Tax Abatements: Better IRS Data Could Benefit Small Businesses and IRS
Highlights
The Internal Revenue Service (IRS) abates hundreds of thousands of small business tax assessments annually because either the business or IRS made an error in calculating the taxes. Preventing these errors would eliminate the need for abatements and save IRS time and money. IRS officials said that abatement data could help them provide services to small business. The officials said that such data might help them find ways to prevent errors that result in abated tax assessments. IRS has some data on tax abatements for small business. IRS' master files contain information on taxpayers' accounts, including abatements. IRS also has paper documents on each abatement transaction. In 1999, IRS developed a data file on all abatements that it extracts and updates from the master files quarterly. However, GAO found many problems with IRS' electronic abatement data. GAO identified several steps that IRS could take to improve existing data on such tax abatements and to obtain additional data on the volume, nature, and burden of tax abatements for small businesses. However, IRS needs to weigh the potential costs and benefits. If IRS begins obtaining data step-by-step, insights into the potential benefits of improving and/or collecting additional data can be gained and informed judgements can be reached about how much data to gather and how to minimize the costs to obtain it.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | To improve IRS' ability to understand and address tax abatements for small businesses, the Commissioner of Internal Revenue should evaluate the benefits and costs of various steps for improving existing data or collecting additional data on the volume, nature, and burden of small business tax abatements. |
Closed – Implemented
IRS created a team to study costs and benefits of improving existing IRS data and collecting more data. During 2003, the team finished analyzing a large file of abatement data to determine ways to improve the data or seek other data on abatements. Based on the analysis, IRS took various actions to start systematically collecting/improving abatement data. First, in October 2003, PAS (Process Analysis Systems), which reviews closed cases to analyze IRS's efficiency in processing those cases, started capturing data on who caused the error that led to the abatements (source), and what the error entailed (error type). Second, IRS also began developing a reason code report to identify why the error occurred for each of the business operating divisions, and to separate the abatement data from data on tax assessment increases. Third, IRS developed a quarterly report from the abatement database on the number and dollar amount of abatements.
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| Internal Revenue Service | To improve IRS' ability to understand and address tax abatements for small business, the Commissioner of Internal Revenue should use any improved or additional data to study cost-effective ways to reduce or eliminate the errors in tax assessments that have to be abated. |
Closed – Implemented
This recommendation flows from the first recommendation, in which IRS analyzed the costs and benefits of using the abatement data to avoid erroneous abatements. This analysis led to changes in the collection of abatement data beginning in October 2003, by means of (1) Process Analysis Systems (PAS) data on who caused the error and what the error entailed, (2) a reason code report to identify why the error occurred for each business operating division (BOD), and (3) a quarterly report from the abatement database on the number and dollar amount of abatements. IRS is using the data to identify where small business taxpayers make the most errors and how to reduce those errors (e.g., improved instructions, forms, and services). IRS officials said the PAS data collection was initially uneven, but believe that they started getting valid data after changes in January 2004. By August 2006, IRS had clarified some of the reason codes for abatements to better analyze the data. That analysis revealed no new insights (i.e., still same types of errors) on types of errors or any ways to reduce the errors such as new forms of taxpayer outreach/education. Thus, IRS used the data to study ways to reduce the errors that are abated, but has not found any cost effective reduction methods.
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