Key Issues > Duplication & Cost Savings > GAO's Action Tracker > Tax Policies and Enforcement (2015-17)
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General Government: Tax Policies and Enforcement (2015-17)

By more effectively using data to manage various enforcement programs, the Internal Revenue Service could bolster tax compliance and potentially collect hundreds of millions of dollars in additional revenue.

Action:

Congress should consider revisiting the use of individual retirement accounts (IRA) to accumulate large balances and considering ways to improve the equity of the existing tax expenditure on IRAs. Options could include limits on (1) the types of assets permitted in IRAs, (2) the minimum valuation for an asset purchased in an IRA, or (3) the amount of assets that can be accumulated in IRAs and employer-sponsored plans that get preferential tax treatment.

Progress:

No legislation enacted limiting account owner accumulations as of March 2020. In its October 2014 report, GAO found that individuals with limited, occupationally related opportunities could engage in sophisticated investment strategies and accumulate considerable tax-preferred wealth in IRAs and subsequently suggested to Congress legislative options. The Senate Finance Committee held a hearing on a range of IRA policy issues in September 2014 for which GAO provided a statement for the record that covered preliminary data on IRA balances.

The Setting Every Community Up for Retirement Enhancement Act of 2019, enacted in December 2019 as division O of the Further Consolidated Appropriations Act, 2020, amended a number of requirements related to retirement accounts (Public Law 116-94). For example, section 401 limits inherited beneficiaries’ ability to continue tax deferral to 10 years beyond the account owner’s death. This provision somewhat reduces the long-term financial benefits of accumulating large balances in IRA accounts.

However the Act did not adopt any of the other limits GAO identified in its October 2014 report. Without legislation, the intended broad-based tax benefits of IRAs are likely to continue to be skewed toward a select group of individuals.

Implementing Entity:

Congress

Action:

Congress should consider expanding the mandate that partnerships and corporations electronically file their tax returns in order to cover a greater share of filed returns.

Progress:

Congress has passed and the President has signed legislation lowering the electronic filing (e-file) threshold for partnership and corporation returns as GAO suggested in May 2014. Section 301 of the Tax Technical Corrections Act of 2018, division U of the Consolidated Appropriations Act, 2018, lowered the threshold of electronic filing by partnerships incrementally over time--from 250 returns to 20 returns in calendar years after 2021 (Public Law 115-141). Subsequently, section 2301 of the Taxpayer First Act incrementally lowered the threshold of electronic filing for both partnerships and corporations from 250 returns to 10 returns in calendar years after 2021 (Public Law 116-25). Requiring greater e-filing of tax return information will help the Internal Revenue Service (IRS) identify which partnership and corporation tax returns would be most productive to examine, and could reduce the number of compliant taxpayers selected for examination. Further, expanded e-filing will reduce IRS's tax return processing costs.

Implementing Entity:

Congress

Action:

Congress should consider altering the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) audit procedures to require partnerships that have more than a certain number of direct and indirect partners to pay any tax owed due to audit adjustments at the partnership level.

Progress:

Legislation has been enacted that would alter TEFRA audit procedures as GAO suggested in September 2014. The Bipartisan Budget Act of 2015, which was enacted in November 2015, includes provisions that repeal TEFRA audit procedures and put in place audit procedures that would require partnerships with more than 100 partners to pay audit adjustments at the partnership level, among other changes.[1] The legislative changes to TEFRA suggested by GAO could help with the time constraints of large partnership audits as well as reduce the resource demands of those audits and the Joint Committee on Taxation estimates this should raise $9.3 billion in additional revenue from fiscal years 2019 to 2025.



[1]Bipartisan Budget Act of 2015, Pub. L. No. 114-74, § 1101, 129 Stat. 584, 625–638.

Implementing Entity:

Congress

Action:

The Commissioner of the Internal Revenue Service (IRS) should collect data to analyze whether IRS is responding to taxpayers within the time frames cited in the revised audit notices.

Progress:

IRS officials analyzed correspondence response timeliness data through the end of fiscal year 2014 and found that delays were continuing and more improvements were needed, including further revisions to notices and a revised automated recorded telephone message for taxpayers calling about the status of an audit.  By analyzing the data as GAO recommended in June 2014, IRS is better able to improve taxpayer service, reduce the need for taxpayer calls, and more efficiently use IRS resources.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should further revise IRS notices (if delays continue) to provide more realistic response times based on the data and take other appropriate actions to ensure efficient use of IRS tax examiner resources.

Progress:

IRS revised the automated telephone message that taxpayers hear when they call, as GAO recommended in June 2014. 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.

As of September 2017, IRS had revised the notice and guidance so that when high inventory levels prevent IRS from meeting the usual time frame for responding, IRS will enter dates for an expected response into notices. The dates will be based on data showing how long IRS is taking to work taxpayer correspondence received. By taking these steps, IRS can be more realistic about audit time frames and can reduce the likelihood that IRS tax examiners receive taxpayer calls about the status of the audit, leaving the examiners more time to actually audit. This will reduce risks of wasting time answering unnecessary calls about audit time frames which would further delay audit work.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should establish formal objectives for the correspondence audit program.

Progress:

IRS agreed with GAO's June 2014 recommendation and correspondence audit program officials planned a working group to develop formal program objectives. In November 2016, IRS officials provided documents intended to define the program objectives, but the objectives were unclear. Clear objectives are defined in specific and measurable terms to enable assessments of program performance toward achieving objectives.

As of December 2019, IRS officials provided draft program objectives to GAO for discussion and are responding to comments from GAO. Without clear, documented objectives, IRS managers lack reasonable assurance that audit program objectives are being achieved through, among other things, effective and efficient use of agency resources.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should ensure that measures for the correspondence audit program reflect those objectives.

Progress:

IRS agreed with GAO's June 2014 recommendation and 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. IRS officials provided documentation in November 2016, but program measures could not be clearly linked to objectives because the objectives (as recommended in action 6) were not clear.

As of December 2019, IRS officials provided draft measures for their draft program objectives to GAO and are responding to comments from GAO. Without measures that reflect program objectives, IRS cannot be assured that the program is achieving its objectives.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should clearly link those measures for the correspondence audit program with strategic IRS-wide goals for ensuring compliance in a cost-effective way while minimizing taxpayer burden.

Progress:

IRS agreed with GAO's June 2014 recommendation and 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. IRS officials provided documentation in November 2016, but measures for the program could not be clearly linked to either the program objectives (as recommended in action 7) or IRS goals because the objectives (as recommended in action 6) were not clear. As of December 2019, IRS officials provided GAO with draft linkages to IRS’s strategic goals for the draft measures and program objectives and are responding to comments from GAO on those linkages.

Without measures clearly linked with strategic goals to give a clear and complete sense of performance in terms of compliance, burden, and costs, IRS lacks a key tool to help it make resource decisions and foster accountability to communicate its progress to Congress and the public. Further, because it does not have a reasonable assurance that it is making decisions cost effectively and taking action to make progress towards its strategic goals, IRS risks missing noncompliance, unnecessarily burdening taxpayers, and wasting resources.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should document how decisions about the correspondence audit program are to be made using performance information.

Progress:

IRS officials agreed with the recommendation and took steps to document the program plan development process, as GAO recommended in June 2014. In July 2017 and May 2018, officials provided documents describing correspondence audit planning processes with details on the role of performance information, including how IRS decides the number of audits to conduct on various compliance issues by considering data on audit coverage tolerances and criteria on potential collection results compared to audit costs. With documentation on the tolerances and criteria for using performance information to guide operational decisions such as allocation of resources, IRS has reasonable assurance that it is making these decisions cost-effectively and achieving better results.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should track and use other program data that have not been used.
 

Progress:

IRS took steps to track and use other program data that have not been used, as GAO recommended in June 2014. In July 2017, IRS officials provided documentation showing they had implemented a new planning method considering collection results data and taxpayer burden indicators for fiscal year 2017. In May 2018, IRS officials said they were planning to use more complete data on the costs of audits in planning audits for fiscal year 2019. By using data that provide a more complete picture of audit compliance results and costs IRS will have more complete performance information to make decisions that justify the use of resources to audit certain types of tax issues and returns.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should develop a plan and timeline for implementing IRS contractor-supported review recommendations to improve the selection of correspondence audit workload and allocation of examiner resources, or develop justifications for not implementing the recommendations.

Progress:

IRS officials pursued efforts with research functions to improve workload selection and better allocate examiner resources, consistent with contractor recommendations and as GAO recommended in June 2014. In July 2017, IRS officials provided documentation showing that for fiscal year 2017 they had implemented a new audit planning method that considered collection results data. IRS research functions also assessed taxpayer burden and performance measures to determine whether examiner resources should be shifted between handling taxpayer telephone calls and doing audit casework. Although IRS was unable to determine the optimum resource allocation, its actions supported improved case selection and helped hold managers accountable to assure IRS took advantage of available opportunities to better select workload, better allocate resources, and improve correspondence audit results.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should approve plans to fully compile and digitize the new data from electronic and paper-filed Form 5498s to ensure the efficient use of the information on nonpublicly traded individual retirement account (IRA) assets.

Progress:

As of March 2017, IRS had begun transcribing paper-filed Form 5498 submissions and compiling information from electronically filed Form 5498 submissions beginning with tax year 2016 data filed in calendar year 2017. For tax year 2015, the first year the new IRA asset reporting was required, IRS did not fund electronic compilation. Once comprehensive digitized information from Form 5498 is available on databases that examiners and examination researchers can access, IRS will be able to conduct enforcement on IRA rules more efficiently and accurately.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should conduct research using the new Form 5498 data to identify individual retirement accounts (IRA) holding nonpublic asset types and use that information for an IRS-wide strategy to target enforcement efforts.

Progress:

IRS is conducting research using data to identify nonpublic IRA asset types to develop an IRS-wide strategy for targeting enforcement efforts, as GAO recommended in October 2014. In February 2018, IRS completed its first analysis of new information about the amounts and types of nonpublic IRA assets from Form 5498 for tax year 2016 filed in 2017. IRS used the asset type data for tax year 2017 filed in 2018 to streamline the process of identifying those IRAs with hard-to-value nonpublic assets at risk for noncompliance. In September 2018, IRS Small Business/Self Employed division approved a new compliance research project examining a sample of IRAs holding certain nonpublic asset types. The compliance research field work began in February 2019 and is to be completed in January 2021. IRS convened a cross-divisional team to identify, assess, and mitigate the risks of IRA noncompliance. IRS officials told GAO they will use the compliance research results to refine audit selection which will help IRS use its resources more effectively.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should build on research data regarding individual retirement accounts (IRA) holding nonpublic assets, and identify options to provide outreach targeting taxpayers with nonpublic IRA assets and their custodians, such as reminder notices that engaging in prohibited transactions can result in loss of the IRA’s tax-favored status.

Progress:

IRS had taken some action to provide general outreach and as of January 2020 has ongoing compliance research that could inform additional opportunities to target outreach to taxpayers with nonmarketable IRA assets at greater risk of noncompliance, as GAO recommended in October 2014. In June 2016, IRS published information on IRS.gov outlining the new information to be reported for nonmarketable IRA assets and included a general caution that IRAs with nonmarketable investments or assets under direct taxpayer control may be subject to a heightened risk of committing prohibited transactions. This caution is similar to those that IRS added to its publications about IRA contributions and distributions. It is a step toward helping taxpayers better understand which investments pose greater risks.

In February 2018, IRS completed its first analysis of new information about the amounts and types of nonpublic IRA assets from Form 5498 for tax year 2016. In October 2019, IRS also completed an interim compliance research project examining a sample of tax returns to determine whether the beneficiary of the IRA caused the IRA to engage in a prohibited transaction. As of January 2020, IRS was conducting a new compliance research project examining IRAs holding certain nonpublic asset types. The compliance research began in February 2019 and is to be completed in January 2021. Unless IRS augments outreach based on reliable data about nonpublicly traded IRA investments, taxpayers at greater risk may not be able to ensure compliance with rules on prohibited transactions.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should add an explicit caution in the individual retirement accounts (IRA) publication for taxpayers about the potential risk of committing a prohibited transaction when investing in nonpublicly traded assets or directly controlling IRA assets.

 

Progress:

In January 2015 IRS added an explicit caution to taxpayers of the potential risk of committing a prohibited transaction when investing in nonpublicly traded assets or directly controlling IRA assets,as GAO recommended in October 2014. IRS added this caution in both the new Publication 590-A, which focuses on IRA contributions, and the 590-B, which focuses on IRA distributions. The new caution should help taxpayers better understand the risks of prohibited transactions when investing in nonpublicly traded assets and better comply with IRA rules.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should work in consultation with the Department of the Treasury (Treasury) on a legislative proposal to expand the statute of limitations on individual retirement account (IRA) noncompliance to help IRS pursue valuation-related misreporting and prohibited transactions that may have originated outside the current statute’s 3-year window.

Progress:

No executive action taken. IRS agreed with GAO's October 2014 recommendation on IRAs with large balances and said it had discussed the recommendation with Treasury's Office of Tax Policy and Benefits Tax Counsel. Consequently, IRS said Treasury is aware of IRS's willingness to support legislative efforts in this area. Ultimately, Treasury reviews all tax legislative proposals and presents the administration's tax proposals for congressional consideration. However, Treasury had not released a legislative proposal as of January 2020. GAO reported in January 2020 that IRS examination officials said the 3-year statute of limitations for assessing taxes owed remains an obstacle in pursuing noncompliance that may span the many years of an IRA investment. Because IRA schemes can occur over many years and the effects of noncompliance may start small but grow, IRS efforts to identify and enforce against possible IRA noncompliance are weakened without expanding the statute in regard to IRAs.

Implementing Entity:

Internal Revenue Service, Department of the Treasury

Action:

The Commissioner of the Internal Revenue Service (IRS) should develop and implement a strategy to better estimate (1) the extent and nature of partnership misreporting, and (2) the effectiveness of partnership examinations in detecting this misreporting.

Progress:

In January 2016, IRS launched the Partnership Research Study (PRS), a research program to measure strategic level compliance, including filing and reporting compliance. IRS's Small Business and Self-Employed division worked with IRS's Research, Applied Analytics, and Statistics division to design this study, which includes mandatory issues that will be audited. The study will include a minimum of 2,000 examined returns. As of July 2017, IRS had started examining 1,750 returns for the study and 500 more will be delivered for examination in November 2017. The study will provide IRS with numeric values that will be utilized in a statistical formula to determine the extent and nature of partnership compliance and misreporting and the effectiveness of partnership examinations.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should use the better information on noncompliance and program effectiveness to determine whether (1) the differences in examination rates across different types of business entities are justified, and (2) an improved tool for selecting partnerships for examination should be developed.

Progress:

In January 2016, IRS launched the Partnership Research Study (PRS), a research program to measure strategic level compliance, including filing and reporting compliance. The study will include a minimum of 2,000 examined returns. As of July 2017, IRS had started examining 1,750 returns for the study and 500 more will be delivered for examination in November 2017. Although IRS will not have useable data based on this study for a couple years, ultimately the study will allow IRS to make better informed decisions about its allocation of enforcement resources and about whether or not to update its major partnership examination selection tool.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should track the results of large partnership audits by (1) defining a large partnership based on asset size and number of partners; (2) revising the activity codes to align with the large partnership definition; and (3) accounting separately for field audits and campus audits.

Progress:

IRS has taken actions to implement GAO's September 2014 recommendation, but the definition IRS provided is not likely to help it analyze results from audits of the very large partnerships that GAO's report covered.

In September 2017, IRS defined large partnerships as those with assets of $10 million or more, without regard to the number of partners. With changes to the Tax Equity and Fiscal Responsibility Act of 1982 partnership audit procedures and enactment of the Bipartisan Budget Act of 2015 (BBA) (sections 1101 and 1102 of Public Law 114-74), IRS officials said that the number of partners is no longer a critical factor when defining a large partnership. IRS is correct that the number of partners is no longer relevant to this statutory definition of large partnership. The recently eliminated Electing Large Partnerships audit procedures had defined large partnerships as those with 100 or more direct partners in a taxable year.

Even so, IRS's new definition of large partnerships is limited compared to large corporations. IRS has defined eight asset categories for tracking large corporation audit results while it has one for large partnerships, which vary widely based on asset amounts and complex structures.

As GAO reported, during tax years 2002 through 2011, the number of large partnerships with 100 or more direct and indirect partners as well as $100 million or more in assets more than tripled to 10,099, some of which had assets exceeding $5 billion. In tax year 2011, more than two-thirds of these large partnerships had at least 100 or more pass-through entities as direct and indirect partners. Until IRS develops a more expansive definition of large partnerships, IRS may have challenges analyzing the results from its audits of large partnerships.

As of January 2020, IRS had revised its activity codes to create a category for its large partnership definition as well as created a reporting and monitoring structure for its new definition to track the results from auditing large partnerships. IRS also created reports to regularly track audit results (e.g., dollar amounts, hours, number of returns, campus versus field locations) for this one category. IRS officials said they plan to use the reports to analyze audit results to identify opportunities to better plan and use resources in auditing large partnerships but this outcome may not be possible with the statutory changes governing partnerships.

Given the challenges involving such audits, IRS officials said they have started efforts to better select partnership returns for audits based on compliance risk. They said these efforts will extend at least through fiscal year 2021.

Thus, IRS does not yet know whether the audit results will be sufficient to analyze ways to better plan and use IRS audit resources as well as to analyze noncompliance risk for its new definition. IRS's analysis may not be able to achieve these ends with only one asset category to cover the wide range of asset amounts above $10 million.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should calculate actual return on investment (ROI) for implemented initiatives, compare the actual ROI to projected ROI, and provide the comparison to budget decision makers for initiatives where IRS allocated resources.

Progress:

No executive action taken as of December 2019. While IRS agreed that having actual ROI data for implemented initiatives would be useful, it did not believe it was feasible to produce such estimates, as GAO recommended in June 2014. GAO maintains that IRS should be able to provide some information on past initiatives, such as whether funds requested were used in the manner originally proposed. As of December 2016, IRS officials reported there is no timeline for full implementation. Comparing projected ROI to actual ROI can help hold managers and IRS accountable for the funding received.

Implementing Entity:

Internal Revenue Service

Action:

The Commissioner of the Internal Revenue Service (IRS) should use actual return on investment (ROI) calculations as part of resource allocation decisions.
 

Progress:

IRS has begun taking steps to determine ROI calculations, but as of December 2019, was not using them for resource allocation decisions, as GAO recommended in June 2014. In October 2016, IRS officials reported there is no timeline for full implementation, but that the work is ongoing. For example, as of November 2017, IRS's Office of Research, Applied Analytics, and Statistics had developed a methodology for estimating the marginal relationship between direct revenue and cost for examinations. The estimates are necessary inputs to establish a measure of ROI, which in turn can guide resource allocation decisions.

IRS also developed a model for allocating correspondence exam workload across subdivisions in its Small Business/Self-Employed Division. As of December 2019, this model used an estimate of marginal revenue but not marginal cost. Until IRS develops a measure for ROI and uses it to help inform resource allocation decisions, the agency may be forgoing additional efficiencies.

Implementing Entity:

Internal Revenue Service
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    • James R. McTigue, Jr
    • Director, Strategic Issues
    • mctiguej@gao.gov
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