Information Reporting
IRS Could Improve Cost Basis and Transaction Settlement Reporting Implementation Gao ID: GAO-11-557 May 19, 2011Effective implementation of two 2008 laws by the Internal Revenue Service (IRS) could increase taxpayers' voluntary compliance. Those laws require reporting to IRS and taxpayers of cost basis for sales of certain securities and of transaction settlement information (i.e., merchants' income from payment cards or third party networks). In response to a congressional request, GAO (1) assessed IRS's implementation plans for the laws; (2) determined the extent to which IRS issued timely regulations and guidance and did outreach; (3) examined how IRS will use the new data to improve compliance; and (4) analyzed IRS's plans to assess implementation and measure performance and outcomes. GAO compared IRS's implementation plans to criteria in past GAO work and other sources; interviewed industry groups and agency officials, and reviewed rulemaking documents; examined IRS's plans to use the new data; and compared IRS's measures and evaluation plans to GAO criteria.
IRS is implementing cost basis and transaction settlement reporting through the new Information Reporting and Document Matching (IRDM) program in the Small Business/Self Employed (SB/SE) and Modernization and Information Technology Services (MITS) divisions. IRDM plans show several elements of effective program management, but do not document coordination with some related IRS projects such as Workforce of Tomorrow. IRS estimated IRDM costs, but MITS's estimate does not reflect some best practices, such as adjusting for inflation. Also, IRDM did not use substantiated tax form volume projections in some budget and risk decisions. To date, IRS spent about $28 million on IRDM and requested another approximately $82 million. IRS outreach with industry stakeholders was thorough early in the rulemaking process, but IRS missed its target dates for issuing regulations by about 1 year due, according to IRS officials, to time needed to learn the complex industries. After IRS released final regulations, industry stakeholders sought clarification of certain issues. IRS did not release additional written guidance until after the regulations' effective dates, which industry stakeholders said may affect their implementation of the new reporting requirements. Although IRS released drafts of the newly required or revised forms, they did not release draft instructions prior to the regulations' effective dates. To use the new data, IRS is developing systems that are expected to improve IRS's existing matching of information returns to individual tax returns and expand matching to business taxpayers. The initial enhancements are to be operational in 2012. IRDM appropriately plans to conduct research and test data quality. IRDM regularly documents lessons learned; however, IRDM has not assigned responsibility or established procedures to use them. IRDM also developed preliminary performance measures to assess the implementation and outcomes, including effects on revenue and compliance. However, IRDM has not documented a plan to finalize the performance measures, such as methodology. GAO recommends, among other things, that IRS improve cost estimation, form volume projections, stakeholder communication, and performance management. IRS generally agreed with the recommendations, but did not describe plans to release draft form instructions or communicate target guidance release dates, both of which would aid industry implementation.
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: Michael Brostek Team: Government Accountability Office: Strategic Issues Phone: (202) 512-9039GAO-11-557, Information Reporting: IRS Could Improve Cost Basis and Transaction Settlement Reporting Implementation
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United States Government Accountability Office:
GAO:
Report to Congressional Requesters:
May 2011:
Information Reporting:
IRS Could Improve Cost Basis and Transaction Settlement Reporting
Implementation:
GAO-11-557:
GAO Highlights:
Highlights of GAO-11-557, a report to congressional requesters.
Why GAO Did This Study:
Effective implementation of two 2008 laws by the Internal Revenue
Service (IRS) could increase taxpayers‘ voluntary compliance. Those
laws require reporting to IRS and taxpayers of cost basis for sales of
certain securities and of transaction settlement information (i.e.,
merchants‘ income from payment cards or third party networks).
In response to a congressional request, GAO (1) assessed IRS‘s
implementation plans for the laws; (2) determined the extent to which
IRS issued timely regulations and guidance and did outreach; (3)
examined how IRS will use the new data to improve compliance; and (4)
analyzed IRS‘s plans to assess implementation and measure performance
and outcomes.
GAO compared IRS‘s implementation plans to criteria in past GAO work
and other sources; interviewed industry groups and agency officials,
and reviewed rulemaking documents; examined IRS‘s plans to use the new
data; and compared IRS‘s measures and evaluation plans to GAO criteria.
What GAO Found:
IRS is implementing cost basis and transaction settlement reporting
through the new Information Reporting and Document Matching (IRDM)
program in the Small Business/Self Employed (SB/SE) and Modernization
and Information Technology Services (MITS) divisions. IRDM plans show
several elements of effective program management, but do not document
coordination with some related IRS projects such as Workforce of
Tomorrow. IRS estimated IRDM costs, but MITS‘s estimate does not
reflect some best practices, such as adjusting for inflation. Also,
IRDM did not use substantiated tax form volume projections in some
budget and risk decisions. To date, IRS spent about $28 million on
IRDM and requested another approximately $82 million as shown below.
Table: IRDM Actual and Requested Funding since Program Inception
Fiscal year: 2009 through 2011, actual;
MITS actual and requested funds: $51.0 million;
Total: $51.0 million.
Fiscal year: 2012 request;
SB/SE IRDM actual or requested funds:
Cost basis reporting: $1.3 million;
Transaction settlement reporting: $27.5 million;
Other direct costs for both: $6.9 million;
MITS actual and requested funds: $23.2 million;
Total: $58.9 million.
Fiscal year: Total, 2009 through 2012: $109.9 million.
Source: Fiscal year 2012 budget request for IRS and IRDM budget
documents.
Note: Other direct costs for both include handling appeals and
litigating cases not resolved by audit or appeal.
[End of table]
IRS outreach with industry stakeholders was thorough early in the
rulemaking process, but IRS missed its target dates for issuing
regulations by about 1 year due, according to IRS officials, to time
needed to learn the complex industries. After IRS released final
regulations, industry stakeholders sought clarification of certain
issues. IRS did not release additional written guidance until after
the regulations‘ effective dates, which industry stakeholders said may
affect their implementation of the new reporting requirements.
Although IRS released drafts of the newly required or revised forms,
they did not release draft instructions prior to the regulations‘
effective dates.
To use the new data, IRS is developing systems that are expected to
improve IRS‘s existing matching of information returns to individual
tax returns and expand matching to business taxpayers. The initial
enhancements are to be operational in 2012. IRDM appropriately plans
to conduct research and test data quality.
IRDM regularly documents lessons learned; however, IRDM has not
assigned responsibility or established procedures to use them. IRDM
also developed preliminary performance measures to assess the
implementation and outcomes, including effects on revenue and
compliance. However, IRDM has not documented a plan to finalize the
performance measures, such as methodology.
What GAO Recommends:
GAO recommends, among other things, that IRS improve cost estimation,
form volume projections, stakeholder communication, and performance
management. IRS generally agreed with the recommendations, but did not
describe plans to release draft form instructions or communicate
target guidance release dates, both of which would aid industry
implementation.
View [hyperlink, http://www.gao.gov/products/GAO-11-557] or key
components. For more information, contact Michael Brostek at (202) 512-
9110 or brostekm@gao.gov.
[End of section]
Contents:
Letter:
Background:
IRDM Implementation Plans Have Many Positive Aspects, but Could Better
Demonstrate Coordination with Other IRS Projects, Adhere to Best
Practices for Cost Estimation, and Use Reliable Data for Decision
Making:
Additional IRS Communication and Guidance, and Release of Future Draft
Form Instructions, Could Benefit Industry Implementation:
IRDM Plans for IT Systems, New Workflows and Organization, and
Research Are Expected to Improve the Compliance Programs for
Individual and Business Taxpayers:
IRS Has Plans to Assess Implementation and Outcomes, but Needs to
Identify and Document IRDM Performance Measures Early on to Ensure
Necessary Data Collection:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Changes to Cost Basis Tracking and Calculations:
Appendix III: Assessment of MITS's IRDM Cost Estimate:
Appendix IV: IRS's Planned Use of Cost Basis and Transaction
Settlement Data:
Appendix V: Comments from the Internal Revenue Service:
Appendix VI: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: IRDM Actual and Requested Funding Since Program Inception:
Table 2: IRS Projections of Annual Form 1099-K Volume:
Table 3: IRS's Existing Process Characteristics Compared with Plans
for the IRDM Program:
Table 4: Selected Changes to Tracking and Calculating Basis for
Reporting Resulting from the Energy Improvement and Extension Act of
2008:
Table 5: MITS IRDM Cost Estimate Alignment with Best Practices:
Table 6: Key Planned IRDM Capability Enhancements for Matching
Documents, Identifying Cases, and Managing Cases Beginning in 2012:
Figures:
Figure 1: New Transaction Settlement Reporting Process for a Typical
Credit or Debit Card Transaction:
Figure 2: Key Dates for Cost Basis and Transaction Settlement
Reporting Rulemakings:
Figure 3: IRDM's Planned End-State for Using Cost Basis and
Transaction Settlement Data:
Abbreviations:
AUR: Automated Underreporter:
BMF: Business Master File:
CADE: Customer Account Data Engine:
CFO: Chief Financial Officer:
DRIP: Dividend Reinvestment Plan:
ETA: Electronic Transactions Association:
FAQ: Frequently Asked Questions:
FIF: Financial Information Forum:
FIRE: Filing Information Returns Electronically:
ICI: Investment Company Institute:
IMF: Individual Master File:
IPM: Integrated Production Model:
IRDM: Information Reporting and Document Matching:
IRMF: Information Returns Master File:
IRPAC: Information Reporting Program Advisory Committee:
IRS: Internal Revenue Service:
IT: Information Technology:
JCT: Joint Committee on Taxation:
MITS: Modernization and Information Technology Services:
RAS: Research Analysis and Statistics:
RIC: Regulated Investment Company:
PSE: Payment Settlement Entity:
SB/SE: Small Business/Self Employed:
SIFMA: Securities Industry and Financial Markets Association:
TIGTA: Treasury Inspector General for Tax Administration:
TIN: Taxpayer Identification Number:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
May 19, 2011:
The Honorable Max Baucus:
Chairman:
The Honorable Orrin G. Hatch:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on the Judiciary:
United States Senate:
The nation's mounting $14 trillion plus debt, as of May 2011, coupled
with the $345 billion gross tax gap--or the difference between what
taxpayers should have paid and actually did--underscores the
importance of the Internal Revenue Service's (IRS) efforts to ensure
everyone meets their obligation to pay taxes.[Footnote 1] Despite
voluntary compliance on the part of most taxpayers and vigorous
enforcement, about 16 percent of taxes are uncollected annually,
according to IRS.
IRS seeks to increase voluntary compliance with tax laws, in part, by
comparing--i.e., matching--income or expenses reported by third
parties on information returns to those taxpayers report on their tax
returns. To increase the information available to IRS for compliance
purposes--and therefore increase the potential for raising revenue--
Congress passed several acts in recent years requiring new third-party
information reporting. Establishing an effective matching program is
important not only for revenue collection, but also because the
biggest benefit of information reporting is the increase in voluntary
compliance that is expected to occur because taxpayers have the
information they need to accurately report income and they realize
that IRS has access to those data. One provision of one of the new
laws requires brokers to report the adjusted cost basis for certain
securities and identify whether a gain or loss is short-or long-term
(referred to in this report as "cost basis reporting").[Footnote 2] In
2008, the Joint Committee on Taxation (JCT) projected this provision
to generate $6.67 billion in revenue over 10 years. Another provision
in the other law requires the reporting of merchants' gross amount of
income from payment card or third-party payment network transactions
(referred to in this report as "transaction settlement reporting").
[Footnote 3] In 2008, the JCT projected this provision to generate
$9.8 billion in revenue over 10 years. In prior reports, we
recommended that Congress consider cost basis reporting legislation
and provided information to Congress on payment card reporting.
[Footnote 4]
Because IRS's effective implementation of these laws could decrease
the tax gap, you requested that we: (1) assess IRS's implementation
plans for the new reporting requirements, including its cost
estimates; (2) determine the extent to which IRS communicated with
industry stakeholders, issued timely regulations and guidance, and
undertook outreach efforts to facilitate stakeholders' ability to
comply with the new reporting requirements; (3) examine how IRS will
use the new returns to improve compliance and determine how
implementation may affect its other functions and its ability to
process and match other kinds of information returns; and (4) analyze
IRS's plans to assess the implementation process, develop performance
measures to monitor operations, and determine any outcomes, such as
the effects of the new returns on voluntary compliance.
To do our work, we analyzed IRS's planning, implementation, and cost
estimate documents to determine whether they met best practices
established by IRS guidance, such as its Internal Revenue Manual, and
in several prior GAO reports cited throughout this report. We also
examined budgets, the new legislation, IRS's proposed regulations, and
public comments received, as well as information technology plans,
preliminary performance measures, and associated plans for the new
requirements. We interviewed IRS officials, including those who are a
part of the Information Reporting and Document Matching (IRDM)
program, the group responsible for the laws' implementation. We also
interviewed industry stakeholders, which represent groups required to
file information returns under the new cost basis and transaction
settlement provisions, as well as members of IRS's Information Return
Program Advisory Committee.
We conducted this performance audit from June 2010 through May 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. See appendix I
for more information on our scope and methodology.
Background:
Cost Basis Reporting:
IRS estimated, for tax year 2001, that $11 billion of the tax gap
could be attributed to individual taxpayers who misreport income from
capital assets, such as securities and other assets owned for
investment or personal purposes.[Footnote 5] Specific to securities
transactions, we estimated based on IRS data and examination of case
files, that for the same year, 38 percent of individual taxpayers
misreported their capital gains or losses.[Footnote 6] To help prevent
some taxpayer misreporting, brokers must, under the new requirements,
report the adjusted cost basis for certain securities on a revised
Form 1099-B, "Proceeds From Broker and Barter Exchange Transactions."
[Footnote 7] For certain securities, brokers must begin collecting
these data on January 1, 2011, and report them to IRS in 2012. Brokers
must begin collecting information on additional securities, beginning
on January 1, 2012.[Footnote 8]
Generally, a taxpayer's gain or loss from a securities sale is the
difference between the gross proceeds from the sale and the original
purchase price, or cost basis, net of any fees or commissions.
However, to determine any gains or losses from securities sales, the
taxpayer must determine if and how the original cost basis of the
securities must be adjusted to reflect certain events, such as stock
splits.[Footnote 9] For years, brokers have been required to report
information on Form 1099-B such as descriptions of securities sold,
sales date, and gross proceeds. However, the law changed what
information is reported and who reports it. Prior to the law's
effective date, the taxpayer was responsible for calculating cost
basis and reporting it to IRS on their tax return. Now, brokers will
be responsible for reporting cost basis information to taxpayers and
IRS on the Form 1099-B. The Form 1099-B is due to taxpayers on
February 15, and to IRS on February 28 for paper returns and March 31
for electronic returns, for the prior calendar year's security sales.
Additional changes resulting from the law are described in table 4,
appendix II.
Transaction Settlement Reporting:
Transaction settlement reporting is expected to help IRS identify and
prevent the underreporting of businesses income. Under the new
requirements, all merchant transactions completed beginning on January
1, 2011, in which either a payment card or a third-party payment
network is used as the form of payment, must be reported by payment
settlement entities (PSE) on the new Form 1099-K, "Merchant Card and
Third Party Network Payments."[Footnote 10] Information reporting on
merchants--businesses that accept payment cards or payment from a
third-party settlement organization for goods and services--is new for
the transaction settlement industry.
A payment card is a card-based payment, such as a credit card, debit
card, or prepaid telephone card, which is accepted by a group of
unrelated merchants.[Footnote 11] For example, a gift card for a
shopping mall is a payment card because it is accepted as payment at a
network of unrelated stores; however, a gift card for a specific store
is not a payment card because it is only accepted by the store that
issued it. A third-party payment network accepts various forms of
payment from a customer to settle transactions with merchants who are
unrelated to the network. Examples of third-party payment networks
include PayPal, certain toll road automated payment systems, and
certain shared service organizations (such as certain accounts payable
services).[Footnote 12]
A PSE--a bank or other organization that processes transactions and
makes payments to the merchant accepting the payment card or the third-
party settlement organization that makes payment to the merchant--is
responsible for reporting payment card and third-party network
transactions annually to IRS and to the merchant, on the Form 1099-
K.[Footnote 13] The new requirements direct PSEs to report the gross
amount of reportable payment transactions, which is the total dollar
amount of aggregate transactions for each merchant, for each calendar
year, without regard to adjustments for credits, cash equivalents,
discounts, fees, refunds, or other deductions.[Footnote 14] In some
cases, more than one PSE may be involved in a single transaction, in
which case the PSE that actually makes payment to the merchant is
responsible for filing the Form 1099-K.
When a customer (cardholder) purchases goods or services from a
merchant using a payment card, the merchant submits the transaction to
the PSE for approval. The PSE submits a request through the card
network, such as Visa or Mastercard, to the bank or other entity that
issued the card (issuer). The issuer checks the customer's account to
determine if the customer is able to cover the cost of the
transaction. If so, the issuer bills or debits the customer's account
for the amount of the transaction. Figure 1 shows this process for a
typical credit or debit card transaction, two commonly used types of
payment cards.
Figure 1: New Transaction Settlement Reporting Process for a Typical
Credit or Debit Card Transaction:
[Refer to PDF for image: illustration]
Daily card transactions:
Customer uses card to make a $100 purchase from merchant;
Issuer bills or debits cardholder‘s account for $100 and customer pays
issuer[A];
Issuer approves transaction and transfers money to PSE[B] through card
network (e.g., Visa, Mastercard);
Merchant submits customer transaction data for authorization;
Merchant receives payment from PSE[B];
Authorization request goes through the PSE and card network.
Yearly submission of data on gross amount of transactions:
PSE sends merchant Form 1099-K;
PSE sends Form 1099-K to IRS;
IRS matches Form 1099-K with merchant tax return;
Merchant submits tax return that includes Form 1099-K information[C].
Source: GAO.
[A] In some cases, such as a credit card transaction, the issuer bills
the customer and the customer may pay later. In other cases, such as a
debit card transaction, funds are directly withdrawn from a customer's
account.
[B] The PSE for credit card and debit card transactions is a merchant
acquiring entity. An acquiring entity is a bank or other organization
that makes payments to the merchant that accepts the credit card or
debit card.
[C] A merchant will receive one or more annual Forms 1099-K from each
PSE that provides the merchant with payments. The merchant will file a
tax return combining the total gross amount of transactions from all
Forms 1099-K.
[End of figure]
Third-party payment network transactions are similar to credit and
debit card transactions in that the third-party network facilitates
transactions between unrelated merchants and customers. Third-party
payment networks have widely varying business models, and can
encompass many different types of payment situations that are not
easily generalized, according to IRS officials and industry
representatives. Typically, a customer pays the third-party settlement
organization for a transaction with an agreed upon form of payment,
which may include a payment card, and the third-party settlement
organization settles the transaction with the merchant. One example of
a third-party network is certain toll collection networks. Some states
that operate toll roads contract with a third-party settlement
organization to bill customers for road usage. The third-party
settlement organization provides a system that allows the toll
facility to record the passage of a vehicle with a transmitter inside.
The third-party settlement organization periodically bills customers'
accounts and makes payments to the state to settle the toll
transactions.
IRS's New Compliance Program for Using Information Returns:
IRS initiated the IRDM program in 2009 in part to implement the two
new information reporting requirements, but more generally to increase
voluntary compliance by expanding and maximizing its ability to use
existing and future information returns and establishing a new
business information matching program. Formerly, IRS had only matched
information returns to individuals' and sole proprietors' tax returns.
[Footnote 15] Under IRDM, IRS plans to build several new information
technology (IT) systems and enhance some existing systems as well as
implement numerous organizational and process changes. Specifically,
IRS plans for IRDM to house a new process to use information returns
to identify individual and business tax returns that are likely
sources of revenue and that are overlooked by the current individual
tax return matching system.
IRDM implementation involves many IRS groups and offices, and is led
by the Small Business/Self Employed (SB/SE) division and Modernization
and Information Technology Services (MITS). The Research Analysis and
Statistics (RAS) division, the Office of Chief Counsel, and the Tax
Forms and Publications group also have important roles in IRDM
implementation. For example, RAS is working with IRDM on a research
plan to assess the effectiveness of the program. IRDM capabilities
will be implemented in stages, beginning in 2012.
IRDM Implementation Plans Have Many Positive Aspects, but Could Better
Demonstrate Coordination with Other IRS Projects, Adhere to Best
Practices for Cost Estimation, and Use Reliable Data for Decision
Making:
IRDM Implementation Plans Address Several Key Areas for Effective
Program Management:
IRS developed a series of plans to implement the IRDM program, which
will be used to implement the new cost basis and transaction
settlement reporting requirements. IRDM plans cover program scope,
management structures, information technology system development,
communications with stakeholders, and other aspects of IRDM
implementation.
We found that IRDM implementation plans generally are consistent with
criteria for effective program planning and implementation listed in
our prior reports and IRS guidance.[Footnote 16] For example, these
criteria call for a leadership structure, an internal communication
strategy, staffing and training provisions, a review process, risk
management, and alignment with the agency strategic plan. IRDM has a
leadership structure, headed by an executive steering committee at the
highest level, with authority over the IRDM Governance Board whose
functions include program management and coordination. It has a
stakeholder management and outreach plan that specifies communication
strategies, as well as a detailed staffing and organizational
development plan to implement document matching for business
taxpayers. IRS's plans include provisions to review and assess the
program for continuous improvement, such as a requirement to document
lessons learned at the end of each significant project phase.
Furthermore, IRDM has a plan that assesses and provides for the
management of program risks and a plan that provides for analysis of
related technology system interdependencies. IRS has begun
implementing several of these plans, to various degrees.It is too
early in the implementation process to comprehensively assess whether
IRDM has followed all of its plans or achieved outcomes and whether
these efforts will be effective.
Regarding the schedule of IRDM implementation, we found that IRS has
met most time lines established in the program implementation plans,
with two notable exceptions: the release of final regulations for cost
basis and transaction settlement reporting, to be discussed later in
this report, and certain software development milestones.[Footnote 17]
Specifically, MITS did not meet milestone dates for the development
and testing of the software expected to enhance IRS's ability to
select potential individual taxpayer cases due to a procurement delay
for the associated hardware, which delayed testing by 1 month. This
software is also expected to aid in the development of a new IT system
to select business taxpayer cases for review. In response to the
delays, IRS officials said they have re-prioritized work and, as of
May 2011, officials said they do not expect the delays to affect the
program's progress.
IRDM Did Not Document Coordination with Related IRS Projects:
The IRDM Strategic Roadmap is the foundational plan for IRDM that
describes the program's scope, desired outcome, implementation phases,
and time line. IRS guidance and our prior work state that
comprehensive plans for implementing a new program should link with
the agency's strategic plan and align with its core processes and
agencywide objectives.[Footnote 18] The Strategic Roadmap is aligned
with IRS's Strategic Plan, which guides and sets goals for IRS's work
at a high level. For example, the Strategic Plan establishes a goal of
enforcing the law to ensure that everyone meets their obligation to
pay taxes which, according to the Strategic Roadmap, IRDM intends to
support by using third-party information reporting to increase
voluntary compliance and treat noncompliance.
However, the Strategic Roadmap and other IRDM plans do not document
coordination with some significant recent and ongoing servicewide
initiatives, such as Workforce of Tomorrow and the Nonfiler Strategy.
IRS officials said they met with the initiatives' team members to
coordinate, but did not document that coordination occurred and
whether or how this coordination ensured that IRDM and other
servicewide initiatives were consistent and would work well
together.[Footnote 19] We did not find any aspects of IRDM plans that
conflict with Workforce of Tomorrow or the Nonfiler Strategy, but
documenting that IRDM plans are coordinated with servicewide
initiatives would be consistent with internal control standards and
could facilitate oversight, help prevent duplicative efforts, and
foster a common understanding of program plans and activities.
[Footnote 20] For example, IRDM has a workforce plan for staffing a
new organization to work business taxpayer cases identified by the new
document matching process. The plan addresses hiring, training, and
leadership, but does not show coordination with the servicewide
Workforce of Tomorrow Task Force and its specific recommendations to
improve IRS's overall recruiting methods, hiring strategies, and
leadership development. The Workforce of Tomorrow report notes that
better coordination of leadership development efforts across IRS could
lead to more consistent application of talent management tools and
more effective use of processes and data for servicewide decision
making.
IRDM is also planning new processes for identifying businesses that do
not file tax returns, including an incipient business Automated
Substitute for Return program.[Footnote 21] An IRDM plan recommends
combining the planned business Automated Substitute for Return program
with a related enforcement program for business nonfilers. This plan
does not show coordination with IRS's servicewide Nonfiler Strategy or
discuss the Nonfiler Strategy's potential effect on IRDM functions.
IRS's Nonfiler Strategy noted that a lack of coordination in nonfiler
work results in ineffective resource allocation. IRS provided us with
a document that officials stated was used to inform the Strategic
Roadmap; it cites how IRDM will make some accommodations for nonfiler
programs, but it does not mention or discuss coordination with the
Nonfiler Strategy.
IRDM plans could demonstrate coordination with Workforce of Tomorrow
and the Nonfiler Strategy by describing IRDM's relationship with and
its effect on these initiatives. After we discussed the issue with
IRDM management in January 2011, officials said they are working to
document this coordination in an updated version of the Strategic
Roadmap, but they had not done so as of May 2011.
IRS Estimated SB/SE and MITS IRDM Costs, but MITS's Estimate Does Not
Reflect Some Best Practices:
SB/SE and MITS, the primary IRS divisions involved in IRDM
implementation, each estimated their share of IRDM program costs for
IRS's budget. SB/SE's first budget request for IRDM, about $36
million, was made for fiscal year 2012.[Footnote 22] Officials expect
that annual funding will increase as the program becomes fully
operational and then remain steady for as long as IRDM continues to
operate.
SB/SE worked with the IRS Chief Financial Officer's (CFO) office to
develop its budget request. SB/SE calculated staffing needs based on
the number and types of cases it anticipated, then used a calculator
developed by the CFO's office to determine the cost of the staff,
including salaries, benefits, training, facilities, and other direct
and indirect costs.
MITS's work on IRDM was funded at $23 million during fiscal year 2010,
and IRS plans for funding to continue at this level through fiscal
year 2016, yielding a total cost of about $166 million for fiscal
years 2009-2016.[Footnote 23] MITS developed an initial cost estimate
in 2008 to formulate its budget request. Total costs for IRDM since
the program's inception are shown in table 1.
Table 1: IRDM Actual and Requested Funding Since Program Inception:
2009 actual;
MITS IRDM costs: $5.1 million;
Total: $5.1 million.
2010 actual;
MITS IRDM costs: $23.0 million;
Total: $23.0 million.
2011 actual;
MITS IRDM costs: $22.9 million;
Total: $22.9 million.
2012 requested;
SB/SE IRDM costs:
Cost basis reporting: $1.3 million;
Transaction settlement reporting: $27.5 million;
Other direct costs for both[A]: $6.9 million;
MITS IRDM costs: $23.2 million;
Total: $58.9 million.
Total, 2009 through 2012;
Total: $109.9 million.
Source: Fiscal year 2012 budget request for IRS and IRDM budget
documents.
[A] Other direct costs for both cost basis and transaction settlement
reporting include handling appeals, litigating cases not resolved by
audit or appeal, and ensuring that staff are available for related
operations such as accounts management and submission processing.
[End of table]
According to best practices established by the GAO Cost Estimating and
Assessment Guide, a cost estimate should be comprehensive, well
documented, accurate, and credible.[Footnote 24] However, MITS's IRDM
cost estimate does not fully meet these four best practices (for a
description of the best practices and the extent to which MITS met
each characteristic, see appendix III). For example,
* The estimate substantially meets the best practices for a
comprehensive cost estimate.[Footnote 25] The estimate covers most
life-cycle costs, is supported by a document that defines the work
needed to accomplish the program's objectives and relates cost and
schedule to deliverables, and provides technical descriptions for each
project phase.[Footnote 26] However, although it defines assumptions
and estimating standards, also referred to as ground rules, the cost
estimate does not cite a rationale for the assumptions and only
considers the impact of risks on a portion of the estimate.[Footnote
27]
* The estimate partially meets best practices for a well documented
cost estimate. It provides technical descriptions for each project
phase and documents a management briefing, but it does not contain
many details about the underlying data used to develop the estimate.
MITS used a computer model to calculate the cost estimate, but the
formulas built into this model and the resulting calculations are not
shown. Thus, it would not be possible for another cost analyst outside
IRS to use available documentation to recreate the estimate without
access to this computer model. Moreover, although IRS provided
documentation of its general cost estimation methodology, the
methodology used to develop this cost estimate was not provided at a
meaningful level of detail.[Footnote 28]
* The estimate partially meets best practices for an accurate cost
estimate. The model used to calculate the estimate was developed using
data from other comparable projects, which provides insight into
actual costs on similar programs.[Footnote 29] However, inflation was
not included. According to IRS officials, inflation is not applied to
cost estimates because it is factored in automatically during the
budget process. If inflation were included in the cost estimate, it
would be double-counted in the budget. Applying inflation is an
important step in creating a cost estimate and it is a best practice
for inflation to be included and documented when creating cost
estimates. Cost data must be expressed in like terms, which requires
the transformation of historical or actual cost data into constant
dollars. Additionally, the cost estimate does not explain variances
between planned and actual costs because the estimate was developed
before the program started; there were no actual IRDM cost data
available. A comparison between the original estimate and actual costs
would allow estimators to see how well they are estimating and how the
program is changing over time. In 2008, the Treasury Inspector General
for Tax Administration (TIGTA) recommended that IRS provide similar
information.[Footnote 30]
* The estimate minimally meets best practices for a credible cost
estimate. It contains a risk analysis, but it only addresses risks on
a small portion of the overall costs and how the risk analysis was
done is not clearly documented. IRS performed a cross-check on the
estimate by using an alternative estimation method to see if it
produced similar results. Specifically, IRS did one cross-check by
comparing the estimate to an expected ratio of operations costs and
nonrecurring costs. However, there was no evidence that other cross-
checks were performed. Further cross-checks using different
calculation methods could enhance the estimate's reliability if they
showed that different methods produce similar results. In addition,
the cost estimate does not contain a sensitivity analysis, which would
examine the effects of changing assumptions and estimating procedures
and therefore highlight elements that are cost sensitive.[Footnote 31]
IRS officials said they typically do not perform a sensitivity
analysis unless the program has reached its preliminary design phase,
which was not the case when they estimated IRDM costs. Furthermore,
although the IRS group that did the cost estimate was independent from
the IRDM program office, IRS did not obtain an independent cost
estimate conducted by an outside group to validate it. According to
officials, due to limited resources, IRS generally only does an
additional independent cost estimate for its largest programs and does
not do an additional estimate for a cost estimate done at the start of
a program. Therefore, because IRDM is not a large program, according
to officials, and because its cost estimate was done before the
program started, an additional independent cost estimate was not done.
Although we recognize that it would be challenging for IRS to do an
independent cost estimate for each project because IRS lacks the
resource to do so, it is a best practice to do an independent cost
estimate because it would provide an unbiased test of whether the
original cost estimate is reasonable.
IRS officials said that, because their cost estimation procedures
became more robust after this cost estimate was prepared in 2008, a
revised cost estimate would follow best practices to a greater extent.
Officials also said that they could more accurately estimate costs now
that they know more about the IRDM program, and that they are
considering revising the estimate but may not do so due to limited
resources. If IRS revises the IRDM cost estimate, following best
practices from our cost estimating guide could enhance its
reliability.[Footnote 32]
IRS Did Not Use Substantiated Projections of Form 1099-K Volume for
IRDM Resource Planning Decisions:
IRDM did not use substantiated volume projections for the new Form
1099-K in some of its budget and risk management decisions because
official projections were not available when those decisions were
made. Making decisions without substantiated projections puts IRS at
risk for misallocating resources. To support sound decisions, the
source or method for obtaining data supporting decisions should be
documented. IRS research standards say that data must be validated,
any limitations must be disclosed, and documentation must be made
available.[Footnote 33] More specifically, IRS and industry guidance
establish that estimates used in project planning should have a sound
basis and documentation to instill confidence that any plans based on
estimates are capable of supporting project objectives.[Footnote 34]
IRS produced three different projections of the number of Forms 1099-
K, expected to be filed annually. One of these--the projection a
contractor developed in 2010 to assess the capacity of MITS's Filing
Information Returns Electronically (FIRE) system[Footnote 35]--was
developed without consulting RAS, which produces form volume
projections that IRS considers reliable. This projection, and the 125
million projection SB/SE developed in 2006, also lack documentation of
the assumptions and methods used to develop them. Table 2 describes
the three Form 1099-K volume projections and the decisions that were
based on them.
Table 2: IRS Projections of Annual Form 1099-K Volume:
Projection: 125 million;
Description: SB/SE produced this projection in 2006, in anticipation
of possible payment card reporting legislation;
Resource planning implication: SB/SE used this projection, in part, to
develop original budget and staffing estimates for SB/SE's fiscal year
2012 IRDM budget request;
Includes detailed supporting documentation: No.
Projection: 60 million;
Description: A contractor developed this projection to use in its
study assessing the capacity of IRS's FIRE system. This FIRE Capacity
Study was released in August 2010;
Resource planning implication: The FIRE Capacity Study explored
several scenarios that rely on Form 1099-K and Form 1099-B volume
projections. It concluded that FIRE is adequately sized to handle the
worst case volume scenarios;
Includes detailed supporting documentation: No.
Projection: 54 million;
Description: RAS produced this preliminary projection in December
2010[A];
Resource planning implication: This projection has supporting
documentation that explains its methodology and assumptions, but it
was not done in time to be used in IRDM resource planning decisions,
such as SB/SE's fiscal year 2012 IRDM budget request;
Includes detailed supporting documentation: Yes.
Source: GAO analysis of IRS data.
[A] RAS publishes yearly projections of information returns to assist
IRS staff with their budget submissions and staffing estimates. The 54
million projection is a preliminary estimate. To finalize this
estimate, RAS is refining its approximation of the number of Forms
1099-K that will be filed for each business. RAS plans to release the
official projection in summer 2011.
[End of table]
The 125 million projection was used in part to calculate SB/SE's
fiscal year 2012 request for about $36 million and 415 full-time
equivalent staff: it factored into staffing calculations such as the
number of employees needed to screen potential cases and respond to
discrepancies between Forms 1099-K and related business tax returns.
Other data also factored into these budget and staffing
calculations.[Footnote 36] In addition, the 60 million projection was
used to make decisions about MITS information technology needs. The
supported preliminary Form 1099-K projection produced by RAS is less
than half of the projection used to inform SB/SE's staffing
calculations. IRDM officials were unable to provide documentation of
the methodology used to develop SB/SE's 125 million projection, but
did provide us some of the assumptions. The FIRE Capacity Study does
not provide sufficient methodology or documentation to support its
findings, including its Form 1099-K projection. For example, the study
says that the assessment team obtained future volume projections by
holding meetings and exchanging e-mails, but does not explain how
those projections were calculated or the basis of the information.
IRDM identified the potential for new information returns to strain
FIRE's capacity as a program risk. The contractor's capacity study,
which IRS intended to address this risk, cannot reliably do so without
substantiated data inputs.
RAS is responsible for producing reliable form volume projections for
IRS decision making, but RAS had not yet produced an official Form
1099-K projection at the time of the formation of the fiscal year 2012
IRDM budget request and the FIRE study's release.[Footnote 37] RAS
officials were not involved in developing the projection used in the
FIRE Capacity Study. Consulting RAS when using Form 1099-K projections
in decision making could enhance the reliability of those projections.
Since we identified the issue, officials said they plan to reassess
whether the FIRE system can handle incoming information returns using
RAS's preliminary projection, but they had not done so as of May 2011.
Additional IRS Communication and Guidance, and Release of Future Draft
Form Instructions, Could Benefit Industry Implementation:
IRS Communication with Industry Stakeholders Early in the Rulemaking
Process Was Thorough:
Prior to preparing the proposed regulations for cost basis and
transaction settlement reporting, IRS counsel met in person and via
phone with industry stakeholders to gain an understanding of issues
facing the industries.[Footnote 38] Treasury officials, who worked
with IRS and ultimately approve the regulations, also met with
industry stakeholders. Additionally, prior to publishing proposed
regulations, IRS posted notices in the Internal Revenue Bulletin to
solicit responses to questions and comments on, among other things,
the definitions of key terms.[Footnote 39] Representatives from the
four cost basis and transaction settlement industry groups we
interviewed said IRS was responsive to their concerns and that its
initial outreach and information gathering efforts were good. In
addition to direct communication with industry groups, IRS also relied
on the Information Reporting Program Advisory Committee (IRPAC), whose
members include tax professionals and industry representatives, for
input.[Footnote 40] Once each of the two proposed regulations were
published, IRS conducted a public hearing and officials communicated
with industry through the public comment letter process. As evidenced
in lessons learned from a prior IRS implementation effort, this early
engagement of external stakeholders is important in the development of
the compliance and operational functions for new tax legislation.
[Footnote 41]
Despite Noteworthy Efforts, IRS Did Not Meet Its Target Dates for
Issuing Regulations:
Due, according to IRS officials, to unanticipated complexities of the
cost basis and transaction settlement industries, IRS counsel did not
meet its target dates for issuing final regulations for either
reporting requirement, as shown in figure 2.
Figure 2: Key Dates for Cost Basis and Transaction Settlement
Reporting Rulemakings:
[Refer to PDF for image: time line]
Cost Basis Reporting:
October 3, 2008:
Emergency Economic Stabilization Act passed.
October 2009:
IRS target for issuing final regulations.
December 16, 2009:
Proposed regulations published.
October 12, 2010:
Final regulations issued.
January 1, 2011:
Effective date for reporting entities to begin data collection.
Transaction settlement reporting:
July 30, 2008:
Housing Assistance Act passed.
October 2009:
IRS target for issuing final regulations.
November 23, 2009:
Proposed regulations published.
August 16, 2010:
Final regulations issued.
January 1, 2011:
Effective date for reporting entities to begin data collection.
Source: GAO analysis.
[End of figure]
Final regulations on cost basis reporting were issued in October 2010,
and for transaction settlement reporting in August 2010. Both laws
establish January 1, 2011, as the effective date for data collection
to begin--over 2 years after the laws' enactment in 2008. Reporting
data are due to IRS in 2012 for both laws.
Although IRS missed its target dates by about a year, the turnaround
for finalizing regulations was relatively fast, according to IRS
counsel, especially when compared with other information reporting
rulemaking.[Footnote 42] One cost basis group acknowledged the short
time between the enactment and the effective date of the laws. IRS
officials said that the rulemakings did not meet deadlines because the
cost basis and transaction settlement industries were more complex
than they anticipated and learning them required more time than
expected. Furthermore, according to IRS counsel, IRS does not have
complete control over the timing of the issuance of regulations
because they must be approved by the Department of the Treasury, which
sets priorities for when regulations are issued.[Footnote 43] The cost
basis and transaction settlement reporting regulations were given
priority, having been listed in Treasury's 2009-2010 Priority Guidance
Plan.[Footnote 44] However, Treasury counsel said the rulemakings
posed unique challenges, such as learning new systems and becoming
familiar with the industries affected by the regulations. Another
Treasury official said that their review process for these regulations
was relatively fast given the complexities. After the final
regulations were issued, the cost basis and transaction settlement
industries had, respectively, 2 ½ months and 4 ½ months before data
collection was to begin.
According to IRPAC and representatives from both industries, the
timing of final regulations left the industries with a short
implementation time. Three cost basis groups said that while the
legislation was under development, they requested from congressional
staff 18 months to implement any information systems or other changes
needed to comply with final regulations; third-party payment networks
said they requested a year. A senior IRDM official said companies
could have started systems development before regulations were final.
Although some cost basis and transaction settlement industry members
used proposed regulations to guide their initial implementation, IRPAC
representatives said companies had to make some assumptions about what
would be in the final regulations, which increases costs.
The short implementation time may affect the quality of data sent to
IRS. One cost basis industry group told us that small firms may not be
ready to comply with the regulations and, as a result, taxpayers and
IRS may receive inaccurate data on the Form 1099-B from those firms.
Although cost basis industry representatives believe it is too soon to
tell which data quality issues will be most pressing, they pointed out
that there may be significant inconsistencies in gifted and inherited
securities because calculation methods are unclear and systems were
not fully prepared for implementation. If these securities are
transferred to other brokers, data quality issues may follow,
resulting in long-term consequences for securities gifted or inherited
in 2011, but sold in later years. A transaction settlement industry
group identified several issues as potential data quality challenges,
including that the industry does not identify merchants based on
Taxpayer Identification Numbers (TIN). According to third-party
payment network representatives, it is too soon to tell how data may
be affected by the short implementation time.
Additional IRS Communication on Rulemaking, Guidance, and Outreach May
Improve Industry Implementation:
After IRS's issuance of final regulations, industry stakeholders
sought clarification of certain issues. IRS did not provide additional
written guidance or participate in outreach events until after the
effective dates of the regulations. IRS officials told us that timing
of the additional guidance resulted from a lengthy review process,
which included IRPAC's review of FAQs for transaction settlement
regulations. Regarding outreach, IRDM officials told us that IRDM
planned to begin outreach once final regulations were issued so that
messages would be based on stable information. Continuous engagement
of external stakeholders is important to ensure compliance with new
tax legislation.[Footnote 45]
Because IRS did not release clarifying guidance or continue outreach
until after the effective dates of the laws, industry groups
experienced a gap in communication from IRS which, according to
industry representatives, could affect implementation. Four industry
groups told us after the final regulations were issued that they were
awaiting additional information, including clarification on certain
reporting responsibilities, which could affect their implementation of
the laws. For example, one cost basis group pointed out that taxpayer
confusion associated with reporting wash sales may cause a large
volume of corrected Forms 1099-B during the year following
implementation.[Footnote 46]
IRS released a Frequently Asked Questions (FAQ) document for cost
basis reporting on its Web site in March 2011. For transaction
settlement reporting, as of May 4, 2011, IRS had not released
additional written guidance since issuing the final regulations. IRS
counsel said some transaction settlement companies and cost basis
entities have contacted them about technical details of
implementation, such as filling out forms, and that IRS has spoken
with them. Additionally, outreach events that will cover both laws,
such as speaking at events for tax professionals, began in February
2011 and, as of April 2011, are scheduled through November 2011. IRPAC
and two industry groups we spoke with said they are not always aware
of IRS's plans for issuing guidance or beginning additional outreach.
The transaction settlement industry's implementation also could be
affected by the gap in guidance and outreach after the regulations
were issued. For example, the definition in the regulations for "third-
party payment network" is broad, according to representatives of
several third-party payment network companies. The definition could
lead some companies to question whether they will need to file a Form
1099-K, according to the companies. IRS counsel acknowledged that the
applicability of the definition depends on a company's specific
business model and said the regulations could not address all possible
examples of third-party payment networks. IRS counsel said they plan
to post FAQs on their Web page and to do letter rulings on request.
[Footnote 47] Third-party payment network representatives we contacted
told us they were unaware of IRS's plans.
In addition to IRS counsel's communication with reporting entities,
IRDM established a team and a plan for stakeholder outreach. IRDM
hired an employee shortly after the laws' effective dates to lead the
communication team, and IRDM participated in its first external
outreach event at the end of February 2011. Earlier action by the IRDM
outreach team might have helped to bridge the communication gaps
between IRS and the cost basis and transaction settlement industries.
Earlier outreach might have also helped IRS raise awareness among
companies, such as certain third-party payment networks, who may not
be aware that they will be required to report. The IRDM Stakeholder
Management and Communication Plan provides a potentially useful
framework to analyze stakeholders' concerns and to prescribe
appropriate IRDM responses. For example, the plan describes a
methodology for analyzing the potential effect of IRDM regulations on
stakeholder groups, and the degree of influence of each stakeholder.
The IRDM team is to analyze stakeholder concerns and ideas, summarize
trends, and develop strategies for specific groups. The plans also
emphasize the need to gauge the effectiveness of IRDM communications.
This framework, if followed, could be a useful tool to help identify
and assess stakeholder needs.
IRS already has a Web page on cost basis, transaction settlement, and
other new information reporting requirements. The page contains copies
of the information returns and regulations for both laws, cost basis
FAQs, and, for transaction settlement stakeholders, instructions for
using IRS's TIN Matching Program.[Footnote 48] The page does not
contain prospective information about upcoming guidance or outreach
or, for other information reporting laws, upcoming rulemaking actions.
The Department of Transportation has a Web page that contains
information about the status of significant rulemakings, including
scheduled milestones, actual dates that milestones were met, and
explanations for any delays. The page is a public version of more
detailed internal tracking of rulemaking milestones and assessing
schedules, which helps department officials determine if a rule is on
or behind schedule, based on target dates.[Footnote 49] A
representative from a cost basis industry group referred us to a
similar Web page run by the Financial Industry Regulatory Authority,
which also contains outreach information on securities regulations.
[Footnote 50]
Additional Web-based information from IRS, such as information about
upcoming events or IRS's approach to letter rulings, could benefit
industry stakeholders. IRS could use the Transportation or Financial
Industry Regulatory Authority pages as a guide for enhancing its Web-
based information on regulations and guidance, and could also include
outreach information. Such information could be especially helpful for
the cost basis industry as IRS begins a new rulemaking for additional
securities that will be required to collect cost basis information
beginning in 2013. Representatives from the cost basis and transaction
settlement industries said such a Web page, if kept up to date, would
aid in their implementation of the laws.
Officials at IRS told us their ability to provide projected issuance
dates for regulations is limited by the uncertainties in Treasury's
review process. An official in Treasury's Office of Tax Policy agreed
that their review process, which could result in significant
revisions, makes it challenging to post projected release dates that
are useful and accurate. According to the official Treasury does not
have an internal system for tracking rulemaking. However, Treasury and
IRS officials could work together to provide projected release dates
to the public. Posting other information, such as upcoming outreach
events and the release of informal guidance, such as FAQs, would also
be beneficial.
IRS Did Not Release Draft Instructions for the Forms 1099-K and 1099-B
for Public Comment:
IRS released draft versions of the new Form 1099-K and the revised
Form 1099-B for tax year 2011 when it released the proposed
regulations in late 2009 for each law; however, IRS did not release
draft instructions for either form because, according to officials,
they were not complete at that time. IRS solicited comments on the
forms during the rulemakings process and continued communication
afterwords with industry groups as new drafts were created.[Footnote
51] IRS has since posted final instructions for both forms, and
officials told us they are taking comments on the instructions through
August 2011.[Footnote 52]
IRPAC representatives said they were unable to adequately comment on
the draft forms without seeing definitions and other explanations
typically included in instructions, and cost basis and transaction
settlement industry stakeholders also emphasized the need for
instructions to help in their implementation of the laws. Not having
instructions available when draft forms were issued left industry
stakeholders with some key unanswered questions, whose outcomes may
affect their system development efforts and ultimately data reported
to taxpayers and IRS. For example, some transaction settlement
representatives asked IRS why the Form 1099-K requests the gross
amount of "payments" rather than the gross amount of "reportable
payment transactions" as required in the regulations. For the
transaction settlement industry, there is a difference between a
payment and a transaction that could affect the dollar amount
reported. Specifically, the transaction amount of a purchase will
almost always be greater than the payment actually received by a
merchant, due to fees charged by the PSE, card issuers, or other
entities facilitating the transaction. The draft instructions
explained what was meant by the term "payments." If transaction
settlement groups had viewed the draft instructions with the draft
forms, their concerns may have been addressed earlier and they could
have proceeded with greater confidence in designing their data
collection processes.
IRS officials acknowledged that some comments made on the forms could
have been avoided if the instructions were available. According to IRS
officials, releasing draft instructions with draft forms is usually
not done because instructions are typically not complete by the time
forms go out for comment. However, IRS officials said they have
released draft instructions with forms on occasion and recognize the
value in doing so.
IRDM Plans for IT Systems, New Workflows and Organization, and
Research Are Expected to Improve the Compliance Programs for
Individual and Business Taxpayers:
Planned Enhancements Should Allow for New Information Return Data to
be Used in New and Existing Compliance Efforts:
IRDM's plans to use the new cost basis and transaction settlement
reporting data rely upon new IT systems that are expected to
automatically match information returns to tax returns. The plans also
provide for a new organization and new workflows for business taxpayer
compliance staff. The specific plans for electronically processing the
new information return data were nearly complete, as of May 2011,
according to a senior IRDM official. The initial round of IT
enhancements is to be operational in 2012, utilizing tax year 2011
data, and over 400 full-time equivalent staff have been requested in
IRS's fiscal year 2012 budget to, among other things, transcribe new
business tax return information and reconcile returns. Additional IT
enhancements are planned for subsequent years. Eventually, all current
and future information return data will go through the IT systems
created for IRDM. (For additional details on planned implementation
time frames, see appendix IV, table 6.)
The two existing programs that will be affected by IRDM are IRS's
Automated Underreporter program (AUR) and nonfiler programs. The
existing AUR matches data on information returns and income reported
by individual taxpayers only.[Footnote 53] A notable planned AUR
improvement is the development of technology to match data from the
Form 1099-K to business tax returns.[Footnote 54] The existing IRS
nonfiler programs work individual taxpayer and business nonfiler
cases. IRS recently implemented a project to modernize its business
nonfiler compliance program and IRDM is developing plans to use and
work with that project, according to a senior IRDM official.[Footnote
55] In particular, IRDM is assessing the feasibility of establishing a
business version of the program IRS uses to estimate taxes owed, known
as the Automated Substitute for Return program, and submit a return on
behalf of individual nonfilers. A summary of the planned IRDM
improvements is shown in table 3.
Table 3: IRS's Existing Process Characteristics Compared with Plans
for the IRDM Program:
Existing process characteristics: Only individual taxpayer data are
used in matching and AUR;
IRDM planned improvements: Include business taxpayer data in matching
and AUR.
Existing process characteristics: IRS receives more third-party data
for business taxpayers than are used in matching;
IRDM planned improvements: Utilize data that IRS receives for
compliance.
Existing process characteristics: Paper-based case files that are
referred between IRS functions, lead to delays;
IRDM planned improvements: Scan documents to enable electronic case
management and notice generation.
Existing process characteristics: IRS employees working cases do not
have data from AUR, nonfiler, and other programs;
IRDM planned improvements: Combine data from the AUR, nonfiler,
examination, and other areas for employees to use when working cases.
Source: GAO analysis of IRDM plans and existing IRS compliance
programs.
[End of table]
The IRDM IT systems are also intended to overcome several limitations
in IRS's existing matching program, which will allow for better use of
data, including Form 1099-B data.[Footnote 56] For example, IRDM is
planning to update rules--criteria for selecting cases--based on prior
case results and other data.[Footnote 57] These rules are important
for IRS to target the cases with potential tax assessments. With the
existing system, rules are difficult to update.[Footnote 58] Because
this will be the first time IRS includes businesses in the document
matching program, IRS must establish rules for businesses. IRDM is
conducting research to establish an initial rule set for tax year
2011, according to a senior IRDM official. As IRS gains information on
business cases, the rules are to be refined. Eventually, according to
the senior official, they would like to use industry data on the usage
of payment cards to profile and segment business tax returns for
appropriate treatment.
IRS also plans to develop new technology to help manage individual and
business cases and, eventually, to contact business taxpayers
automatically through notices. Additionally, IRDM is intended to
enable monthly updates and storage of 10 years worth of information
return data, thereby modernizing the existing reliance on files that
cannot be updated frequently. IRS expects to accomplish this by using
the Integrated Production Model (IPM) database to house the data that
feed the matching processes.[Footnote 59] IPM is designed to serve as
a central repository for compliance data. It includes taxpayer data
from databases known as Master Files, which contain taxpayer and
business account information. In addition to the new matching
technology, IRDM's planned changes will facilitate the use of data
among compliance staff. Appendix IV, figure 3 shows an overview of the
planned state for information return processing once IRDM is fully
implemented.
As of May 2011, IRS was developing some details of the plans to use
the new data. For example, IRDM officials were determining how certain
business taxpayer cases will be sent to, and worked, in IRS's Large
Business and International division.[Footnote 60]
IRS intends for the individual AUR program to benefit from IRDM, but
potential resource limitations could affect the individual AUR
program. IRDM was developed under the assumption that the program
cannot harm the operations and production of the current individual
AUR program, but officials acknowledge some risks exist. For example,
IRDM plans acknowledge a risk of personnel gaps in the individual AUR
program if a large number of those staff are hired into the business
matching program. IRDM plans also suggest that if funding is not
received for fiscal year 2011, staff from the individual program may
be diverted from their current work to help work in the business
matching organization. IRDM considers the risk of not receiving 2011
funding to have a low probability of occurring and, if it does occur,
IRDM predicts a moderate impact on schedule. As of May 2011, according
to a senior IRDM official, IRS does not plan to realign individual AUR
staff during fiscal year 2011, but a lack of funding will impact the
number of test cases IRS can complete.
Research and Testing Are Key Determinants of How Effectively IRS Will
Use the New Information Return Data:
IRS's effective use of the new information return data to promote
compliance, particularly in initial years and for business filers,
will rely heavily on research to design the matching program, set
initial case selection criteria, and to ensure that data feeding the
IT systems are accurate. To design the data matching program, IRS is
evaluating filing patterns of taxpayers and information return filers
to determine when, and how often, matching can be performed, according
to a senior IRDM official.
To develop initial rules for selecting businesses to contact when the
document matching program identifies discrepancies between Forms 1099-
K and business tax returns, IRDM has conducted, and continues to
conduct, research on how to best identify revenue-producing business
taxpayer cases. Specifically, IRS completed a manual review of
documents already filed by small corporations to estimate the volume,
amount, and potential tax revenue that may be collected by contacting
taxpayers about unreported income. After contacting taxpayers about
income discrepancies, 21 percent of the cases resulted in a tax
assessment. IRS is doing a follow-up study that will provide, among
other things, additional information on business case tax revenue,
taxpayer response rates to notices, and hours spent per case. This
research will help establish a skeletal set of case selection criteria
for 2011 data, according to a senior IRDM official. The results of
this, and other research, will support additional details in IRDM's
planned use of the new data.
When the new data arrive in 2012, IRDM plans call for data quality
testing, prior to matching, on 2011 Form 1099-K data. Data quality
testing could identify potential reporting errors which industry
groups are concerned about. The testing, and mitigating adjustments
based on any errors found, will be key to ensuring the long-term
ability of IRDM's IT systems to identify productive cases.
IRS Has Plans to Assess Implementation and Outcomes, but Needs to
Identify and Document IRDM Performance Measures Early on to Ensure
Necessary Data Collection:
IRDM Is Documenting Lessons Learned, but Lacks Accountability for
Implementing Improvements:
At the end of each IRDM IT project milestone IRDM produces a lessons
learned document, in accordance with IRS's Enterprise Lifecycle
Guidance, which requires a lessons learned report at the end of each
life-cycle phase.[Footnote 61] Lessons learned can be useful tools for
an organization to identify areas of improvement as well as ways to
make those improvements. The IRDM lessons identified at the end of
Milestone 2 detail eight problem areas and ways to prevent them in the
future.
IRDM does not include a plan for accountability, such as assignment of
implementation responsibility and a periodic review of the lessons
learned to ensure the improvements are implemented. For four of the
Milestone 2 lessons, IRDM documented some actions to take to address
each issue. IRDM did not document those individuals or offices
responsible for implementing corrective measures or otherwise
following up on the lesson for any of the documented lessons learned.
For example, in response to challenges associated with assigning
subject matter experts, the IRDM lessons learned document states that
the program should keep resource reassignment to a minimum; however,
there is no designation of who is accountable for implementation or
time frame for when this solution will be followed up. IRS officials
said they intend to follow up on lessons learned within the next
milestone, and that each program office is responsible for ensuring
that cited improvements are implemented. Without documentation of
responsibilities and follow-up on lessons learned, program officials
risk missing opportunities for improvement.
IRDM Developed Preliminary Performance Measures, but Needs a Plan to
Ensure Necessary Data Collection and Effectiveness of Measures:
IRDM planning documents list 31 preliminary performance measures for
the program. IRDM has not yet committed to a final set of performance
measures because, according to IRDM officials, they are determining
how they will use the new information. Four of the measures are
finalized. According to an IRDM plan, they expect to have some more
finalized by August 2011, and others finalized by December 2011.
[Footnote 62]
A prior assessment we did of program implementation at IRS emphasizes
the importance of developing evaluation plans prior to full project
implementation in order to ensure that the data necessary for
evaluation are collected in an efficient and timely way.[Footnote 63]
Developing a written plan, including tasks to be completed, is an
important step in assuring that necessary systems and resources are
available for timely data collection. Although IRDM has identified
dates on which to begin collecting performance measure data, officials
did not provide a plan to develop and finalize the measures. If
measures are not developed early, program managers run the risk that
the necessary data for evaluation cannot be collected, which could
limit the potential for meaningful performance management. Although
developing measures early is important to most effectively utilize
performance data, we recognize that measures may evolve over time and
that the process to develop the measures may be challenging.
The preliminary IRDM performance measures demonstrate two attributes
of effective performance measures as identified in our prior work.
[Footnote 64] For example, successful performance measures are linked
with the agency's goals and mission. The IRDM measures are linked to
an IRDM strategy and outcome, as well as to IRS goals. Successful
performance measures should also be designed, where appropriate, to
meet a numerical goal and have an office or individual accountable for
meeting that goal. Almost all of the IRDM measures are quantifiable
and IRDM plans assign each measure to an organization that will be
responsible for collecting and analyzing data, such as RAS.
IRDM has not fully documented its preliminary performance measures,
making it difficult to determine whether the measures meet other
attributes of successful performance measures. IRS could further
leverage IRDM performance measures by incorporating additional key
attributes of successful performance measurement into IRDM plans. For
example, the current list of measures does not contain definitions for
each measure. One proposed performance measure is "taxpayer
satisfaction for the Business Master File system," but no details are
provided on how taxpayer satisfaction will be gauged or used.[Footnote
65] It is unclear from this description what data IRS will be
assessing and how the data will be interpreted. IRDM plans should
clearly state the name and include a description of each measure that
is consistent with the methodology that will be used to calculate it.
IRDM planning documents do not explain how the preliminary measures
were developed. Well-designed evaluation plans should be properly
documented and consider the kind of information to be acquired, the
sources of information, the methods to be used for sampling from data
sources and for collecting information, the timing and frequency of
information collection, and the basis for comparing outcomes.[Footnote
66] IRDM has a framework and process for how performance measures
should be defined, how to describe scope, data sources, methodology,
and data reliability. IRDM has implemented some elements of their plan
for some of the preliminary measures. For example, six of the
performance measures have documentation that includes methodology.
However, IRDM does not identify how baseline data for any of the
measures will be collected.
In addition to measuring the outcomes of IRDM, performance data are
needed to contribute to IRS's planned efforts to measure whether cost
basis and transaction settlement reporting increases revenue and
voluntary compliance, and therefore decreases the tax gap. As of May
2011, IRDM officials have identified one preliminary performance
measure to capture the effect of the legislation on revenue, and one
preliminary measure of voluntary compliance.[Footnote 67] According to
IRS officials, it will be challenging to isolate the effects of the
legislation on both revenue and voluntary compliance and they have not
yet determined how this will be done. In particular, as of December
2010, they noted the challenges of taking into account other factors
that are not easily measured. For example, when attempting to measure
the effect of the legislation on voluntary compliance, it may be
difficult for researchers to account for a taxpayer who, for example,
fails to accurately report capital gains from non-securities
investments in an effort to offset reporting the capital gains
identified on the new information returns. IRS officials have said RAS
is working on how to capture changes in compliance behavior in
response to the new information reporting requirements.
Conclusions:
The two new information returns have the potential to improve taxpayer
compliance. The new IRDM program could enhance IRS's ability to use
these and other information returns and more precisely target
resources for compliance, thereby reducing the tax gap. Opportunities
for improvement exist in IRDM that could help the program achieve
these goals. For example, documenting IRDM coordination with related
servicewide projects can help prevent inefficiencies and duplicated
efforts. In addition, reliable cost estimates can help ensure that
funding levels match the program's needs. Moreover, clearly
documenting the assumptions and methodology for data used to inform
planning decisions, such as form volume projections, can support
reliable decision making.
IRS and the cost basis and transaction settlement industries had just
over 2 years to implement the reporting requirements, which made
timely communication from IRS critical. Incomplete information about
the regulations, forms, and guidance for the new requirements could
adversely affect the quality of data provided by the industries and
undermine efforts to identify noncompliance. IRS made a noteworthy
effort to communicate with industry. However, IRS could adopt
additional communication approaches.
Performance management provides a means to evaluate program outcomes,
identify improvement opportunities, and maintain accountability.
Lessons learned, which are identified at the end of each IRDM
milestone, provide ongoing opportunities to enhance the program. It is
important that IRS document its plans to follow up on these lessons so
that improvements are implemented. Further, to the extent possible,
IRS should ensure that its performance measures for IRDM have the
attributes of effective measures and that procedures to collect data
are timely developed. A plan to establish and implement IRDM's
performance measures would allow IRDM to move forward with fully
documenting the methodology and data sources needed to measure the
impact of the IRDM program.
Recommendations for Executive Action:
To improve implementation of cost basis and transaction settlement
reporting, we recommend that the Commissioner of Internal Revenue take
the following seven actions:
1. Document in IRDM plans any coordination between IRDM and the
Workforce of Tomorrow and Nonfiler Strategy projects. IRS should
develop procedures or requirements to incorporate in IRDM planning
documents the integration between IRDM and any other servicewide
projects which could affect IRDM.
2. For future updates to MITS's IRDM cost estimate, ensure that the
revised estimate is developed in a manner that reflects the four
characteristics of a reliable estimate discussed in this report.
3. Clearly document the assumptions and rationale for Form 1099 volume
projections used in resource planning decisions, and consult with RAS
when developing projections.
4. Work with Treasury to share with the public its plans and expected
release dates for IRDM regulations and formal guidance. IRS could
consider including information similar to what is posed on the
Department of Transportation's or the Financial Industry Regulatory
Authority Web sites. IRS should also include other pertinent
information regarding IRDM implementation, such as upcoming informal
guidance, including FAQs, upcoming outreach, and description of the
letter ruling process.
5. For future releases of new or significantly revised forms, whenever
possible, release draft instructions to facilitate the most useful
comments.
6. Document a plan to assign responsibility and establish a procedure
to follow up on the lessons learned identified after each milestone
phase.
7. Develop a plan to establish and implement IRDM performance
measures. The plan should include documentation of the process and
rationale for developing and using IRDM performance measures,
including information such as the methodology, data sources, and
targets, in order to establish that the performance measures have the
necessary attributes of efficient measures.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Commissioner of Internal
Revenue for his review and comment. We received written comments from
the Deputy Commissioner for Services and Enforcement, which are
reprinted in appendix V. IRS also provided us with technical comments,
which we incorporated into the report as appropriate.
IRS said it has taken actions consistent with our recommendations to
improve its implementation plans. Of our seven recommendations, IRS
explicitly agreed with three; without explicit agreement, described
steps it is taking to address two; agreed in principle with another;
and neither agreed nor disagreed with a final recommendation.
IRS explicitly agreed with our recommendations regarding its cost
estimate, form volume projections, and lessons learned. In agreement
with the recommendation to ensure that a revised MITS IRDM cost
estimate reflects GAO's four characteristics of a reliable estimate,
IRS said it intends to update the estimate in a manner consistent with
the GAO Cost Estimating and Assessment Guide. In response to our
recommendation to clearly document the assumptions and rationale for
Form 1099 volume projections, IRS agreed that additional documentation
for the 125 million projection would have been helpful. IRS said that
RAS will provide updated estimates for use in decision making, and
that it will continue to consult with RAS when developing and
documenting projections. IRS also agreed to assign responsibility and
establish a procedure to follow up on lessons learned. In its
response, IRS said it has taken steps to improve lessons learned
reports by assigning responsibility and due dates for each lesson,
which will facilitate their periodic review.
While not directly saying if it agreed with our recommendation on
documenting coordination between IRDM and servicewide projects, IRS
said it has taken steps to document coordination in the IRDM Strategic
Roadmap. Similarly, in response to our performance measurement
recommendation, IRS said that it will fine tune its current
performance measurement plan by drafting definitions for IRDM's
performance measures and will include methodology, data sources, and
targets to ensure all necessary attributes of performance measures are
captured.
IRS agreed in principle with our recommendation to, whenever possible,
release draft instructions of new or significantly revised forms.
Recognizing the value of obtaining feedback on draft instructions, IRS
said that it strives to release draft instructions as quickly as
possible, but needs to release forms early so that software developers
and IRS technology specialists can begin programming activities. We
agree it is not always possible to release draft instructions with new
or revised forms, but doing so whenever possible can help stakeholders
ensure that the data reported on such forms are appropriate and also
help minimize the burden of developing systems to report data to IRS.
IRS did not explicitly agree or disagree with our recommendation that
it share, with the public, plans and expected release dates for IRDM
outreach, regulations, and formal and informal guidance. IRS agreed
that continuous engagement of stakeholders is important and
highlighted that its Web site contains information reporting guidance,
which IRS staff are available to discuss. However, IRS said that it
cannot accurately predict release dates for formal guidance published
in the Federal Register or Internal Revenue Bulletin. IRS counsel told
us this was because Treasury reviews formal guidance, including
regulations. IRS also said, as we note in our report, that IRDM
guidance projects were listed in an annual Priority Guidance Plan
published by IRS and Treasury. However, the plan only lists projects
to be completed in the coming year, without more specific projected
release dates and, for cost basis and transaction settlement
reporting, the plan provides information on regulations but not
guidance and outreach. We recognize that predicting release dates is
difficult. In a Web-based environment IRS could both note this
uncertainty and change estimated dates as necessary. Using the IRS Web
site to post expected release dates for outreach, regulations, and
guidance would help external stakeholders anticipate IRS actions and
plan their implementation of the laws.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send 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 will also send copies to
the Commissioner of Internal Revenue, the Secretary of the Treasury,
the Chairman of the IRS Oversight Board, and the Director of the
Office of Management and Budget. Copies are also available at no
charge on the GAO Web site at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions or wish to discuss the
material in this report further, please contact me at (202) 512-9039
or brostekm@gao.gov. Contact points for our offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. GAO staff members who made major contributions to this report
are listed in appendix VI.
Signed by:
Michael Brostek:
Director, Tax Issues Strategic Issues Team:
[End of section]
Appendix I: Scope and Methodology:
To address the four objectives of this report, we focused on the
Information Reporting and Document Matching (IRDM) program because it
is the program responsible for implementing cost basis and transaction
settlement reporting.
To assess IRS's implementation plans for the new requirements, we
compared the Internal Revenue Service's (IRS) plans, such as the IRDM
Strategic Roadmap and the IRDM Program Management Plan, to criteria
from prior GAO reports, the Internal Revenue Manual, and other
sources.[Footnote 68] When possible, we looked for evidence of IRS
following its plans, but we did not broadly evaluate whether these
plans and actions are contributing to the program's goals of
increasing compliance. Because most components of IRDM were still
being developed, we used dates in IRDM planning documents to gauge
whether established time frames had been met and IRS was meeting
planned time frames. To assess IRS's cost estimates to implement the
new requirements, we compared IRS cost estimates and budget plans for
the implementation with GAO's cost estimating criteria.[Footnote 69]
To determine to what extent the estimate adheres to the
characteristics of a high-quality cost estimate, we evaluated the
Modernization and Information Technology Services (MITS) division's
IRDM life-cycle cost estimate to assess whether it met key
characteristics identified in the GAO Cost Estimating and Assessment
Guide. Our guide, which is based on extensive research of best
practices for estimating program schedules and costs, indicates that a
high-quality, valid, and reliable cost estimate should be well
documented, comprehensive, accurate, and credible. We analyzed the
cost estimating practices used by MITS against these best practices to
determine whether the IRDM cost estimate is comprehensive, accurate,
well-documented, and credible. We then characterized the extent to
which each of these four characteristics of reliable cost estimates
were met; that is, we rated each characteristic as being either: Met,
Substantially Met, Partially Met, Minimally Met, or Not Met. To do so,
we scored each of the individual key practices associated with cost
and scheduling best practices on a scale of 1-5 (Does not meet = 1,
Minimally Meets = 2, Partially Meets = 3, Substantially Meets = 4, and
Meets = 5), and then averaged the individual practice scores
associated with a given best practice to determine the overall rating.
We shared our cost guide, the criteria against which we evaluated the
program's cost estimates, as well as our preliminary findings with
program officials. We then discussed our preliminary assessment
results with IRDM officials and cost estimators. When warranted, we
updated our analyses based on the agency response and additional
documentation provided to us.
To determine the extent to which IRS has issued timely regulations and
guidance and undertaken outreach efforts, we interviewed IRS officials
in the Office of Chief Counsel about the rulemaking process for both
laws. We analyzed the timing of the regulations and communication from
IRS relative to the enactment dates and effective dates of both laws.
In order to identify key issues, we examined the comment letters IRS
received in response to the proposed regulations for both laws. We
also reviewed the Stakeholder Management and Communication Plan, which
is a plan developed by IRDM to manage communication with industry and
other stakeholders. We met with representatives of the Information
Reporting Program Advisory Committee (IRPAC), an IRS advisory group
made up of tax professionals, as well as four private industry groups
which represent companies that will be required to file information
returns under the new cost basis and transaction settlement
provisions; the Electronic Transactions Association (ETA), which
represents the payment card industry and third-party payment networks;
the Securities Industry and Financial Markets Association (SIFMA); the
Financial Information Forum (FIF), which represents the financial
technology industry; and the Investment Company Institute (ICI), which
represents the mutual fund industry to discuss their communications
with IRS and possible data quality issues.
To examine how IRS will use the new returns to improve compliance, and
the possible effects of the implementation, we examined IRS plans
depicting the future information technology systems and IRDM business
processes for using information returns in compliance efforts, and
discussed the plans with IRS officials.[Footnote 70] To gauge whether
IRS plans consider potential data accuracy issues, we compared IRDM
plans for using the new data to GAO criteria for controlling data
quality.
To analyze IRS's plans to assess the implementation process, we
reviewed the existing lessons learned documentation. To determine
IRS's plans to assess program outcomes, we reviewed the preliminary
performance measures found in documents such the IRDM Program
Management Plan and the IRDM Strategic Roadmap. To the extent
possible, we assessed the preliminary measures against GAO's
performance measurement and program evaluation criteria.[Footnote 71]
We also interviewed IRS officials from the Research Analysis and
Statistics (RAS) division to identify efforts made to develop
performance measures and measure the outcome of the program.
For each objective, we shared our assessment criteria with IRS
officials, who agreed with their relevance. We also interviewed IRS
officials in the Small Business/Self Employed (SB/SE) division, MITS,
and Forms and Publications. We gave IRS officials an interim briefing
on some of the findings in this report. Our work was done mainly at
IRS Headquarters in Washington, D.C. and its division office in New
Carrollton, Maryland, where the officials responsible for implementing
the information returns programs were located. To assess the
reliability of the cost estimate data that we used to support findings
in this report, we reviewed relevant program documentation, such as
cost estimation spreadsheets and a report explaining the estimate, to
substantiate evidence obtained through interviews with knowledgeable
agency officials, where available. We found the data we used to be
sufficiently reliable for the purposes of our report. We also made
appropriate attribution indicating the sources of the data.
We conducted this performance audit from June 2010 through May 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: Changes to Cost Basis Tracking and Calculations:
Table 4 identifies six changes to reporting requirements affecting
both brokers and issuers of stock. These changes were highlighted in
comment letters submitted by industry in response to proposed
regulations. Prior to the legislation, brokers were required to
provide some information, including gross sales of securities, to the
Internal Revenue Service (IRS) on the Form 1099-B. The new legislation
requires that in addition to this information, brokers are responsible
for reporting adjusted cost basis information and whether a gain or
loss is long term or short term. Major changes to reporting
requirements can be categorized as either a tracking change or a
calculation change. The tracking rules allow brokers to track events
affecting the basis amount of a security over the period of ownership
and to pass that information among other brokers, IRS, and taxpayers.
The calculation rules instruct brokers on which of the various
methodologies should be used to calculate basis and when to take into
account other tax rules that affect basis.
Table 4: Selected Changes to Tracking and Calculating Basis for
Reporting Resulting from the Energy Improvement and Extension Act of
2008:
Type: Tracking;
Change to cost basis reporting requirement:
* Cost Basis: Although brokers have previously been responsible for
reporting gross sales to IRS and taxpayers through the Form 1099-B,
brokers are now also responsible for tracking and reporting cost basis
information.
* Transfer Statements: Transferring broker is required to transfer
cost basis to new broker within 15 days of the transfer and is given a
penalty for failure to do so.
* Issuer Actions: Issuer is required to file or publish corporate
action information within 45 days.
* Gifted and Inherited Securities: For gifted securities, brokers are
required to report fair market value and/or carryover basis;
for inherited securities, brokers are required to report fair market
value at date of death.
Type: Calculation;
Change to cost basis reporting requirement:
* Basis Calculation Method: There are now default calculations for
cost basis that are determined by type of security, broker default
methods and/or taxpayer election.
* Adjustment to Basis under Wash Sale Rules: Brokers are to determine
adjusted basis without regard to wash sale rules unless the
transactions occur in the same account with respect to identical
securities.
Source: GAO analysis.
[End of table]
[End of section]
Appendix III: Assessment of MITS's IRDM Cost Estimate:
We assessed the Modernization and Information Technology Service
(MITS) group's Information Reporting and Document Matching (IRDM)
program cost estimate to determine the extent to which it meets best
practices established by the GAO Cost Estimating and Assessment
Guide.[Footnote 72] We found that the cost estimate meets one,
substantially meets three, partially meets nine, minimally meets four,
and does not meet two best practices.[Footnote 73] Table 5 shows the
extent to which the MITS IRDM Cost Estimate meets practices.
Table 5: MITS IRDM Cost Estimate Alignment with Best Practices:
Best practices characteristics:
A comprehensive cost estimate:
* includes all life-cycle costs;[A];
* completely defines the program, reflects the current schedule, and
is technically reasonable;
* has a product-oriented work breakdown structure,[B] traceable to the
program's technical scope, at an appropriate level of detail; and;
* documents all cost-influencing ground rules and assumptions[C];
Overall assessment: Substantially meets best practices for a
comprehensive cost estimate;
Characteristics of MITS's IRDM cost estimate (assessment of whether
best practices met):
* Covers most life-cycle costs but not the system's eventual
retirement. (Substantially meets);
* Provides technical descriptions for each project phase, but doesn't
reflect schedule changes. (Substantially meets);
* Has a work breakdown structure that breaks down the end product and
outlines the major work but has not been updated; (Substantially
meets);
* Lists ground rules and assumptions, but doesn't provide historical
data to support the assumptions and only considers the impact of risks
on a portion of the estimate (Partially meets).
Best practices characteristics: A well documented cost estimate should:
* capture the source data used, the reliability of the data, and how
the data were made compatible with other data in the estimate;
* describe the calculations and the methodology used to derive each
element's cost;
* describe how the estimate was developed;
* discuss the technical baseline description;[D] and;
* provide evidence of management review and acceptance;
Overall assessment: Partially meets best practices for a well
documented cost estimate;
Characteristics of MITS's IRDM cost estimate (assessment of whether
best practices met):
* Does not contain many details about the data used (Minimally meets);
* Cost calculations were based on expert judgment as well as a model
that accounts for software development, testing, quality assurance,
and other factors, but the calculations themselves are not shown
(Partially meets);
* Contains a narrative about the program and cost tables, and shows
results of cost calculations, but does not discuss risk or show
formulas used in calculations (Partially meets);
* Provides technical descriptions for each project piece (Meets);
* Documents a management briefing which contains the project and
technical information, but lacks risk information, ground rules,
assumptions, and evidence of management acceptance (Partially meets).
Best practices characteristics: An accurate cost estimate:
* produces unbiased results;
* is properly adjusted for inflation;
* contains few mistakes;
* is regularly updated to reflect significant program changes;
* documents and explains variances between planned and actual costs;
and;
* reflects cost estimating experiences from comparable programs;
Overall assessment: Partially meets best practices for an accurate
cost estimate;
Characteristics of MITS's IRDM cost estimate (assessment of whether
best practices met):
* Shows a 60-70 percent confidence level for project cost, but does
not show a confidence level for operations cost or the cost estimate
as a whole, and does not show how the confidence level was calculated
(Partially meets);
* The estimate is in constant 2011 dollars. MITS does not adjust cost
estimates for inflation because inflation is included during the
budget process (Partially meets);
* Though few numbers and equations are presented, the numbers shown
are all accurate (Partially meets);
* IRS does not plan to update the cost estimate. Instead, IRS updates
the Exhibit 300 (E-300) annually(Partially meets);
* As of April 2011, IRS is developing a process to compare its cost
estimates to actual costs; (Minimally meets);
* Uses a model based on a database of historical costs, but
documentation was not adequate to assess how the model was used and
whether it was calibrated properly (Partially meets).
Best practices characteristics: A credible cost estimate includes:
* a sensitivity analysis that identifies a range of possible costs
based on varying inputs[E];
* a risk and uncertainty analysis[F];
* cross-checking of major cost elements; and;
* an independent cost estimate conducted by another organization;
Overall assessment: Minimally meets best practices for a credible cost
estimate;
Characteristics of MITS's IRDM cost estimate (assessment of whether
best practices met):
* Contains no evidence that a sensitivity analysis was performed (Does
not meet);
* Contains a risk analysis for the project costs only. However, it is
unclear how this analysis was done (Partially meets);
* IRS uses a rule of thumb that operations costs are 50 percent
greater than non-recurring costs, but there was no evidence that other
cross-checks were performed (Minimally meets);
* An independent cost estimate was not performed (Does not meet).
Source: GAO analysis of MITS IRDM cost estimate documents.
[A] A life-cycle cost estimate provides a complete and structured
accounting of all resources and associated cost elements required to
develop, produce, deploy, and sustain a particular program.
[B] A work breakdown structure defines the work necessary to
accomplish a program's objectives. It is product-oriented if it allows
a program to track cost and schedule by defined deliverables, such as
a hardware or software component.
[C] Ground rules are a set of estimating standards that provide
guidance and minimize conflicts in definitions, while assumptions are
judgments about past, present, or future conditions that may affect
the estimate.
[D] A technical baseline description provides a common definition of
the program, including detailed technical, program, and schedule
descriptions of the system, for a cost estimate to be built on.
[E] A sensitivity analysis examines how changes to key assumptions and
inputs affect the estimate.
[F] A risk and uncertainty analysis recognizes the potential for error
and attempts to quantify it.
[End of table]
[End of section]
Appendix IV :IRS's Planned Use of Cost Basis and Transaction
Settlement Data:
Table 6 lists the years that the Internal Revenue Service (IRS)
expects to have key Information Reporting and Document Matching (IRDM)
capabilities in place. Each year, IRDM is expected to increase in
functionality, for both individual and business data.
Table 6: Key Planned IRDM Capability Enhancements for Matching
Documents, Identifying Cases, and Managing Cases Beginning in 2012:
2012:
* Begin matching for calendar year business filers; use new technology
for individual return matching;
* Designate type of case, such as nonfiler, for business taxpayers;
* Use statistics and analytic technology for individual and business
case selection;
* Begin using automation for computation of owed taxes, and for case
management for calendar year business filers;
* Collect feedback on cases worked to refine the matching programs and
case selection.
2013:
* Expand matching to include business taxpayers on a fiscal year
schedule, and flow through entities;
* Summarize initial data on taxpayer compliance behavior;
* Collect feedback on analytic technology and refine case management
accordingly;
* Expand the use of automation to generate taxpayer notices, and for
case management for fiscal year and flow through entities.
2014 and beyond:
* Use statistical tools to segment business cases by industry, type of
return, preparer, etc.;
* Summarize enhanced data on taxpayer compliance behavior;
* Use statistics and analytic technology for nonfiler case management;
* Use matching data to send taxpayer notices earlier;
* Create virtual case files.
Source: GAO analysis of IRDM planning documents.
[End of table]
Figure 3 provides an overview of how, once implemented, IRDM will
process and match information return data, and manage cases.
Differences between IRS's existing system for processing information
returns and the anticipated IRDM systems are described earlier in this
report in table 3.
Figure 3: IRDM's Planned End-State for Using Cost Basis and
Transaction Settlement Data:
[Refer to PDF for image: illustration]
Submissions processing:
Taxpayers submit returns:
Form 1040;
Form 1120;
Form 1065.
Payers submit returns:
Form 1099-B;
Form 1099-K.
Form information is entered into designated master file:
For taxpayer: IMF[A]; BMF[A];
For payer: IRMF[A].
Data are consolidated into IPM: IPM[A].
Matching and case selection:
Assimilation:
* Form completion checked;
* TIN validation;
* Other cross checks.
Correlation:
* Matching
* First list of potential cases are generated and grouped[B]:
- Under-reporters;
- Known notifiers;
- Unknown notifiers;
* Potential revenue per case is computed.
Potential case inventory:
Analysis software applied:
* Selection rules applied;
* Ranked by potential revenue;
* Repeat cases identified;
* Certain cases to LB&I.
Case inventory:
Continuous updating, workload management, and results reporting.
Case management:
Cases are batched and sent to tax examiners to pursue through sending
notices and other taxpayer contacts.
Tax examiner updates taxpayer data[B].
Source: GAO analysis of IRS information.
[A] The figure represents IRDM functions, with the exception of the
Integrated Production Model (IPM), a database of taxpayer information
which is being developed by another Modernization and Information
Technology Services (MITS) program. Other databases involved in this
system are the individual master file (IMF), the business master file
(BMF), and the information returns master file (IRMF).
[B] At these points in the process, updated information on the
taxpayer is sent to the appropriate Master File(s).
[End of figure]
Submissions Processing:
Tax returns are submitted to IRS, and data from the forms are
transmitted to the appropriate account master file. A master file
contains tax data and related information pertaining to certain forms
or taxpayers; the IMF contains data on individuals, the BMF contains
data on business income taxpayers. Information returns are submitted
to IRS through the Web-based Filing Information Returns Electronically
system and, eventually, transmitted to the IRMF. This process will be
same as before IRDM was implemented. Master file data are then
consolidated into the IPM database.
Matching and Case Selection:
Tax and information return data go through the assimilation process,
which does basic checks on the forms to identify basic errors such as
blank boxes on returns, or invalid Taxpayer Identification Numbers
(TIN). If a TIN is determined to be incorrect, IRS contacts the payer
who must check the TIN with records and attempt to correct the
information return, which may include notifying the taxpayer. If the
issue is not resolved, the payer must begin backup withholding. Next,
correlation--or matching--is done to identify discrepancies between
the BMF or IMF, and IRMF data. Under IRDM, for the first time, IRS
will be matching BMF data to the IRMF. The matching results in a first
list of potential cases, that are grouped as underreporters or
nonfilers. For each potential case, a revenue estimate for the case is
calculated, and the master files are updated to indicate a mismatch.
The potential case list is further refined when statistical software
and criteria for selecting the cases with the postrevenue potential
are applied. IRDM will allow for more frequent updates of these
criteria and for information from prior cases to inform the case
selection process, which results in a final case list. Certain cases
are sent to Large Business and International division, Examination, or
other functions.
Case Management:
Cases are batched and given to tax examiners for a manual review, and
master files are updated. Based on the review, the taxpayer may
receive notices from IRS asking for explanations of discrepancies
between income reported on their tax return and the information
return. In initial years of IRDM, notices for business taxpayers will
be generated by a tax examiner or other staff; eventually those
notices will be generated automatically based on a tax examiner's case
review. Depending on the taxpayer's response, a case could be resolved.
[End of section]
Appendix V: Comments from the Internal Revenue Service:
Department Of The Treasury:
Internal Revenue Service:
Deputy Commissioner:
Washington, D.C. 20224:
May 9, 2011:
Mr. Michael Brostek:
Director, Tax Issues:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Mr. Brostek:
Thank you for the opportunity to review the Government Accountability
Office (GAO) draft report titled, "Information Reporting: IRS Could
Improve Cost Basis and Transaction Settlement Reporting
Implementation" (Job Code 450854). Information reporting is essential
to taxpayers' voluntary compliance and ensuring appropriate filing and
use of these new information returns is an important responsibility of
the Internal Revenue Service (IRS). We recognize the importance of
these provisions and the impact they will have on compliance.
The efforts of the Information Returns Document Matching (IRDM)
Program have been extensive and innovative. We appreciate GAO's
acknowledgment of the implementation planning and structure. We
established the IRDM governance structure which includes executives at
the highest level and follows project management disciplines to ensure
due diligence in the ongoing management of this program. We engaged
impacted stakeholders in the development of the regulations and forms.
Consistent with GAO's recommendations, we have taken actions to
improve our implementation plans and continue to progress through our
milestones in a timely manner to ensure we are prepared to receive and
use the data on the new information returns. We have addressed these
improvements and provided additional comments that specifically
address each of your recommendations in a separate enclosure.
If you have any questions, please contact me, or a member of your
staff may contact Faris Fink, Commissioner, Small Business/Self-
Employed Division at (202) 622-0600.
Sincerely,
Signed by:
Steven T. Miller:
Deputy Commissioner for Services and Enforcement:
Enclosure:
[End of letter]
Enclosure: GAO Recommendations and IRS Responses to GAO Draft Report
Information Reporting: IRS Could Improve Cost Basis and Transaction
Settlement Reporting Implementation: GAO-11-557:
Recommendation:
Document in IRDM plans any coordination between IRDM and the Workforce
of Tomorrow and Nonfiler Strategy projects. IRS should develop
procedures or requirements to incorporate in IRDM planning documents
the integration between IRDM and any other servicewide projects that
could affect IRDM.
Comments:
IRDM considered many internal stakeholders in planning for
implementation, including support organizations such as Human Capital
Office (HCO) and Agency-Wide Shared Services (AWSS) who shepherd the
processes for hiring and training associated with Workforce of
Tomorrow initiatives. Since these initiatives are being built into IRS
hiring and training plans, they will automatically be employed as part
of the embedded support. Likewise, IRDM is represented in Servicewide
Non-Filer Strategy efforts and IRDM staff recently briefed the Non-
Filer Executive Advisory Council on the IRDM objectives as they relate
to Non-Filers.
We have taken steps to document coordination between IRDM and IRS
initiatives in our Strategic Roadmap and will continue to update
planning documents as appropriate going forward.
Recommendation:
If MITS IRDM cost estimate is redone, ensure that the revised estimate
is developed in a manner that reflects the four characteristics of a
reliable estimate as discussed in the GAO report.
Comments:
We concur that any revised estimate should be developed in a manner
that is consistent with the GAO Cost Estimating and Assessment Guide.
Strategy and Planning intends to update the estimate as we believe
that it will be beneficial for the agency to collect and model the
project attributes and use the results to help refine future estimates.
Recommendation:
Clearly document the assumptions and rationale for Form 1099 volume
projections used in resource planning decisions, and consult with RAS
when developing projections.
Comments:
During the audit period, we supplied GAO with three projections. The
first projection, the information from December 2005 (updated March
2006), reflects a projected costing to implement a legislative
proposal. We agree that additional documentation for the calculation
would have been helpful.
Procuring system hardware to support the growth in filings requires
significant lead time. Therefore, the initial volume projections for
additional information returns were developed early on to plan for
systems capacity. These projections were used to size equipment and
systems, and they represent the potential maximum volume in
information return receipts that can be accommodated.
Research Analysis Statistics (RAS) Office of Research developed the
most recent estimate as a starting point for workload planning and to
develop approximate mean expected volumes. The Office of Research will
update the estimates for staffing and logistical considerations. We
will continue to consult with RAS when developing projections and
document the methodology, assumptions, and rationale for the
projections.
Recommendation:
Work with Treasury to share with the public its plans and expected
release dates for IRDM regulations and formal guidance. IRS could
consider including information similar to what is posted on the
Department of Transportation's or Financial Industry Regulatory
Authority websites. IRS should also include other pertinent
information regarding IRDM implementation, such as upcoming informal
guidance, including FAQs, upcoming outreach, and description of the
letter ruling process.
Comments:
We agree that continuous engagement of external stakeholders is
important. We established a page on IRS.gov to collect formal
published and informal written guidance about our information
reporting projects. Our published guidance includes contact names and
telephone numbers, and these individuals are available during normal
business hours to assist persons who may have questions about the
guidance we publish. Before we publish guidance in the Federal
Register or the Internal Revenue Bulletin, we publish an annual
Priority Guidance Plan on IRS.gov, which we update periodically,
informing the public of the guidance projects, including IRDM projects
that the Department of Treasury and the IRS intend to publish during
the current plan year. We do not include expected release dates for
these guidance projects, including IRDM projects, because accurate
release dates cannot be predicted. Finally, we publish a description
of the letter ruling process annually in the first revenue procedure
we publish each year. This revenue procedure, which is available in
the Internal Revenue Bulletin and on IRS.gov includes, among other
things, an up-to-date list of subjects on which the IRS will not rule.
Recommendation:
For future releases of new or significantly revised forms, whenever
possible, release draft instructions to facilitate the most useful
comments.
Comments:
We agree with this recommendation in principle. While our practice is
to release instructions as quickly as possible, the overriding
priority in supporting taxpayers and practitioners is the early
release of forms so that software developers and IRS information
technology specialists can begin programming activities. This often
precludes the simultaneous release of forms and instructions. We do,
however, recognize the importance of obtaining meaningful feedback
from our customers and strive to provide draft instructions for new or
substantially revised forms as soon as and whenever possible.
Recommendation:
Document a plan to assign responsibility and establish a procedure to
follow-up on lessons learned identified after each milestone phase.
Comments:
We agree with this recommendation. The IRDM staff has taken steps to
improve the usefulness of the Lessons Learned Reports by assigning
responsibility for each lesson learned, along with due dates for
status reporting. These assignments are included in the Lessons
Learned Report for simplified tracking and follow up, and a periodic
review of the lessons learned will occur on a regular basis. In
addition, the IRDM staff will work with the MITS Lessons Learned
process owners to implement similar improvements to the enterprise
level artifacts and processes.
Recommendation:
Develop a plan to establish and implement IRDM performance measures.
The plan should include documentation of the process and rationale for
developing and using IRDM performance measures, including information
such as the methodology, data sources, and targets to establish that
the performance measures have the necessary attributes of efficient
measures.
Comments:
Our Performance Measurement Plan includes a plan of action,
milestones, and dates. We shared our plan with GAO. We are drafting a
dictionary with definitions for the data and measures. Many of the
measures are patterned after Individual Master File (IMF) returns and
definitions need to be modified to fit with Business Master File (BMF)
returns. As needed, we will fine-tune the methodology, data sources,
and targets for performance measurement to ensure all necessary
attributes are captured.
[End of section]
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contact:
Michael Brostek, (202) 512-9039, or brostekm@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Libby Mixon, Assistant
Director; Laurel Ball; Mary Coyle; Jennifer Echard; Ioan Ifrim; Donna
Miller; Cynthia Saunders; Stacey Steele; A.J. Stephens; and Lindsay
Welter made key contributions to this report.
[End of section]
Footnotes:
[1] The debt figure is the total public debt outstanding. The gross
tax gap was last estimated by IRS for tax year 2001. At that time, IRS
estimated that it would eventually recover around $55 billion of the
2001 tax gap through late payments and IRS enforcement actions,
leaving a net tax gap of $290 billion.
[2] Energy Improvement and Extension Act of 2008, Pub. L. No. 110-343,
div. B, § 403, 122 Stat. 3765, 3854-3860 (2008).
[3] Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289,
Housing Assistance Tax Act of 2008, div. C, § 3091, 122 Stat. 2654,
2908-2911 (2008).
[4] See GAO, Capital Gains Tax Gap: Requiring Brokers to Report
Securities Cost Basis Would Improve Compliance if Related Challenges
Are Addressed, [hyperlink, http://www.gao.gov/products/GAO-06-603]
(Washington, D.C.: June 13, 2006) and Tax Administration: Costs and
Uses of Third-Party Information Returns, [hyperlink,
http://www.gao.gov/products/GAO-08-266] (Washington, D.C.: Nov. 20,
2007).
[5] The overall capital gains tax gap could be larger than the $11
billion attributable to taxpayers understating their gains or
overstating their losses because IRS did not estimate how much of the
tax gap is attributable to individual taxpayers who did not file tax
returns to report capital gains or did not pay the capital gains taxes
they reported on filed returns.
[6] The securities transactions included in this estimate include
sales of corporate stock, mutual funds, bonds, options, futures
contracts, and capital gain distributions.
[7] 26 U.S.C. § 6045(g); 26 C.F.R. §§ 1.6045-1, 1.6045A-1, 1.6044B-1.
[8] Stocks other than those from a Regulated Investment Company (RIC)
or a Dividend Reinvestment Plan (DRIP) require reporting starting
January 1, 2011. Additional reporting requirements for RIC and DRIP
stock, including mutual funds, begin with stocks acquired on or after
January 1, 2012. Reporting requirements for additional applicable
securities will begin on January 1, 2013. A broker could be a dealer,
a barter exchange, or any other person who regularly acts as a
middleman with respect to property or services. 26 U.S.C. §
6045(c)(1), (g).
[9] When a company declares a stock split, its share price will
decrease, but a shareholder's total market value will remain the same.
For example, if you own 100 shares of a company that trades at $100
per share and the company declares a two for one stock split, you will
own a total of 200 shares at $50 per share immediately after the split.
[10] 26 U.S.C. § 6050W; 26 C.F.R. §§ 1.6050W-1, 6050W-2.
[11] Information returns are not required under the new law for
instances where a person uses the payment card to withdraw cash, get
cash advances, or when a convenience check linked to a payment card is
accepted.
[12] Unlike payment card transactions, third-party network
transactions are only reportable if a merchant's aggregate amount of
such payments for the year exceeds $20,000 and if the number of
aggregate transactions exceeds 200. Payments to certain payees with a
foreign address are not required to be reported as long as, prior to
payment, the payer has documentation that the payee is a "foreign
person."
[13] For a payment card, the PSE is an acquiring bank. For a third-
party network, the PSE is a third-party settlement entity.
[14] Beginning in 2012, PSEs will be required to withhold 28 percent
of the gross amount of transactions for merchants that do not have a
valid taxpayer identification number (TIN), which could be a Social
Security number. IRS uses TINs to match information returns to tax
returns.
[15] A sole proprietor is an individual who owns an unincorporated
business by himself or herself.
[16] To evaluate IRDM plans, we used criteria established by: IRS's
Internal Revenue Manual; prior GAO work including GAO, Internal
Control Management and Evaluation Tool, [hyperlink,
http://www.gao.gov/products/GAO-01-1008G] (Washington, D.C.: August
2001); Results-Oriented Cultures: Implementation Steps to Assist
Mergers and Organizational Transformations, [hyperlink,
http://www.gao.gov/products/GAO-03-669] (Washington, D.C.: July 2,
2003); Earned Income Tax Credit: Implementation of Three New Tests
Proceeded Smoothly, but Tests and Evaluation Plans Were Not Fully
Documented, [hyperlink, http://www.gao.gov/products/GAO-05-92]
(Washington, D.C.: Dec. 30, 2004); and other sources.
[17] The individual software development projects under MITS must pass
through seven milestones before completion. A milestone is a point in
time when management reviews updated cost, progress, and risk
information. SB/SE activities and tasks other than IT development for
IRDM are tracked separately. IRDM officials said they are working on
developing a master schedule to integrate key dates of MITS projects
and business activities.
[18] [hyperlink, http://www.gao.gov/products/GAO-01-1008G]; GAO,
Executive Guide: Effectively Implementing the Government Performance
and Results Act, [hyperlink,
http://www.gao.gov/products/GAO/GGD-96-118] (Washington, D.C.: June
1996); and IRS, Internal Revenue Manual: The IRS Balanced Performance
Measurement System, Section 1.5.1-5.
[19] The servicewide Workforce of Tomorrow Task Force engages a broad
spectrum of IRS employees and critical stakeholders in identifying and
understanding essential workforce issues and designing solutions.
(IRS, Workforce of Tomorrow Task Force Final Report, Washington, D.C.:
August 2009.) The servicewide Nonfiler Strategy aims to foster
coordination among IRS programs to bring nonfilers into the tax system
and ensure future compliance. Nonfilers are taxpayers who are required
to file but do not file by the extended deadline.
[20] [hyperlink, http://www.gao.gov/products/GAO-01-1008G].
[21] Automated Substitute for Return is a program to contact taxpayers
who have not filed tax returns voluntarily and for whom income
information is available to substantiate a significant potential
income tax liability.
[22] In previous years, MITS's funding included some SB/SE costs
associated with IRDM, such as travel, while staffing for SB/SE's IRDM
program management office was covered by SB/SE's general budget. Other
IRS groups and offices that have staff working on IRDM tasks, such as
RAS and the Office of Chief Counsel, also use their general budgets
for IRDM work.
[23] MITS received about $5 million in IRDM funding in fiscal year
2009.
[24] 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. 9,
2009).
[25] We rated the extent to which IRS met each best practice on the
following scale: "Meets," IRS provided complete evidence that
satisfies the entire criterion; "Substantially meets," IRS provided
evidence that satisfies a large portion of the criterion; "Partially
meets," IRS provided evidence that satisfies about half of the
criterion; "Minimally meets," IRS provided evidence that satisfies a
small portion of the criterion; and "Does not meet," IRS provided no
evidence that satisfies any of the criterion. See appendix I for
further description of our scope and methodology.
[26] The full life cycle of a program includes inception, design,
development, deployment, operation, and maintenance, until the program
is retired.
[27] Ground rules are a set of estimating standards that provide
guidance and minimize conflicts in definitions, while assumptions are
judgments about past, present, or future conditions that may affect
the estimate.
[28] MITS's general cost estimation methodology is documented in its
Estimator's Reference Guide.
[29] IRS used a commercially available information technology cost
model to calculate MITS's IRDM costs. Though the model is based on
historical costs from comparable projects, assumptions that IRS
applies to the model, such as that no additional functionality would
be required to validate taxpayer identification numbers, are not
supported by historical information.
[30] TIGTA recommended that the IRS Chief Information Officer ensure
the reliability of the cost estimation process by implementing
procedures to compare actual project operations and maintenance costs
to initial estimates and revise the estimation process, if necessary.
(Treasury Inspector General for Tax Administration, The Modernization
Vision and Strategy Program Is Achieving Desired Results, but Risks
Remain, Reference No. 2009-20-008 (Oct. 31, 2008).)
[31] A sensitivity analysis examines how changes to key assumptions
and inputs, such as the proportion of forms that will be filed
electronically, affect the estimate.
[32] [hyperlink, http://www.gao.gov/products/GAO-09-3SP].
[33] IRS, Internal Revenue Manual: Servicewide Research Data
Standards, Section 1.7.2.
[34] Carnegie Mellon University Software Engineering Institute,
Capability Maturity Model Integration for Development (Pittsburgh,
Pa.: August 2006); IRS, Enterprise Lifecycle Guidance.
[35] The FIRE system is the IRS portal that receives incoming
information returns filed electronically.
[36] Other data that IRS used in its budget and staffing calculations
included the projected number of related tax returns and anticipated
mismatches between tax returns and information returns. SB/SE's fiscal
year 2012 budget and staffing request also includes resources to work
cases on individual taxpayers.
[37] RAS projections are released annually in IRS Publication 6961,
Calendar Year Projections of Information and Withholding Documents for
the United States and IRS Campuses.
[38] For the purposes of this report, the cost basis industry includes
brokers and entities that support brokers by providing goods or
services, such as technology systems. The transaction settlement
industry includes payment settlement entities and entities that
support them.
[39] Notice and comment procedures are defined in the Administrative
Procedure Act. This typically means that an agency will (1) publish a
notice of proposed rulemaking; (2) provide an opportunity for public
comment, usually through letters, on the proposed rule; and (3) after
the comment period, publish a final rule. 5 U.S.C. § 553.
[40] IRPAC is an advisory body to the Commissioner of Internal Revenue
on information reporting issues. IRPAC is not permitted to engage in
lobbying activities, but may comment on the benefits and burdens of
legislation that includes tax information reporting provisions.
[41] IRS, Recovery Act Lessons Learned (November 2010).
[42] For example, legislation requiring withholding on all payments
made by federal, state, or local government entities to persons
providing property or services was enacted in 2006, and is not
effective until 2012. Tax Increase Prevention and Reconciliation Act
of 2005, Pub. L. No. 109-222, § 511, 120 Stat. 343, 364-365 (2006) as
amended by the American Recovery and Reinvestment Act of 2009, Pub. L.
No. 111-5, div. B, § 1511, 123 Stat. 115, 355 (2009). IRS issued these
proposed regulations on December 5, 2008 and final regulations were
published on May 9, 2011. 73 Fed. Reg. 74,082; 76 Fed. Reg. 26,583.
[43] According to counsel at Treasury, in addition to regulations,
they must approve material posed in the Internal Revenue Bulletin,
with a few exceptions. Informal guidance that does not include
substantive policy decisions, as is typically the case for Frequently
Asked Questions (FAQ), does not need to go through a review process
with Treasury.
[44] The Priority Guidance Plan is an annual publication by Treasury
and IRS that lists projects that are priorities for allocation of the
resources of both offices, and it is used to identify and prioritize
tax issues that require regulations or other actions.
[45] IRS, Recovery Act Lessons Learned (November 2010).
[46] If a taxpayer acquires a stock or security within 30 days of
selling a substantially similar stock or security, the taxpayer is not
generally permitted to claim a loss on the sale (commonly referred to
as a wash sale). 26 U.S.C. § 1091; 26 C.F.R. § 1.1091-1.
[47] A letter ruling is a written determination issued to a taxpayer
in response to the taxpayer's written inquiry, filed prior to the
filing of returns or reports that are required by the tax laws, about
its status for tax purposes or the tax effects of its acts or
transactions. Taxpayers are charged a fee for this assistance.
[48] The TIN Matching Program is a computer system that permits payers
to check the TIN furnished by the payee against the name/TIN
combination contained in the IRS's database maintained for the
program. IRS will then inform the payer whether or not the name/TIN
combination matches a name/TIN combination in the database.
[49] See GAO, Federal Rulemaking: Improvements Needed to Monitoring
and Evaluation of Rules Development as Well as to the Transparency of
OMB Regulatory Reviews, [hyperlink,
http://www.gao.gov/products/GAO-09-205] (Washington D.C.,: Apr. 20,
2009).
[50] The Financial Industry Regulatory Authority, Inc. is the largest
independent regulator of securities firms that do business in the
United States; it is a nongovernmental entity.
[51] An IRS official told us that IRS did share the draft instructions
for the Form 1099-B with IRPAC, but not with any other external
industry stakeholders. IRPAC received a copy of draft Form 1099-K
instructions one business day prior to their public release.
[52] A final version of Form 1099-K and instructions was released in
February 2011. IRS also released a final Form 1099-B at that time, but
then removed a box and reissued a draft Form 1099-B in March 2011. The
final Form 1099-B and instructions were released in March 2011.
[53] AUR handles cases where a taxpayer underreported payments on his
or her tax return or overclaimed certain deductions (i.e., mortgage
interest, real estate taxes). After mismatches are identified by IRS's
computer systems, AUR reviewers manually screen cases to determine
whether the discrepancy can be resolved without taxpayer contact. For
the remaining cases, IRS may send a notice to the taxpayer.
[54] Form 1099-K data on merchants' gross income will be matched to
the following tax returns: Form 1120, Form 1120-S, Form 1065, and Form
1040 Schedules C, E, and F, according to IRS officials.
[55] For more information on the business nonfiler program, see GAO,
Tax Gap: IRS Has Modernized Its Business Nonfiler Program but Could
Benefit from More Evaluation and Use of Third-Party Data, [hyperlink,
http://www.gao.gov/products/GAO-10-950] (Washington D.C.: Aug. 31,
2011).
[56] Form 1099-B data on securities sales will be matched to the
following tax returns: Form 1040 Schedule D and Form 8949, according
to IRS officials.
[57] Other potential criteria include, whether a taxpayer uses a tax
preparer, receives other Forms 1099, or lives in a particular region,
according to a senior IRDM official.
[58] We previously recommended that IRS periodically and regularly
evaluate the business rules used to generate notices, and that IRS
collection managers and executives have access to collection
information for taxpayers delinquent in paying their taxes. As of
November 2010 , IRS has not implemented the recommendations. See GAO,
Tax Debt Collection: IRS Needs to Better Manage the Collection Notices
Sent to Individuals, [hyperlink,
http://www.gao.gov/products/GAO-09-976] (Washington, D.C.: Sept. 30,
2009).
[59] IPM is expected to include individual taxpayer data from the
Customer Account Data Engine (CADE) 2 database, which is under
development. See GAO, Taxpayer Account Strategy: IRS Should Finish
Defining Benefits and Improve Cost Estimates, [hyperlink,
http://www.gao.gov/products/GAO-11-168] (Washington D.C.,: Mar. 24,
2011).
[60] Small business underreporter cases identified through IRDM will
be worked in a new organization within SB/SE. Cases involving large
businesses or international entities will be sent to the Large
Business and International division.
[61] A project milestone is an executive management decision point
placed at a natural breakpoint in the life cycle. IRS, Internal
Revenue Manual, Section 2.16.1 Enterprise Lifecycle Guidance.
[62] These four measures were finalized as part of the Exhibit 300
process. The Exhibit 300 is a document required by Office of
Management and Budget to support information technology projects. It
includes the project's desired outcome and budget justification.
[63] GAO, Tax Administration: Planning for IRS's Enforcement Process
Changes Included Many Key Steps but Can Be Improved, [hyperlink,
http://www.gao.gov/products/GAO-04-287] (Washington, D.C.: Jan. 20,
2004).
[64] GAO, Tax Administration: IRS Needs to Further Refine Its Tax
Filing Season Performance Measures, [hyperlink,
http://www.gao.gov/products/GAO-03-143] (Washington, D.C.: Nov. 22,
2002).
[65] Business Master File is an IRS database that holds information
from business filers.
[66] [hyperlink, http://www.gao.gov/products/GAO-01-1008G]; GAO,
Designing Evaluations, GAO/PEMD 10.1.4 (Washington, D.C.: March 1991).
[67] The two measures are "Increase in average gross receipts due to
new Tax Gap Legislation (taking into account other contributing
factors)" and "Number of additional business returns filed due to new
Tax Gap Legislation (taking into account other contributing factors)."
[68] Criteria were developed from sources such as: GAO, Results-
Oriented Cultures: Implementation Steps to Assist Mergers and
Organizational Transformations, [hyperlink,
http://www.gao.gov/products/GAO-03-669] (Washington, D.C.: July 2003);
GAO, Internal Control Management and Evaluation Tool, [hyperlink,
http://www.gao.gov/products/GAO-01-1008G] (Washington, D.C.: August
2001), Carnegie Mellon University Software Engineering Institute,
Capability Maturity Model Integration for Development (Capability
Maturity Model Integration for Development); the Internal Revenue
Manual Exhibit 1.5.1-5, and Section 2.16.1.
[69] 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. 9,
2009).
[70] Including the Integrated IRDM End-to-End High Level To-Be Process
Flow diagram.
[71] Criteria were developed from sources such as GAO, Tax
Administration: IRS Needs to Further Refine Its Tax Season Performance
Measures, [hyperlink, http://www.gao.gov/products/GAO-03-143]
(Washington, D.C.: Nov. 22, 2002).
[72] 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. 9,
2009).
[73] We rated the extent to which IRS met each best practice on the
following scale: "Meets," IRS provided complete evidence that
satisfies the entire criterion; "Substantially meets," IRS provided
evidence that satisfies a large portion of the criterion; "Partially
meets," IRS provided evidence that satisfies about half of the
criterion; "Minimally meets," IRS provided evidence that satisfies a
small portion of the criterion; and "Does not meet," IRS provided no
evidence that satisfies any of the criterion.
[End of section]
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