User Fees
Additional Guidance and Documentation Could Further Strengthen IRS's Biennial Review of Fees Gao ID: GAO-12-193 November 22, 2011The President's fiscal year 2012 budget proposal requests $13.6 billion to fund the Internal Revenue Service (IRS), including $204 million in spending funded through user fee collections. Well-designed and well-implemented user fees can reduce taxpayer burden by funding portions of IRS services that provide special benefits to users beyond what is normally provided to the public. As such, GAO was asked to (1) describe the types and amounts of IRS user fees and how IRS collects and uses them, (2) assess how IRS sets and reviews existing user fees, and (3) assess how IRS identifies additional areas where new fees could be justified. GAO reviewed relevant laws, guidance, and literature on user fee design and implementation. GAO reviewed IRS documents and cost estimates and interviewed IRS officials in the Chief Financial Officer's (CFO) office and program divisions.
Although user fee collections fund less than 2 percent of IRS's budget, fee collections are expected to reach $309 million in fiscal year 2012 and recently involved nearly 20 million transactions with taxpayers. IRS charges user fees for various activities that include assisting taxpayers in complying with their tax liabilities, clarifying the application of the tax code to particular circumstances, and ensuring the quality of paid preparers of tax returns, among others. In fiscal year 2010, two fees accounted for more than 80 percent of total retained user fee collections: (1) Installment agreements (IA): Provides taxpayers who cannot pay their full tax liability the option to pay their full tax liability with smaller monthly payments over a period of time for up to 60 months. This service is offered to most taxpayers for $105 with lower rates for low-income taxpayers and those who opt for a direct debit agreement. This service generated $198 million, or 68 percent of IRS's total retained user fee collections. (2) Income verification express services (IVES): Provides 2-business-day processing and electronic delivery of tax return transcripts for users, such as mortgage lenders and other financial market entities, to confirm the income of a borrower (taxpayer) during the processing of a loan application. IRS charged a fee of $2.25 for each IVES transcript request. This service generated $40 million, or 14 percent of total retained fee collections. IRS conducts a review of its user fees biennially (or every 2 years) and has taken steps to improve its estimates of the cost of providing its user fee services, with particular attention to its largest fee. For example, IRS hired a contractor to evaluate, update, and simplify the IA user fee cost estimate. However, for a few of IRS's smaller fee programs, GAO found that IRS omitted fees from its biennial review, did not clearly document assumptions to be used in some cost estimates, and lacked documentation of factors considered in setting some fees. For example, one user fee has not been reviewed or updated since fiscal year 1996, while program managers for another user fee were uncertain about salary assumptions. GAO also found that while officials stated that they consider factors other than cost (such as potential effects on taxpayer compliance and administrative burden) in setting fee rates, they did not thoroughly document these factors or corroborate anecdotal support with analysis. Finally, GAO found that IRS did not fully document final decisions made on fee rates as a result of its biennial review. IRS has implemented several new user fees in recent years, but it may not be taking full advantage of its process for identifying new user fees. As directed by Office of Management and Budget Circular A-25, IRS's CFO requests that each division review its programs and provide proposals for new user fees on a biennial basis. However, officials in some divisions or offices said that they had no formal solicitation process for employees to suggest new user fee proposals. Further, IRS does not clearly refer staff to consider established guidelines identified in the Internal Revenue Manual or other resources when identifying potential new user fees during its biennial review. GAO was unable to determine the extent to which IRS staff considered these guidelines. GAO recommends that the Commissioner of Internal Revenue take steps to include certain additional fees in IRS's biennial review, improve guidance on estimating costs of user fees, and improve the documentation of assumptions used, factors considered, and decisions made during the setting and reviewing of existing fees. In addition, steps should be taken to provide clear, specific, and direct guidelines for IRS employees and managers to follow in identifying potential new fee opportunities. In written comments, IRS agreed with our recommendations.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: James R. White Team: Government Accountability Office: Strategic Issues Phone: (202) 512-5594GAO-12-193, User Fees: Additional Guidance and Documentation Could Further Strengthen IRS's Biennial Review of Fees
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United States Government Accountability Office:
GAO:
Report to the Subcommittee on Financial Services and General
Government, Committee on Appropriations, U.S. Senate:
November 2011:
User Fees:
Additional Guidance and Documentation Could Further Strengthen IRS's
Biennial Review of Fees:
GAO-12-193:
GAO Highlights:
Highlights of GAO-12-193, a report to the Subcommittee on Financial
Services and General Government, Committee on Appropriations, U.S.
Senate.
Why GAO Did This Study:
The President‘s fiscal year 2012 budget proposal requests $13.6
billion to fund the Internal Revenue Service (IRS), including $204
million in spending funded through user fee collections. Well-designed
and well-implemented user fees can reduce taxpayer burden by funding
portions of IRS services that provide special benefits to users beyond
what is normally provided to the public. As such, GAO was asked to (1)
describe the types and amounts of IRS user fees and how IRS collects
and uses them, (2) assess how IRS sets and reviews existing user fees,
and (3) assess how IRS identifies additional areas where new fees
could be justified. GAO reviewed relevant laws, guidance, and
literature on user fee design and implementation. GAO reviewed IRS
documents and cost estimates and interviewed IRS officials in the
Chief Financial Officer‘s (CFO) office and program divisions.
What GAO Found:
Although user fee collections fund less than 2 percent of IRS‘s
budget, fee collections are expected to reach $309 million in fiscal
year 2012 and recently involved nearly 20 million transactions with
taxpayers. IRS charges user fees for various activities that include
assisting taxpayers in complying with their tax liabilities,
clarifying the application of the tax code to particular
circumstances, and ensuring the quality of paid preparers of tax
returns, among others. In fiscal year 2010, two fees accounted for
more than 80 percent of total retained user fee collections:
* Installment agreements (IA): Provides taxpayers who cannot pay their
full tax liability the option to pay their full tax liability with
smaller monthly payments over a period of time for up to 60 months.
This service is offered to most taxpayers for $105 with lower rates
for low-income taxpayers and those who opt for a direct debit
agreement. This service generated $198 million, or 68 percent of IRS‘s
total retained user fee collections.
* Income verification express services (IVES): Provides 2-business-day
processing and electronic delivery of tax return transcripts for
users, such as mortgage lenders and other financial market entities,
to confirm the income of a borrower (taxpayer) during the processing
of a loan application. IRS charged a fee of $2.25 for each IVES
transcript request. This service generated $40 million, or 14 percent
of total retained fee collections.
IRS conducts a review of its user fees biennially (or every 2 years)
and has taken steps to improve its estimates of the cost of providing
its user fee services, with particular attention to its largest fee.
For example, IRS hired a contractor to evaluate, update, and simplify
the IA user fee cost estimate. However, for a few of IRS‘s smaller fee
programs, GAO found that IRS omitted fees from its biennial review,
did not clearly document assumptions to be used in some cost
estimates, and lacked documentation of factors considered in setting
some fees. For example, one user fee has not been reviewed or updated
since fiscal year 1996, while program managers for another user fee
were uncertain about salary assumptions. GAO also found that while
officials stated that they consider factors other than cost (such as
potential effects on taxpayer compliance and administrative burden) in
setting fee rates, they did not thoroughly document these factors or
corroborate anecdotal support with analysis. Finally, GAO found that
IRS did not fully document final decisions made on fee rates as a
result of its biennial review.
IRS has implemented several new user fees in recent years, but it may
not be taking full advantage of its process for identifying new user
fees. As directed by Office of Management and Budget Circular A-25, IRS‘
s CFO requests that each division review its programs and provide
proposals for new user fees on a biennial basis. However, officials in
some divisions or offices said that they had no formal solicitation
process for employees to suggest new user fee proposals. Further, IRS
does not clearly refer staff to consider established guidelines
identified in the Internal Revenue Manual or other resources when
identifying potential new user fees during its biennial review. GAO
was unable to determine the extent to which IRS staff considered these
guidelines.
What GAO Recommends:
GAO recommends that the Commissioner of Internal Revenue take steps to
include certain additional fees in IRS‘s biennial review, improve
guidance on estimating costs of user fees, and improve the
documentation of assumptions used, factors considered, and decisions
made during the setting and reviewing of existing fees. In addition,
steps should be taken to provide clear, specific, and direct
guidelines for IRS employees and managers to follow in identifying
potential new fee opportunities. In written comments, IRS agreed with
our recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-12-193]. For more
information, contact James R. White at (202) 512-9110 or
whitej@gao.gov.
[End of section]
Contents:
Letter:
Background:
IRS User Fee Collections, Associated Service Volume, and Carryover
Amounts Have Increased with Most of the Revenue Used to Fund Taxpayer
Services:
IRS Reviews User Fees Biennially but Does Not Clearly Document Some
Processes or Decisions:
IRS Has Implemented New User Fees, but the Extent to Which Guidelines
Were Used to Assess Potential Fee Opportunities Is Unclear:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: IRS User Fee Descriptions and Amounts:
Appendix III: Comments from the Internal Revenue Service:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Services for Which User Fees Are Charged, by IRS Business
Division or Program Office:
Table 2: IRS User Fees by Authority to Charge a Fee and Authority to
Provide Goods or Services:
Table 3: IRS's Total Retained User Fee Collections, Fiscal Years 2005
through 2010:
Table 4: IRS User Fee Volume, Fiscal Years 2005 through 2010:
Table 5: Carryover of IRS Miscellaneous Retained Fees, Fiscal Years
2008 through 2010:
Table 6: Transfers from IRS Miscellaneous Retained Fees Fund to IRS
Appropriations Accounts, Fiscal Years 2008 through 2010:
Table 7: Selected Guidelines to Consider When Establishing New User
Fees:
Abbreviations:
CADE 2: Customer Account Data Engine 2:
CFO: Chief Financial Officer:
FET: foreign insurance excise tax:
FOIA: Freedom of Information Act:
IA: installment agreement:
IOAA: Independent Offices Appropriation Act:
IRS: Internal Revenue Service:
IVES: income verification express service:
LB&I: Large Business and International:
MRF: Miscellaneous Retained Fees:
OIC: offer in compromise:
OMB: Office of Management and Budget:
PFA: pre-filing agreement:
PTIN: preparer tax identification number:
SB/SE: Small Business and Self-Employed:
SEE: special enrollment examination:
SFFAS: Statement of Federal Financial Accounting Standards:
TE/GE: Tax Exempt and Government Entities:
W&I: Wage and Investment:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
November 22, 2011:
The Honorable Richard Durbin:
Chairman:
The Honorable Jerry Moran:
Ranking Member:
Subcommittee on Financial Services and General Government:
Committee on Appropriations:
United States Senate:
The President's fiscal year 2012 budget proposal requests $13.6
billion to fund the Internal Revenue Service's (IRS) administration of
the tax laws, which includes providing taxpayer services to make
voluntary compliance easier and enforcing tax laws to ensure that
taxpayers meet their tax obligations. This amount includes $204
million funded through user fee collections. IRS collects user fees to
help offset the costs of providing services to specific beneficiaries,
including services that help taxpayers meet their tax obligations,
such as installment agreements and offers in compromise, among
others.[Footnote 1] Although user fees fund less than 2 percent of
IRS's fiscal year 2012 budget request, fee collections are expected to
reach approximately $309 million in fiscal year 2012 and recently
approached nearly 20 million transactions with taxpayers.[Footnote 2]
Well-designed and well-implemented user fees can fund IRS services
that provide special benefits beyond those provided to the general
public and thereby reduce the burden on taxpayers not using those
services. The Office of Management and Budget (OMB) provides guidance
on how executive branch agencies should set and implement user fees
through Circular No. A-25.[Footnote 3] Further, the circular and the
Chief Financial Officers (CFO) Act of 1990 direct federal agencies to
review their user fees every 2 years and make recommendations about
the fees charged.[Footnote 4] The circular also states that each
agency should review its programs to determine whether it could charge
new fees for its services, noting that if imposing such fees is
prohibited or restricted by law, agencies should recommend legislative
changes as appropriate.[Footnote 5]
In response to your request, this report (1) describes the types and
amounts of IRS user fees and how IRS collects and uses them, (2)
assesses how IRS sets and reviews existing user fees, and (3) assesses
how IRS identifies additional areas where new user fees could be
justified.
To address these objectives, we reviewed user fee legislation and
guidance, agency and budget documents, prior GAO work and other
relevant literature on user fee design and implementation
characteristics, and cost estimates for user fees that were included
in IRS's biennial review process. We also interviewed and obtained
written responses from IRS officials in the various divisions and
offices who were responsible for overseeing the various user fees. We
obtained information about IRS's internal controls for the revenue and
volume data we used and determined that the data were sufficiently
reliable for the purposes of this report. For further details on our
scope and methodology, see appendix I.
We conducted this performance audit from February 2011 through
November 2011 in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform
the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
Background:
User Fee Definition and Design Principles:
A user fee is a charge assessed to beneficiaries for goods or services
provided by the federal government.[Footnote 6] In general, a user fee
is related to some voluntary transaction or request for government
goods or services--such as a passport or admission to a national park--
above and beyond what is normally provided to the public. Taxes, on
the other hand, arise from the government's sovereign power to raise
revenue and need not be related to any specific benefit. Unlike user
fees, taxes are generally imposed to raise revenue to fund benefits
for the general public, such as national defense.
GAO has published a guide on the principles of effective user fee
design.[Footnote 7] In this guide, we focused on criteria that have
often been used to assess user fees and other government collections.
* Efficiency is whether the fee ensures that the government is
providing the amount of the service that is economically desirable.
Efficient fees increase awareness of the costs of government services,
creating incentives to reduce costs where possible. In addition,
efficient fees act as a measure of the service's worth while meeting
demand for the service.
* Equity is the extent to which everyone is considered to be paying a
fair share (whether fairness is based on program use or the user's
ability to pay).
* Revenue adequacy is the extent to which the fee covers the intended
share of service costs, and whether the fee revenue is stable enough
to withstand short-term fluctuations in economic activity.
* Administrative burden is the cost of collecting and enforcing the
fee, as well as any costs users incur to pay the fee.
* These criteria interact and are often in conflict with each other;
as such, trade-offs exist when considering among the criteria to
design a fee. The weight that different policymakers may place on
different criteria will vary, depending on how they value different
attributes. To that end, understanding the trade-offs associated with
different aspects of a fee's design can provide decision makers with
better information and support more robust deliberations about user
fee financing.
Organization of IRS User Fees:
IRS charges user fees for various services that assist taxpayers in
complying with their tax liabilities, clarify the application of the
tax code to particular circumstances, and ensure the quality of paid
preparers of tax returns, among others. IRS is organized into four
operating divisions based on types of taxpayers: (1) Wage and
Investment (W&I); (2) Large Business and International (LB&I); (3)
Small Business and Self-Employed (SB/SE); and (4) Tax Exempt and
Government Entities (TE/GE). Each division provides at least one
service to taxpayers for which it charges a fee. In addition to these
primary operating divisions, IRS has a number of offices, including
Chief Counsel, Appeals, Professional Responsibility, and Return
Preparer, that also provide services to taxpayers for a fee. Table 1
shows user fee services organized by business division or program
office responsible for managing the user fee programs. Descriptions of
the services and user fees, including fee rates, are included in
appendix II.[Footnote 8]
Table 1: Services for Which User Fees Are Charged, by IRS Business
Division or Program Office:
Appeals:
* Advance art determination letters: A statement of value from IRS
that can be used to substantiate the value of the art prior to filing
the tax return that reports the charitable contribution or the estate
or gift tax.
Chief Counsel:
* Letter rulings and determination letters: Types of written
statements from IRS that apply tax law to the taxpayer's specific set
of facts on a transaction.
Large Business and International:
* Competent authority limitation on benefits determination letters:
Tax treaty assistance provided to taxpayers related to actions taken
by countries that may result in taxation that is contrary to the
provisions of a treaty;
* Foreign insurance excise tax exemption: An agreement with IRS
governed by a tax treaty under which a foreign insurer assumes the
responsibility of paying an excise tax on behalf of its domestic
insured;
* Pre-filing agreements: Examination of specific issues by IRS
relating to tax returns before they are filed to resolve issues that
are likely to be disputed in audits.
Office of Professional Responsibility:
* Enrolled actuary: The registration of an actuary who has met certain
standards and qualifications and has been approved to perform
actuarial services required under federal pension law;
* Enrolled agent and retirement plan agent: The registration of a
person who has earned the privilege of representing taxpayers before
IRS;
* Special enrollment examination: A three-part exam tax practitioners
must pass to become an enrolled agent and practice before IRS.
Return Preparer Office:
* Preparer tax identification number: Identification number required
for all paid tax return preparers, including attorneys, certified
public accountants, and enrolled actuaries.
Small Business and Self-Employed:
* Offer in compromise: An agreement between IRS and a taxpayer to
settle a tax liability for payment of less than the full amount owed;
* Installment agreement: A payment option or payment plan that allows
taxpayers to pay his or her full tax liability with smaller monthly
payments over a period of time for up to 60 months.
Tax Exempt and Government Entities:
* Letter rulings and determination letters: Types of written
statements from IRS that apply tax law to the taxpayer's specific set
of facts on a transaction.
Wage and Investment:
* Income verification express service: Electronic confirmation of a
taxpayer's income for lenders;
* U.S. residency certification: A letter certifying U.S. residency for
purposes of claiming benefits under an income tax treaty or exemption
from a value-added tax imposed by a foreign country.
Source: GAO analysis of IRS data.
[End of table]
The CFO has oversight responsibilities for the initial assessment,
updates, and collection of user fees. While the CFO does not provide
the services for which user fees are charged, it does have the
responsibility to ensure that user fees are appropriately collected,
deposited, and reported.
Authority to Collect User Fees:
IRS derives its authority to charge user fees from either the
Independent Offices Appropriation Act (IOAA) or various other specific
statutes.[Footnote 9] Although OMB Circular A-25 states that agencies
should recover full costs to the government to the extent permitted by
law for providing the service or good,[Footnote 10] the authority for
each fee determines how much of the costs IRS is required to recover.
[Footnote 11] For example, IRS is directed by the circular to recover
full costs for fees authorized by IOAA, unless an exception applies.
[Footnote 12] Agencies, however, may request waivers from OMB to
charge less than full cost if the fee would be unduly costly to
collect or otherwise justifies an exception.[Footnote 13] IRS has
waivers pending with OMB to charge less than full cost for installment
agreements and offers in compromise.[Footnote 14] According to IRS
officials, increasing these fees to full cost could discourage
taxpayers from using these services.
In contrast, when IRS is authorized to charge a user fee under a
specific statute, the provisions of that statute govern. For example,
IRS can charge a reasonable fee for income verification express
service and U.S. residency certifications.[Footnote 15] In some cases,
such as with letter rulings and determination letters, minimum rates
are specified in the statute. Table 2 shows IRS user fees by
authorizing legislation and illustrates that the authority to charge a
user fee can be separate from the authority to provide the good or
service.
Table 2: IRS User Fees by Authority to Charge a Fee and Authority to
Provide Goods or Services:
IOAA (full cost recovery):
User fee type: Installment agreement;
Authority to charge a user fee: 31 U.S.C. § 9701;
Authority to provide goods/services: 26 U.S.C. § 6159.
User fee type: Offer in compromise;
Authority to charge a user fee: 31 U.S.C. § 9701;
Authority to provide goods/services: 26 U.S.C. § 7122.
User fee type: Enrolled agent/retirement plan agent;
Authority to charge a user fee: 31 U.S.C. § 9701;
Authority to provide goods/services: 31 U.S.C. § 330.
User fee type: Enrolled actuary;
Authority to charge a user fee: 31 U.S.C. § 9701;
Authority to provide goods/services: 29 U.S.C. § 1242.
User fee type: Special enrollment examination;
Authority to charge a user fee: 31 U.S.C. § 9701;
Authority to provide goods/services: 31 U.S.C. § 330.
User fee type: Preparer tax identification number;
Authority to charge a user fee: 31 U.S.C. § 9701;
Authority to provide goods/services: 26 U.S.C. § 6109(a)(4).
Specific authority (reasonable cost):
User fee type: Letter rulings and determination letters[A];
Authority to charge a user fee: 26 U.S.C. § 7528;
Authority to provide goods/services: 26 U.S.C. § 7528.
User fee type: Income verification express service;
Authority to charge a user fee: 26 U.S.C. § 6103(p)(2);
Authority to provide goods/services: 26 U.S.C. § 6103(p)(2).
User fee type: U.S. residency certification;
Authority to charge a user fee: 26 U.S.C. § 6103(p)(2);
Authority to provide goods/services: 26 U.S.C. § 6103(p)(2).
Source: GAO.
[A] Includes advance art determination letters, pre-filing agreements,
foreign insurance excise tax exemptions, competent authority
limitation on benefits determination letters, and Office of the Chief
Counsel and TE/GE division letter rulings and determination letters.
[End of table]
IRS User Fee Collections, Associated Service Volume, and Carryover
Amounts Have Increased with Most of the Revenue Used to Fund Taxpayer
Services:
IRS User Fee Revenue and the Volume of User Fee Services Have
Increased in Recent Years:
In fiscal year 2010, IRS collected and retained $290 million in user
fees and transferred an additional $62 million of user fee collections
to the U.S. Treasury General Fund (General Fund). Upon collection,
user fees are recorded into various IRS financial systems and are
deposited either into IRS's Miscellaneous Retained Fees (MRF) Fund for
use by the agency, the General Fund, or both.[Footnote 16] The
allocation of fees between funds is determined by a formula specified
in the Treasury, Postal Service and General Government Appropriations
Act of 1995 (1995 Treasury Appropriations Act), which was based on the
fees and fee amounts in effect at the time.[Footnote 17] For example,
collections from user fees that existed prior to September 30, 1994,
such as enrolled actuary, are divided between IRS's MRF Fund and the
General Fund. User fees implemented after September 30, 1994, such as
installment agreements, are fully retained by IRS.
Table 3 provides IRS's total retained user fee collections by category
for the past 6 fiscal years. Installment agreements have generated the
majority of IRS's user fee collections. In fiscal year 2010, they
accounted for approximately 68 percent ($198 million of $290 million)
of IRS's total retained user fee collections. A rate increase
implemented in January 2007 resulted in a 55 percent increase (or from
approximately $79 million to $122 million) in collections from fiscal
year 2006 to 2007.[Footnote 18] According to IRS officials and as
shown in table 3, despite the rate increase, taxpayers continued to
initiate, restructure, or reinstate installment agreements at similar
or higher levels. The second largest contributor to fee collections
came from income verification express service, which accounted for
approximately $40 million or 14 percent of fee collections in fiscal
year 2010. Fee collections from income verification express service
increased significantly from fiscal years 2007 to 2009, which IRS
officials attributed to the turmoil in the financial and housing
markets.[Footnote 19] Changes in collection amounts can occur because
of fee rate changes or because of other factors, such as programmatic
changes or economic conditions.
Table 3: IRS's Total Retained User Fee Collections, Fiscal Years 2005
through 2010:
Installment agreement;
FY 2005: $79.0 million;
FY 2006: $78.8 million;
FY 2007: $122.1 million;
FY 2008: $133.2 million;
FY 2009: $158.0 million;
FY 2010: $198.5 million.
Income verification express service;
FY 2005: N/A;
FY 2006: N/A;
FY 2007: $4.1 million;
FY 2008: $8.4 million;
FY 2009: $31.8 million;
FY 2010: $39.7 million.
Tax Exempt and Government Entities: letter rulings and determination
letters;
FY 2005: $1.3 million;
FY 2006: $5.8 million;
FY 2007: $19.5 million;
FY 2008: $21.3 million;
FY 2009: $20.4 million;
FY 2010: $27.1 million.
Chief Counsel: letter rulings and determination letters;
FY 2005: $4.1 million;
FY 2006: $8.1 million;
FY 2007: $11.2 million;
FY 2008: $14.4 million;
FY 2009: $16.4 million;
FY 2010: $14.0 million.
Offer in compromise;
FY 2005: $7.1 million;
FY 2006: $5.2 million;
FY 2007: $5.2 million;
FY 2008: $4.2 million;
FY 2009: $5.3 million;
FY 2010: $5.1 million.
U.S. residency certification;
FY 2005: N/A;
FY 2006: N/A;
FY 2007: $2.1 million;
FY 2008: $2.8 million;
FY 2009: $3.1 million;
FY 2010: $2.9 million.
Enrollments[A];
FY 2005: $0.8 million;
FY 2006: $0.8 million;
FY 2007: $1.8 million;
FY 2008: $2.5 million;
FY 2009: $1.8 million;
FY 2010: $2.1 million.
Large Business and International: competent authority limitation on
benefits determination letters, foreign insurance excise tax
exemptions, and pre-filing agreements;
FY 2005: $0.6 million;
FY 2006: $0.7 million;
FY 2007: $1.2 million;
FY 2008: $1.0 million;
FY 2009: $1.4 million;
FY 2010: $1.0 million.
Advance art determination letters[B];
FY 2005: 0.0;
FY 2006: 0.0;
FY 2007: 0.0;
FY 2008: 0.0;
FY 2009: 0.0;
FY 2010: 0.0.
Total;
FY 2005: $92.9 million;
FY 2006: $99.5 million[C];
FY 2007: $167.4 million[C];
FY 2008: $187.6 million[C];
FY 2009: $238.2 million;
FY 2010: $290.5 million[C].
Source: GAO analysis of IRS data.
Notes: Because of tiered fee structures and implementation of rate or
programmatic changes, the fee rates for each category of user fees
cannot be used to calculate the actual volume as reported in table 4.
In this table, N/A indicates user fees that had not yet been
implemented. This table does not include fee collections from (1) user
fees treated as offsetting collections and (2) the preparer tax
identification number user fee because IRS began collections in fiscal
year 2011.
[A] This category includes fee collections for the enrolled agent,
enrolled actuary, and special enrollment examination user fees.
[B] Collections were less than a million.
[C] Figures do not sum to the total because of rounding.
[End of table]
By volume of user fee services, income verification express service
topped the list of services provided in fiscal year 2010 with
approximately 16 million requests followed by installment agreements
with about 3 million requests, as shown in table 4. IRS decreased the
income verification express service fee rate from $4.50 to $2.25 in
fiscal year 2010 because of the increased volume, which lowered the
unit cost per income verification express service request. Installment
agreement volume has also increased in recent years, despite the
fiscal year 2007 fee rate increases.
Table 4: IRS User Fee Volume, Fiscal Years 2005 through 2010:
In thousands:
Income verification express service;
FY 2005: N/A;
FY 2006: N/A;
FY 2007: 904;
FY 2008: 1,856;
FY 2009: 7,067;
FY 2010: 16,120.
Installment agreement;
FY 2005: 2,080;
FY 2006: 2,076;
FY 2007: 2,035;
FY 2008: 2,073;
FY 2009: 2,246;
FY 2010: 2,900.
Tax Exempt and Government Entities: letter rulings and determination
letters;
FY 2005: 68;
FY 2006: 72;
FY 2007: 73;
FY 2008: 72;
FY 2009: 77;
FY 2010: 105.
U.S. residency certification[A];
FY 2005: N/A;
FY 2006: N/A;
FY 2007: 44;
FY 2008: 68;
FY 2009: 79;
FY 2010: 72.
Enrollments;
FY 2005: 32;
FY 2006: 15;
FY 2007: 22;
FY 2008: 31;
FY 2009: 38;
FY 2010: 36.
Offer in compromise;
FY 2005: 48;
FY 2006: 39;
FY 2007: 31;
FY 2008: 28;
FY 2009: 35;
FY 2010: 34.
Chief Counsel: letter rulings and determination letters;
FY 2005: 6;
FY 2006: 6;
FY 2007: 7;
FY 2008: 8;
FY 2009: 11;
FY 2010: 6.
Advance art determination letters;
FY 2005: 0;
FY 2006: 0;
FY 2007: 0;
FY 2008: 0;
FY 2009: 0;
FY 2010: 0.
Large Business and International: competent authority limitation on
benefits determination letters, foreign insurance excise tax
exemptions, and pre-filing agreements;
FY 2005: 0;
FY 2006: 0;
FY 2007: 0;
FY 2008: 0;
FY 2009: 0;
FY 2010: 0.
Total;
FY 2005: 2,234;
FY 2006: 2,208;
FY 2007: 3,116;
FY 2008: 4,136;
FY 2009: 9,553;
FY 2010: 19,273.
Source: GAO analysis of IRS data.
Notes: Zero denotes volume of less than a thousand. Because of tiered
fee structures and implementation of rate or programmatic changes, the
fee rates for each category of user fees cannot be used to calculate
the actual collections as reported in table 3. In this table, N/A
indicates user fees that had not yet been implemented. This table does
not include volume for (1) user fees treated as offsetting collections
and (2) the preparer tax identification number user fee because IRS
began collections in fiscal year 2011.
[A] Volume represents the number of applications received. Because the
fee charged is based on the number of certifications provided, which
can vary per application, the revenue generated will also vary.
[End of table]
IRS Can Carry Over Unspent User Fee Revenue:
IRS has permanent, indefinite authority to obligate and spend user fee
collections. This authority allows the agency independence and
flexibility in the use of these funds. IRS can obligate user fee
collections for any activity for which it has an appropriation with
OMB approval, and it can carry over any unexpended fee collections for
use in subsequent years. We have suggested that carryovers are one way
agencies can establish reserves to sustain operations in the event of
a sharp downturn in user fee collections or other events.[Footnote 20]
According to IRS, the agency has a reserve of unspent fee collections
that can be used for critical needs. The carryover is what is left
over after IRS transfers fee collections to supplement its
appropriations in order to meet agencywide needs. Table 5 provides
information on IRS's MRF carryover balances, which have grown in
recent years as fee activity has increased. At the end of fiscal year
2010, $288 million in fee collections was carried over for use in
future fiscal years.
Table 5: Carryover of IRS Miscellaneous Retained Fees, Fiscal Years
2008 through 2010:
Unobligated balance carried forward, start of year;
FY 2008: $129 million;
FY 2009: $70 million;
FY 2010: $143 million.
New budget authority;
FY 2008: $188 million;
FY 2009: $238 million;
FY 2010: $290 million.
Unobligated balance transferred to other accounts;
FY 2008: -$247 million;
FY 2009: -$166 million;
FY 2010: -$146 million.
Unobligated balance carried forward, end of year;
FY 2008: $70 million;
FY 2009: $143 million;
FY 2010: $288 million.
Source: GAO analysis of the President's Budget Appendix for Treasury
and IRS data.
Note: Figures may not sum to total because of rounding.
[End of table]
IRS has used the flexibility afforded by its permanent authority to
obligate previously collected user fees to help pay for contingencies
such as the damages resulting from the 2006 flood of its headquarters
building.[Footnote 21] More recently, IRS tapped $89 million in user
fee collections to fund its Business Systems Modernization Program for
the Customer Account Data Engine 2 (CADE 2) system. According to IRS
officials, uncertainty in funding during the spring of 2011
jeopardized activities necessary to roll out the CADE 2 system in
preparation for the 2012 filing season. According to IRS officials,
the agency has recently set a reserve target amount of $100 million to
provide additional flexibility to address unexpected contingencies.
While IRS does not need congressional approval to use additional fee
collections for such contingencies, it must obtain approval from the
Department of the Treasury and OMB.
IRS User Fee Collections Fund Taxpayer Services and Agency Operations:
IRS uses both annual appropriations from Congress and user fee
collections to fund its activities, including those related to
taxpayer services, such as prefiling taxpayer education and
maintaining taxpayer accounts, and operations support, such as
infrastructure and information services. Although its services and
operations are primarily funded through annual appropriations, IRS
supplements these appropriations with user fee collections, which
account for less than 2 percent of IRS's total budget.
In order to supplement its appropriations with user fee collections,
IRS transfers its user fee collections from the MRF Fund to its
appropriation accounts, as shown in table 6. Once user fee collections
are transferred to the appropriation accounts, the user fees and
annual appropriations are fungible. In other words, IRS does not track
the use of fee collections by user fee program after they have been
transferred to the various appropriation accounts.
Table 6: Transfers from IRS Miscellaneous Retained Fees Fund to IRS
Appropriations Accounts, Fiscal Years 2008 through 2010:
Taxpayer services;
FY 2008: $152 million;
FY 2009: $127 million;
FY 2010: $118 million.
Enforcement;
FY 2008: $13 million;
FY 2009: $6 million;
FY 2010: -$2 million[A].
Operations support;
FY 2008: $82 million;
FY 2009: $33 million;
FY 2010: $31 million.
Business systems modernization;
FY 2008: 0;
FY 2009: 0;
FY 2010: 0.
Health insurance tax credit administration;
FY 2008: 0;
FY 2009: 0;
FY 2010: 0.
Total transfers;
FY 2008: $247 million;
FY 2009: $166 million;
FY 2010: $146 million.
Source: GAO analysis of the President's Budget Appendix for Treasury
and IRS data.
Note: Figures may not sum to total because of rounding.
[A] Denotes amount of unused fee collections transferred back to IRS's
Treasury Account Symbol.
[End of table]
According to IRS officials, IRS's appropriation accounts for taxpayer
services, operations support, and enforcement provide funding for
IRS's user fee programs. For example, the enforcement account funds
the installment agreement, offer in compromise, and enrollment-related
user fee programs, and the taxpayer services account funds the U.S.
residency certification and income verification express service user
fee programs. However, the amount of user fee collections that is
transferred to these appropriation accounts from the MRF Fund is not
directly related to the cost of specific programs or the amount
collected from specific fees.
In contrast, the user fee program for the preparer tax identification
number does not receive congressional appropriations and must recover
all costs for providing the service through its fee collections. Fee
receipts are transferred back to the user fee program to fund all
activities related to that fee program. As we mentioned earlier, IRS
has the flexibility to determine how to allocate the user fee
collections it retains, which is not uncommon among federal agencies.
IRS Reviews User Fees Biennially but Does Not Clearly Document Some
Processes or Decisions:
IRS Conducts a Biennial Review of User Fees and Has Taken Steps to
Improve Its Cost Estimates:
As directed by the CFO Act of 1990 and OMB Circular A-25, IRS conducts
a general review of its user fees on a biennial basis. To initiate the
biennial review, IRS's CFO issues a memorandum to senior management in
relevant business divisions and program offices requesting that they
validate the cost of providing services for which they charge a user
fee and provide suggestions for new user fees.[Footnote 22] Based on
the cost estimates developed and other considerations, senior
management will propose whether to increase, decrease, or keep the
current fee rates. These proposals are sent to the CFO and are then
compiled and forwarded in a report to the Commissioner for final
review and approval.
IRS has made efforts to improve its cost estimation process in support
of its user fees, with particular attention given to its largest fee
by amount collected. For example, the Treasury Inspector General for
Tax Administration's 2006 audit concluded that installment agreement
user fee cost estimates were based on incorrect assumptions and
contained calculation errors and unsupported costs. To address these
issues, IRS hired a contractor to assess the cost estimate for the
fiscal year 2007 biennial review and re-hired the contractor to
prepare the cost estimate for the fiscal year 2009 biennial review.
For the fiscal year 2011 biennial review, the contractor was hired to
simplify the fiscal year 2009 cost estimate. According to officials,
IRS does not plan to use the contractor for future biennial reviews.
According to officials, IRS has also taken steps recently to improve
the cost estimate for the offer in compromise user fee. For the
biennial review in 2009, officials conducted interviews and developed
a complex series of spreadsheets to estimate costs of the offer in
compromise program. This process, which IRS described as "less precise
and more reliant on estimates and averages," estimated the full cost
of the average offer in compromise agreement to be $2,132. Because the
2009 process was very labor-intensive, IRS assessed other options for
gathering the information needed to prepare the cost estimate. As a
result of this assessment, IRS simplified its cost estimation process
while making it easier to collect information about program costs. The
revised fiscal year 2011 review process resulted in an estimated full-
cost user fee of $2,718, an approximate 22 percent increase over that
calculated in the 2009 biennial review. According to IRS, the 2009
cost calculations were likely significantly understated, and its 2011
process for capturing offer in compromise costs will yield
consistently reliable data going forward.
Based on the biennial review, IRS has also revised fee rates to
reflect the updated cost of providing various services, such as income
verification express service and Chief Counsel letter rulings.
IRS Omitted Some Fees from Biennial Review:
IRS has omitted three fees--advance art determination letters,
reproduction of tax returns, and special statistical studies and
compilations--from its biennial review and contrary to the
requirements of the CFO Act.[Footnote 23] According to an IRS
official, the cost estimate used to support the advance art
determination letter user fee has not been reviewed or updated since
fiscal year 1996 because of very low demand (fewer than 20 per year
from fiscal year 2005 to fiscal year 2010).[Footnote 24] IRS also
omitted from the biennial review the user fees for reproduction of tax
returns and special statistical studies and compilations because it
interpreted these fees as not being covered by the biennial review
requirement.
However, the CFO Act requires IRS to review, on a biennial basis, the
fees, royalties, rents, and other charges imposed by IRS for services
and things of value it provides.[Footnote 25] In addition, OMB
Circular A-25 provides guidance on conducting a biennial review of
user fees regardless of the authorizing statute to the extent
permitted by law. Since there is no alternative statutory review
process for these fees, they fall under the review requirements of the
CFO Act and guidelines of OMB Circular A-25. Furthermore, as
articulated in the accounting standards for the federal government,
Congress and federal executives need cost information to make
decisions about allocating federal resources, modifying programs, and
evaluating program performance.[Footnote 26]
According to IRS, it collected $6.4 million from these three fees for
fiscal year 2010, compared to IRS's fiscal year 2010 total retained
user fee collections of $290 million. Although these fee amounts are
small compared to the total amount of user fee collections, regular,
substantive fee reviews help ensure that Congress, executive branch
agencies, and stakeholders have complete information about both
program costs and the alignment between costs and collections. Absent
regular reviews, it becomes increasingly likely that fees and costs
will become misaligned and that taxpayers could be charged fee rates
that do not appropriately reflect the cost of providing the service.
However, as outlined in the OMB Circular and our user fee design
guide, the benefits achieved from collecting a user fee need to be
considered along with the time and costs required to administer and
review the fee program. While a comprehensive review of some of these
fees every 2 years may not always be cost-effective given the amount
collected from these fees, it may be possible to perform a simplified
update during some review cycles.
Assumptions Used to Estimate Cost of Some User Fee Programs Were Not
Always Correct or Well Documented:
According to IRS officials, the CFO's office works closely with
business divisions and program offices to develop cost estimates,
provides guidance on data to include in the cost estimates, and
develops Internal Revenue Manual guidelines to document IRS's process
for setting and reviewing user fees. In a recent report, we found that
IRS set the user fee for the preparer tax identification number in
accordance with established guidelines for cost estimation.[Footnote
27] However, for IRS's smaller user fee programs, we found that data
or assumptions used in cost estimates were not always well documented
or understood by officials. For example, for the LB&I fees, the fiscal
year and data source for some of the fiscal year 2009 cost estimate
components were not documented. In another case, we noted some
confusion early in the fiscal year 2011 review process from managers
in the W&I division about what assumption should be used to estimate
the pay increase in the fiscal year 2011 cost estimate. They assumed
that they should include a 5 percent pay increase in the fiscal year
2011 cost estimate for the U.S. residency certification fee when the
CFO had determined that such an increase should not be included.
[Footnote 28] We also found a calculation error--double counting more
than $6.8 million in direct labor costs--in the cost estimate for the
offer in compromise user fee, which the CFO's office did not detect in
its review of cost estimates.
According to GAO's cost estimation guide, assumptions used to estimate
costs should be documented to include the rationale behind the
assumptions and any historical data that support the assumption,
[Footnote 29] and federal accounting standards require documentation
of all managerial cost accounting activities, processes, and
procedures used to associate costs with products, services, or
activities.[Footnote 30] IRS's Internal Revenue Manual sections on
user fees and managerial cost accounting contain guidelines for
developing cost estimates.[Footnote 31] However, IRS has not provided
a documented set of assumptions and decision rules for program
managers to follow in estimating costs of user fee program activities
for each biennial review. Although it is the responsibility of IRS's
business units to develop the cost estimates, supplemental guidance or
tools from the CFO's office that provide a crosswalk between the cost
estimation guidelines and specific cost estimate assumptions could
potentially help staff avoid mistakes that would need to be caught
later in the review process. Finally, because these tools could
provide more specific instructions on assumptions to be used and
documenting data sources, IRS can better ensure consistency of its
cost estimates across user fee programs.
IRS Does Not Always Document Factors Considered or Decisions Made
during Biennial Review of Existing User Fee Rates:
In setting user fee rates, IRS officials said they consider taxpayer
burden, administrative costs, and potential effects on taxpayer
compliance, among other factors, when determining whether to recover
full cost. For example, IRS set the U.S. residency certification fee
rate at $35 rather than $110, the estimated fiscal year 2009 cost of
providing the service.[Footnote 32] Based on anecdotal information,
IRS decided that raising the fee rate could discourage taxpayers from
applying for the certification, which could result in higher
withholding of foreign income taxes and potentially lower income tax
revenue to the U.S. Treasury. Similarly, IRS has kept the offer in
compromise fee rate at $150 since the fee's inception in 2003, even
though IRS recently estimated that it costs more than $2,700 to
implement the program per user. According to IRS officials, the fee
rate has been kept at $150 to encourage taxpayers who owe taxes to
work with IRS and resolve their tax bills.
GAO's user fee design guide outlines important factors to consider
when setting user fee rates, including evaluating users' ability to
pay and the extent to which the general public and certain individuals
benefit from the fee-based program. As described above, IRS officials
consider factors other than cost recovery in setting fee rates.
However, we found that IRS has not thoroughly documented these
factors, corroborated anecdotal support with data analysis, or studied
the effect of user fees on taxpayer behavior. A 2007 report by the
National Taxpayer Advocate also found that IRS had not studied the
effect of user fees on taxpayer behavior or demand for IRS services.
Further, although officials said that changing the offer in compromise
fee rate would be costly, IRS has not documented the extent to which
changing this fee rate and others would impose additional costs or
administrative burden on the agency.
After reviewing fee rates, IRS publishes some of the revised fees in
revenue procedures and other documentation.[Footnote 33] However,
IRS's fiscal year 2009 biennial report did not document whether the
proposed fee rates discussed in the report had been approved by the
IRS Commissioner. For example, in the report, IRS officials proposed a
$5 fee increase from $35 to $40 for providing U.S. residency
certification. When asked about the disposition of the proposed fee
rates presented in the biennial report, officials initially stated
that all the proposed fees in the biennial report had been approved
and implemented, as appropriate. However, we found documentation that
the user fee for U.S. residency certification remained at $35, which
officials later confirmed. IRS officials acknowledged that they used
an informal process to decide whether to go forward with the proposed
fee increase, which led to miscommunication in determining which fee
rate had been implemented.
GAO's standards for internal control in the federal government
establish the need for clear documentation.[Footnote 34] According to
these internal control standards, events should be promptly recorded
to maintain their relevance and value to management in controlling
operations and making decisions. Moreover, thoroughly documenting
decisions and the rationale behind decisions becomes increasingly
important as the federal workforce ages and the retirement of senior
managers and staff risks the loss of valuable institutional knowledge.
IRS Has Implemented New User Fees, but the Extent to Which Guidelines
Were Used to Assess Potential Fee Opportunities Is Unclear:
IRS has implemented several new user fees in recent years. As part of
IRS's fiscal year 2005 biennial review, the former IRS Commissioner
tasked all business divisions and program offices with identifying
potential new user fees to offset processing costs. Through this
review, IRS identified several new user fees, including income
verification express service and U.S. residency certification, which
were implemented in fiscal year 2007. As a result of IRS establishing
these new fees, Congress removed the limit on user fee collections
that IRS could retain and reduced IRS's annual appropriation by the
estimated amount of user fees that would be collected.[Footnote 35]
Since then, IRS has also identified three new user fees related to
return preparers and implemented the first fee, preparer tax
identification number, in September 2010. IRS plans to implement the
remaining two user fees for competency testing and fingerprinting
requirements in fiscal year 2012.[Footnote 36] According to IRS
officials, the return preparer user fee program will be funded
exclusively through collections from these three fees.
IRS faces unique challenges in establishing user fees. For example,
the National Taxpayer Advocate has noted that user fees may prevent
the public from accessing IRS's services because they cannot afford to
pay the fee or may discourage people from seeking services that help
IRS fulfill its core mission. User fees may also be costly for IRS to
administer and divert resources from activities that bring in more tax
revenue. On the other hand, user fees can promote an efficient and
fair allocation of government resources and ensure that those who are
receiving special benefits pay for them.
As directed by OMB Circular A-25, IRS requests business divisions and
program offices responsible for implementing user fees to review their
programs and provide proposals for new user fees as part of its
biennial review.[Footnote 37] IRS has also developed Internal Revenue
Manual guidelines to assist staff in identifying potential new user
fees. However, IRS may not be taking full advantage of its process for
identifying new user fees. For example, officials in some divisions or
offices said that they had no formal process for soliciting
suggestions from employees on new user fee proposals. Although the
CFO's biennial review memo refers managers to the Internal Revenue
Manual when reviewing costs of existing user fees, it does not
specifically indicate that these same guidelines or other established
design guidelines should be considered when examining new user fees
opportunities. We were unable to determine the extent to which IRS
staff considered these guidelines, and in our survey of division
commissioners, we identified variation in the criteria considered
across the operating divisions and offices. If managers are unclear
about the process for soliciting user fee proposals or do not receive
clear direction on what guidelines to consider when evaluating their
programs for new user fees, IRS may be less able to fully engage its
staff in evaluating new user fees. As a result, IRS could be missing
potential fee opportunities or misallocating resources toward
developing fee proposals that are not efficient, equitable, cost-
effective, or feasible. The cost and effort involved to clarify its
process for soliciting new user fee proposals and to refer staff to
established guidelines for identifying and evaluating potential fee
opportunities would likely be modest to IRS, since, as table 7 shows,
several sources exist for such guidelines.
Table 7: Selected Guidelines to Consider When Establishing New User
Fees:
Source: OMB Circular A-25;
Selected guidelines:
Does a special benefit exist to an identifiable recipient beyond the
general public?
Has a review been conducted of all other agency programs to determine
whether new fees should be assessed?
Does an excise tax already exist for government services that benefit
specific individuals? If yes, a new user fee may not be implemented;
Have managers of other similar programs been consulted when proposing
new fees or modifying existing fees?
Has the agency consulted with OMB if it requires legislation to
institute new fees?
Will the user fee recover the full cost to the agency providing the
service?.
Source: IRS Internal Revenue Manual 1.32.19;
Selected guidelines: Are benefits voluntary and specific?
Can fee payers be identified?
Is the fee based on actual cost?
Is there a legitimate business case for fee (i.e., fee would further
the interests of tax administration, the federal government, or the
public)?
Can the fee be readily administered (i.e., fee can be easily collected
prior to rendering service, and changes and costs needed to administer
fee are evaluated)?
Is the fee for an activity IRS is already performing?
Does implementation of the fee require major data processing changes?
What are the public implications of the new fee?.
Source: GAO user fee design guide (GAO-08-386SP);
Selected guidelines: What is the users' ability to pay?
Is a similar service provided by the private sector? If so:
* Will private producers be subject to unfair competition if the fee
is not set to recover the full costs of the service?
* Should their charges be a reference point in setting fees?
Does the agency have timely and reliable cost data to link the fee to
program costs?
Will the fee structure be user specific or systemwide?
* Is the amount of the fee small or large relative to other costs that
the user faces?
* Are there numerous different groups of users?
* Is the cost variation among the different groups of users large or
small?
Does the program have high fixed costs?
* Is a two-part fee structure, with a flat rate plus a fee based on
usage, appropriate?;
How frequently will fees be reviewed and updated?
What mechanisms will be used to gather stakeholder input?
Source: 2007 Taxpayer Advocate Service Annual Report to Congress;
Selected guidelines: Has IRS researched both the cost of administering
the user fee and the effect of the fee on the demand for the specific
service in question?
Has IRS conducted additional research and analysis sufficient to
justify the fee and show that:
The proposed fee will not have a significant negative impact on
voluntary compliance or IRS collections or impair IRS's ability to
accomplish its mission?
The proposed fee will not cost more to administer than IRS could
otherwise produce by using the same resources for tax administration?
The proposed fee does not apply to services that taxpayers have little
choice in obtaining?
The proposed fee will not deny basic services to taxpayers who cannot
afford them?
The services subject to a fee are provided in a reasonably efficient
manner so that the fee is not disproportionate to the value received
by the service recipient?
Source: GAO.
[End of table]
Conclusions:
Because of the volume of IRS's user fee transactions with the public,
ensuring that user fee rates are properly set, collected, and reviewed
is important for taxpayers. As a result of its biennial reviews of
user fees, IRS has focused on improving cost estimates related to its
most significant fees in recent years. However, we that found that (1)
some fees were omitted from the biennial review, (2) assumptions used
in cost estimates were not always well documented, and (3) factors
considered in setting fees and decisions made were not always well
documented. It is also unclear the extent to which user fee design
guidelines were used to assess new fee opportunities. Given that most
of these issues pertained to IRS's smaller fee programs, steps taken
to strengthen the review process should not only improve the
efficiency of the review but also be cost-effective. Accordingly, we
have identified some additional steps, such as clarifying the review
guidelines up front, which could potentially decrease the amount of
rework needed downstream and be implemented at low cost.
Recommendations for Executive Action:
We recommend that the Commissioner of Internal Revenue take the
following five actions to:
* Include certain fees in the biennial review that were previously
omitted.
* Develop supplemental guidance or tools that provide more detailed
information on data and assumptions to include in cost estimates.
* Better document the factors considered in setting and reviewing
existing user fees.
* Better document the decisions made in setting and reviewing existing
user fees.
* Provide clear, specific, and direct guidelines for IRS employees and
managers to follow in identifying potential fee opportunities.
Agency Comments:
We provided a draft of this report to the Commissioner of Internal
Revenue for his review and comment. In written comments, reprinted in
appendix III, the Deputy Commissioner for Operations Support agreed
with our recommendations and indicated that IRS plans to implement
them during its fiscal year 2013 biennial review of user fees.
We are sending copies of this report to the Chairmen and Ranking
Members of other Senate and House committees and subcommittees that
have appropriation, authorization, and oversight responsibilities for
IRS. We are also sending copies to the Commissioner of Internal
Revenue, the Secretary of the Treasury, and other interested parties.
In addition, the report is available at no charge on the GAO website
at [hyperlink, http://www.gao.gov].
If you or your staff members have any questions or wish to discuss the
material in this report further, please contact me at (202) 512-9110
or whitej@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Individuals making key contributions to this report are listed
in appendix IV.
Signed by:
James R. White:
Director, Tax Issues Strategic Issues Team:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The objectives of this report were to (1) describe the types and
amounts of user fees collected and how the Internal Revenue Service
(IRS) collects and uses fees, (2) assess how IRS sets and reviews
existing user fees, and (3) assess how IRS identifies additional areas
where new user fees could be justified.
To meet these objectives, we reviewed user fee legislation and
guidance, agency and budget documents, literature on user fee design
and implementation characteristics, and cost estimates for user fees
that were included in IRS's biennial review process. We primarily
focused on user fees that were included in IRS's fiscal year 2009
biennial review.[Footnote 38] We also obtained information about IRS's
internal controls for the revenue and volume data we used and
determined that the data were sufficiently reliable for the purposes
of this report. Specifically, we relied on our audit of the aggregated
year-end user fee balances and transaction testing for the installment
agreement user fee revenue amount, which accounts for the majority of
user fee collections and found that the revenue data were sufficiently
reliable for our descriptive purposes. Further, we performed a
separate analysis to assess the reliability of the user fee volume
data by (1) conducting a correlation analysis between the revenue and
volume data and (2) using the revenue amount and fee rate to calculate
the volume. Based on our analyses, we determined that the volume data
were sufficiently reliable for our descriptive purposes.
In addition, we interviewed officials from IRS's Office of the Chief
Financial Officer, Office of the Chief Counsel, Large Business and
International Division, Office of Professional Responsibility, Return
Preparer Office, Small Business and Self-Employed Division, Tax Exempt
and Government Entities Division, and Wage and Investment Division,
who were responsible for overseeing the user fee programs, and the
Taxpayer Advocate Service. We also obtained written responses from the
deputy commissioner of each of the user fee programs we selected.
Finally, we reviewed prior GAO work on user fees and cost estimation
and other relevant literature.
We conducted this performance audit from February 2011 through
November 2011 in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform
the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
[End of section]
Appendix II: IRS User Fee Descriptions and Amounts:
Chief Counsel letter rulings and determination letters: IRS's Chief
Counsel issues letter rulings and determination letters for a variety
of requests, including but not limited to, (1) advanced pricing
agreements, (2) private letter rulings, (3) change in accounting
method, and (4) change in accounting period. User fees range from $150
to $14,000. IRS publishes updated guidance on obtaining Chief Counsel
letter rulings and determination letters and fee amounts in the first
Revenue Procedure each year.
Competent authority limitation on benefits determination letter: IRS
charges a user fee of $15,000 for taxpayers who request a
discretionary determination under a limitation on benefits provision.
Revenue Procedure 2006-54 provides guidance on requesting a competent
authority limitation on benefits determination letter.
Enrolled actuary: An enrolled actuary is an individual who has met
certain standards and qualifications set forth by the Joint Board for
the Enrollment of Actuaries and has also been approved to perform
actuarial services required under the Employee Retirement Income
Security Act of 1974. IRS charges a user fee of $250 for the initial
enrollment and for the renewal, which occurs on a triennial basis.
Implementing regulations for the enrolled actuary fee are at 26 C.F.R.
§§ 300.7 and 300.8 and 20 C.F.R. § 901.11.
Enrolled agent/enrolled retirement plan agent: In order to become
enrolled to practice before IRS, an individual must submit an
application and meet certain standards, pay a user fee of $30 for the
initial enrollment and for renewal every 3 years, and pass the special
enrollment examination that is administered by IRS. Similar to
attorneys and certified public accountants, enrolled agents and
enrolled retirement plan agents are unrestricted as to which taxpayers
they can represent and types of tax matters they can handle.
Implementing regulations for the enrolled agents and enrolled
retirement plan agents fee are at 26 C.F.R. §§ 300.5 and 300.6.
Foreign insurance excise tax (FET) exemption: FET is imposed on
premiums paid to the foreign insurer. Applicants (which are foreign
insurance companies) may apply for a FET closing agreement with IRS
under Revenue Procedure 2003-78 certifying that they meet the
residency and limitation of benefits articles of the applicable income
tax treaty. Through this agreement, the foreign insurer (or applicant)
assumes the responsibility of paying the tax, if any, that otherwise
would be paid by the domestic insured party. Applicants requesting a
FET exemption must pay a $4,000 fee.
Income verification express service (IVES): This service provides 2-
business-day processing and electronic delivery of tax return
transcripts for users, such as mortgage lenders and other financial
market entities, to confirm the income of a borrower (or taxpayer)
during the processing of a loan application. IRS charges a user fee of
$2.00 for each IVES transcript request.[Footnote 39]
Installment agreement (IA): An IA is a payment option or payment plan
that allows a taxpayer to pay his or her full tax liability with
smaller monthly payments over a period of time for up to 60 months.
Interest and any applicable penalties continue to accrue until the
balance is paid in full. To secure an IA, applicants must submit a
completed application and pay the applicable user fee. There are three
levels of fees applicable to new IAs: (1) $105 for most taxpayers, (2)
$52 for taxpayers entering into direct debit agreements, and (3) $43
for taxpayers who qualify for the low-income rate (i.e., taxpayers
whose incomes falls below 250 percent of the poverty level). Taxpayers
who request reinstatement of an IA must pay a fee of $45. Implementing
regulations for the IA fee are at 26 C.F.R. §§ 300.1 and 300.2.
Offer in compromise (OIC): An OIC is an agreement between IRS and a
taxpayer to settle a tax liability for payment of less than the full
amount owed. When submitting an offer for consideration, taxpayers
must make a partial payment unless a waiver applies.[Footnote 40]
Taxpayers may pay the offer amount in a lump sum, in which 20 percent
of the offer amount is due when submitting the offer, or in
installment payments, in which case the first installment payment is
due with the offer (unless the taxpayers qualify for low-income
waiver, in which case the 20 percent or installment payment is not
applicable). If IRS accepts the offer amount, the user fee is applied
toward the remaining balance due.[Footnote 41] Implementing
regulations for the OIC fee are at 26 C.F.R. § 300.3.
Pre-filing agreement (PFA): Taxpayers are subject to the $50,000 user
fee only if they are selected to participate in the PFA program. If
taxpayers are selected, IRS will examine specific issues relating to
their tax returns before they are filed. The objective of the PFA
program is to resolve issues that are likely to be disputed in post-
filing audits. Revenue Procedure 2009-14 provides guidance on the PFA
program.
Preparer tax identification number (PTIN): All paid tax return
preparers, including attorneys, certified public accountants, and
enrolled agents, are required to apply for a PTIN before preparing any
federal tax returns in 2011 and thereafter. Individuals who apply for
a PTIN must pay an annual fee of $64.25. Of that amount, IRS collects
$50 for associated PTIN activities and the remaining $14.25 is
transferred to a third-party vendor responsible for maintaining the
registration system. Implementing regulations for the PTIN fee are at
26 C.F.R. § 300.9.
[End of section]
Special enrollment examination (SEE): Prior to enrolling as an
enrolled agent or enrolled retirement plan agent, individuals must
either pass a three-part exam or possess years of past IRS service and
technical experience specified in Circular 230 to practice before IRS.
IRS charges $11 per part to oversee the examination. Implementing
regulations for the SEE fee are at 26 C.F.R. § 300.4.
Tax Exempt and Government Entities letter rulings and determination
letters: The Tax Exempt and Government Entities Division issues letter
rulings and determination letters for a variety of activities,
including but not limited to employee plans and exempt organizations.
Depending on the request, fees can range from $200 to $25,000.
U.S. residency certification: Income tax treaties between the United
States and foreign countries can reduce withholding rates for certain
types of income paid to U.S. residents. In such cases, U.S. treaty
partners may require taxpayers to provide a letter of U.S. residency
certification for purposes of claiming benefits under an income tax
treaty or exemption from a value-added tax imposed by the foreign
country. Applicants requesting such certifications would need to
submit a $35 fee for the first 20 certifications and $5 for each
additional request of 20 certifications thereafter to IRS.
[End of section]
Appendix III: Comments from the Internal Revenue Service:
Department Of The Treasury:
Internal Revenue Service:
Deputy Commissioner:
Washington, D.C. 20224:
November 10, 2011:
Mr. James R. White:
Director, Tax Issues:
Strategic Issues Team:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. White:
Thank you for the opportunity to comment on the draft audit report
titled "User Fees: Additional Guidance and Documentation Could Further
Strengthen IRS's Biennial Review of Fees." We appreciate the time your
team spent reviewing IRS user fees and the biennial review process.
We are pleased that the Government Accountability Office (GAO)
recognized our efforts in conducting a biennial review of user fees
and striving to improve our cost estimation in order to make sound
decisions regarding user fee rates. Additionally, the GAO recognized
that the IRS set the Return Preparer user fee in accordance with
established cost estimation guidelines. We agree with the
recommendations contained in your report to continue to make
improvements to our biennial review process, and we will implement
them during the fiscal year 2013 biennial review.
We are committed to implementing appropriate improvements to ensure
that the IRS maintains sound financial practices. If you have any
questions, or would like to discuss our response in further detail,
please contact me or a member of your staff may contact Pamela LaRue,
Chief Financial Officer, at (202) 622-6400.
Sincerely,
Signed by:
Beth Tucker:
Deputy Commissioner for Operations Support:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
James R. White, (202) 512-9110 or whitej@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Jay McTigue (Assistant
Director), Elizabeth Fan, and Susan Sato made key contributions to
this report. Doreen Eng, Edward Nannenhorn, Jacqueline Nowicki, Chelsa
Gurkin, Melanie Papasian, Neil Pinney, and Andrew J. Stephens also
provided valuable assistance.
[End of section]
Footnotes:
[1] An installment agreement is a payment plan that allows a taxpayer
to pay his or her full tax liability with smaller monthly payments
over a period of time. An offer in compromise is an agreement between
IRS and a taxpayer to settle a tax liability for payment of less than
the full amount owed.
[2] IRS expects to collect and retain approximately $309 million in
user fees for fiscal year 2012, but it plans to use only $204 million,
as reflected in its budget request. As we discuss later in this
report, IRS has permanent authority to obligate and spend user fee
collections and can carry forward any unused collections for use in
subsequent years.
[3] OMB Circular A-25 also states that each agency will review user
charges biennially; these reviews will include (1) ensuring that
existing charges are adjusted to reflect unanticipated changes in
costs or market values and (2) a review of other programs within the
agency to determine whether fees should be initiated for government
services or goods for which the agency is not currently charging fees.
[4] The CFO Act requires an agency's CFO to review, on a biennial
basis, the fees, royalties, rents, and other charges for services and
things of value and make recommendations on revising those charges to
reflect costs incurred. The CFO Act of 1990, Pub. L. No. 101-576, 104
Stat. 2838, 2843 (Nov. 15, 1990), created section 902 of title 31,
United States Code. Also, see OMB Circular A-25, § 8(e).
[5] OMB Circular A-25, § 6.
[6] GAO, A Glossary of Terms Used in the Federal Budget Process,
[hyperlink, http://www.gao.gov/products/GAO-05-734SP] (Washington,
D.C.: September 2005).
[7] GAO, Federal User Fees: A Design Guide, [hyperlink,
http://www.gao.gov/products/GAO-08-386SP] (Washington, D.C.: May 29,
2008).
[8] For this review, we focused primarily on user fees included in
IRS's fiscal year 2009 review. IRS also charges user fees for requests
related to (1) the Freedom of Information Act of 1986 (FOIA), (2)
historic easement, (3) reproduction of tax returns, and (4) special
statistical studies and compilations. FOIA mandates public access to
records of federal agencies unless the information is protected from
disclosure. Fee rates for FOIA requests vary depending on the type of
requester and the purpose of the request. All collected fees are
deposited into the General Fund of the U.S. Treasury. In addition,
taxpayers may deduct an amount greater than $10,000 for the donation
of an easement on a building in a historic district by paying a $500
filing fee to IRS. Collections from the historic easement filing fee
are deposited into IRS's Miscellaneous Retained Fees Fund; however,
the historic easement fee is not considered a user fee because IRS
provides no special benefit or service in exchange for receiving this
fee. Lastly, fee collections from the reproduction of tax returns and
special statistical studies and compilations user fees are generally
treated as offsetting collections and do not flow through IRS's
Miscellaneous Retained Fees Fund. Collections related to these user
fees amounted to approximately $6.4 million in fiscal year 2010.
Officials indicated that, as of October 1, 2011, the fee for
reproduction of tax returns would no longer be treated as offsetting
collections and would instead flow through a subfund of IRS's
Miscellaneous Retained Fees Fund.
[9] IOAA is codified at 31 U.S.C. § 9701.
[10] According to the circular, full cost includes all direct and
indirect costs, but is not limited to salaries and benefits; physical
overhead; consulting; material and supply costs; utilities; insurance;
travel; rents or imputed rents on land, buildings, and equipment;
management and supervisory costs; costs of collecting and enforcing
fees; research; establishment of standards and regulation; and imputed
costs. OMB Circular A-25, § 6(d)(1).
[11] User fees assessed under specific statutory authority should also
be construed consistent with IOAA to the extent possible as part of an
overall statutory scheme. Thus, OMB Circular A-25 provides guidance
regarding assessments of user charges not only under IOAA but also
under other more specific fee statutes to the extent permitted by law--
that is, the provisions of a more specific user fee statute take
precedence over the circular's guidance and also over the more general
provisions of IOAA itself.
[12] OMB Circular A-25, §§4(b), 6(a)(2), 6(c).
[13] If OMB approves an agency's decision to charge less than full
cost, an exception is granted for a 4-year period. After the exception
period has expired, the agency must submit another request for
approval by OMB. OMB Circular A-25, § 6(c)(3).
[14] IRS has charged less than full cost for both installment
agreements and offers in compromise since fiscal years 1997 and 2002,
respectively. IRS's most recent waivers for installment agreements and
offers in compromise expired in March 2010. IRS officials explained
that the approval of new waivers was pending because OMB requested
additional support from IRS for not charging full cost for these fees,
which IRS plans to provide as part of its fiscal year 2011 biennial
review.
[15] Unlike IOAA-derived user fees that require full cost recovery,
IRS is not required to recover full cost for user fees authorized by
specific statutes which permit IRS to charge what it considers to be
reasonable, or fair. Income verification express service provides 2-
business-day processing and electronic delivery of tax return
transcripts for users, such as mortgage lenders and other financial
market entities, to confirm the income of a borrower (taxpayer) during
the processing of a loan application.
[16] As specified in IRS's Internal Revenue Manual on user fees, the
agency generally collects user fees at the time the service is
requested. IRS utilizes a variety of collection mechanisms, ranging
from checks received at IRS campuses, bank lockboxes, or the IRS
National Office, or electronically through Pay.gov.
[17] Congress authorized IRS to retain a portion of its user fee
collections to fund operations in the 1995 Treasury Appropriations
Act. The amount of user fee collections that IRS was allowed to retain
and spend was limited to $119 million. Pub. L. No. 103-329, title 1, §
3, 108 Stat. 2382, 2388-89 (Sept. 30, 1994). In 2005, the limit was
removed as part of the Transportation, Treasury, Housing and Urban
Development, the Judiciary, the District of Columbia, and Independent
Agencies Appropriations Act, 2006. Pub. L. No. 109-115, div. A, title
II, § 209, 119 Stat. 2396, 2439 (Nov. 30, 2005).
[18] From the implementation of the installment agreement user fee in
fiscal year 1995 to fiscal year 2006, taxpayers paid $43 to initiate a
new installment agreement or $24 to restructure or reinstate an
installment agreement. Since the fiscal year 2007 fee rate change,
taxpayers pay $105 (or $52 for direct debit payment) to initiate a new
installment agreement or $45 to restructure or reinstate an
installment agreement. Low-income taxpayers pay a reduced fee of $43
to initiate a new installment agreement.
[19] IRS officials stated that requests for income verification
express service transcripts have increased over the past few years
because of the first-time homebuyers credit and property owners who
refinanced their mortgages, among other reasons.
[20] [hyperlink, http://www.gao.gov/products/GAO-08-386SP].
[21] Treasury Inspector General for Tax Administration, The Internal
Revenue Service Expects to Spend About $13 Million to Recover From the
2006 Flood of Its Headquarters Building, 2007-10-113 (Washington,
D.C.: July 13, 2007).
[22] According to IRS's Internal Revenue Manual, full cost of user
fees should include all direct and indirect costs for providing the
good, resource, or service requested. Such costs include personnel
costs, overhead costs, and costs to collect the fee, among others.
[23] According to an IRS official, the fee for special statistical
studies and compilations is calculated separately for each request, in
general. Thus, costs could be estimated more frequently than
biennially. The IRS official added that although the CFO's office has
assisted with these cost estimates in the past, it has not reviewed
these fees.
[24] OMB Circular A-25 requires the fee to be reviewed every 2 years.
Previously, IRS felt that it had met the intent of the circular by
reviewing all of its other user fees for letter rulings and
determination letters. Since the time of our review, IRS officials
said that they have reviewed and updated this cost estimate for the
fiscal year 2011 biennial review.
[25] 31 U.S.C. § 902(a)(8).
[26] Statement of Federal Financial Accounting Standards (SFFAS) No.
4, Managerial Cost Accounting Standards and Concepts, para. 1.
[27] GAO, Tax Preparer Regulation: IRS Needs a Documented Framework to
Achieve Goal of Improving Taxpayer Compliance, [hyperlink,
http://www.gao.gov/products/GAO-11-336] (Washington, D.C.: Mar. 31,
2011).
[28] The CFO's office added that the cost estimates for fiscal year
2011 had not been finalized at the time of our review, and assumptions
were subject to change.
[29] GAO, GAO Cost Estimating and Assessment Guide: Best Practices for
Developing and Managing Capital Program Costs, [hyperlink,
http://www.gao.gov/products/GAO-09-3SP] (Washington, D.C.: Mar. 2,
2009).
[30] SFFAS No. 4, para. 71.
[31] IRS, Internal Revenue Manual 1.32.19 and 1.32.3.
[32] The $35 fee covers requests of up to 20 certifications. The fee
rate increases for additional certification requests.
[33] Revenue procedures are official IRS statements of a procedure
that affects the rights and duties of taxpayers and provide
instructions concerning an IRS position, such as a change in fee rate.
User fees administered by IRS's Office of Chief Counsel, TE/GE
division, and LB&I division are published in revenue procedures.
[34] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: Nov. 1, 1999), 15.
[35] Pub. L. No. 109-115, div. A, title II, § 209, 119 Stat. 2396,
2439 (Nov. 30, 2005).
[36] [hyperlink, http://www.gao.gov/products/GAO-11-336] discussed
IRS's plans for implementing user fees for preparer tax administration
number registration, competency testing, and continuing education.
Since then, IRS has decided not to establish a fee for continuing
education and has decided to establish a user fee for fingerprinting
preparers as part of a background check.
[37] Circular, § 8(e).
[38] We also included some discussion about user fees not included in
IRS's fiscal year 2009 biennial review, including (1) preparer tax
identification number, (2) user fees treated as offsetting
collections, and (3) statutorily set user fees.
[39] Prior to October 1, 2011, IRS charged $2.25 per IVES transcript
request.
[40] IRS waives the $150 fee for applicants who meet the poverty
threshold.
[41] If an offer is accepted under Effective Tax Administration
criteria or doubt as to collectibility under special circumstances,
the fee will be applied against the amount of the offer, unless the
taxpayer requests that it be refunded.
[End of section]
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