oversight

Tax Policy and Administration: 1996 Annual Report on GAO's Tax-Related Work

Published by the Government Accountability Office on 1997-07-01.

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

                 United States General Accounting Office

GAO              Report to the Joint Committee on
                 Taxation



July 1997
                 TAX POLICY AND
                 ADMINISTRATION
                 1996 Annual Report on
                 GAO’s Tax-Related
                 Work




GAO/GGD-97-122
          United States
GAO       General Accounting Office
          Washington, D.C. 20548

          General Government Division

          B-277179

          July 1, 1997

          The Honorable Bill Archer
          Chairman
          The Honorable William V. Roth, Jr.
          Vice Chairman
          Joint Committee on Taxation

          Over the years, the General Accounting Office has provided Congress, the
          executive branch, and the public with detailed information on and
          objective analyses of the nation’s tax system. As part of our responsibility,
          we have studied both the revenue side of the budget—tax receipts that
          finance federal government operations and tax expenditures that promote
          numerous social and economic objectives—and the federal agency that
          administers the tax code, the Internal Revenue Service (IRS).

          Some of our reports and testimonies have addressed how IRS collects
          delinquent taxes, responds to taxpayers’ inquiries, and plans to modernize
          its operations to improve productivity and better manage its finances.
          Other reports and testimonies have described how tax system reforms and
          the growth of tax expenditures affect IRS’ operations and taxpayers’
          compliance burden. Still others have discussed ways to narrow the gap
          between the amount of outstanding taxes owed by individuals and
          businesses and the money IRS collects.

          This report summarizes the studies we issued during fiscal year 1996 to
          Congress and IRS and the statements we made before Congress and the
          National Commission on Restructuring the Internal Revenue Service. For
          the year, we published 50 reports under 6 broad areas:

      •   IRSmanagement and budget,
      •   individual and business tax issues,
      •   customer service,
      •   submission processing,
      •   accounts receivable/collections, and
      •   tax expenditures and preferences.

          The following pages highlight notable reports and testimonies from these
          areas. Appendix I summarizes all of our fiscal year 1996 products, and
          appendix II lists them chronologically.




          Page 1                                    GAO/GGD-97-122 1996 Annual Tax Report
                         B-277179




                         IRSis in the midst of reorganizing and reengineering its major
IRS Management and       technological, organizational, operational, and financial processes.
Budget                   Through its reengineering efforts and Tax Systems Modernization (TSM)
                         program, IRS plans to introduce new technology to support these and other
                         changes directed toward making it a more efficient organization. However,
                         as a result of tighter budgets and increasing congressional concern over
                         the pace of its modernization, IRS is rethinking its business vision and
                         rescoping its planned changes.

                         Tax Systems Modernization: Progress in Achieving IRS’ Business Vision
                         (GAO/T-GGD-96-123, May 9, 1996). In hearings before the Senate Governmental
                         Affairs Committee, we described IRS’ progress toward achieving its vision
                         for improving its operations by the year 2001 and its plans for using TSM in
                         support of that vision. IRS’ vision calls for organizational, technological,
                         and operational changes in processing tax returns, providing customer
                         service, and ensuring compliance with tax laws. IRS has made some
                         progress in modernizing its operations but still falls far short of its vision.

                         One of the biggest problems facing IRS has been its inefficient system for
                         processing most tax returns. It had not significantly reduced the number of
                         paper returns it processes, nor had it delivered the new systems needed to
                         process paper documents more efficiently. IRS’ efforts to improve
                         customer service have also fallen short. Even if taxpayers were able to
                         reach IRS, agency assistors did not always have the information readily
                         available to answer their questions, and IRS has been slow in changing
                         work processes and implementing new information systems. Furthermore,
                         budget reductions and concerns over taxpayer burden led IRS to cancel or
                         postpone certain programs that were intended to help improve
                         compliance. Until IRS successfully modernizes its processes and
                         operations, we do not believe it will achieve its business vision.

                         Managing IRS: IRS Needs to Continue Improving Operations and Service
                         (GAO/T-GGD/AIMD-96-170, July 29, 1996). In our first statement before the
                         National Commission on Restructuring the Internal Revenue Service, we
                         shared some of the long-standing challenges that IRS faces as it strives to
                         improve its organization, operation, processes, and customer service.
                         These challenges include

                     •   the inefficient manner in which IRS processes most tax returns;
                     •   the managerial, technical, and human resource obstacles that hinder IRS
                         from fulfilling its customer service vision;




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                      •   the problems that continue to undermine the effectiveness of IRS’
                          collection programs;
                      •   the need to resolve serious financial management problems that affect the
                          reliability of its financial statements; and
                      •   the need to better coordinate its reengineering efforts, which could
                          generate new business requirements that are not addressed by TSM
                          projects or that make some of those projects obsolete.

                          Financial Audit: Examination of IRS’ Fiscal Year 1995 Financial Statements
                          (GAO/AIMD-96-101, July 11, 1996). In accordance with the Chief Financial
                          Officers Act of 1990, this report to Congress presented the results of our
                          efforts to audit IRS’ Principal Financial Statements for fiscal years 1995 and
                          1994. The report discussed IRS’ continuing financial management problems
                          in such areas as reconciling taxpayer revenue and refund accounts,
                          substantiating the amounts of various types of taxes it collects, verifying
                          nonpayroll operating expenses, and reliably reporting its accounts
                          receivable balances. It also described IRS’ weaknesses in its controls over
                          recordkeeping and computer security, and it contained our formal
                          opinions and reports on IRS’ financial statements, internal controls, and
                          compliance with laws and regulations.


                          IRSdata indicate that the portion of the gap between taxes owed and paid
Individual and            that can be attributed to individual taxpayers amounts to about $94 billion
Business Tax Issues       per year. Of that amount, the failure to report income accounts for about
                          $73 billion. Tax law changes as well as changes to IRS’ taxpayer guidance
                          could increase compliance by making it easier for taxpayers to comply
                          with tax laws. Changes in IRS’ enforcement programs could make these
                          programs more effective and less intrusive on taxpayers.

                          Businesses play a significant role in our tax system. They not only pay
                          income taxes but are also responsible for providing information to taxing
                          authorities about payments to individuals and for withholding income and
                          Social Security taxes from employees’ salaries. IRS data indicate that the
                          portion of the tax gap attributable to corporate taxpayers amounts to
                          about $33 billion per year. Of this amount, large corporations account for
                          about $24 billion, and small corporations account for about $7 billion.
                          Businesses, particularly large corporations, also spend considerable sums
                          of money resolving disputes with IRS over audit results.

                          Internal Revenue Service: Results of Nonfiler Strategy and Opportunities
                          to Improve Future Efforts (GAO/GGD-96-72, May 13, 1996). Our report to the



                          Page 3                                    GAO/GGD-97-122 1996 Annual Tax Report
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    Commissioner of Internal Revenue discussed our review of IRS’ strategy,
    which began in fiscal 1993, to bring an estimated 10 million individual and
    business nonfilers back into the system and keep them there. We assessed
    the results of IRS’ strategy and determined whether opportunities existed
    to improve any future nonfiler efforts.

    According to IRS, the Nonfiler Strategy was generally a success. The
    agency (1) reduced the size of the nonfiler inventory; (2) eliminated
    unproductive cases, which allowed it to focus enforcement resources
    more effectively; and (3) increased the number of returns secured from
    individual nonfilers.

    However, although IRS achieved its goal of reducing the backlog of nonfiler
    investigations, it was unclear how much, if at all, voluntary taxpayer
    compliance improved as a result of the strategy. The absence of
    comprehensive cost data made it difficult to assess the return on IRS’
    investment.

    We identified several areas in which opportunities existed to improve any
    future effort directed at nonfilers. These opportunities related to (1) the
    time it took IRS to make telephone contact with nonfilers; (2) the use of
    higher graded staff to perform tasks that might have been effectively
    performed by lower graded staff; and (3) procedures for dealing with
    recidivists—that is, nonfilers who were brought into compliance and then
    became nonfilers again. We also recommended establishing measurable
    goals and developing comprehensive data on program costs.

    Tax Administration: IRS Is Improving Its Controls for Ensuring That
    Taxpayers Are Treated Properly (GAO/GGD-96-176, Aug. 30, 1996). In this
    report to the Chairman of the Senate Finance Committee, we addressed
    continuing allegations of taxpayer abuse by IRS employees years after the
    enactment of the Taxpayer Bill of Rights in 1988. We studied

•   the adequacy of IRS’ controls to protect against taxpayer abuse;
•   the extent of information available concerning abuse allegations received
    and investigated by IRS, the Department of the Treasury’s Office of
    Inspector General (OIG), and the Department of Justice; and
•   the role of the Inspector General in investigating abuse allegations.

    Owing to the lack of specific data elements on taxpayer abuse in the
    information systems at IRS, Treasury’s OIG, and the Department of Justice,
    we were unable to determine the adequacy of IRS’ system of controls that



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                   are used to identify, address, and prevent instances of abuse. However, we
                   were encouraged by IRS’ decision to develop a taxpayer complaint tracking
                   system that essentially adopts the definition of taxpayer abuse that is
                   included in our 1994 report.1


                   IRS’“Customer Service Vision” guides its efforts to improve customer
Customer Service   service. The vision is founded on increased accessibility, including
                   up-front problem identification, improved notices and publications,
                   telephone interaction in lieu of correspondence, one-stop service, and
                   blended work groups. As part of this effort, IRS is identifying new ways to
                   improve service and developing systems to support this service.

                   Tax Administration: IRS Faces Challenges in Reorganizing for Customer
                   Service (GAO/GGD-96-3, Oct. 10, 1995). As part of our continuing efforts to
                   provide Congress with the information and analyses it needs to improve
                   IRS’ tax administration, we reviewed the progress IRS was making toward
                   achieving its customer service vision. Our report discussed (1) IRS’ goals
                   for customer service and its plans to achieve them, (2) the gap between
                   current performance and these goals, (3) agency progress to date,
                   (4) current management concerns, and (5) several important challenges IRS
                   faces.

                   We found that although IRS had made some progress toward its customer
                   service vision, the agency’s lack of clarity in management responsibilities
                   had, to some extent, hampered its ability to implement its customer
                   service plans. IRS expects to improve its customer service by having fewer
                   work locations and automated workload management, giving customer
                   service representatives better access to taxpayer accounts, improving
                   taxpayer accessibility to telephone service, and allowing taxpayers to
                   resolve their inquiries after a single telephone contact. IRS has been
                   particularly slow, however, in improving taxpayer accessibility and
                   reassigning staff to customer service centers.

                   IRS needs to determine how to manage the transition to a different
                   organization while maintaining its ongoing workload, decide what the role
                   of customer service representatives will be, develop and effectively use
                   new information technology, and devise ways to measure the work of new
                   customer service centers and balance their competing workloads. We
                   recommended that IRS assign ownership and clearly define roles and


                   1
                    Tax Administration: IRS Can Strengthen Its Efforts to See That Taxpayers Are Treated Properly
                   (GAO/GGD-95-14, Oct. 14, 1994).



                   Page 5                                                 GAO/GGD-97-122 1996 Annual Tax Report
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             responsibilities for its projects and emphasize the need to develop, test,
             and implement new customer service products and services.

             Tax Administration: Making IRS’ Telephone Systems Easier to Use Should
             Help Taxpayers (GAO/GGD-96-74, Mar. 11, 1996). At the request of the House
             Subcommittee on Oversight, Committee on Ways and Means, we reviewed
             IRS’ development and use of interactive telephone systems to improve
             customer service, focusing on IRS’ efforts to make the telephone systems
             easier to use, protect taxpayer data, and assign responsibility for providing
             developers with systems requirements information.

             Three prototype interactive telephone systems—designed to reduce
             correspondence between IRS and taxpayers and to make the agency more
             accessible—suffered from too many menu options and other problems.
             Future interactive systems may require more safeguards to protect
             taxpayer data.

             Resolving the shortcomings in the current systems is essential if IRS is to
             achieve its goal of increasing interactive telephone assistance to
             45 percent of taxpayers’ calls. We recommended that IRS conduct a
             cost-benefit analysis of the actions needed to overcome the problems of
             too many menu options, including the addition of multiple toll-free
             numbers and publication of written instructions on how to use the
             interactive menus.


             IRS’ current procedures for processing tax returns are dependent on
Submission   antiquated technology, which will eventually be replaced through TSM.
Processing   Critical in that regard is the extent to which IRS can increase electronic
             filings. Meanwhile, existing systems and capabilities must continue
             functioning.

             Tax Administration: Electronic Filing Falling Short of Expectations
             (GAO/GGD-96-12, Oct. 31, 1996). In a report to the Senate Committee on
             Governmental Affairs, we discussed IRS’ progress in broadening the use of
             electronic filing, the availability of the data needed to develop an
             electronic filing strategy, and the implications for IRS if it does not
             significantly reduce its paper processing workload.

             Although IRS has some data on the cost of processing electronic and paper
             returns, it does not have comparative data on other costs, such as storage
             and retrieval, that can vary depending on how a return is filed. IRS also



             Page 6                                    GAO/GGD-97-122 1996 Annual Tax Report
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                           does not have adequate data on why taxpayers do not file electronically
                           and what it would take to get them to do so, nor does it have estimates on
                           the number of electronic returns it could expect to receive after some
                           market intervention.

                           We recommended that IRS (1) identify those groups of taxpayers who offer
                           the greatest opportunity to reduce IRS’ paper processing workload and
                           operating costs if they filed electronically and (2) develop strategies that
                           seek to eliminate impediments that inhibit those groups from filing
                           electronically. We also recommended that IRS adopt electronic filing goals
                           that focus on reducing the paper processing workload and operating costs
                           and prepare contingency plans for the possibility that electronic filings
                           will fall short of expectations.


                           IRS’ accounts receivable is recognized by us and the Office of Management
Accounts Receivable/       and Budget (OMB) as a high-risk area. The primary reason for this
Collections                designation is that IRS’ efforts to collect the tens of billions of dollars
                           taxpayers owe in delinquent taxes have been inefficient and unbalanced.
                           Despite many initiatives to correct its accounts receivable problems, IRS
                           has made little sustained progress in resolving the problems at the root of
                           its collection performance.

                           Tax Administration: IRS Tax Debt Collection Practices (GAO/T-GGD-96-112,
                           Apr. 25, 1996). During its review of IRS’ debt collection practices, the House
                           Ways and Means Subcommittee on Oversight asked us to discuss the
                           challenges facing IRS and the potential benefits of involving private parties
                           in the collection of tax debts. IRS faces some formidable challenges in
                           collecting tens of billions of dollars in delinquent taxes, including

                       •   a lack of accurate and reliable information on either the makeup of its
                           accounts receivable or the effectiveness of the collection tools and
                           programs it uses, and
                       •   an aged inventory of receivables, outdated collection processes, and
                           antiquated technology.

                           This lack of reliable information on taxpayer accounts affects IRS’ ability to
                           determine whether its agents are resolving cases in the most efficient and
                           effective manner. Similarly, the lack of reliable performance data affects
                           IRS’ ability to target its collection efforts to specific taxpayers or specific
                           types of debts. We believe that IRS needs a long-term comprehensive
                           strategy to guide its efforts to improve tax debt collection, and such a



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                           B-277179




                           strategy must start with accurate and reliable information. Without this
                           strategy, any changes made to the system may not provide the planned
                           results. We also believe that private industry may provide some help in
                           collecting tax debts by assisting in performing some collection-related
                           activities.


                           Tax expenditures—tax provisions that grant special relief to encourage
Tax Expenditures and       certain behaviors or to aid taxpayers in special circumstances—cost
Preferences                $400 billion of federal revenue annually. Tax expenditures are not subject
                           to systematic review, and policymakers have few opportunities to make
                           explicit comparisons between tax expenditures and federal spending
                           programs. Improving the effectiveness of tax expenditures can result in
                           significant savings.

                           Tax Policy and Administration: Review of Studies of the Effectiveness of
                           the Research Tax Credit (GAO/GGD-96-43, May 21, 1996). During a
                           congressional hearing in 1995, we were asked to evaluate recent studies of
                           the research tax credit to determine whether the evidence was adequate to
                           conclude that each dollar taken of the research tax credit stimulates at
                           least one dollar of research spending in the short run and about two
                           dollars of research spending in the long run.2 In response to a
                           congressional request, we reviewed eight studies of the research tax
                           credit, focusing on

                       •   the adequacy of the studies’ data and methods to determine the amount of
                           research spending stimulated per dollar of foregone tax revenue and
                       •   other factors that determine the credit’s value to society.

                           The studies we reviewed indicated that the amount of research spending
                           stimulated by the research tax credit was larger than estimated by most of
                           the studies published during the 1980s. The eight studies, however,
                           provided mixed evidence on the amount of spending stimulated by the
                           credit per dollar of revenue cost.

                           Further, the estimates presented in recent studies do not provide all the
                           information needed to evaluate the effectiveness of the latest version of
                           the credit. The amount of research spending stimulated per dollar of
                           incentive revenue cost depends not only on the responsiveness of
                           spending to a tax incentive but also on the credit’s design. There has been

                           2
                           The May 10, 1995, hearing was held by the Subcommittee on Oversight, House Ways and Means
                           Committee.



                           Page 8                                              GAO/GGD-97-122 1996 Annual Tax Report
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little research on how the latest design of the credit has affected incentives
and costs.

Although most of the studies we reviewed used more sophisticated
statistical techniques and more years of data than prior studies of the
credit, all of them had data and methodological limitations. For example,
the studies did not use tax return data to determine the credit’s incentive
because the authors did not have access to such confidential data.
Therefore, the authors had to rely on publicly available data, which used
different definitions of taxable income and research spending. As a result
of the data limitations, we were unable to conclude that a dollar of
research tax credit would stimulate a dollar of additional research
spending and, in the long run, lead to about two dollars of research
spending.


We are sending copies of this report to other congressional committees,
the Director of OMB, the Secretary of the Treasury, and the Commissioner
of Internal Revenue. Copies will also be available to others upon request.

Major contributors to this report are listed in appendix III. If you or your
colleagues would like to discuss any of the matters in this report, please
call me on (202) 512-9110.




Lynda D. Willis
Director, Tax Policy and
  Administration Issues




Page 9                                     GAO/GGD-97-122 1996 Annual Tax Report
Contents



Letter                                                                                        1


Appendix I                                                                                   12

Summaries of
Tax-Related Products
Issued in Fiscal Year
1996
Appendix II                                                                                  50

Chronological Listing
of GAO Products on
Tax Matters Issued in
Fiscal Year 1996
Appendix III                                                                                 53

Major Contributors to
This Report




                        Abbreviations

                        DOD       Department of Defense
                        EIC       Earned Income Credit
                        IRC       Internal Revenue Code
                        IRS       Internal Revenue Service
                        NTIS      National Technical Information Service
                        OID       Original issue discount
                        OIG       Office of Inspector General
                        OMB       Office of Management and Budget
                        SSN       Social Security number
                        TCMP      Taxpayer Compliance Measurement Program
                        TSM       Tax Systems Modernization
                        VA        Veterans Affairs


                        Page 10                            GAO/GGD-97-122 1996 Annual Tax Report
Page 11   GAO/GGD-97-122 1996 Annual Tax Report
Appendix I

Summaries of Tax-Related Products Issued
in Fiscal Year 1996

                     IRS Financial Audits: Status of Efforts to Resolve Financial
IRS Management and   Management Weaknesses (GAO/T-AIMD-96-170, Sept. 19, 1996); Financial
Budget               Audit: Actions Needed to Improve IRS Financial Management
                     (GAO/T-AIMD-96-96, June 6, 1996); and IRS Operations: Significant
                     Challenges in Financial Management and Systems Modernization
                     (GAO/T-AIMD-96-56, Mar. 6, 1996). In testimony before the Subcommittee on
                     Government Management, Information and Technology, House Committee
                     on Government Reform and Oversight and before the Senate Committee
                     on Governmental Affairs, we discussed the results of our fiscal year 1994
                     financial audit of IRS. We found that IRS could not adequately verify or
                     reconcile, in total and by type of tax, the amount of revenue it collected or
                     the refunds it made for fiscal years 1992 through 1995. We also found large
                     discrepancies between information in IRS’ masterfiles and the Treasury
                     data used for various types of taxes.

                     Several internal control weaknesses contributed to IRS’ financial
                     management problems. For example, IRS was unable to provide adequate
                     documentation for numerous transactions posted to taxpayer accounts
                     and in its nonmaster file because the information had been lost, physically
                     destroyed, or was no longer maintained. In addition, taxpayer refunds
                     were not always screened by IRS employees, as required by IRS policy, to
                     determine whether the refunds could be offset against any outstanding
                     debts. The reliability of IRS’ $113 billion tax debt inventory was also in
                     question because IRS could not verify the accounts receivable balance or
                     the amounts that were considered collectible.

                     IRSalso had problems in substantiating nonpayroll expenses and
                     reconciling appropriations available for expenditure with Treasury’s
                     central accounting records. This occurred, primarily, because IRS was
                     unable to provide support for when and if certain goods and services were
                     received. Not having this support made IRS vulnerable to receiving
                     inappropriate interagency charges and seriously undermined any effort to
                     provide reliable, consistent cost or performance information.

                     In our March 6, 1996, testimony, we also noted that IRS’ attempts to
                     modernize its tax processing systems were at serious risk because of
                     management and technical weaknesses. For example, IRS did not have a
                     comprehensive business strategy to cost-effectively reduce paper
                     submissions, and it had not yet fully developed and put in place the
                     requisite management, software development, and technical
                     infrastructures necessary to successfully implement its modernization
                     program. In addition, IRS failed to



                     Page 12                                   GAO/GGD-97-122 1996 Annual Tax Report
    Appendix I
    Summaries of Tax-Related Products Issued
    in Fiscal Year 1996




•   manage the selection and acquisition of information systems as
    investments,
•   develop adequate cost-benefit analyses for its modernization proposals,
•   implement quality assurance metrics for its software development
    projects,
•   require adequate systems and acceptance testing, and
•   define standard interfaces before implementing interconnecting systems.

    Over the past 4 years, we made 59 recommendations to improve IRS’
    financial management systems and reporting and numerous other
    recommendations to improve IRS’ modernization efforts. IRS agreed with
    most of our recommendations and was working to improve its financial
    management and information technology capability and operations.
    However, we noted that many difficult problems remained, and IRS needed
    to intensify and sustain its efforts.

    IRS  Operations: Critical Need to Continue Improving Core Business
    Practices (GAO/T-AIMD/GGD-96-188, Sept. 10, 1996) and Internal Revenue
    Service: Business Operations Need Continued Improvement
    (GAO/AIMD/GGD-96-152, Sept. 9, 1996). In testimony before the Senate
    Committee on Governmental Affairs, following on our report to the
    Chairman and Ranking Minority Member, we discussed the problems IRS
    was experiencing in fulfilling its business vision, overcoming management
    and technical weaknesses in its TSM effort, and improving the reliability of
    its financial management systems.

    We said that IRS needed to develop an effective implementation strategy
    for achieving its business vision. We suggested that such a strategy should
    include developing the capacity to make sound investments in information
    technology, building the necessary in-house technical expertise needed to
    effectively manage its Tax Systems Modernization (TSM) projects, and
    addressing the serious financial management problems that affect the
    credibility of its financial information.

    We also said that

•   IRS,the Department of the Treasury, and the Office of Management and
    Budget needed to ensure that IRS’ information management initiatives are
    promptly and fully implemented;
•   Congress should consider limiting IRS funding for TSM to critical and
    cost-effective projects; and




    Page 13                                    GAO/GGD-97-122 1996 Annual Tax Report
    Appendix I
    Summaries of Tax-Related Products Issued
    in Fiscal Year 1996




•   the National Commission on Restructuring the Internal Revenue Service
    would have a leading role in evaluating IRS’ operations and recommending
    organizational, management, and operating changes.

    Tax Systems Modernization: Actions Underway But Management
    and Technical Weaknesses Not Yet Corrected (GAO/T-AIMD-96-165, Sept.
    10, 1996) and Tax Systems Modernization: Cyberfile Project Was
    Poorly Planned and Managed (GAO/AIMD-96-140, Aug. 26, 1996). In
    testimony before the Senate Committee on Governmental Affairs, we
    discussed IRS’ efforts to modernize its tax processing system. The
    testimony followed up on our August report on Cyberfile.

    Overall, we found pervasive management and technical problems with IRS’
    modernization efforts. IRS had not defined a process for selecting,
    controlling, and evaluating its technology investments; had not completed
    procedures for requirements management, quality assurance,
    configuration management, and project planning and tracking; and had not
    defined its systems, security, and data architectures. A Treasury report
    acknowledged that IRS did not have the capability to develop and integrate
    its TSM effort, and although it directed that IRS obtain additional contractual
    help to do so, it also acknowledged that IRS did not have the capability to
    successfully manage all of its current contractors.

    For example, IRS’ Cyberfile project was intended to enable taxpayers to
    prepare and electronically submit their tax returns via personal
    computers. However, IRS’ selection of the Commerce Department’s
    National Technical Information Service (NTIS) to develop Cyberfile was not
    based on sound analysis of NTIS’ ability to develop and operate an
    electronic filing system, and in fact, development and acquisition were
    undisciplined, and Cyberfile was poorly managed and overseen. In the end,
    Cyberfile was not delivered on time, and IRS, after advancing more than
    $17 million to NTIS, suspended Cyberfile’s development. During the project,
    IRS and NTIS failed to follow all applicable procurement laws in developing
    Cyberfile; NTIS circumvented procurement laws in implementing Cyberfile;
    Cyberfile’s obligations and costs were not accounted for properly; and
    adequate financial program management controls were not implemented
    to ensure that Cyberfile would be cost-effective.

    In the past, we made numerous recommendations to IRS relating to its
    systems modernization effort. Although IRS had initiated activities intended
    to begin responding to our recommendations, none of them had been fully
    implemented.



    Page 14                                    GAO/GGD-97-122 1996 Annual Tax Report
    Appendix I
    Summaries of Tax-Related Products Issued
    in Fiscal Year 1996




    At the time of our testimony, IRS did not have

•   the effective strategic information management practices needed to
    manage its modernization efforts,
•   the mature and disciplined software development processes needed to
    ensure that systems built would perform as intended,
•   a completed systems architecture that was detailed enough to guide and
    control systems development and acquisition, and
•   a schedule for accomplishing any of the aforementioned tasks.

    Further, IRS did not manage all of its current contractual efforts effectively,
    and its plans to use a “prime” contractor and transition much of its
    systems development to additional contractors was not well defined.

    In our testimony, we suggested that Congress consider limiting TSM
    spending to only cost-effective modernization efforts that

•   support ongoing operations and maintenance;
•   correct IRS’ pervasive management and technical weaknesses;
•   are small, represent a low technical risk, and can be delivered in a
    relatively short time; and
•   involve deploying already developed systems that have been fully tested,
    are not premature given the lack of completed systems architecture, and
    have proven business value.

    Our testimony also suggested that Congress consider requiring that IRS
    institute disciplined systems acquisitions processes and develop plans and
    schedules before permitting IRS to increase its reliance on contractors.

    In our August report, we recommended that IRS

•   review the breakdown in its acquisition and financial management
    processes and controls that permitted the mismanagement of Cyberfile
    and
•   take steps to correct the weaknesses and ensure that they are not repeated
    on future projects.

    We also recommended that the Department of Commerce

•   review NTIS’ acquisition and financial management processes and controls
    that permitted it to disregard procurement laws and regulations,




    Page 15                                    GAO/GGD-97-122 1996 Annual Tax Report
    Appendix I
    Summaries of Tax-Related Products Issued
    in Fiscal Year 1996




•   take steps to correct the weaknesses and ensure that they do not recur,
    and
•   not permit NTIS to accept new systems development projects from other
    federal agencies until the weaknesses are corrected.

    Managing IRS: IRS Needs to Continue Improving Operations and
    Service (GAO/T-GGD/AIMD-96-170, July 29, 1996). In testimony before the
    National Commission on Restructuring the Internal Revenue Service, we
    discussed various challenges facing IRS as it tries to make its organization,
    operations, and processes more effective and efficient and improve service
    to taxpayers. Our testimony made the following points:

•   One of IRS’ biggest problems has been the inefficient way in which it
    processes most tax returns. IRS needs to develop an effective strategy to
    reduce the volume of paper returns. Although IRS has taken some actions
    to increase the number of electronic returns filed, it does not have a
    comprehensive strategy to reach its electronic filing goal by 2001.
•   IRS’ strategy for improving customer service offers promise because it is
    designed to improve taxpayers’ ability to get assistance from IRS and
    provide its employees with access to the information they need to help
    taxpayers. However, IRS needs to develop a framework to overcome the
    important managerial, technical, and human resource challenges it faces in
    implementing this vision.
•   Long-standing problems continue to undermine the effectiveness of IRS’
    collection programs. To address these problems, significant changes are
    needed in the way IRS does business.
•   IRS has made some progress in resolving issues that prevented us from
    expressing an opinion on the reliability of its financial statements;
    however, serious financial management problems remain uncorrected.
•   IRS needs to develop the capacity to make sound investment decisions in
    information technology. The outcome of IRS’ reengineering efforts could
    generate new business requirements that are not addressed by
    modernization projects or that make some of those projects obsolete.

    Financial Audit: Examination of IRS’ Fiscal Year 1995 Financial
    Statements (GAO/AIMD-96-101, July 11, 1996). In accordance with the Chief
    Financial Officers Act of 1990, we reported on our audit of IRS’ principal
    financial statements for fiscal year 1995. We stated that

•   we were unable to give an opinion on those statements or report on
    compliance with laws and regulations because of limitations on the scope
    of our work and



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•   material weaknesses in internal controls resulted in ineffective controls
    for safeguarding assets from material loss and for ensuring material
    compliance with relevant laws and regulations.

    The following five management problems undermined our ability to attest
    to the reliability of IRS’ financial statements:

•   The amount of total revenue ($1.4 trillion) and tax refunds ($122 billion)
    could not be verified or reconciled to accounting records maintained for
    individual taxpayers in the aggregate.
•   The amount reported for various types of taxes, such as Social Security
    and excise taxes, could not be substantiated.
•   The reliability of estimates of $113 billion for valid accounts receivable
    and $46 billion for collectible accounts receivable could not be
    determined.
•   A significant portion of IRS’ reported $3 billion in nonpayroll operating
    expenses could not be verified.
•   The amount IRS reported as appropriations available for expenditure for
    operations could not be reconciled fully with Treasury’s central
    accounting records.

    IRSadvised us of various steps it was taking to correct the problems our
    audit identified (such as development of software programs to capture
    detailed revenue and refund transactions), but we could not verify the
    results of IRS’ efforts because they were not complete.

    Tax Systems Modernization: Actions Underway But IRS Has Not Yet
    Corrected Management and Technical Weaknesses (GAO/AIMD-96-106,
    June 7, 1996). Pursuant to a legislative requirement, we reviewed IRS’
    actions to correct the management and technical weaknesses we
    identified in July 1995 that jeopardized IRS’ TSM efforts.1 We found that
    although IRS had initiated several corrective actions, many of them were
    still incomplete; and none, either individually or in the aggregate, fully
    responded to any of our recommendations.

    For example, IRS had created an investment review board to select,
    control, and evaluate its information technology investments. However,
    the criteria for the board’s decisions were still undocumented and
    undefined, and IRS still had not reviewed the basis for its planned and
    ongoing systems. Furthermore, while IRS had completed a descriptive

    1
    Tax Systems Modernization: Management and Technical Weaknesses Must Be Corrected If
    Modernization Is to Succeed (GAO/AIMD-95-156, July 26, 1995).



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    overview of an integrated, three-tier, distributed systems architecture, it
    had not completed the systems architecture nor its security and data
    architectures, and there was no schedule for doing so.

    IRS had not established an effective organizational structure to consistently
    manage and control TSM. IRS had planned to use software development
    contractors to develop TSM, yet its plans and schedules in this area were
    poorly defined and could not be fully understood or assessed. Moreover,
    as the experiences with Cyberfile and the Document Processing System
    projects made clear, IRS did not have the mature processes needed to
    acquire software and manage contractors effectively.

    We suggested that Congress consider limiting TSM spending to only
    cost-effective modernization efforts that

•   support ongoing operations and maintenance;
•   correct pervasive management and technical weaknesses;
•   are small, represent low risk, and can be delivered quickly; and
•   involve deploying already developed and fully tested systems that have
    proven business value and are not premature given the lack of a
    completed architecture.

    Tax Systems Modernization: Progress in Achieving IRS’ Business
    Vision (GAO/T-GGD-96-123, May 9, 1996). In testimony before the Senate
    Committee on Governmental Affairs, we discussed IRS’ progress in
    achieving its business vision for 2001 and modernizing its operations. IRS
    has developed a vision for 2001 that calls for organizational, technological,
    and operational changes affecting the way in which the agency processes
    tax returns, provides customer service, and ensures compliance with tax
    laws. IRS has made progress in modernizing its operations, but the
    differences between IRS’ existing operations and those proposed in its
    vision are great.

    One of the biggest problems facing IRS is its inefficient system for
    processing most tax returns. IRS has made little progress either in reducing
    the number of paper returns it processes or in delivering the new systems
    needed to improve paper processing. For example, IRS established a goal
    to receive 80 million tax returns electronically by 2001, but it lacks a
    comprehensive business strategy for achieving that goal.

    The second part of IRS’ vision is to improve service to taxpayers.
    Taxpayers have long had a problem reaching IRS by telephone, and when



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they do, IRS assistors do not always have easy access to the information
needed to resolve the problems. IRS’ strategy for improving customer
service includes consolidating work units, changing work processes, and
increasing the use of or implementing new information systems. It is a
promising strategy, but IRS faces many challenges in its implementation.

The third part of IRS’ vision is to increase compliance with tax laws.
Compliance levels have remained at 87 percent for the last several years,
and the goal is to increase compliance to 90 percent. IRS established that
goal on a set of assumptions that have since changed
significantly—changes that could jeopardize the achievement of its goal.
For example, budget and taxpayer burden concerns led IRS to postpone
indefinitely the Taxpayer Compliance Measurement Program (TCMP), the
results of which were to provide more up-to-date information for a new
compliance research information system.

We questioned IRS’ ability to make sound investment decisions until it
reengineers important processes, such as tax return processing. Until
clearly defined business requirements drive its modernization projects,
there is no guarantee that these projects will successfully improve IRS
operations.

Tax Administration: IRS’ Fiscal Year 1996 and 1997 Budget Issues
and the 1996 Filing Season (GAO/T-GGD-96-99, Mar. 28, 1996). In testimony
before the Subcommittee on Oversight, House Committee on Ways and
Means, we discussed budget issues facing IRS in fiscal years 1996 and 1997
and provided interim results on our review of the 1996 filing season.2

IRS’1996 appropriation totaled $7.3 billion—$860 million less than what the
President had requested and $160 million less than IRS’ fiscal year 1995
appropriation. To cover the resulting labor cost shortfall, IRS officials said
that they reduced travel and overtime costs, cash awards, hours for
seasonal staff, and the number of nonpermanent staff. IRS wanted to
ensure that it had enough staff to process returns and issue refunds, so
most of the cuts were absorbed by compliance programs.

IRSrequested nearly $8 billion for fiscal year 1997, an increase of
$647 million from fiscal year 1996. The largest increases were for
compliance initiatives and TSM, two areas that have been plagued by
problems in the past. Concerning TSM, we expressed the belief that IRS

2
See our final report on the filing season, IRS’ 1996 Tax Filing Season: Performance Goals Generally
Met; Efforts to Modernize Had Mixed Results (GAO/GGD-97-25, Dec. 18, 1996).



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    could not make effective use of systems development funds at that time
    because it had not yet corrected managerial and technical weaknesses that
    we had identified in July 1995.3

    The interim results of our review of the 1996 filing season indicated that

•   IRS was delaying fewer refunds than it did in 1995 while it validated Social
    Security numbers (SSN) and Earned Income Credit (EIC) claims;
•   taxpayers appeared to be having an easier time reaching IRS by telephone,
    although accessibility was still low; and
•   more taxpayers were using alternative filing methods.

    Tax Systems Modernization: Management and Technical
    Weaknesses Must Be Overcome to Achieve Success (GAO/T-AIMD-96-75,
    Mar. 26, 1996). In testimony before the Senate Committee on
    Governmental Affairs, we discussed the status of IRS’ TSM program. IRS had
    spent more than $2.5 billion on TSM through fiscal year 1995 and planned to
    spend a total of up to $8 billion through 2001. TSM is central to IRS’ vision of
    a paper-free work environment in which taxpayer account updates are
    rapid and taxpayer information is readily available to IRS employees
    responding to taxpayer inquiries.

    We found that IRS still

•   did not have a comprehensive strategy to maximize electronic filings;
•   assumed that it would receive specified funding for systems development
    and technology, yet was unable to assure Congress that it could spend its
    1996 and future TSM appropriations judiciously and effectively;
•   did not have a complete and integrated systems architecture;
•   did not have a single entity that had the responsibility and authority to
    control all of its information systems projects;
•   did not have key planning documents, risk analyses and alternate
    solutions, or a formal process to define, manage, and control its Cyberfile
    project;
•   failed to provide adequate physical security and software controls for
    Cyberfile;4 and
•   could not adequately document many of its financial transactions,
    including revenue collections, or reconcile its accounts with those at the
    Department of the Treasury.

    3
    Tax Systems Modernization: Management and Technical Weaknesses Must Be Corrected If
    Modernization Is to Succeed (GAO/AIMD-95-156, July 26, 1995).
    4
     See Security Weaknesses at IRS’ Cyberfile Data Center (GAO/AIMD-96-85R, May 9, 1996).



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Status of Tax Systems Modernization, Tax Delinquencies, and the
Potential for Return-Free Filing (GAO/T-GGD/AIMD-96-88, Mar. 14, 1996). In
testimony before the Subcommittee on Treasury, Postal Service, and
General Government, House Committee on Appropriations, we discussed
IRS’ efforts to manage and implement its multibillion dollar TSM program
and to collect tens of billions of dollars in tax debts. We also discussed the
potential for implementing a return-free filing system.

Regarding TSM, we discussed weaknesses in IRS’ electronic filing strategy;
strategic information management; software development; systems
architecture, integration, and testing; and accountability and control of
systems modernization. These weaknesses must be corrected if TSM is to
succeed.

In the tax collection area, we noted that IRS’ efforts are hampered by
inaccurate and unreliable information, antiquated computer systems and a
rigid collection process, unintended problems with implementing
safeguards against taxpayer abuses, a lack of accountability in its
organizational structure, and staffing imbalances. As a result, IRS cannot
accurately identify how much money the government is owed or how
much of the debt is collectible.

We also discussed how return-free filing could reduce the filing burden of
many taxpayers while reducing the amount of paper IRS must process. We
discussed two forms of return-free filing: “final withholding” and “agency
reconciliation,” both of which would require several changes to the
current tax system.

In the final withholding system, the withholder of income taxes
determines the taxpayer’s liability and withholds that amount. While
taxpayers would save millions of hours in preparation time and millions of
dollars in preparation costs, employers would incur additional
administrative costs associated with their increased responsibilities. In the
agency reconciliation system, the tax agency determines the taxpayer’s tax
liability based on information documents. Under this system, taxpayers
would also save millions of hours in preparation time and millions of
dollars in preparations costs. With either system, IRS would save millions
of dollars in processing costs.

IRS Staffing Trends (GAO/GGD-96-73R, Jan. 31, 1996). In a letter to the
Chairman, Senate Committee on Finance, we provided information on IRS’




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                          staffing trends from fiscal years 1981 through 1996. This information
                          updated what we had reported in 1993.5 We showed staffing data from two
                          sources—IRS’ annual reports and budgets. The annual report data showed
                          higher staffing levels because that source included staffing that was
                          funded through reimbursements from other agencies.


                          Tax Administration: Income Tax Treatment of Married and Single
Individual and            Individuals (GAO/GGD-96-175, Sept. 3, 1996). This report, prepared at the
Business Tax Issues       request of Senator Orrin G. Hatch, provides information on income tax
                          provisions in the Internal Revenue Code (IRC) that potentially create
                          “marriage penalties” or “marriage bonuses,” with respect to the tax liability
                          of married couples. A marriage penalty results when two married persons
                          have a greater tax liability than two single persons with the same total
                          income. Conversely, a marriage bonus results when a married couple owes
                          less taxes than two similarly situated single persons.

                          We identified 59 IRC provisions in which tax liability depends at least
                          partially on the taxpayer’s marital status. They include three sections most
                          commonly discussed in connection with marriage penalties and bonuses:
                          those on the tax rate, the standard deduction, and the EIC.

                          The 59 provisions can be grouped into 4 categories.

                      •   One group of nine provisions, such as those on the tax rate and Social
                          Security taxation, makes some adjustment for the differences between
                          joint and single income, but adjustments for married couples filing jointly
                          are less than twice those allowed for single taxpayers.
                      •   A second group of 15 provisions, such as those limiting capital losses and
                          the home-mortgage interest deduction, includes only one limitation that
                          applies equally to married and single taxpayers.
                      •   A third group of nine provisions, such as those allowing a personal
                          exemption, treats married couples as if they are single individuals or
                          provides couples with twice the benefit allowed a single person.
                      •   A fourth group of 26 provisions treats a married couple as a unit for tax
                          purposes.

                          The single most important factor that determines a provision’s effect on
                          married couples is how income is divided between spouses. Fifty-six of
                          the 59 tax provisions could result in a marriage penalty or bonus
                          depending on the taxpayer’s individual circumstances. Couples with

                          5
                           Tax Administration: Trends for Certain IRS Programs (GAO/GGD-93-102FS, May 26, 1993).



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disparate incomes generally could enjoy a marriage bonus, while couples
with equivalent incomes generally incur a marriage penalty. Other factors
affecting a couple’s tax liability include which spouse owns property, has
capital gains or losses, and is qualified for tax deductions and credits.

Insufficient data prevented us from quantifying the number of taxpayers
potentially subject to the various marriage penalties and bonuses
described in the report.

Tax Administration: IRS Is Improving Its Controls for Ensuring
That Taxpayers Are Treated Properly (GAO/GGD-96-176, Aug. 30, 1996).
Allegations of taxpayer abuse prompted Congress to pass the Taxpayer
Bill of Rights in 1988. Six years later, we issued a report urging IRS to
strengthen its controls for ensuring that taxpayers are treated properly.6
Pursuant to a request from the Chairman, Senate Committee on Finance,
we examined the adequacy of IRS’ controls to protect against abuse of
taxpayers; the extent of information available concerning abuse
allegations received and investigated by IRS, Treasury’s Office of the
Inspector General (OIG), and the Department of Justice; and the OIG’s role
in investigating abuse allegations.

IRShad initiated actions to implement many of the recommendations we
made in our 1994 report and had initiated other actions in anticipation of
provisions included in Taxpayer Bill of Rights 2 (P.L. 104-168). Among
other things, IRS was improving controls over employee access to
computerized taxpayer accounts; establishing an expedited appeals
process for some collection actions; and classifying recurring taxpayer
problems by major issues, such as penalties imposed on taxpayers. Those
actions, if effectively implemented, could improve IRS’ overall treatment of
taxpayers and better protect against taxpayer abuse.

Despite IRS’ actions, we were unable to reach a conclusion on the overall
adequacy of its controls because it did not yet have the capability to
capture needed management information. IRS was establishing a tracking
system for taxpayer complaints and reviewing its management information
systems to determine the best way to capture relevant information for that
system. If effectively designed, such a system could better allow IRS to
ensure that instances of taxpayer abuse are identified and addressed and
that actions are taken to prevent their recurrence.



6
 Tax Administration: IRS Can Strengthen Its Efforts to See That Taxpayers Are Treated Properly
(GAO/GGD-95-14, Oct. 26, 1994).



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We were not able to determine the extent to which allegations of taxpayer
abuse were received and investigated because the information systems at
IRS, Treasury OIG, and Justice did not include specific data elements on
taxpayer abuse. Treasury OIG officials said that they generally handled
allegations involving IRS executives but often referred allegations involving
lower level managers to IRS for investigation and administrative action.
Although we did not independently test the effectiveness of this
arrangement, we found no evidence to suggest that these allegations were
not being properly handled.

Tax Administration: Tax Compliance of Nonwage Earners
(GAO/GGD-96-165, Aug. 28, 1996). At the request of the Chairman,
Subcommittee on Oversight, House Committee on Ways and Means, we
provided information regarding the tax implications of the rapid growth in
nonwage income. Nonwage income has grown significantly since 1970,
when it accounted for 16.7 percent of total income for individuals. For tax
year 1992, the most recent available information at the time we did our
work, nonwage income accounted for over 23 percent (or $859 billion) of
total income for individuals. Individual tax returns showing only nonwage
income increased from about 10 percent in 1970 to over 15 percent in
1992. The six largest sources of nonwage income—pensions, interest,
self-employment, capital gains, dividends, and partnerships/subchapter S
corporations—accounted for 91.6 percent of all nonwage income reported
for 1992. Pension income was by far the largest and fastest growing source
of nonwage income.

IRS data showed that taxpayers who earned most of their income from
nonwage sources were more likely to have problems paying their taxes
than were wage earners and, as a result, owed more delinquent taxes than
did wage earners. Approximately 74 percent of IRS’ inventory of tax debt
for individual taxpayers at the end of fiscal year 1993 was owed by
taxpayers with primarily nonwage income. Taxpayers with
self-employment, interest, and dividend income accounted for about
two-thirds of this nonwage income.

The proportion of the taxpayer population reporting nonwage income will
continue to increase as the population ages because pension income is the
largest and fastest growing source of nonwage income. Options for
improving timely tax payments on nonwage income include withholding
income taxes on more sources of nonwage income, increasing taxpayer
awareness of tax payment responsibilities for nonwage income, and
modifying the estimated tax payment system.



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Tax Administration: Issues in Classifying Workers as Employees or
Independent Contractors. (GAO/T-GGD-96-130, June 20, 1996). In testimony
before the Subcommittee on Oversight, House Committee on Ways and
Means, we discussed the classification of workers for federal tax
purposes. To determine the Social Security and unemployment taxes they
need to pay on employee wages, employers must classify workers as
employees or independent contractors. If workers are determined to be
employees, employers must (1) withhold and deposit income and Social
Security taxes from wages paid and (2) pay unemployment taxes and the
employers’ share of Social Security taxes. Independent contractors pay
their own Social Security and income taxes.

For 1984, the last time IRS made a comprehensive estimate, IRS estimated
that about 750,000 of the more than 5 million employers (15 percent)
misclassified 3.4 million employees as independent contractors. This
noncompliance resulted in an estimated loss of $1.6 billion in Social
Security, unemployment, and income taxes. IRS studies indicate that
independent contractors, compared with employees, have a much lower
level of income tax compliance and account for a higher proportion of the
income tax gap. IRS completed 12,983 employment tax examination
program audits from 1988 to 1995. Those audits recommended
$830 million in employment tax assessments and reclassified 527,000
workers as employees.

Costs and unclear classification rules can contribute to this
noncompliance. Employers can lower their costs, such as payments of
employment taxes or benefits, by using independent contractors. Also,
many employers struggle in making the classification decision because of
unclear rules. Employers cannot be certain that their classification
decisions will withstand challenges by IRS. If not upheld, they risk large
retroactive tax assessments.

Two approaches that could boost independent contractor compliance
within existing classification rules include (1) improving information
reporting on payments made to independent contractors and
(2) withholding income taxes from such payments. These approaches
could also increase, to some extent, the burdens on independent
contractors and employers that use them.

Tax Research: IRS Has Made Progress But Major Challenges Remain
(GAO/GGD-96-109, June 5, 1996). IRS is changing its tax compliance philosophy.
Although it will continue to use enforcement to catch noncompliance, IRS



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is trying to induce compliance through nonenforcement work, such as
taxpayer assistance and education. This new approach involves
researching ways to improve compliance for specific market
segments—groups of taxpayers who share characteristics or behaviors. IRS
wants to boost total compliance to 90 percent by 2001 and believes that its
new compliance research approach will help meet this goal. Taxpayer
compliance in paying taxes owed has remained steady during the past 20
years at about 87 percent, and IRS estimates annual tax losses from
noncompliance at more than $100 billion.

In a report to the Commissioner of Internal Revenue, we discussed IRS’
new compliance research approach. Our analysis indicated that the
success of this new approach would depend on the support it received
throughout IRS, the availability of objective compliance data and skilled
research staff, the infrastructure for organizing and managing the
research, and the measures used to evaluate how well the new approach
works.

We found only mixed support for the new research approach. Many IRS
officials questioned whether it would help achieve the 90-percent
compliance goal, and there was disagreement over the initiative’s national
focus, with many officials preferring a district-level one. In addition, IRS
did not have a reliable source of objective compliance data, did not have
research staff with the specialized skills needed to achieve the initiative’s
research objectives, and had not completed its development of a
management infrastructure or a process for measuring the results of the
new approach.

We recommended that IRS develop an approach for monitoring the
effectiveness of mechanisms established to build support for the new
approach as well as for the staff-sharing and training efforts that were
under way, devise a method to better ensure that reliable compliance data
are available when needed, and establish milestones for completing the
management infrastructure and performance measures.

Internal Revenue Service: Results of Nonfiler Strategy and
Opportunities to Improve Future Efforts (GAO/GGD-96-72, May 13, 1996).
At the beginning of fiscal year 1993, IRS had an inventory of about
10 million individual and business nonfilers. IRS estimated that unpaid
taxes on nonfiled individual income tax returns for 1992 alone totaled
more than $10 billion. Concerned about this noncompliance, IRS began a
strategy in fiscal year 1993 to bring nonfilers into the system and keep



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    them there. We reviewed IRS’ Nonfiler Strategy to assess the results and to
    determine whether there were opportunities to improve future nonfiler
    efforts.

    IRStook several positive steps to achieve the goals of the Nonfiler Strategy.
    Among other things, the Examination function deployed staff to work on
    nonfiler cases; other IRS functions increased their emphasis on nonfiler
    activities; and IRS eliminated old cases from inventory, established
    cooperative working arrangements with states and the private sector, and
    implemented a refund hold program.

    According to IRS, the Nonfiler Strategy was generally a success. Among
    other things, IRS reduced the size of the nonfiler inventory; eliminated
    unproductive cases, which allowed it to focus enforcement resources
    more effectively; and increased the number of returns secured from
    individual nonfilers.

    However, the results of the Strategy were less conclusive when compared
    with its goals. IRS achieved its goal of reducing the backlog of nonfiler
    investigations. However, there was insufficient information with which to
    judge whether voluntary taxpayer compliance improved as a result of the
    Strategy, and the absence of comprehensive cost data made it difficult to
    assess return on investment.

    We identified several areas in which opportunities existed to improve any
    future IRS effort directed at nonfilers. Those opportunities related to

•   the time that elapsed before IRS made telephone contact with nonfilers,
•   the use of higher graded staff to perform tasks that might be effectively
    done by lower graded staff, and
•   procedures for dealing with nonfilers who are brought into compliance
    and then become nonfilers again.

    Besides making recommendations on those areas, we recommended that
    IRS establish measurable goals and develop comprehensive data on
    program costs to better assess the results of future nonfiler efforts.

    Tax Administration: Audit Trends and Results for Individual
    Taxpayers (GAO/GGD-96-91, Apr. 26, 1996). In response to a request from the
    Chairman, Subcommittee on Oversight, House Committee on Ways and
    Means, we provided information on




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•   the trend in IRS’ audit rates for individual returns (i.e., the percentage of
    individual income tax returns filed that are audited) and
•   the overall results of IRS’ most recent audits of individual returns.

    The audit rate for individuals decreased between fiscal years 1988 and
    1993 from 1.57 percent to 0.92 percent, which, according to IRS officials,
    resulted from an increase in the total number of returns filed, the
    additional time spent auditing complex returns, and an overall reduction in
    examination staffing. The audit rate rebounded over the next 2 years,
    increasing to 1.67 percent by fiscal year 1995. IRS officials attributed the
    increase to the involvement of district office auditors in pursuing nonfilers
    and an emphasis on reviewing EIC claims—work that historically was not
    counted as audits.

    Audit rates varied widely by geographic location, with the rates being the
    highest in the western regions of the country and lowest in the middle
    regions. In general, audits of the highest income individuals resulted in
    more additional recommended tax per return than did audits of the lowest
    income individuals by as much as 4 to 5 times more. However, the amount
    of additional recommended tax per audit hour for the highest income
    individuals was less than twice that for the lowest income filers because of
    the time needed to audit the more complex returns of the former.

    Tax Administration: Alternative Strategies to Obtain Compliance
    Data (GAO/GGD-96-89, Apr. 26, 1996). In October 1995, IRS decided to
    postpone indefinitely the 1994 Taxpayer Compliance Measurement
    Program because of budget concerns. In addition, Congress, taxpayer
    groups, paid preparers, and others exerted considerable pressure to cancel
    the program because of its cost to and burden on taxpayers. For more
    than 30 years, this program has been IRS’ primary means for gathering
    comprehensive and reliable taxpayer compliance data. IRS has used the
    data to

•   identify areas in which tax law needs to be changed to improve voluntary
    compliance,
•   estimate the tax gap and its components, and
•   objectively select returns to audit that have the most potential for
    noncompliance.

    In this report to the Commissioner of Internal Revenue, we assessed the
    potential effects on IRS’ compliance programs of postponing the 1994 TCMP
    and identified some potential short- and long-term TCMP alternatives.



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    IRS officials told us that they did not know how IRS would obtain the
    taxpayer compliance data it needs, and they recognized that the loss of
    1994 TCMP data could increase compliant taxpayers’ burden over the long
    term because audits may become less targeted. To mitigate data losses
    over the short term, IRS could employ several alternatives, including doing
    a smaller survey. A limited survey would reduce the quantity and quality of
    the data collected, but still provide statistically valid national compliance
    data.

    Without TCMP, IRS must determine how it will measure compliance over the
    long term, since its workload and future revenues depend on taxpayers’
    voluntary compliance. Long-term alternatives include

•   conducting small multiyear TCMP-type audits from smaller samples and
    combining the data from several years to ensure the necessary precision
    and coverage,
•   using data from operational audits to assess compliance changes, and
•   conducting periodic national mini-TCMP audits to identify emerging issues.

    Each of these alternatives would be cheaper and less burdensome to IRS
    and taxpayers than the proposed TCMP sample but would also provide less
    comprehensive compliance data.

    We noted that regardless of how IRS decides to replace the information
    that would have been provided by TCMP, it was important for IRS to begin
    soon because any alternative is likely to require several years to put into
    place, and the data will be needed to update information on IRS’
    compliance programs.

    We recommended that IRS identify a short-term strategy to minimize the
    negative effects of the compliance information that was likely to be lost
    because TCMP was postponed and develop a cost-effective, long-term
    strategy to ensure the continued availability of reliable compliance data.

    Tax System: Issues in Tax Compliance Burden (GAO/T-GGD-96-100,
    Apr. 3, 1996). Businesses and individuals spend time and money—and
    sometimes experience frustration—trying to comply with federal, state,
    and local tax requirements. We refer to this experience as the “taxpayer
    compliance burden.” In testimony before the Subcommittee on National
    Economic Growth, Natural Resources, and Regulatory Affairs, House
    Committee on Government Reform and Oversight, we discussed
    information that we collected on the federal tax compliance burden from



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businesses, tax accountants, tax lawyers, representatives of tax
associations, and IRS staff.

According to those interviewed, the compliance burden is caused by the
tax code’s complexity, ambiguous language, and frequent changes. As a
result, many businesses are uncertain about what they must do to comply
with the code. Recordkeeping, time-consuming calculations, the interplay
of state and local tax requirements, and IRS’ administration of the tax code
add to the burden. Concerning the latter, the officials who were
interviewed identified several problems. Primarily, those problems
centered around the tax knowledge of IRS’ auditors, the clarity of IRS’
correspondence and notices, and the amount of time IRS takes to issue
regulations. Estimating businesses’ tax compliance burden and costs
would be difficult since businesses do not collect the data needed to make
reliable estimates.

The greatest reduction in the tax compliance burden could be gained by
simplifying the tax code. Return-free filing alternatives used in other
countries could reduce individual taxpayers’ tax compliance and IRS
administrative burdens; but employers, tax preparers, and state tax
systems could be further burdened or adversely affected. Reducing
businesses’ and individuals’ tax compliance burdens will be difficult
because of the tax policy trade-offs, such as revenue, equity, and social
and economic issues.

Tax Administration: IRS Can Improve Information Reporting for
Original Issue Discount Bonds (GAO/GGD-96-70, Mar. 15, 1996).
Information reporting is a vital tool for promoting voluntary compliance
with U.S. income tax laws. This reporting, which is done through a series
of returns designed to report nonwage income on IRS Form 1099, is
intended to ensure that taxpayers know of and report investment and
other income on their tax returns. In a report to the Commissioner of
Internal Revenue, we provided information on IRS’ efforts to ensure that
taxpayers report investment income earned from bonds sold at original
issue discount (OID), focusing on the completeness and use of IRS
Publication 1212, List of Original Issue Discount Instruments.7

IRS asserted that brokerage firms, banks, and investment managers could
rely on Publication 1212 to identify all publicly offered OID bonds and
compute OID income; however, many OID bonds were missing from
Publication 1212. We identified at least 37 bonds worth billions of dollars

7
 Generally, the term “OID” covers bonds sold at a discount—that is, below their redemption value.



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    that should have been listed but were not. IRS’ source of information for
    Publication 1212 is Form 8281, Information Return for Publicly Offered
    Original Issue Discount Instruments, which is filed by bond issuers. IRS
    primarily relied on its sizable penalty (up to $50,000) to ensure that OID
    bond issuers file Form 8281. However, no IRS organization had primary
    responsibility for monitoring such compliance, and there was no evidence
    that IRS had ever assessed the penalty for failure to file or for late filings.
    IRS did not use any other information it received, such as corporate tax
    returns, to help ensure compliance with Form 8281 reporting
    requirements. Because Publication 1212 was not complete, those who
    relied on it to determine their information reporting requirements could
    not be sure they were reporting all OID income to IRS or to bond owners.

    We recommended that IRS assign responsibility for monitoring and
    enforcing the OID bond issuance reporting requirements to specific
    organizational units and that IRS develop procedures, such as computer
    matching, to help ensure that all OID information is listed in Publication
    1212. We also recommended that IRS work with representatives of the
    securities industry to develop means to inform and remind OID bond
    issuers of their responsibility to file Form 8281.

    Tax Administration: Diesel Fuel Excise Tax Change (GAO/GGD-96-53,
    Jan. 16, 1996). At the request of Senator Daniel Patrick Moynihan, we
    reported on changes in diesel fuel excise tax collections in 1994, IRS’
    responses to concerns about its regulations implementing new diesel fuel
    taxation requirements, and incentives to evade motor fuel excise taxes or
    obtain false refunds.

    IRSdata indicated that diesel fuel excise tax collections increased about
    $1.2 billion, or 22.5 percent, from 1993 to 1994. Treasury estimated that
    increased tax compliance accounted for between $600 million and
    $700 million of the additional collections.

    IRS addressed two major concerns about the dyeing requirements in its
    regulations by settling on one dye color (red) rather than two and delaying
    any action on using colorless markers to indicate tax-free fuel until the
    effectiveness of the dyeing program could be determined. However, IRS
    had not addressed several concerns, including

•   the taxation of diesel fuel additives,
•   the appropriate concentration level of red dye to avoid possible adverse
    effects on engines,



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•   the potential impact on the availability of diesel fuel for recreational
    boating use,
•   requests that the state of Alaska be exempted from the dyeing
    requirements, and
•   the effects of using dyed fuel in intercity buses on companies’ operating
    cost and their ability to comply with EPA regulations.

    The new diesel taxation approach appeared to be raising significant
    additional revenue; however, anyone who wished to defraud the system
    continued to have significant incentives to do so. For example, evading
    just the federal tax on an 8,000-gallon truckload of diesel fuel would yield
    an illicit profit of $1,920. IRS had detected several fraudulent schemes
    involving refunds of gasoline or diesel fuel excise taxes, but it did not
    know how extensive this fraud might be.

    Tax Administration: Audit Trends and Taxes Assessed on Large
    Corporations (GAO/GGD-96-6, Oct. 13, 1995). We reviewed the results of IRS’
    efforts to audit the tax returns of about 45,000 large corporations. IRS’
    audits of those returns and the returns of the 1,700 largest corporations in
    IRS’ Coordinated Examination Program have generated about two-thirds of
    the additional taxes recommended from all income audits. Using IRS data,
    we analyzed audit trends for fiscal years 1988 through 1994, computed the
    rate at which taxes recommended by agents were assessed, and developed
    profiles of audited large corporations and compared them with large
    corporations that were not audited.

    For every dollar invested in large corporation audits, IRS recommended $56
    and ultimately assessed $15 in additional taxes for the years 1988 through
    1994. IRS invested more hours in directly auditing large corporations but
    recommended less additional tax per hour invested in 1994 than in 1988. In
    1994, IRS spent 25 percent more hours and audited only 3 percent more
    returns. Further, in 1994 constant dollars, additional taxes recommended
    decreased 4 percent in total, decreased 7 percent per return audited, and
    decreased 23 percent per audit hour. In 1994, large corporations appealed
    66 percent of the additional taxes that IRS recommended in its audits.

    Between 1988 and 1994, IRS assessed 27 percent of the recommended
    additional taxes either after agreement or resolution in appeals. This
    assessment rate varied widely when disaggregated. For example, the rate
    reached as high as 103 percent and fell to less than 1 percent at 20 IRS
    districts that recommended over $100 million in additional taxes during
    the 7 years we analyzed. The reasons for such disparate rates were not



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    apparent. IRS believed that the assessment rate was not an accurate
    measure of audit effectiveness since various factors outside the audit
    (such as economic conditions or net operating losses) could lower the
    rate.

    Our profiles of large corporations showed that most were engaged in
    either manufacturing or the finance and insurance industries in 1992.
    Audited corporations tended to report higher average incomes, tax
    liabilities, and other tax amounts than nonaudited corporations.

    Tax Administration: Information on IRS’ Taxpayer Compliance
    Measurement Program (GAO/GGD-96-21, Oct. 6, 1995). In response to a
    request from Representative Joseph K. Knollenberg, we provided
    information on IRS’ TCMP for tax year 1994.

    IRS had generally taken appropriate action on the concerns raised in our
    1994 report that dealt with meeting milestones for starting TCMP audits,
    testing TCMP database components, developing data collection systems,
    and collecting and analyzing data.8 Because of uncertainties about its
    fiscal year 1996 budget, IRS had delayed the start of its TCMP audits from
    October 1 to December 1, 1995. This delay was fortuitous because IRS had
    not completed testing the TCMP database components and data collection
    systems.9

    IRS had planned to collect data on partners, shareholders, and
    misclassified workers as we suggested in our 1994 report. These additional
    data should have allowed IRS to improve its measure of compliance levels.
    IRS had also planned to have auditors computerize some of their comments
    on audit findings, which should have made it easier for researchers to
    analyze TCMP results. However, IRS had not developed a research plan that
    could be used to analyze final TCMP results.

    We also reported that

•   we knew of no other IRS or third-party data that could be used to develop
    return selection formulas that would allow IRS to target its audits as
    effectively as TCMP data and
•   TCMP could be very useful, not only for improving compliance in the
    existing tax system but also as a tool for designing and administering a
    new system.

    8
     Status of the Tax Year 1994 Compliance Measurement Program (GAO/GGD-95-39, Dec. 30, 1994).
    9
     IRS subsequently decided to postpone this TCMP indefinitely.



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                   Tax Administration: Making IRS’ Telephone Systems Easier to Use
Customer Service   Should Help Taxpayers (GAO/GGD-96-74, Mar. 11, 1996). In a report to the
                   Chairman, Subcommittee on Oversight, House Committee on Ways and
                   Means, we discussed IRS’ efforts to develop interactive telephone systems,
                   focusing on IRS’ efforts to make the telephone systems easier to use, meet
                   security requirements for protecting taxpayer data, and assign “process
                   owners” who would be responsible for providing developers with input
                   about systems’ requirements.

                   Three prototype interactive telephone systems—designed to reduce
                   correspondence between IRS and taxpayers and to make IRS more
                   accessible—suffered from too many menu options and other problems. IRS’
                   telephone-routing system required taxpayers to remember up to eight
                   menu options—even though guidelines called for no more than four—and
                   did not allow taxpayers to return to the main menu when they made a
                   mistake or wanted to resolve other issues. IRS was aware of the menu
                   problems, but it believed that multiple options were necessary because tax
                   issues are complex. IRS had yet to do a cost-benefit analysis of the use of
                   multiple toll-free numbers, which IRS officials had recommended as a
                   solution to the problem of too many menu options. Providing taxpayers
                   with a written, detailed step-by-step description on how to use the menu
                   options might be another way to make the telephone systems more user
                   friendly.

                   IRS complied with government security requirements when developing its
                   first three interactive telephone systems. However, future interactive
                   systems should allow taxpayers greater access to tax information; and
                   more secure features, such as a personal identification number, may be
                   needed to protect taxpayer data. IRS process owners were designated late
                   and had not provided all the requirements information needed for the
                   telephone systems’ development.

                   Successful IRS implementation of interactive telephone systems is critical
                   to improving IRS customer service. IRS expects telephone assistance to
                   double as it tries to move toward a paperless system. Resolving the
                   shortcomings discussed in this report is essential if IRS is to achieve its
                   goal of handling 45 percent of taxpayer calls through interactive telephone
                   systems. We recommended that IRS conduct a cost-benefit analysis of the
                   actions needed to overcome the problems caused by too many menu
                   options, including multiple toll-free numbers and written instructions on
                   how to use the interactive menus.




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    Tax Administration: IRS Faces Challenges in Reorganizing for
    Customer Service (GAO/GGD-96-3, Oct. 10, 1995). IRS is undergoing a major
    effort to modernize its information systems and restructure its
    organization. This effort involves several components, one of which IRS
    calls its “customer service vision.” This vision is a plan for improving IRS’
    interactions with taxpayers and includes folding parts of IRS’ field structure
    into 23 customer service centers. These centers would work primarily by
    telephone to provide taxpayer service, distribute forms, collect unpaid
    taxes, and adjust taxpayer accounts. They would absorb current IRS
    telephone operations and help to convert much of IRS’ written
    correspondence work to the telephone.

    In a report to the Chairmen and Ranking Minority Members of interested
    congressional committees, we reviewed the progress IRS had made toward
    its customer service vision. We focused on

•   IRS’ customer service goals and its plans to meet these goals,
•   the gap between IRS’ current operations and its vision,
•   IRS’ progress to date in meeting its goals,
•   current management concerns, and
•   important challenges IRS faces.

    IRS’ customer service goals are to provide better service to taxpayers, use
    its resources more efficiently, and improve taxpayers’ compliance with tax
    laws. IRS plans to serve taxpayers better by improving their access to
    telephone service and resolving most problems with a single contact. IRS
    expects to improve its efficiency by having fewer work locations and
    automated workload management, giving customer service
    representatives better computer resources and nationwide access to
    taxpayer accounts, and converting work currently done by
    correspondence to the telephone. IRS expects to improve compliance by
    answering more taxpayer inquiries and having more timely data to follow
    up on compliance problems.

    There was a large gap between IRS’ current operations and its customer
    service vision. For example, although IRS planned to improve accessibility,
    taxpayers who called IRS’ toll-free telephone assistance sites in fiscal year
    1994 got busy signals 73 percent of the time. IRS had made some progress
    toward its vision by initiating limited operations in a few new customer
    service centers, but only a few staff had been reassigned to those centers,
    and new computer and telephone systems to support the centers were still
    in the early stages of development and testing.



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                 A lack of clarity in management responsibilities had, to some extent,
                 hampered IRS in implementing its customer service plans. In that regard,
                 we noted that no single individual was responsible for the success of all
                 the work activities and resources that were to be transferred to customer
                 service. We also discussed the absence of owner involvement during
                 project development and the failure of owners to establish the quality
                 measures critical to evaluating the performance of interactive telephone
                 systems.

                 IRSwould have to overcome several important challenges to achieve its
                 customer service goals. Those challenges included

             •   managing the transition to a different organization while maintaining
                 ongoing workloads,
             •   developing and effectively using new information technology, and
             •   devising ways to measure the work of the customer service centers and
                 balance their competing workloads.

                 We recommended that IRS clarify the criteria for assigning ownership for
                 its modernization projects; define roles and responsibilities for those
                 owners; and emphasize to owners the need to provide the business
                 requirements necessary to develop, test, and implement new customer
                 service products and services.


                 Earned Income Credit: IRS’ 1995 Controls Stopped Some
Submission       Noncompliance, But Not Without Problems (GAO/GGD-96-172, Sept. 18,
Processing       1996). At the request of the Chairman, Senate Committee on Finance, we
                 reviewed IRS’ efforts to reduce EIC noncompliance. IRS took several steps to
                 prevent and detect EIC noncompliance in 1995. Those steps stopped some
                 noncompliance; however, a number of problems remained.

                 The up-front controls used by IRS in its Electronic Filing System

             •   identified about 1.3 million problems with SSNs on submissions from
                 persons who were claiming EIC and
             •   prevented the affected returns from being filed electronically until the
                 problems were corrected.

                 However, IRS’ increased emphasis on validating SSNs on paper returns
                 generated a workload that far exceeded its capabilities. IRS identified
                 about 3.3 million paper returns with missing or invalid SSNs for



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    EIC-qualifying   children or dependents and delayed related refunds, but it
    only had the resources to follow up on 1 million cases. IRS also delayed
    refunds on another 4 million EIC returns that did not have any SSN problems
    to give itself time to check for duplicate SSNs, only to release almost all of
    those refunds without checking.

    Although IRS’ data provided some evidence of the results of its efforts in
    1995, they were not sufficient to allow an overall assessment of the impact
    of IRS’ initiatives on EIC noncompliance. For example,

•   IRS had not yet released the results of an EIC compliance study that it did in
    1995,
•   data on the results of the SSN verification effort for paper returns were not
    reported in a way that isolated tax year 1994 cases from prior years’ cases
    or distinguished between EIC cases and cases involving dependents, and
•   IRS did not track what happened to returns rejected by the Electronic
    Filing System.

    We recommended that IRS consider cost-effective ways to compile the data
    needed to better assess the effectiveness of its efforts to combat EIC
    noncompliance.

    Tax Refund Timeliness (GAO/GGD-96-131R, June 26, 1996). At the request of
    the Chairman, House Committee on Ways and Means, we reviewed the
    processing and issuance of income tax refund payments in 1996 and
    compared that year’s pattern with the patterns in 1994 and 1995. The
    Chairman’s request was prompted by a concern that the timing of income
    tax refund payments might be manipulated to avoid reaching the debt
    limit.

    Our work indicated that

•   the number and dollar amount of refunds issued as of the end of April 1996
    either exceeded or closely approximated the end-of-April figures for 1994
    and 1995 and
•   the average number of days for issuing refunds in 1996 was the same as in
    past years.

    Also, our tracking of returns processed by the Kansas City Service Center
    showed nothing unusual. Thus, we concluded that there was no evidence
    that any special steps were taken in 1996 to delay refunds. However, that
    did not mean that no refunds were delayed in 1996. As in 1995, but to a



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    much lesser degree, IRS delayed some refunds in 1996 to verify SSNs and EIC
    claims.

    IRS Efforts to Control Fraud in 1995 (GAO/GGD-96-96R, Mar. 25, 1996). At
    the request of the Ranking Minority Member of the Senate Committee on
    Governmental Affairs, we reviewed the status and results of IRS’ efforts to
    reduce its exposure to fraud in 1995. IRS introduced new controls and
    expanded existing controls to both deter the filing of fraudulent returns
    and identify questionable returns once they had been filed. IRS’ efforts to
    deter fraud appear to have had a positive effect, but the identification of
    questionable returns was less successful.

    To deter the filing of fraudulent returns, IRS established filters to screen
    electronic submissions for missing, invalid, or duplicate SSNs and to
    prevent those returns from being filed electronically until the problems
    were corrected. The electronic filing filters identified 4.1 million SSN
    problems in 1995. IRS also

•   expanded its process for determining the suitability of tax return
    preparers and transmitters who wanted to participate in the electronic
    filing program and
•   eliminated the Direct Deposit Indicator because of concern that it might
    have encouraged filing fraud by facilitating refund anticipation loans.

    To improve the identification of noncompliance on returns after they had
    been filed, IRS

•   placed an increased emphasis on validating SSNs on paper returns and
    delayed refunds to give itself time to do those validations and to check for
    possible fraud and
•   upgraded the Questionable Refund Program.

    As a result, IRS prevented the issuance of millions of dollars in
    questionable refunds. However, IRS also

•   identified many more SSN problems than it was able to deal with and ended
    up releasing the refunds without resolving the problems and
•   delayed millions of refunds with valid SSNs to check for duplication, but
    ended up releasing those refunds after several weeks without checking the
    SSNs.




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    The 1995 Tax Filing Season: IRS Performance Indicators Provide
    Incomplete Information About Some Problems (GAO/GGD-96-48, Dec. 29,
    1995). In response to a request from the Chairman, Subcommittee on
    Oversight, House Committee on Ways and Means, we reviewed IRS’
    performance during the 1995 tax filing season. We focused on the
    processing of individual income tax returns and refunds, the ability of
    taxpayers to reach IRS by telephone, and the performance of a new IRS
    computer system for processing returns.

    IRS’indicators showed that it generally met its 1995 filing season goals. For
    example, IRS received more individual income tax returns than the year
    before; answered 11 percent more telephone calls than expected; issued
    refunds faster, on average, than its 40-day goal; and accurately filled
    97 percent of taxpayers’ orders for forms and publications. However, these
    indicators did not provide a complete assessment of the filing season and
    masked several serious problems.

    Specifically,

•   IRS’efforts to combat fraud, which resulted in over 7 million refunds being
    delayed so that IRS could verify SSNs, generated much adverse publicity
    that might have been alleviated if IRS had better forewarned taxpayers of
    potential refund delays;
•   our tests and IRS data showed that taxpayers continued to have serious
    problems trying to reach IRS by telephone; and
•   a new document-imaging system did not perform as expected, leading to
    increased return processing costs and lower-than-expected productivity.

    We recommended that IRS, if it planned to continue validating SSNs and
    delaying refunds in 1996, adjust its methodology for assessing refund
    timeliness. We also recommended that after IRS develops a measure of the
    accessibility of its telephone assistance, which IRS was working on at the
    time of our review, it add that measure to its key filing season
    performance indicators.

    Tax Administration: Electronic Filing Falling Short of
    Expectations (GAO/GGD-96-12, Oct. 31, 1995). Electronic filing is a
    cornerstone of IRS’ plan to move away from the traditional filing of paper
    returns. IRS established a goal of receiving 80 million tax returns
    electronically in 2001. In a report to the Ranking Minority Member of the
    Senate Committee on Governmental Affairs, we discussed




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•   IRS’progress in broadening the use of electronic filing,
•   the availability of data needed to develop an electronic filing strategy, and
•   the implications for IRS if it does not significantly reduce its
    paper-processing workload.

    From 1992 through 1994, the number of returns filed electronically grew
    from 12.6 million to 16.4 million, an annual growth rate of 14 percent. In
    1995, the number of electronic returns was expected to drop to about
    14.8 million, which IRS attributed to various actions it took to crack down
    on refund fraud. Assuming 1995 was an aberration and the 14 percent
    annual growth rate of the preceding years resumed, we estimated that only
    about 33 million returns would be filed electronically by 2001.

    A major impediment to the expansion of electronic filing is its cost to the
    public. Taxpayers who file an electronic return through a preparer or
    electronic filing transmitter have to pay as much as $40 for these services.
    One aspect of IRS’ current electronic filing program that contributes to its
    cost (not only to the public but also to IRS) is the need for taxpayers to
    submit a paper signature document to affirm that information on the
    electronic return is accurate.

    Most of the electronic returns IRS received in 1994 were individual income
    tax returns that could have been filed on Form 1040A or 1040EZ—forms
    that are among the least costly paper returns to process. In addition, IRS
    had made little headway in increasing the number of electronically filed
    business returns, which are generally more complex and thus more costly
    to process on paper than individual returns. The fact that less complex
    returns comprise a disproportionate share of electronic filing may be, at
    least in part, because of IRS’ goal of 80 million returns. Focusing on that
    goal could cause IRS to target its efforts at groups of taxpayers or types of
    returns that will boost the number of electronic returns but not necessarily
    yield the greatest reductions in IRS’ paper-processing workload and
    operating costs.

    Although IRS has some comparative data on the cost to process electronic
    and paper returns, it does not have comparative data on other costs, such
    as storage and retrieval, that can vary depending on how a return is filed.
    IRS also does not have


•   adequate data on why taxpayers do not file electronically and what it
    would take to get them to do so and




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                       •   estimates of the number of electronic returns IRS can expect to receive
                           from those taxpayers after some market intervention.

                           Without a significant increase in electronic filing, IRS’ customer service and
                           paper-processing workloads may overwhelm its planned staffing and
                           require changes to various aspects of its modernization efforts. IRS did not
                           have contingency plans for that eventuality.

                           We recommended that IRS (1) identify those groups of taxpayers who offer
                           the greatest opportunity to reduce IRS’ paper-processing workload and
                           operating costs if they were to file electronically and (2) develop strategies
                           that seek to eliminate impediments that inhibit those groups from filing
                           electronically. We also recommended that IRS adopt electronic filing goals
                           that focus on reducing IRS’ paper-processing workload and operating costs
                           and prepare contingency plans for the possibility that electronic filings
                           will fall short of expectations.


                           IRS Tax Collection Reengineering (GAO/GGD-96-161R, Sept. 24, 1996). In a
Accounts Receivable/       letter to the Chairman, Senate Committee on Finance, we provided
Collections                information on IRS’ efforts to reengineer its enforcement action program,
                           which included the delinquent tax collection process.

                           The enforcement action reengineering effort started in June 1994 and was
                           suspended in November 1995. When the effort was suspended, few results
                           had been achieved in changing work processes or addressing IRS’
                           long-standing collection problems. An independent consultant’s report
                           identified several factors that hampered the reengineering effort: IRS did
                           not (1) have the organizational commitment and support needed to
                           achieve the level of change desired, (2) fully implement the reengineering
                           methodology needed, and (3) integrate its reengineering efforts with the
                           existing systems modernization program.

                           In October 1995, IRS established a separate office to coordinate all future
                           strategic change initiatives, like reengineering. In January 1996, IRS
                           announced plans to initiate a new reengineering project focusing on the
                           tax settlement process, which was expected to include aspects of
                           enforcement action and the tax collection processes.

                           IRS had also undertaken several projects to change the role of revenue
                           officers in the collection process by modernizing their jobs. One project,
                           for example, was to automate many manual work processes and link



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    revenue officers to IRS’ computer databases through the use of laptop
    computers.

    Tax Administration: IRS Tax Debt Collection Practices
    (GAO/T-GGD-96-112, Apr. 25, 1996). IRS confronts major hurdles in collecting
    tens of billions of dollars in delinquent taxes. As Congress tries to balance
    the federal budget, these unpaid taxes have become increasingly
    important as have IRS’ collection efforts. We discussed IRS’ tax debt
    collection practices before the Subcommittee on Oversight, House
    Committee on Ways and Means.

    We expressed the belief that IRS could do more to improve its collection
    practices. The challenges facing IRS’ improvement efforts include

•   a lack of accurate and reliable information on either the makeup of its
    accounts receivable or the effectiveness of the collection tools and
    programs it uses,
•   an aged inventory of receivables,
•   outdated collection processes, and
•   antiquated technology.

    IRSis attempting to modernize its information and processing systems, but
    these actions will not be completed for several years. Without reliable
    information on the accounts they are trying to collect and the taxpayers
    who owe the debts, IRS employees generally do not know whether they are
    resolving cases in the most efficient and effective manner and may spend
    time pursuing invalid or unproductive cases. This lack of reliable
    performance data also affects IRS’ ability to target its collection efforts to
    specific taxpayers or types of debts. IRS needs a comprehensive strategy to
    guide its efforts to improve tax debt collections, starting with having
    accurate and reliable information.

    We recommended in May 1993 that IRS test the use of private debt
    collectors to support its collection efforts.10 Such a test could provide
    useful insight into the effectiveness of the techniques and technologies
    used in the private sector to collect older accounts. For example, IRS could
    learn which actions are most productive based on the type of case, type of
    taxpayer, and age of the account.




    10
      See New Delinquent Tax Collection Methods for IRS (GAO/GGD-93-67, May 11, 1993).



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                           Insular Areas Update (GAO/GGD-96-184R, Sept. 13, 1996). In a letter to the
Tax Expenditures and       Chairman, Senate Committee on Energy and Natural Resources, we
Preferences                provided information on the fiscal arrangements between the U.S.
                           government and American Samoa, Guam, the Commonwealth of the
                           Northern Mariana Islands, the Commonwealth of Puerto Rico, and the U.S.
                           Virgin Islands. The letter updated information presented in our 1995
                           testimony.11

                           Since our 1995 testimony, the only significant change in how federal taxes
                           apply to the territories related to the Puerto Rico and possessions tax
                           credit—the tax credit was repealed, although existing claimants may
                           continue to earn credits during a 10-year transition period. We also
                           reported the following information for fiscal year 1995:

                       •   IRS collected $3.3 billion from Puerto Rico for individual and corporation
                           income taxes, unemployment taxes, estate and gift taxes, and excise taxes.
                       •   The Bureau of Alcohol, Tobacco, and Firearms collected $232.4 million in
                           excise taxes on rum shipped from Puerto Rico to the United States and
                           $47.8 million on rum shipped from the U.S. Virgin Islands to the United
                           States. The Treasury transferred $204.9 million and $41.7 million in rum
                           excise tax revenue to the governments of Puerto Rico and the U.S. Virgin
                           Islands, respectively.
                       •   The Customs Service collected $138.2 million in duties in Puerto Rico, of
                           which $96 million was transferred to the Puerto Rican government.
                           Customs also collected $9.2 million in duties in the U.S. Virgin Islands, of
                           which $4.2 million was transferred to the U.S. Virgin Islands government.
                       •   Federal expenditures in the five territories totaled $11.4 billion. The
                           expenditures included grants and other payments to the territorial
                           governments as well as salaries and wages for federal employees.

                           Profile of Indian Gaming (GAO/GGD-96-148R, Aug. 20, 1996). In a letter to
                           the Chairman, House Committee on Ways and Means, we provided
                           information on the Indian gaming industry. As of July 1996, according to
                           data from the National Indian Gaming Commission, 177 of the 557
                           officially recognized Indian tribes were operating 240 gaming facilities. An
                           additional 41 tribes had authorization to operate but had not yet opened
                           their gaming facilities. The 85 tribes that had filed financial statements for
                           either 1994 or 1995 reported about $3.5 billion in total gaming revenues
                           (defined as dollars wagered minus payouts) for 110 gaming facilities. Of
                           the 110 facilities, the 6 largest accounted for 40 percent of the revenues.

                           11
                            U.S. Insular Areas: Information on Fiscal Relations With the Federal Government (GAO/T-GGD-95-71,
                           Jan. 31, 1995).



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Appendix I
Summaries of Tax-Related Products Issued
in Fiscal Year 1996




On the basis of our analysis of the financial statements, we determined
that about $1.2 billion had been transferred from gaming facilities to 74 of
the 85 tribes.

Tax Policy: Analysis of Certain Potential Effects of Extending
Federal Income Taxation to Puerto Rico (GAO/GGD-96-127, Aug. 15, 1996).
In response to a request from the Chairman of the House Committee on
Resources and the Chairman of its Subcommittee on Native American and
Insular Affairs, we provided information on some potential effects of
extending the IRC to residents of the Commonwealth of Puerto Rico. Our
estimates relating to federal tax liabilities were based on the income and
demographic characteristics of Puerto Rican taxpayers in 1992, the latest
year for which detailed data were available.

If IRC tax rules had been applied to residents of Puerto Rico and if there
were no behavioral responses to this, the residents would have owed
around $623 million in federal income tax before taking into account the
EIC. The total amount of EIC would have been about $574 million, leaving a
net aggregate federal tax liability of about $49 million. We estimated that
about 59 percent of the population who filed individual income tax returns
in 1992 would have earned some EIC. The average EIC earned by eligible
taxpayers would have been $1,494.

We estimated that 41 percent of the households filing income tax returns
would have had positive federal income tax liabilities, 53 percent would
have received net transfers from the federal government because their EIC
would have more than offset their precredit liabilities, and 6 percent
would have had no federal tax liability.

If application of federal income tax resulted in an additional $49 million in
tax liability after subtracting EIC as we estimated and if the Puerto Rican
government wanted to keep constant the aggregate amount of combined
federal and Puerto Rican individual income tax levied on its residents, it
would have had to reduce its individual income tax revenue by about
5 percent.

We also accounted for the probability that some Puerto Rican residents
who were not required to file Puerto Rican tax returns in 1992 would file
federal tax returns because they qualified for the EIC. We estimated, as an
upper limit, that those additional EIC claims could total about $64 million,
and we discussed how additional EIC claims in that amount would affect
the data discussed above.



Page 44                                    GAO/GGD-97-122 1996 Annual Tax Report
Appendix I
Summaries of Tax-Related Products Issued
in Fiscal Year 1996




Program Expenses of Charities (GAO/GGD-96-125R, July 10, 1996). In a
letter to Senator Daniel R. Coats, we provided information on program
service expenses reported by organizations that are exempt from taxation
under IRC 501(c)(3). These organizations are collectively known as
charities. Program service expenses are those expenses directly related to
the exempt purposes of the organization. Analysis of the organizational
expense data was based on information collected by IRS from the long
Form 990 returns filed by 121,627 charitable organizations that reported
expenses.

We estimated that the percentage of expenses allocated to program
services for those organizations that filed was about 86 percent of total
expenses for 1992. As a percentage of their total expenses, more than
60 percent of these charitable organizations had program service expenses
of 80 percent or greater.

Earned Income Credit: Profile of Tax Year 1994 Credit Recipients
(GAO/GGD-96-122BR, June 13, 1996). At the request of the Chairman, Senate
Committee on Finance, we provided information on participation in the
EIC program for tax years 1990 to 1994 and the characteristics of taxpayers
who received the credit in tax year 1994.

Total EIC program costs increased 150 percent from 1990 to 1994, and the
number of EIC recipients increased by about 50 percent, to 19.1 million.
Extension of the EIC to certain childless adults in 1994 was the main reason
for the recent growth in the number of EIC claimants. In tax year 1994,
about 15 million families with children received $20.5 billion in EIC while
4 million childless adults received EIC totaling $700 million.

Most of the taxpayers claiming the EIC for families with children filed as
heads of households, and nearly 90 percent of childless adult claimants
were single. The majority of EIC claimants were 25 to 44 years old, and in
tax year 1994, 1.2 million EIC recipients also claimed $507 million in child
and dependent care credits. EIC recipients, compared with filers who did
not claim EIC, were more likely to file their returns electronically, use
simpler tax forms, and use a tax preparer. EIC recipients derived their
income primarily from earnings rather than investment income. EIC is
structured so that the credit amount increases as income increases,
plateaus at a maximum credit amount, and then phases out as income
exceeds a certain amount. About 60 percent of taxpayers claiming EIC for
families with children had income in the credit’s phase-out range.




Page 45                                    GAO/GGD-97-122 1996 Annual Tax Report
    Appendix I
    Summaries of Tax-Related Products Issued
    in Fiscal Year 1996




    In 1995, Congress enacted an indirect wealth test to eliminate from the EIC
    program taxpayers with investment income over $2,350. If that investment
    income threshold had been in place in tax year 1994, about 284,000
    taxpayers, who had claimed $212 million of EIC, would not have been able
    to do so.

    Tax Policy and Administration: Review of Studies of the
    Effectiveness of the Research Tax Credit (GAO/GGD-96-43, May 21, 1996).
    During a congressional hearing in 1995, we were asked to evaluate recent
    studies of the research tax credit to determine whether the evidence was
    adequate to conclude that available evidence suggests that each dollar
    taken of the research tax credit stimulates at least one dollar of research
    spending in the short run and about two dollars of research spending in
    the long run.12 In response to a request from Representative Robert T.
    Matsui, we reviewed eight studies of the research tax credit, focusing on

•   the adequacy of the studies’ data and methods to determine the amount of
    research spending stimulated per dollar of foregone tax revenue and
•   other factors that determine the credit’s value to society.

    We found that four studies supported the claim that, during the 1980s, the
    research credit stimulated research spending that exceeded its revenue
    cost, but the other four studies did not support the claim or were
    inconclusive. All of the studies had significant data and methodological
    limitations that made it difficult to evaluate industry’s true responsiveness
    to the research tax credit. Because the authors did not have access to
    confidential tax return data, they used publicly available data to determine
    the credit’s incentive. Public data were not a suitable substitute for tax
    return data because public data used different definitions of taxable
    income and research spending. Furthermore, the studies’ analytical
    methods, such as use of industry aggregates and failure to incorporate
    important tax code interactions, made their findings imprecise and
    uncertain. We also found little research on the latest design of the credit to
    determine its effect on incentives and costs.

    As a result, the studies’ evidence was not adequate to conclude that a
    dollar of research tax credit would stimulate a dollar of additional
    short-term research spending or about two dollars of additional long-term
    research spending. Moreover, the value of the research tax credit to
    society cannot be determined simply by comparing the amount of research

    12
     The May 10, 1995, hearing was held by the Subcommittee on Oversight, House Ways and Means
    Committee.



    Page 46                                             GAO/GGD-97-122 1996 Annual Tax Report
    Appendix I
    Summaries of Tax-Related Products Issued
    in Fiscal Year 1996




    spending stimulated by the credit versus the credit’s revenue cost. A
    comparison would have to be made between the total benefits gained by
    society from research stimulated by the credit and the estimated costs to
    society resulting from the collection of taxes required to fund the credit.

    Budget Issues: Selected GAO Work on Federal Financial Support of
    Business (GAO/AIMD/GGD-96-87, Mar. 7, 1996). The federal government
    provides financial benefits to businesses as a way to fulfill a wide range of
    public policy goals. At the request of Representative Charles F. Bass, we
    summarized our previously issued work on spending programs and tax
    benefits available to businesses. Our work showed that these benefits are
    spread throughout the budget, including programs in international affairs,
    energy, natural resources and environment, agriculture, and
    transportation. In cases where programs are poorly designed, including
    those benefiting businesses, the federal government may spend more
    money or lose more revenue than needed to reach its intended audience
    and achieve program or service goals.

    The problems with these financial support programs can be grouped into
    several categories:

•   ineffective or inefficient transfers, wherein some businesses receive
    federal funds or tax benefits to do things they would have done anyway;
•   preemption of market forces, wherein artificially increasing the price of
    goods to consumers can encourage inefficient production and increase
    costs;
•   moral hazards, wherein federal programs provide incentives to businesses
    to undertake more, risky activities than they would without the program;
    and
•   duplication and working at cross-purposes, wherein several federal
    programs address the same problem or where one program may
    counteract the beneficial effects of another program.

    Tax Consequences of Offsets (GAO/NSIAD-96-74R, Dec. 22, 1995). In a letter
    to the Chairmen and Ranking Minority Members of the Senate Committee
    on Armed Services, Senate Committee on Veterans’ Affairs, House
    Committee on National Security, and House Committee on Veterans’
    Affairs, we provided information on the tax consequences to veterans of
    the required offset of certain types of Department of Defense (DOD)
    separation pay and Department of Veterans Affairs (VA) disability
    compensation.




    Page 47                                    GAO/GGD-97-122 1996 Annual Tax Report
    Appendix I
    Summaries of Tax-Related Products Issued
    in Fiscal Year 1996




    In 1980, Congress authorized DOD to provide lump-sum separation pay to
    service members for involuntary separation. In 1991, to assist DOD in
    downsizing, Congress authorized DOD to pay a higher level of lump-sum
    separation pay or an annual annuity to those who separate voluntarily.
    After separating, some veterans qualify for service-connected disability
    compensation from VA. Federal income taxes are withheld from separation
    pay. Disability compensation is tax-exempt. Federal law requires the
    recoupment of the gross amount of separation pay (known as an offset)
    from those who also receive disability compensation for the same period
    of service.

    We were asked if separation pay could be reclassified as disability
    compensation for tax purposes and whether veterans could deduct
    recouped separation pay from gross income. According to IRS, veterans
    may not reclassify separation pay as disability compensation and may not
    deduct recouped separation pay from gross income. IRS did conclude,
    however, that in one limited situation, veterans may retroactively exclude
    part of their lump-sum separation pay from gross income if they also
    qualify for disability compensation.

    Tax Exempt (GAO/GGD-96-47R, Nov. 8, 1995; GAO/GGD-96-46R, Nov. 8, 1995; and
    GAO/GGD-96-29R, Oct. 10, 1995). In November 8, 1995, letters to
    Representatives Ernest Istook and David M. McIntosh, we analyzed IRS
    Statistics of Income data for certain tax exempt organizations. We noted
    that these data were limited in that they

•   covered grants from all levels of government, not just the federal
    government and
•   did not include all federal grants received by exempt organizations.

    For Representative Istook, we provided information on grant receipts,
    lobbying expenditures, and political expenditures for certain organizations
    that were exempt from tax under IRC sections 501(c)(3) through 501(c)(9).
    IRS data showed that there were 259,502 organizations exempt under those
    code sections of which 44,274 reported receiving government grants
    totaling about $42.6 million. Of those organizations receiving grants, 1,029
    reported lobbying expenditures totaling about $43.2 million, and 41
    reported political expenditures totaling about $2.4 billion.

    For Representative McIntosh, we compared the average lobbying
    expenditures for tax-exempt charitable organizations that received
    government grants with the average expenditures for charities that did not



    Page 48                                    GAO/GGD-97-122 1996 Annual Tax Report
            Appendix I
            Summaries of Tax-Related Products Issued
            in Fiscal Year 1996




            receive government grants in tax year 1992. IRS data showed that out of
            122,563 charities, 2,132 reported lobbying expenditures that totaled about
            $75.9 million for tax year 1992. Of the organizations that reported lobbying
            expenditures, 48 percent reported receiving government grants. Grantees
            reported average lobbying expenditures of about $41,940 per organization,
            and nongrantees reported average lobbying expenditures of about $29,701
            per organization.

            In an October 10, 1995, letter to Representative Ernest Istook, we reviewed
            the methodology used by Dr. William Duncan to prepare his analysis
            entitled Non-Profit Lobbying Statistics. In his analysis, Dr. Duncan
            attempted to quantify the lobbying expenditures of 501(c)(3) organizations
            that received government grants in tax year 1992. We noted that his
            approach should produce reasonably accurate results if the methodology
            he described to us was applied to the data he identified.


            Summary of Selected GAO Reports (GAO/GGD-96-193R, Sept. 26, 1996). In a
Other       letter to the Co-Chairmen, National Commission on Restructuring the
            Internal Revenue Service, we summarized selected GAO reports about IRS
            that were issued in fiscal years 1991 through 1995 and in the first three
            quarters of fiscal year 1996. We noted that the reports

        •   identified areas that are particularly problematic to IRS, such as tax return
            processing, customer service, collection efforts, financial management,
            and information technology and
        •   indicated the formidable challenges IRS faces in making its organization,
            operations, and processes more effective and efficient while improving
            service to taxpayers.

            Tax Policy and Administration: 1995 Annual Report on GAO’s
            Tax-Related Work (GAO/GGD-96-61, Mar. 8, 1996). Pursuant to a legislative
            requirement, we summarized our work on tax policy and administration
            during fiscal year 1995. This report highlights notable reports and
            testimony from fiscal year 1995, discusses actions taken on our
            recommendations as of the end of 1995, discusses recommendations that
            we made to Congress before and during fiscal year 1995 that had not been
            acted upon, and lists the assignments for which we were given access to
            tax information under the law. Our key recommendations related to
            improving compliance with the tax laws, better assisting taxpayers,
            enhancing the effectiveness of tax incentives, improving IRS management,
            and improving the processing of returns and receipts.



            Page 49                                    GAO/GGD-97-122 1996 Annual Tax Report
Appendix II

Chronological Listing of GAO Products on
Tax Matters Issued in Fiscal Year 1996


               Report title and number                                                    Date issued
               Tax Administration: Information on IRS’ Taxpayer Compliance                    10/06/95
               Measurement Program (GAO/GGD-96-21)
               Tax Administration: IRS Faces Challenges in Reorganizing for                   10/10/95
               Customer Service (GAO/GGD-96-3)
               Tax Exempt (GAO/GGD-96-29R)                                                    10/10/95
               Tax Administration: Audit Trends and Taxes Assessed on Large                   10/13/95
               Corporations (GAO/GGD-96-6)
               Tax Administration: Electronic Filing Falling Short of Expectations            10/31/95
               (GAO/GGD-96-12)
               Tax Exempt (GAO/GGD-96-46R)                                                    11/08/95
               Tax Exempt (GAO/GGD-96-47R)                                                    11/08/95
               Tax Consequences of Offsets (GAO/NSIAD-96-74R)                                 12/22/95
               The 1995 Tax Filing Season: IRS Performance Indicators Provide                 12/29/95
               Incomplete Information About Some Problems (GAO/GGD-96-48)
               Tax Administration: Diesel Fuel Excise Tax Change                              01/16/96
               (GAO/GGD-96-53)
               IRS Staffing Trends (GAO/GGD-96-73R)                                           01/31/96
               IRS Operations: Significant Challenges in Financial Management                 03/06/96
               and Systems Modernization (GAO/T-AIMD-96-56)
               Budget Issues: Selected GAO Work on Federal Financial Support                  03/07/96
               of Business (GAO/AIMD/GGD-96-87)
               Tax Policy and Administration: 1995 Annual Report on GAO’s                     03/08/96
               Tax-Related Work (GAO/GGD-96-61)
               Tax Administration: Making IRS’ Telephone Systems Easier to                    03/11/96
               Use Should Help Taxpayers (GAO/GGD-96-74)
               Status of Tax Systems Modernization, Tax Delinquencies, and the                03/14/96
               Potential for Return-Free Filing (GAO/T-GGD/AIMD-96-88)
               Tax Administration: IRS Can Improve Information Reporting for                  03/15/96
               Original Issue Discount Bonds (GAO/GGD-96-70)
               IRS Efforts to Control Fraud in 1995 (GAO/GGD-96-96R)                          03/25/96
               Tax Systems Modernization: Management and Technical                            03/26/96
               Weaknesses Must Be Overcome to Achieve Success
               (GAO/T-AIMD-96-75)
               Tax Administration: IRS’ Fiscal Year 1996 and 1997 Budget                      03/28/96
               Issues and the 1996 Filing Season (GAO/T-GGD-96-99)
               Tax System: Issues in Tax Compliance Burden                                    04/03/96
               (GAO/T-GGD-96-100)
               Tax Administration: IRS Tax Debt Collection Practices                          04/25/96
               (GAO/T-GGD-96-112)
               Tax Administration: Audit Trends and Results for Individual                    04/26/96
               Taxpayers (GAO/GGD-96-91)
               Tax Administration: Alternative Strategies to Obtain Compliance                04/26/96
               Data (GAO/GGD-96-89)
                                                                                           (continued)



               Page 50                                           GAO/GGD-97-122 1996 Annual Tax Report
Appendix II
Chronological Listing of GAO Products on
Tax Matters Issued in Fiscal Year 1996




Report title and number                                                    Date issued
Tax Systems Modernization: Progress in Achieving IRS’ Business                 05/09/96
Vision (GAO/T-GGD-96-123)
Internal Revenue Service: Results of Nonfiler Strategy and                     05/13/96
Opportunities to Improve Future Efforts (GAO/GGD-96-72)
Tax Policy and Administration: Review of Studies of the                        05/21/96
Effectiveness of the Research Tax Credit (GAO/GGD-96-43)
Tax Research: IRS Has Made Progress But Major Challenges                       06/05/96
Remain (GAO/GGD-96-109)
Financial Audit: Actions Needed to Improve IRS Financial                       06/06/96
Management (GAO/T-AIMD-96-96)
Tax Systems Modernization: Actions Underway But IRS Has Not                    06/07/96
Yet Corrected Management and Technical Weaknesses
(GAO/AIMD-96-106)
Earned Income Credit: Profile of Tax Year 1994 Credit Recipients               06/13/96
(GAO/GGD-96-122BR)
Tax Administration: Issues in Classifying Workers as Employees                 06/20/96
or Independent Contractors (GAO/T-GGD-96-130)
Tax Refund Timeliness (GAO/GGD-96-131R)                                        06/26/96
Program Expenses of Charities (GAO/GGD-96-125R)                                07/10/96
Financial Audit: Examination of IRS’ Fiscal Year 1995 Financial                07/11/96
Statements (GAO/AIMD-96-101)
Managing IRS: IRS Needs to Continue Improving Operations and                   07/29/96
Service (GAO/T-GGD/AIMD-96-170)
Tax Policy: Analysis of Certain Potential Effects of Extending                 08/15/96
Federal Income Taxation to Puerto Rico (GAO/GGD-96-127)
Profile of Indian Gaming (GAO/GGD-96-148R)                                     08/20/96
Tax Systems Modernization: Cyberfile Project Was Poorly                        08/26/96
Planned and Managed (GAO/AIMD-96-140)
Tax Administration: Tax Compliance of Nonwage Earners                          08/28/96
(GAO/GGD-96-165)
Tax Administration: IRS Is Improving Its Controls for Ensuring                 08/30/96
That Taxpayers Are Treated Properly (GAO/GGD-96-176)
Tax Administration: Income Tax Treatment of Married and Single                 09/03/96
Individuals (GAO/GGD-96-175)
Internal Revenue Service: Business Operations Need Continued                   09/09/96
Improvement (GAO/AIMD/GGD-96-152)
IRS Operations: Critical Need to Continue Improving Core                       09/10/96
Business Practices (GAO/T-AIMD/GGD-96-188)
Tax Systems Modernization: Actions Underway But Management                     09/10/96
and Technical Weaknesses Not Yet Corrected
(GAO/T-AIMD-96-165)
Insular Areas Update (GAO/GGD-96-184R)                                         09/13/96
Earned Income Credit: IRS’ 1995 Controls Stopped Some                          09/18/96
Noncompliance, But Not Without Problems (GAO/GGD-96-172)
                                                                            (continued)



Page 51                                           GAO/GGD-97-122 1996 Annual Tax Report
Appendix II
Chronological Listing of GAO Products on
Tax Matters Issued in Fiscal Year 1996




Report title and number                                                     Date issued
IRS Financial Audits: Status of Efforts to Resolve Financial                    09/19/96
Management Weaknesses (GAO/T-AIMD-96-170)
IRS Tax Collection Reengineering (GAO/GGD-96-161R)                              09/24/96
Summary of Selected GAO Reports (GAO/GGD-96-193R)                               09/26/96




Page 52                                            GAO/GGD-97-122 1996 Annual Tax Report
Appendix III

Major Contributors to This Report


                        David J. Attianese, Assistant Director
General Government      Charles W. Woodward III, Evaluator-in-Charge
Division, Washington,   Elizabeth W. Scullin, Communications Analyst
D.C.




(268775)                Page 53                               GAO/GGD-97-122 1996 Annual Tax Report
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