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General government > 6. IRS's Public Referral Programs

The Internal Revenue Service could potentially collect billions of dollars in tax underpayments through its nine public referral programs and save resources by better managing fragmentation and overlap, improving communication, and streamlining processes.

Why This Area Is Important

Individuals who submit information to the Internal Revenue Service (IRS) about tax noncompliance by others through IRS’s public referral programs can help IRS identify taxes that may otherwise go uncollected. Such efforts are an important piece of IRS’s overall enforcement strategy and can help reduce the net $385 billion tax gap—the difference between taxes owed and those ultimately collected.[1] IRS has nine referral programs that allow others to report possible tax law violations by individuals and businesses. Of these nine programs, IRS’s whistleblower program, in which qualifying whistleblowers are paid from 15 to 30 percent of collected proceeds, received over 12,000 claims in fiscal year 2015 and is the largest in terms of revenue collected—more than $3 billion since fiscal year 2007. The information referral process, which covers underreporting of income, false claims of tax benefits, failure to file a return, and failure to withhold and pay taxes, received over 87,000 referrals in fiscal year 2015. This general program resulted in at least $209 million in recommended tax assessments from fiscal year 2012 through fiscal year 2015. The other referral programs are specific to certain issues, such as identity theft or misconduct by return preparers. The following table describes IRS’s nine referral programs.

IRS’s Nine Programs for Public Reporting of Alleged Tax Noncompliance and Misconduct

Referral program

Type of tax issue

Whistleblower Office

Any tax violation; serves as an application for monetary award

Information Referral Process

Any tax violation by individual or business taxpayers; for those not seeking award

Identity Theft

Actual or potential incidents of identity theft

Return Preparer Office

Tax return preparers that filed or altered a tax return without taxpayer consent

Small Business/Self-Employed Abusive Transactions

Suspected abusive tax avoidance schemes or tax return preparers that promote such schemes

Large Business and International Office of Tax Shelter Analysis

Abusive tax shelters involving large numbers of taxpayers and posing greater compliance risk

Tax Exempt and Government Entities Exempt Organizations

Violation by a tax-exempt organization

Tax Exempt and Government Entities Employee Plans

Abusive tax transactions by a retirement plan

Electronic Filing Program

Fraudulent and abusive returns

Source: GAO analysis of IRS referral forms and IRS.gov.  |  GAO-16-375SP


[1]This estimate is for fiscal year 2006, which is the most recent available.

 

What GAO Found

In a February 2016 report, GAO found that IRS does not have a mechanism to facilitate information sharing across its nine referral programs. Such a mechanism would help IRS better coordinate and identify possible efficiencies, as well as better manage fragmentation and overlap. Internal control standards require management to ensure that there are adequate means of communicating and obtaining information from stakeholders.[1] GAO found that while a few of IRS’s referral programs with overlapping responsibilities coordinate with each other, no formal mechanism exists for all nine of the programs to do so. For example, IRS’s Return Preparer Office and Identity Theft Program coordinate on identity theft referrals. In addition, the Return Preparer Office and Small Business/Self-Employed Abusive Transactions unit coordinate on abusive transactions involving tax preparers, and they also can access a common electronic information system to identify overlapping referrals.

However, the other programs do not regularly collaborate. This lack of collaboration has resulted, for example, in confusion for the individuals coming forward to report tax noncompliance. GAO found that individuals reporting noncompliance may report one allegation to multiple referral programs, which causes both the public and IRS to spend resources unnecessarily. Without a broader collaborative mechanism to communicate across the multiple referral programs, IRS may be missing opportunities to assist the public, collect revenue owed, and leverage resources to streamline processes.

In addition, IRS’s referral programs involve largely manual processes, which forces IRS to spend resources reading and routing each of the referrals received. Clerks in the general information referral program, for example, manually screened over 87,000 letters and Forms 3949-A, Information Referral, in 2015. They then routed the referrals to other IRS divisions for additional manual screening and possible examination. Also in 2015, the information referral program rerouted more than 2,900 referrals related to identify theft and return preparer misconduct that were submitted on the wrong form to the wrong referral program, which resulted in inefficiencies and processing delays. Similarly, IRS’s Whistleblower Office staff manually screen an average of 10,000 Forms 211, Application for Award for Original Information, annually and sometimes multiple times before the information is sent to an examination team. For example, whistleblower claims alleging over $2 million in tax noncompliance are generally reviewed three times: first, by intake staff to check for completeness; second, by another group to identify whether to send the information to the operating divisions for a more rigorous review; and third, by subject matter experts in the operating division who recommend whether the operating division should take action.

Internal control standards state that effective information technology management is critical to achieving the useful, reliable, and continuous reporting and communication of information.[2] According to IRS’s strategic plan for fiscal years 2014 through 2017, the public prefers Internet-based service over other service channels, such as phones, paper, or in person. A senior official in IRS’s Online Services office stated that a universal online referral intake system to control the routing of referrals would be preferable to the separate systems that presently exist for each referral form. Currently, IRS’s referral forms are received within IRS units through different channels (e.g., mail, fax, and e-mail). According to one official, IRS’s Return Preparer Office is exploring the conversion of its specialized referral form to an online form. However, if the various referral programs separately explore developing online form submissions, IRS risks replicating or compounding the fragmented referral forms and means of submitting these forms. An IRS plan and timeline for developing a consolidated, online referral submission could assist IRS in leveraging specialized expertise to further consolidate the referral intake process. IRS says it is committed to expanding its portfolio of digital service offerings to meet customer expectations while continuing to keep taxpayer data secure. Strengthened collaboration across the nine referral programs could enable IRS to explore a more systemic online referral submission process. Such an effort could help IRS improve its ability to more efficiently receive and process referrals, while also reducing the public confusion caused by trying to choose among multiple forms.

In an October 2015 report, GAO also identified key problems specific to the whistleblower program that are discouraging whistleblowers from coming forward: few large awards have been paid, claims take years to process, and communication with whistleblowers is limited. Since expanding the whistleblower program in fiscal year 2007, IRS has received thousands of high-dollar claims (those alleging noncompliance of more than $2 million), but it had paid only 31 high-dollar awards as of September 30, 2015. The manual intake and review process previously described, as well as staffing shortfalls, resulted in claim processing backlogs—more than 5,000 in the intake review process alone in fiscal year 2015. GAO found that resource allocation decisions, including the use of short-term detailees, did not completely address these work flow backlogs; as of January 2016, IRS reported that the backlog had shrunk to about 400 claims.[3] This backlog resulted in delays in the intake and processing of claims.

IRS’s Whistleblower Office has studied its claim review work flow to identify opportunities to more efficiently use staff by consolidating processes. However, as of January 2016, IRS had put implementation of any significant changes on hold while it awaits additional recommendations from an internal process improvement review. Increasing efficiency can help government make better use of scarce resources.[4] Improving efficiency in claim intake and processing may help IRS process claims more quickly and pay more awards, which, in turn, may encourage more individuals with information about tax noncompliance to come forward.

Regarding communications, GAO also found in October 2015 that IRS’s recently published information for whistleblowers lacked important information, such as an outline of the claim submission and review process, key information about taxpayer rights, and examples of what to include when submitting Form 211, Application for Award for Original Information. Consistent with internal control standards, IRS’s Whistleblower Office should be the primary source of information to the public about the program. Program managers should ensure that there are adequate means of communicating with external stakeholders who may have a significant impact on the agency achieving its goals.[5] Providing such information to whistleblowers and their representatives could potentially reduce the administrative burden on IRS and alleviate workload. In addition, if whistleblowers are not clear about the Form 211 submission and review process or are discouraged by timeliness and communications concerns, they are less likely to come forward with information that could help IRS address noncompliance and collect additional revenues.

Further, GAO found that IRS was not collecting comprehensive information to evaluate whether the benefit of a recent pilot program to send letters to whistleblowers annually with a limited update on the status of their claim was worth the costs. For example, IRS’s Whistleblower Office did not have plans to reach out to letter recipients for feedback on the usefulness of the status update letters because, according to IRS officials, reaching out for feedback would be contrary to the intent of the pilot program, which is to reduce incoming calls and correspondence from whistleblowers. A comprehensive analysis of the various costs and benefits of a project is the Office of Management and Budget’s recommended technique for formally evaluating government projects. If IRS’s Whistleblower Office is not collecting enough information to evaluate efforts to improve communication, IRS may be using resources inefficiently and further discouraging whistleblowers from coming forward.



[1]GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1. (Washington, D.C.: November 1999).

[3]A detailee is a federal employee who is temporarily assigned or loaned to another unit, agency, or department without a permanent change of position. The detailees assigned to the Whistleblower Office were from other areas of IRS.

[4]See GAO, Fragmentation, Overlap, and Duplication: An Evaluation and Management Guide, GAO-15-49SP (Washington, D.C.: Apr. 14, 2015). This guide defines economy and efficiency as maintaining services or outcomes using fewer resources (such as time, money, and staff) or improving or increasing the quality or quantity of services or outcomes while maintaining (or reducing) resources expended.

Actions Needed

To enhance revenue, better manage fragmentation and overlap across multiple referral programs, and improve efficiency in receiving information from the public on possible tax noncompliance, GAO recommended in February 2016 that the Commissioner of Internal Revenue should take the following two actions:

  • Establish a coordination mechanism to facilitate communication and information sharing across IRS referral programs on crosscutting tax issues and ways to improve efficiency in the mechanisms for public reporting of possible tax violations.
     
  • Direct the referral programs to establish a mechanism to coordinate on a plan and timeline for developing a consolidated, online referral submission in order better position IRS to leverage specialized expertise while exploring options to further consolidate the initial screening operations.

In October 2015, GAO also recommended that to improve the intake and claim review process of IRS’s Whistleblower Office, and evaluate how to increase information available to whistleblowers, the Commissioner of Internal Revenue should take the following three actions:

  • Implement a staffing plan for streamlining the intake and initial review process for the whistleblower program to make more efficient use of staff resources.
     
  • Develop an additional or revised fact sheet, publish additional information about the whistleblower program on the IRS website, or both.
     
  • Develop a comprehensive plan for evaluating the costs and benefits of the pilot annual status letter program, including obtaining feedback from whistleblowers in the pilot regarding the usefulness of the letter.

Improving coordination among referral programs and streamlining processes could reduce the negative effects of fragmentation and overlap and facilitate IRS’s efforts to collect taxes owed and reduce the tax gap. Although there is uncertainty in the cost savings and additional revenues these actions would generate for IRS, these programs could potentially help IRS identify and collect billions of dollars in tax revenue that would otherwise go uncollected.

How GAO Conducted Its Work

The information contained in this analysis is based on findings from the products in the related GAO products section. For IRS’s referral programs, GAO reviewed IRS guidance and forms for making referrals, assessed coordination among the programs using Standards for Internal Control in the Federal Governmentand GAO’s body of work on interagency collaboration, and interviewed IRS officials. For the Whistleblower Office, GAO reviewed award files for 17 paid high-value whistleblower program claims; reviewed IRS guidance and documentation; analyzed IRS data; and interviewed IRS officials, whistleblowers, and whistleblower attorneys.

Table 4 in appendix V lists the referral programs and related budgetary information.

Agency Comments & GAO Contact

In commenting on GAO’s February 2016 report on which much of this analysis is based, the IRS Deputy Commissioner for Services and Enforcement agreed with GAO’s recommendations and stated that IRS will be exploring the feasibility of using a single form for referral reporting as well as considering an online option for the public to submit referrals to IRS. As of February 2016, the Deputy Commissioner stated that IRS set up a cross-functional working group and is working to identify the specific actions, responsible officials, and timelines to address GAO’s recommendations.  As of March 2016, IRS has provided no further update.

In commenting on GAO’s October 2015 report on which some of this analysis is based, the IRS Deputy Commissioner for Services and Enforcement agreed with GAO’s recommendations and underscored the importance of the whistleblower program as part of IRS’s overall enforcement efforts. The Deputy Commissioner also stated that IRS is committed to improving the whistleblower claim review process and implementing the recommendations in GAO’s report. In a letter dated January 29, 2016, IRS stated that it expects to implement the recommendations by October 1, 2016.

GAO provided a draft of this report section to IRS for review and comment. IRS did not have comments.

For additional information about this area, contact James R. McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov or Jessica Lucas-Judy at (202) 512-9110 or lucasjudyj@gao.gov.

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