Recommendation: To further ensure that the new campaigns under LB&I's new approach for addressing tax compliance are implemented successfully, the Commissioner should document lessons learned from stakeholder input and past performance.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open

Comments: As of February 2020, IRS officials said LB&I has developed and deployed the Campaign Development Form and the LB&I Taxpayer Registry to capture stakeholder input and feedback. The form documents all actions and a decision made on a particular campaign and is used to monitor real-time performance. While this will help IRS document lessons learned moving forward, IRS officials have not said how they would document lessons learned in the past.

Recommendation: The Commissioner of Internal Revenue should direct the referral programs to establish a mechanism to coordinate on a plan and timeline for developing a consolidated, online referral submission in order to better position IRS to leverage specialized expertise while exploring options to further consolidate the initial screening operations.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open
Priority recommendation

Comments: As of January 2020, IRS had taken some action to establish a mechanism to coordinate on a plan and timeline for developing a consolidated, online referral submission, as GAO recommended in its February 2016 report. IRS established a cross-functional team in February 2016 to comprehensively review IRS's referral programs. Among other things, the team has explored options to consolidate the initial screening operations and determine the scope and complexity for moving the referral process to an online format. According to IRS, an electronic submission process is expected to provide better access to the program and reduce the burden associated with making a written report or referral. In November 2016, the cross-functional team requested information technology resources for fiscal year 2019 to develop an online system which could potentially replace four separate referral forms, filter out incomplete referrals, and electronically route referrals for further IRS action. IRS assessed options for consolidating all forms for the various referral programs and determined that consolidating them to a single form was not feasible because of the technical nature and complexity of the various referral types. The cross-functional team had worked with IRS On Line Services to develop an online application prototype and was considering the cost-effectiveness of a commercial off-the-shelf product. According to IRS, the online application will make it easier for the public to report possible tax violations. Also, the online system will improve efficiency in coordination and provide reports that will be incorporated into the quarterly coordination meetings of the new cross-division referral coordination committee. As of January 2020, IRS was still considering funding for online referral submission development. IRS estimated that a commercial off-the-shelf product would cost about $2 million with an online referral capacity operational within one year. IRS said it will consider further consolidating the referral programs once the online application is in place. Without continued progress on efforts to consolidate referral intake, IRS faces continued inefficiencies in receiving and processing referrals as well as public confusion caused by trying to choose among multiple forms.

Recommendation: The Commissioner of Internal Revenue should track the results of large partnerships audits: (a) define a large partnership based on asset size and number of partners; (b) revise the activity codes to align with the large partnership definition; and (c) separately account for field audits and campus audits.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open
Priority recommendation

Comments: 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.

Recommendation: The Commissioner of Internal Revenue should analyze the audit results by these activity codes and types of audits to identify opportunities to better plan and use IRS resources in auditing large partnerships.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open
Priority recommendation

Comments: As of January 2020, IRS created a reporting and monitoring structure for its new large partnership 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. 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. Given these and other 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.

Recommendation: To clarify the desired results of the correspondence audit program and its linkages to IRS-wide activities, the Commissioner of the Internal Revenue Service should establish formal program objectives.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open
Priority recommendation

Comments: IRS 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. As of December 2019, IRS officials provided draft program objectives to GAO for discussion and are responding to comments from GAO. We will update the status when IRS provides any further supporting documentation, as we requested in March 2020.

Recommendation: To clarify the desired results of the correspondence audit program and its linkages to IRS-wide activities, the Commissioner of the Internal Revenue Service should ensure that the program measures reflect those objectives.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open
Priority recommendation

Comments: IRS 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 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. We will update the status when IRS provides any further supporting documentation, as we requested in March 2020.

Recommendation: To clarify the desired results of the correspondence audit program and its linkages to IRS-wide activities, the Commissioner of the Internal Revenue Service should clearly link those measures with strategic IRS-wide goals on ensuring compliance in a cost-effective way while minimizing taxpayer burden.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open
Priority recommendation

Comments: IRS 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 or IRS goals because the objectives 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. We will update the status when IRS provides any further supporting documentation, as we requested in March 2020.

Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should track savings from Compliance Maintenance and CAP overall and develop a plan for reinvesting any savings.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open

Comments: As of December 2019, IRS had taken some steps to implement this August 2013 recommendation, but had not developed a plan to track and reinvest any savings. IRS provided documents from October 2019 which discussed how portfolio management is used as a tool to prioritize and allocate time to eight compliance program areas, including CAP. IRS officials explained that any hours saved in a compliance program area are reallocated to the same or another compliance program area based on the division's strategic priorities rather than a plan focusing on CAP. Furthermore, CAP has not yet achieved the desired outcome of saving resources, according to IRS. If IRS finds any savings from CAP, it will need to develop a plan for reinvesting it to expand audit coverage. Without a plan for tracking savings and using them to increase audit coverage, IRS cannot be assured that the savings are effectively invested in either CAP or non-CAP taxpayers with a high compliance risk.

Recommendation: To increase the effectiveness of IRS's examinations individual tax returns, the Commissioner of Internal Revenue should transcribe data from paper-filed Form 1040 Schedules C and E that are not currently transcribed and make that data available to SB/SE examiners for classification. If IRS has evidence that the costs related to transcribing all such data on Schedules C and E are prohibitive, IRS could do one or both of the following actions: (1) transcribe less data by transcribing only the missing data for selected line items, such as certain, large expense line items, or (2) develop a budget proposal to fund an initiative for transcribing Schedule C and E.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open

Comments: IRS has taken some steps to implement this May 2013 recommendation. In September 2015, IRS completed a study on whether to transcribe more data from paper-filed returns. IRS officials said the study showed that the benefits to be derived from additional transcription are not significant and would not outweigh the added cost. That study did not provide specific information about the costs and benefits of transcribing information from Schedules C and E. In December 2018, IRS provided a cost-benefit estimate for transcribing all data from Schedules C and E and concluded that the cost of transcribing all additional Schedule C and Schedule E lines would exceed the expected benefits. This analysis satisfied the first part of GAO's recommendation. However, the study did not address whether transcribing certain, select lines on Schedules C and E would be cost-effective, as GAO's recommendation suggested. Having specific data transcribed and electronically available likely will improve the classification of audits as well as the quality of the audits, according to examiners GAO spoke with for the report. As of March 2020, GAO continues to monitor IRS's progress.

Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to perform a risk assessment to determine the appropriate level of Integrated Data Retrieval System (IDRS) access that should be granted to employee groups that handle hard-copy taxpayer receipts and related sensitive taxpayer information as part of their job responsibilities.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open

Comments: IRS's actions to address this recommendation are ongoing. In October 2019, the functions within the Small Business/Self-Employed organization completed risk assessments to determine the appropriate level of Integrated Data Retrieval System (IDRS) access that should be granted to the employees who handle hard-copy taxpayer receipts and related sensitive taxpayer information as part of their job responsibilities. In addition, IRS officials stated that during fiscal year 2020, the Taxpayer Advocate Service organization, in coordination with the Information Technology organization, as necessary, will complete a risk assessment of all employee groups that handle hard-copy taxpayer receipts and related sensitive taxpayer information to determine the most appropriate level of IDRS access.

Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to, based on the results of the risk assessment, update the Internal Revenue Manual (IRM) accordingly to specify the appropriate level of IDRS access that should be allowed for (1) remittance perfection technicians and (2) all other employee groups with IDRS access that handle hard-copy taxpayer receipts and related sensitive information as part of their job responsibilities.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open

Comments: IRS's actions to address this recommendation are ongoing. IRS officials stated that by October 2020, the Small Business/Self-Employed, Taxpayer Advocate Service, and Tax Exempt & Government Entities organizations will work with the Information Technology organization, as necessary, to ensure that the applicable Internal Revenue Manual section(s) are revised for any policy changes on (1) risk mitigation, including specifying the appropriate level of Integrated Data Retrieval System access that should be allowed and (2) risk acceptance for affected employee groups, as needed.

Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to establish procedures to implement the updated IRM, including required steps to follow to prevent (1) remittance perfection technicians and (2) all other employee groups that handle hard-copy taxpayer receipts and related sensitive information as part of their job responsibilities from gaining access to command codes not required as part of their designated job duties.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open

Comments: IRS's actions to address this recommendation are ongoing. IRS officials stated that by October 2020, the Small Business/Self-Employed, Taxpayer Advocate Service, and Tax Exempt & Government Entities organizations will work with the Information Technology organization, as necessary, to establish procedures to prevent affected employees from gaining access to command codes not required as part of their designated job duties, as needed.

Recommendation: To simplify the burden that the corporate exemption places on payers to distinguish payees' business status and also provide greater information reporting, Congress may wish to consider requiring payers to report payments to corporations on the form 1099 MISC, as we previously suggested and as proposed in the Bush Administration's budget.

Agency: Congress
Status: Open

Comments: No legislative action has been taken, as of March 2020, to require payers engaged in a trade or business to report on payments to corporations for services, thereby reducing these payers' burden to determine which payments require reporting, as GAO recommended in January 2009. Reporting of third-party information is a powerful compliance tool, and eliminating the reporting exemption for payments to corporations would be a cost-effective way to improve voluntary compliance.

Recommendation: To gauge the extent of 1099-MISC payer noncompliance and its contribution to the tax gap, the Commissioner of Internal Revenue should, as part of future research studies, develop an estimate of 1099-MISC payer noncompliance.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open

Comments: According to IRS, developing such an estimate requires a multi-pronged approach and a large amount of coordinated effort. One prong is to determine the extent of filing compliance among employers. A second prong would determine the extent to which 1099-MISC payers properly report their payments. Starting with the Tax Year 2001 individual income tax reporting compliance study, the National Research Program (NRP) office has been collecting some data related to Form 1099-MISC compliance, from both the payer and payee perspectives. Additional data were generated by the NRP reporting compliance study for employment tax. As part of the NRP employment tax research, IRS examiners were to review taxpayers' Form 1099 filing compliance. Data collected from these studies should shed some light on whether employers are appropriately reporting required payments on Form 1099-MISC. As of March 2020, IRS had completed its preliminary analysis and expected to complete more comprehensive analysis of the NRP employment tax data by May 2020. GAO will continue to monitor IRS's progress.

Recommendation: To gauge the extent of 1099-MISC payer noncompliance and its contribution to the tax gap, the Commissioner of Internal Revenue should, as part of future research studies, determine the nature and characteristics of those payers that do not comply with 1099-MISC reporting requirements so that this information can be factored into an IRS-wide strategy for increasing 1099-MISC payer compliance.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open

Comments: IRS researchers collected data on 1099-MISC reporting as part of its National Research Program (NRP) study on employment taxes, a program that involved examinations of a sample of tax returns for tax years 2008 through 2010. As part of the NRP employment tax research, IRS examiners were to review taxpayers' Form 1099 filing compliance. Collecting data on this issue will enable IRS to study the nature and characteristics of payers that do not comply with 1099-MISC reporting requirements. As of March 2020, IRS had completed its preliminary analysis and expected to complete more comprehensive analysis of the NRP employment tax data by May 2020. GAO will continue to monitor IRS's progress.

Recommendation: Given the potential for improving compliance now and in the future, Congress may wish to provide IRS with the authority to use math error checks to identify and correct returns with ineligible (1) IRA "catch-up" contributions, and (2) contributions to traditional IRAs from taxpayers over age 70-1/2.

Agency: Congress
Status: Open

Comments: As of March 2020, Congress has expanded IRS's math error authority in certain circumstances, but not as broadly as GAO suggested in February 2010. Section 208 of division Q of the Consolidated Appropriations Act, 2016 (Public Law 114-113 enacted in December 2015) gave IRS the authority to use math error authority if (1) a taxpayer claimed the Earned Income Tax Credit, Child Tax Credit, or the American Opportunity Tax Credit (AOTC) during the period in which a taxpayer is not permitted to claim such credit as a consequence of either having made a prior fraudulent or reckless claim; or (2) a taxpayer omitted information required to be reported because the taxpayer made prior improper claims of the Child Tax Credit or the AOTC. While expanding math error authority is consistent with what GAO suggested in February 2010, GAO maintains that a broader authorization of math error authority with appropriate controls would enable IRS to correct obvious noncompliance, would be less intrusive and burdensome to taxpayers than audits, and would potentially help taxpayers who underclaim tax benefits to which they are entitled. If Congress decides to extend broader math error authority to IRS, controls may be needed to ensure that this authority is used properly such as requiring IRS to report on its use of math error authority. The Administration also requested that Congress expand IRS's math error authority as part of the Service's Congressional Budget Justification and Annual Performance Report and Plan for fiscal year 2019. Specifically, the Administration requested authority to correct a taxpayer's return in the following circumstances: 1) the information provided by the taxpayer does not match the information contained in government databases; 2) the taxpayer has exceeded the lifetime limit for claiming a deduction or credit; or 3) the taxpayer has failed to include with his or her return certain documentation that is required by statute. As of April 2019, the Congress had not provided IRS with such authority.

Recommendation: To provide clarity for which taxpayers with rental real estate activity must report expense payments on information returns and to provide greater information reporting, Congress may wish to consider amending the Internal Revenue Code to make all taxpayers with rental real estate activity subject to the same information reporting requirements as other taxpayers operating a trade or business.

Agency: Congress
Status: Open

Comments: No legislative action had been taken, as of January 2020, to make owners of rental real estate subject to the same payment reporting requirements regardless of whether they engaged in a trade or business under current law, as GAO recommended in August 2008. Changing reporting requirements and holding taxpayers with rental real estate to the same filing requirements as taxpayers whose activities are considered a trade or business would provide clarity about who is required to file, which would improve tax compliance.

Recommendation: The Secretary of the Treasury should ensure that the tax gap strategy includes (1) a segment on improving sole proprietor compliance that is coordinated with broader tax gap reduction efforts and (2) specific proposals, such as the options we identified, that constitute an integrated package.

Agency: Department of the Treasury
Status: Open

Comments: As of January 2020, Treasury has taken no action to address this recommendation and has not provided GAO with plans to do so. Treasury's tax gap strategy does not cover sole proprietor compliance in detail while coordinating it with broader tax gap reduction efforts as GAO recommended in July 2007. In March 2016, Treasury officials reported to GAO that they have implemented or proposed several actions to address the tax gap among sole proprietors, such as requiring reporting on payment card payments and improved audit selection procedures for sole proprietors. However, GAO's July 2007 report noted there are many trade offs involved in various options for improving sole proprietor compliance. GAO recommended that Treasury's strategy for reducing the tax gap include a segment on sole proprietor compliance that is coordinated with broader tax gap reduction efforts.

Recommendation: The Commissioner of Internal Revenue should match independent contractors' information returns with their tax returns to more systematically identify employers who are misclassifying employees as independent contractors and to better target audit resources for doing employment tax examinations.

Agency: Department of the Treasury: Internal Revenue Service
Status: Open

Comments: Call 202/512-6100 for additional information.

Recommendation: Section 630 of the Revenue Act of 1978 restricts IRS' authority to ensure that current and future classifications will be correct. In view of the equity issues and tax revenues involved, Congress may wish to consider repealing this restriction against requiring employers to prospectively reclassify employees who have been misclassified as independent contractors.

Agency: Congress
Status: Open

Comments: Call 202/512-6100 for additional information.