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General government: Tax-Exempt Entities Compliance (2020-09)

The Internal Revenue Service should better leverage fragmented data about tax-exempt entities to enhance the detection of noncompliance, improve the effectiveness of enforcement programs, and enhance federal revenues by potentially millions of dollars in tax changes.

Year Identified: 2020
Area Number: 9
Area Type: Fragmentation, Overlap & Duplication

3 Total Action(s)

Action 1
Partially Addressed

The Commissioner of Internal Revenue should link audit data on abusive tax schemes involving tax-exempt entities across operating divisions, and use the linked data to assess emerging issues and develop policy responses.

Type
Executive Branch
Last Updated
August 31, 2021
Progress:

The Internal Revenue Service (IRS) partially agreed with GAO’s September 2019 recommendation and has taken steps to fully implement it. As of May 2021, IRS plans to create a list of existing project codes identifying abusive schemes involving tax exempt entities. IRS plans to determine if each operating division can add the same codes in its systems so that the entities can be tracked in audit data across the operating divisions.

Separately, IRS’s Office of Research, Applied Analytics and Statistics (RAAS) plans to evaluate and use, where possible, existing analytic tools to mine narrative fields of tax forms to provide leads on abusive schemes involving tax-exempt entities. RAAS also plans to identify who would manage cross-division analysis that could enhance IRS‘s objective to assess emerging issues and develop policy responses.

IRS is scheduled to complete these actions in 2021 using data from existing systems. IRS plans to consider including business requirements aimed at linking audit data to assess emerging issues in its enterprise case management system under development. Successfully completing these efforts should help ensure that IRS is using its existing data resources effectively and help identify more abusive tax schemes involving tax-exempt entities.

Implementing Entity:
Internal Revenue Service
Action 2
Partially Addressed

The Commissioner of Internal Revenue should test the ability of the Return Inventory Classification System (RICS) to facilitate analysis and monitoring of audit data across the operating divisions, and support the Internal Revenue Service’s (IRS) enforcement objectives.

Type
Executive Branch
Last Updated
August 31, 2021
Progress:

The Internal Revenue Service (IRS) agreed with GAO’s September 2019 recommendation and has taken steps to implement it. As of May 2021, IRS said it had held cross-business unit meetings to determine what data it can share among its audit divisions. IRS’s Office of Research, Applied Analytics and Statistics was working on determining how to link audit data across divisions. Furthermore, the Tax Exempt/Government Entities division, which has audit responsibility over tax-exempt entities, was developing a cost estimate to determine if RICS can be used to link data across divisions. IRS expects to complete these efforts in 2022. Successfully completing these actions should improve IRS’s ability to detect abusive tax schemes using existing data and improve compliance.

Implementing Entity:
Internal Revenue Service
Action 3
Partially Addressed

The Commissioner of Internal Revenue should use existing data analytic tools to further mine Form 8886 and Form 8918 data, which could be used to find audit leads on tax-exempt entity involvement in potentially abusive tax schemes.

Type
Executive Branch
Last Updated
August 31, 2021
Progress:

The Internal Revenue Service (IRS) agreed with GAO’s September 2019 recommendation and has taken steps to implement it. As of May 2021, IRS’s Office of Research, Applied Analytics and Statistics (RAAS)  was exploring the use of data analytic tools and plans to continue to evolve its existing image processing and test analytics pipelines to identify audit leads. Specifically, RAAS will determine if existing tools can identify keywords in disclosure reports and determine whether a tax-exempt entity was party to a reportable transaction that warrants further compliance investigation. IRS will also determine whether continued analyses are productive. IRS expects to complete the project in 2022. Successfully completing these actions will help IRS better leverage existing resources and identify noncompliance among tax-exempt entities.

Implementing Entity:
Internal Revenue Service
GAO Contacts