, and Jay Pelkofer made key contributions to this product.
[End of section]
Related GAO Products:
U.S. General Accounting Office. Tax Administration: Advance Tax
Refund Program Was a Major Accomplishment, but Not Problem Free.
GAO-02-827. Washington, D.C.: August 2, 2002.
U.S. General Accounting Office. Tax Administration: New Compliance
Research Effort Is on Track, but Important Work Remains. GAO-02-769.
Washington, D.C.: June 27, 2002.
U.S. General Accounting Office. Tax Administration: Impact of
Compliance and Collection Program Declines on Taxpayers. GAO-02-674.
Washington, D.C.: May 22, 2002.
U.S. General Accounting Office. IRS Audit Rates: Rate for Individual
Taxpayers Has Declined But Effect on Compliance Unknown. GAO-01-
484. Washington, D.C.: April 25, 2001.
U.S. General Accounting Office. Tax Administration: Information on
Selected IRS Tax Enforcement and Collection Efforts. GAO-01-589T.
Washington, D.C.: April 5, 2001.
U.S. General Accounting Office. Tax Administration: IRS‘ Use of
Nonaudit Contacts. GAO/GGD-00-7. Washington, D.C.: March 16, 2000.
U.S. General Accounting Office. Tax Administration: IRS Is Working to
Improve Its Estimates of Compliance Burden. GAO/GGD-00-11. Washington,
D.C.: May 22, 2000.
U.S. General Accounting Office. IRS Audits: Weaknesses in Selecting and
Conducting Correspondence Audits. GGD-99-48. Washington, D.C.: March
31, 1999.
U.S. General Accounting Office. Tax Administration: IRS‘ Audit and
Criminal Enforcement Rates for Individual Taxpayers Across the Country.
GAO/GGD-99-19. Washington, D.C.: December 23, 1998.
U.S. General Accounting Office. Internal Revenue Service: Results of
Nonfiler Strategy and Opportunities to Improve Future Efforts. GAO/GGD-
96-72. Washington, D.C.: May 13, 1996.
U.S. General Accounting Office. Tax Administration: Audit Trends and
Results for Individual Taxpayers. GAO/GGD-96-91. Washington, D.C.:
April 26, 1996.
Statement of Johnny C. Finch, Senior Associate Director, General
Government Division, GAO, Before the Subcommittee on Commerce,
Consumer, and Monetary Affairs, Committee on Government Operations,
House of Representatives, on IRS‘ Information Returns Matching Program,
April 29, 1986.
[End of section]
Footnotes:
[1] The fiscal 2002 data on number of tax returns filed by individuals
had not been finalized before we issued the report.
[2] This report refers to the portion of tax returns audited by IRS as
the audit contact rate. Similarly, the portion of tax returns for which
IRS contacts taxpayers about possible noncompliance is the contact rate
for the math error, document matching, and nonfiler programs.
[3] U.S. General Accounting Office, Tax Administration: Audit Trends
and Results for Individual Taxpayers, GAO/GGD-96-91 (Washington, D.C.:
Apr. 26, 1996).
[4] U.S. General Accounting Office, IRS Audit Rates: Rate for
Individual Taxpayers Has Declined But Effect on Compliance Unknown, GAO-
01-484 (Washington, D.C.: Apr. 25, 2001).
[5] U.S. General Accounting Office, Tax Administration: IRS‘ Use of
Nonaudit Contacts, GAO/GGD-00-7 (Washington, D.C.: Mar. 16, 2001).
[6] U.S. General Accounting Office, Tax Administration: IRS Is Working
to Improve Its Estimates of Compliance Burden, GAO/GGD-00-11
(Washington, D.C.: May 22, 2000).
[7] For example, an audit might address unreported income, which is the
focus of document matching, because document matching can only verify
individual income reported on information returns. According to IRS,
information returns only report 80 percent of all individual income
reported on tax returns.
[8] IRC sec. 6213 grants math error authority for issues such as
calculation errors, entries that are inconsistent with or exceed
statutory limits, various omissions of information, or incorrect use of
an IRS table.
[9] IRC sec. 6041, 6044, 6045, 6049, 6050, and 6051, among others,
authorize information reporting to help identify a discrepancy on
individual income such as wages, interest, dividends, pension
distributions, and gross proceeds from stock sales.
[10] IRC sec. 6020 grants this authority to IRS and allows IRS to
prepare a return for a taxpayer who did not file as required and
process that return to assess taxes owed.
[11] IRC sections 7602 through 7606 and 7609 grant these powers.
[12] IRC sections 7602, 7605, 7609, and 7491 address these
restrictions.
[13] The Restructuring Act also restricted the audit technique that can
be used to identify unreported income; requires IRS to explain taxpayer
rights including the right to be represented during audits; requires
IRS to disclose the general criteria for why the return was selected
for audit; and restricts the ability to summon a third party for an
audit.
[14] Publication 1 (Your Rights as a Taxpayer) explains the rights that
taxpayers have in contacts with IRS.
[15] Taxpayers are not always required to file a tax return such as
when their income is too low.
[16] Document matching staff time includes the time to resolve
discrepancies before and after contacting taxpayers.
[17] The masterfile is IRS‘s historical record of transactions
involving each taxpayer‘s account.
[18] IRS letter to respond to questions from the Senate Finance
Committee, March 26, 2001.
[19] IRS had not collected data on these masterfile math errors prior
to fiscal year 1997.
[20] U.S. General Accounting Office, Tax Administration: Advance Tax
Refund Program was a Major Accomplishment, but Not Problem Free, GAO-02-
827 (Washington, D.C.: Aug. 2, 2002), U.S. General Accounting Office,
IRS‘s 2002 Tax Filing Season: Returns and Refunds Processed Smoothly;
Quality of Assistance Improved GAO-03-314 (Washington, D.C.: Dec. 20,
2002), and Internal Revenue Service, Tax Compliance Activities Report,
June 24, 2002, prepared in response to a directive in the House Report
accompanying the legislation (P.L. 107-67).
[21] Also see GAO-01-484.
[22] We did not analyze the portion of potentially noncompliant tax
returns that IRS could not check due to resource limitations. In its
September 2002 progress report to the IRS Oversight Board, IRS
presented data showing that it is checking compliance on a decreasing
portion of potentially noncompliant returns.
[23] To ensure efficient returns processing, returns with small dollar
value discrepancies are accepted as filed and taxpayers are not sent
math error notices.
[24] IRS had measured the voluntary compliance of individual taxpayers
periodically, last doing so for tax year 1988. IRS stopped because of
various congressional and other concerns about the measurement program.
[25] See U.S. General Accounting Office, Tax Administration: New
Compliance Research Effort Is On Track, but Important Work Remains, GAO-
02-769 (Washington, D.C.: June 27, 2002).
[26] IRS annually compiles data about its enforcement activities in its
Data Book. IRS also publishes that data on its public Web site and may
use some of that data in other publications such as budget documents.
[27] IRS‘s letter dated March 26, 2001.
[28] IRS does not track how many taxpayers are contacted by more than
one program for a tax return.
[29] IRS‘s letter dated March 26, 2001.
[30] In general, IRS sends taxpayers a written notice, called a
statutory notice of deficiency, which states that additional tax will
be assessed and provides 90 days for them to respond. The proposed tax
is automatically assessed if the taxpayer does not respond or does not
file an appeal.
[31] These payers file the information returns on income paid with IRS
as well as the taxpayers receiving the income to induce their voluntary
compliance in reporting the income on their tax returns.
[32] Among other reasons, we used 1983 because it was the first year
after a major expansion of the information reporting requirements.
[33] IRS had done very limited K-1 matching, relying on electronically
filed schedules K-1, but stopped this matching in the mid-1990s due to
resource and other constraints.
[34] GAO/GGD-00-7.
[End of section]
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