oversight

Tax Policy and Administration: 1989 Annual Report on GAO's Tax-Related Work

Published by the Government Accountability Office on 1990-03-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

TAX POLICY AND
ADMINISTRATION
1989 Annual Report
on GAO’s Tax-Related
Work
United States
General Accounting Office
Washington, D.C. 20648

General Government Division

B-137762

March 16, 1990

The Honorable Dan Rostenkowski
Chairman, Committee on
  Ways and Means
House of Representatives

The Honorable Lloyd Bentsen
Chairman, Committee on
  Finance
United States Senate

The Honorable Lloyd Bentsen
Chairman, Joint Committee on
  Taxation
Congress of the United States

The Honorable John Conyers, Jr.
Chairman, Committee on
  Government Operations
House of Representatives

The Honorable John Glenn
Chairman, Committee on
  Governmental Affairs
United States Senate

This report is submitted in compliance with 31 U.S.C. 719(d) and sum-
marizes GAO'S work on tax policy and administration during fiscal year
1989. It includes information on legislative actions taken as of December
31, 1989, on GAO’S recommendations, recommendations to Congress
made before fiscal year 1989 that remain open, and assignments for
which GAO was authorized access to tax information under 31 U.S.C.
713.

Until now, the annual report was prepared on a calendar year basis.
Beginning this year, the report will be prepared on a fiscal year basis to
better ensure that information in the report is available to Congress
when it begins its annual oversight and appropriations cycles.




Page   1                                       GAO/GGD-9046   Annual   Tax Report
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    I
                        El37702




                        The products GAO issued in fiscal year 1989 discussed specific congres-
Ney Recommendations     sional and administrative actions to increase federal revenues, enhance
fd>rTax Policy and      the effectiveness of tax incentives, improve compliance with the
&ministrati&t in        nation’s tax laws, and improve the Internal Revenue Service’s (IRS) man-
                        agement effectiveness.
11990

I crease Revenues       Many have suggested that a credible strategy for reducing the federal
                        deficit must include some revenue increases. GAO analyzed options that
                        could be considered as Congress deliberates the revenue side of the defi-
;                       cit reduction equation including:

                    l   Adjusting the federal excise taxes on such products as alcohol, tobacco,
                        and certain weapons to keep pace with inflation would raise an addi-
                        tional $12 to $76 billion over a 5-year period. Some of the per unit dollar
                        amounts of these excise taxes have remained the same for over 3
                        decades in spite of the significant price changes experienced during this
                        time. Although some argue that the relative burden of excise taxes is
                        borne more heavily by low-income people, the evidence, although incon-
                        clusive, suggests that the taxed commodities are discretionary
                        purchases disproportionately consumed by higher income groups. (See
                        p. 44.)
                    l   A value-added tax on consumption is often suggested because of its rev-
                        enue potential-about     $125 billion annually at a S-percent rate applied
                        on most goods and services. The United States is the only industrialized
                        nation without some kind of broad-based national consumption tax.
                        GAO'S study of other nations’ experiences suggests that a federal value-
                        added tax linked to the broad consumption base of the nation’s economy
                        would provide a significant and stable source of revenue with relatively
                        small percentage rates that would not tax savings as the current income
                        tax does. The disadvantages of a broad-based value-added tax include
                        (1) its regressivity, because lower income people use more of their
                        income for consumption, and (2) the administrative and compliance
                        issues posed for tax administrators as well as businesses. A value-added
                        tax, however, could be designed to mitigate some of these concerns. For
                        example, necessities such as food and health care could be exempted
                        from the tax to ease the burden on lower-income families. To the extent
                        that necessities are exempted or multiple rates are introduced, a value-
                        added tax would need to be structured using a more complex method of
                        calculation. (See pp. 45 and 47.)




                        Page 2                                         GAO/GGD9046   Annual   Tax Report
                                    B.13’7762




Enharjce Effectiveness of           Tax preferences and incentives are often adopted by Congress to foster
Tax Idcentives                      certain policy goals, such as improving access to housing or promoting
                                    employment for lower income workers. In 1989, over 120 tax preference
                                    items accounting for over $300 billion in revenue foregone remained in
                                    the tax code, despite continuing concerns that they frequently are not
                                    well targeted at intended beneficiaries and that the subsidized activities
                                    would have been undertaken anyway. GAO suggested improvements to
                                    several tax incentives to enhance their effectiveness including:

                                . The research and experimentation tax credit cost over $7 billion in fed-
                                  eral tax revenues but only stimulated between $1 billion and $2.5 billion
                                  of additional research spending. More research per federal tax dollar
                                  would be stimulated by restructuring the credit to reward firms for
                                  increasing their spending above a fixed-base amount that is adjusted for
                                  inflation. Congress enacted a revised fixed-base credit that will be effec-
                                  tive for the first 9 months of 1990. If Congress decides to make this
                                  credit permanent, it should provide for periodic adjustments to the base
                                  as a means of reducing the amount of the credit earned for research
                                  expenditures that firms would have made without the credit. (See p.
                                  75.)
                                l According to estimates by the Joint Committee on Taxation, between
                                  $400 million and $500 million in federal tax revenues are foregone to
                                  subsidize employers who provide educational assistance to their work-
                                  ers under section 127 of the tax code, which was recently extended
                                  through September 1990. However, adequate information is not availa-
                                  ble to evaluate whether the benefits of this tax expenditure are targeted
                                  to those needing it the most. To help assess the effectiveness of this pro-
                                  gram, GAO recommended that Congress consider requiring employers
                                  who use this provision to report such things as the average income of
                                  participants and the average benefits provided for various salary levels.
                                  (See p. 72.)


Improve Compliance                  Compliance with the nation’s tax laws persists as a significant problem
                                    that costs billions of dollars in lost federal revenues. IRS estimated tax-
                                    payers would not pay $87.1 billion in income taxes owed the govern-
                                    ment in 1988, an amount that could grow to nearly $114 billion by 1992.
                                    GAO identified a number of enforcement initiatives to enhance IRS' effec-
                                    tiveness, some of which require congressional action:

                            l       Major tax losses occur when employers misclassify their workers as
                                    independent contractors because employers do not withhold income
                                    taxes from them and independent contractors are more likely than


                                    Page 3                                        GAO/GGD-9046   Annual   Tax Report
 //
                     B-137762




                     employees not to report all of their income. For example, IRS estimated
                     that sole proprietors, many of whom are independent contractors,
                     accounted for $16 billion in unpaid income taxes for 1987. GAO identified
                     a systematic approach for IRS to identify employers likely to misclassify
                     workers. Although IRS has agreed to implement this approach, its effec-
                     tiveness will be seriously hampered by section 530 of the Revenue Act
                     of 1978 which prevents IRS from reclassifying many contractors as
                     employees. For example, IRS' most recent estimate shows a revenue loss
                     of about $111 million associated with section 530. GAO recommended
                     that Congress modify this section to permit IRS to require employers to
                     prospectively reclassify employees who have been misclassified as inde-
                     pendent contractors. (See p. 32.)
                 l   More effective civil tax penalties can deter noncompliance and help
                     reduce the gap between taxes owed and taxes paid. As part of the Omni-
                     bus Budget Reconciliation Act of 1989, Congress reformed key penalties
                     for such things as underreporting tax liability and failing to file infor-
                     mation returns and tax returns. The act made a number of improve-
                     ments, but some of its provisions seemed to reduce the incentive to
                     comply. For example, the act reduced penalties applied to taxpayers
                     who understate their tax liabilities by more than $6,000 and eliminated
                     the only penalty applied to taxpayers who fail to report income dis-
                     closed on information returns. In a report on options for civil penalty
                     reform, GAO recommended, among other things, that Congress retain the
                     latter penalty and strengthen the understatement penalty. (See p. 40.)
                 l   According to its statistics, IRS annually gains about $3 billion in revenues
                     through the computer matching done as part of its information returns
                     program. GAO believes that millions of dollars in additional revenues
                     could be obtained if more information returns were filed. For example,
                     GAO found that the state and local governments it visited filed informa-
                     tion returns on only about 10 percent of the contractor payments they
                     should have reported and IRS' examination program is not effectively
                     identifying the many businesses that fail to file required information
                     returns. Perhaps even greater revenue can be realized from IRS' adoption
                     of a document matching program for payments to corporations and
                     partnerships. While the revenue impact from having this program is
                     uncertain, revenue estimates have ranged from $300 million to $8 bil-
                     lion GAO is currently monitoring IRS' study of this issue. (See pp. 29 and
                     31.)


IRS’Managekent       The successful implementation of these and other tax administration ini-
Effectiveness        tiatives critically depends on IRS' organizational capacity and compe-
                     tence. In fiscal year 1989, GAO and IRS completed a major study that


                     Page 4                                         GAO/GGD9046   Annual Tax Report
                      provided a managerial agenda for the future. The study identified sev-
                      era1 major challenges facing IRS including the need to modernize the
                      agency’s outdated tax processing system, update critical accounting and
                      financial systems, and strengthen human resources. (See p. 50.)

                      IRSis beginning to make some of the major changes in executive leader-
                      ship, planning, and accountability called for in that report, and GAO will
                      be issuing a status report on IRS’progress. GAO is also closely monitoring
                      the modernization of IRS' information and tax processing systems. Sev-
                      eral reports and testimonies addressed problems with the agency’s cost
                      estimates, the integration of system components, and the tracking of
                      projects within the modernization effort. (See pp. 14, 16, 18 and 20.)


                      Various congressional committees and Members of Congress used GAO'S
Actions Resulting     products in overseeing tax administration operations, considering tax
Frond GAO’s Reports   policy issues, and enacting legislation. The Technical and Miscellaneous
                      Revenue Act of 1988 and the Omnibus Budget Reconciliation Act of
                      1989, for example, addressed several issues raised in our reports on
                      such matters as life insurance taxation, tax-exempt bonds, and civil
                      penalties.

                      IRS has taken, or plans to take, action on most of the recommendations
                      GAO made in fiscal year 1989. For example, IRS (1) made organizational
                      changes intended to provide executive direction over information and
                      financial management activities, (2) developed critical success factors
                      for use in measuring performance and assessing accomplishments, (3)
                      took steps to use its collection resources more efficiently and better pro-
                      tect the collection of tax revenues on completed criminal prosecution
                      cases, (4) improved its methodology for studying the effects of the
                      refund offset program on compliance, and (5) said it would start match-
                      ing independent contractors’ information returns with their tax returns
                      by January 1991 and would help state and local governments better
                      understand their requirements for reporting payments made to indepen-
                      dent contractors.


                      GAO does its work on tax policy and administrationmatters pursuant to
                      31 U.S.C. 713, which authorizes the Comptroller General to audit IRS and
            Y         the Bureau of Alcohol, Tobacco, and Firearms. GAO Order 0135.1, as




                      Page 6                                         GAO/GGD-99-46   AnnuaJ Tax Report
amended, prescribes the procedures and requirements that must be fol-
lowed in protecting the confidentiality of tax returns and return infor-
mation made available to GAO when doing tax-related work. This order is
available upon request.

Copies of this report are being sent to the Director of the Office of Man-
agement and Budget, the Secretary of the Treasury, and the Commis-
sioner of Internal Revenue. Copies will also be sent to interested
congressional committees and to others upon request.

Major contributors to this report are listed in appendix VIII, If you or
your colleagues would like to discuss any of the matters in the report,
please call me on 275-6407 or Paul Posner, Associate Director, on 272-
7904.




Jennie S. Stathis
Director, Tax Policy and
  Administration Issues




Page 6                                         GAO/GGD-9046   Annual   Tax Report
c




    Page 7   GAO/GGD-9046   Annual Tax Report
Contents


Letter                                                         1

APpendixI                                                     10
Summariesof Tax-
Related Products
Issuedin FiscalYear
1989 by Subject
Matter
mm
A pendixI1                                                    78
SL     ariesofTax-
Related Products
IssuedBefore Fiscal
Year1989WithOpen
Recommendations to
Congressasof
December31,1989
Appendix III                                                  90
Legislative Actions
Takenin1989onGAO
Recommendations
AppendixIV
Listing of Open
Recommendations to
Congress




                      Page 8   GAO/GGD9046   Annual   Tax Report
                         Contents




    I
    I

Appendix V
Listing of
Recommendations
Made in Fiscal Year
198 ~to the
co     issioner of
Inte+ nal Revenue
Appendix VI
Chronological Listing
of GbO Products on
Tax Matters Issued in
Fiscal Year 1989
Appendix VII
Listing of Assignments
for Which GAO Was
Authorized Access to
Tax ‘Data in Fiscal
Year 1989
Appkndix VIII
Major Contributors to
This: Report

                         Abbreviations

                         Acs        Automated Collection System
                         ADP        automated data processing
                         AES        Automated Examination System
                         IHS        Internal Revenue Service
                         SSA        Social Security Administration
                         VA         Veterans Administration


                         Page 9                                      GAO/GGD-9046   Annual   Tax Report
                                                                                              (

Apflendix I

Simxmries of Tax-Relakd Products Issued in                                                            ’
F’hcal Year 1989 by Subject Matter

AI)P and Information   Progress in Installing IRS’ Communications Replacement                       13

   C
Te hnology                  System
                       IRS Needs to Assess Design Alternatives for Its Electronic
                            Filing System
                                                                                                    14

                       Testimony on IRS’Progress in Implementing Its Electronic                     16
                            Filing and Communications Replacement Systems
                       Analysis of Proposal for Direct Deposit of Income Tax                        17
                            Refunds
                       IRS’Automated Examination System-Troubled         Past,                      18
                            Uncertain Future
                       Testimony on the Budgetary Implications of IRS’Tax                           20
                            System Modernization and Automated Examination
                            System Efforts

Coinpliance            IRS’Combined Annual Wage Reporting Reconciliation                            21
                            Program
                       Labor and IRS Enforcement of the Employee Retirement                         22
                            Income Security Act
                       Improving IRS’Business Nonfiler Program                                      23
                       Reducing Delays in the Pursuit of Tax Revenue on Closed                      25
                            Criminal Cases
                       Status of IRS’Studies of the Refund Offset Program                            27
                       State and Local Compliance With IRS’Information                               29
                            Reporting Requirements
                       Missing Independent Contractors’ Information Returns                         31
                            Not Always Detected
                       Information Returns Can Be Used to Identify Employers                        32
                            Who Misclassify Workers
                       Testimony on the Information Return Requirements for                          34
                            Independent Contractors
                       Periodic Evaluation Needed If IRS Uses Levies to Collect                      35
                            Deferred Accounts
                       Statistics on IRS’Use of Levies to Collect Delinquent                         36
                            Taxes
                       IRS Can Improve the Process for Collecting loo-Percent                        37
                            Penalties
                       Options for Civil Penalty Reform                                              40




                       Page 10                                       GAO/GGD-9046   Annual   Tax Report
   f


                     AQQendix I
                     S-es        of Tax-Related Products hued   in
                     Fiscal Year lB89 by Subject Matter




Excibe Taxes and     Transition Series: Revenue Options                                              42
Otheir Revenue       Economic, Administrative, and Taxpayer Compliance
                         Aspects of a Gross Income Tax
                                                                                                     43
Potential            Revenue Potential of Restoring Excise Taxes to Past                             44
                         Levels
                     Tax-Credit and Subtraction Methods of Calculating a                             45
                         Value-Added Tax
                     Value-Added Tax Issues for U.S. Tax Policymakers                                47
                     Higher Excise Tax Should Significantly Reduce the                               48
                         Number of Smokers
                     The Insurance Excise Tax and Competition for U.S.                               49
                         Reinsurance Premiums

General Management   Managing IRS: Actions Needed to Assure Quality Service                          50
                         in the Future
   I                 Testimony on Actions Needed to Assure Quality IRS                               52
                         Service in the Future
                     Transition Series: Internal Revenue Service Issues                              54
                     Testimony on the Administration’s Fiscal Year 1990                              55
                         Budget Proposals for IRS and the Tax Court
                     Results of IRS’Mid-Fiscal Year 1989 Financial Review                            56
                     Testimony on College Students’ Perceptions of the Federal                       57
                         Government as an Employer
                     IRS’Data on Its Investigations of Employee Misconduct                           58
                     Testimony on the Reliability of IRS’ Data on Investigations                     59
                         of Alleged Employee Misconduct

Returns Processing   Effective Implementation of the Tax Reform Act Led to                           60
                          Uneventful 1988 Filing Season
                     Interest on Tax Refunds Paid by IRS in 1988                                     61
                     Testimony on the Status of the 1989 Tax Return Filing                           62
                          Season

Taxpayer Service     Accessibility, Timeliness, and Accuracy of IRS’Telephone                        63
                         Assistance Program
                     Testimony on IRS’Telephone Assistance Program                                   64
                     How Precise Are IRS’Estimates of Taxpayers Calling for                          65
                         Assistance?
                     IRS’Interpretative Guidance Implementing the Tax                                67
                          Reform Act



                     Page 1 I                                        GAO/GGD-9646   Annual   Tax Report
             Appendix I
             Summaries of Tax-Related Products    Issued in
             Fiscal Year 1989 by Subject Matter




T&r Policy   Preliminary Data on Tax-Exempt Bonds Used to Finance
                  Housing for the Elderly
             Deducting Interest on Funds Borrowed to Purchase or                             69
                  Carry Tax-Exempt Bonds
             Effect of Changes in Procurement and Tax Policy on the                          71
                  Defense Industry
             Insufficient Information to Assess Effect of Tax Free                           72
                  Education Assistance
             Costs Associated With Low Income Housing Tax Credit
                  Partnerships
             The Research Tax Credit Has Stimulated Some Additional
                  Research Spending

Other        1988 Annual Report on GAO’s Tax-Related Work




             Page 12                                          GAO/GGD9046   Annual   Tax Report
                           Appendix I
                           SummsrIee of Tax-Relatid Products   Issued ln
                           Nscal Year 1989 by Subject Matter




ADP’and Information
Technology
     I




Prodress in Installing -
IRS’ ommunications         At the request of the Chairman of the Subcommittee on Oversight,
Rep1 cement System         House Committee on Ways and Means, GAO reviewed the status of IRS'
                           installation of a new $156 million Communications Replacement System.
    ”                      The system consists of computers and software that enable IRS personnel
                           to access mainframe computers through computer terminals in order to
                           process taxpayer inquiries and correct tax returns.

                           GAO found that (1) tests of the new system at IRS' Martinsburg,  West
                           Virginia, Computing Center identified about 900 software problems-
                           most of which had been corrected by January 1989; (2) IRS had not for-
                           mally accepted the system as of January 1989 because the contractor
                           had not corrected all of the problems and had not delivered acceptable
                           documentation describing how the system’s software worked and how it
                           could be used; (3) IRS decided, in November 1987, to install the new sys-
                           tem at its 10 service centers despite the remaining problems, because it
                           believed those problems would not adversely affect the system’s ability
                           to process taxpayer inquiries or correct tax returns-a decision that GAO
                           considered reasonable; and (4) the system had been installed at all 10
                           centers by December 1988.


Related GAO Product(s)     GAO/T-IMTEC-8Q-2,3/16/89; GAOIIMTEC-88-3 1,3/3 l/88; GAO/T-
                           IMTEC-87-1, 2/6/87; and GAO/IMTEC-87-3BR, 10/14/86




                           Page 13                                         GAO/GGD9046   Annual   Tax Report
                      Appendix I
                      Summnries of Tax-Related Producta Issued in
                      Fiscal Year 1989 by Subject Matter




(GAO/IMTEC-89-33,
II@ Needs to Assess
Dbsign Alternatives   In a report to the Chairman of the Subcommittee on Oversight, House
fhr Its Electronic    Committee on Ways and Means, GAO discussed IRS' development of an
                      electronic filing system, which is intended to streamline the tax process-
Filing System         ing system by using computers instead of the traditional paper forms for
                      filing individual tax returns. The report focused on (1) problems the
                      electronic filing system encountered during the 1988 and 1989 filing sea-
                      sons and (2) IRS' approach for expanding electronic filing nationwide in
                      1990.

                      GAO found that (1) IRS had spent about $13 million through fiscal year
                      1988 developing an electronic filing system; (2) although the system
                      processed about 583,000 returns during the 1988 filing season, it expe-
                      rienced problems when a major software component failed to operate as
                      intended; (3) IRS experienced similar problems during the 1989 filing
                      seasons because replacement software was not ready on time; and (4)
                      IRS' failure to clearly define system performance requirements or allow
                      adequate time to decide whether contract deliverables were acceptable
                      contributed to the software problems and resulted in IRS paying for
                      defective software.

                      GAO noted that IRS intended to expand the availability of electronic filing
                      nationwide in 1990 by enhancing the current system rather than replac-
                      ing it. GAO expressed its concern with that approach because (1) the cur-
                      rent system was originally developed only as an interim measure until a
                      nationwide system could be fielded and (2) IRS had not yet demonstrated
                      that this approach was best for achieving the agency’s ultimate goals for
                      electronic filing.

-~
Recommendation(s)     The Commissioner of Internal Revenue should validate the design
                      approach for the nationwide electronic filing system before selecting
                      and funding a system. At a minimum, IRS should (1) clearly define sys-
                      tem requirements for nationwide implementation, including determining
                      how it will minimize the burgeoning, paper-intensive nature of the cur-
                      rent system and accommodate the processing of tax due returns and (2)
                      identify and analyze the costs and benefits of various alternatives for
                      meeting the requirements for a nationwide system.

                      The Commissioner of Internal Revenue should ensure better manage-
                      ment in contracting for automated data processing (ADP) support ser-
                      vices by (1) revising IRS procedures to require project offices to get


                      Page 14                                        GAO/GGD99-46   Annual   Tax Report
                          Appendix I
                          Sunuuarles of Tax-Related Products   Issued In
                          Fiscal Year 1989 by Subject Matter




                          technical assistance in writing and negotiating contracts for major ADP
                          systems and (2) allowing enough time to thoroughly test deliverables,
                          thereby ensuring product quality.


Actiob(s ) Taken and/or   IRSagreed with the recommendations and has completed or is in the pro-
                          cess of completing their implementation, For example, IRS said that elec-
Pendipg                   tronic filing will be operational nationwide by the 1990 filing season and
                          system requirements have been clearly defined. IRS also said that it was
                          determining how to reduce the paper-intensive aspect of the current sys-
                          tem and that the costs and benefits of various alternatives for meeting
                          requirements for a nationwide electronic filing system have been estab-
                          lished. With regard to our recommendation about ensuring better man-
                          agement in contracting for ADP support services, IRS has developed a new
                          project planning process which is currently being used in its ADP mod-
                          ernization projects.


Relatbd GAO Product(s)    GAO/T-IMTEC-89-2,3/16/89               and GAO/IMTEC-#S-40,7/13/88




                          Page 16                                             GAO/GGD-9043   Auuud   Tax Report
                         Appendix I
                         Summaries of Tax-Related Products    Issued in
                         Fiscal Year 1989 by Subject Matter




                         (GAO/T-IMTEC-89-2,03/16/89)
Tktimony on IRS’
Progress in              In testimony before the Subcommittee on Oversight, House Committee
Imiplementing Its        on Ways and Means, GAO discussed IRS’(1) development of an electronic
                         filing system for individual tax returns and (2) progress in installing
El$ctronic Filing and    new communications processors.
COmmunications
                         With respect to electronic filing, GAO noted that IRS (1) abandoned its
Replacement Systems      original plans for a nationwide system in November 1986 because its
                         strategy for acquiring the necessary computers had been disapproved
                         by the Department of the Treasury; (2) implemented an interim system
                         for use in 16 of its 63 districts during the 1988 filing season; (3)
                         expanded electronic filing from 16 to 48 districts in 1989 even though
                         the interim system used in 1988 was not completely successful and a
                         modified version of that system was not ready for use; (4) proposed to
                         expand and modify the interim system for nationwide implementation,
                         although it had not demonstrated the system’s ability to meet its long-
                         range needs; and (5) spent about $13 million through 1988 and planned
                         to spend another $163 million on system development and operations
                         through 1999.

                         With respect to the Communications Replacement System, GAO noted
                         that IRS (1) awarded a contract to replace its existing data communica-
                         tion processing system and obsolete computer terminals; (2) experienced
                         several project delays due to contract award protests and redirection of
                         contract efforts; (3) installed, in November 1987, its new Communica-
                         tions Replacement System, which is now operational at all 10 service
                         centers and is working reasonably well; and (4) is withholding contrac-
                         tor payments until the contractor provides acceptable systems documen-
                         tation and corrects some software problems that do not affect returns
                         processing.


Related GAO Product(s)   GAO/IMTEC-89-33,5/5/89;   GAO/IMTEC-89-14,2/22/89;  GAOJMTEC-
                         88-40, 7/13/88; GAO/IMTEC-88-31,3/3 l/88; GAO/T-IMTEC-87-1,
                         2/6/87; and GAO/IMTEC-87-3BR, 10/14/86




                         Page 16                                          GAO/GGD9043   Annual   Tax Report
    c

                        Appendix I
                        Summaries of Tax-Related Products Iseued in
                        Fiscal Year 1989 by Subject Matter




    /
                        (GAO/IMTEC-89”34,02/24/89)
Analysis of Proposal
for Qirect Deposit of   In a report to Senator Daniel Inouye, GAO commented on a proposal to
Inco@e
    ,
        Tax Refunds     electronically transfer federal income tax refunds directly into taxpay-
                        ers’ bank accounts. IRS already offers electronic refunds on returns filed
                        electronically. The proposal would extend that service to returns filed
                        on paper and would require IRS to notify the taxpayer by mail before
                        making the electronic transfer.

                        While noting that there was no disagreement on the technical feasibility
                        of offering income tax refunds by direct deposit to taxpayers who file
                        paper returns, GAO cited the following concerns raised by IRS: (1) taxpay-
                        ers and IRS staff could err in transcribing the bank routing and transit
                        number and the taxpayer’s bank account number if the information
                        were provided to IRS using paper returns; (2) the proposal would be
                        costly to implement for paper returns; (3) the proposed provision to
                        notify the taxpayer by mail before making the electronic payment was
                        unneeded and costly and could delay refund receipt; and (4) little time
                        would be saved in issuing refunds by electronic transfers, rather than by
                        checks, since a direct deposit refund would arrive only 1 to 4 days
                        before a check.

                        GAO noted that (1) officials of Treasury’s Financial Management Service
                        and IRS agreed that the direct deposit option should not be offered to
                        taxpayers filing paper returns until a way was found to reduce the error
                        potential and the cost and (2) IRS' Research Division was working to
                        develop a direct deposit proposal that would ensure data accuracy and
                        be cost effective.




                        Page 17                                       GAO/GGD-90-46   Annual Tax Report
                                                                                                 t
                                                                                                          ,-
                         Appendix I
                         Summaries of Tax-Related Product8 Issued in
                         Fiecal Year 1989 by Subject Matter




                         (GAO/IMTEC-89-54,06/22/89)
I@’ Automated
Ebamination              In response to a request from the Subcommittee on Oversight, House
S stem-Troubled          Committee on Ways and Means, GAO reviewed IRS' Automated Examina-
                         tion System (Am), which is intended to automate the examination of
Pt t, Uncertain Future   income tax returns. GAO focused on (1) IRS' progress in developing and
                         implementing AES and (2) AES' compatibility with IRS' Tax System Mod-
                         ernization effort, which is intended to streamline tax processing through
                         increased automation.

                         GAO found that IRS (1) projected a total cost of $77 million for AES devel-
                         opment and implementation when it established the project in 1982; (2)
                         significantly expanded the project in 1984 and 1985, projecting comple-
                         tion by 1989 at a total cost of $1 billion; (3) spent about $187 million on
                         AI33 from its inception through fiscal year 1988; (4) currently estimates
                         project completion by 1995 at a total cost of $1.8 billion; (5) currently
                         projects AES benefits at $16.2 billion over its g-year life, down from a
                         contractor estimate of $42.7 billion in 1987; (6) has not convincingly
                         demonstrated or verified any dollar benefits from the single currently
                         operational AES component; (7) cited software development problems as
                         the primary cause of AES cost overruns and schedule slippages; (8)
                         decided to develop AESindependently from its Tax System Moderniza-
                         tion effort, so as not to postpone implementation of AES, and then incor-
                         porate AES into the modernization effort later-a decision that may
                         require costly system modifications; and (9) had its 1990 AES budget
                         request reduced by the Office of Management and Budget from $110
                         million for continued development and operations and maintenance to
                         $19.5 million for operations and maintenance only.

                         IRS officials told GAO that the AESproject would not be abolished because
                         they believe automating the examination function will provide major
                         benefits. Accordingly, IRS planned to restructure the project and seek
                         increased funding in the fiscal year 1991 budget.


Recommendation(s)        Before additional investments are made in AES, the Commissioner of
                         Internal Revenue should establish a sound and consistent methodology
                         for estimating its benefits. To validate this methodology and measure
                         the success of further development efforts, estimated benefits should be
                         compared with actual benefits achieved as components of the system
                         are deployed, and the Commissioner should make this comparison avail-
                         able to Congress as part of the agency’s annual budget submission.



                         Page 18                                        GAO/GGD-90-46   Annual   Tax Report.
     .

                         Appendix I
                         Summariee of Tax-Related Producte Issued in
                         Fhcal Year 1989 by Subject Matter




                         In view of the unresolved questions concerning AI% integration with Tax
                         System Modernization, the Commissioner should develop a strategy to
                         enable AILS to function effectively with other components of the modern-
                         ized system, In particular, IRS should determine how AESstandards for
                         data structures can be made consistent with the standards of other sys-
                         tems within the modernization effort.


Actio (s) Taken and/or   IRS generally agreed with the recommendations and is in the process of
Pend”~ng                 revising and enhancing AES. Specifically, IRS agreed that each future seg-
                         ment of the system should be closely monitored and said that a State-
                         ment of Work would soon be released to an independent contractor,
                         which would establish a method of evaluating productivity and tracking
                         actual usage and impact. IRS said also that it expects to develop a strat-
                         egy for integrating AES within its modernization effort early in fiscal
                         year 1990.


ReladedGAO Product(s)    GAO/T-IMTEC-89-4,4/4/89




                         Page 19                                        GAO/GGD-9046   Annual Tax Report
                         Appendix I
                         Summaries of Tax-Related Products    Issued in
                         Fiscal Year 1989 by Subject Matter




                         (GAO/T-IMTEC-89-4,04/04/89)
Thstimony on the
Bbdgetary                In testimony before the Subcommittee on Oversight, House Committee
I plications of IRS’     on Ways and Means, GAO discussed IRS' fiscal year 1990 budget for auto-
                         mation initiatives. GAO noted that (1) IRS' budget request of $933 million
T x System               for automated data processing focused on two critical efforts-main-
Ml
 1 dernization and       taining existing computer systems and pursuing its long-range automa-
                         tion plan, known as Tax System Modernization, and (2) total estimated
Abtomated                costs for the modernization effort had been understated in past years
Examination System       and were difficult to track because projects were renamed, consolidated,
Efforts                  split, and not always clearly identified in budget documents.

                         GAO also discussed AES, which is intended to automate the examination
                         of tax returns. GAO said that (1) AES' estimated costs had risen from $1
                         billion to $1.8 billion and the system’s scheduled completion date had
                         slipped from 1989 to 1995 due to software development problems; (2)
                         IRS had developed AES without adequate planning for its integration into
                         the modernization system and had not addressed how it would make AElS
                         data structures consistent with other data structures; and (3) the Office
                         of Management and Budget had reduced the AES budget request by 82
                         percent because it lacked clear management direction and tangible
                         benefits.

                         GAO expressed the belief that IRS should (1) clearly and consistently
                         identify all projects that comprise the modernization program in its
                         yearly budget requests and (2) resolve AES problems, demonstrate its
                         benefits, and plan for its integration into system modernization before
                         making further investments.


Related GAO Product(s)   GAO/IMTEC-89-54,6/22/89               and GAO/T-GGD-89-16,4/4/89




                         Page 20                                             GAO/GGD-9046   Annual   Tax Report
                         Appendix 1
                         Summaries of Tax-Related Products    Iesued in
                         Fiscal Year 1869 by Subject Matter




Corr)pliance

                         (GAO/GGD-89-21, 12/l 4/88)
IRS’/Combined Annual
Wa e Reporting           In a report to the Joint Committee on Taxation, GAO provided informa-
Rett nciliation          tion on the Combined Annual Wage Reporting Reconciliation Program.
                         The primary purpose of this program is to ensure that employers submit
Pro ram                  correct wage and tax withholding information to both IRS and the Social
    t                    Security Administration (SSA) so that (1) employees’ social security
                         accounts can be properly credited and (2) proper income and employ-
                         ment tax withholding can be collected from employers.

                         GAO reported that (1) under an agreement between IRS and SSA, IRS
                         assumed responsibility for matching employers’ annual earnings infor-
                         mation reported to SSA with the comparable quarterly earnings informa-
                         tion and income tax withholding reports submitted to IRS, (2) the number
                         of discrepancies with potential tax implications that IRS annually identi-
                         fied totaled about 500,000 between 1981 and 1984 and then increased to
                         791,000 in 1986, (3) IRS resolved an average of 54 percent of the discrep-
                         ancies between 1981 and 1986, and (4) the discrepancies accounted for
                         about 0.1 percent of the taxes withheld from 1981 to 1986.

                         GAO found that, from 1981 to 1984, IRS (1) assessed employers additional
                         taxes, interest, and penalties of $2.7 billion, but abated almost $1.4 bil-
                         lion of those assessments and (2) collected almost $500 million leaving
                         an uncollected amount of $800 million at the time of GAO'S review. GAO
                         said that IRS planned to double its staff assigned to Reconciliation Pro-
                         gram cases in fiscal year 1989, which IRS expected would allow it to
                         resolve almost all of the cases with tax implications and help it identify
                         patterns of employers who are responsible for the discrepancies.


Related GAO Product(s)   GAO/T-HRD-88-29,8/g/88               and GAO/HRD-87-52, g/18/87




                         Page 21                                             GAO/GGD90-46   Annual   Tax Report
                                                                                                  l




                      Appendix I
                      Summaries of Tax-Related Products    Issued in
                      Fiscal Year 1989 by Subject Matter




                      (GAO/HRD-89-32,01/23/89)
Labor and IRS
Enforcement of the    In response to a request from the Chairman of the Subcommittee on
Edployee Retirement   Oversight, House Committee on Ways and Means, GAO reviewed efforts
                      by the Department of Labor and IRS to enforce the Employee Retirement
Indome Security Act   Income Security Act’s pension plan provisions. Labor is primarily
   I                  responsible for enforcing the act’s fiduciary provisions and for ensuring
                      that pension plan information is reported and disclosed to plan partici-
                      pants and other interested parties. IRSis primarily responsible for
                      administering the act’s participation, vesting, and funding standards
                      and for determ ining whether pension plans qualify for favorable tax
                      treatment,

                      In discussing IRS’role, GAO said that (1) the number of pension plans that
                      IRS examined totaled about 20,000 in fiscal year 1985, decreased to
                      about 14,500 in 1986, further decreased to about 5,300 in 1987, then
                      increased to about 12,000 during the first 9 months of fiscal year 1988;
                      (2) IRS cited 20.5 percent of the plans for violations in fiscal year 1985,
                      28.9 percent in 1986,32 percent in 1987, and 22.3 percent during the
                      first 9 months of fiscal year 1988; (3) the number of violations IRS iden-
                      tified decreased from 18,037 in fiscal year 1985 to 14,742 in 1986, and
                      6,409 in 1987; (4) the violations IRS cited most often during fiscal years
                      1986 and 1987 involved prohibited transactions, pension plan contribu-
                      tions that were not sufficient to satisfy m inim u m funding requirements,
                      and failures to include eligible persons in a plan or meet m inim u m cover-
                      age requirements; (5) IRS assessed taxes and penalties of $7.9 m illion in
                      fiscal year 1985, $10.2 m illion in 1986, $12.5 m illion in 1987, and $3.4
                      m illion in the first 9 months of 1988; (6) revocations of plans’ tax-quali-
                      fied status increased from 78 in fiscal year 1985 to 167 in 1986, then
                      dropped to 45 in 1987; and (7) the average number of hours spent on a
                      pension plan examination declined from about 15 in fiscal years 1986
                      and 1987 to about 13 in 1988.




                      Page 22                                          GAO/GGD-90-46   Annual   Tax Report
                             Appendix I
                             munmarles of Tax-Related Products    Issued in
                             Fiscal Year 1989 by Subject Matter




    I
    I
                             (GAO/GGD-89-39,03/08/89)
Imp jroving IRS’
Bus:iness Nonfiler           On May 24, 1988, GAO issued a report entitled Tax Policy and Adminis-
Pro!                         tration: IRS Could Reduce the Number of Unproductive Business Nonfiler
                             InVeStigatiOnS(GAO/GGD-88-77)  as a reSUlt,OfCUKLlyZing data from fOUr
                             states. Subsequently, GAO received additional information from one of
                             the four states-California-and      IRS.In its March 1989 report, GAO dis-
                             cussed its analysis of that data.

                             California provided state employment tax information on 100 busi-
                             nesses that IRS had identified as potential nonfilers of employment tax
                             returns. IRS had closed these cases without obtaining returns after the
                             businesses claimed that they had not paid wages during the periods in
                             question. GAO' analysis of California’s data disclosed that (1) 21 of the
                             businesses were liable for 31 delinquent federal employment tax returns
                             because they paid wages during periods for which they reported paying
                             none and (2) IRS could use state employment tax information not only to
                             identify erroneous taxpayer statements but also to more expeditiously
                             close investigations involving businesses that owed no taxes.

                             After reviewing additional information received from IRS, GAO noted that
                             IRS (1) continued to mail employment tax publications to nonfilers with
                             invalid addresses because a computer code that automatically generated
                             mailing lists was still on the master file and (2) was unable to estimate
                             the cost of the erroneous mailing because it did not track the numbers of
                             publications forwarded to invalid addresses.


Rec@mmendation(s)            The Assistant Commissioner for Collections should

                         l direct IRS collection staffs in the California district offices to use Califor-
                           nia state employment tax information in business nonfiler investigations
                           and explore similar opportunities for using other states’ tax information
                           in the business nonfiler program and
                         . direct appropriate collection staff to work with computer services staff
                           to correct the computer coding problem so that employment tax publica-
                           tions are not mailed to invalid addresses.


Action(s) Taken and/or       IRS is examining how to obtain California State employment tax data on
Pending                      a regular and, if possible, automated basis and plans to determine what
                             specific changes are needed to correct the publication mailing problem.



                             Page 23                                          GAO/GGD-90-46   Annual   Tax Report
                                                                                                     ,

                         Appendix I
                         Summaries of Tax-Related Products    Issued iu
                         Fiscal Year 1989 by Subject Matter




                         IRS is also considering using the state of Virginia’s State Taxation
                         Accounting Reporting System to better identify unproductive cases.


Related GAO Product(s)   GAO/GGD-88-77,6/24/E%




                         Page 24                                          GAO/GGD-90-40   Annual   Tax Report
.
                             Appendix I
                             Summaries of Tax-Related Producta Lesued in
                             Fiscal Year 1999 by Subject Matter




Pursuit of Tax               In response to a request from the Joint Committee on Taxation, GAO
Revenue on Closed            evaluated IRS’General Enforcement Program, focusing on (1) the amount
                             of civil tax assessed and collected and (2) IRS' process for referring com-
Cri$inal Cases               pleted cases for civil action. It is under this program that IRS investigates
    I                        criminal tax violations other than those involving income derived from
    )                        illegal sources, such as drug trafficking.

                             GAO reviewed selected General Enforcement Program cases completed in
                             fiscal year 1984 and found that IRS (1) had assessed about $204 million
                             in penalties on 2,470 criminal cases and was still auditing another 408
                             cases; (2) had collected $89 million of the $204 million assessed, was
                             actively attempting to collect another $58 million, and had determined
                             that $57 million was uncollectible; (3) had not timely referred cases for
                             civil action once criminal action had been completed; and (4) lacked
                             internal controls to track cases that could be referred for civil action.


Recommendation(s)            To better protect the collection of tax revenues on completed criminal
                             prosecution cases:

                         l The Commissioner of Internal Revenue should establish appropriate
                           internal control mechanisms in the Criminal Investigation Division to
                           better ensure prompt notification to the Office of Chief Counsel about
                           actions taken on criminal prosecution cases and about delayed authori-
                           zations of civil action on such cases.
                         9 The Chief Counsel should establish controls to better ensure timely
                           authorization of civil action on completed criminal prosecution cases.


Action(s) Taken and/or       A criminal investigation task force recommended that the responsible
                             special agent have letters signed by the U.S. Attorney on the day crimi-
Penping                      nal action is completed to authorize civil action. IRS' Criminal Investiga-
                             tion Division is drafting form letters for this purpose and adding fields
                             to its management information system to track compliance with this
                             new requirement.

                             The Office of Chief Counsel has established new criteria and additional
                             guidance for its attorneys. The attorneys are required to authorize civil
                             action within 5 days of the completion of all criminal action. Counsel has
                             also expanded its automatic closing procedures to these criminal cases to
                             ensure their timely closure.


                             Page 26                                         GAO/GGD90-46   Annual Tax Report
                         Appendix I
                         Summaries of Tax-&dated Products     Issued iu
                         Fiscal Year 1989 by SubJect Matter




Relqted GAO Product(s)   GAO/GGD-88-61,4/25/88




                         Page 26                                          GAO/GGD-9046   Annual   Tax Report
                          Appendix I
                          Summaries of Tax-R&ted      Products   Issued in
                          Fiscal Year 1999 by Subject Matter




     /
Statbs   of IRS’ Ss
of tde Refund Offset      Under the Refund Offset Program, IRS offsets federal tax refunds due
Pro&xm                    taxpayers who are delinquent in paying such debts as child and spousal
                          support payments or federal education loans. IRS has made several stud-
                          ies to assess the effect, if any, of refund offsets on taxpayers’ compli-
                          ance with the tax laws. In a report to the Chairmen of the Senate
                          Committee on Finance and the House Committee on Ways and Means,
                          GAO discussed IRS’methodology for measuring that effect. GAO focused
                          on (1) IRS’improvements to its study methodology and (2) ways to make
                          future studies’ results more precise.

                          GAO found that IRS had improved its studies of the effects of offsetting
                          refunds on taxpayer compliance by (1) incorporating previous filing
                          behavior into its analyses for use in establishing patterns to compare
                          with post-offset filing patterns and (2) improving the quality of its
                          study data and its documentation of study programming requirements.
                          However, some methodological limitations remained. Although IRS
                          matched its offset and control groups on some tax characteristics, there
                          was a risk of bias in its findings because it did not account for other
                          relevant preexisting differences such as prior tax-delinquent behavior
                          and non-tax characteristics (e.g., age and geographic location). IRS could
                          further improve its studies by using updated information to measure the
                          level of IRS enforcement action required to make taxpayers compliant
                          and to assess whether noncompliance was temporary or permanent.


Recommendation(s)         To improve future studies of the effect of the Refund Offset Program on
                          compliance with tax laws, IRS should make the offset and control groups
                          as comparable as possible. IRS’studies should statistically control for
                          prior tax-delinquent behavior and nontax characteristics, such as age
                          and geographic location. In addition, IRS should use the most current tax-
                          payer information when comparing the offset and control groups’ filing
                          behavior over time. This should result in a better understanding of the
                          magnitude of any noncompliance problem, enable IRS to measure the
                          level of enforcement actions required to make taxpayers compliant, and
                          provide a better basis to analyze the temporary versus permanent
                          nature of compliance.


Action(s) Take’n and/or   IRS agreed that it should make its offset and control groups as compar-
Pending                   able as possible. For its April 1989 report on the effects of nontax
                          refund offsets on t;r. * ‘lyer compliance, IRS excluded individuals from its


                          Page 27                                                          GAO/GGD-9046   Annual   Tax Report

                                                                             p’PyII*l;,i
                                                                                                                c
                          Appenti   I
                          Summarlee of Tax-Related Producta   Issued in
                          Piscal Year 1989by Subject Matter




                          study groups who had tax-related offsets in tax years 1984-1986. IRS
                          plans further improvements in study group comparability. For example,
                          in future studies, IRS plans to consider nontax characteristics such as age
                          and geographical location when comparing the offset and control
                          group’s filing behavior.

                         IRSdid not agree that it should use the most current taxpayer informa-
                         tion when comparing the offset and control groups’ filing behavior over
                         time. IRS said that its current study approach classifies a nonfiler as any
                         taxpayer not filing by the end of September of the filing year. IRS
                         believes this to be an appropriate approach to studying the effect of off-
                         sets on voluntary compliance, which IRS says is the purpose of the study.
                         Using the most current taxpayer data to identify the level of enforce-
                         ment action needed to make noncompliant taxpayers file returns, as we
                         suggested, was not the purpose of its study, according to IRS.


Related GAO Product(s)   GAO/GGD-88117,9/l/88             and GAO/GGD-87-39BR, 2/9/87




                         Page 28                                          GAO/GGD-90-46   Annual   Tax Report
                         Appendix I
                         Summaries of Tax-Related Producte    Issued iu
                         Fiscal Year 1989 by Subject Matter




                         (GAO/GGD-89-63,05/04/89)
State1and Local
Comhliance With IRS’     In response to a request from the Chairman of the Subcommittee on
InfoFation Reporting     Commerce, Consumer, and Monetary Affairs, House Committee on Gov-
                         ernment Operations, GAO determined whether state and local govern-
Reqqrements
     ,                   ments were complying with IRS requirements for filing information
                         returns to report payments made to independent contractors.
     ~
                         GAO found that (1) state agencies and local governments in GAO'S sample
                         only reported about 10 percent of the payments that they should have
                         during 1985 and 1986; (2) most state and local governments’ policies
                         and procedures were not in full compliance with IRS requirements, pri-
                         marily because the governments did not fully understand the require-
                         ments; (3) although the governments usually reported payments for
                         professional services such as those provided by attorneys and consul-
                         tants, they did not report payments for such things as construction, auto
                         repairs, and janitorial services because they erroneously believed that
                         payments for such services fell outside the reporting requirements; and
                         (4) IRS examined businesses’ income tax returns but did not monitor
                         state and local governments’ compliance with the reporting
                         requirements.

                         GAO said that IRS had contracted with the National Association of State
                         Auditors, Comptrollers, and Treasurers in 1988 to review information
                         return procedures and compliance levels in six states. As of February
                         21, 1989, the Association had finished reviews in three states. The Asso-
                         ciation’s Executive Director said that those reviews showed that (1)
                         state governments need to better understand their responsibilities and
                         (2) compliance with those responsibilities has been hampered by states’
                         accounting systems that were not tailored to information reporting.


Recommendation(s)        The Commissioner of Internal Revenue should

                       . establish an IRS focal point to provide assistance to those state and local
                         government officials needing further clarification or elaboration on their
                         reporting requirements;
                       . encourage state and local audit agencies to routinely check the agencies
                         they audit for information returns compliance; and
                       . use the National Association of State Auditors, Comptrollers, and Trea-
                         surers’ study of six states in developing an IRS program for monitoring
                         and enforcing state and local governments’ information returns
                         compliance.


                         Page 29                                          GAO/GGD9046   Annual   Tax Report
9
                                                                                                            l




                                Appendix I
                                Summaries of Tax-Related Products   Issued In
                                Pied Year 1989 by Subject Matter




    Ac/tion( s) Taken and/or    IRS said that it plans to (1) establish a focal point in the district offices
    Pepding                     where state and local offices can get help in understanding their report-
                                ing requirements; (2) maintain a dialogue with the state offices that are
                                responsible for information return compliance; (3) selectively examine
                                certain states to assess and improve compliance; and (4) provide all
                                states with the results of the National Association of State Auditors,
                                Comptrollers, and Treasurers’ study and encourage them to do compli-
                                ance reviews.


    Related GAO Product(s)     GAO/GGD-89-107, g/25/89; GAO/GGD-89-110, g/8/89; and GAO/T-
                               GGD-89-21,5/16/89




                               Page 30                                           GAO/GGD-90-46   Annual   Tax Report
                             Appendix I
                             Summaries of Tax-Related Producta Issued in
                             Fiscal Year 19S9 by Subject Matter




                             (GAO/GGD-89-110,09/08/89)
Missihg Independent
Cont*actors’                 In response to a request from the Chairman of the Subcommittee on
Infohation Returns           Commerce, Consumer, and Monetary Affairs, House Committee on Gov-
                             ernment Operation, GAO reviewed whether IRS’examinations effectively
Not +lways Detected          identified businesses that failed to file information returns for payments
     I                       made to independent contractors.

                             GAO found that (1) IRS examinations of business tax returns did not
                             effectively identify businesses that failed to file required information
                             returns on payments to contractors; (2) revenue agents did not identify
                             an estimated 1,261 information returns that 467 businesses should have
                             filed, involving about $6.2 million in payments; (3) managers said that
                             they did not stress the importance of these compliance checks because
                             other issues such as overstated deductions and unreported income took
                             higher priority; (4) because managers did not enforce workpaper stan-
                             dards requiring agents to document the scope and depth of their work,
                             they did not know the extent to which checks were made; (5) IRS proce-
                             dures for doing compliance checks were vague; and (6) data that could
                             help revenue agents check compliance were not being used.


Recorpmendation(s)           To improve IRS compliance checks of information return reporting
                             requirements, the Commissioner of Internal Revenue should

                         . require that field managers and quality reviewers stress the importance
                           of doing compliance checks, enforce workpaper standards, and assess
                           the effectiveness of the checks;
                         . establish minimum requirements for revenue agents to follow in doing
                           compliance checks; and
                         . require that data summarizing businesses’information return filings be
                           made available to, and be used by, revenue agents when doing compli-
                           ance checks.


Action(s) Taken and/or       IRS plans to establish requirements for compliance checks and is taking
                             corrective actions to ensure that data on business’ information return
Pending                      filings are being used.


Related GAO Product(s)       GAO/GGD-89- 107, g/25/89; GAO/T-GGD-89-2 1,5/ 16/89; and GAO/
                             GGD-89-63,5/4/89



                             Page 31                                       GAO/GGD-9046   Anuual   Tax Report
                           Appendix I
                           Summaries of Tax-Related Products    Issued ln
                           Fiscal Year 1989 by Subject Matter




                           (GAO/GGD-89-107, g/25/89)
Information Returns
Cab Be Used to             In response to a request from the Chairman of the Subcommittee on
Id$ntify Employers         Commerce, Consumer, and Monetary Affairs, House Committee on Gov-
                           ernment Operations, GAO assessed whether matching independent con-
WQo Misclassify            tractors’ information returns with their tax returns would provide IRS
Wqrkers                    with a systematic method for identifying employers who misclassify
   I                       employees as independent contractors.

                           From information returns, GAO identified about 191,000 independent
                           contractors who had received all of their income from one of about
                           32,000 employers. IRS’revenue officers (1) interviewed a sample of 408
                           of those employers and determined that 157 had misclassified their
                           employees as independent contractors; (2) completed detailed examina-
                           tions of 95 of those 157 employers and found that 92 had misclassified
                           17,347 employees; and (3) recommended, for those 92 employers, taxes
                           and penalties of $16.7 million in 1986 and 1987.

                           GAO also noted that (1) IRS would not have to create a new matching
                           process to identify misclassifications because it already matched infor-
                           mation returns and income tax returns to identify unreported income
                           and (2) although IRS could use information returns to better identify mis-
                           classified employees, section 530 of the Revenue Act of 1978 prohibits
                           IRS from assessing back taxes that should have been withheld and paid
                           and restricts IRS’authority to require certain employers to reclassify
                           workers, even for future years.


Recommendation(s) to IRS   To more systematically identify employers who are misclassifying
                           employees as independent contractors and to better target audit
                           resources for doing employment tax examinations, IRS should match
                           independent contractors’ information returns with their tax returns.


Recommendation(s) to       In view of the equity issues and tax revenues involved, Congress may
Congress                   want to consider repealing the restriction against requiring employers to
                           prospectively reclassify employees who have been misclassified as inde-
                           pendent contractors.




                           Page 32                                          GAO/GGD90-46   Annual   Tax Report
    i


                         Appendix I
                         Summarlee of Tax-Related Products    Issued iu
                         Flacal Year 1989 by Subject Matter




Actip(s) Taken and/or    IRSsaid it plans to start matching independent contractors’ information
Penqing                  returns with their tax returns by January 1991. No congressional action
                         with respect to section 530 had been taken or was planned as of Decem-
                         ber 31, 1989,


Rela ed GAO Product(s)   GAO/GGD-89-110, g/8/89; GAO/T-GGD-89-21,5/16/89;                 and GAO/
    f                    GGD-89-63,5/4/89




                         Page 33                                          GAO/GGD-90-46    Annual   Tax Report
                                                                                                           ,

                         Appendix1
                         Summaries   of Tax-Related   Producta   Issued in
                         Fiscal Year 1989 by Subject Matter




    &
    /
Teqtimony  on the
Infbrmation Return       In testimony before the Subcommittee on Commerce, Consumer, and
Requirements for         Monetary Affairs, House Committee on Government Operations, GAO dis-
                         cussed work it was doing for the Subcommittee on information returns
Independent              used to report payments made to independent contractors. GAO assessed
Co$tractors              (1) IRS’efforts to ensure that employers submit the required information
                         returns and (2) the merits of using information returns to detect employ-
                         ers who misclassify employees as independent contractors.

                         GAO noted that (1) federal, state, and local governments, as well as pri-
                         vate sector businesses, were not fully complying with IRS’information
                         return reporting requirements, partly because IRS had done little to
                         promote compliance; (2) IRS had not made a concerted effort to help gov-
                         ernment officials understand information reporting responsibilities and
                         had put a low priority on identifying businesses who did not submit
                         required information returns; (3) IRS did not have a systematic approach
                         for identifying employers who misclassify workers; and (4) IRS could use
                         information returns to better target its enforcement resources on those
                         employers most likely to misclassify. These matters are more fully dis-
                         cussed in the summaries of three reports GAO issued on the results of its
                         work. (See pp. 29,31, and 32.)


Related GAO Product(s)   GAO/GGD-89-107, g/25/89; GAO/GGD-89-110, g/8/89; and GAO/GGD-
                         89-63,5/4/89




                         Page 34                                             GAO/GGD-9046AnnualTaxReport


                                                         .*
                         Appendix I
                         8ummarIes of Tax-Related Products    Issued in
                         Fiscal Year 1989 by Subject Matter




                         (GAO/GGD-89-34,02/14/89)
Periodic Evaluation
NeejdedIf IRS Uses       In a report to the Joint Committee on Taxation, GAO discussed IRS’
Levies to Collect        planned use of levies to collect taxes on deferred delinquent accounts.
                         Deferred accounts are those that IRS considers too small to justify going
Deffrred Accounts        through the complete collection process.
    /
                         GAO found that (1) in 1988, IRS developed a plan for taking a more active
                         approach to resolving deferred individual taxpayer accounts that would
                         involve annually levying taxpayer assets; (2) although IRS' past studies
                         and GAO'S analysis suggested that using levies to collect deferred
                         accounts had merit, there was insufficient information available to ade-
                         quately evaluate the cost-effectiveness of such a program or whether it
                         would adversely affect other operations; (3) IRSdid not consider busi-
                         ness deferred accounts in its plans because no national program existed
                         for identifying business assets that could be levied; and (4) IRS decided,
                         before proceeding with nationwide implementation of the deferred
                         account levy program, to further evaluate such things as the program’s
                         costs and benefits and its impact on computer capacity and to consider
                         both individual and business accounts in that evaluation.


Recommendation(s)        If a nationwide levy program is implemented for deferred accounts, the
                         Commissioner of Internal Revenue should establish procedures for peri-
                         odically evaluating the program’s effectiveness.


Action(s) Taken and/or   After further study and analysis, IRS decided not to implement a nation-
Peqding                  wide levy program to collect deferred delinquent accounts. In reaching
                         its decision, IRS concluded that such a program would not be cost
                         effective.




                         Page 36                                          GAO/GGIWO-46   Annual   Tax Report
                          Appendix I
                          Summaries of Tax-Related Products    Leued in
                          Fiscal Year 1989 by Subject Matter




   ,


Staltistics on IRS’3Use
   I




of Levies to Collect      In a fact sheet prepared for the Joint Committee on Taxation, GAO pro-
Deiinquent Taxes          vided information on the results of IRS' use of levies to collect delinquent
                          taxes through its Automated Collection System (ACS).

                          GAO said that (1) IRS used levies to attempt collection from about one-
                          half of the delinquent taxpayers whose accounts it had sent to ACS dur-
                          ing 1986; (2) IRS averaged about two levies per taxpayer, of which about
                          one-half were productive; (3) tax collections totaled about $696 million
                          between the time IRS sent the cases to ACS in 1986 until mid-1988; and (4)
                          business levies produced slightly more per taxpayer than individual
                          levies.




                          Page 36                                         GAO/GGD9646   Annual   Tax Report
                         Appendix I
                         Summaries of Tax-Related Products    Issued in
                         Fiscal Year 1989 by Subject Matter




                         (GAO/GGD-89-94,08/2 l/89)
IRS!Can Improve the
Proress for Collecting   If IRS cannot collect income and Social Security taxes from a business
loo-Percent Penalties    that has withheld them from employees’ paychecks, it may assess
                         responsible persons, such as corporate officers, a penalty in the same
                         amount as the withheld taxes. In response to a request from the Joint
                         Committee on Taxation, GAO reviewed IRS' collection of these assess-
                         ments, referred to as loo-percent penalty assessments, to determine
                         whether IRS could collect them more efficiently and effectively.

                         GAO analyzed a sample of 200 penalty case files selected at random from
                         a universe of 793 files closed during the 4 months ended October 3 1,
                         1987, at four IRS district offices. GAO reported that (1) loo-percent pen-
                         alty cases, unlike most other delinquencies, were sent directly to reve-
                         nue officers in IRS' 63 district offices for collection, thus bypassing IRS'
                         Automated Collection System (ACS); (2) as such, those cases did not com-
                         pete on an equal basis with other delinquencies referred by ACS for dis-
                         trict collection resources, and the efficiencies associated with ACS'
                         computerized recordkeeping, telephone technology, and improved man-
                         agement control went unrealized; and (3) IRSspent an average of $247 to
                         close loo-percent penalty cases via revenue officers, compared to $57
                         on cases processed through ACS.

                         Although not required by the Internal Revenue Manual, revenue officers
                         said that they often obtain taxpayers’ financial statements to identify
                         levy sources during initial investigations. GAO found that financial infor-
                         mation, including levy sources and financial statements, obtained by
                         revenue officers during initial investigations was not readily available
                         for subsequent use by revenue officers trying to collect the delinquen-
                         cies because (1) investigating officers did not routinely arrange to have
                         levy sources inputted into IRS' computerized levy source file and (2)
                         financial statements obtained by investigating officers were not being
                         routinely included with the delinquency documents provided to the col-
                         lecting officers.

                         GAO also found that (1) adequate internal controls were not in place to
                         assure that the correct amount of delinquent tax was collected-a factor
                         that caused revenue officers to over-or under-collect the delinquencies
                         in about 9 percent of the 793 cases in GAO'S universe and (2) available
                         information on the status of delinquencies was not adequate to accu-
                         rately report that portion of the accounts receivable balance applicable
                         to loo-percent penalties.



                         Page 37                                          GAO/GGD-9046   Annual   Tax Report
                               Appendix I
                               Summaries of Tax-Related Products    Issued in
                               Fiscal Year 1989 by Subject Matter




  aomrnendation(s)
Re’                            To ensure that IRS uses collection resources more efficiently, the Com-
                               missioner of Internal Revenue should

                           . establish a milestone for completing as quickly as possible servicewide
                             implementation of procedures for processing loo-percent penalty cases
                             through ACS,
                           . revise the Internal Revenue Manual to conform to the stated practice of
                             obtaining financial information when responsible parties are identified
                             during initial investigations and it is appropriate to do so,
                           . establish appropriate controls to ensure that levy sources identified dur-
                             ing the loo-percent penalty investigations are documented in IRS’com-
                             puterized levy source file so that they are readily available during the
                             collection phase, and
                           l develop a procedure to ensure that financial statements obtained during
                             the investigations are available on ACS’computerized database to facili-
                             tate processing of loo-percent penalties through ACS.

                               To improve accounting and internal controls, the Commissioner of Inter-
                               nal Revenue should establish milestones for (1) completing the develop-
                               ment of procedures to systematically provide collection employees with
                               the information needed to accurately determine the status of delinquen-
                               cies and (2) developing a way to more accurately report the accounts
                               receivable balance as it relates to loo-percent penalties.


Actrion( s) Taken and/or       IRSgenerally agreed with the report’s recommendations and, in most
Pending                        cases, has initiatives underway that respond to the recommendations or
                               their intent. For example, on the basis of the results of its loo-percent
                               penalty test, IRS has decided to process, on a nationwide basis, loo-per-
                               cent penalty cases through AW during fiscal year 1990. Also during that
                               year, IRS plans to complete an analysis of various systems that are avail-
                               able for establishing appropriate controls to ensure that the levy sources
                               obtained during a loo-percent penalty investigation are input to IRS’
                               levy source file.

                               IRS has developed a procedure that is intended to ensure that financial
                               data secured during loo-percent penalty investigations are also input to
                               the database for ACS use.

                               IRS is also implementing a proposal for systemic changes which will
                               allow employees to readily determine correct account balances of
                               related loo-percent penalty cases. IRS plans to begin system acceptabil-
                               ity testing in May 1990. In addition, IRS is working with Treasury to


                               Page 38                                          GAO/GGD-9046   Annual   Tax Report
Appendix I
Summarlea of TadMated    Products   Issued ln
F’hd Year 1989 by Subject Matter




ensure that loo-percent penalties are accurately reflected in the
accounts receivable balance.

IRSdid not agree, however, to revise its instructions to conform to the
revenue officers’ stated practice of obtaining taxpayer financial infor-
mation during initial investigations because it (1) did not believe that
such data should be obtained during the course of all investigations and
(2) said that the Internal Revenue Manual adequately defines those
instances in which financial data should be obtained. GAO agrees that it
may not be appropriate to collect financial data in all cases but does not
agree that the Manual is clear as to when it should be collected.




Page 39                                         GAO/GGD-90-46   Aunual   Tax Report
                        Appendix I
                        Summaries of Tax-Related Products    Issued in
                        Fiscal Year 1999 by Subject Matter




                        (GAO/GGD-89-81,09/06/89)
Options for Civil
Peqalty Reform          In a report to the Chairman of the Subcommittee on Private Retirement
   I                    Plans and Oversight of the Internal Revenue Service, Senate Committee
                        on Finance, GAO (1) provided information on concerns voiced by tax
                        administrators, practitioners, and others about various civil tax penal-
                        ties and (2) analyzed proposals that have been made to respond to those
                        concerns.

                        The proposals analyzed in the report were those contained in the
                        Improved Penalty Administration and Compliance Tax Act of 1989
                        (H.R. 2528, 1Olst Congress) and in a 1989 IRS civil penalty task force
                        report. The penalties discussed included (1) the penalty for failure to
                        file an income tax return; (2) various information return filing penalties;
                        (3) the penalty for failing to timely deposit employment and other taxes;
                        (4) major taxpayer accuracy/conduct penalties, including those for neg-
                        ligence, fraud, and substantial understatement; (5) return preparer
                        accuracy/conduct penalties; and (6) the penalty for promoting abusive
                        tax shelters. For each of those penalties, the report discusses (1) current
                        law, (2) concerns with the current system, (3) the proposals for change,
                        and (4) GAO'S analysis of those proposals.


Reqommendati.on(s) to   To support the statutory requirement that all taxpayers file a tax return
                        in a timely manner, Congress should establish a time-sensitive failure to
Congress                file penalty that would be assessed against all delinquent taxpayers
                        whether or not they had a tax liability, unless the failure is due to rea-
                        sonable cause.

                        Congress should ensure that any legislation enacted maintains and
                        enhances the value of penalties in deterring noncompliance. Congress
                        should retain an underreporting penalty similar to the existing presump-
                        tive negligence penalty that would penalize taxpayers failing to report
                        income disclosed on information returns. The House-passed bill would
                        have eliminated this penalty.

                        With regard to penalty rates, Congress should consider setting higher
                        rates than the House bill or reducing the threshold of understated tax
                        liability. This would trigger the substantial understatement penalty to at
                        least partly restore the economic value of the penalties that was eroded
                        in recent years due to lower tax rates.




                        Page 40                                          GAO/GGD-90-46   Annual   Tax Report
                          Appendix I
                          Summarlee of Tax-Related Producta Issued in
                          Fiscal Year 1989 by Subject Matter




                          Congress should increase the monetary value of return preparer penal-
                          ties to improve their economic deterrent value and should use a two-tier
                          penalty, with the first tier consisting of negligence and the second tier
                          consisting of willful understatement or intentional disregard.

                          To bolster taxpayer confidence in the fairness and equity of the tax-
                          payer accuracy/conduct penalties, Congress should (1) eliminate stack-
                          ing of the accuracy/conduct penalties (i.e., assessing more than one
                          penalty for the same act); (2) target the application of the negligence
                          penalty; (3) establish reasonable cause as the abatement/waiver crite-
                          rion, except for fraud; and (4) statutorily define substantial authority.

                          Because of the nature of noncompliance associated with tax shelters,
                          Congress should not establish a statute of limitations as recommended
                          by IRS' task force.

                          To simplify administration, all types of information returns should be
                          treated consistently. Within that context, (1) all caps on the amount of
                          the penalty should be eliminated, (2) there should be a single abatement
                          criterion, (3) magnetic media filing thresholds should be set administra-
                          tively, and (4) only returns exceeding thresholds should be penalized.

                          If the penalties for filing late or incorrect information returns are made
                          time-sensitive, as proposed in the House bill and recommended by IRS, IRS
                          should administratively set the penalty dates to allow for potential
                          future changes in underreporter program processing time frames. Fur-
                          ther, to promote voluntary correction of returns, penalties should not be
                          assessed against payers who voluntarily correct their returns.


Achion( s) Taken and/or   The Omnibus Budget Reconciliation Act of 1989, (P.L. 101-239, Dec. 19,
                          1989) addressed, among other things, the civil penalty reform issue.
Peliding                  While not adopting all of GAO'S positions on penalty reform, many of
                          GAO'S recommendations were included in the act, such as uniform treat-
                          ment of information returns, elimination of stacking in the accuracy/
                          conduct penalties, targeting of the negligence penalty, and increased
                          preparer penalties.


Related GAO Product(s)    GAO/T-GGD-88-55, g/28/88; GAO/GGD-88-69,7/25/88;              and GAO/T-
                          GGD-88-24,3/31/88




                          Page 41                                       GAO/G&D-90-46    Annual   Tax Report
                     Appendix I
                     Summaries of Tax-Related Products    Issued in
                     Fiscal Year 1989 by Subject Matter




Exdise Taxes and
Other Revenue
Potkntial

                     (GAO/OCG-89-3TR, 1 l/88)
Trdnsition Series:
Regenue Options      In this report, one of a series addressing major policy issues facing Con-
                     gress and the Administration, GAO discussed certain frequently proposed
                     options for raising revenue to reduce the budget deficit. The options dis-
   ,                 cussed included (1) raising income tax rates, (2) broadening the income
                     tax base, (3) enacting a new consumption tax, (4) increasing revenue
                     from federal excise taxes, (5) increasing IRS' enforcement of tax laws,
                     and (6) increasing nontax revenue sources.

                     In discussing those options, GAO said that (1) it will be extremely diffi-
                     cult, based on past experience, to bring down the deficit without some
                     revenue increases and (2) a combination of revenue options could
                     emerge because each option alone has some drawbacks. For example (1)
                     many Members of Congress believe that they have a tacit agreement
                     with the public, through the Tax Reform Act of 1986, not to raise rates;
                     (2) a consumption tax could be regressive, with low-income persons pay-
                     ing a higher percentage of their income in this tax than those earning
                     higher incomes; and (3) hiring and training additional enforcement staff
                     could take several years.




                     Page 42                                          GAO/GGD-90-46   Annual   Tax Report
                      Appendix I
                      Summaries of Tax-Related Products    Issued in
                      Fiscal Year 1989 by Subject Matter




                      (GAO/GGD-89-36,02/16/89)
Economic,
Aministrative, and    In response to a request from Senator Charles Grassley and Congress-
   payer Compliance   man Bill Archer, GAO reviewed Treasury and Congressional Research
                      Service literature and studies to (1) identify the general economic
   ects of a Gross    effects of a gross income tax and (2) compare certain administrative and
                      taxpayer compliance aspects of the tax with the current tax system. A
                      gross income tax, as opposed to a net income tax, would tax (1) the total
                      receipts of a firm with few or no deductions for the costs of doing busi-
                      ness and (2) the total income of an individual with no deductions of any
                      kind.

                      GAO found that a gross income tax would (1) reduce competition by pro-
                      viding an incentive for producers and suppliers to merge, (2) tax firms
                      that earned little net income or suffered a loss, (3) be a disincentive to
                      investment by raising the effective marginal tax rate on capital, and (4)
                      shift the distribution of the tax burden to lower-income people. GAO also
                      noted that (1) proponents believed that a gross income tax would reduce
                      administrative and taxpayer compliance costs if it replaced corporate
                      and personal income taxes and (2) IRS believed that a gross income tax
                      would neither simplify the tax system nor reduce its administrative
                      costs, and the transition to such a system would place an overwhelming
                      burden on IRS.

                      GAO expressed the belief that a gross income tax system would not be
                      preferable to the current system, even if it were less costly, because of
                      its potential for greater economic distortion.




                      Page 43                                          GAO/GGD-90-46   Annual   Tax Report
                         Appendix I
                         Summarles of Tax-Related Producta Ieeued in
                         Fiscal Year 1989 by Subject Matter




                         (GAO/GGD-89-52,05/09/89)
Retenue Potential of
Reskoring Excise         In a report to the Joint Committee on Taxation, GAO discussed (1) alter-
Tqes to Past Levels      natives for increasing revenues from excise taxes imposed on alcoholic
                         beverages, tobacco, gas-guzzling automobiles, firearms, and wagering
                         occupations and (2) associated policy and administrative issues.

                         GAO reported that (1) the excise taxes it reviewed had not been updated
                         to reflect inflation; (2) the Joint Committee estimated that if those taxes
                         had been updated to keep pace with inflation, they would have gener-
                         ated additional revenues of $2 to $13 billion in 1989 and $12 to $75
                         billion over the 5 years from 1989 to 1993; and (3) to ensure that the
                         real dollar value of excise tax revenues does not erode over time with-
                         out periodic congressional intervention, Congress could index per-unit
                         tax rates to an appropriate measure of price change or convert per-unit
                         taxes to ones that are imposed as a percentage of the price of the prod-
                         uct or service.

                         GAO said that (1) increasing or changing the excise tax rate structure
                         might cause administrative problems and (2) while opponents of excise
                         tax increases argue that such taxes are regressive and decrease con-
                         sumption, a majority of the public favors increases in certain excise
                         taxes, specifically those involving alcohol and tobacco, since such taxes
                         help reduce the deficit and offset some of the social costs resulting from
                         the consumption of the taxed items.


Related GAO Product(s)   GAO/HRD-89-119,6/30/89




                         Page 44                                        GAO/GGD-So-46   Annual   Tax Report
                          Appendix1
                          Summaries of Tax-Related Froducte    Ieeued in
                          Fiscal Year 1989 by Subject Matter




Tax-Credit and *
Subtraction Methods       In a report to the Joint Committee on Taxation, GAO provided informa-
of Calculating a Value-   tion on the two principal methods for calculating a value-added tax-
                          the subtraction method and the tax-credit or invoice method. The sub-
Adlded Tax                traction method calculates the tax using information on the total busi-
                          ness activity of a firm while the tax-credit method calculates the tax for
                          each transaction. GAO analyzed each method’s impact on regressivity
                          and U.S. competitiveness and discussed the compliance and administra-
                          tive costs associated with each method.

                          With respect to regressivity, GAO said that (1) a single-rate value-added
                          tax would make low-income households pay a higher percentage of their
                          income in value-added taxes, since they spend a larger part of their
                          income on consumption than higher income households; (‘2) alternatives
                          to reducing the regressivity of a value-added tax include providing a tax
                          credit for low-income households on their tax returns or imposing multi-
                          ple value-added tax rates; (3) although providing refundable tax credits
                          would be compatible with either the tax-credit or subtraction method,
                          only the tax-credit method would be compatible with multiple rates; and
                          (4) multiple rates would be complex and would tend to increase adminis-
                          trative and compliance costs.

                          On the competitiveness issue, GAO noted that (1) although changes in
                          exchange rates may compensate for price increases in domestic goods
                          and services induced by the value-added tax, many countries try to off-
                          set potential problems through border tax adjustments that usually
                          involve rebating the tax on exports and imposing the tax on imports; (2)
                          the tax-credit method is well suited for border tax adjustments; and (3)
                          the subtraction method could be used for border tax adjustments but
                          would make verification of exported untaxed goods more difficult.

                          As for compliance and administrative costs, GAO said that (1) IRS esti-
                          mated the additional administrative costs associated with a single-rate
                          tax to be about $700 million annually-less if small firms were
                          exempted from the tax; (2) there were no reliable estimates of the
                          administrative costs associated with a simple subtraction method value-
                          added tax or a multiple-rate tax-credit value-added tax; and (3) there
                          were no comprehensive studies of the compliance costs U.S. taxpayers
                          might experience under either method.




                          Page 46                                          GAO/GGD-9646   Annual   Tax Report
                         Appendix I
                         Summarles of Tax-Related Products    Issued in
                         Fiscal Year 1989 by Subject Matter




Related GAO Product(s)   GAO/GGD-89-125BR, 9/15/89 and GAO/GGD-86-91,8/20/86




                         Page 46                                          GAO/GGD-9046   Annual   Tax Report
                         Appendix1
                         Summaries of Tax-Related Products   hued   in
                         N~cal Year 1989 by Subject Matter




   I


      l/89)
Val/ue-Added  Tax
Iss es for U.S. Tax      In a briefing report to the Joint Committee on Taxation, GAO provided
Pol’
   “rcymakers            information on the advantages and disadvantages of the value-added
                         tax, focusing on (1) how the tax would operate, (2) European countries’
                         experiences with value-added tax, and (3) the key issues in deciding
                         whether or not to enact such a tax.

                         GAO found that (1) a comprehensive 5-percent value-added tax could
                         raise about $125 billion in revenues annually, while one that exempted
                         food, housing, and medical care would raise about $72 billion; (2)
                         although a few industrialized countries did not have a value-added tax
                         system, all but the United States had some type of broad-based national
                         consumption tax; (3) 47 countries have introduced a value-added tax
                         over the past 30 years, several countries have considered proposals, and
                         Canada plans to implement a value-added tax in 1991; (4) the European
                         Economic Community required the value-added tax as a condition for
                         membership as a means of decreasing trade and other economic distor-
                         tions among its members; and (5) most countries use the tax credit
                         method value-added tax, which is calculated separately for each pur-
                         chase or sale and included in the price at each stage of production or
                         distribution.

                         GAO said that (1) the value-added tax preserved neutrality    between capi-
                         tal and labor, since it created no incentive for businesses to substitute
                         one factor for another; (2) the advantages of the United States adopting
                         a value-added tax would include its potential self-enforcement and lack
                         of bias against savings; and (3) the disadvantages would include regres-
                         sivity, the impact on international trade, the administrative costs and
                         compliance burden associated with introduction of a consumption tax
                         system at the federal level, and the potential conflicts with state and
                         local tax bases. Some also argue that because the broad-base of a value-
                         added tax allows it to generate large amounts of revenue with small per-
                         centage rate increases, there might be a temptation to remove con-
                         straints on federal spending increases.


Related GAO Product(s)   GAO/GGD-89-87,6/20/89               and GAO/GGD-86-91, S/20/86




                         Page 47                                             GAO/GGD90-46   Annual   Tax Report
,

                           Appendix1
                           Summaries of Tax-Related Producte Issued in
                           Fled Year 1989 by Subject Matter




       /
        - Excise Tax
    Higher
    Shopld Significantly   In a report to Congressman M ichael Andrews, GAO provided information
    Redbce the Number of   on the impact of cigarette excise taxes on teenage smoking.
    S m dkers              GAO noted that (1) despite the decline in teenage smoking since 1975,
                           smoking among teenagers continues to be widespread; (2) raising the
                           federal excise tax on cigarettes would reduce teenage smoking to the
                           extent that teenage smokers respond to the higher prices; (3) using data
                           from surveys done in the late 1960s and the 197Os, researchers con-
                           cluded that a l-percent increase in cigarette prices would lead to a
                           reduction in the rate of teenage smoking from .76 to 1.2 percent; (4)
                           antismoking campaigns and the shift in social norms against smoking
                           since those studies may have left the current pool of teenage smokers
                           more resistant to changes in price; and (5) conversely, the increasing
                           concentration of smokers among low-income people since the studies
                           may have increased teenage price responsiveness.

                           Given the changes since the latest research and the lack of more defini-
                           tive evidence, GAO concluded that it would be reasonable to rely on the
                           researchers’ smaller (.76 percent) estimate of price responsiveness.
                           Using that estimate, a 21-cent-per-pack increase in the federal excise tax
                           in 1989 would likely lead to a significant reduction of over 500,000 teen-
                           age smokers.




                           Page 48
                        Appendix1
                        Summaries of Tax-Related Pmducts     hued   in
                        Fiscal Year 1989 by Subject Matter




                        (GAO/GGD-89-115BR, 09/25/89)
The; Insurance Excise
Tai and Competition     In response to a request from Congressman Fortney H. (Pete) Stark, GAO
for b.S. Reinsurance    examined the effects of the Tax Reform Act of 1986 on competition
                        between U.S. and foreign property and casualty reinsurers in the U.S.
Prej-niums              market.
    I
                        GAO found that available data were inconclusive regarding the act’s
                        effects on the competitiveness of U.S. reinsurers in the domestic market,
                        Although the foreign share of the U.S. reinsurance market rose since tax
                        reform-from     26.1 percent in 1986 to 32.6 percent in 1987 and a pro-
                        jected 38.6 percent in 1988-the foreign share was also relatively high
                        during the 1960s.

                        GAO said that several questions should be considered in any delibera-
                        tions about changing current insurance excise tax policy. These ques-
                        tions include

                        What other factors besides the excise tax-such as taxes in foreign
                        countries-influence   a reinsurer’s relative tax position in the U.S.
                        market?
                        Do foreign reinsurers complement U.S. reinsurers and provide coverage
                        that is not normally available in the U.S. market?
                        Who bears the burden of the excise tax on reinsurance premiums-US.
                        consumers or foreign reinsurers?
                        Would an increased excise tax be perceived as a barrier to entry into the
                        U.S. reinsurance market and would it be compatible with recent efforts
                        to liberalize trade?




                        Page 49                                          GAO/GGD-90-46   Annual   Tax Report
                         Appendix I
                         &unmarierr of Tax-Related Products   Issued in
                         Fiscal Year 19&l by Subject Matter




          -


Gederal Management

                         (GAO/GGD-89-1,10/14/88)
Mafiaging IRS: Actions
Needed to Assure         This report was the result of a joint effort between IRS and GAO to find
Quhlity Service in the   solutions to the major management issues confronting IRS. IRS’most
                         pressing challenges are to (1) better plan and direct its information sys-
Fujure                   tems modernization effort, (2) address the deterioration in its ability to
   I                     attract and retain a quality workforce and leadership cadre, (3)
                         strengthen management of financial systems to resolve significant inter-
                         nal control problems, (4) devise an effective approach to ensure that a
                         “quality first” mindset permeates the agency’s internal culture, and (5)
                         ensure more rigorous evaluation of field operations to improve uneven
                         performance and ensure uniform and equitable treatment for all
                         taxpayers.


Recbmmendation(s)        The report contained about 40 recommendations. Key ones were
                         directed at (1) ensuring that IRS’Strategic Business Plan, which was
                         developed to strengthen the link between planning and budgeting, effec-
                         tively drives IRS’information systems modernization efforts and the
                         annual budget process; (2) improving critical data processing and
                         accounting operations; (3) developing an agencywide performance mea-
                         surement system to, among other things, gauge progress toward improv-
                         ing quality service to the public; and (4) strengthening internal
                         evaluations of field activities.


A&ion(s) Taken and/or    IRS took several actions before the report was issued. It reorganized its
Pending                  top management structure to improve accountability and strengthen
                         communication. It improved management decisionmaking by setting up
                         a strategic management system and initiated efforts to improve the
                         quality of its services.

                         Since issuance of the report, IRS has taken several additional steps.
                         Among other things, IRS has (1) made organizational changes intended to
                         provide executive direction over information and financial management
                         activities and (2) established critical success factors for use in develop-
                         ing a performance system and assessing accomplishments against the
                         Strategic Business Plan. IRS has also assigned responsibility for ensuring



                         Page 60                                          GAO/GGD9046   Annual   Tax Report
                         Appendix I
                         Summaries of Tax-Related Products    Imud   In
                         Fiscal Year 1989 by Subject Matter




                         that each recommendation is implemented and has developed a report-
                         ing procedure to provide top management with periodic updates on the
                         status of those efforts. GAO is assessing IRS' progress in implementing the
                         recommendations and expects to issue a status report later this year.


Reldted GAO Product(s)   GAO/T-GGD-89-6,2/22/89; GAO/OCG-89-26TR, 1 l/88; GAO/IMTEC-88-
                         23BR, 4/27/88; and GAOIIMTEC-88-SFS, 1 l/9/87




                         Page 51                                          GAO/GGD4iO46   Annual   Tax Report
                            Appendix I
                            Summaries of Tax-Related Products    Issued in
                            Fiscal Year 1988 by Subject Matter




Tes/-imony   on   Actions   (GAO/T-GGD-89-6,02/22/89>

Neeidedto Assure            In testimony before the Subcommittee on Private Retirement Plans and
Quqlity IRS Service in      Oversight of the Internal Revenue Service, Senate Committee on
                            Finance, GAO discussed the critical management challenges IRSfaces in
the iFuture                 ensuring high-quality, tax service- challenges that were discussed in
                            detail in GAO’S October 1988 report (see p. 50.)

                            GAO noted that IRS critically  needs to modernize its outdated computer-
                            based tax processing system, but progress in that modernization has
                            been slow due to leadership changes and lack of effective management
                            direction. Although IRS designated one of its deputy commissioners as an
                            information resources manager, he had other significant responsibilities
                            that precluded him from giving the modernization his full-time atten-
                            tion. GAO also noted that (1) weak internal controls over accounting
                            processes and inaccurate processing systems have undermined IRS’abil-
                            ity to satisfy its financial responsibilities; (2) IRS’financial structure has
                            incompatible systems and labor-intensive operations; (3) although IRS
                            has begun a major quality improvement effort, the transition from a
                            production focus to a quality-oriented focus presents a long-term man-
                            agement challenge at the daily operating level; and (4) IRS initiated a
                            strategic management process to help set agencywide goals, establish
                            mission priorities, and measure its progress in meeting its objectives.

                            GAO said that IRS needs to (1) create a separate deputy commissioner
                            with extensive technical expertise to direct its system modernization, (2)
                            raise the level of executives’ technical expertise so they can make
                            informed decisions about the modernization, (3) establish a chief finan-
                            cial officer to direct financial management activities, (4) establish per-
                            formance measures for all major activities for use in assessing progress
                            in improving workforce quality, and (5) provide adequate oversight
                            over field operations.

                            Since the testimony, IRS has established the position of Chief Informa-
                            tion Officer, one of whose duties will be to oversee system moderniza-
                            tion, and has designated the Deputy Commissioner for Planning and
                            Resources as IRS’Chief Financial Officer. IRS is also developing a new
                            business review process, which is to include measurable critical success
                            factors that it can use to evaluate the extent to which an activity sup-
                            ports IRS’Strategic Business Plan.




                            Page 62                                          GAO/GGD-9046   Annual   Tax Report
                         Appendix I
                         Summades of Tax-Related producta     Issued in
                         Fiscal Year 1989 by Subject Matter




Related GAO Product(s)   GAO/GGD-89- 1,l O/ 14/88




            Y




                         Page 63                                          GAO/GGD-90-46   Annual   Tax Report
                     Appendix1
                     Summarlee of Tax-Related Products    Issued in
                     Fiscal Year 1989 by Subject Matter




    ti
Tradsition Series:
Intehal Revenue      In this report, one of a series addressing issues facing Congress and the
Sedice Issues        administration, GAO summarized tax administration issues that if not
                     addressed could lead to (1) serious problems in processing tax returns,
                     (2) a decline in taxpayer confidence in the tax system, and (3) a signifi-
                     cant loss in tax revenues.

                     GAO said that IRS needs to (1) modernize its inefficient and outdated tax
                     processing system by imparting the necessary sense of urgency to the
                     modernization effort and, with Congress’help, by ensuring that ade-
                     quate technical expertise and money are available to support the effort;
                     (2) update its accounting and financial systems, the success of which
                     can be enhanced by designating a chief financial officer and by develop-
                     ing a financial management plan to set priorities, fix accountability, and
                     maintain and monitor system operations and improvements; (3)
                     strengthen human resources management by offering more competitive
                     salaries, providing high-quality training, and implementing a quality
                     assurance plan; (4) improve tax collection activities by developing more
                     effective ways to prevent or detect delinquencies; and (5) improve tax-
                     payer compliance by increasing tax audits and developing better infor-
                     mation systems for identifying potential noncompliance.




                     Page 54                                          GAO/G&D-9046   Annual Tax Report
                         AppedixI
                         fhmmaries of Tax-Related Products   Iaeued in
                         F%wal Year 1989 by SubJect Matter




                         (GAO/T-GGD-89-16,04/04/89)
Te$timony on the
A inistration’s          In testimony before the Subcommittee on Oversight, House Committee
Fis al Year 1990         on Ways and Means, GAO discussed the administration’s fiscal year 1990
                         budget request for IRS and the Tax Court.
Buf get Proposals for
IR$ and the Tax Court    GAO noted that (1) IRSexpected to experience a budgetary shortfall in
                         fiscal year 1989 of about $360 million, partly because of unfunded sala-
                         ries, employee benefits, and postage fees and partly because of manage-
                         ment’s decision to undertake initiatives for which funds had not been
                         budgeted; and (2) the administration’s fiscal year 1990 budget request
                         for IRS of about $5.5 billion, although an increase over 1989, would prob-
                         ably not be enough to maintain basic operations, thus raising the pros-
                         pects for another shortfall. The 1990 budget request appeared
                         insufficient primarily because it did not include funding to cover the
                         substantial costs IRSexpected to incur in implementing three new pieces
                         of legislation-The Technical and Miscellaneous Revenue Act of 1988,
                         the Anti-Drug Abuse Act of 1988, and the Medicare Catastrophic Cover-
                         age Act.

                         GAO also noted that (1) the administration’s request of $28.1 million for
                         the Tax Court in fiscal year 1990 was consistent with the Court’s level
                         of funding for 1989; (2) the Court had made significant progress in
                         reducing its case inventory; and (3) the Court could experience
                         increased case loads due to various factors, including provisions in the
                         Technical and Miscellaneous Revenue Act of 1988 that expanded the
                         Court’s jurisdiction.


Related GAO Product(s)   GAO/GGD-89- 116,8/ 18/89 and GAO/T-IMTEC-89-4,4/4/89




                         Page 56                                         GAO/GGD90-46   Annual Tax Report
                         Appendix I
                         Summaries of Tax-Related Prducta     Issued In
                         Fiscal Year 1989 by Subject Matter




                         (GAO/GGD-89-116,08/18/89)
Resklts of IRS’Mid-
Fiscal Year 1989         In a report to the Subcommittee on Oversight, House Committee on
Finincial Review         Ways and Means, GAO discussed IRS' mid-fiscal year 1989 financial
                         review and its actions to offset a budget shortfall of about $360 million.

                         GAO found that IRS froze hiring and restricted travel, training, and equip-
                         ment acquisitions at the beginning of fiscal year 1989 to offset the
                         shortfall, but determined during the mid-year review that those actions
                         would not be sufficient. As a result, IRS further reduced support ser-
                         vices, equipment, training, and space alterations, and cut back, various
                         service center programs and post-filing season taxpayer service through
                         furloughs of temporary staff.

                         GAO reported that, although the full effect of IRS' cutbacks would not be
                         apparent until after fiscal year 1989 (1) taxpayers experienced more
                         difficulty in reaching IRS over the telephone, (2) the manageability of
                         certain service center correspondence inventories decreased, and (3) IRS
                         expected decreased revenues from its document-matching activities. In
                         addition, GAO noted that other potential effects of the cutbacks
                         depended on the extent to which IRS (1) would have to hire inexperi-
                         enced personnel to compensate for furloughed employees who did not
                         return to IRS and (2) could eventually fund items, such as space altera-
                         tions, that it had deferred.


Related GAO Product(s)   GAO/T-GGD-89-16,4/4/89




                         Page 66                                          GAO/GGD-90-46   Axuwal Tax Report
                        Appendix I
                        Summarles of Tax-Related Products    Issued in
                        Fiscal Year 1989 by Subject Matter




   ,
                        (GAO/T-GGD-89-32,6/19/89)
Tesbimony on College
Students’-Perceptions   In testimony before the Subcommittee on Federal Services, Post Office
of he Federal           and Civil Service, Senate Governmental Affairs Committee, GAO dis-
                        cussed how college students perceive the federal government as an
Got ernment as an       employer. The testimony included information specifically related to IRS’
Em$loyer                recruiting program.

                        GAO said that many studies have pointed out the increasing intellectual
                        sophistication and skill levels government work will require and the
                        resulting need for bright, capable employees to enter the federal service.
                        GAO noted, however, that (1) the government is not now in a competitive
                        position to get its fair share of talented graduates and is already having
                        difficulty recruiting and retaining quality personnel; (2) many federal
                        agencies did not actively recruit on college campuses or used less-than-
                        effective recruitment techniques; (3) starting salaries in the private sec-
                        tor were as much as 41 percent higher than those in the federal govern-
                        ment; and (4) many students did not know that federal jobs were
                        available; believed that applying for federal employment was confusing,
                        time-consuming, and difficult; and believed that government work could
                        not provide excitement, satisfaction, or adequate pay.




                        Page 67                                          GAO/GGD-9046   Annual   Tax Report
                         Appendix I
                         Sunuuaries of Tax-Related Products   Issued in
                         Fiscal Year 1989 by Subject Matter




                         (GAO/GGD-89-13,11/18/88)
IRS Data on Its
Investigations of        In response to a request from the Chairman of the Subcommittee on
Em! loyee Misconduct     Commerce, Consumer, and Monetary Affairs, House Committee on Gov-
   p                     ernment Operations, GAO analyzed data from IRS' Internal Security Man-
                         agement Information System to determine the (1) nature and results of
                         IRS investigations of alleged employee misconduct and (2) extent to
                         which data in the system was coded incorrectly.

                         GAO found that the system was of limited value in characterizing the
                         nature and results of IRS investigations due to the extensive number of
                         missing or invalid codes in such areas as the (1) locations and offices of
                         employees who allegedly committed violations, (2) sources of the allega-
                         tions, (3) types of violations, (4) administrative actions taken, and (5)
                         results of criminal prosecution.

                         GAO also found that IRS (1) has not used the system’s data for making
                         operational decisions about budgets, assignments, or plans because of
                         the system’s reliability problems and (2) plans to implement a new sys-
                         tem in fiscal year 1989 that will have validity checks to ensure input of
                         accurate and complete data. (See p. 59 for updated information on IRS'
                         plans.)


Related GAO Product(s)   GAO/T-GGD-89-38,7/27/89




                         Page 68                                          GAO/GGD-90-46   Annual   Tax Report
                                 Appendix I
                                 Summa&a of Tax-Related Products      Issued in
                                 Fiscal Year 1989 by Subject Matter




     I
      -
Testimony    on the
Reliiability of IRS’Data In hearings before the Subcommittee on Commerce, Consumer, and Mon-
on Ibvestigations of     etary Affairs, House Committee on Government Operations, GAO dis-
                         cussed IRS' Internal Security Management Information System, focusing
Allyged Employee         on the validity and usefulness of the system’s data and IRS' efforts to
Misponduct               improve the system.

                                 GAO found that insufficient   validity checks resulted in unreliable system
                                 data. Among other things, the data did not describe where many investi-
                                 gations took place or identify such important case characteristics as (1)
                                 the types of employee investigated, (2) IRS' administrative actions, (3)
                                 IRS' referrals for criminal prosecution, or (4) prosecutive results.

                                 GAO noted that IRS had started developing a new system with additional
                                validity checks to preclude incomplete or illogical data. Although the
                                new system would apparently provide better data, GAO cautioned that
                                (1) IRS planned to correct only some of the invalid data in the old system
                                before converting the database to the new system; (2) IRS frequently
                                treated cases as closed when the investigative work was done, even
                                though final disposition had not occurred, resulting in incomplete data;
                                (3) IRS did not know whether the new system would meet management
                                needs; (4) requirements and computer programs needed to develop the
                                new system had not been documented, which could cause problems in
                                testing, operating, maintaining, and refining the system; and (5) IRS did
                                not have a plan for periodically reviewing data accuracy.


Relhted GAO Product(s)           GAO/GGD-89-13, 1 l/18/88




                                 Page 69                                          GAO/GGD-9046   Annual   Tax Report
                         Appendix I
                         Summaries of Tax-Related Products    Issued iu
                         Fiscal Year 1989 by Subject Matter




Retprns Processing

                         (GAO/GGD-89-2, 1 l/14/88)
Effhctive
Imdlementation of the    In response to requests from the Joint Committee on Taxation and the
Td Reform Act Led to     Subcommittee on Oversight, House Committee on Ways and Means, GAO
                         evaluated IRS’(1) implementation of the Tax Reform Act of 1986 and (2)
Un ’ventfull             efforts to provide taxpayer service and process tax returns during the
Fili “, g Season         1988 filing season.

      1                  GAO found that IRS (1) released many tax forms early for public comment
                         and pretested forms that were significantly changed or would be widely
                         used; (2) distributed publications, contacted taxpayer groups, and
                         worked with a public affairs organization to inform taxpayers about tax
                         law changes and to encourage them to file early; (3) increased the
                         number of telephone assistors from 3,500 in 1987 to 4,500 in 1988,
                         trained them earlier than in past years, increased the number of tele-
                         phone lines by 30 percent over 1987, and increased the operating hours
                         of telephone offices; (4) hired additional returns processing staff,
                         reduced service center inventories to the lowest level in 3 years, and
                         conducted extensive readiness checks at all service centers; (5) met its
                         target date for issuing refunds; (6) met its goal of handling the increased
                         volume of calls from taxpayers seeking assistance, and (7) generally did
                         a good job filling taxpayers’ orders for forms and publications.

                         GAO identified some opportunities    for IRS to improve the effectiveness of
                         future filing seasons by (1) revising sections of tax forms that were the
                         source of numerous errors in 1988, (2) tailoring the tax package mailed
                         to taxpayers to encourage the use of simpler forms, and (3) ensuring
                         that taxpayers have ready access to tax forms and publications.


Related GAO Product(s)   GAO/GGD-89-40,6/19/89;               GAO/T-GGD-89-12,3/16/89;       and GAO/
                         GGD-89-42,3/7/89




                         Page 60                                              GAO/GGD-9046    Annual   Tax Report
                         Appendix I
                         Summaries of Tax-Belated Products   Issued in
                         FLcal Year 1989 by Subject Matter




In&h-est on Tax *
Re$nds Paid by IRS       In elaborating on information in its report on the 1988 filing season (see
in l/988                 p. 60), GAO provided information on the amount of interest IRSpaid on
                         taxpayers’ refunds that year.
   I
   I
                         The Internal Revenue Code requires that IRS pay interest on any tax-
                         payer refund it does not process within 45 days of the return’s due date
                         or the date IRS received the return, whichever was later. GAO said that
                         (1) IRS generally processed refund returns first and did not begin
                         processing nonrefund returns until after the 45-day interest-free period
                         expired; (2) as of October 1988, IRS had paid interest of about $12.6 mil-
                         lion on about 1.1 million refunds, compared to $8.3 million on about
                         800,000 refunds during a comparable period in 1987; and (3) of the $4.3
                         million increase, about $1.4 million was due to increased interest rates
                         and about $2.8 million was due to an increase in the number of
                         nonrefund returns that IRS later found to contain errors that resulted in
                         refunds.


Related GAO Product(s)   GAO/GGD-89-2, 1 l/14/88 and GAO/GGD-86-72,7/28/86




                         Page 61                                         GAO/GGD-90-46   Annual   Tax Report
                         Appendix I
                         Sununarlee of Tax-Related Products   Issued in
                         Piscat Year 1080 by Subject Matter




         - on the
    timony
    ;USOf the 1989 Tax   In testimony before the Subcommittee on Oversight, House Committee
    Jrn Filing Season    on Ways and Means, GAO discussed IRS' 1989 tax return filing season. GAO
                         said that (1) its test calls to 29 IRS call sites over a 2-week period showed
                         that IRS' accessibility declined slightly compared to 1988 while the over-
                         all accuracy of assistors’ answers to individual tax questions remained
                         about the same and (2) questions that required assistors to probe for
                         information continued to cause the most problems.

                         GAO also said that (1) of the 36 IRS sites responsible for distributing tax
                         materials to the public that GAO visited, none had available all of the 79
                         forms and publications that each site was required to stock and 15 were
                         missing 10 or more of those items; (2) almost half of those responsible
                         for managing inventories of tax materials at the sites GAO visited had
                         not received the pertinent training; and (3) shipments of tax materials in
                         response to mail and telephone orders GAO placed with IRS' distribution
                         centers were frequently incomplete with no explanation as to why or
                         indication that missing materials had been back ordered.

                         GAO noted that (1) although IRS appeared to be processing tax returns
                         smoothly, some service centers had fallen behind last year’s processing
                         pace; (2) a greater proportion of taxpayers filed simpler tax forms than
                         in 1988; (3) the percentage of filed returns that contained taxpayer
                         errors or that IRS erroneously processed was lower than last year, but
                         taxpayers still made many of the same kinds of errors as they did in
                         1988; and (4) service center case inventory levels were generally run-
                         ning at or below 1988 levels.


Related GAO Product(s)   GAO/T-GGD-89-13,3/15/89               and GAO/GGD-89-2,11/14/88




                         Page 62                                             GAO/GGD-9046   Annual   Tax Report
                         Appendix I
                         Summaries of Tax-Related Pruducta Issued in
                         Fiscal Year 1989 by Subject Matter




Twpayer Service
  I
                         (GAO/GGD-89-30,02/02/89)
Acdessibility ,
Tiqeliness, and          In response to requests from the Chairmen of the Subcommittee on
AC uracy of IRS’         Oversight, House Committee on Ways and Means, and the Subcommittee
                         on Commerce, Consumer, and Monetary Affairs, House Committee on
Tel“, phone Assistance   Government Operations, GAO reviewed the accessibility, timeliness, and
Prqgraxn                 accuracy of IRS' Telephone Assistance Program during the 1988 filing
                         season.

                         GAO anonymously placed 1,908 calls to IRS telephone assistance sites
                         nationwide and found that (1) it was able to reach IRS on the first call 76
                         percent of the time and within five call attempts 93 percent of the time,
                         compared with 61 percent and 88 percent, respectively in 1987; (2) IRS
                         placed calls on hold 4 percent less often than in 1987, and the average
                         waiting time decreased 29 percent; (3) IRS assistors incorrectly
                         responded to test questions 36 percent of the time compared to 31 per-
                         cent in 1987; and (4) assistors were less likely to respond accurately
                         when the question required probing in order to ascertain all of the perti-
                         nent facts or involved recent changes to the tax law.


Related GAO Product(s)   GAO/T-GGD-89-12,3/16/89; GAO/T-GGD-89-13,3/15/89; GAO/T-
                         GGD-88-47,7/13/88; GAO/GGD-88-17,12/3/87; and GAO/GGD-86-89FS,
                         6/18/86




                         Page 63                                        GAO/GGD90-46   Annual   Tax Report
                       Appendix I
                       Summaries of Tax-Related Products    Issued in
                       Fiscal Year 1989 by Subject Matter




Testimony on IRS’ m
Telephone Assistance   In hearings before the Subcommittee on Commerce, Consumer, and Mon-
Prbgram                etary Affairs, House Committee on Government Operations, GAO dis-
                       cussed IRS' Integrated Test Call Survey System. IRS had worked with GAO
                       to develop this system to produce a valid measure of the accuracy of IRS'
                       responses to taxpayers’ questions in the area of individual tax law.

                       In its testimony, GAO commented specifically on the test call results IRS
                       had publicly reported on March 10, 1989. As a result of those calls, IRS
                       had reported an error rate of 30.8 percent for toll-free telephone assis-
                       tance. GAO said that (1) the reported error rate was based on only the
                       last 2 weeks of what was at that time a 4-week test and on only 29 of 62
                       test questions; (2) IRS used a more liberal scoring of responses than had
                       been agreed to with GAO, without which the error rate would have been
                       39.6 percent; (3) many of the answers IRS considered accurate under
                       that liberal scoring were incomplete and potentially misleading, and
                       could lead taxpayers to make errors; and (4) IRS' failure to maintain con-
                       sistent scoring standards raised questions about the validity and integ-
                       rity of test results.




                       Page 64                                          GAO/GGD90-46   Anuue.l Tax Report
                        Appendix I
                        Summarlea of Tax-Related Products   Issued in
                        Nscal Year 1989 by Subject Matter




                        (GAG/GGD-89-31,02/21/89)
Hoiv Precise Are IRS’
E&mates of              In response to congressional and administrative concerns over the
Taqpayers Calling for   amount of resources devoted to IRS' Taxpayer Service Program, GAO (1)
                        reviewed IRS' approach for estimating demand for telephone assistance
As$istance?             and for determining the level of telephone service provided to taxpayers
                        and (2) compared IRS' demand estimating approach and performance
                        measurement with that of other organizations that operate toll-free tele-
                        phone services.

                        IRSuses telephone demand estimates to help develop budgetary projec-
                        tions for its taxpayer service function, determine the level of service
                        provided to taxpayers, and manage and operate its telephone sites. IRS
                        defined telephone demand as the estimated number of persons calling
                        for assistance, and it defined level of service as the number of calls
                        answered relative to the estimated number of callers. GAO said that (1) it
                        agreed with IRS' assumptions that a portion of unanswered calls were
                        redial attempts and that redial attempts were related to system conges-
                        tion; (2) neither IRS nor GAO knew, however, the extent to which system
                        congestion affected the redial rate or how often callers redial after
                        receiving a busy signal; and (3) due to these and other uncertainties
                        inherent in estimating callers, GAO could not attest to or refute the accu-
                        racy of IRS’demand estimates. GAO also said that other telecommunica-
                        tions organizations based their level of service on total call volume-a
                        method that, while overstating the number of persons seeking assis-
                        tance, would be useful for examining the level of congestion in IRS' toll-
                        free telephone system and the difficulty taxpayers experienced in con-
                        tacting IRS.


Recommendation          To provide Congress information with which to more fully assess the
                        toll-free telephone assistance program and help determine the level of
                        funding the program warrants, IRS should provide in its budget submis-
                        sions to Congress level-of-service information based on both estimated
                        demand and actual call volume data from the prior fiscal year. This
                        information should include the estimated number of persons calling IRS
                        for service, the percentage of those assisted, the total call volume, and
                        the percentage of calls answered.




                        Page 08                                         GAO/GGD-99-46   Annual   Tax Report
                        Appendix I
                        Summarlee of Tax-Related Products   Issued in
                        F%xd Year 1989 by Subject Matter




Act&m(s) Taken and/or   IRS said that future budget submissions would include the number of
Penciling               calls answered, busy signals, and abandoned calls for the most recently
                        completed fiscal year. This type of information was first included in IRS’
      ’                 fiscal year 1989 budget submission.


Rel                     GAO/GGD-89-30,2/2/89;           GAO/GGD-88-17,12/3/87;    and GAO/GGD-86-
                        89F’S, 6/18/86




                        Page 66                                          GAO/GGD-9046   Annual   Tax Report
                         Appendix I
                         Summaries of Ta.mRelated Products Iseut?d in
                         Fiscal Year 1989 by Subject Matter ’




                         (GAO/GGD-89-40,06/19/89)
IRS/’Interpretative
Guidance                 In response to requests from the Joint Committee on Taxation and the
Implementing the Tax     Chairman of the Subcommittee on Oversight, House Committee on Ways
                         and Means, GAO discussed IRS’provision of interpretative guidance
Ref/orm Act              regarding implementation of the Tax Reform Act of 1986 (P.L. 99-514).

                         GAO reported that (1) to implement the act, IRS developed a priority list
                         of act sections that, in IRS’opinion, required some type of early guid-
                         ance; (2) IRS’implementation plan provided for publishing 217 regula-
                         tions, revenue rulings, revenue procedures, notices, and announcements,
                         of which 174 were to be published before January 1988; (3) as of
                         December 31, 1987, most of the regulations and all of the revenue proce-
                         dures planned for publication before the 1988 filing season were still in
                         process; and (4) some of those unpublished regulations and revenue pro-
                         cedures were subsequently published during the 1988 filing season, but
                         many were still pending as of April 30, 1988.

                         GAO also reported that (1) as IRS gained familiarity with the act, it
                         shifted some priorities and went on to publish by the end of April 1988
                         many regulations and other guidance that were not included in the origi-
                         nal implementation plan; (2) the sufficiency of the interpretative guid-
                         ance provided to taxpayers would probably not be known for another
                         year or two, pending results of IRS audits of tax returns subject to the
                         act; (3) IRS Internal Audit staff who monitored the 1988 filing season
                         said they did not identify any problems that could be attributed to insuf-
                         ficient interpretative guidance; and (4) as a result of complaints it
                         received after publishing a revised Form W-4 (Employee’s Withholding
                         Allowance Certificate) without obtaining public comments, IRS began
                         obtaining broader public comments on new or revised tax forms.


Related GAO Product(s)   GAO/GGD-89-2,1 l/14/88




                         Page 67                                          GAO/GGD-9946   AuuuaJ Tax Report
                         Appendix I
                         Summarlee of Tax&&ted       Products   Issued in
                         Fiscal Year 1989 by Subject Matter




Tajr Policy

                         (GAO/GGD-89-7,10/14/88)
Prbminary Data on
Tax-Exempt Bonds         In a report to the Joint Committee on Taxation, GAO provided data on
U&d to Finance           tax-exempt bonds issued to finance housing for the elderly.
Hobsing for the          By law, private organizations that provide housing for elderly or low-
Elderly                  income individuals can apply to IRS for tax-exempt status under section
                         501(c)(3) of the Internal Revenue Code. Although 601(c)(3) organiza-
                         tions cannot issue tax-exempt bonds to finance their operations, state
                         and local governments can issue tax-exempt bonds on behalf of such
                         organizations if the bonds meet certain requirements.

                         GAO reported that (1) state and local government units must file an
                         information return, Form 8038, when they issue private tax-exempt
                         bonds; (2) Form 8038 does not identify the 501(c)(3) organization that
                         will use the proceeds of the issue; and (3) because IRS cannot link partic-
                         ular bond issues with individual 501(c)(3) organizations, it cannot easily
                         enforce the $150 million limit on the outstanding bonds of an individual
                         organization.


Re4ommendation(s)        The Commissioner of Internal Revenue should require that the employer
                         identification numbers of the users of qualified 501(c)(3) bonds be
                         reported on Form 8038. With such data, IRS can make computer checks
                         by organization to ensure they comply with the Internal Revenue Code.


Action(s) Taken and/or   IRS revised Form 8038 to require the reporting of employer identification
Pending                  numbers. The revised form was published on October 13, 1989.




                         Page 68                                            GAO/GGD9046   Annual   Tax Report
                     Appedx     I
                     Sunuuarles of Tax-Related Products   Issued in
                     Piecal Year 19S9 by Subject Matter




Funjds Borrowed to   The federal tax code is designed to tax net income-gross income minus
Purbhase or Carry    expenses incurred in the production of that income. If a deduction for
                     interest expense incurred to produce tax-exempt income is allowed, a
Taq-Exempt Bonds     taxpayer can engage in what is called arbitrage by using the deduction
                     to offset other taxable income. Internal Revenue Code section 265 disal-
                     lows the deduction of interest expense associated with tax-exempt
                     income. The amount of disallowed interest expense is calculated in a dif-
   I                 ferent manner for financial institutions than for individuals and nonfi-
                     nancial corporations.

                     In response to a request from the Joint Committee on Taxation, GAO
                     reviewed section 265 and found that parts of it are difficult to adminis-
                     ter, and little is known about how well taxpayers comply with this sec-
                     tion. Specifically, GAO found that (1) although income tax forms required
                     individual taxpayers to report tax-exempt income, IRS had no mecha-
                     nism, such as Form 1099 information reporting, with which it could
                     readily verify the amount reported and (2) because corporations were
                     not required to separately report taxable and tax-exempt assets on the
                     corporate tax form, IRS could not readily check whether a nonfinancial
                     corporation was subject to the de minimus rule (i.e., if less than 2 per-
                     cent of total assets are tax-exempt securities) or whether a financial
                     institution had incorrectly applied the mechanical disallowance rule (a
                     method of automatically allocating a portion of interest expense to tax-
                     exempt securities).

                     GAO said that (1) IRS had done audits in which section 265 was an issue,
                     but determining noncompliance given the lack of information concerning
                     tax-exempt interest income and the subjectivity of the existing rules
                     could be difficult; (2) evidence on the extent of individual compliance
                     with section 265 is limited and inconclusive; (3) IRS has not studied cor-
                     porate taxpayer compliance with section 265; (4) IRS officials expressed
                     the belief that extending the mechanical disallowance rule to all corpo-
                     rate taxpayers would make administration of section 265 easier; and (5)
                     the effect of extending the mechanical rule on the market for tax-
                     exempt securities would depend on whether the rule was added to or
                     replaced existing tax provisions.




                     Page 69                                          GAO/GGLL9046   Annual   Tax Report
                            Appendix I
                            Summaries of Tax-Related Products    Issued in
                            Fiscal Year 1999 by Subject Matter




Recommendation(s)           The Commissioner of Internal Revenue should

                          . study the costs and benefits of requiring information reporting for tax-
                            exempt interest income and
                          q consider changing Schedule L on the U.S. Corporation Income Tax
                            Return to separately identify tax-exempt securities from other
                            securities.


Actj(on(s) Taken and/or     IRS said it would solicit information on tax-exempt interest in its Tax-
Pen ing                     payer Compliance Measurement Program. While IRS believes that this
                            should provide some information on the usefulness of information
    P                       reporting as well as compliance with section 265, IRSdoes not believe
                            that the data obtained will enable management to fully evaluate the
                            costs and benefits of requiring information reporting for tax-exempt
   !                        interest income as we recommended. IRS said that it is unlikely that the
                            financial institutions that pay this income would be willing to provide
                            IRSthe names and Social Security numbers of owners of tax-exempt
                            securities and amounts paid because there is no legal requirement to do
                            so.

                            In addition, IRS changed Schedule L on the U.S. Corporation Income Tax
                            Return to separately identify tax-exempt securities from other types.




                            Page 70                                          GAO/GGD-90-46   Annual   Tax Report
                         Appendix I
                         Summaries of Tax-Related Products   Issued in
                         Fkal Year 1989 by Subject Matter




                         (GAO/NSIAD-89-121,05/17/89)
Eff ct of Changes in
Pro urement and Tax      In response to a request from Congressman Charles Bennett, GAO
Pol’”cy on the Defense   reviewed a consultant’s study on the impact of selected changes in pro-
                         curement and tax policies on the defense industry. The study had con-
Indbstry                 cluded that combined uncoordinated governmental policy changes were
     I                   affecting the financial condition and operating results of defense firms
     I                   to the point where it might be uneconomical to do business with the
                         Department of Defense.

                         GAO noted that the consultant (1) focused on six policy changes, includ-
                         ing tax law changes, that were implemented from 1984 to 1987 and (2)
                         used financial data from nine defense programs to compare program
                         performance under prior policies and to estimate the profits and cash
                         flows that would have occurred if the new policies were in effect when
                         each program began. The consultant reported that the policy changes
                         would cause (1) a 23-percent reduction in profits; (2) an additional
                         financing requirement for the nine contractors of $8.5 billion, and (3) a
                         lower return on investment than would be necessary to preserve share-
                         holder value.

                         GAO agreed with the basic concept of the consultant’s study-that    the
                         cumulative impact of policy changes should be considered before the
                         changes are made. GAO'S analysis, however, identified several problems
                         with the consultant’s methodology and indicated that the study’s con-
                         clusions could not be validated for the defense industry as a whole. GAO
                         expressed the need for a profitability reporting program that would give
                         policymakers verified information with which to systematically analyze
                         the cumulative impact of government policies on defense contractors’
                         profitability.


Related GAO Product(s)   GAO/NSIAD-88-59,12/02/87               and GAO/NSIAD-87-175,09/17/87




                         Page 71                                             GAO/GGD904   Annual   Tax Report
                         Appendix I
                         Summaries of Tax-Related Products    Issued in
                         Fiscal Year 1989 by Subject Matter




                         (GAO/GGD-89-76,06/23/89)
    efficient
InfQlrmation to Assess   In a report to Congressman Frank Guarini, GAO (1) evaluated data that
Effh!ct of Tax Free      the Department of the Treasury used to assess the effect of section 127
                         of the Internal Revenue Code and (2) assessed the availability and relia-
    cation Assistance    bility of certain information relating to section 127. This section allows
                         individuals to exclude from their gross income the value of educational
                         assistance provided by an employer through an employee educational
                         assistance program.

                         In June 1988, Treasury concluded that section 127, which was due to
                         expire on December 31,1988, should not be extended. GAO reported that
                         the information on which Treasury relied, although the best available,
                         was insufficient to support its conclusion. GAO explained that the infor-
                         mation came from surveys that were not specifically focused on gather-
                         ing information to evaluate the success of section 127, had low response
                         rates, or were not representative of the population being surveyed. GAO
                         said that (1) in 1984, Congress enacted a reporting requirement (section
                         6039D of the Internal Revenue Code) to provide a basis for assessing
                         section 127, but the information required of employers was not suffi-
                         ciently specific; and (2) information that would be useful in assessing
                         section 127, such as the average income of participants and the average
                         benefit at each salary level, was unavailable from reliable sources.


Recommend.ation(s) to    When GAO issued its report, section 127 had expired. GAO recommended
                         that if Congress decided to reinstate the provision, it might want to
Congress                 revise the reporting requirement to better assess the provision’s effects.
                         This could be done by requiring information on the salary level of par-
                         ticipants and the average benefit at each salary level. To help make any
                         further assessment of section 127, Congress could also specify that the
                         data be reported for a sufficient length of time to adequately measure
                         any effects.


Action(s) Taken and/or   On December 19, 1989, the President signed the Omnibus Budget Recon-
Pending                  ciliation Act of 1989 (P.L. lOl-239), which among other things, retroac-
                         tively extended section 127 through September 30, 1990. It did not,
                         however, revise the employer reporting requirement. Thus, Congress
                         will be in the same predicament when the section expires in September
                         1990 as it was during past expirations because it will not have sufficient




                         Page 72                                          GAO/GGD9046   Annual   Tax Report
    Appendix I
    Summaries of Tax-Related Products    Issued in
    Fiscal Year 1989 by Subject Matter




    information to (1) adequately measure the provision’s effects or (2) pro-
    vide an adequate basis for determining whether or not section 127 had
    achieved its objectives and should, therefore, be extended permanently.




Y




    Page 73                                          GAO/GGDBO-46   Annual   Tax Report
                             Appendix I
                             Sununarles of Tax-Related Products   Issued in
                             Fiscal Year 1989 by Subject Matter




     I
Cosbs    Associated   With   (GAO/GGD8Q~lOOFS, 07/10/8Q)
Low/ Income Housing          In a fact sheet to the Chairman of the Subcommittee on Select Revenue
Ta$ Credit        -          Measures, House Committee on Ways and Means, GAO provided informa-
                             tion on the various fees and expenses associated with real estate part-
Partnerships                 nerships that use the low-income housing tax credit. GAO specifically
                             focused on the proportion of equity financing used for fees and
                             expenses, which would reduce the amount of equity available for actual
                             housing construction and rehabilitation.

                             GAO  reviewed data for each of the 19 public real estate partnership
                             offerings on the market that used the low-income housing tax credit
                             and, for comparison purposes, obtained information on the expenses and
                             fees for the 48 residential or residential/commercial public partnership
                             offerings being marketed that did not use the credit. GAO said that (1)
                             the 19 publicly offered low income tax credit partnership projects used
                             a higher average proportion of equity to pay fees and expenses than the
                             other 48 partnerships- 27 percent compared to 21 percent; (2) the pro-
                             portion of fees that low-income tax credit partnerships spent was within
                             guidelines promulgated by the North American Securities Administra-
                             tors Association, Inc.; (3) those guidelines, which were formally or infor-
                             mally followed by 25 states, allowed a higher proportion of equity to be
                             used for fees and expenses by partnerships carrying higher proportions
                             of debt, such as is generally the case for low-income housing partner-
                             ships; (4) the 19 low income partnerships’ debts averaged 76.7 percent
                             of equity, while the other 48 partnerships’ debts averaged 39 percent of
                             equity; and (5) the amount of fees and expenses paid out of equity dif-
                             fered among the 19 low-income partnerships-ranging        from 17 percent
                             to 33.8 percent.




                             Page 74                                          GAO/GGD-00-46   Annua.l Tax Report
                         Appendix I
                         Summarlee of Tax-R.elated koducte    Issued in
                         Fiscal Year 1989 by Subject Matter




    I

Thd -Research Tax
Crebit Has Stimulated    In response to a mandate in the Technical and Miscellaneous Revenue
Sonje Additional         Act of 1988 and a request from Congressman Brian Donnelly, GAO
                         reviewed the structure, administration, and effectiveness of the
Resbarch Spending        research and experimentation tax credit. The credit, which is intended
                         to stimulate additional research spending, allows taxpayers to reduce
                         their tax liabilities by 20 percent of qualified research and experimenta-
                         tion expenditures that exceed a base amount. The base amount is equal
                         to the taxpayer’s most recent 3-year average of qualified expenditures
                         or 50 percent of the taxpayer’s current year expenditures, whichever is
                         greater.

                         GAO found that (1) the credit stimulated between $1 billion and $2.5 bil-
                         lion in additional research spending between 1981 and 1985 at a cost of
                         $7 billion in tax revenues; (2) although the amount of stimulated spend-
                         ing was below the credit’s revenue cost, the long-term total benefits
                         from research could be much higher; and (3) the credit could provide
                         more of an incentive if the moving-average base were replaced with a
                         fixed base indexed to the growth in gross national product or another
                         indexing factor and if the base and index were periodically reviewed
                         and adjusted as needed.

                         GAO also found that (1) IRS had difficulty   administering the credit and
                         questioned the credit claimed by 79 percent of the corporations it
                         audited; (2) many revenue agents reported that the definition of quali-
                         fied research expenditures was unclear; and (3) in May 1989, Treasury
                         issued regulations to clarify the definition.


Action(s) Taken and/or   The Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239, Dec. 19,
Pending                  1989) changed the method of calculating the research and experimenta-
                         tion tax credit. As before, the credit applies only to the extent that the
                         taxpayer’s qualified research expenditures for the current year exceed
                         the taxpayer’s base amount, Under the new law, the base amount is the
                         product of the fixed-base percentage and the taxpayer’s average annual
                         gross receipts for the 4 years preceding the tax year for which the credit
                         is being calculated. The new law also prescribes methods for determin-
                         ing the fixed-base percentage for existing firms and start-up firms.




                         Page 76                                          GAO/GGD9046   Aruuml Tax Report
                         Appendix I
                         Summarlee of Tax-Related Producte Issued in
                         Fiscal Year 1989 by Subject Matter




                         This fixed-based method will be effective only for the first 9 months of
                         1990. If Congress decides to make the credit permanent, it should pro-
                         vide for periodic adjustments to the base as a means of reducing the
                         amount of the credit.


Related GAO Product(s)   GAO/GGD-88-98BR, 6/l 7/88




                         Page 76                                       GAO/GGD-90-46   Annual   Tax Report
        I .




              Appendix I
              Sununarles of Tax-ReIated Products Issued in
              Fiscal Year 1989 by Subject Matter




    /
O th$r

              (GAO/GGD-89-106,09/29/89)

              This report was prepared in compliance with a legislative requirement
Woqk          and contains information on GAO'S tax policy and administration-related
              work during calendar year 1988. The report includes (1) summaries of
              tax-related products issued in 1988, (2) summaries of tax-related prod-
              ucts issued before 1988 with open recommendations to Congress, (3)
              descriptions of legislative actions taken in 1988 in response to GAO rec-
              ommendations, (4) a list of open recommendations to Congress, (5) a list
              of recommendations GAO made in 1988 to the Commissioner of Internal
              Revenue, and (6) brief descriptions of assignments for which GAO was
              authorized access to tax data in 1988.




              Page 77                                        GAO/G-GD-96-46 Annual   Tax Report
S-ties      of Tax-Related Products Issued
@ fore F’iscallYear 1989 With Open
Recommendationsto Congressas of
9
                Congress Should Consider Alternatives to Increase Gas                        79
                    Guzzler Tax Compliance
                Congress Should Consider Amending the Social Security                        81
                    Act to Specify a Time Limit for Certifying Social
                    Security Earnings
                Congress Should Consider Amending the Internal                               83
                    Revenue Code to Permit VA Access to Tax
                    Information for Use in Administering the
                    Unemployability Compensation Program
                Congress Should Amend the Internal Revenue Code to                           84
                    Allow VA Access to Tax Information for Use in
                    Administering the Veterans’ Pension Program
                Congress Should Revise the Internal Revenue Code to                          86
                    Significantly Increase the Penalty for Abusive Tax
                    Shelters and Reduce the Level of Proof Needed to
                    Apply the Penalty for Aiding and Abetting
                Congress Should Consider Requiring IRS to Include in Its                     88
                    Annual Budget Submission Information on Actual
                    Revenues Derived from Audits




                Page 78                                      GAO/GGD-9046   Annual   Tax Report
                         Appendix Jl
                         Summaries of Tax-Related Products Issued
                         Before Fiscal Year 1989 With Open
                         R.ecommendations to Congress as of
                         December 31,1989




     /
     /
      - Should
Congjress
Con ider Alternatives    In a report to the Joint Committee on Taxation, GAO (1) discussed the
to I crease Gas          need for improving taxpayer compliance with the gas guzzler excise tax,
                         (2) evaluated IRS' efforts to enforce the tax, and (3) identified methods
Guzi ler Tax             for improving taxpayer compliance.
Comjpliance
                         The gas guzzler excise tax, enacted in 1978, applies to domestic and
                         imported cars manufactured after 1979 that weigh 6,000 pounds or less
                         and do not satisfy specified miles-per-gallon ratings. To measure compli-
                         ante with the tax, GAO randomly sampled gas guzzler vehicles imported
                         through four U.S. Customs districts that accounted for about 80 percent
                         of the independent imports from November 1983 through November
                         1984. Independent importers are those who import vehicles that have
                         been manufactured for the foreign market and generally need to be mod-
                         ified to meet U.S. emissions and safety standards.

                         GAO found that (1) less than 1 percent of the independent importers paid
                         the gas guzzler tax and (2) this noncompliance resulted in lost tax reve-
                         nues of over $6 million. IRS believed that the primary reasons indepen-
                         dent importers did not pay the tax, besides intentional tax evasion, were
                         that (1) many liable taxpayers were unaware of the tax and (2) some
                         importers who were aware of the tax did not believe that it applied to
                         them.

                         GAO concluded that (1) although IRS has taken actions to enforce the tax,
                         more needed to be done and (2) achieving a more acceptable compliance
                         level could require additional resources or a diversion of scarce IRS
                         resources from other IRS activities.


Recommendation(s) to     As alternatives for collecting the tax more efficiently with a limited IRS
                         resource commitment, Congress should consider (1) amending Internal
Congress                 Revenue Code section 4064, “Gas Guzzler Tax,” to require importers to
                         pay the tax to Customs at the time fuel-inefficient vehicles are imported
                         or (2) amending the bonding requirement for independent importers to
                         require proof of payment of the gas guzzler tax before the bond is
                         released.


Action(s) Taken and/or   The Joint Committee on Taxation presented several proposals for
Pending                  increasing gas guzzler tax revenue in a June 1987 pamphlet that con-
                         tained a listing of possible revenue sources. One of these proposals

                                          I
                         Page 79                                        GAO/GGLMO-46   Annual   Tax Report
                         Appendix II
                         S-es        of Tax-Related Products Issued
                         Before Ned     Yeax 1989 With Open
                         Recommendations     to C4mgres.9 as of
                         December 31,1989




  /                      involved having Customs, rather than IRS, collect the tax on all imported
  I                      vehicles. No further action had been taken as of December 31,1989.


Related GAO Product(s)   GAOIRCED-87-29, 12/l l/86




                         Page 80                                       GAO/GGD-99-46   Annual   Tax Report
                         Appendix II
                         Summaries of Tax%Lelated Products Ieaued
                         Before Nscal Year 1989 With Open
                         Racommendat.lonm to Congress 88 of
                         December al,1989




                         (GAO/HRD-87-52,09/18/87)
Con$ress Should
Consider Amending        In a report to the Chairmen of the Senate Committee on Finance and the
the ocial Security Act   House Committee on Ways and Means, GAO discussed the effectiveness
                         of the Social Security Administration’s (SSA) process for crediting indi-
to S ecify a Time        viduals’ earnings to their individual accounts and the effect of
Lim’1t for Certifying    uncredited or erroneously credited earnings on individuals’ benefits and
Soci$l Security          on Social Security trust funds.
Ear ings                 Employers report employees’ earnings to SSAand IRS at different times
    ”                    and for different purposes. IRS compares the annual total earnings
                         reported to SSA with the annual total of the quarterly earnings employ-
                         ers reported to IRS. From 1978 through 1984, SSA recorded about $58.5
                         billion less in employees’ earnings than IRS. The amount of earnings
                         recorded by SSA effects the size of individuals’ Social Security benefits
                         and the amount of tax revenues to which the Social Security trust funds
                         are entitled. Therefore, differences between IRS' and VA'S recorded
                         amounts must be reconciled. GAO found that (1) SSA and IRS had not
                         worked well together to resolve differences in employers’ earning
                         reports; (2) neither SSA nor IRS has compiled sufficient data to identify
                         the causes of differences and the actions necessary to prevent or reduce
                         future occurrences; and (3) SSA’S plans to resolve some backlogged
                         uncredited earnings reports did not encompass all such reports and did
                         not include steps for addressing employers who could not or would not
                         respond to information requests. GAO said that (1) three of every five
                         individuals with uncredited earnings faced the possible loss of about
                         $17 a month in Social Security benefits and (2) unless it can certify
                         recorded earnings for previous tax years, SSA may not be entitled to a
                         portion of the tax revenues that it has received.


Recommend.ation( s) to   To provide an incentive for more timely reconciliation of earnings
Congress                 reports, Congress should consider amending section 201(a) of the Social
                         Security Act to specify a time limit, such as the employer earnings rec-
                         ord retention period specified by IRS, for the Secretary of Health and
                         Human Services to certify earnings. If Congress chooses not to specify a
                         time limit, it should consider whether (1) SSA should be required to relin-
                         quish trust fund money to general revenue funds for those earnings
                         amounts that employers have reported to IRS but SSA has not recorded or
                         (2) the trust funds should be permitted to retain revenues based on IRS-
                         recorded employers’ earning reports.




                         Page 81                                        GAO/GGD-99-46   Annual   Tax Report
                         Appendix II
                         Summaries of Tax-R&&d      Products Issued
                         Before Fiscal Year 1989 With Open
                         Recommendations    to Congress as of
                         December 31,1989




.c$ion(s) Taken and/or   As of December 31,1989, no action had been taken.
ebding
i
elated GAO Product(s)    GAO/GGD-89-2 1,12/ 14/88; GAO/T-HRD-88-29,8/g/88;           and GAO/T-
                         HRD-88-2,10/E/87




                         Page 82                                      GAO/GGD96-46    Annual   Tax Report
     .




                         Appendix II
                         Summarles of Tax-Related Products Ieeued
                         Before Fiscal Year 1989 With Open
                         Recommendations to Congress ae of
                         December 31,1989




                         (GAO/HRD-87-62,09/2 l/87)
Cor$ress Should
Consider Amending        In response to a request from the Ranking M inority Member of the Sen-
                         ate Committee on Veterans’ Affairs, GAO reviewed the Veterans Admin-
                         istration’s (VA) Unemployability Compensation Program to determine
                         whether (1) veterans receiving unemployability benefits were reporting
                         their earnings to VA as required and (2) accessto tax information would
                         enable VA to better administer the program.

                         GAO found that (1) 90 percent of the veterans receiving unemployability
                         benefits, who should have reported their earnings to VA, failed to do so;
                         (2) veterans received potential overpayments of over $10 m illion during
                         1984 and 1985; and (3) VA rating boards used different criteria in deter-
                         m ining marginal earnings, which could result in unequal and inconsis-
                         tent eligibility determinations for unemployability benefits. Although
                         accessto tax information could improve payment accuracy, granting VA
                         access to any tax information raises privacy concerns. Thus, GAO con-
                         cluded that VA should be prepared to demonstrate that it is ready to
                         comply with and implement privacy safeguards before access is granted.


Recommendation(s)to      To improve the VA eligibility determination process, Congress should
                         consider amending section 6103(l)(7) of the Internal Revenue Code to
Congress                 permit VA access to tax data. Congress would need to weigh the potential
                         benefits of such disclosure with (1) privacy concerns and (2) IRS con-
                         cerns that expanding access in this way could affect voluntary compli-
                         ance with the tax system.


Action(s) Taken and/or   W h ile several proposals were introduced, no legislation to grant VA
                         access to third-party-reported tax return information had been enacted
Pending                  as of December 31, 1989.


Related GAO Product(s)   GAO/HRD-88-24,3/16/88;           GAO/HRD-85-31,5/2 l/85; and
                         GAO/HRD-84-72,6/5/84




                         Page 83                                         GAO/GGD-9046   Annual Tax Report
                         AppendLv II
                         Sununarles of Tax-Related Products Issued
                         Before Ned    Year 1989 With Open
                         Recommendations    to Congress 88 of
                         December 31.1989




                         (GAO/HRD-88-24,03/16/88)
Congress Should
&end the Internal        In response to a request from the Ranking Minority Member of the Sen-
Rekenue Code to          ate Committee on Veterans’ Affairs, GAO assessed VA'S Pension Program
                         to determine (1) how accurately it recorded beneficiary income, (2) the
Allow VA Access to       extent of overpayments in the program nationwide, and (3) whether
Ta@Information for       program access to tax data was warranted.
Usb in Administering     GAO found that (1) of the 1.4 million 1984 VA pension recipients, 698,000
the Veterans’Pension     had their income reported to IRS and SSA by third-party sources and of
pq%raJn                  those, 549,000 had $947 million more income on their tax records than
                         on the VA records; (2) because it did not include this income in its pen-
     /                   sion calculations, VA made potential overpayments of $182.5 million; (3)
     /                   more than 26,000 recipients reported no earned income to VA, while tax

   I/j
                         data showed earnings of at least $1,000 each; (4) some recipients
                         reported no earnings over several years while tax data showed signifi-
                         cant earnings in those years; and (5) about 60 percent of the overpay-
                         ments were solely attributable to unrecorded interest and dividend
                         income.

                         GAO also found that (1) VA could not identify about $157.2 million in
                         potential overpayments because it lacked access to tax data; (2) since VA
                         did not field-test its self-reporting questionnaires before using them,
                         design weaknesses could have added to the inaccurate reporting; and (3)
                         although allowing VA access to third-party-reported tax data would be
                         the most practical way to verify income, IRS has concern that using tax
                         data for nontax purposes may intrude into personal privacy and erode
                         public compliance with the nation’s voluntary tax system.


Recommendation(s) to     Given the potential savings and the absence of data on potential adverse
Congress                 consequences to the tax system and taxpayer privacy, Congress should
                         amend section 6103(l)(7) of the Internal Revenue Code to allow VA to
                         access tax information so it can verify the income information that VA
                         pension program beneficiaries report, investigate and resolve income
                         differences, and prevent similar recurrences.


Action(s) Taken and/or   In 1988, the Senate passed a bill amending section 6103(l)(7) of the
                         Internal Revenue Code to grant VA access to third-party-reported tax
Pending      u           return data to verify income and eligibility for any needs-based pensions
                         provided under any program administered by VA. No further congres-
                         sional action was taken in 1988.


                         Page 84                                       GAO/GGD-90-46   Annual   Tax Report
                        Appendix ll
                        Summaries of Tax-Related Products Issued
                        Before Fiscal Year 1989 With Open
                        Recommendations    to Congress as of
                        December 91.1989




                        Proposed legislation to grant VA’S successor, the Department of Veterans
                        Affairs, access to third-party-reported tax return information for
                        income verification purposes was reintroduced in Congress during 1989.
                        The House and Senate passed separate bills providing the Department
                        access to this tax data; but, as of December 31, 1989, no further action
                        had been taken.


R&/ted GAO Product(s)   GAO/HRD-87-62,9/2 l/87; GAO/HRD-85-3 1,5/2 l/85; and GAO/HRD-
                        84-72,6/5/84




                        Page 85                                     GAO/GGDSO-PG Annual   Tax Report
                         Appendix II
                         Summaries of Tax-Related Products Iesued
                         Before Fiscal Year 1989 With Open
                         Recommendations    to Congress aa of
                         December 31,1989




                         (GAO/GGD-8%69,07/25/88)
Corigress Should
Revise the Internal      In response to a request from the Joint Committee on Taxation, GAO
Redenue Code to          examined IRS’legislatively mandated efforts to curtail abusive tax shel-
                         ters, focusing on the effectiveness of (1) the tax shelter registration and
Significantly Increase   abusive shelter detection team programs in identifying abusive tax shel-
the, Penalty for         ters and (2) IRS efforts to administer the penalties Congress provided to
Ab I sive Tax Shelters   curb the sale and promotion of abusive shelters.
an J Reduce the Level    GAO found that (1) the registration program did not provide district
                         examination personnel with enough information to identify abusive tax
                         shelters or to initiate investigations; (2) the detection team program did
    ly the Penalty for   not provide district personnel with selection criteria to properly identify
                         the types of shelter cases considered potentially subject to penalties; (3)
                         although Congress raised the penalty to deter promotion and sale of
                         abusive tax shelters from 10 percent to 20 percent of the gross income
                         derived or to be derived from the shelter, promoters continued to have
                         financial incentives for promoting abusive shelters; (4) although IRS
                         assessed some penalties for persons who knowingly aided or abetted tax
                         shelter abuses, it could have assessed more penalties if the law required
                         a lesser burden of proof; (5) IRS either overlooked or incorrectly com-
                         puted the penalties in 16 of 29 cases GAO reviewed in three districts; (6)
                         IRS’computational errors totalled $4.2 million in penalty underassess-
                         ments; and (7) most of the errors occurred because IRS lacked penalty
                         guidance, internal controls to ensure appropriate penalties, and proce-
                         dures to detect errors and oversights and ascertain compliance with
                         regulations.


Recommend.ation(s) to    To reduce the financial incentive for promoting abusive tax shelters,
Congress                 Congress should modify Internal Revenue Code section 6700 to signifi-
                         cantly increase the penalty above the current 20 percent of gross income
                         derived, or to be derived, by any party involved with the promotion or
                         sale of an abusive shelter. To reduce the financial incentive for promot-
                         ing abusive tax shelters, Congress should modify Internal Revenue Code
                         section 6701 to reduce the level of proof from knowingly to “knows or
                         reasonably should have known” that the investor would understate tax
                         liability to ensure that all abusive shelters are subject to penalty for aid-
                         ing and abetting.




                         Page 86                                         GAO/GGD-90-46   Annual   Tax Report
                          Appendix LI
                          Summaries of Tax-Related Products Issued
                          Before Fiscal Year 1989 With Open
                          Recommendations    to Congress aa of
                          December 31,1989




Actj/qn(s) Taken and/or   The Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239, Dec. 19,
Penfhng                   1989) included, among other things, a provision to increase the penalty
                          to the lesser of $1,000 or 100 percent of the gross receipts derived from
                          the promotion of an abusive tax shelter. As of December 31, 1989, no
                          action had been taken to modify section 6701 I


Rel$ed GAO Product(s)     GAO/GGD-89-81, g/6/89




                          Page 87                                       GAO/GGD9046   Annual   Tax Report
                        Appendix II
                        Summaries of Tax-Related Products Issued
                        Before Fiscal Year 1989 With Open
                        Recommendations    to Congress as of
                        December 31,1989




                        (GAO/GGD-88-119,08/08/88)
Congress Should
Cobsider Requiring      In response to a request from the Chairman of the Senate Committee on
IR$ to Include in Its   the Budget, GAO addressed two questions: (1) Can Congress rely on IRS’
                        estimates of examination yield? and (2) Were the expected results of an
A&tual Budget           increase in examination staff in 1987 realized. For fiscal year 1987, Con-
Submission              gress had provided IRS funds to add 2,500 examination staff-an
Information on Actual   increase that IRS said would enable it to audit 120,000 more returns and
                        assess, as a result of those audits, $829 million in additional taxes, pen-
RebenuesDerived         alties, and interest.
FrbmI Audits            With respect to IRS’estimates of overall examination yield, GAO found
    1                   that (1) for each year since 1978, IRS has consistently underestimated
                        the amount of additional taxes that its examination staff would recom-
   II                   mend; (2) the annual underestimate averaged 28 percent over the period
                        and ranged from about $100 million in 1978 to about $3.8 billion in
                        1986; and (3) future estimates of revenues to be gained from audits
                        would be more reliable if IRS used more realistic assumptions-for
                        example, information IRS was using to compute the amount of additional
                        tax that would eventually be assessed as a result of audits came from
                        outdated data that IRS had compiled from tracking the results of audits
                        closed in 1972. IRS used that same tracking data to compute the “actual”
                        assessed amounts shown in its budgets but did not disclose in those bud-
                        gets that the “actuals” were really only estimates.

                        With respect to the yield realized as a result of the staffing increase
                        authorized for fiscal year 1987, GAO noted that (1) IRS estimated the
                        yield to be $847.5 million in assessed taxes, penalties, and interest even
                        though it did not achieve the examination staffing levels authorized for
                        fiscal year 1987 and did fewer audits than anticipated and (2) IRS’esti-
                        mate was significantly overstated because, among other things, IRS
                        failed to take into account the amount of potential revenue lost because
                        experienced examination staff was used to train and coach new staff
                        and thus was unavailable to audit returns.

~-
Recommendation(s) to    Congress should consider requiring IRS to include in its annual budget
                        submission information on the actual amount of revenues derived from
Congress                its audits.




                        Page 88                                       GAO/XX%9046   Annual   Tax Report
                         Appendix II
                         Summaries of Tax-Related Products Issued
                         Before Fiscal Year 1989 With Open
                         Recommendations    to Congress as of
                         December 31,1989




Action(s) Taken and/or   No steps have yet been taken to require including actual revenue in IRS'
Pend$ng                  budget, primarily because IRS has yet to devise a methodology for gener-
                         ating such numbers. In the meantime, IRSrevised the wording in its
                         budget request for fiscal year 1990 to make it clear that the “actual”
                         results were estimates.


Relatbd GAO Product(s)   GAO/GGD-88- 16,12/2/87




                         Page 89                                      GAO,‘GGD4O-46   Annual   Tax Report
Appendix III

L(gislative Actions Taken in 1989 on
G/A0 Recommendations

                Congress Restricted Mortality Charges on Single Premium
                    Life Insurance
                Tax-Exempt Mortgage Bonds Have Been Better Targeted                        92
                    to Those in Need
                Congress Revised Taxation of Single Premium Life                           94
                    Insurance
                Congress Extended IRS’Tax Refund Offset Program for                        96
                    Defaulted Student Loans
                Congress Amended the Bad Check Penalty                                     98




               Page 90                                     GAO/GGD-9046   Annual   Tax Report
                         Appendix Ill
                         Legislative Actlone Taken in 1989 on
                         GAO Recommendations




            *
Con(qess Restricted
Mo$ality Charges on      In response to a request from Congressman Fortney H. (Pete) Stark, GAO
Single Premium Life      (1) examined tax policy issues arising from life insurance companies’
                         use of higher-than-standard mortality charges to increase premiums and
Insyrance                (2) assessed how proposals to change the tax status of investment-ori-
    I                    ented life insurance addressed increased mortality assumptions.

                         GAO noted that policyholders of single premium life insurance and other
                         investment-oriented insurance products can shelter more money for
                         investment and have more funds available for low-cost, tax-free policy
                         loans, since life insurance companies can (1) set premiums based on the
                         mortality charges that they specify in the policies, (2) enhance policies’
                         investment potential by specifying charges in excess of those normally
                         considered reasonable for life insurance contracts, and (3) use higher
                         mortality charges to artificially inflate premiums for individuals who
                         are considered standard risks. In an examination of 40 single premium
                         life insurance policies, GAO found that 8 stated a maximum mortality
                         charge that was based on a rate of at least 2 times the standard rate.

                         GAO concluded that (1) recent legislative proposals curtailing the tax
                         advantages associated with investment-oriented life insurance did not
                         deal directly with excessively high mortality charges and (2) revision of
                         the cash value corridor test to disqualify certain contracts from
                         favorable tax treatment would eliminate excessive borrowing and
                         reduce the incentive to inflate mortality assumptions.


Action(s) Taken          The information in this report was used in the House of Representatives’
                         mark-up of proposed tax legislation, which evolved into the Technical
                         and Miscellaneous Revenue Act of 1988 (P.L. 100-647, Nov. 10, 1988).
                         The act, among other things, limited the ability of life insurers to specify
                         unreasonable mortality charges in a life insurance policy.


Related GAO Product(s)   GAO/GGD-88- 120FS, 8/8/88; GAO/T-GGD-88-20,03/15/88;            and GAO/
                         GGD-88-9BR, lO/ 16/87




                         Page 91                                        GAO/GGD90-46   Annud   Tax Report
                       Appendix III
                       Legislative Actions Taken in 1989 on
                       GAO Recommendations




Bonds Have Been        In a report to the Joint Committee on Taxation, GAO provided informa-
Better Targeted to     tion on the role of qualified mortgage bonds in providing financing for
                       single-family housing to first-time home buyers. Among the topics cov-
Those in Need          ered were (1) the characteristics of those assisted and (2) how those
                       households compare with other first-time buyers. Authority for state
                       and local governments to issue those bonds was due to expire in Decem-
                       ber 1988.

                       GAO found that (1) about two-thirds    of the 177,786 buyers in its sample
                       who received bond-assisted mortgage loans from January 1983 through
                       June 1987 could have bought the same house at the same time without
                       bond assistance; (2) assisted buyers generally had the same income,
                       racial, marital, and age characteristics as nonassisted buyers; and (3)
                       although about two-thirds of the assisted buyers were part of low- or
                       moderate-income households, their median income was similar to the
                       median income of all first-time buyers in metropolitan areas.

                       GAO also found that (1) the median reduction in assisted buyers’ interest
                       rate was 1.44 percent, or about $40 per month after taxes; (2) since
                       bond assistance did not affect factors such as the buyer’s ability to pur-
                       chase the home, it did little to increase affordability; (3) recent tax
                       reform laws may narrow the interest rate differential between tax-
                       exempt and taxable issues which could provide an even smaller increase
                       in affordability; and (4) the federal tax loss was about $25 million annu-
                       ally for every $1 billion of bonds issued and could cost $7.8 billion from
                       1989 through 1993.


Recommendation(s) to   GAO concluded that qualified mortgage bonds were an inefficient  and
                       costly way to provide assistance to first-time home buyers, served
Congress               mostly buyers who could afford homes anyway, and did little to
                       increase home affordability for low- and moderate-income people. As a
                       result, GAO questioned whether the bond issuance authority should be
                       extended.

                       If issuance authority were extended, however, GAO recommended that
                       Congress consider including in the Internal Revenue Code four require-
                       ments: (1) those being assisted cannot qualify to purchase the house
                       under conventional requirements; (2) all or a portion of the subsidy
                       should be recaptured at time of sale (based on the extent of appreciation
                       of house price); (3) income eligibility requirements should be adjusted


                       Page 92                                        GAO/GGD90-46   Annual   Tax Report
     ,.
 .
                         Appendix lII
                         Legislative Actions Taken in 1989 on
                         GAO Recommendations




                         for the purchaser’s household size; and (4) bond issuers and participat-
                         ing mortgage lenders should not be allowed to set aside mortgage funds
                         for specific developers.


Actiqn(s) Taken          Congress extended the authority to issue qualified mortgage bonds
                         through December 31, 1989, as part of the Technical and Miscellaneous
                         Revenue Act of 1988 (P.L. 100-647, Nov. 10,1988). The act also tight-
                         ened the targeting rules for these bonds. Among other things, it modified
                         the income restrictions to reflect different housing costs and family sizes
                         and provided for a recapture of a portion of the subsidy if the property
                         is sold within 10 years.


Related GAO Product(s)   GAO/RCED-88- 190BR, 06/27/88




                         Page 93                                       GAO/GGD-90-46   Annual   Tax Report
                        Appendix ItI
                        Legislative Actions Taken in 1989 on
                        GAO Recommendations




                        (GAO/T-GGD-8%20,03/E/88)
CcjngressRevised
Tdxkion of Single       In testimony before the Subcommittee on Select Revenue Measures,
P+mium Life             House Committee on Ways and Means, GAO discussed (1) the sales, fea-
                        tures, and tax treatment of single premium life insurance and (2) poten-
Inburance               tial approaches for changing the tax-favored status of single premium
                        life insurance products.

                        Single premium life insurance policies (1) allow one large premium pre-
                        payment, (2) combine death benefits with earnings, which accumulate
                        tax-free, and (3) allow loans against the policies at little or no cost
                        because the income on the funds offsets the interest charges. GAO found
                        that (1) single premium life insurance sales grew 850 percent between
                        1984 and 1987, from $1 billion to $9.5 billion, while premium sales on
                        new periodic-pay policies during the same period grew 20 percent, from
                        $8.3 billion to $10 billion; (2) because recent legislation resulted in the
                        loss of traditional tax shelters, single premium life insurance products
                        made good alternatives to certificates of deposit and money market
                        holdings; and (3) these policies seemed inconsistent with congressional
                        efforts to constrain tax advantages for investment-oriented life insur-
                        ance products.


Recommendation(Is) to   GAO recommended that Congress consider legislative remedies that
Congress                would eliminate the tax advantage associated with investment-oriented
                        single premium life insurance products. Two alternatives were dis-
                        cussed-one would treat tax loans from single premium policies as
                        income in the year withdrawn, the other would remove favorable tax
                        treatment from policies if loans reduced death benefits below certain
                        levels.


Action(s) Taken         One intention of the Technical and Miscellaneous Revenue Act of 1988
                        (P.L. 100-647, Nov. 10, 1988) was to discourage the purchase of life
                        insurance as a tax-sheltered investment vehicle. The act created a new
                        category of products called modified endowment contracts-any        policy
                        funded at a more rapid rate than seven equal annual premiums. The act
                        required that loans or other amounts received from these contracts
                        would be taxable to the extent of the interest that had built up inside
                        the policies. Thus, single premium policies would be classified as modi-
                        fied endowment contracts, and loans from them would be taxable. This
                        provision, therefore, is consistent with the thrust of GAO'S
                        recommendation.


                        Page 94                                        GAO/GGD-90-46   Annual   Tax Report
   l



                                    A p p e n d i x III
                                    Legislative Actiona T a k e n in 1 9 8 9 o n
                                    G A O Recommendations




R e la te dG A O P r o d u c t(s)   G A O /G G D - 8 8 - 1 2 0 F S8, /8 /8 8 ; G A O /G G D - 8 8 - Q & 6 /1 4 /8 8 ;a n d G A O /
                                    G G D - 8 8 - Q B R1, 0 /1 6 /8 7




                                    Page 95                                                        G A O /G G D - 9 0 4 0 A n n u a l Tax Report
                        Appendix III
                        Legislative Actions   Taken in 1989 on
                        GAORecommendations




                        (GAO/HRD-87-76,09/30/87)
Cc/ngressExtended
IR ’Tax Refund          In response to a request from the Subcommittee on Postsecondary Edu-
0 frifset Program for   cation, House Committee on Education and Labor, GAO examined needed
                        legislative and regulatory changes for the Department of Education’s
Ddfaulted Student       Guaranteed Student Loan Program, focusing on (1) guaranty agencies’
LGans                   loan collection practices and procedures, (2) ways to reduce default
                        costs, (3) the amount of time defaulters have to repay loans, and (4)
                        whether guaranty agencies are promptly remitting Education’s share of
                        collections.

                        GAO found that (1) new regulations require all guaranty agencies to
                        standardize collection practices and follow specific actions to collect
                        defaulted loans, (2) 1986 legislation should help to reduce defaults and
                        increase collections by requiring guaranty agencies to report repayment
                        patterns to credit bureaus and requiring defaulters to pay reasonable
                        collection costs, (3) the establishment of a National Student Loan Data
                        System should help to further reduce costs by providing means to verify
                        eligibility, (4) new regulations require guaranty agencies to share all
                        default payments made on reinsured loans with Education, (5) guaranty
                        agencies allow longer repayment periods than Education and have 60
                        days to remit default collections to Education, (6) Education collected
                        about $117 million in income tax refund offsets from loan defaulters for
                        tax years 1985 and 1986, and (7) the offset program’s cost was small
                        compared to its results.


Recommendation(s) to    GAO recommended that Congress continue the offset program for tax
Congress                years 1987 and 1988 for defaulted student loans.



Action(s) Taken         In the Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203) Con-
                        gress extended the refund offset program until July 1,1988, and
                        required that GAO study the effectiveness of the program and report on
                        the results by April 1989. GAO issued its report (GAO/GGD-89-60) on April
                        25, 1989.

                        On October 13, 1988, Congress passed the Family Support Act of 1988
                        (P.L. lOO-485), which extended the refund offset program to January
                        10, 1994.




                        Page 96                                       GAO/GGD9046   ANIU~   Tax Report
                     Appendix tll
                     Legldatlve Actions Taken in 1989 on
                     GAO Recommendations




Relat$d Product(s)   GAO/GGD-89-60,4/25/89; GAO/HRD-88-52BR, l/7/88; GAO/HRD-88-
                     72,8/31/88; GAO/GGD-87-39BR, 2/g/87; and GAO/HRD-86-114BR,
     I               7/17/86




                     Page 97                               GAO/GGD-90-46   Annual   Tax Report
                       Appendix IlI
                       Legislative Actiona Taken in 1989 on
                       GAO Recommendations




Cbngress
BedCheck Penalty       In a briefing report to the Joint Committee on Taxation, GAO presented
                       the results of its review of IRS' administration of the bad check penalty.
                       GAO'S objectives were to determine (1) the number of bad checks
                       returned to IRS by depositories, (2) the extent to which IRS assessed the
                       penalty against taxpayers submitting such checks, and (3) the extent to
                       which penalty assessments covered the costs of processing bad checks
                       and assessing penalties.

                       GAO found that (1) IRS assessed penalties on 82 percent of the 184,000
                       checks that depositories returned during the first 6 months of 1986, (2)
                       it did not assess penalties on the balance because it determined that they
                       were tendered in good faith, (3) the deterrent effect of the bad check
                       penalty was difficult to determine because taxpayers who submitted
                       bad checks were also subjected to bank processing charges and other IRS
                       penalty and interest assessments which acted as deterrents, (4) IRS
                       processing costs exceeded the amount of the penalty assessment for
                       about 69 percent of the bad checks it processed during the first 6
                       months of 1986, and (6) the l-percent penalty for bad checks written for
                       large amounts more than offset the costs to process checks written for
                       smaller amounts.


Recommendation(s) to   Since the bad check penalty had remained unchanged since 1954, GAO
Cdngress               recommended that Congress consider whether the penalty was still
                       appropriate and the extent it should serve as a deterrent or to recover
                       processing costs.


Action(s) Taken        The Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647,
                       Nov. 10, 1989) increased the penalty to 2 percent of the check’s amount.
                       If the amount of the check or money order is less than $750, the penalty
                       is the lesser of $15 or the amount of the check or money order.




                       Page 98                                       GAO/GGD90-46   Annual   Tax Report
Appendix IV

Lis@ .ngof Open Recommendationsto Congress



                                                                                                                                              Page
                                             the Restriction Against Requiring Employers to Prospectively   Reclassify Employees Who
                                                                                                                                                32


                                                             to Better Assess the Effects of Section 127 of the Internal Revenue Code
                                                                                                                                                 72
                                                                                                                                               - 79
                                                                                       for Certifying Social Security Earnings                   81
                                                                                         to Tax Information for Use in Administering    the
                                                                                                                                                83
                                                                                             for Use in Administering   the Veterans’
                                                                                                                                                a4
                                                                                              Abusive Tax Shelters and Reduce the
                                       ~-~--           --                                                                                       86
Congresi     Should Consider~Requ%glRS     to Include in Its Annual Budget Submission Information on Actual Revenues Derived from
Audits   ;                                                                                                                                      88




                            Y




                                                 Page 99                                                     GAO/GGD-90-46    Annual    Tax Report
  I
Apbendix V

L/sting of RecommendationsMade in F’iscall
qear 1989 to the Commissioner of
I&ernal Revenue
    1

    /                                                                                                                                              Page
Vali ate the Design Approach for the Nationwide Electronic Filing System Before Selecting and Funding a System and Take Action to                     -
Ens t re Better .-Management
                   . .._ ..-..-.       in Contracting for ADP Support Services                                                                        14
Establish a Sound and Consistent Methodology for Estimating the Benefits of IRS’ Automated Examination System and Develop a
StraEegy for Integrating That System With IRS’ Tax System Modernization Effort                                                                        18
Improve IRS’ Business Nonfiler Program                                                                                                                23
Better Protect the Collection of Tax Revenues on Completed Criminal Prosecution Cases                                                                 25
Ma e Methodological Changes to Improve Future IRS Studies of the Refund Offset Program’s Effects on Compliance With Tax Laws                          77
    4
Hel State and L&at-?&ernn%ts                    Understand and Comply With Information Reporting Requirements
                               -.-._~-                                                                                                           --.. 29
Imp ove IRS’ Procedures for Ensuring Businesses’ Compliance With Requirements to File Information Returns on Payments to
Ind e”pendent Contractors                                                                                                                             31
Mat h~lndependent &$%%rs’?nformation                      Returns With Their Tax Returns to Better Identify Employers Who Misclassify Employees
as IPdependent Contractors                                                                                                                            32
Est
  .   blish Procedures        for  Periodically
                     ~. -.--. ..- . .            Evaluating  a  Planned    Nationwide   Levy Program  for Deferred Accounts, If Implemented           35
Hel Ensure More Efficient Use of Collection Resources by Improving the Process for Collecting loo-Percent Penalties                                   37
Im rove IRS’ Management to Assure Quality            __l--Service   in the Future                                                               _.- 50
Proc ide Conoress
             -.- ._----with
                          -~ Bette?nfo%na%~on            the Level of Service Being Provided Through the Toll-Free Telephone Assistance Program       65
Require Reporting of Information Needed to Enforce                 the
                                                           -_________-  Volume   Limit on Certain Tax-Exempt   Bonds                                  68
lmdrove Administration of Section 265 Dealina With Tax-Exemot Interest Income




                                                   Page 100                                                       GAO,‘GGD9043     Annual   Tax Report
                    .




A p p e n q b xV I
          I
C o n o logicaiL istin g o f G A O P r o d u c tso n T a x
M3 te rs Issu e din F’iscaYl e a r 1 9 8 9




 .~...   ~ - --I~           ..-..   ._.--

E ffective! Implementation of the Tax R e f o r m Act L e d to Uneventful 1 9 8 8 ’Filing S e a s o n ( G A O /G G D - 8 9 - 2 )                                                      11/14;88
fkS’.Dati on-Its Investigations-.-. _--- of E m p l o y e e Misconduct ( G A O /G G D - 8 9 - 1 3 ) -                                                                                 11;18;88
IRS’C o m b i n e d A n n u a l W a g e R e p o r t i n g Reconciliation P r o g r a m ( G A O /G G D - 8 9 - 2 1 )                                                                   12/14/08
D e d u c t i n a Interest o n F u n d s B o r r o w e d to P u r c h a s e o r Carry T a x - E x e m p t B o n d s ( G A O /G G D - 8 9 - 1 4 )                                      12/19/88
L a b o r a 1 d IRS E n f o r c e m e n t-----.-
                                           of the E m p l o y e e Retirement l n d o m e Security Act ( G A O / H R D - 8 9 - 3 2 )                                                   01;23;89
Accessibility, Timeliness, & r d Accuracy of IRS’T e l e p h o n e Assistance P r o g r a m ( G A O /G G D - 8 9 - 3 0 )                                                              02/02/09
Periodic/Evaluation~Nkeded%RS%se~vies                                  to Collect D e f e r r e d Accounts ( G A O /G G D - 8 9 - 3 4 )                                               02/i 4 / 8 9
Economic, Admrnistrative, a n d T a x p a y e r C o m p l i a n c e Aspects of a G r o s s I n c o m e Tax ( G A O /G G D - 8 9 - 3 6-I)                                              02/l 6 1 8 9
H o w P r & i s e A r e if% Estimates of T a x p a y e r s ‘Calling for’Assistance? ( G A O /G G D - 8 9 - 3 1 )                                                                      02;21;89
Testimohy O n - A c t i o n s - N e e d e d to A s s u r e Quality IRS Service in the Future ( G A O /T-G G D - 8 9 - 6 )                                                             02/22/89
P r o g r e s $ In Installing IRS’C o m m u n i c a t i o n s R e p l a c e m e n t System ( G A O / I M T E C 8 9 - 1 4 )                                                            02/22/89
Analysijof P r o p o s a l f o r ~ d r r ~ ~ f e p ~ s i t of I n c o m e Tax R e f u n d s ( G A O / I M T E C - 8 9 - 3 4 )                                                         02/24/89
Interest o n Tax R e f u n d s P a i d b y IRS in 1 9 8 8 ( G A O /G G D - 8 9 - 4 2 )                                                                                                03/07/89
Improving IRS’B u s i n e & N o n % r P r o g % m               ( G A O /G G D - 8 9 - 3 9 )                                                                                          03/08/89
Testrmony o n IRS’. T e l e p h o n e Assistance P r o g r a m ( G A O /T-G G D 8 Q 1 3 )                                                                                             03/ 1 5 / 8 9
R e d u c i n g Delays-in the Pursuit of Tax R e v e n u e o n C l o s e d Criminal C a s e s ( G A O /G G D - 8 9 - 4 1 )                                                            03/l 6 1 8 9
Testimony o n the-Status of the 1 9 8 9 Tax R e t u r n Filing S e a s o n ( G A O /T-G G D - 8 9 - 1 2 )                                                                             03/i 6 1 8 9
Testimohy o n IRS’ P r o g r e s s % % n p G e n t i n g Its Electronic Filing a n d C o m m u n i c a t i o n s R e p l a c e m e n t Systems                                        03/l 6 1 8 9
( G A O /T;IMTEC-89-2)
Testrmony o n the A d ’~ inistraiion~iiscal Y e a r 1 9 9 0 B u d g e t P r o p o s a l s For IRS a n d the Tax Court ( G A O /T-G G D - 8 9 - 1 6 )                                  04/04/89
Testimony o n the B u d g e t a r y Implications of IRS’Tax System M o d e r n i z a t i o n a n d A u t o m a t e d E x a m i n a t i o n System E fforts                            04/04/89
( G A O /T-IMTEC-89-4)
S tatus of IRS S tudies of~thsReTund~ffset P r o g r a m ( G A O /G G D - 8 9 - 6 0 )                                                                                                 04/25/89
S tate a n d L o c a l C o m p l i a n c e W ith IRS’Information R e p o r t i n g R e q u i r e m e n t s ( G A O /G G D - 8 9 - 6 3 )                                               05/04/a<
IRS N e e d s to Assess D e s i g n Alternatives for Its Electronic Filing System ( G A O / I M T E C - 8 9 - 3 3 )                                                                   05/05/09
                                                         --~~.---_I_
R e v e n u e Potential of Restoring             Excise
                                             .---~~   .~ ~ ~ -Taxes
                                                               -           to Past Levels ( G A O /G G D - 8 9 - 5 2 )                                                                05/09/8%
Testimdnv o n the Information R e t u r n R e q u i r e m e n t s for I n d e p e n d e n t Contractors ( G A O /T-G G D - 8 9 - 2 1 )                                                05/l 6 1 8 9
E ffect of C h a n g e s i n b r o c u r e m e n t a n d Tax Policy o n the D e f e n s e Industry ( G A O / N S I A D - 8 9 - 1 2 1 )                                                05;17;89
Testrmdny o n C o l l e g e S tudents’ P & % $ i o n s of the F e d e r a l G o v e r n m e n t a s a n E m p l o y e r ( G A O /T-G G D - 8 9 - 3 2 )                               06/l g / a 9
IRS’Interpretative G u i d a n c e l m & m e n % g t h e                      Tax R e f o r m Act ( G A O /G G D - 8 9 - 4 0 )                                                       06/l 9 1 0 9
Tax-Credit a n d Subtraction-Methodsf                           Calculating V a l u e - A d d e d Tax ( G A O /G G D - 8 9 - 8 7 )                                                   06/20/89
IRS’A u t o m a t e d E x a m i n a t i o n ~ s y s t e m - T r o u b l e d Past, Uncertain Future ( G A O / I M T E C - 8 9 - 5 4 )                                                 06/22/89
lnsuffrclent Information to & .essEffect                         of Tax F r e e E d u c a t i o n Assistance ( G A O /G G D - 8 9 - 7 6 )                                            06/23/89
H i g h e r Excise Tax S h o u l d - % $ % & % l y R e d u c e the N u m b e r of S m o k e r s ( G A O / H R D 8 9 - 1 1 9 )                                                        06/30/89
Costs Associated W i t h ~ L ~ ~ n c o & % % s i n g                      Tax Credit Partnerships ( G A O /G G D - 8 9 - 1 O O F S )                                                 07/l O /89
S tatis& o n IR$‘% s e of Levies      -           to   Collect
                                              .--.-. -.-            D  e l i n q u e n t Taxes ( G A O /G G D - 8 9 . 9 7 F S )                                                      0 7 /I 7 1 8 9
                                                                                                                                                                                   (continued)




                                                                   Page 101                                                                        G A O /G G D - 9 0 - 4 6 A n n u a l Tax Report
                                                   Appendix VI
                                                   Chronological Lbting of GAO Products on
                                                   Tax Mattern Issued in Fiscnl Year 1989




Testihonv on the Re liability of IRS’ Data on Investigations of Alleged Employee Misconduct      (GAO/T-GGD-89-38)                    07/27/09
Rest/Its  of IRS’
..__,~~_._.,     ._ --Mid-Fiscal
                        ._         Year 1989 Financial
                                                . _ Review (GAO/Gc
             _ . ..___   _... .--- .-_.. _-_               \_   , id-894 16)                                                          08/l 8189
IRS an lmorove the Process for Collectina loo-Percent Penalties (GAO/GGD-89-94)
  -T-      ‘1.~                                                       .
                                                                                                                                      08121 I89
?heE%%%h               Tax C&fit Has Stimulated Some Additional Research Spending (GAO/GGD-89-114)                                    09;05;89
Opti ns for Civil Penalty Reform (GAO/GGD-89-81)                                                                                      09/06/89
         P
  . ..-- “.J ...--r-..-
Missinn        lndennndent-... Contractors’     .-.. . . Returns Not Alwavs, Detected (GAO/GGD-89-l
                               __.... -- .__ Information                              .    ,        l( 1)                             09/08/89
~&~-Added~&?ssues                                                             '5RRb
 .._._ .-..-.._-. -..-.-.- --.- for U.S. Tax Policymakers (GAO/GGD-89.12,-.       .,                                                  09/l 5189
The insurance Excise Tax and Comoetition for U. S. Reinsurance Premiums (GAO/GGD89-115BR)                                             09125189
                                                                                                                                      I
lnfor/natron
          _..._. Returns
                    .-_ . Can Be Used tb Identify Employers Who Misclassify Workers (GAO/GGD89v107)                                   09/25/89
1984 Annual Report on GAO’s Tax-Related Work (GAO/GGD-89-106)                                                                         09129 189




                      Y




                                                   Page 102                                                   GAO/GGD-SO-46 Annual   Tax Report
Amen&            VII

L&king of Assignments for Which GAO Was
Akhorized Access to Tax Data in Fiscal
Ye&r 1989

Subject/matter
..-----                                 Objectiver
Insurancb Excise Tax                    To examine (1) how IRS administers the insurance excise tax, (2) IRS procedures and
         /                              techniques for identifying potential nonfilers, (3) the role of tax treaties in the administration
                                        and collection of excise taxes, (4) IRS’ enforcement of the tax in the United States and in
                                        treaty and non-treaty countries, and (5) industry and taxpayer data on insurers and
..----+       ______                    reinsurers that do business in the United States but reside overseas.
Tax Ref --
-...-     rm Act’s Effect on Shipping   To study the effect of the Tax Reform Act of 1986 on the shipping industry.
Cost to4 rain IRS Revenue Agents        To determine the extent to which experienced examination staff are used to train newly hired
____--._~!-                             revenue agents and the cost, in terms of foregone revenue, of that training.
Partnerdhio Tax Returns                 To review (1) IRS’ methodoloav for selecting partnership tax returns for examination and (2)
            ’
-...___._ ___~                          the effectiveness of the examination process.
Cash Vjrsus Accrual Accounting          To (1) evaluate the reasons why some business organizations are allowed to use the cash
                                        method of accountin as o posed to the accrual method and determine if the rationale is
                                        still valid and justifie 8 tn lrg
                                                                       + t of the increasing budget deficit and (2) analyze the tax burden
          ,                             borne by those usina the accrual method.




                                         Page 103                                                     GAO/GGD-9046     Annual   Tax Report
Major Contributors to This Report


   1
   I


G neral Government
D f vision, Washington,   issues
                          Joseph T. Valonis, Evaluator-in-Charge
DiC                       Larry H. Endy, Assistant Director
                          Natwar M. Gandhi, Assistant Director
                          Martin S. Morris, Tax Attorney
                          Gerald Stankosky, Assistant Director
                          Charles L. Vehorn, Assistant Director
                          Lynda D. Willis, Assistant Director


                          Hazel E. Edwards, Assistant Director
Ir$formation
Management and
Tiechnology Division,
Washington, D.C.




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