IRS Correspondence Audits:

Better Management Could Improve Tax Compliance and Reduce Taxpayer Burden

GAO-14-479: Published: Jun 5, 2014. Publicly Released: Jul 7, 2014.

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What GAO Found

The notices the Internal Revenue Service (IRS) sends during correspondence audits have misled taxpayers by providing unrealistic time frames on when IRS would respond to their correspondence. For example, notices stated that IRS would respond within 30 to 45 days when it has consistently taken several months to do so. Further, as of early 2014, IRS data show that it had not responded timely to more than 50 percent of the correspondence taxpayers sent. In many cases, refunds are held up until the audit is finished. According to IRS tax examiners, notices caused taxpayer frustration and generated unnecessary taxpayer calls to IRS. Furthermore, examiners who answer such calls said they do not know when IRS will respond. IRS recently revised the notices, but the revisions were not based on analysis of historical data nor did IRS have a plan to analyze data to ensure it is responding timely per revised notices.

The taxpayers cannot understand why IRS would send a letter out with such unrealistic time frames and there is no acceptable way we can explain it to them. That is why they are so frustrated. It puts us in a very awkward and embarrassing situation…. I try to gain control of the situation and tell the taxpayer I understand the frustration so that he will calm down so we can make the phone call productive, but this takes time and wastes time for both the taxpayer and me.

Source: tax examiner focus group interview.

IRS does not have information to determine how the correspondence audit program affects its compliance, taxpayer burden, and cost strategic goals. IRS has not documented objectives for the program. While IRS has many program measures such as how many audits are closed annually, they are not linked to the compliance, burden, and cost goals. Thus, it is not possible to tell whether the program is performing better or worse from one year to the next. Beyond the measures, IRS did not have guidance on how IRS managers were to use program data to make decisions. In some cases, the program data being used are incomplete. For example, IRS did not track data on the number of times a taxpayer called IRS or sent documents. Using incomplete information limits insights on the additional revenues identified from IRS's audit investments and on how much burden the audits impose on the taxpayers.

In 2012 IRS began its Correspondence Examination Assessment Project (CEAP) to reduce taxpayer burden. With a contractor, IRS identified five problem areas involving communications with taxpayers, the audit process, expedited audit resolution, resource alignment, and program metrics. CEAP has 19 improvement efforts finished or underway. However, IRS has not defined the intended benefits and tracked the actual benefits. As a result, it will be difficult to determine whether the efforts successfully addressed the problems. The CEAP contractor recommended that IRS develop a tool for better balancing resource allocation between, for example, telephone calls and reviewing correspondence. IRS officials said they would consider the recommendations but did not have a specific plan or timeframe. Thus, it will be difficult to hold IRS managers accountable for ensuring that the recommendations are completed in a timely manner.

Why GAO Did This Study

IRS uses correspondence audits (done by mail and the majority of IRS audits) to resolve disputes over tax return reporting of relatively simple issues. Tax observers and IRS itself have concerns that these audits impose unnecessary burden on taxpayers or costs on IRS.

GAO was asked to assess the audit program. In this report, GAO assessed the extent to which (1) IRS correspondence audit notices create unnecessary burden or costs; (2) IRS can determine if the audits are meeting its compliance, burden, and cost goals; and (3) IRS's improvement efforts are likely to deliver the expected benefits.

GAO visited two IRS audit sites, analyzed IRS audit program objectives, measures, and decisions, and documented improvement efforts, and interviewed program officials and IRS tax examiners. GAO compared IRS's practices to internal control guidance and criteria for results-oriented management.

What GAO Recommends

GAO recommends that IRS (1) collect and analyze data on whether IRS is responding timely in revised audit notices, (2) establish program objectives as well as measures that reflect the objectives and strategic goals, (3) document guidance for making decisions with program data, (4) track previously unused program data to provide more performance insights, (5) document the intended and actual benefits of audit improvement efforts, and (6) develop a plan and timeline for implementing the contractor's recommendations. In commenting, IRS described planned actions on all the recommendations.

For more information, contact James R. White at (202) 512-9110 or whitej@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: As we recommended, IRS officials collected and analyzed data on how long it took IRS to respond to taxpayers being audited through the end of fiscal year 2014. IRS found that delays in terms of IRS's responses exceeding the timeframe cited in the audit notices were continuing and more improvements were needed, including further revisions to the timeframes cited in audit notices and a revised automated recorded telephone message that taxpayers heard when calling about the status of the audit. IRS is working on these improvements.

    Recommendation: To reduce the need for taxpayer calls, ensure that IRS is providing taxpayers with more realistic time frames on when IRS will respond, and more efficiently use IRS resources, the Commissioner of the Internal Revenue Service should collect data to analyze whether IRS is responding within the time frames cited in the revised audit notices.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Open

    Comments: IRS revised the automated telephone message that taxpayers hear when they call but has not revised its notices, as GAO recommended. The new message provides taxpayers information on the correspondence audit workload and time frames and asks that they allow a certain number of days before calling to check on the status of their audit. IRS's use of such automation to serve taxpayers can divert calls away from tax examiners, give taxpayers better service and more realistic response time frame expectations, and result in more timely IRS responses and more efficient use of IRS resources. However, IRS has yet to further revise notices to provide more realistic time frames. In February 2016, IRS officials said that by May 2016, they expect to decide among options for needed notice revisions, including an option to allow individual correspondence audit offices to enter a customized response date based on their respective inventory levels at the time notices are sent. We have since requested that IRS provide information on the decision and actions taken. To the extent that IRS can be more realistic about audit time frames, IRS tax examiners are less likely to receive taxpayer calls about the status of the audit, leaving them more time to actually audit.

    Recommendation: If IRS delays are continuing, the Commissioner of the Internal Revenue Service should further revise the notices to provide more realistic response times based on the data and take other appropriate actions to ensure efficient use of IRS tax examiner resources. For example, IRS could choose to provide taxpayers who call IRS with a recorded message notifying them of delays in IRS responding and when to expected an IRS response.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Open

    Comments: IRS officials said that, among other actions, they plan to review and update program documentation and guidance as warranted. Officials confirmed in June 2016, they expect to complete actions to implement the recommendation by September 2016.

    Recommendation: To clarify the desired results of the correspondence audit program and its linkages to IRS-wide activities, the Commissioner of the Internal Revenue Service should establish formal program objectives.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Open

    Comments: IRS officials said that, among other actions, they plan to review and update program documentation and guidance as warranted to ensure a clear link between correspondence audit program objectives and related measures. Officials confirmed in June 2016, they expect to complete actions to implement the recommendation by September 2016.

    Recommendation: To clarify the desired results of the correspondence audit program and its linkages to IRS-wide activities, the Commissioner of the Internal Revenue Service should ensure that the program measures reflect those objectives.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Open

    Comments: IRS officials said that, among other actions, they plan to review and update program documentation and guidance as warranted to ensure that program measures clearly link to IRS strategic goals. Officials confirmed in June 2016, they expect to complete actions to implement the recommendation by September 2016.

    Recommendation: To clarify the desired results of the correspondence audit program and its linkages to IRS-wide activities, the Commissioner of the Internal Revenue Service should clearly link those measures with strategic IRS-wide goals on ensuring compliance in a cost-effective way while minimizing taxpayer burden.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Open

    Comments: IRS officials agreed with the recommendation and said they would thoroughly document the program plan development process but did not refer to documenting how program decisions are to be made using performance information. In April 2016, officials provided information on researching and testing of a new audit planning method during fiscal year 2016, using costs and collection results data. In response to our request for information on timeframes for completing these tests and fully implementing the method, IRS officials did not provide a specific date. Instead, officials said tests and analyses would not be complete until two years after related fiscal year 2016 audits close. Officials were not clear on any efforts to use other program data, such as whether or when performance information on taxpayer burden related to audits is to be used.

    Recommendation: To better inform decisions being made about the correspondence audit program, the Commissioner of the Internal Revenue Service should document how the decisions are to be made using the performance information (including criteria and tolerances used).

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Open

    Comments: In April 2016, officials provided information on researching and testing of a new audit planning method during fiscal year 2016, using costs and collection results data. In response to our request for information on timeframes for completing these tests and fully implementing the method, IRS officials did not provide a specific date. Instead, officials said tests and analyses would not be complete until two years after related fiscal year 2016 audits close. Officials were not clear on any efforts to use other program data, such as whether or when performance information on taxpayer burden related to audits is to be used.

    Recommendation: To better inform decisions being made about the correspondence audit program, the Commissioner of the Internal Revenue Service should track and use other program data that have not been used to provide more complete performance information. Examples of data that could be tracked and used include how much of the recommended tax amounts is collected over time; taxpayer burden and experience such as how often audits are resolved in one contact, how often taxpayers correspond or call, and how long taxpayers wait for IRS to respond to their documents and for the audit to close; and costs beyond the direct audit time, such as the costs to answer taxpayer calls per audit, assess the recommended tax, and collect those tax assessments.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  8. Status: Open

    Comments: IRS Correspondence audit program officials said they would document the expected benefits of ongoing changes by June 2016. We have since asked IRS officials to provide related documents.

    Recommendation: To better ensure an effective investment of resources in the CEAP efforts, the Commissioner of the Internal Revenue Service should clearly document the intended benefits of ongoing efforts to address identified problems, and the process for measuring and tracking actual benefits.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  9. Status: Open

    Comments: IRS officials agreed with the recommendation and said they would continue to pursue efforts with research functions to further improve workload selection and maximize resource usage. However, officials said IRS does not intend to develop a plan or timeline for implementing the contractor recommendations to improve the selection of correspondence audit workload and allocation of examiner resources or to evaluate them, for example, by developing justifications for not implementing them. In April 2016, officials said they expect to complete the research and document planned corrective actions by June 2016. We have since asked IRS officials to provide the related documents.

    Recommendation: To better ensure an effective investment of resources in the CEAP efforts, the Commissioner of the Internal Revenue Service should develop a plan and timeline for implementing the CEAP contractor's recommendations on possible ways to improve the (a) selection of correspondence audit workload and (b) allocation of resources between providing telephone assistance and reviewing taxpayer correspondence to resolve audits or develop justifications for not implementing the recommendations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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