Tax Administration
Opportunities to Improve Compliance Decisions and Service to Taxpayers through Enhancements to Appeals' Feedback Project Gao ID: GAO-06-396 March 24, 2006Taxpayers disagreeing with Internal Revenue Service (IRS) compliance decisions can request an independent review by IRS's Appeals Office (Appeals). In 2004 the Commissioner requested that Appeals establish a feedback program to share the results of Appeals' reviews with the compliance programs. GAO was asked to assess whether (1) information on Appeals results would provide useful feedback to IRS operating divisions to benefit compliance programs, Appeals, and taxpayers through better case resolution and (2) the feedback project is being effectively managed to maximize its potential to improve IRS's performance and thereby reduce disputes with taxpayers.
Appeals' case result information has the potential to help compliance programs improve taxpayer service, but realizing improvements requires investments in data collection and analysis that must be considered in light of the likely benefits. Based on a review of 153 Appeals cases, GAO estimates that 41 percent of the 102,623 cases closed in fiscal year 2004 were not fully sustained. Of these, about half were not sustained because Appeals applied a law or regulation differently than the programs. Lacking such information, officials could not assess whether actions like additional guidance were needed. However, identifying specific provisions that were interpreted differently would require data gathering and analysis. Because the differences span a host of laws and regulations, corrective action may only affect a small number of cases. Improved decision making, however, can benefit compliance programs, Appeals, and taxpayers. An initial data analysis, such as identifying programs with high nonsustention rates due to differences in applying laws or regulations, would help to target areas most likely to benefit from feedback. Appeals has taken several initial steps to launch the feedback project. During 2005, for example, Appeals and the compliance programs began to identify additional information needs. In addition, Appeals and the compliance programs could refine the feedback project's objectives to target the results-oriented improvements that are logical benefits of information sharing. Obtaining agreement between Appeals and the programs on objectives may not be easy because their perspectives differ on the steps needed to improve operations, but is necessary. Also, Appeals' plans to update its information system to provide additional data on case results will be hindered by inaccurate data. We found that several important data fields had error rates up to 14 percent. Appeals staff cited several reasons for this, including weak data verification procedures.
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Report to the Chairman and Ranking Minority Member, Committee on
Finance, U.S. Senate:
March 2006:
Tax Administration:
Opportunities to Improve Compliance Decisions and Service to Taxpayers
through Enhancements to Appeals' Feedback Project:
GAO-06-396:
GAO Highlights:
Highlights of GAO-06-396, a report to the Committee on Finance, U.S.
Senate.
Why GAO Did This Study:
Taxpayers disagreeing with Internal Revenue Service (IRS) compliance
decisions can request an independent review by IRS‘s Appeals Office
(Appeals). In 2004 the Commissioner requested that Appeals establish a
feedback program to share the results of Appeals‘ reviews with the
compliance programs.
GAO was asked to assess whether (1) information on Appeals results
would provide useful feedback to IRS operating divisions to benefit
compliance programs, Appeals, and taxpayers through better case
resolution and (2) the feedback project is being effectively managed to
maximize its potential to improve IRS‘s performance and thereby reduce
disputes with taxpayers.
What GAO Found:
Appeals‘ case result information has the potential to help compliance
programs improve taxpayer service, but realizing improvements requires
investments in data collection and analysis that must be considered in
light of the likely benefits. Based on a review of 153 Appeals cases,
GAO estimates that 41 percent of the 102,623 cases closed in fiscal
year 2004 were not fully sustained. Of these, about half were not
sustained because Appeals applied a law or regulation differently than
the programs. Lacking such information, officials could not assess
whether actions like additional guidance were needed. However,
identifying specific provisions that were interpreted differently would
require data gathering and analysis. Because the differences span a
host of laws and regulations, corrective action may only affect a small
number of cases. Improved decision making, however, can benefit
compliance programs, Appeals, and taxpayers. An initial data analysis,
such as identifying programs with high nonsustention rates due to
differences in applying laws or regulations, would help to target areas
most likely to benefit from feedback.
Appeals has taken several initial steps to launch the feedback project.
During 2005, for example, Appeals and the compliance programs began to
identify additional information needs. In addition, Appeals and the
compliance programs could refine the feedback project‘s objectives to
target the results-oriented improvements that are logical benefits of
information sharing. Obtaining agreement between Appeals and the
programs on objectives may not be easy because their perspectives
differ on the steps needed to improve operations, but is necessary.
Also, Appeals‘ plans to update its information system to provide
additional data on case results will be hindered by inaccurate data. We
found that several important data fields had error rates up to 14
percent. Appeals staff cited several reasons for this, including weak
data verification procedures.
Figure: IRS's Appeals System
[See PDF for Image]
[End of Figure]
What GAO Recommends:
GAO recommends that IRS (1) perform an initial analysis of feedback
data to identify areas most likely to generate benefits for compliance
programs, Appeals, and taxpayers, (2) investigate whether additional
actions are needed to improve the consistency of decisions, (3) further
develop results-oriented objectives and measures for the feedback
project, and (4) build upon current efforts to improve feedback data by
establishing internal controls to verify data accuracy on an ongoing
basis. In commenting on a draft of this report, IRS agreed with our
recommendations.
To view the full product, 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:
Feedback Information Could Be Useful for Improving Performance:
Appeals Can Build on Existing Efforts to Improve the Feedback Project:
Conclusions:
Recommendations:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Appeals Workstreams:
Appendix III: Appeal Rates:
Appendix IV: Comments from the Commissioner of Internal Revenue:
Related GAO Products:
Tables:
Table 1: Reasons Appeals Did Not Fully Sustain Compliance Decisions,
Percentage of Nonsustained Cases in GAO's Sample by Reason, and
Illustrative Examples, Fiscal Year 2004:
Table 2: Comparison of the Composition of Appeals Workload, Rate of
Compliance Cases Appealed, Percentage of Appeals Workload, and Cases
Not Fully Sustained:
Table 3: Reasons that Appeals Did Not Fully Sustain Compliance Program
Decisions, Percentage of Cases Not Fully Sustained, Sample of Cases
Closed in Fiscal Year 2004:
Table 4: Confidence Intervals for Table 1:
Table 5: Confidence Intervals for Table 2:
Table 6: Confidence Intervals for Table 3:
Table 7: Description of Appeals Workstreams:
Table 8: Appeal Rates by Workstream, Fiscal Year 2004:
Figure:
Figure 1: IRS's Appeals System:
Abbreviations:
ACDS: Appeals Centralized Database System:
ACM: Appeals Case Memorandum:
CIC: Coordinated Industry Case:
CDP: Collection Due Process:
DCI: Data Collection Instrument:
EITC: Earned Income Tax Credit:
IC: Industry Case:
IS: Innocent Spouse:
IRS: Internal Revenue Service:
LMSB: Large and Mid-Sized Business Division:
OIC: Offer-In-Compromise:
SB/SE: Small Business/Self-Employed Division:
TE/GE: Tax-Exempt and Government Entities Division:
W&I: Wage and Investment Division:
Letter:
March 24, 2006:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max Baucus:
Ranking Minority Member:
Committee on Finance United States Senate:
To help maintain the public's confidence in the tax system, the
Internal Revenue Service (IRS) believes it needs to ensure that
taxpayers receive a fair, impartial, and uniform resolution of tax
disputes. If taxpayers disagree with IRS decisions to assess additional
tax or take collection action, they can bring their cases before the
IRS Appeals function (Appeals), which independently reviews whether
compliance decisions correctly reflect the facts as well as applicable
law, regulations, and IRS procedures.[Footnote 1] With a staff of about
1,900 employees and a budget of about $193 million in fiscal year 2005,
Appeals annually closes over 100,000 cases where taxpayers disputed
IRS's compliance decisions.
Our prior reports have found that results-oriented organizations use
performance information to continuously identify performance gaps and
put that information to work to improve their operations. One possible
source of this information in IRS is the results of Appeals cases.
Using this information, IRS compliance programs may possibly identify
whether Appeals would agree that the case decision represents the best
result for IRS and the taxpayer. Then, using Appeals case results
information, compliance program managers may possibly be able to
identify weaknesses in their programs and improve operations, providing
better service to taxpayers, and possibly resolving more cases before
an appeal. In line with this concept, the Commissioner recently
requested that Appeals establish a feedback project intended to
maximize the benefits of sharing Appeals decisions with the compliance
programs.
Based on your request, this report's objectives are to determine
whether (1) information on Appeals results would provide useful
feedback to IRS operating divisions to benefit compliance programs,
Appeals, and taxpayers through better case resolution and (2) the
feedback project is being effectively managed to maximize its potential
to improve IRS's performance and thereby reduce disputes with taxpayers.
To make determinations in both areas, we reviewed Appeals and
compliance program documents and our prior work on performance
management, and interviewed Appeals and compliance program officials.
To determine whether information on the results of Appeals cases has
the potential to provide useful feedback, we reviewed a random sample
of Appeals cases closed in fiscal year 2004 to determine whether the
cases contained information that could be useful for improving case
results. Principally, we collected data on whether Appeals sustained or
overturned the compliance program's decision in each case and
identified the main reasons for the Appeals decision. The results from
that sample have related confidence intervals and precision estimates
that are presented in this letter and in appendix I. We conducted our
review from October 2004 through October 2005 in accordance with
generally accepted government auditing standards.
Results in Brief:
As an independent reviewer of IRS compliance program's cases, Appeals'
case results information has the potential to help those programs
improve their service to taxpayers, but realizing improvements requires
investments in data collection and analysis that must be considered in
light of the likely benefits to the compliance programs, Appeals, and
taxpayers. Based on our review of 153 compliance program cases closed
in fiscal year 2004, we estimate that 41 percent of the 102,623 cases
closed in that year (42,075 cases) were not fully sustained by
Appeals.[Footnote 2] Of these cases, Appeals did not sustain 52 percent
(21,879 cases) because, at least in part, it applied a law or
regulation differently than the compliance programs.[Footnote 3]
Because they have not received this type of information, the compliance
programs could not assess whether additional guidance, training, or
other initiatives were needed. However, identifying more specifically
which laws or regulations were interpreted differently by the programs
would require an investment to gather and analyze additional data.
Because these differing applications span a host of laws and
regulations across all of IRS's compliance programs, in many cases the
corrective action that might be taken may only affect a relatively
small number of cases. Improved decision making, however, can benefit
compliance programs, Appeals, and taxpayers. Systematic data analysis,
such as identifying programs with high nonsustention rates due to
differences in applying laws or regulations, would help identify those
programs most likely to benefit from feedback.[Footnote 4] This
analysis would also help to focus attention on the costs of developing
the feedback data and benefits to be obtained. Currently, IRS does not
have plans for these analyses.
Appeals has taken several initial steps to launch the feedback project
requested by the IRS Commissioner. During 2005, several information-
sharing and cooperative projects (e.g., providing copies of case
memorandums and basic summary data) were established with some
compliance programs on Appeals case results. Appeals and compliance
managers can take further steps to build upon those efforts. For
example, Appeals plans to update its information system to provide
additional information on case results, such as the reasons for
Appeal's decisions. In addition, Appeals developed the feedback
project's objectives and measures with limited input from the
compliance programs. Appeals and the compliance programs can partner on
further developing results-oriented objectives that take into account
compliance programs' diverse circumstances and clearly articulate the
feedback project's expected outcomes and associated performance
measures. Obtaining agreement between Appeals and the compliance
programs on objectives and performance measures may not be easy because
their perspectives differ on the steps needed to improve IRS
operations, but it is a necessary step because the programs themselves
must play active roles in the project to make any changes that will
improve their case results. However, the program will be hindered by
inaccurate data. For example, we found that several important data
fields related to Appeals case results had error rates up to 14
percent.[Footnote 5] Appeals staff cited several reasons for the errors
including a lack of attention to complete and accurate data, confusion
about the results of the appeal by those entering the data, and weak
data verification procedures.
In order to maximize the opportunities for the Appeals feedback project
to improve IRS's compliance decisions and service to taxpayers, we are
recommending that IRS analyze feedback data to identify areas most
likely to benefit from feedback projects; further investigate the most
promising areas and assess whether additional actions, such as new
guidance or training, are needed to improve the consistency of
decisions; further develop results-oriented objectives and associated
performance measures for feedback projects; and build upon its current
efforts to improve Appeals information for the feedback projects by
establishing internal controls to verify, on an ongoing basis, the
accuracy of information on case outcomes. In written comments on a
draft of this report, the Commissioner of Internal Revenue agreed with
our recommendations and said they will help IRS develop a much stronger
feedback program.
Background:
America's tax system is based on taxpayers voluntarily filing tax
returns that report the full amount of tax owed and paying any taxes
that are due. IRS has four operating divisions:
* Wage and Investment Division (W&I) serves the vast number of
individual taxpayers including those who file jointly and only have
wage and investment income.
* Small Business/Self-Employed Division (SB/SE) serves about 45 million
small business, individual taxpayers with rental properties and farming
businesses, and individuals investing in businesses, such as
partnerships. SB/SE also serves corporations and partnerships with less
than $10 million in assets and provides field collection services for
the other three IRS divisions.
* Large and Mid-Size Business Division (LMSB) serves corporations,
subchapter S corporations, and partnerships with assets greater than
$10 million. These businesses have a large number of employees, have
complicated tax and accounting issues, and often conduct business
globally.
* Tax-Exempt and Government Entities Division (TE/GE) serves three very
distinct customer segments. Employee Plans serves private and public
retirement plan customers. Exempt Organizations serves customers that
are exempt from income taxes, such as charities, civic organizations,
and business leagues. Government Entities serves customers from
federal, state, and local governments; Indian tribal governments; and
tax-exempt bond issuers.
These divisions are responsible for providing a full range of services
to these taxpayers. Typically, these services would include assisting
taxpayers with filing returns, processing those returns and maintaining
their accounts, and examining suspected inaccurate returns. Taxpayers
who are assessed additional tax and penalties or who have a pending
enforcement action to collect delinquent taxes, such as a proposed levy
or lien,[Footnote 6] have the right to request a hearing through an
administrative appeal before the assessment or collection actions are
final.[Footnote 7] IRS notifies the taxpayers in writing of these
pending actions and explains their appeal rights. Generally, the
taxpayer has 30 days from this notification to request an appeal.
The Appeals Process:
Appeals' mission is to independently resolve tax disputes prior to
litigation on a basis which is fair and impartial to both the
government and the taxpayer. To assure their independence, Appeals'
staff cannot discuss substantive case issues with compliance staff
unless taxpayers or their representative are present. Generally,
compliance staff does not directly participate in an appeal or learn
about the resulting decision. To identify whether the proposed
compliance action should be sustained, Appeals staff review the case
file prepared by IRS's compliance program and determine whether that
evidence demonstrates that the taxpayer and compliance staff have
followed the applicable law, regulation, and IRS procedure. If
requested, the taxpayer may meet with Appeals staff and provide
additional evidence to support their appeal. To close an examination
case, Appeals may (1) agree with the examination program and fully
sustain its recommended assessment, (2) disagree and reduce the
recommended assessment to partially sustain the assessment, or (3)
fully concede to the taxpayer's position and not sustain the
assessment. For a collection case, Appeals may (1) agree with and
sustain the proposed enforcement action or (2) not sustain the proposed
enforcement action by modifying the proposed action (e.g., propose an
installment agreement rather than a levy), deferring collection, or
fully conceding to the taxpayer's position. If the taxpayer and IRS
cannot reach agreement on the outcome of the case through the Appeals
process, the taxpayer may have the case reviewed by the U.S. Tax Court,
U.S. Court of Federal Claims, or a U.S. district court.
In line with its mission to resolve cases prior to litigation, Appeals
is also authorized to review the facts of the case in light of the
hazards that would exist if the case were litigated.[Footnote 8]
Appeals is the only IRS organization authorized to consider hazards of
litigation when deciding whether to allow taxes and penalties.[Footnote
9] This means that Appeals may recommend a fair and impartial
resolution somewhere between fully sustaining or fully conceding the
examiner's proposal that reflects the probable result in the event of
litigation.
If taxpayers do not reach agreement with IRS examiners on the proposed
deficiency, or if they choose not to contact Appeals, IRS will issue a
notice of deficiency. This notice describes the deficiency and states
that the taxpayer has 90 days to file a petition with the court for a
redetermination of the deficiency. However, even though Appeals may be
initially bypassed, it still has an opportunity to settle these
cases.[Footnote 10] Under IRS procedures designed to encourage
resolution of cases at the lowest possible level, the attorney from the
local IRS District Counsel's office handling the court case is required
to refer the case to Appeals for possible settlement before it is
scheduled for trial.[Footnote 11] Figure 1 summarizes IRS's appeals
system.
Figure 1: IRS's Appeals System:
[See PDF for image]
[End of figure]
Appeals' workload is organized into eight "workstreams" that reflect
similarities in the case workload rather than which of IRS's four
operating divisions initiated the case. Two of the eight workstreams
relate to collection issues and generally originate in two of IRS's
four operating divisions responsible for collection issues (Collection
Due Process and Offer-in-Compromise workstreams). Three of the eight
workstreams include a wide range of generally smaller examination and
returns-processing-related penalty cases (Innocent Spouse, Penalty
Appeals, and Exam/TEGE). The three other workstreams (Coordinated
Industry Case, Industry Case, and Other) cover a small number of
complex examinations from IRS's LMSB programs as well as cases that do
not fit into other workstreams.[Footnote 12] Appendix II includes
definitions of Appeals workstreams, identifies the related operating
divisions for the workstream, and the number of cases closed in each
workstream during fiscal year 2004.
Strategic Approach:
Results-oriented organizations consistently strive to improve their
performance through strategic planning. As part of this approach,
agencies set objectives and measure performance to evaluate whether
performance has improved. Specifically,
* goals or objectives are the results that a program is expected to
achieve, and:
* performance measures are selected after goals or objectives are
developed, logically related to these goals or objectives, and used to
gauge progress toward them.
Other federal agencies have previously decided that developing and
sharing information on the results of appeals may help them measure
performance or at least serve as an indicator of whether their
decisions are legally correct. For example, the Merit Systems
Protection Board, an independent quasi-judicial agency established to
protect merit systems in the federal workplace, has set a performance
goal of maintaining or reducing its low percentage of appealed
decisions that are reversed or sent back to board judges for a new
decision. The board's performance plan for fiscal year 2005 contains an
array of case-specific data to measure this performance goal.
Feedback Information Could Be Useful for Improving Performance:
Appeals overturned about 41 percent of the fiscal year 2004 cases we
reviewed and in about half of those cases Appeals disagreed with the
way compliance programs applied the law or regulations. This suggests
that providing information on Appeals decisions could help compliance
program managers improve case results by fostering more proper and
consistent case decisions. However, finding the source of possible
inconsistencies will require gathering and analyzing additional
information and systematic analysis. Improved decision making, however,
can benefit compliance programs, Appeals, and taxpayers.
Feedback on Appeals Results Could Be Useful:
Based on our case review, for cases closed in fiscal year 2004, we
estimate that Appeals did not sustain about 41 percent of compliance
cases (about 42,075 of the 102,623) that year. We identified six
principal reasons for those nonsustentions. As shown in table 1, we
estimate that Appeals did not sustain compliance decisions in 52
percent of the cases not sustained (21,879 cases) at least in part
because Appeals disagreed with compliance staff's application of tax
law or IRS regulations.[Footnote 13] Providing feedback on such
disagreements could help compliance managers improve case results by
taking action to foster the proper and consistent application of tax
laws and regulations. For example, compliance managers could assess
whether guidance or manuals, supervision, quality control, or other
management tools should be revised to ensure that cases are properly
closed. Identifying more specifically which laws or regulations were
applied differently by the compliance programs would require an
investment to gather and analyze additional data. For instance, in
table 1 we identified the handling of a state tax refund as an example
of differing applications of tax laws and regulations. To determine
whether this is a common problem or an isolated instance, officials
would have to investigate the issue by, for example, drawing a random
sample of cases or questioning first-line managers and staff. Because
these differing applications span a host of laws and regulations across
IRS's compliance programs, the corrective action that might be taken
may only affect a relatively small number of cases. In complex cases,
Appeals and the compliance managers may need to work together to
develop a mutual understanding of how laws and regulations should be
applied.
Table 1: Reasons Appeals Did Not Fully Sustain Compliance Decisions,
Percentage of Nonsustained Cases in GAO's Sample by Reason, and
Illustrative Examples, Fiscal Year 2004:
Reason Appeals did not fully sustain compliance decision: Application
of laws or regulations;
Percentage of cases not fully sustained based on the reason [A[B]]: 52;
Illustrative case examples: Examination revised taxable income to
include the state refund for the prior year. Appeals determined that
the taxpayer had not itemized on his or her federal return for the
prior year and received no tax benefit. Therefore, examination should
not have included the refund in taxable income.
Reason Appeals did not fully sustain compliance decision: Additional
information provided by the taxpayer or not accepted by compliance;
Percentage of cases not fully sustained based on the reason [A[B]]: 44;
Illustrative case examples: Examination disallowed a taxpayer's
dependency exemptions and Earned Income Tax Credit (EITC) in a
correspondence examination of the tax return. On appeal, the taxpayer
presented supporting documentation, including birth certificates and
school records, to substantiate the claim.
Reason Appeals did not fully sustain compliance decision: Original
audit work or significant rework by Appeals;
Percentage of cases not fully sustained based on the reason [A[B]]: 14;
Illustrative case examples: The taxpayer contended that he or she was
not liable for a tax assessment since the taxpayer had lost his or her
wallet and someone else used the taxpayer's Social Security Number to
file the return. The taxpayer filed in Tax Court. Since the case had
not been reviewed by Appeals, Chief Counsel forwarded the case to
Appeals for review. Appeals determined that the taxpayer was not liable
for the deficiency since the taxpayer was the victim of identity theft.
Reason Appeals did not fully sustain compliance decision: Taxpayer not
responsive to compliance;
Percentage of cases not fully sustained based on the reason [A[B]]: 13;
Illustrative case examples: Examination determined that a taxpayer had
not filed a tax return and thus incurred a tax deficiency. Both
compliance and Appeals requested the tax return. The taxpayer did not
submit the tax return until the case was sent to Chief Counsel to
prepare for a Tax Court hearing. Once the tax return was processed, the
taxpayer was due a refund.
Reason Appeals did not fully sustain compliance decision: Hazards of
litigation;
Percentage of cases not fully sustained based on the reason [A[B]]: 13;
Illustrative case examples: Failure to file and related penalties
imposed against the taxpayer were abated when the taxpayer presented
unique and sympathetic facts (e.g., the corporation was a nonprofit
organization primarily using volunteer workers) that would be a hazard
if the case proceeded to litigation.
Reason Appeals did not fully sustain compliance decision: Appeals
changed collection alternative;
Percentage of cases not fully sustained based on the reason [A[B]]: 11;
Illustrative case examples: Taxpayer requested a Collection Due Process
hearing because he or she wanted an alternative method of collection
other than the levy proposed by compliance. During the appeal, the
taxpayer requested and entered into an installment agreement that
allowed the taxpayer to pay the delinquent tax over time through
periodic payments.
Source: GAO sample of Appeals cases.
[A] These percentages are based on a subset of 63 nonsustained cases.
The margin of error for these estimates is larger than for the sample
as a whole. Confidence intervals are shown in appendix I.
[B] Since a case can have multiple reasons why it is not sustained, the
percentage of cases not fully sustained does not total to 100 percent.
[End of table]
As also shown in table 1, we estimate that Appeals did not sustain
compliance decisions in 44 percent of the cases because the taxpayer
provided additional information to Appeals. For cases in this category,
officials would need to investigate whether compliance staff could have
done more to obtain the information needed to resolve the tax before
the case was appealed. For example, compliance managers might assess
whether staff clearly articulated the type and extent of information
needed, gave the taxpayer sufficient time to respond, or received the
information but did not use it appropriately to resolve the case.
Similar data gathering and analysis would be needed for the other
reasons we identified for Appeals not sustaining cases in order for the
information to be useful in improving compliance's decision making. For
example, for cases where Appeals had to perform original audit work or
significant rework, compliance managers would need to identify why
their staff did not perform the necessary work while the case was still
their responsibility. For cases where Appeals accepted a collection
alternative, compliance managers might assess whether it was because
the taxpayer had not requested an alternative, the taxpayer's financial
circumstances had changed since compliance worked on the case, or a
request for an alternative was inappropriately rejected by compliance
staff. For cases where taxpayers did not respond to compliance,
compliance managers might assess whether staff had made sufficient
attempts to contact the taxpayer.
Improved Decision Making Would Benefit Compliance Programs, Appeals,
and Taxpayers:
As shown in table 2, the appeal rate--the percentage of cases appealed-
-varies across Appeals' workstreams from 29 percent for LMSB's
Coordinated Industry Case program (CIC) cases to one-tenth of 1 percent
for cases in the Penalty Appeals and Other workstreams.[Footnote 14]
Managers of programs with high appeal rates told us that they would
benefit from Appeals feedback information in improving decision making.
For example, with relatively high appeals rates and complex tax issues
frequently considered in both the Industry Case (IC) and CIC programs,
LMSB managers believe that Appeals case result information is important
for managing their programs to update policies and procedures, modify
or assess new training needs, or identify needed changes in the tax
law.[Footnote 15] Similarly, Offer-in-Compromise program managers say
they have benefited from working with Appeals staff on studies
analyzing why cases were not sustained by Appeals. One study indicated
that compliance managers and Appeals needed to reevaluate or reinforce
some of their policies as well as be more consistent in following
established procedures for assessing financial information, such as
calculating transportation expenses, establishing the value of cars,
and estimating future income.
Table 2: Comparison of the Composition of Appeals Workload, Rate of
Compliance Cases Appealed, Percentage of Appeals Workload, and Cases
Not Fully Sustained:
Appeals workstreams: Coordinated Industry Case;
Number of appeals cases closed in fiscal year 2004: 653;
Percentage of Appeals workload: 0.6;
Percentage of cases compliance closed that are appealed: 29;
Number of cases in GAO's sample: N/A[A];
GAO sample percentage of cases not fully sustained: N/A[A].
Appeals workstreams: Offer-in-Compromise (OIC);
Number of appeals cases closed in fiscal year 2004: 17,887;
Percentage of Appeals workload: 17.2;
Percentage of cases compliance closed that are appealed: 13;
Number of cases in GAO's sample: 28;
GAO sample percentage of cases not fully sustained: 14[B].
Appeals workstreams: Industry Case (IC);
Number of appeals cases closed in fiscal year 2004: 670;
Percentage of Appeals workload: 0.6;
Percentage of cases compliance closed that are appealed: 14;
Number of cases in GAO's sample: N/A[A];
GAO sample percentage of cases not fully sustained: N/A[A].
Appeals workstreams: Innocent Spouse (IS);
Number of appeals cases closed in fiscal year 2004: 4,713;
Percentage of Appeals workload: 4.5;
Percentage of cases compliance closed that are appealed: 8;
Number of cases in GAO's sample: 7;
GAO sample percentage of cases not fully sustained: 57[C].
Appeals workstreams: Collection Due Process (CDP);
Number of appeals cases closed in fiscal year 2004: 32,226;
Percentage of Appeals workload: 31.0;
Percentage of cases compliance closed that are appealed: 1;
Number of cases in GAO's sample: 53;
GAO sample percentage of cases not fully sustained: 19[A].
Appeals workstreams: Exam/TEGE;
Number of appeals cases closed in fiscal year 2004: 28,592;
Percentage of Appeals workload: 27.5;
Percentage of cases compliance closed that are appealed: 0.4;
Number of cases in GAO's sample: 40;
GAO sample percentage of cases not fully sustained: 73[B].
Appeals workstreams: Penalty Appeals;
Number of appeals cases closed in fiscal year 2004: 14,647;
Percentage of Appeals workload: 14.1;
Percentage of cases compliance closed that are appealed: 0.1;
Number of cases in GAO's sample: 16;
GAO sample percentage of cases not fully sustained: 69[C].
Appeals workstreams: Other;
Number of appeals cases closed in fiscal year 2004: 4,558;
Percentage of Appeals workload: 4.4;
Percentage of cases compliance closed that are appealed: 0.1;
Number of cases in GAO's sample: 9;
GAO sample percentage of cases not fully sustained: 56[C].
Appeals workstreams: Total;
Number of appeals cases closed in fiscal year 2004: 103,946;
Percentage of Appeals workload: 100;
Percentage of cases compliance closed that are appealed: 0.3;
Number of cases in GAO's sample: 153;
GAO sample percentage of cases not fully sustained: 41.
Source: GAO sample of Appeals cases closed during fiscal year 2004, IRS
Data Book 2003, and IRS data.
[A] N/A means not applicable. IC and CIC workstreams are not included
in our sample because these cases are very complex and the supporting
documentation is voluminous. See appendix I.
[B] GAO's sample results for three workstreams--Collection Due Process,
Exam/TEGE, and Offer-in-Compromise--are statistically generalizable to
the specific workstream population. The rate of cases not fully
sustained for Exam/TEGE differs from Collection Due Process and from
Offer-in-Compromise cases. The margin of error for these estimates is
larger than for the sample as a whole due to the smaller sample sizes
when looking at each workstream separately. Confidence intervals are
shown in appendix I.
[C] GAO's sample results for Innocent Spouse, Penalty Appeals, and
Other are not statistically generalizable because the sample sizes were
not large enough. Consequently, these workstream results apply only to
cases in our sample.
[End of table]
Managers of programs with low appeal rates may not see as much benefit
in obtaining feedback from Appeals. With an appeal rate of less than
one-half of 1 percent, managers in W&I, the source of many cases in the
Exam/TEGE workstream, explained that they had limited interest in
devoting resources to analyzing Appeals feedback information, although
they would review any analysis Appeals provided to them. Managers told
us that, given the challenges facing W&I, they needed to focus
resources on other issues.
However, although managers might not see much direct benefit for their
programs, reducing the appeal rate for compliance programs could
benefit Appeals. As shown in table 2, the Exam/TEGE, Penalty Appeals,
and Other workstreams have appeal rates of less than 1 percent, but the
cases from these three workstreams make up about half of Appeals'
workload. In addition, the cases that are appealed are generally not
fully sustained. The percentage of cases in our sample that were not
sustained ranged from 73 percent for Exam/TEGE to 56 percent for the
Other workstream.[Footnote 16] From Appeals' perspective, improving
case results in these workstreams could represent a target of
opportunity for reducing its case load and increasing its efficiency.
Analysis of our sample found that across all workstreams, Appeals cases
that are fully sustained require about half of the staff hours of cases
that are not fully sustained.
If providing feedback to compliance programs improved their decision
making, taxpayers would benefit as well. For example, if compliance
programs used feedback information to improve their understanding of
how to apply tax laws and regulations, they could reduce the number of
taxpayers requesting an appeal and therefore resolve cases more quickly
and with more uniform decisions. Further, since Appeals managers said
some taxpayers decide not to pursue an appeal even though they disagree
with a compliance decision, more consistent application of the tax laws
or regulations could also improve the fairness and accuracy of their
outcomes.
The Exam/TEGE workstream can be used as a hypothetical example of the
potential effect of these benefits. If the quality of compliance case
decisions were to improve and as a result the percentage of cases fully
sustained in Appeals were to increase from 28 percent to 38 percent,
Appeals would save an estimated 7 staff years.[Footnote 17] Another
potential cost saving would result if fewer taxpayers appealed because
the quality of compliance case decisions improved. For example, if the
number of cases from the Exam/ TEGE workstream that are appealed fell
by 10 percent, Appeals would save an estimated 17 staff years.[Footnote
18]
More Systematic Data Analysis Would Help to Identify Useful Feedback:
Identifying which compliance programs would benefit most from feedback
is important given that Appeals hears a wide variety of cases, the
cases are spread across the operating divisions, and Appeals does not
fully sustain cases for a variety of reasons. This dispersion means
that in some situations the costs IRS would incur to analyze Appeals
data and devise and implement improvements in operations may not be
justified given how few cases could be affected.
When analyzing our case sample, we found that overall (1) about half of
all not fully sustained cases cited either the application of laws and
regulations or additional information as the reason for nonsustention
and (2) certain workstreams have significantly higher nonsustention
rates than others. As shown in table 3, by considering these two facts
in combination, we found that two workstreams-Penalty Appeal and Exam/
TEGE-had a large percentage of cases that were not sustained for these
two reasons. Other information already available might also be used to
identify the most promising areas in which to conduct feedback
projects. For example, those cases that are most costly to Appeals to
work on, measured for instance by staff hours per case, may yield the
most savings to Appeals if the cases could be resolved in the
compliance programs without an appeal being made. Appeals and
compliance programs have been selecting their projects more on the
basis of manager judgment than through data analysis, such as those
cases described above.
Table 3: Reasons that Appeals Did Not Fully Sustain Compliance Program
Decisions, Percentage of Cases Not Fully Sustained, Sample of Cases
Closed in Fiscal Year 2004:
Reason Appeals did not fully sustain compliance decision[B]:
Application of laws or regulations;
Percentage of issues cited in cases not fully sustained[A]: CDP: 3.2;
Percentage of issues cited in cases not fully sustained[A]: OIC: 2.2;
Percentage of issues cited in cases not fully sustained[A]: Innocent
Spouse: 4.3;
Percentage of issues cited in cases not fully sustained[A]: Penalty
Appeals: 9.7;
Percentage of issues cited in cases not fully sustained[A]: Exam/TEGE:
12.9;
Percentage of issues cited in cases not fully sustained[A]: Other: 3.2;
Percentage of issues cited in cases not fully sustained[A]: Total: 35.5.
Reason Appeals did not fully sustain compliance decision[B]: Additional
information provided by the taxpayer or not accepted by compliance;
Percentage of issues cited in cases not fully sustained[A]: CDP: 4.3;
Percentage of issues cited in cases not fully sustained[A]: OIC: 1.1;
Percentage of issues cited in cases not fully sustained[A]: Innocent
Spouse: 0.0;
Percentage of issues cited in cases not fully sustained[A]: Penalty
Appeals: 1.1;
Percentage of issues cited in cases not fully sustained[A]: Exam/TEGE:
20.4;
Percentage of issues cited in cases not fully sustained[A]: Other: 3.2;
Percentage of issues cited in cases not fully sustained[A]: Total: 30.1.
Reason Appeals did not fully sustain compliance decision[B]: Original
audit work or significant rework by Appeals;
Percentage of issues cited in cases not fully sustained[A]: CDP: 2.2;
Percentage of issues cited in cases not fully sustained[A]: OIC: 0.0;
Percentage of issues cited in cases not fully sustained[A]: Innocent
Spouse: 0.0;
Percentage of issues cited in cases not fully sustained[A]: Penalty
Appeals: 1.1;
Percentage of issues cited in cases not fully sustained[A]: Exam/TEGE:
5.4;
Percentage of issues cited in cases not fully sustained[A]: Other: 1.1;
Percentage of issues cited in cases not fully sustained[A]: Total: 9.7.
Reason Appeals did not fully sustain compliance decision[B]: Taxpayer
not responsive to compliance;
Percentage of issues cited in cases not fully sustained[A]: CDP: 3.2;
Percentage of issues cited in cases not fully sustained[A]: OIC: 0.0;
Percentage of issues cited in cases not fully sustained[A]: Innocent
Spouse: 0.0;
Percentage of issues cited in cases not fully sustained[A]: Penalty
Appeals: 0.0;
Percentage of issues cited in cases not fully sustained[A]: Exam/TEGE:
5.4;
Percentage of issues cited in cases not fully sustained[A]: Other: 0.0;
Percentage of issues cited in cases not fully sustained[A]: Total: 8.6.
Reason Appeals did not fully sustain compliance decision[B]: Hazards of
litigation;
Percentage of issues cited in cases not fully sustained[A]: CDP: 0.0;
Percentage of issues cited in cases not fully sustained[A]: OIC: 0.0;
Percentage of issues cited in cases not fully sustained[A]: Innocent
Spouse: 1.1;
Percentage of issues cited in cases not fully sustained[A]: Penalty
Appeals: 3.2;
Percentage of issues cited in cases not fully sustained[A]: Exam/TEGE:
3.2;
Percentage of issues cited in cases not fully sustained[A]: Other: 1.1;
Percentage of issues cited in cases not fully sustained[A]: Total: 8.6.
Reason Appeals did not fully sustain compliance decision[B]: Appeals
changed collection alternative;
Percentage of issues cited in cases not fully sustained[A]: CDP: 5.4;
Percentage of issues cited in cases not fully sustained[A]: OIC: 1.1;
Percentage of issues cited in cases not fully sustained[A]: Innocent
Spouse: N/A[C];
Percentage of issues cited in cases not fully sustained[A]: Penalty
Appeals: N/A[C];
Percentage of issues cited in cases not fully sustained[A]: Exam/TEGE:
N/A[C];
Percentage of issues cited in cases not fully sustained[A]: Other: 1.1;
Percentage of issues cited in cases not fully sustained[A]: Total: 7.5.
Reason Appeals did not fully sustain compliance decision[B]: Total;
Percentage of issues cited in cases not fully sustained[A]: Total: 100.
Source: GAO sample of Appeals cases.
[A] The 63 cases not fully sustained from the sample of 153 cases cited
93 reasons for nonsustained cases. Totals many not add due to rounding.
[B] Confidence intervals for the Penalty Appeals and Exam/TEGE
application of laws and regulations and additional information provided
by the taxpayer or not accepted by compliance for Exam/TEGE are
presented in appendix I. Confidence intervals for the other cells are
not provided because the sample size is not large enough to project
results.
[C] N/A means not applicable. These cells are not applicable because
Innocent Spouse, Penalty Appeals, and Exam/TEGE are Appeals workstreams
related to tax assessments, and the alternatives for the collection of
delinquent tax do not apply.
[End of table]
As discussed earlier, Appeals and compliance program managers will need
to sort through possible reasons why some areas appear to have high
levels of nonsustained cases. This may require several iterations of
data analysis, discussion, and manager judgment.
Once officials have identified the areas with the greatest potential
for improvement, Appeals and compliance programs can explore low-cost
avenues for using feedback information. For example, in two of the
three workstreams with the highest percentage of appealed cases,
Appeals and compliance programs have completed some projects based on
Appeals case results. The joint study on Offer-in-Compromise cases not
sustained by Appeals was conducted by a small team of compliance and
Appeals staff and involved the review of 113 cases in 1 week. In
contrast, Appeals and LMSB concluded that jointly reviewing fully
conceded issues in the CIC program was too expensive because these
cases can involve numerous complex issues. Rather, Appeals has started
to provide to LMSB all Appeals Case Memorandums (ACM) as a low-cost
solution for providing the information to target possible areas needing
improvement.[Footnote 19] However, Appeals has not yet explored
potential avenues for using feedback information in other large
workstreams, such as Penalty Appeals.
Appeals Can Build on Existing Efforts to Improve the Feedback Project:
Appeals has taken several steps to launch and begin expanding the
feedback project. As Appeals and compliance managers gain experience in
analyzing and using feedback information, Appeals, in partnership with
compliance managers, can build upon those efforts by identifying the
additional feedback information that needs to be shared and further
developing results-oriented objectives. In addition, potentially useful
feedback data contain errors that undermine their usefulness.
Appeals Is Providing Some Feedback Based on Officials' Initial
Judgments of Its Needs:
Appeals has taken several steps to launch and expand the feedback
project. For example, officials are sending ACMs to certain compliance
programs. During 2005, Appeals started to send ACMs to:
* LMSB Industry Case and Coordinated Industry Case programs,
* W&I for the Innocent Spouse and EITC programs,
* SB/SE for the Collection Due Process, Offer-in-Compromise, and
International Examination programs,[Footnote 20] and:
* TE/GE for some Exempt Organizations cases.
The Collection Due Process program also receives some summary-level
information on whether the taxpayer and Appeals agreed on the outcome
of an appeal as well as the Appeals inventory level. Appeals and the
compliance programs are working together to determine which additional
programs should receive specific feedback information.
In addition, Appeals and compliance programs' staff meet regularly
through advisory board meetings. The advisory boards were created to
focus on important cross-functional issues, solve problems, identify
new issues arising in the compliance programs, and generally maintain
close working relationships. For example, as previously discussed,
Appeals and the SB/SE collection staff jointly worked on a review of
Offer-In-Compromise cases to determine why Appeals accepted some offers
that the compliance program rejected and are considering similar
efforts with other compliance programs.
Generally, decisions on what information to initially share with the
compliance programs have grown out of discussions between Appeals and
compliance staff and reflect their best judgment about the information
that likely will help the compliance programs improve case results.
Appeals and the compliance programs are still determining what
additional feedback information should be shared. Appeals, in
coordination with the compliance programs, is revising its case closing
documents to provide additional information describing the basis for
the resolution of a case. For example, Appeals is working with the
compliance programs to provide information on whether additional
information was considered by Appeals, cases were closed based on
hazards of litigation, or taxpayers did not respond or delayed their
responses. Compliance program managers told us that providing more
detailed information tailored to their needs will help them to improve
their results. Appeals plans to implement a revised Appeals case
closing system during 2006. Appeals managers believe, and we agree,
that the compliance programs will likely identify additional
information needs in the future as they begin to analyze and use the
information. For example, some compliance managers have told us that
information on sustention rates would be useful. However, Appeals' has
no plans to develop this information.
Partnership with Compliance Programs Could Help Ensure That Feedback
Information Will Be Used to Achieve Desired Program Results:
Although Appeals has worked with the compliance programs on many
aspects of the feedback project, Appeals developed the objectives and
performance measures for the feedback project with relatively little
input from the compliance programs. After initially developing the
objectives and measures, Appeals distributed them to compliance program
representatives for comment but received little response. Appeals
officials therefore concluded the compliance programs agreed with the
objectives and measures.
Best practices in strategic planning, of which setting objectives is a
part, call for the involvement of stakeholders.[Footnote 21] In the
case of the feedback project, involving the compliance programs in
establishing the project objectives is particularly important because
the programs themselves must play active roles in the project to make
any changes that will improve their case results. Appeals officials
acknowledge that mutually agreed upon objectives and measures would
increase the likelihood that compliance programs would use the feedback
information provided.
However, gaining consensus may not be easy. The following illustrates
the importance of involving the compliance programs in these decisions
and of the potential difficulties that could arise. Appeals could adopt
an objective for the feedback project of improving the sustention rate
for compliance program cases that go to Appeals. That is, if the
quality of compliance decisions is improved through feedback of Appeals
case results, more appealed cases should be upheld. However, some of
the compliance program officials we interviewed do not want improvement
in the sustention rate to be an objective for a variety of reasons. For
example, officials note that Appeals can change a case result for
reasons that are out of their control. As discussed before, Appeals is
authorized to close cases based on hazards of litigation and compliance
programs are not. As a result, compliance managers are concerned that
including cases closed based on hazards of litigation as part of a
sustention rate would be unfair. Other managers do not agree that
Appeals always makes the correct decisions on compliance cases. Thus,
the active involvement of compliance program officials in the selection
of objectives would be important to determining the strengths and
weaknesses of potential objectives.
Further, the involvement of compliance programs in establishing
objectives and project measures may better ensure that the feedback
project is focusing on desired results. As defined by Appeals in April
2005, the objectives of the case feedback project are to:
* build strong relationships between Appeals and operating divisions
and functions,
* capture and share trend data,
* analyze trend data-and provide meaningful commentary to the operating
divisions and functions, and:
* influence operating division policy and procedure.
Although these objectives indicate some of the activities that are
integral to feedback sharing and a desired outcome--influence on
operating divisions' policies and procedures--involving the operating
divisions in considering program objectives would provide an
opportunity to build on these objectives to more fully define the
results intended for the feedback project. The Commissioner did not
specify the benefits that he thought should result from sharing of
Appeals case information with the operating divisions and their
compliance programs. However, as discussed earlier, sharing this
information has the potential to improve the operations of the
divisions and, consequently, the quality of their case decisions,
potentially increasing the case sustention rate and taxpayer
satisfaction with the Appeals process while also decreasing the time to
complete an appeal. In addition, sharing information may also improve
Appeals' decision making by, for example, clarifying IRS's
interpretation of new or particularly complex tax laws so that both
Appeals and compliance managers apply them consistently. By working
with the compliance programs, Appeals would have the opportunity to
further refine the project objectives to more specifically identify
which of these possible results-oriented improvements are being sought
by the project. For example, as mentioned earlier, the Merit Systems
Protection Board has set a performance goal of maintaining or reducing
its low percentage of appealed decisions that are reversed or sent back
to the board. To the extent that new objectives are identified, Appeals
and the compliance programs would need to ensure that appropriate
performance measures are developed to track progress toward those
objectives.
Project Is Correcting Flaws in Data, but Sufficient Internal Controls
to Monitor and Verify Data Not Yet Developed:
When we compared data in Appeals' Centralized Database System
(ACDS)[Footnote 22] to documentation in closed Appeal case files, we
found significant error rates related to data that would be used for a
case feedback project. The highest error rates in the fields were
related to the results of an appeal, such as in the revised tax,
revised penalty amounts, or case-closing code field.[Footnote 23] For
example, 14 percent of the cases contained errors in the revised tax
field. These errors related to the outcome data that likely would be
included as part of any feedback information provided to the compliance
programs and would diminish the information's usefulness to compliance
program managers. Further, 12 of 165 cases (7 percent) could not be
analyzed because the files could not be located or essential Appeals
documents were not available.[Footnote 24]
On the basis of error rates identified, we reviewed internal
controls[Footnote 25] for processing case results data and identified
several internal control weaknesses that may have contributed to
inaccurate data in ACDS. For example, we were informed by Appeals that
some appeals officers, who are responsible for working the taxpayers'
case, did not verify that ACDS data, such as the amount of tax or
penalty owed by the taxpayer, was entered into ACDS accurately. Appeals
policy requires that the appeals officers verify the key data in ACDS,
such as the statute of limitations date, when a case is received. When
a case is completed, Appeals procedures require the case manager, who
supervises the appeals officer, to review and sign case-closing
documents, which include data such as the amount of proposed tax or
penalty and case-closing code. The closed-case data are then entered
into the ACDS information system by the Appeals Processing Services
staff. According to Appeals, once the case is sent to Processing
Services for data entry, the appeals officer and case manager generally
do not see the case again and do not know whether the closing data have
been entered into ACDS accurately. Appeals guidance does not require
that the appeals officer or Processing Services staff verify whether
the data were accurately entered.
According to Processing Services staff, appeals officers may not ensure
that case-closing documents are complete. For example, data, such as
the amount of revised tax or penalty (the amount of tax or penalty as
determined by Appeals) or the closing code, may not be entered on the
closing document by the appeals officers. Processing Services staff
said that in these cases, they must review the case file to determine
the correct closing data and enter that data into ACDS. The staff
stated that identifying the correct data may be difficult in complex
cases.
Other internal controls only partly compensate for the lack of data
entry verification. Appeals performs an annual Inventory Validation
Listing process for open cases where critical fields in ACDS are
verified and errors identified are corrected in ACDS. Since only open
cases are reviewed, fields with closing data, such as revised tax,
revised penalty, and closing code, are not reviewed. These closing
fields are critical to the feedback loop process and without
verification inaccurate data could be sent to the compliance programs.
Appeals is making efforts to improve the accuracy of the data in ACDS.
Appeals, for the first time, completed a data reliability study of ACDS
in 2005. This study consisted of a random probability sample of 1,568
Appeals cases where data fields that were considered critical or were
used daily were tested. From the study, Appeals identified data
accuracy and internal control issues that were consistent with our
findings. Appeals found that some fields in ACDS had lower than
expected accuracy rates. For example, the revised tax field for the
Innocent Spouse workstream had an accuracy rate of 71.9 percent, while
the revised penalty field for the Other workstream was 78.1
percent.[Footnote 26] Appeals also identified that improvements were
needed in (1) internal controls including training of Processing
Services staff on ACDS input procedures, (2) ACDS data fields with
lower than expected accuracy rates, and (3) Appeals' section of the
Internal Revenue Manual, which includes guidelines for standard data
accuracy reviews.
Appeals has been revising its database and related data entry
procedures to improve the accuracy of the data in ACDS. Case-closing
documents are being redesigned in a computer-based format so that only
data which are appropriate to the case under appeal could be selected,
thus reducing the potential for errors. Although Appeals is making
efforts to improve the accuracy of the data in ACDS, it has not
completed plans to address all of the identified data accuracy issues.
Appeals will likely continue to experience data accuracy issues unless
it improves its internal controls to verify, on an ongoing basis, the
accuracy of case data entered into ACDS.
Conclusions:
Using the results of Appeals case outcomes has the potential to improve
compliance programs' case results and service to taxpayers with
benefits that could accrue to the divisions, Appeals, and taxpayers.
Nevertheless, given the scope of Appeals' work, careful targeting of
investments to use Appeals information is needed to ensure that the
benefits will be significant enough to justify the costs IRS incurs to
collect and analyze Appeals data and make changes in policies,
procedures, or practices based on those analyses. Because relatively
few compliance program cases may be affected by the use of some Appeals
feedback information, officials need to be judicious in selecting
topical areas to study. Opportunities exist to move beyond professional
judgment in selecting these areas to a more data-driven approach.
However, to maximize the benefits of sharing Appeals information, as
intended by the Commissioner, the officials need to better define what
the program is intended to achieve and how results will be measured.
Appeals and the compliance programs need to enter into an active
partnership to develop results-oriented objectives and associated
performance measures for the feedback project. Finally, the feedback
project must be built on reliable data, which requires that better
internal controls be instituted to drive down the error rates in key
data that will be provided to the compliance programs.
Recommendations:
We are making recommendations to the Commissioner of Internal Revenue
to ensure that the feedback project reaches its maximum potential in
improving case results. Specifically, we recommend that the
Commissioner direct Appeals:
* in partnership with the compliance programs, to analyze Appeals case-
results data, such as the workstream sustention rates, reasons for
nonsustention, or staff hours spent per case, to identify areas in
which improvements are likely to generate the greatest benefits to the
compliance programs, Appeals, and taxpayers;
* in partnership with the compliance programs, to further investigate
the most promising areas and assess whether actions, such as additional
guidance or training, are needed to improve the quality of compliance
programs' case decisions;
* in partnership with the compliance programs, to further develop
results-oriented objectives and associated performance measures for the
feedback project; and:
* to build upon its current efforts to improve the quality of Appeals
information for the feedback project by establishing internal controls
to verify, on an ongoing basis, the accuracy of the data entered into
Appeals information systems on case results.
Agency Comments and Our Evaluation:
The Commissioner of Internal Revenue provided written comments on a
draft of this report in a March 6, 2006, letter which is reprinted in
appendix V. The Commissioner agreed with our recommendations and said
they will help IRS develop a much stronger feedback program.
With regard to the first recommendation, the Commissioner said IRS
would continue quarterly meetings between the operating divisions and
Appeals and report national-level feedback data at least annually to
identify specific compliance programs where shared benefits would be
realized. We agree that these actions would be a first step toward
implementing the recommendation. However, as discussed in the report,
more systematic data analysis would help Appeals and the compliance
programs identify areas more likely to realize the benefits of using
feedback data. As discussed in the Commissioner's comments, this may
involve reviewing external data, such as the National Taxpayer
Advocate's reports, as well as other data to identify areas that may
yield the most savings to IRS if the cases were resolved in the
compliance programs without appeals. The analysis of existing data is a
necessary step toward tailoring analyses to each of IRS's compliance
programs.
As agreed with your offices unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its issue date. At that time, we will send copies of this report
to the Secretary of the Treasury, The Commissioner of Internal Revenue,
and other interested parties. Copies will be made available to others
upon request. This report is available at no charge on GAO's Web site
at [Hyperlink=http://www.gao.gov].
If you or your staff have any questions, please contact me at (202) 512-
9110 or Jonda Van Pelt, Assistant Director, at (415) 904-2186. We can
also be reached by e-mail at brostekm@gao.gov or vanpeltj@gao.gov,
respectively. Contact points for our offices of Congressional Relations
and Public Affairs may be found on the last page of this report. Key
contributors to this report were Carl Barden, Evan Gilman, Leon Green,
Shirley Jones, Laurie King, Ellen Rominger, and Michael Rose.
Signed by:
Michael Brostek:
Director, Tax Issues Strategic Issues Team:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
Our objectives were to determine whether (1) information on Appeals
results has the potential to provide useful feedback to the Internal
Revenue Service (IRS) operating divisions to benefit compliance
programs, Appeals, and taxpayers through better case resolution and (2)
the feedback project was being effectively managed to maximize its
potential to improve IRS's performance and thereby reduce disputes with
taxpayers.
To determine whether information on the results of Appeals cases has
the potential to provide useful feedback and whether the feedback
project is being effectively managed, we interviewed 24 Appeals
executives, managers, and staff who work with compliance program staff
on feedback issues, coordination, or information systems issues. We
also interviewed 58 compliance program executives, managers, and staff
selected by operating division liaisons to represent their compliance
programs because of their familiarity with Appeals issues. We discussed
with these officials the type of feedback data that are being collected
by Appeals and sent to the compliance program officials as well as the
type of feedback data compliance program officials would like to
receive from Appeals. We reviewed documents provided by Appeals on the
feedback project.
We reviewed the Appeals Centralized Database System (ACDS) to determine
whether it contained sufficient case results information. We found that
it did not contain sufficient information for our analyses, such as
whether Appeals agreed with the compliance decision. Therefore, to
develop this information, we selected a random probability sample of
case files to review. The sample was drawn from an initial population
of 103,946 Appeals cases closed in ACDS for fiscal year 2004. However,
since Industry Case (IC) and Coordinated Industry Case (CIC) cases,
which originate from IRS's Large and Mid-Size Business Division (LSMB),
are complex and the supporting documentation is voluminous, we excluded
these 1,323 cases from the population. Therefore, the final population
size was 102,623 cases.
Of the 165 cases selected in our sample, we reviewed 153 cases to
determine the results of the cases. The remaining 12 cases could not be
analyzed because the files could not be located or essential Appeals
documents were not available. We assessed the known characteristics of
the 12 cases not received against those of the 153 received for
potential systematic differences. Based on this nonresponse bias
analysis, we concluded that it was acceptable to treat the 12 cases as
missing at random.
We reviewed documents, such as the Appeals Case Memorandum and the Case
Activity Record, and determined whether the cases were fully sustained,
partially sustained, or not sustained. In determining the extent to
which a case was sustained, we based our decision on the determination
made by Appeals in the Appeals Case Memorandum using the following
scale: "fully sustained" indicated that in our judgment Appeals agreed
with compliance on all issues appealed by the taxpayer; "partially
sustained" indicated that Appeals agreed with at least one but not all
of the issues; and "not sustained" indicated that Appeals did not agree
with any of the issues. We also reviewed the cases to determine the
reasons the cases were not sustained by Appeals. Since cases could
include several compliance issues, there may have been multiple reasons
why a case was not sustained. We recorded each decision and the reason
for the decision cited in the Appeals case file for a case not being
sustained on a data collection instrument (DCI) that we developed. The
analysts who participated in reviewing the case files and recording the
information on the data collection instrument were knowledgeable about
the appeals process and how to interpret the information in the case
files.
To ensure that the data entered on the DCIs conformed to GAO's data
quality standards, each completed DCI was reviewed by at least one
other GAO analyst. The reviewer compared the data recorded on the DCI
to the data in the case files to determine whether he or she concurred
with the interpretation of the case files and the way the data were
recorded on the DCI. When there were differing perspectives, the
analysts met and reconciled them.
Tabulations of the DCI items were automatically generated using a
statistical software package to develop case outcome information. For
these analyses, the computer programs were checked by a second,
independent analyst.
We developed case outcome information for each of the Appeals
workstreams except IC and CIC. For the CDP, Exam/TEGE, and OIC
workstreams, our sample sizes were large enough to generalize the
results separately for each workstream, or to have a margin of error
small enough to produce meaningful workstream estimates.
Because we followed a probability procedure based on random selection,
our sample is only one of a large number of samples that we might have
drawn. Since each sample could have provided different estimates, we
express our confidence in the precision of our particular sample's
results as a 95 percent confidence interval, plus or minus 8 percentage
points. This is the interval that would contain the actual population
value for 95 percent of the samples we could have drawn. For example,
Appeals did not sustain 41 percent of the cases in the sample, which
has a 95 percent confidence interval of 33 percent as a lower bound and
49 percent as an upper bound. Workstream estimates come from subsets of
the sample. Thus workstream-specific estimates have larger confidence
intervals due to the smaller sample size. Tables 4, 5, and 6 present
the confidence intervals for sample data presented in the report.
Table 4: Confidence Intervals for Table 1:
Reason Appeals did not fully sustain compliance decision: Application
of laws or regulations;
Percentage of cases not fully sustained: 52;
Confidence intervals: Lower bound: 40.0;
Confidence intervals: Upper bound: 64.8.
Reason Appeals did not fully sustain compliance decision: Additional
information provided by the taxpayer or not accepted by compliance;
Percentage of cases not fully sustained: 44;
Confidence intervals: Lower bound: 32.1;
Confidence intervals: Upper bound: 56.8.
Reason Appeals did not fully sustain compliance decision: Original
audit work or significant rework by Appeals;
Percentage of cases not fully sustained: 14;
Confidence intervals: Lower bound: 6.7;
Confidence intervals: Upper bound: 25.5.
Reason Appeals did not fully sustain compliance decision: Taxpayer not
responsive to compliance;
Percentage of cases not fully sustained: 13;
Confidence intervals: Lower bound: 5.6;
Confidence intervals: Upper bound: 23.6.
Reason Appeals did not fully sustain compliance decision: Hazards of
litigation;
Percentage of cases not fully sustained: 13;
Confidence intervals: Lower bound: 5.6;
Confidence intervals: Upper bound: 23.6.
Reason Appeals did not fully sustain compliance decision: Appeals
changed collection alternative;
Percentage of cases not fully sustained: 11;
Confidence intervals: Lower bound: 4.5;
Confidence intervals: Upper bound: 21.7.
Source: GAO.
Note: Based on a subset of 63 cases not sustained by Appeals.
[End of table]
Table 5: Confidence Intervals for Table 2:
Appeals workstreams: Offer-in-Compromise;
GAO sample: percentage of Appeals cases not fully sustained: 14;
Number of cases in the sample for this workstream: 28;
Confidence intervals: Lower bound: 4;
Confidence intervals: Upper bound: 33.
Appeals workstreams: Innocent Spouse;
GAO sample: percentage of Appeals cases not fully sustained: 57;
Number of cases in the sample for this workstream: 7;
Confidence intervals: Lower bound: 18;
Confidence intervals: Upper bound: 90.
Appeals workstreams: Collection Due Process;
GAO sample: percentage of Appeals cases not fully sustained: 19;
Number of cases in the sample for this workstream: 53;
Confidence intervals: Lower bound: 9;
Confidence intervals: Upper bound: 32.
Appeals workstreams: Exam/TEGE;
GAO sample: percentage of Appeals cases not fully sustained: 73;
Number of cases in the sample for this workstream: 40;
Confidence intervals: Lower bound: 56;
Confidence intervals: Upper bound: 85.
Appeals workstreams: Penalty Appeals;
GAO sample: percentage of Appeals cases not fully sustained: 69;
Number of cases in the sample for this workstream: 16;
Confidence intervals: Lower bound: 41;
Confidence intervals: Upper bound: 89.
Appeals workstreams: Other;
GAO sample: percentage of Appeals cases not fully sustained: 56;
Number of cases in the sample for this workstream: 9;
Confidence intervals: Lower bound: 21;
Confidence intervals: Upper bound: 86.
Appeals workstreams: Total;
GAO sample: percentage of Appeals cases not fully sustained: 41;
Number of cases in the sample for this workstream: 153;
Confidence intervals: Lower bound: 33;
Confidence intervals: Upper bound: 49.
Source: GAO.
[End of table]
Table 6: Confidence Intervals for Table 3:
Reasons Appeals did not fully sustain compliance decision: Application
of laws and regulations;
Penalty Appeals: Percentage not sustained: 9.7;
Penalty Appeals: Confidence interval: Lower bound: 4.5;
Penalty Appeals: Confidence interval: Upper bound: 17.6;
Exam/TEGE: Percentage not sustained: 12.9;
Exam/TEGE: Confidence interval: Lower bound: 6.8;
Exam/TEGE: Confidence interval: Upper bound: 21.5.
Reasons Appeals did not fully sustain compliance decision: Additional
information provided by the taxpayer or not accepted by compliance;
Penalty Appeals: Percentage not sustained: 1.1;
Penalty Appeals: Confidence interval: Lower bound: N/A;
Penalty Appeals: Confidence interval: Upper bound: N/A;
Exam/TEGE: Percentage not sustained: 20.4;
Exam/TEGE: Confidence interval: Lower bound: 12.8;
Exam/ TEGE: Confidence interval: Upper bound: 30.1.
Source: GAO.
Note: N/A means not applicable because the confidence interval was not
computed.
[End of table]
To determine how effectively the feedback project was being managed, we
reviewed documents supplied by Appeals and compliance program
officials, such as meeting minutes for the advisory boards and
strategic planning documents. We also interviewed these officials and
reviewed our prior work on best practices for developing information
that can be used to improve agency performance.
To compute appeal rates, we compared compliance cases closed in fiscal
year 2003 by workstream to the Appeals cases closed in fiscal year 2004. Since Appeals typically required about a year to complete a case, the 2004 Appeals closings were cases that were most likely closed by
compliance programs during 2003. Further, IRS uses a similar approach
to compute audit rates. To identify the number of compliance cases by
workstream, we used data published in IRS's fiscal year 2003 Databook.
Data on cases closed for the Innocent Spouse and Offer-in-Compromise
workstreams was not available in the Databook and was provided by IRS
staff.
Data Reliability:
We assessed whether the case results data contained in ACDS were
sufficiently reliable for our use. We selected the first 100 cases from
our random sample of 165 cases to make this determination. We
interviewed knowledgeable Appeals officials about the data, performed
electronic testing of relevant data fields for obvious errors in
accuracy and completeness, and collected and reviewed documentation
about the data and the system. We also reviewed prior Treasury
Inspector General for Tax Administration reports.
Of the 100 cases selected for our sample, we reviewed 92 cases from all
of the Appeals workstreams except as mentioned earlier, the IC and CIC
workstreams. The remaining 8 cases could not be analyzed because
essential Appeal documents were not available. We compared documents in
closed Appeals cases, such as the Appeals Case Memorandum, to data in
ACDS. However, Appeals did not always provide documentation for the
basis of the compliance determination; therefore, in some cases, we
were unable to determine if data, such as the amount of tax proposed by
compliance, were accurate.
We had Appeals verify data errors in fields that were specific to case
results information, such as the amount of revised tax and penalty, as
well as the closing code. Due to the high error rate of some data
fields in our sample, we reviewed internal controls used in the
processing of case results data at one Appeals area office. This review
consisted of observation and inquiry of Appeals officials on Appeals'
case processing procedures and review of Appeals documentation. We also
spoke to officials in Appeals headquarters concerning weaknesses
identified in Appeals' internal controls.
On the basis of our data reliability review of ACDS, we determined that
data in ACDS were not sufficiently reliable for our use. Instead of
relying on that data, we used data developed from our sample of Appeals
cases and continued our analyses of Appeals' internal controls.
We conducted our review at Appeals headquarters in Washington, D.C.,
and one Appeals area office from October 2004 through October 2005 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Appeals Workstreams:
Appeals' workload is organized into eight workstreams. These
workstreams include cases that have similar characteristics rather than
reflecting the IRS operating division where they originated. For
example, cases in the Collection Due Process workstream include only
appeals by taxpayers under provisions of the IRS Restructuring and
Reform Act 1998, which authorizes an independent review by Appeals of
proposed levies and filed liens. These cases could originate in either
the Wage and Investment Division or the Small Business and Self-
Employed Division, since either division could propose a levy or file a
lien. Other workstreams include a wide range of cases from across IRS
operating divisions. The Exam/TEGE workstream includes appeals for
compliance actions, including recommended assessments and proposed
penalties originating from much of IRS's reporting and filing
compliance program, with the exclusion of LMSB cases. These appeals can
include diverse issues, such as recommended assessments related to the
Earned Income Tax Credit or large charitable organizations, such as
universities or hospitals. During fiscal year 2004, Appeals completed
nearly 104,000 cases. Table 7 describes these workstreams and the IRS
operating divisions where these cases where proposed.
Table 7: Description of Appeals Workstreams:
Appeals workstream: Collection Due Process (CDP);
Definition: The IRS Restructuring and Reform Act of 1998 authorized an
independent review by Appeals and by the courts of proposed levies and
filed liens. The taxpayers, under some circumstances, could have the
original assessment reviewed and can request an appeal for liens and
levies that are past the 30-day period;
Originating IRS division (s): SB/SE; W&I;
Appeals cases closed in fiscal year 2004: 32,226;
Percentage of total cases: 31.0%.
Appeals workstream: Exam/TEGE;
Definition: This workstream includes appeals for tax disputes
originating with three of four IRS operating divisions' examination
functions. The workstream does not include cases originating in LMSB's
Industry Case and Coordinated Industry Case programs. This workstream
includes cases from a wide range of major IRS compliance programs,
including the campus compliance, field examination, exempt organization
examinations, employee plans examinations, international issues
examinations, tax shelters, and examinations of excise, employment, and
estate and gift tax returns;
Originating IRS division (s): W&I; SB/SE; TE/GE;
Appeals cases closed in fiscal year 2004: 28,592;
Percentage of total cases: 27.5%.
Appeals workstream: Offer-in-Compromise (OIC);
Definition: The Internal Revenue Code authorizes the Secretary of the
Treasury to compromise tax debts prior to reference to the Department
of Justice for prosecution or defense. Under current regulations, debts
may be compromised if there is doubt as to liability, doubt as to
collectibility, and for effective tax administration. Appeals cases in
this workstream are primarily reviewed by SBSE's centralized OIC
collection functions at the Brookhaven and Memphis campuses since offer
cases may include taxpayers from each of IRS's four operating divisions;
Originating IRS division (s): SB/SE; LMSB; W&I; TE/GE;
Appeals cases closed in fiscal year 2004: 17,887;
Percentage of total cases: 17.2%.
Appeals workstream: Penalty Appeals;
Definition: Most of the requests in this workstream relate to requests
for abatement of penalties for a taxpayer's failure to file, failure to
pay, and failure to deposit. Typically, these are penalties generated
through automated compliance tests;
Originating IRS division (s): W&I; SB/SE; TE/GE; LMSB;
Appeals cases closed in fiscal year 2004: 14,647;
Percentage of total cases: 14.1%.
Appeals workstream: Innocent Spouse;
Definition: Under the Innocent Spouse program, one spouse requests
relief from a joint tax liability after assessment because (1) a joint
return had an understatement of tax due to erroneous items of the
nonrequesting spouse, (2) the requesting spouse did not know and had no
reason to know there was a tax understatement at the time the return
was signed, and (3) taking into account all facts and circumstances,
holding the requester for relief liable for the tax would be unfair.
Appeals reviews determinations after rejection by W&I;
Originating IRS division (s): W&I;
Appeals cases closed in fiscal year 2004: 4,713;
Percentage of total cases: 4.5%.
Appeals workstream: Other;
Definition: These include appeals for several other tax disputes that
are not included in other Appeals workstreams. These cases include the
Collection Appeals program cases, trust fund recovery penalty cases,
requests for abatement of interest, and tax disclosure cases;
Originating IRS division (s): W&I; SB/SE; LMSB; TE/GE; Disclosure;
Appeals cases closed in fiscal year 2004: 4,558;
Percentage of total cases: 4.4%.
Appeals workstream: Coordinated Industry Case;
Definition: These are appeals related to the recommended assessment of
additional tax and penalties for the largest corporate taxpayers in the
United States. These taxpayers have been audited by a team of revenue
agents rather than a single agent.[A];
Originating IRS division (s): LMSB;
Appeals cases closed in fiscal year 2004: 653;
Percentage of total cases: .6%.
Appeals workstream: Industry Case;
Definition: These are appeals related to the recommended assessment of
additional tax and penalties for corporations with $10 million or more
in assets that are not in the Coordinated Industry Case program.[A];
Originating IRS division (s): LMSB;
Appeals cases closed in fiscal year 2004: 670;
Percentage of total cases: .6%
Appeals workstream: Total cases closed by Appeals;
Appeals cases closed in fiscal year 2004: 103,946;
Percentage of total cases: 100%.
Source: GAO.
[A] Appeals cases from the Coordinated Industry Case and Industry Case
program were not included in our sample.
[End of table]
[End of section]
Appendix III: Appeal Rates:
Taxpayers in each workstream requested Appeals of recommended
assessments or other compliance actions, such as proposed levies and
filed liens, at widely differing rates. To compute the appeal rate for
each workstream, we compared the number of compliance cases closed for
each workstream to the number of cases Appeals closed. We compared
fiscal year 2003 compliance case closings to fiscal year 2004 Appeals
case closings because Appeals averaged 260 calendar days during fiscal
year 2004 to complete its work on a case.[Footnote 27] For example, as
reported in table 16 of the IRS Databook for 2003, during fiscal year
2003, IRS filed 548,683 notices of federal tax liens, served 1,680,844
notices of levy, and made 399 seizures for a total of 2,229,926
compliance actions. Each of these actions could be the basis for a CDP
appeal. During fiscal year 2004, Appeals completed work on 32,226 CDP
cases, for an Appeal rate of 1.445 percent or 1 percent.
Table 8: Appeal Rates by Workstream, Fiscal Year 2004:
Appeals workstream: CIC;
Number of compliance cases closed in fiscal year 2003: 2,287;
Number of cases closed by Appeals in fiscal year 2004: 653;
Appeal rate: 29%.
Appeals workstream: IC;
Number of compliance cases closed in fiscal year 2003: 4,769;
Number of cases closed by Appeals in fiscal year 2004: 670;
Appeal rate: 14%.
Appeals workstream: OIC[A];
Number of compliance cases closed in fiscal year 2003: 136,822;
Number of cases closed by Appeals in fiscal year 2004: 17,887;
Appeal rate: 13%.
Appeals workstream: IS[B];
Number of compliance cases closed in fiscal year 2003: 57,606;
Number of cases closed by Appeals in fiscal year 2004: 4,713;
Appeal rate: 8%.
Appeals workstream: CDP[C];
Number of compliance cases closed in fiscal year 2003: 2,229,926;
Number of cases closed by Appeals in fiscal year 2004: 32,226;
Appeal rate: 1%.
Appeals workstream: Exam/TEGE[D];
Number of compliance cases closed in fiscal year 2003: 6,926,956;
Number of cases closed by Appeals in fiscal year 2004: 28,592;
Appeal rate: .4%.
Appeals workstream: Penalty Appeals[E];
Number of compliance cases closed in fiscal year 2003: 17,827,467;
Number of cases closed by Appeals in fiscal year 2004: 14,647;
Appeal rate: .1%.
Appeals workstream: Other[F];
Number of compliance cases closed in fiscal year 2003: 6,078,884;
Number of cases closed by Appeals in fiscal year 2004: 4,558;
Appeal rate: .1%.
Appeals workstream: Total;
Number of compliance cases closed in fiscal year 2003: 33,264,717;
Number of cases closed by Appeals in fiscal year 2004: 103,946;
Appeal rate: .3%.
Sources: GAO analysis of IRS data.
Note: Compliance cases closed in fiscal year 2003 are most likely to
have been closed by Appeals during fiscal year 2004.
[A] Offers received in 2003;
offer closing data not available.
[B] Case closing data provided by IRS.
[C] Number of liens filed and levy notices issued, rather than cases
closed.
[D] Total examinations, less IC and CIC examinations, plus Information
Returns program cases, EP/EO examinations, and EITC notices.
[E] Excluding employment tax penalties.
[F] Total employment tax penalties. Total compliance cases closed in
fiscal year 2003 does not include disclosure appeals and abatement of
interest. Data on these compliance actions would not have a material
effect on the computation of the appeal rate.
[End of table]
Other approaches could be used to compute appeal rates. Our analysis
used compliance cases closed as the basis for measuring appeal rates
because (1) a uniform, published source of data was available and
provided data on six of the eight Appeals workstreams and (2) it
broadly compares IRS compliance programs to the Appeals program.
Another approach for measuring appeal rates, for example, could use
only cases closed where IRS recommended an additional tax assessment
and not include cases where no tax was proposed, because taxpayers
would not have a basis for requesting an appeal. In some programs this
difference may be substantial. For example, in the Offer-in-Compromise
program, according to unpublished data provided by IRS, 58 percent of
fiscal year 2003 Offer-in-Compromise cases were closed by Compliance
because the offer was not processable or was returned to the taxpayer.
Accordingly, the taxpayer did not have a basis for an appeal.
Eliminating these cases from the Offer-In-Compromise cases closed in
2003 would more than double the appeal rate from 13 percent to 31
percent.
However, limited data are available to use other approaches for
computing appeal rates. For example, about 30 percent of the cases
closed in Appeals' second largest workstream, Exam/TEGE, originated
from the Earned Income Tax Credit and the Automated Underreporter
programs. Data were not published on the proportion of these cases that
were closed with recommended assessments.
[End of section]
Appendix IV: Comments from the Commissioner of Internal Revenue:
Department Of The Treasury:
Internal Revenue Service:
Washington, D.C. 20224:
Commissioner:
March 6, 2006:
Mr. Michael Brostek:
Director, Tax Issues:
Strategic Issues Team:
United States Government Accountability Office:
Washington, D.C. 20548:
Dear Mr. Brostek:
Thank you for the opportunity to respond to your draft audit report
entitled Tax Administration: Opportunities to Improve Compliance
Decisions to Taxpayers through Enhancements to Appeals' Feedback
Project (GAO-06-396). Your audit report is very timely since we are in
the early stages of program development for the Appeals feedback loop
process. Your recommendations will help us develop a stronger feedback
process.
Your report provides an assessment of two issues: 1) whether
information on Appeals results would provide useful feedback to IRS
operating divisions and would benefit its compliance programs and 2)
whether the feedback process is being effectively managed to maximize
its potential to improve IRS's performance and reduce disputes with
taxpayers.
We agree with the four audit recommendations. Our feedback process is
built around on-going interactions, meetings and discussions between
Appeals and each operating division. Adopting your recommendations will
allow us to strengthen the process by which we provide both individual
case resolution information as well as program level-data.
I am pleased your report reflects that no one approach for feedback
will be possible since the issues and cases vary so significantly by
operating division. This supports our plan to tailor feedback to each
operating division. We will work and resolve issues through an advisory
board process.
Our comments on the draft report's specific recommendations are
enclosed. If you have any questions, please contact Karen Ammons,
Deputy Chief, Appeals at (202) 435-5600.
Sincerely,
Signed by:
Mark W. Everson:
Enclosure:
Our comments on the report's specific recommendations follow:
Recommendation 1: Perform an initial analysis of feedback data to
identify areas most likely to generate benefits for compliance
programs, Appeals, and taxpayers.
To address your recommendation we will continue quarterly Operating
Division/ Appeals Board meetings and report national level feedback
loop data at least annually to identify specific compliance programs
where shared benefits would be realized.
Recommendation 2: Investigate whether additional actions are needed to
improve the consistency of decisions.
The Advisory Board is the forum where we explore additional actions
needed to improve consistency of decisions. Through quarterly board
meetings we will identify areas where joint Appeals/ operating division
program reviews and/or data analysis will serve as tools to identify
areas for improvement. The advisory boards will also review external
data sources, such as the National Taxpayer Advocates' prior year
reports to the Congress and customer satisfaction survey data, to help
identify programs which may benefit from more extensive review.
In addition, Appeals is in the process of automating feedback data and
reports. Once implemented the Advisory Boards will review the data for
each operating division and use it to guide and adjust program
operations.
Recommendation 3: Further develop results-oriented objectives and
measures for the feedback project.
We agree a shared cross-functional set of objectives and performance
measures are necessary for the success of the Feedback Project. From
analysis of the feedback data, the cross-functional Advisory Boards
will set specific Feedback Project objectives for the feedback project
for the coming year. The board will target the most critical types of
cases having benefits to both the operating divisions and Appeals and
identify the performance measures for the following year's improvement
activities.
Recommendation 4: Build upon current efforts to improve feedback data
by establishing internal controls to verify data accuracy on an ongoing
basis.
Appeals has just completed an extensive data accuracy review of its
Appeals Centralized Database System (ACDS) resulting in a comprehensive
report. This review was conducted in conjunction with the Office of
Program Evaluation and Risk Analysis (OPERA) using valid sampling
methodology. This review and report produced a number of
recommendations which Appeals is implementing and will enhance data
accuracy and improve the data reliability. Some of the most important
recommendations Appeals is adopting are:
* Create standard data accuracy reviews by technical and managerial
employees as well as headquarters analysts during operational reviews.
* Create specific ACDS data validation programs to prevent data entry
errors.
* Establish clear guidelines on data accuracy procedures.
[End of section]
Related GAO Products:
Tax Administration, Planning for IRS's Enforcement Process Changes
Included Many Key Steps but Can Be Improved. G [Hyperlink, http://
www.gao.gov/cgi-bin/getrpt?GAO-04-287] AO-04-287. Washington, D.C.:
January 20, 2004.
Tax Administration, IRS Needs to Further Refine Its Tax Filing Season
Performance Measures. GAO-03-143. Washington, D.C.: November 22, 2002.
IRS Modernization: IRS Should Enhance It's Performance Management
System. GAO-01-234. Washington, D.C.: February 23, 2001.
Standards for Internal Control in the Federal Government. GAO/AIMD-00-
21.3.1. Washington, D.C.: November 1999.
Executive Guide: Measuring Performance and Demonstrating Results of
Information Technology Investments. GAO/AIMD-98-89. Washington, D.C.:
March 1998.
Executive Guide: Effectively Implementing the Government Performance
and Results Act. GAO/GGD-96-118. Washington, D.C.: June 1996.
(450368):
FOOTNOTES
[1] Compliance programs include numerous IRS examination programs,
which may assess additional taxes, and its collection programs, which
may take enforcement actions (e.g., liens, levies, seizures) to collect
delinquent taxes. Each IRS operating division manages multiple
compliance programs.
[2] This estimate is based on our random sample. We are 95 percent
confident that the actual proportion is between 33 percent and 49
percent.
[3] Fifty-two percent of the cases in our sample were not fully
sustained for this reason. We are 95 percent confident that the actual
proportion is between 40.0 percent and 64.8 percent.
[4] Sustention rate is the proportion of cases sent to Appeals that are
not changed following review.
[5] Of the cases in our sample, 14.1 percent identified errors in the
revised tax field (Appeals' determination of the tax liability). We are
95 percent confident that the actual proportion is between 7.7 percent
and 23.0 percent.
[6] Under the Internal Revenue Code, "levy" is defined as the seizure
of a taxpayer's assets to satisfy a tax delinquency. A "lien" is a
legal claim, filed in accordance with state property law that attaches
to property to secure payment of a debt.
[7] 26 CFR 601.106 and Internal Revenue Code sections 6320 and 6330.
[8] Hazards of litigation are a substantial uncertainty (1) as to how
the courts would interpret and apply the law, (2) about the court's
likely factual findings, or (3) about the admissibility or weight that
would be given to a specific item of evidence. 26 CFR 601.106(f)2 and
Internal Revenue Manual section 8.6.1.3.1. Hazards of litigation are
not considered for collection cases.
[9] Appeals is the only IRS administrative function with the authority
to consider settlements of tax controversies and as such has the
primary responsibility to resolve these disputes without litigation to
the maximum extent possible. Internal Revenue Manual section 1.2.1.8.4.
[10] Collection Due Process cases must be considered by Appeals before
review by a court.
[11] 26 CFR 601.106(d) 3(iii) and Internal Revenue Manual section
8.4.1.2.
[12] Generally these include requests for abatement of interest, Trust
Fund Recovery Penalty cases, the Collection Appeals program, and
Disclosure issues.
[13] Cases may have multiple reasons for closing because a case may
include more than one possible instance of noncompliance. Generally,
each issue is analyzed separately on its merits and the appeals
determination may be based on separate reasons for each issue.
[14] The CIC program examines the largest corporate taxpayers in the
United States using a team of revenue agents rather than a single
agent.
[15] The IC program examines corporations with $10 million or more in
assets that are not in the Coordinated Industry program.
[16] Our sample results for Innocent Spouse, Penalty Appeals, and Other
are not statistically generalizable because the sample sizes were not
large enough. Consequently, these workstream results apply only to
cases in our sample.
[17] Estimate is based on our sample of Appeals cases closed in fiscal
year 2004. We estimate the savings would be 6.7 staff years and are 95
percent confident that the savings would be between 1.1 and 12.3 staff
years.
[18] Estimate is based on our sample of Appeals cases closed in fiscal
year 2004. We estimate the savings would be 16.7 staff years and are 95
percent confident that the savings are between 12.4 and 21.1 staff
years.
[19] ACMs document Appeals' decision in a case and explain why Appeals
decided to either sustain or overturn compliance decisions. ACMs
typically include an analysis of the facts and the applicable tax laws
and regulations for the case.
[20] The EITC is a refundable tax credit originally intended to offset
the burden of Social Security taxes and provide a work incentive for
low-income taxpayers. The IC, CIC, Innocent Spouse, Collection Due
Process, and Offer-in-Compromise programs are described in appendix II.
[21] GAO, Executive Guide: Effectively Implementing the Government
Performance and Results Act, GAO/GGD-96-118 (Washington, D.C.: June
1996), p. 13.
[22] ACDS is a computer-based system used to control and track cases
throughout the appeal process. It generates Appeals management
statistics and reports.
[23] The case-closing field primarily describes whether the taxpayer
agreed or disagreed with Appeals' determination and whether the case
was appealed to court. For some workstreams, closing codes also
describe whether Appeals sustained the case.
[24] Another ongoing assignment also has not located a significant
percentage of Appeals files. A subsequent study will more fully analyze
the issues related to unavailable case files.
[25] Agencies establish internal controls to prevent and detect errors
and fraud.
[26] Appeals is 95 percent confident that for the revised tax field,
the actual proportion is between 65.0 and 78.7 percent, and for the
revised penalty field, the actual proportion is between 71.9 and 84.3
percent.
[27] This computation also follows the approach that IRS uses to
compute audit rates. For that computation, IRS compares the number of
returns filed to the number of audits closed in the following year.
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E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800
U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548:
