Information Reporting:

IRS Could Improve Cost Basis and Transaction Settlement Reporting Implementation

GAO-11-557: Published: May 19, 2011. Publicly Released: Jun 20, 2011.

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Effective implementation of two 2008 laws by the Internal Revenue Service (IRS) could increase taxpayers' voluntary compliance. Those laws require reporting to IRS and taxpayers of cost basis for sales of certain securities and of transaction settlement information (i.e., merchants' income from payment cards or third party networks). In response to a congressional request, GAO (1) assessed IRS's implementation plans for the laws; (2) determined the extent to which IRS issued timely regulations and guidance and did outreach; (3) examined how IRS will use the new data to improve compliance; and (4) analyzed IRS's plans to assess implementation and measure performance and outcomes. GAO compared IRS's implementation plans to criteria in past GAO work and other sources; interviewed industry groups and agency officials, and reviewed rulemaking documents; examined IRS's plans to use the new data; and compared IRS's measures and evaluation plans to GAO criteria.

IRS is implementing cost basis and transaction settlement reporting through the new Information Reporting and Document Matching (IRDM) program in the Small Business/Self Employed (SB/SE) and Modernization and Information Technology Services (MITS) divisions. IRDM plans show several elements of effective program management, but do not document coordination with some related IRS projects such as Workforce of Tomorrow. IRS estimated IRDM costs, but MITS's estimate does not reflect some best practices, such as adjusting for inflation. Also, IRDM did not use substantiated tax form volume projections in some budget and risk decisions. To date, IRS spent about $28 million on IRDM and requested another approximately $82 million. IRS outreach with industry stakeholders was thorough early in the rulemaking process, but IRS missed its target dates for issuing regulations by about 1 year due, according to IRS officials, to time needed to learn the complex industries. After IRS released final regulations, industry stakeholders sought clarification of certain issues. IRS did not release additional written guidance until after the regulations' effective dates, which industry stakeholders said may affect their implementation of the new reporting requirements. Although IRS released drafts of the newly required or revised forms, they did not release draft instructions prior to the regulations' effective dates. To use the new data, IRS is developing systems that are expected to improve IRS's existing matching of information returns to individual tax returns and expand matching to business taxpayers. The initial enhancements are to be operational in 2012. IRDM appropriately plans to conduct research and test data quality. IRDM regularly documents lessons learned; however, IRDM has not assigned responsibility or established procedures to use them. IRDM also developed preliminary performance measures to assess the implementation and outcomes, including effects on revenue and compliance. However, IRDM has not documented a plan to finalize the performance measures, such as methodology. GAO recommends, among other things, that IRS improve cost estimation, form volume projections, stakeholder communication, and performance management. IRS generally agreed with the recommendations, but did not describe plans to release draft form instructions or communicate target guidance release dates, both of which would aid industry implementation.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Internal Revenue Service (IRS) added a section to the Information Return and Document Matching (IRDM) Strategic Roadmap, a key planning document for the program, that shows how IRDM is aligned with other servicewide projects. Although IRS did not develop specific and procedures or requirements to incorporate IRDM alignment into IRDM planning documents, the IRS documented the necessary alignments as we recommended.

    Recommendation: To improve implementation of cost basis and transaction settlement reporting, the Commissioner of Internal Revenue should document in IRDM plans any coordination between IRDM and the Workforce of Tomorrow and Nonfiler Strategy projects. IRS should develop procedures or requirements to incorporate in IRDM planning documents the integration between IRDM and any other servicewide projects which could affect IRDM.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: As of August 2013, the Internal Revenue Service (IRS) officials told us it will not be updating the original cost estimate for the Information Reporting and Document Matching (IRDM) program that we assessed in this report, as the system is nearing the Operations and Maintenance phase of development. In July 2012, IRS developed a new estimate for IRDM Release 2, which builds on the capabilities of the original IRDM system. GAO assessed the IRDM Release 2 estimate, with respect to the four characteristics of a reliable estimate, in report GAO-13-401. GAO found that the estimate substantially met the practices for a comprehensive, well-documented, and accurate cost estimate and partially met the practices for a credible estimate. IRS officials attributed the improvement in cost estimating practices to recommendations made during GAO reviews of earlier estimates and increased adherence to industry standards.

    Recommendation: To improve implementation of cost basis and transaction settlement reporting, the Commissioner of Internal Revenue should, for future updates to MITS's IRDM cost estimate, ensure that the revised estimate is developed in a manner that reflects the four characteristics of a reliable estimate discussed in this report.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: In July 2011, the Internal Revenue Service's Research, Analysis and Statistics division published official Form 1099-K volume projections for fiscal years 2012 through 2012. The projections, available in Publication 6961, include a discussion of methodology and data sources for the projections

    Recommendation: To improve implementation of cost basis and transaction settlement reporting, the Commissioner of Internal Revenue should clearly document the assumptions and rationale for Form 1099 volume projections used in resource planning decisions, and consult with research analysis and statistics when developing projections.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Open

    Comments: As of June 2014, the Internal Revenue Service (IRS) Web page on information reporting does not provide information on upcoming information guidance, upcoming outreach, or a description of the private letter ruling process. IRS officials said information on letter rulings is found elsewhere on www.irs.gov. Regarding coordination with Treasury on sharing potential release dates for regulations and formal guidance, IRS did not provide any evidence of this coordination. However, IRS officials said they share with external stakeholders the general timeframes for upcoming guidance.

    Recommendation: To improve implementation of cost basis and transaction settlement reporting, the Commissioner of Internal Revenue should work with Treasury to share with the public its plans and expected release dates for IRDM regulations and formal guidance. IRS could consider including information similar to what is posed on the Department of Transportation's or the Financial Industry Regulatory Authority Web sites. IRS should also include other pertinent information regarding IRDM implementation, such as upcoming informal guidance, including frequently asked questions, upcoming outreach, and description of the letter ruling process.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: In tax year 2011 the Internal Revenue Service (IRS) changed their process and procedures to include the release of all forms' draft instructions for external comments, whenever feasible. In November 2011, IRS posted on its Web site the 2012 draft instructions for Form 1099-B, "Proceeds From Broker and Barter Exchange Transactions," and requested comments on the draft.

    Recommendation: To improve implementation of cost basis and transaction settlement reporting, the Commissioner of Internal Revenue should, for future releases of new or significantly revised forms, whenever possible, release draft instructions to facilitate the most useful comments.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Implemented

    Comments: In 2011, the Internal Revenue Service changed their lessons learned review process and developed a template for tracking lessons learned, which included a section that identified to whom the action was assigned and when the action was expected to take place.

    Recommendation: To improve implementation of cost basis and transaction settlement reporting, the Commissioner of Internal Revenue should document a plan to assign responsibility and establish a procedure to follow up on the lessons learned identified after each milestone phase.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Closed - Implemented

    Comments: The Internal Revenue Service (IRS) developed and implemented a performance measurement plan for the Information Return and Document Matching (IRDM) program, which was updated in June 2013 and July 2014. The plan includes a performance measurement framework and process for measuring and reporting data. IRS also provided performance measure definitions, methods and data sources, a data dictionary, and targets.

    Recommendation: To improve implementation of cost basis and transaction settlement reporting, the Commissioner of Internal Revenue should develop a plan to establish and implement IRDM performance measures. The plan should include documentation of the process and rationale for developing and using IRDM performance measures, including information such as the methodology, data sources, and targets, in order to establish that the performance measures have the necessary attributes of efficient measures.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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