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Highlights

The Internal Revenue Service (IRS) does not know how many businesses failed to file required returns, nor does it have an estimate of the associated lost tax revenue--the business nonfiling tax gap. Many cases it does investigate are unproductive because the business does not owe the return IRS expects. GAO was asked to assess (1) the data challenges of estimating the business nonfiler tax gap, (2) how recent program changes have affected IRS's capacity to identify and pursue business nonfilers, and (3) additional opportunities for IRS to use third-party data. GAO reviewed IRS's tax gap estimates, nonfiler program processes and procedures, and matched closed nonfiler cases with various other data.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Internal Revenue Service 1. To understand the scope of the business nonfiler population, the Commissioner of Internal Revenue should estimate the magnitude of business nonfiling among businesses registered with IRS, using data from its operational files to select cases for further investigation. Based on the results of this work IRS should develop a tax gap estimate for the impact of business nonfiling insofar as doing so is cost-effective.
Closed - Not Implemented
As of December 2017, IRS said it did not plan to develop a partial estimate of the business nonfiler rate, as we recommended in August 2010. IRS reported that funding would likely be unavailable for it to do so using operational data. According to IRS, its existing operational data on business nonfilers are sufficient. However, even a partial estimate could give IRS additional information that would be useful in its strategic planning and help it determine what priority it should place on this type of noncompliance. However, given the lack of sufficient data and IRS's budget priorities, GAO has closed this action as not addressed and will no longer track implementation
Internal Revenue Service 2. To monitor the performance of business nonfiler activities, the Commissioner of Internal Revenue should set a deadline for developing data that can be used to measure the performance of the BMF CCNIP and its business nonfiler compliance activities overall.
Closed - Not Implemented
IRS has determined that it does not have the necessary data that could be used to measure its business nonfiler efforts across the agency and that it therefore cannot set a deadline for developing such data, as GAO recommended in August 2010. According to IRS, developing such data would be prohibitively costly. Rather, as of December 2017, IRS plans to continue to use the data at the operating division level. Absent cross-agency performance data, IRS is unable to fully understand the outcomes of its business nonfiler efforts. GAO maintains that developing these IRS performance data for all business nonfilers may still produce benefits. However, given the lack of data, costs to produce the data, and IRS' competing priorities, IRS is not able to develop a deadline for developing the data. As a result, GAO has closed this action as not addressed and will no longer track implementation.
Internal Revenue Service 3. To monitor the performance of business nonfiler activities, the Commissioner of Internal Revenue should develop a separate efficiency measure for business nonfilers insofar as doing so is cost-effective.
Closed - Not Implemented
In its initial response to our recommendation, IRS said that if cost effective, the new team formed at the Servicewide Nonfiler Executive Advisory Council would develop a separate efficiency measure for business nonfilers. During their September 2010 meeting, the Council commissioned a team to look for data that could be used to develop a business nonfiler efficiency measure. In January 2011, this team reported that data did not exist and changing the IRS financial accounting systems to capture the data would be cost-prohibitive. The Council decided that IRS will continue to calculate a combined individual and business nonfiler efficiency measure rather than develop a separate efficiency measure for business nonfilers.
Internal Revenue Service 4. To monitor the performance of business nonfiler activities, the Commissioner of Internal Revenue should develop an evaluation plan for the BMF CCNIP selection codes, including both an initial evaluation and an ongoing monitoring plan, and conduct an evaluation based on this plan. Results from the study and the ongoing monitoring could be used to refine the selection codes to improve the effectiveness of the program.
Closed - Implemented
In November 2012, IRS developed an evaluation plan, including a timeline, the data to be used, and an ongoing monitoring plan. IRS completed an evaluation of the selection codes in September 2013 and determined that selection codes were appropriately assigned to cases and determined what selection codes were more likely to generate returns. With the results of this evaluation, IRS has better information to draw from in prioritizing its business nonfiler cases, helping to ensure that the new program is acheiving its goal of selecting more productive cases to work.
Internal Revenue Service 5. To identify additional actions to help achieve the goal of fewer unproductive cases, the Commissioner of Internal Revenue should add closing codes that would better indicate all known causes for "not liable to file" determinations and use this information to analyze causes of unproductive cases and use them as appropriate to identify any actions IRS could take either administratively or through education and outreach that could reduce the number of business nonfiler cases where the filing requirement in IRS's records is not applicable.
Closed - Not Implemented
IRS said that Collection, Planning & Analysis conducted a coordinated review of the existing closing codes to determine where capturing additional reasons for not liable determinations would prove valuable for further research efforts. IRS said that this review determined that the existing "not liable to file a return" closing code was sufficient and no linkage between this closing code and unproductive cases could be established. In its initial report, GAO stated that having additional information on closing codes could be useful in a number of ways including program evaluation and outreach activities.
Internal Revenue Service 6. To ensure that IRS does not inappropriately close cases as not liable to file returns, the Commissioner of Internal Revenue should reinforce to collections staff the need to check for business activity using information return data and selection codes.
Closed - Implemented
IRS said that the training material that was delivered to Campus personnel during FY 2010 program reviews would be provided to all interested offices. The IRM revisions have been developed to include instructions for using selection codes as a research tool for full compliance checks. On 2/15/2011, IRS added a new IRM section 5.19.2.6.5.4.1, which details how to use selection codes in determining liability for returns identified as delinquent. IRS updated IRM 5.1.11 (used by revenue officers) to include an instruction to research information return data and selection codes prior to closing a delinquent return module as not liable.
Internal Revenue Service 7. To ensure that IRS does not inappropriately close cases as not liable to file returns, the Commissioner of Internal Revenue should study the feasibility and cost-effectiveness of using private sector business activity data and federal contract data to make a determination of whether federal contractors and other businesses are liable for filing tax returns.
Closed - Implemented
IRS completed a study in 2013 on the feasibility and cost-effecitiveness of using two non-IRS, private data sources. This study concluded that using these two data sources would not be cost-effective.
Internal Revenue Service 8. To ensure federal contractors comply with filing requirements, the Commissioner of Internal Revenue should establish a process similar to the Federal Employee/Retiree Delinquency Initiative (FERDI) program for federal workers and retirees that will give a high priority to businesses identified as potential nonfilers that have federal contracts.
Closed - Implemented
IRS created an indicator of federal contractor business nonfiler cases in the queue of its collection function. By placing an indicator for federal contractor cases, collections staff can identify these cases among non-contractor cases. However, IRS has not provided evidence that federal contractor business nonfiler cases are being prioritized. IRS stated that they plan to update risk rules using the federal contractor indicator, which could effectively prioritize the cases, it has not provided evidence that they have done so. In addition, IRS plans to add a selection code to its business nonfiler case selection program for federal contractors, which could give those cases priority. As of October 2014, IRS had created the federal contractor indicator and code as indicated above to make federal contractor nonfilers a priority, even though it has not shown that it was a "high priority" as suggested in our recommendation.

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