Tax Administration:

IRS Does Not Investigate Most High-Income Nonfilers

GGD-91-36: Published: Mar 13, 1991. Publicly Released: Mar 18, 1991.

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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) program for detecting and pursuing individuals with income over $100,000 who failed to file required tax returns.

GAO found that: (1) IRS did not fully investigate or assess taxes for high-income nonfilers who did not respond to its notices on unfiled tax returns; (2) even if high-income nonfilers eventually filed tax returns, their returns received less scrutiny from IRS than those who filed returns on time; (3) district revenue officers did not investigate or assess taxes for about half of the high-income nonfilers at three service centers; (4) revenue officers did not pursue many high-income nonfilers because IRS understated the estimated yields that could result from investigations; (5) even if IRS correctly estimated those yields, it did not have sufficient revenue officers to investigate an increased amount of cases; (6) the Substitute for Returns Program (SFR) would enable IRS to investigate more high-income nonfilers; (7) SFR produced more yield at the lowest cost and created a tax assessment that was otherwise unlikely; (8) although IRS checked returns that were filed on a timely basis for noncompliance, it did not have a systematic way of checking for underreported income or overstated deductions on delinquent returns; (9) IRS did not computer match delinquent returns with information returns, and did not refer many of those returns to the Examination Division to be checked for noncompliance; and (10) nearly half of the delinquent returns that GAO asked IRS to check had evidence of noncompliance.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: IRS had been revising the formula for high-income nonfiler cases.

    Recommendation: The Commissioner of Internal Revenue should separately estimate net tax yields for high-income nonfiler cases in the formula for screening cases to be investigated by revenue officers.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS changed its procedure so that all high-income nonfiler cases that are resolved after collection action will be referred to the Examination Division. A memorandum to all assistant regional commissioners (collection) was issued May 5, 1991.

    Recommendation: The Commissioner of Internal Revenue should modify SFR to include high-income nonfiler cases that would otherwise escape IRS action.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: Memorandums issued in May and June 1991 contained instructions to refer all secured high-income nonfiler returns to Examination. A September 1991 manual supplement required Collection and Revenue offices to conduct a complete investigation following the procedures in IRM 5200. High-income nonfiler cases selected for field examination should be worked using the procedures in the Handbook.

    Recommendation: The Commissioner of Internal Revenue should develop a system to ensure that delinquent returns from high-income nonfilers are checked for unreported income and overstated deductions.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: High-income nonfiler cases selected for field examination should be worked using procedures in the Techniques Handbook for Indepth Examinations. Indirect methods should be used to determine other sources and subsequent year income. Where the taxpayer does not voluntarily comply with the examiners requests to produce books and records, a summons to testify and produce records should be considered.

    Recommendation: To ensure that the Examination Division's limited resources are used efficiently, IRS should complete in-depth examinations only on those delinquent returns for which strong evidence of noncompliance was found during the check.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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