https://www.gao.gov Mon, 26 Oct 2020 16:25:11 -0400 GAO /images/gao_logo_rss.gif https://www.gao.gov/ Feed provided by GAO. Click to visit. https://www.gao.gov/products/GAO-21-178T What GAO Found Information technology (IT) operational challenges have hampered the Internal Revenue Service's (IRS) ability to effectively carry out its responsibilities. For example: In May 2020, GAO reported that new and continuing deficiencies in information system security controls over financial and tax processing systems included deficiencies related to access controls, segregation of duties, and other areas. These collectively represented a significant deficiency in risks of unauthorized access to, modification of, or disclosure of financial reporting and taxpayer data and disruption of critical operations. GAO made 18 new recommendations to address these deficiencies, bringing the total number of GAO cybersecurity recommendations that IRS has not yet implemented to 132. A January 2020 GAO report stated that customer service representatives and frontline managers reported frequently experiencing computer problems that adversely affected their ability to serve taxpayers. Specifically, they reported their computers freezing or taking excessive time to reboot. These computer problems could cause phone calls to disconnect before taxpayer issues were resolved, which required taxpayers to call back and wait in the queue again. GAO recommended that IRS address this challenge; IRS now has actions underway to implement GAO's recommendation. GAO has also issued several reports identifying numerous opportunities for the IRS to improve the management of its IT investments. IRS has addressed some of the related recommendations but other important ones are not yet implemented. For example: In June 2018, GAO reported that IRS had not fully implemented key risk management practices for three mission critical systems facing significant risks due to their reliance on legacy programming languages, outdated hardware, and a shortage of human resources with needed skills. For example, for one of the systems, the more than 50-year old Individual Master File, IRS was using assembly language and Computer Business Oriented Language (COBOL)—languages that were both developed in the 1950s. As a result of these and other findings in its report, GAO made 21 recommendations to IRS. As of September 2020, IRS had implemented three of the 21 recommendations. In June 2016, GAO reported that IRS had established IT investment priorities that supported two types of activities—operations and modernization. While IRS had developed a process for prioritizing operations activities, it did not have such a process for modernization. Accordingly, GAO recommended that IRS develop this process to better assure Congress and other decision makers that the highest priorities are funded. In September 2020, the agency told GAO that it expected to implement this process for the fiscal year 2022 budget cycle. Why GAO Did This Study The IRS, a bureau of the Department of the Treasury, relies extensively on IT to annually collect more than $3 trillion in taxes, distribute more than $400 billion in refunds, and carry out its mission of providing service to America's taxpayers in meeting their tax obligations. This year, IRS also relied on IT to process and disburse economic impact payments totaling hundreds of billions of dollars to millions of Americans in accordance with the Coronavirus Aid, Relief, and Economic Security Act. IRS expects to spend $3.2 billion on IT for fiscal year 2020. GAO was asked to testify about IT management at IRS. Specifically, this testimony summarizes GAO's prior reports on IT challenges that IRS has faced in carrying out its operational responsibilities and on opportunities for the agency to improve the management of its IT investments. To do so, GAO reviewed its previously issued reports identifying IT operational challenges and opportunities to improve the management of its systems, and incorporated information on the agency's actions in response to related recommendations. What GAO Recommends GAO has made a number of recommendations to IRS to address IT challenges and needed improvements. While IRS has generally agreed with these, it still needs to implement the numerous critical recommendations that remain outstanding. For more information, contact Vijay D’Souza at (202) 512-6240 or dsouzav@gao.gov. Wed, 07 Oct 2020 00:00:00 -0400 https://www.gao.gov/products/GAO-20-656 What GAO Found The Internal Revenue Service's (IRS) mission and strategic plan state expectations for IRS to improve the taxpayer experience and services it provides. However, IRS and its divisions that manage programs serving the largest taxpayer groups—the Wage and Investment (W&I) and the Small Business/Self-Employed (SB/SE) divisions—did not have performance goals to specify the desired improvements. For example, W&I aligned its service programs to IRS's strategic objectives for taxpayer services that state broad types of management activities such as monitoring the taxpayer experience and addressing issues. However, it did not have performance goals that specify outcomes to improve the taxpayer experience, such as reducing taxpayer wait times for telephone assistance. Because IRS and these two divisions do not have performance goals for improving the taxpayer experience, IRS does not have related performance measures. IRS has many performance measures—including more than 80 for W&I and SB/SE—for assessing the services it provides, such as related to timeliness and accuracy of information provided to taxpayers. However, these existing measures do not assess improvements to the taxpayer experience, such as whether tax processes were simpler or specific services met taxpayers' needs. The division-level measures also lack targets for improving the taxpayer experience. Further, the existing measures do not capture all of the key factors identified in Office of Management and Budget guidance for how customers experience federal services, including customer satisfaction and how easy it was to receive the services. As a result, IRS does not have complete information about how well it is satisfying taxpayers and improving their experiences. IRS analyzes its taxpayer service measures to compare performance with targets but the analyses provide few insights and no recommendations to improve the taxpayer experience, such as to provide more timely tax filing guidance. Also, IRS does not have a process to use service measures to guide decisions on allocating resources to improve the taxpayer experience. As a result, IRS is challenged to use performance data to balance resource allocation for efforts to improve the taxpayer experience compared with other IRS efforts. Finally, IRS reports limited information to the public about performance related to the taxpayer experience for transparency and accountability. The table below summarizes important management practices that IRS did not fully follow to provide taxpayers a top-quality service experience. Why GAO Did This Study According to IRS, providing top-quality service is a critical part of its mission to help taxpayers understand and meet their tax responsibilities. Congress, the National Taxpayer Advocate, and the administration have recognized the importance of improving how taxpayers experience IRS services. Setting goals and objectives with related performance measures and targets are important tools to focus an agency's activities on achieving mission results. GAO was asked to review IRS's customer service performance measures. This report assesses IRS's (1) goals and objectives to improve the taxpayer experience; (2) performance measures to support improved experiences; and (3) use of performance information to improve the experience, allocate resources, and report performance. To assess IRS's goals, measures, targets, and use of them, GAO compared IRS's practices to key practices in results-oriented management. What GAO Recommends GAO is making 7 recommendations, including that IRS identify performance goals, measures, and targets; as well as analyze performance; develop processes to make decisions on resources needed; and report performance on improving the taxpayer experience. IRS indicated that it generally agreed with the recommendations, but that details around their implementation were under consideration and would be provided at a later date. For more information, contact Jessica Lucas-Judy at (202) 512-9110 or LucasJudyJ@gao.gov. Wed, 23 Sep 2020 00:00:00 -0400 https://www.gao.gov/products/GAO-20-679 What GAO Found Nonprofit hospitals must satisfy three sets of requirements to obtain and maintain a nonprofit tax exemption (see figure). Requirements for Nonprofit Hospitals to Obtain and Maintain a Tax-Exemption While PPACA established requirements to better ensure hospitals are serving their communities, the law is unclear about what community benefit activities hospitals should be engaged in to justify their tax exemption. The Internal Revenue Service (IRS) identified factors that can demonstrate community benefits, but they are not requirements. IRS does not have authority to specify activities hospitals must undertake and makes determinations based on facts and circumstances. This lack of clarity makes IRS's oversight challenging. Congress could help by adding specificity to the Internal Revenue Code (IRC). While IRS is required to review hospitals' community benefit activities at least once every 3 years, it does not have a well-documented process to ensure that those activities are being reviewed. IRS referred almost 1,000 hospitals to its audit division for potential PPACA violations from 2015 through 2019. However, IRS could not identify if any of these referrals related to community benefits. GAO's analysis of IRS data identified 30 hospitals that reported no spending on community benefits in 2016, indicating potential noncompliance with providing community benefits. A well-documented process, such as clear instructions for addressing community benefits in the PPACA reviews or risk-based methods for selecting cases, would help IRS ensure it is effectively reviewing hospitals' community benefit activities. Further, according to IRS officials, hospitals with little to no community benefit expenses would indicate potential noncompliance. However, IRS was unable to provide evidence that it conducts reviews related to hospitals' community benefits because it does not have codes to track such audits. Why GAO Did This Study Slightly more than half of community hospitals in the United States are private, nonprofit organizations. IRS and the Department of the Treasury have recognized the promotion of health as a charitable purpose and have specified that nonprofit hospitals are eligible for a tax exemption. IRS has further stated that these hospitals can demonstrate their charitable purpose by providing services that benefit their communities as a whole. In 2010, Congress and the President enacted PPACA, which established additional requirements for tax-exempt hospitals to meet to maintain their tax exemption. GAO was asked to review IRS's implementation of requirements for tax-exempt hospitals. This report assesses IRS's (1) oversight of how tax-exempt hospitals provide community benefits, and (2) enforcement of PPACA requirements related to tax-exempt hospitals. What GAO Recommends GAO is making one matter for congressional consideration to specify in the IRC what services and activities Congress considers sufficient community benefit. GAO is also making four recommendations to IRS, including to establish a well-documented process to ensure hospitals' community benefit activities are being reviewed, and to create codes to track audit activity related to hospitals' community benefit activities. IRS agreed with GAO's recommendations. For more information, contact Jessica Lucas-Judy at (202) 512-9110 or lucasjudyj@gao.gov. Thu, 17 Sep 2020 00:00:00 -0400 https://www.gao.gov/products/GAO-20-589 What GAO Found Federal law provides certain tax benefits for transactions involving genuine insurance products, including insurance products held offshore. While taxpayers may lawfully hold offshore insurance products, they contain features that make them vulnerable for use in abusive tax schemes. For example, offshore insurance products can be highly technical and individualized, making enforcement challenging, according to Internal Revenue Service (IRS) officials. Furthermore, insurance is not defined by federal statute, potentially making a determination of what constitutes genuine insurance for federal tax purposes unclear. Offshore micro-captive insurance products, which are made by small insurance companies owned by the businesses they insure, may be abused if the corporate taxpayer improperly claims deductions for payments made to a micro-captive for federal tax purposes. Courts have applied certain considerations to determine whether these deductions can be claimed. For example, one consideration is whether the insurance legitimately distributes risk across participating entities. IRS officials said they expend significant resources reviewing these schemes because of the varied ways insurance companies may work. Offshore variable life insurance products, which are insurance policies with investment components over which the insured has certain control, may be abused if the individual taxpayer fails to meet IRS reporting requirements or pay appropriate federal income taxes. Federal regulations require that taxpayers with certain foreign life insurance accounts report this information to IRS and the Financial Crimes Enforcement Network. The structure of life insurance products may vary and taxpayers are required to pay taxes based on the underlying type of financial product the policy represents. The figure below shows how noncompliance may occur when taxpayers use life insurance and micro-captive insurance in abusive tax schemes. Abusive Use of Micro-captive and Life Insurance Why GAO Did This Study When structured in abusive ways, insurance products held offshore can be designed to aid in unlawful tax evasion by U.S. taxpayers. Two products that IRS has recently warned have the potential for such abuse include micro-captive insurance and variable life insurance policies. GAO was asked to review how taxpayers may abuse offshore insurance products. This report describes (1) how offshore insurance tax shelters provide opportunities for income tax abuse; (2) how offshore micro-captive insurance is used and how it is used in abusive tax schemes; and (3) how offshore variable life insurance is used and how it is used in abusive tax schemes. GAO reviewed IRS tax and information return forms, relevant U.S. case law and IRS guidance, academic and trade publications, and applicable statutes and regulations. GAO also interviewed IRS officials and professionals in the tax preparation and insurance industries. For more information, contact Jessica Lucas-Judy at (202) 512-9110 or LucasJudyJ@gao.gov. Thu, 30 Jul 2020 00:00:00 -0400 https://www.gao.gov/products/GAO-20-454 What GAO Found The Internal Revenue Service (IRS) used data to select almost 70 percent of its examinations of Form 990 returns in fiscal year 2019. Almost half of these examinations were selected using models that score returns for potential noncompliance (see figure). Figure: Increased Use of Data in Examination Selection, Fiscal Years 2016-2019 Of the returns examined that were selected using the model, 87 percent resulted in a change to the return, indicating that IRS identified noncompliance. GAO found that the model did not improve change rates compared to prior selection methods and a higher model score is not associated with a higher change rate. IRS has not fully implemented or documented internal controls in its established processes for analyzing data for examination selection. For example: IRS has not defined measurable objectives for using data to select returns for examination . Without measurable objectives, IRS cannot assess how well it is doing or fully implement other internal controls. IRS's models have deficiencies affecting the validity and reliability of return scoring and selection . IRS has incomplete definitions and procedures and did not always follow its definitions when assigning point values for identifying potential noncompliance for examination. As a result, return scoring by the models is not always consistent. IRS did not consistently document the processing and use of data in decision-making on examination selection . Without such documentation, IRS cannot support its use of data in examination selection in all cases. IRS does not regularly evaluate examination selection. Examination data were inconsistent across years and IRS only tracks one prior year of data. IRS also did not save data on all returns that the models scored. Without data and regular evaluations, IRS cannot assure that its models are selecting returns as intended and that deficiencies are identified and corrected. Why GAO Did This Study Exempt organizations often provide charitable services, or in some instances, membership benefits in furtherance of an exempt purpose. They generally do not pay federal income tax. IRS examines exempt organization returns (Form 990 and others) to address noncompliance, which may promote confidence in the tax exempt sector. In 2016, IRS started using three analytical models using Form 990 data to identify potential noncompliance and select returns for examination. GAO was asked to review IRS's use of Form 990 data. This report assesses (1) IRS's use of data to select returns for examination and, (2) the process IRS has established for selecting returns. GAO analyzed (1) examination data from fiscal years 2016 through 2019 including results from the largest Form 990 model, and (2) model documentation for a generalizable sample. GAO interviewed IRS officials and assessed IRS policies and procedures using relevant standards for internal control. What GAO Recommends GAO makes 13 recommendations, including that IRS establish objectives, revise model documentation, fully document processing and using data in decisions, and regularly evaluate examination selection. IRS agreed with all recommendations except one related to evaluating examination selection methods using consistent historical data over time. GAO continues to believe that this recommendation is valid as discussed in the report. For more information, contact James R. McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov. Tue, 16 Jun 2020 00:00:00 -0400 https://www.gao.gov/products/GAO-20-377 What GAO Found The Office of Management and Budget (OMB) issues shutdown guidance for agencies in Circular A-11. Of four selected agency components, three—U.S. Customs and Border Protection (CBP), the Internal Revenue Service (IRS), and the International Trade Administration (ITA)—operated in fiscal year (FY) 2019 under contingency plans that included most of the key information elements specified in Circular A-11 . The plan that the fourth one—Office of the U.S. Trade Representative (USTR)—operated under, authored by the Executive Office of the President, did not include a majority of the key information elements. OMB guidance instructs agencies to have plans in place for both short and prolonged—longer than 5 days—shutdowns. None of the four selected agencies' FY 2019 contingency plans fully addressed anticipated changes in the event of a prolonged shutdown. GAO found that IRS, ITA, and USTR internally discussed and planned for anticipated operational changes in the event of a prolonged FY 2019 shutdown. CBP officials said they only focused on short-term operational needs. Having a comprehensive plan for a potential prolonged shutdown would help provide clearer workforce expectations during any future shutdowns. Having sufficient internal controls, such as documented policies and procedures, in place prior to a shutdown can help agencies implement changes in day-to-day operations during a shutdown. Selected agency components all incorporated some internal controls in their shutdown-related activities, as shown in the table below. However, none of the agency components had controls for limiting both physical and virtual workspace access for employees during a shutdown, each citing the difficulty of implementing such controls. Having these controls in place would help components ensure that they operate consistently with their contingency plans and avoid misuse of government resources. Selected Agency Components Varied in the Sufficiency of Their Internal Controls Why GAO Did This Study A lapse in appropriations resulted in the federal government partially shutting down from December 22, 2018, to January 25, 2019. GAO was asked to evaluate agency contingency plans and operations during the FY 2019 shutdown. This report assesses the extent to which selected agencies and selected components (1) had contingency plans that were consistent with applicable OMB guidance, (2) planned for a potential prolonged shutdown and changed operations during the shutdown, and (3) had shutdown policies and procedures consistent with relevant internal control principles. GAO selected CBP, IRS, ITA, and USTR as agency components for review because they are under the jurisdiction of the Senate Committee on Finance and were affected by the FY 2019 shutdown. GAO reviewed OMB's guidance, agencies' contingency plans, and other documentation. GAO interviewed agency and component officials. What GAO Recommends GAO is making 14 recommendations, including that certain agency components improve contingency plans, document shutdown procedures, and improve controls for physical and virtual workspace access during a shutdown. CBP and ITA agreed with the recommendations directed to them; IRS partially agreed with one and disagreed with two; and USTR did not state whether it agreed or disagreed, but has begun taking steps to implement two recommendations. For more information, contact James R. McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov. Mon, 01 Jun 2020 00:00:00 -0400 https://www.gao.gov/products/GAO-20-366 What GAO Found The platform economy is an arrangement where workers offering goods or services connect with customers through an app or other online platform. Estimates of the population of platform workers lack certainty, but generally range from around 1.5 million to 2 million workers for recent years and suggest that the platform workforce may be growing. According to stakeholders, such as researchers and tax preparers, platform workers may not realize that a company is treating them as independent contractors rather than employees and that they must comply with different tax requirements. To help address this challenge, the Internal Revenue Service (IRS) developed a communications plan aimed at workers in the platform economy (which IRS calls the gig economy). Examples of IRS's Social Media Communications Tailored for Platform Workers The communications plan incorporates leading practices for redesigning web pages and improving the online user experience, but lacks a monitoring plan to help assure IRS's efforts address platform workers' tax challenges. GAO found that platform workers may not receive information on their earnings, creating compliance challenges for them and enforcement challenges for IRS. GAO identified actions that could promote compliance. For example, some platform companies only report total annual payments for workers if they exceed $20,000 and 200 transactions—an amount that exceeds the average gross pay from a single company for many platform workers. Amending this rule to lower the reporting thresholds would provide workers with more information to help them comply with their tax obligations. The change could also enhance IRS's ability to ensure that these workers are correctly reporting their income. Additionally, IRS could implement voluntary withholding on payments to independent contractors (including platform workers). IRS data indicate that tax withholding substantially increases the compliance rate. Why GAO Did This Study Platform companies typically classify workers offering services as independent contractors and do not withhold taxes from their payments for remittance to IRS. GAO was asked to review issues related to platform workers and tax compliance. This report, among other things, examines (1) what is known about the platform workforce, and (2) options to promote compliance among its workers. GAO reviewed research on the U.S. platform economy and interviewed stakeholders on the tax-related challenges platform workers face; reviewed IRS documents; interviewed IRS officials; and assessed potential impacts of some options that could address platform worker tax-related challenges. What GAO Recommends GAO is making seven recommendations to IRS, including actions to enhance its communications plan, increase information reporting for platform workers, and allow voluntary withholding. IRS agreed with the recommendation to enhance its communications plan. For four recommendations related to information reporting and voluntary withholding, IRS either disagreed or said it was unable to agree because it could not commit to an implementation date due to higher priorities. GAO continues to believe that all the recommendations are valid, as discussed in the report. For more information, contact James R. McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov. Thu, 28 May 2020 00:00:00 -0400 https://www.gao.gov/products/GAO-20-411R What GAO Found During its audit of the Internal Revenue Service’s (IRS) fiscal years 2019 and 2018 financial statements, GAO identified new deficiencies in information system security controls that along with unresolved control deficiencies from prior audits, collectively represent a significant deficiency in the agency’s internal control over financial reporting systems. Specifically, GAO identified 11 new deficiencies in information system security controls over certain IRS financial and tax processing systems that are relevant to internal control over financial reporting. Of the 11 new deficiencies, five were related to access controls, three were related to configuration management, one was related to segregation of duties, and two were related to information security management program controls. In a separately issued LIMITED OFFICIAL USE ONLY report, GAO communicated to IRS management detailed information regarding the 11 new deficiencies in information system security controls and made 18 recommendations to address them. In addition, GAO found that as of September 30, 2019, IRS had completed corrective actions to address deficiencies in information system security controls associated with 13 of the 127 recommendations resulting from GAO’s prior financial audits. GAO closed these recommendations. In the LIMITED OFFICIAL USE ONLY report, GAO communicated to IRS management the status of previously reported recommendations as of September 30, 2019. As a result, IRS has 132 GAO recommendations to address—the 114 remaining open recommendations from GAO’s prior financial audits and the 18 new recommendations GAO made in the LIMITED OFFICIAL USE ONLY report. Until these new and continuing control deficiencies, which collectively represent a significant deficiency, are fully addressed, IRS financial reporting and taxpayer data will remain unnecessarily vulnerable to unauthorized access, modification, or disclosure. Summary of GAO Recommendations to IRS for Addressing Deficiencies in Information System Security Controls Information system security control area Open recommendations from prior audits as of September 30, 2018 Prior recommendations closed as of September 30, 2019 New recommendations resulting from FY 2019 audit Total remaining open recommendations Access controls 93 8 7 92 Configuration management 26 3 7 30 Segregation of duties 1 — 1 2 Contingency planning 1 1 — — Information security management program 6 1 3 8 Total 127 13 18 132 Legend: FY = fiscal year; — = no recommendation made. Source: GAO analysis of Internal Revenue Service (IRS) data.  |  GAO-20-411R Why GAO Did This Study This report presents the new deficiencies in information system security controls identified during GAO’s audit of IRS’s fiscal years 2019 and 2018 financial statements based on its fiscal year 2019 testing of controls over certain IRS financial and tax processing systems relevant to internal control over financial reporting. The report also includes the results of GAO’s fiscal year 2019 follow-up on the status of IRS’s corrective actions to address deficiencies in information system security controls and associated recommendations contained in GAO’s prior years’ reports that were open as of September 30, 2018. What GAO Recommends In a separately issued LIMITED OFFICIAL USE ONLY report, GAO made 18 recommendations to address 11 new deficiencies in information system security controls related to access controls, configuration management, segregation of duties, and information security management program. In commenting on a draft of the separately issued LIMITED OFFICIAL USE ONLY report, IRS agreed with GAO’s recommendations and stated that it will ensure that its corrective actions include root cause analysis for sustainable fixes. GAO will evaluate the effectiveness of IRS’s efforts to address these deficiencies during its audit of IRS’s fiscal year 2020 financial statements. For more information, contact Cheryl E. Clark at (202) 512-9377 or clarkce@gao.gov or Vijay A. D’Souza at (202) 512-6240 or dsouzav@gao.gov. Wed, 13 May 2020 00:00:00 -0400 https://www.gao.gov/products/GAO-20-492 What GAO Found Employment-related identity fraud occurs when people use a name or Social Security number (SSN) other than their own to get a job. People may do this if they are not authorized to work in the United States or are trying to avoid child support payments, among other reasons. Victims may face Internal Revenue Service (IRS) enforcement actions based on wages earned by fraudsters. IRS identified more than 818,000 cases in 2018, but this included only one form of employment-related identity fraud—mismatches between the identity listed on the Form W-2, Wage and Tax Statement (W-2) and the identity on the tax return. The true scope of employment-related identity fraud is unknown. GAO reviewed additional forms of this fraud and identified 1.3 million SSNs that for 2016 had both (1) characteristics associated with employment-related identity fraud; and (2) wages reported by the employer on a W-2, but not reported by the employee on a tax return. This includes about 9,000 individuals whose employers reported W-2s in five or more states, but who did not include them all on their tax return (see figure). Example of a Social Security Number Potentially Used for Employment-Related Identity Fraud The Social Security Administration (SSA) processes W-2s before sending W-2 data to IRS for enforcement purposes. SSA has developed processes to detect some inaccurate W-2s and notify potential fraud victims. IRS uses W-2 information to deter some potential fraudsters, but has not assessed the costs and benefits of expanding its enforcement efforts to include certain individuals who may underwithhold taxes or not file returns. Doing so could help IRS determine if such an effort would enable the agency to collect additional revenue. SSA and IRS entered into a memorandum of understanding (MOU) to collaborate to exchange wage data. However, they have not established performance goals and measures for the MOU, implemented the MOU's monitoring provisions, or clearly defined the data elements they exchange. Why GAO Did This Study Employment-related identity fraud poses risks to IRS's ability to collect taxes owed on wages and to SSA's ability to correctly calculate and manage Social Security benefits. GAO was asked to review employment-related identity fraud. This report examines (1) the potential scope of employment-related identity fraud, including what IRS knows about this type of fraud and what GAO could determine by analyzing Department of Health and Human Services' National Directory of New Hires (NDNH) and IRS data; (2) SSA and IRS actions to detect and deter this fraud as well as notify victims; and (3) SSA and IRS's collaboration on the issue. GAO analyzed 3 months of 2016 NDNH wage data and 2016 IRS taxpayer data to identify potential employment-related identity fraud. GAO also reviewed relevant IRS and SSA documentation and interviewed agency officials. This is a public version of a sensitive report that GAO issued in January 2020. Information that SSA deemed sensitive has been omitted. What GAO Recommends GAO is making 12 recommendations to IRS and SSA, including that IRS assess the feasibility of adding checks to its review of employment-related identity fraud, and assess the costs and benefits of expanding enforcement; and that both agencies improve the implementation of their MOU. SSA agreed and IRS neither agreed nor disagreed with the recommendations. For more information, contact Jessica Lucas-Judy at (202) 512-9110 or LucasJudyJ@gao.gov, or Rebecca Shea at (202) 512-6722 or SheaR@gao.gov. Wed, 06 May 2020 00:00:00 -0400 https://www.gao.gov/products/GAO-20-480R What GAO Found During its audit of the Internal Revenue Service's (IRS) fiscal years 2019 and 2018 financial statements, GAO identified new control deficiencies in IRS's internal control over financial reporting that although not considered a material weakness or significant deficiency, nonetheless warrant IRS management's attention. These control deficiencies concern IRS's transporting taxpayer receipts, reviewing taxpayers' accounts for duplicate refunds, recording acceptance of goods and services, and calculating future lease payments for non-cancellable operating leases. GAO communicated to IRS management detailed information regarding these four new control deficiencies and made four recommendations to address them. In addition, for 11 of the 37 recommendations from GAO's prior reports related to control deficiencies in IRS's internal control over financial reporting, GAO found that IRS implemented corrective actions during fiscal year 2019 that resolved the related control deficiencies, and as a result, these recommendations were closed. Therefore, IRS currently has 30 GAO recommendations to address—the previous 26 open recommendations and the four new recommendations GAO is making in this report. GAO is making four recommendations to address the new control deficiencies identified during its audit. These recommendations are intended to improve IRS's internal controls over financial reporting as well as to bring IRS into conformance with its own policies and Standards for Internal Control in the Federal Government. In commenting on a draft of this report, IRS stated that it is committed to implementing appropriate improvements to ensure that it maintains sound financial management practices. IRS agreed with GAO's four new recommendations and described planned actions to address each recommendation. Why GAO Did This Study The purpose of this report is to present those internal control deficiencies identified during GAO's audit of IRS's fiscal years 2019 and 2018 financial statements for which GAO did not already have any recommendations outstanding. This report provides new recommendations to address these internal control deficiencies. This report also includes the results of GAO's follow-up on the status, as of September 30, 2019, of IRS's corrective actions taken to address recommendations contained in GAO's prior years' reports that remained open as of September 30, 2018. What GAO Recommends GAO is making four recommendations to address the new control deficiencies identified during its audit. These recommendations are intended to improve IRS’s internal controls over financial reporting as well as to bring IRS into conformance with its own policies and Standards for Internal Control in the Federal Government. In commenting on a draft of this report, IRS stated that it is committed to implementing appropriate improvements to ensure that it maintains sound financial management practices. IRS agreed with GAO’s four new recommendations and described planned actions to address each recommendation. For more information, contact Cheryl E. Clark at (202) 512-3406 or clarkce@gao.gov. Thu, 30 Apr 2020 00:00:00 -0400 https://www.gao.gov/products/GAO-20-548PR What GAO Found In April 2019, GAO identified 23 priority recommendations for the Internal Revenue Service (IRS). Since then, IRS has implemented 6 of those recommendations by, among other things, increasing the frequency at which incoming W-2 information was made available, which would expand the agency's efforts to systematically verify wage information reported on tax returns and avoid issuing invalid refunds. In April 2020, GAO identified 7 additional priority recommendations for IRS, bringing the total number to 24. These open recommendations involve the following areas: Improve payment integrity Reduce tax fraud Improve resource investment decision-making and oversight Improve information security Improve audit effectiveness Improve taxpayer services Enhance strategic human capital management Safeguard sensitive assets and records Full implementation of these issues could significantly improve IRS's operations. Why GAO Did This Study Priority open recommendations are the GAO recommendations that warrant priority attention from heads of key departments or agencies because their implementation could save large amounts of money; improve congressional and/or executive branch decision making on major issues; eliminate mismanagement, fraud, and abuse; or ensure that programs comply with laws and funds are legally spent, among other benefits. Since 2015, GAO has sent letters to selected agencies to highlight the importance of implementing such recommendations. For more information, contact James R. McTigue, Jr. or Jessica Lucas-Judy at (202) 512-9110 or mctiguej@gao.gov or lucasjudyj@gao.gov. Thu, 23 Apr 2020 00:00:00 -0400 https://www.gao.gov/products/GAO-20-336 What GAO Found Five out of six agencies used their improper payment estimation results to identify the root causes for the eight programs GAO reviewed. However, the Department of the Treasury (Treasury) used 2006 through 2008 taxpayer data to identify root causes of fiscal year 2018 Earned Income Tax Credit (EITC) improper payments. Without timely data on the true root causes of EITC improper payments, Treasury will lack quality information needed to develop appropriate corrective actions to reduce them. In addition, only one agency we reviewed—the Department of Veterans Affairs (VA)—adhered to relevant Improper Payments Information Act of 2002, as amended (IPIA), requirements and Office of Management and Budget (OMB) guidance. The Department of Agriculture (USDA) and Treasury did not develop agency corrective action plans corresponding to the identified root causes of improper payments for the Supplemental Nutrition Assistance Program (SNAP) and EITC, respectively. In addition, the remaining three agencies did not have processes in place to either establish planned completion dates, monitor progress, or measure the effectiveness of their corrective actions in reducing improper payments. Agency Monitoring and Evaluation of Corrective Action Plans for Selected Programs Program Did agency establish planned completion dates? Did agency annually monitor progress? Did agency annually measure effectiveness? Supplemental Nutrition Assistance Program N/A N/A N/A Direct Loan ✓ ✓ ✗ Pell Grant ✓ ✓ ✗ Children's Health Insurance Programa ✗ ✓ ✗ Earned Income Tax Credit N/A N/A N/A Prosthetic and Sensory Aids Service ✓ ✓ ✓ Old Age, Survivors, and Disability Insuranceb ✗ ✗ ✗ Supplemental Security Incomeb ✗ ✗ ✗ Legend: ✓= yes; ✗= no; N/A = not applicable as agency did not develop corrective actions corresponding to identified root causes of improper payments for the selected programs. Source: GAO analysis of agencies' corrective action plans and processes. | GAO-20-366 aThe Department of Health and Human Services (HHS) did not have documented procedures for its corrective action plan process. bSubsequent to our review, the Social Security Administration (SSA) implemented new procedures, including directives to establish planned completion dates and monitor progress. Unless agencies develop corrective action plans that correspond to root causes of improper payments and implement processes to monitor progress and measure their effectiveness, their ability to ensure that their efforts will reduce improper payments will be limited Why GAO Did This Study Improper payments, estimated at almost $175 billion for fiscal year 2019, are a significant problem in the federal government. IPIA and OMB guidance directs agencies to analyze the root causes of improper payments and develop corrective actions to reduce improper payments. This report examines (1) actions that agencies took to identify root causes of improper payments for selected programs, (2) the extent to which their corrective action plans correspond to identified root causes, and (3) the extent to which they monitored progress and evaluated the effectiveness of corrective actions. GAO analyzed corrective action plans reported in fiscal year 2018 for the following eight programs: Department of Education's Direct Loan and Pell Grant; HHS's Children's Health Insurance Program; SSA's Old Age, Survivors, and Disability Insurance and Supplemental Security Income; Treasury's EITC; USDA's SNAP; and VA's Prosthetic and Sensory Aids Service. GAO selected these programs based, in part, on those programs with at least $1 billion in fiscal year 2018 improper payment estimates. What GAO Recommends GAO is making seven recommendations: one each to Education, HHS, and SSA and two each to USDA and Treasury to improve their processes for addressing root causes of improper payments and measure their effectiveness. In their responses, SSA agreed, USDA generally agreed, Education and Treasury neither agreed nor disagreed, and HHS disagreed with GAO's respective recommendation(s). GAO clarified four recommendations and continues to believe all the recommendations are valid. For more information, contact Beryl H. Davis at (202) 512-2623 or davisbh@gao.gov. Wed, 01 Apr 2020 00:00:00 -0400 https://www.gao.gov/products/GAO-20-103 What GAO Found The Internal Revenue Service (IRS) has made considerable progress issuing guidance to taxpayers for Public Law 115-97—commonly known as the Tax Cuts and Jobs Act of 2017 (TCJA)—but has additional work remaining to issue all planned guidance, as shown in the figure. Internal Revenue Service Implementation of Planned Guidance for Public Law 115-97, Commonly Known as the Tax Cuts and Jobs Act of 2017 Notes: IRS refers to regulations and other information that it considers binding on the IRS—including the types in the figure above—as guidance. This figure displays completed and planned guidance at the end of fiscal year 2019. To improve efficiency of TCJA guidance development, IRS internally collaborated earlier and more frequently than during more routine tax law changes. IRS officials said the benefits of this enhanced collaboration included faster decision-making on time-sensitive guidance, including regulations. IRS officials agreed enhanced collaboration had value but as of December 2019 had not identified the parameters for when this collaborative approach would be warranted. IRS may face challenges ensuring compliance with certain TCJA provisions because third-party information reporting is not always available. GAO's past work has found that one of the important factors contributing to the tax gap is the extent to which information is reported to IRS by third parties. Without third-party reporting, IRS will have to rely on resource-intensive audits to enforce certain TCJA provisions, which could be challenging given recent trends of declining audit rates and enforcement staff. GAO has recommendations from March 2019 for IRS to take actions to mitigate hiring risks and reduce skill gaps. IRS was also unable to update all information technology systems prior to the start of the 2019 tax season due to the magnitude of TCJA changes. As a result, IRS was not able to capture certain tax return information in a format that can be easily analyzed to help with compliance planning activities. One IRS division took steps to convert certain tax return data to a more useable format, but efforts to identify other viable opportunities have not been taken. Without appropriate data for analyses, IRS could face challenges enforcing certain TCJA provisions. Why GAO Did This Study According to IRS, TCJA was the most sweeping tax law change in more than three decades, with 86 provisions that modified, added to, or repealed business and international taxes, such as the qualified business income deduction. IRS determined it would take significant effort to implement the law given the limited time-frame and magnitude of the provisions. GAO was asked to review IRS's implementation of TCJA business and international provisions. Among other reporting objectives, this report examines IRS's (1) progress implementing the provisions, (2) processes to provide guidance, and (3) challenges for effectively administering these provisions. To address these objectives, GAO analyzed IRS documentation on project management, compliance planning, and regulation development. Additionally, GAO interviewed IRS officials and tax practitioners. What GAO Recommends GAO is making five recommendations, including that IRS develop and document procedures for continued enhanced collaboration and convert tax return data to a more useable format for compliance purposes. IRS disagreed; however, GAO believes that these recommendations will benefit guidance development and tax administration. In prior work, GAO recommended that IRS measure which activities are producing desired hiring outcomes and take steps to reduce skill gaps among revenue agents. IRS agreed with these recommendations and, as of December 2019, plans to report on efforts to close skill gaps by December 2021. For more information, contact Jessica Lucas-Judy at (202) 512-9110 or lucasjudyj@gao.gov. Tue, 25 Feb 2020 00:00:00 -0500 https://www.gao.gov/products/GAO-20-188 What GAO Found Taxpayers are required to report and pay taxes on income from virtual currency use, but the Internal Revenue Service (IRS) has limited data on tax compliance for virtual currencies. Tax forms, including the information returns filed by third parties such as financial institutions, generally do not require filers to indicate whether the income or transactions they report involved virtual currency. IRS also has taken some steps to address virtual currency compliance risks, including launching a virtual currency compliance campaign in 2018 and working with other agencies on criminal investigations. In July 2019, IRS began sending out more than 10,000 letters to taxpayers with virtual currency activity informing them about their potential tax obligations. IRS's virtual currency guidance, issued in 2014 and 2019, addresses some questions taxpayers and practitioners have raised. For example, it states that virtual currency is treated as property for tax purposes and that using virtual currency can produce taxable capital gains. However, part of the 2019 guidance is not authoritative because it was not published in the Internal Revenue Bulletin (IRB). IRS has stated that only guidance published in the IRB is IRS's authoritative interpretation of the law. IRS did not make clear to taxpayers that this part of the guidance is not authoritative and is subject to change. Examples of Virtual Currency Transactions that Can Produce Taxable Capital Gains Information reporting by third parties, such as financial institutions, on virtual currency is limited, making it difficult for taxpayers to comply and for IRS to address tax compliance risks. Many virtual currency transactions likely go unreported to IRS on information returns, due in part to unclear requirements and reporting thresholds that limit the number of virtual currency users subject to third-party reporting. Taking steps to increase reporting could help IRS provide taxpayers useful information for completing tax returns and give IRS an additional tool to address noncompliance. Further, IRS and the Financial Crimes Enforcement Network (FinCEN) have not clearly and publicly explained when, if at all, requirements for reporting financial assets held in foreign countries apply to virtual currencies. Clarifying and providing publicly available information about those requirements could improve the data available for tax enforcement and make it less likely that taxpayers will file reports that are not legally required. Why GAO Did This Study Virtual currencies, such as bitcoin, have grown in popularity in recent years. Individuals and businesses use virtual currencies as investments and to pay for goods and services. GAO was asked to review IRS's efforts to ensure compliance with tax obligations for virtual currencies. This report examines (1) what is known about virtual currency tax compliance; (2) what IRS has done to address virtual currency tax compliance risks; (3) the extent to which IRS's virtual currency guidance meets taxpayer needs; and (4) whether additional information reporting on virtual currency income could assist IRS in ensuring compliance. GAO reviewed IRS forms and guidance and interviewed officials at IRS, FinCEN, and other federal agencies, as well as tax and virtual currency stakeholders. What GAO Recommends GAO is recommending that IRS clarify that part of the 2019 guidance is not authoritative and take steps to increase information reporting, and that FinCEN and IRS address how foreign asset reporting laws apply to virtual currency. IRS agreed with the recommendation on information reporting and disagreed with the other two, stating that a disclaimer statement is unnecessary and that it is premature to address virtual currency foreign reporting. GAO believes a disclaimer would increase transparency and that IRS can clarify foreign reporting without waiting for future developments in the industry. FinCEN agreed with GAO's recommendation. For more information, contact James R. McTigue, Jr., at (202) 512-9110 or mctiguej@gao.gov. Wed, 12 Feb 2020 00:00:00 -0500 https://www.gao.gov/products/GAO-20-66R What GAO Found The Federal Election Commission (FEC) reported that in 2017 and 2018, candidates, party committees, and political action committees raised about $8.6 billion and spent about $6 billion on activities associated with federal elections. Concerns about limiting the potential for political corruption and providing transparency to voters, while protecting free speech, have been at the heart of campaign finance law. Reports of foreign interference during the 2016 election have also focused attention on campaign finance issues in the United States. Legal framework: The Federal Election Campaign Act (FECA) sets forth provisions governing campaign finance law. Since the enactment of FECA in 1971, subsequent legislation and court rulings have further shaped the campaign finance framework. Roles and responsibilities of federal agencies and challenges faced: FEC: The FEC is responsible for civil enforcement of FECA, including administering the public disclosure system, promulgating regulations, and enforcing laws through audits, investigations, and civil litigation. The FEC is led by up to six appointed commissioners and most consequential agency activity requires affirmative votes of at least four commissioners. Officials reported challenges in administering and enforcing campaign finance laws, including obtaining complete and accurate information from filings, managing the backlog of enforcement matters, completing audits in a timely manner, and addressing staffing shortages, including the absence of a quorum of commissioners since August 2019. Department of Justice (DOJ): DOJ is responsible for investigating and prosecuting criminal violations of FECA’s provisions. Officials reported several challenges related to these responsibilities. For example, violations are often concealed and there is no complaining victim, and proving criminal intent is difficult because it requires proof that the alleged violator’s conduct was committed "knowingly and willfully.” Coordination between FEC and DOJ: While FEC and DOJ coordinate activities related to campaign finance, some of the agencies’ coordination activities are not reflected in their jointly signed Memorandum of Understanding (MOU), which has not been updated since it was signed in 1977. FEC officials stated that they consider the MOU to be the current guidance used to coordinate the two agencies’ enforcement efforts. However, DOJ officials stated that the MOU is no longer binding DOJ policy. Reviewing and updating, as appropriate, coordination practices between the FEC and DOJ, to include the MOU or other guidance, could help the agencies ensure consistent and effective coordination when enforcing campaign finance law. Internal Revenue Service (IRS): IRS is responsible for examining and enforcing tax-exempt organizations’ compliance with the applicable tax provisions related to political campaign intervention. Officials reported various challenges in carrying out these responsibilities, such as obtaining complete, timely, and accurate information from filers and navigating statutes and regulations in monitoring compliance. Perspectives on the campaign finance framework: Our review of literature and interviews with selected organizations found a range of perspectives on key issues. For example, according to some sources in our review: Campaign finance laws have not kept up with the rapid expansion of campaign spending on the internet and do not regulate online political ads to the same extent as television, radio, and print ads. Campaign finance laws related to prohibited activities for foreign nationals do not fully address the types of activities in which they may engage to hide their influence in U.S. elections. For example, foreign nationals may use certain 501(c) organizations or limited liability companies, which historically have not been required to publicly report their funding sources, to hide their spending. While some sources view requirements to publicly disclose campaign funding sources as helping inform the electorate and prevent corruption, other sources view these requirements as oppressive or stigmatizing to those who may support unpopular candidates or organizations. Why GAO Did This Study GAO was asked to review issues related to the enforcement of campaign finance laws in federal elections. This report provides information on (1) the legal framework; (2) federal agencies’ roles and responsibilities, including challenges faced in enforcement efforts; and (3) the perspectives of literature and selected organizations on key aspects of the federal campaign finance framework. GAO reviewed relevant statutes and regulations as well as FEC, DOJ, and IRS policies and guidance. GAO also reviewed literature from 2016 through 2018, and interviewed officials from the FEC, DOJ, and IRS, and selected organizations representing a range of views on campaign finance issues. What GAO Recommends GAO recommends that the FEC and DOJ review guidance addressing the coordination of their activities to enforce campaign finance law, and once a quorum of FEC commissioners is in place, update that guidance as appropriate. The FEC stated it would consider the recommendation once a quorum is restored and DOJ did not comment. For more information, contact Rebecca Gambler at 202-512-8777 or GamblerR@gao.gov. Sun, 02 Feb 2020 00:00:00 -0500 https://www.gao.gov/products/GAO-20-174 What GAO Found The Internal Revenue Service (IRS) has efforts in place to detect business identity theft refund fraud (business IDT), which occurs when thieves create, use, or try to use a business's identifying information to claim a refund. IRS uses computerized checks, or fraud filters, to screen incoming returns. From January 2017 to August 2019, IRS researched about 182,700 returns stopped by business IDT fraud filters. IRS determined that about 77 percent of returns (claiming $38.3 billion) were not business IDT and about 4 percent of returns (claiming $384 million) were confirmed business IDT. As of August 2019, IRS was reviewing the remaining returns. The Fraud Reduction and Data Analytics Act of 2015 created requirements for agencies to establish financial and administrative controls for managing fraud risks. These requirements are aligned with leading practices outlined in GAO's A Framework for Managing Fraud Risks in Federal Programs ( Fraud Risk Framework) . IRS has taken steps to understand fraud risks associated with business IDT but has not aligned its efforts with selected components within the Fraud Risk Framework . First, IRS leadership has demonstrated a commitment to identifying and combating overall identity theft refund fraud, but has not designated a dedicated entity to design and oversee business IDT fraud risk management efforts agency-wide. This is because the program is relatively new. Without designating an entity to help guide agency-wide business IDT fraud risk efforts, it is not clear which entity would be responsible for assessing business IDT risks and documenting the results. Second, IRS has not conducted a fraud risk assessment or developed a fraud risk profile for business IDT consistent with the Fraud Risk Framework's leading practices. Doing so would help IRS determine the likelihood and impact of risks, the level of risk IRS is willing to tolerate, and the suitability, costs, and benefits of existing fraud risk controls. IRS officials stated that they have not formally performed a fraud risk assessment or developed a risk profile because they have directed their resources toward identifying and addressing business IDT that is occurring right now and improving fraud detection efforts. Documenting a risk profile would also help IRS determine whether additional fraud controls are needed and whether to make adjustments to existing controls. Third, IRS has not assessed which business-related tax forms or fraud scenarios pose the greatest risk to IRS and taxpayers. Current business IDT fraud filters cover the most commonly filed tax forms; however, IRS has not developed fraud filters for at least 25 additional business-related forms that may be susceptible to business IDT. Without additional data on business IDT, IRS cannot estimate the full size and scope of this problem. IRS has procedures for resolving business IDT cases and has described general guidelines for resolving business IDT cases, but it does not resolve all cases within these guidelines. Further, IRS has not established customer service-oriented performance goals for resolving business IDT cases, which is inconsistent with federal guidance. Establishing performance goals may help IRS better serve taxpayers and minimize additional costs to the Treasury. Why GAO Did This Study Business IDT is an evolving threat to both taxpayers and IRS and if not addressed can result in large financial losses to the government. The risk of business IDT has increased due to the availability of personally identifiable information and general ease of obtaining business-related information online. This makes it more difficult for IRS to distinguish legitimate taxpayers from fraudsters. GAO was asked to review IRS's efforts to combat business IDT. This report (1) describes IRS's current efforts to detect business IDT, (2) evaluates IRS's efforts to prevent business IDT against selected fraud risk management leading practices, and (3) assesses IRS's efforts to resolve business IDT cases. GAO reviewed IRS documents and business IDT fraud detection data, evaluated IRS's efforts to combat business IDT against two components of GAO's Fraud Risk Framework , analyzed case resolution data, and interviewed IRS officials. What GAO Recommends GAO is making six recommendations, including that IRS designate a dedicated entity to manage its business IDT efforts, develop a fraud risk profile consistent with leading practices, implement additional fraud filters consistent with the profile, and establish customer service-oriented performance goals for resolving business IDT cases. IRS agreed with five recommendations. IRS neither agreed nor disagreed with our recommendation to establish customer service-oriented performance goals, but stated it would take actions consistent with the recommendation. For more information, contact James R. McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov. Thu, 30 Jan 2020 00:00:00 -0500 https://www.gao.gov/products/GAO-20-70 What GAO Found Executive retirement plans allow select managers or highly compensated employees to save for retirement by deferring compensation and taxes. As of 2017, more than 400 of the large public companies in the Standard & Poor's 500 stock market index offered such plans to almost 2,300 of their top executives, totaling about $13 billion in accumulated benefit promises. Top executives at large public companies generally accumulated more plan benefits than top executives at the smaller public companies in the Russell 3000 stock market index. Advantages of these plans include their ability to help executives increase retirement savings and potentially reduce tax liability, but the plans come with risks as well. To receive tax deferral, federal law requires the deferred compensation to remain part of a company's assets and subject to creditor claims until executives receive distributions (see figure). Department of Treasury officials and industry experts said executive retirement plans can be tax-advantaged and may have revenue effects for the federal government; however, the revenue effects are currently unknown. Federal Income Tax Treatment of Deferred Compensation in Executive Retirement Plans The Internal Revenue Service (IRS) oversees executive retirement plans for compliance with federal tax laws. For example, IRS must ensure that key executives are taxed on deferred compensation in certain cases where that compensation has been set aside, such as when a company that sponsors a qualified defined benefit retirement plan is in bankruptcy. However, IRS audit instructions lack sufficient information on what data to collect or questions to ask to help its auditors know if companies are complying with this requirement. As a result, IRS cannot ensure that companies are reporting this compensation as part of key executives' income for taxation. The Department of Labor (DOL) oversees these plans to ensure that only eligible employees participate in them since these plans are excluded from most of the federal substantive protections that cover retirement plans for rank-and-file employees. DOL requires companies to report the number of participants in the plan; however, the one-time single page filing does not collect information on the job title or salary of executives or the percentage of the company's workforce participating in these plans. Such key information could allow DOL to better identify plans that may be including ineligible employees. Without reviewing its reporting requirements to ensure adequate useful information, DOL may continue to lack insight into the make-up of these plans and will lack assurance that only select managers and highly compensated employees are participating. Why GAO Did This Study Some types of employers offer executive retirement plans to help select employees save for retirement. There are no statutory limits on the amount of compensation that executives can defer or benefits they can receive under these plans. However, employees in these plans do not receive the full statutory protections afforded to most other private sector employer-sponsored retirement plans, such as those related to vesting and fiduciary responsibility, among other things. These plans can provide advantages but they also have disadvantages because plan benefits are subject to financial risk, such as in a company bankruptcy. GAO was asked to review these plans. This report examines, among other objectives, (1) the prevalence, key advantages, and revenue effects of executive retirement plans and (2) how federal oversight protects benefits and prevents ineligible participation. GAO analyzed industry-compiled Securities and Exchange Commission plan data for 2013 to 2017 (the most recent data available at the time of our analysis); reviewed relevant federal laws, regulations, and guidance; and interviewed officials from IRS and DOL, among others. What GAO Recommends GAO is making four recommendations, including that IRS improve its instructions for auditing companies that offer these plans, and that DOL consider modifying reporting by companies to better describe participants in these plans. IRS and DOL neither agreed nor disagreed with our recommendations. For more information, contact Charles Jeszeck at (202) 512-7215 or jeszeckc@gao.gov. Tue, 28 Jan 2020 00:00:00 -0500 https://www.gao.gov/products/GAO-20-210 What GAO Found The Internal Revenue Service's (IRS) Publications 590-A and 590-B serve as a general handbook for millions of taxpayers with individual retirement accounts (IRA). However, the two-part publication provides limited information for IRA owners with unconventional assets surrounding complex tax rules in four compliance areas: (1) barred investments, (2) prohibited transactions, (3) unrelated business income, and (4) fair market value. GAO found other limited information about these topics on IRS's website. With only about 2 percent of IRAs invested in unconventional assets, adding more pages to Publications 590-A and 590-B may not be practical. By assessing options for informing IRA owners investing in unconventional assets, such as directing them to web pages with specialized information and technical regulations, IRS could better help them comply. Noncompliance involving unconventional IRA assets is difficult to detect and time consuming for IRS to pursue. Whereas IRS relies on automated enforcement for IRAs invested in conventional assets held by custodians and trustees, enforcement for IRAs invested in unconventional assets or under IRA owner control requires labor-intensive audits of individual taxpayers. Using newly compiled information, IRS identified about 2 million IRAs that held certain types of hard-to-value assets as of 2016; however, about 20 percent of the forms were missing fair market value amounts for these assets (see fig.). Numbers of IRAs Reporting Certain Types of Unconventional Assets and Reporting Their Value (Tax Year 2016) Data element from IRS Form 5498 Number of forms reporting (in millions) Certain types of unconventional nonmarket assets 2.0 Fair market value of specified assets 1.6 Source: GAO analysis of IRS data. | GAO-20-210 IRS officials said this type of reporting alone may be inadequate for audit selection and identifying potentially abusive IRAs. When IRS lacks sufficient data to detect abusive transactions, IRS can require taxpayers to self-report certain transactions that have been used by other taxpayers to avoid taxes. Additional taxpayer or custodian disclosure of potentially abusive IRA transactions coupled with IRS analysis of reported details may help IRS to select IRA owner tax returns to audit. Fragmented responsibility among IRS divisions creates challenges for examiners who need to share expertise and collaborate on IRA enforcement. The division responsible for tax-exempt entities trains its examiners on how to determine if an employee retirement plan has engaged in business activities subject to taxation. However, examiners in the division that audits complex individual tax returns, including those involving IRAs, do not receive such training. Training for those examiners could help improve collaboration on IRA enforcement. Why GAO Did This Study Unconventional IRA investments—such as real estate, certain precious metals, private equity, and virtual currency—can introduce risks to account owners who assume greater responsibility for navigating the complex rules that govern tax-favored retirement savings. IRS enforces tax rules relating to IRAs and can assess additional taxes. GAO was asked to examine the challenges associated with enforcing rules governing IRAs invested in unconventional assets. This report examines (1) the extent to which IRS offers guidance to help taxpayers understand the rules governing unconventional IRA assets; and (2) the challenges IRS faces in enforcing those rules. GAO identified and analyzed IRS information to help taxpayers understand four compliance areas. GAO reviewed IRS analysis of nonmarket IRA assets reported by IRA custodians, and IRS audit procedures and training materials; and interviewed relevant IRS officials to identify enforcement challenges. What GAO Recommends GAO is recommending that IRS (1) assess options for updating its IRA publications to provide more information for taxpayers with unconventional assets, (2) evaluate the feasibility of requiring disclosure for high-risk IRA asset types associated with abusive tax schemes, and (3) develop auditor resources (such as training materials or job aids) that explain how IRAs with unconventional assets can generate unrelated business income tax. IRS generally agreed with GAO's recommendations. For more information, contact James R. McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov, or Charles A. Jeszeck at (202) 512-7215 or jeszeckc@gao.gov. Mon, 27 Jan 2020 00:00:00 -0500 https://www.gao.gov/products/GAO-20-313 To see the version of this page in English, see GAO-20-55. Conclusiones de la GAO En vísperas de la temporada de presentación de 2019, el Servicio de Impuestos Internos (IRS, por sus siglas en inglés) colaboraba con el Departamento del Tesoro (Tesoro) y la Oficina de Administración y Presupuesto (OMB, por sus siglas en inglés) al implementar cambios significativos en la ley tributaria proveniente de la Ley Pública 115-97—comúnmente conocida como la Ley de Empleos y Reducción de Impuestos (TCJA, por sus siglas en inglés). Esto incluyó la publicación de directrices, la creación de productos fiscales (por ejemplo, formularios) y los sistemas de reprogramación. El IRS también tomó varias medidas para informar al público sobre los cambios a través de campañas y divulgación en los medios públicos. El rendimiento del IRS durante la temporada de presentación de 2019 se vio obstaculizado inicialmente por desafíos significativos que el IRS superó en gran medida. A medida que la agencia implementó la TCJA, un lapso de cinco semanas en las asignaciones de fondos suspendió a muchos empleados del IRS durante preparativos críticos para la temporada de presentación. Esto condujo a fuertes caídas en el servicio telefónico al comienzo de la temporada de presentación junto con demoras en el procesamiento de las declaraciones en papel y correspondencia de contribuyentes acumulada. Si bien el IRS mejoró el rendimiento en el transcurso de la temporada de presentación, el rendimiento general siguió siendo inferior al del año pasado. La GAO identificó varias áreas en el que el IRS tiene la oportunidad de mejorar el servicio al cliente y facilitar el cumplimiento. Primero, los servicios del IRS para contribuyentes con dominio limitado del inglés (LEP, por sus siglas en inglés) son muy limitados, inexactos en algunos casos y de difícil acceso. Por ejemplo, debilidades en los procedimientos del IRS para revisar y actualizar el contenido traducido llevan a información desactualizada en su sitio web (ver figura). Además, el IRS no ha evaluado ni documentado sus decisiones de traducir muchos productos de impuestos vitales, incluido el Formulario 1040, uno de los formularios más comúnmente utilizados para individuos, y cuáles servicios de interpretación oral para potencialmente proporcionar a los contribuyentes con LEP. En mejorar los servicios para contribuyentes con LEP les ayudará a comprender y cumplir con sus obligaciones tributarias. Figura: Información Traducida Desactualizada en IRS.gov para la Temporada de Presentación de Impuestos de 2019 El IRS tampoco utiliza regularmente los aportes de sus empleados para evaluar el impacto de su capacitación de servicio al cliente para identificar mejoras. Finalmente, GAO descubrió que el IRS depende cada vez más de las horas de sobretiempo para cumplir con sus objetivos de procesamiento y servicio; sin embargo, el IRS carece de una estrategia para usar eficientemente las horas de sobretiempo. La dependencia en las horas de sobretiempo aumenta los costos para el IRS y puede llevar al agotamiento de los empleados. Propósito de Este Estudio Durante la temporada de presentación de impuestos, generalmente desde enero a mediados de abril, el IRS procesa más de 100 millones de declaraciones de impuestos individuales y comerciales y brinda servicios telefónicos, por correspondencia, en línea y en persona a decenas de millones de contribuyentes. La temporada de presentación de 2019 es la primera durante la cual la mayoría de los individuos y las empresas presentaron declaraciones afectadas por cambios grandes en la ley tributaria bajo la TCJA. Se le solicitó a la GAO que analizara el rendimiento del IRS en implementar la TCJA y administrar la temporada de presentación de 2019. La GAO evaluó (1) el rendimiento del IRS en coordinar con el Tesoro y OMB en implementar la TCJA antes de la temporada de presentación de 2019 y el los esfuerzos del IRS en comunicar al público los cambios de la ley tributaria; (2) el rendimiento del IRS en brindar servicio al cliente y en procesar las declaraciones de impuestos de ingresos individuales y comerciales durante la temporada de presentación de 2019 en comparación con las temporadas de presentación anteriores; y (3) cualquier oportunidad que pueda existir para mejorar la capacidad del IRS de proporcionar un servicio al cliente de calidad y facilitar el cumplimiento de los contribuyentes. La GAO analizó documentos y datos del IRS, el Tesoro y la OMB, y entrevistó a funcionarios competentes. Para obtener más información, contactar a Jessica Lucas-Judy al (202) 512-9110 (en inglés) o lucasjudyj@gao.gov. Recomendaciones para Acción Ejecutiva El Comisionado de Impuestos Internos debería poner a disposición del público, como en su sitio web, una lista de temas tributarios considerados fuera de alcance de responder para los representantes de servicio al cliente del teléfono, así como incluir referencias sobre cómo y dónde encontrar información sobre estos temas. (Recomendación 1) El Comisionado de Impuestos Internos debería conciliar la autoridad e implementar procedimientos para revisar rutinariamente las versiones en inglés de los productos tributarios vitales más utilizados y páginas web para garantizar que la información se incluya en los idiomas más comunes dónde los contribuyentes con LEP puedan obtener el contenido traducido. Si dicho contenido no está traducido, los productos y páginas web deben incluir información sobre los contribuyentes con LEP y donde pueden obtener asistencia de idioma del IRS. (Recomendación 2) El Comisionado de Impuesto Internos debería conciliar la autoridad e implementar procedimientos para prevenir de manera rutinaria, eficaz, detectar y corregir, errores como la información incorrecta u obsoleta en sus páginas web multilingües. Por ejemplo, estos procedimientos podrían solicitar que las divisiones trabajen con la sección de Lingüística, Política, Recursos y Servicios cada vez que la versión en inglés del contenido traducido sea actualizada. (Recomendación 3) El Comisionado de Impuesto Internos debería llevar a cabo la evaluación de cuatro factores de sus servicios de idioma a personas con LEP para sus productos fiscales más utilizados para determinar (1) cuáles productos deben traducirse y a qué idiomas y (2) qué asistencia de interpretación será proporcionado, para llegar a la combinación adecuada de servicios de traducción e interpretación. El IRS debe documentar estas evaluaciones, incluyendo las determinaciones hechas, y tomar las medidas apropiadas basadas en estas evaluaciones. (Recomendación 4) El Comisionado de Impuestos Internos debería recopilar y utilizar los comentarios de los empleados sobra las fortalezas y debilidades de su capacitación, incluyendo si la capacitación es efectiva para mejorar el rendimiento de los representantes de servicio al cliente, para informar los cambios en su programa y estrategia de capacitación bajo la Ley del Contribuyente Primero. (Recomendación 5) El Comisionado de Impuestos Internos debería dirigir la división de Salarios e Inversiones a desarrollar e implementar una estrategia, en colaboración con su iniciativa de planificación estratégica de la fuerza laboral, para el uso eficiente de las horas de sobretiempo. (Recomendación 6) El Comisionado de Impuestos Internos debería evaluar aún más el aumento de “tiempo de inactividad del sistema” e identificar posibles soluciones para mitigar cualquier problema y reducir el tiempo de inactividad del sistema. (Recomendación 7) El Comisionado de Impuestos Internos debería realizar un monitoreo regular de las fluctuaciones en los cargos de tiempo de inactividad del sistema, como aumentos generales o por unidades específicas, para determinar qué factores, si los hay, están interrumpiendo el trabajo del representante de servicio al cliente. (Recomendación 8) Wed, 15 Jan 2020 00:00:00 -0500 https://www.gao.gov/products/GAO-20-55 Para la versión de esta página en español, ver a GAO-20-313. What GAO Found In advance of the 2019 filing season, the Internal Revenue Service (IRS) collaborated with the Department of the Treasury (Treasury) and the Office of Management and Budget (OMB) to implement significant tax law changes from Public Law 115-97—commonly known as the Tax Cuts and Jobs Act (TCJA). This included publishing guidance, creating tax products (e.g., forms), and reprogramming systems. IRS also took several steps to inform the public of the changes through public media campaigns and outreach. IRS’s performance during the 2019 filing season was initially hindered by significant challenges that IRS largely overcame. As the agency implemented TCJA, a five-week lapse in appropriations furloughed many IRS employees during critical filing season preparations. This led to sharp declines in telephone service early in the filing season along with delays in paper return processing and backlogs of taxpayer correspondence. While IRS improved performance over the course of the filing season, overall performance remained lower than last year. GAO identified several areas for IRS to improve customer service and facilitate compliance. First, its services to taxpayers with limited-English proficiency (LEP) are very limited, inaccurate in some cases, and difficult to access. For example, weaknesses in IRS procedures for reviewing and updating translated content lead to outdated information on its website (see figure). Also, IRS has not assessed and documented its decisions whether to translate many vital tax products, including Form 1040—one of the most commonly-used forms for individuals—and what oral interpretive services to potentially provide to taxpayers with LEP. Improving services for taxpayers with LEP will help them better understand their tax obligations and could help enhance compliance. Figure: Outdated Translated Information on IRS.gov for 2019 Filing Season IRS also does not regularly use employee input to evaluate the impact of customer service training on performance to identify improvements. Finally, GAO found that IRS increasingly relies on overtime to meet processing and service goals; however, IRS lacks a strategy for efficiently using overtime. Dependence on overtime can increase costs to IRS and lead to employee burnout. Why GAO Did This Study During the tax filing season, generally from January to mid-April, IRS processes more than 100 million individual and business tax returns and provides telephone, correspondence, online, and in-person services to tens of millions of taxpayers. The 2019 filing season is the first during which most individuals and businesses filed returns affected by major tax law changes under TCJA. GAO was asked to review IRS’s performance implementing TCJA and managing the 2019 filing season. GAO assessed (1) IRS’s performance collaborating with Treasury and OMB to implement TCJA prior to the 2019 filing season and IRS’s efforts to communicate tax law changes to the public; (2) IRS’s performance providing customer service and processing individual and business income tax returns during the 2019 filing season compared to prior filing seasons; and (3) any opportunities that may exist to improve IRS’s ability to provide quality customer service and to facilitate taxpayer compliance. GAO analyzed IRS, Treasury, and OMB documents and data and interviewed cognizant officials. What GAO Recommends GAO made 8 recommendations to IRS, including improving service to taxpayers with LEP by ensuring translated information on its website is updated, and assessing and documenting the appropriate mix of language services it should provide; using employee input to evaluate the impact of customer service training on performance; and implementing a strategy for efficient use of overtime. IRS agreed with 6 recommendations and neither agreed nor disagreed with 2 recommendations, as discussed in the report. For more information, contact Jessica Lucas-Judy at (202) 512-9110 or lucasjudyj@gao.gov. Wed, 15 Jan 2020 00:00:00 -0500 https://www.gao.gov/products/GAO-20-71 What GAO Found The Internal Revenue Service's (IRS) online services for individual taxpayers primarily provide taxpayers one-way communication of key information derived from their tax return, such as when an anticipated refund should arrive, or allow taxpayers to pay money owed or make payment arrangements. IRS has done little research or reporting on the extent to which its online services are satisfying taxpayers' needs. Also, IRS has not set a target for using online services to help reduce taxpayer burden. Selected foreign and state revenue agencies' online services have developed online filing and communication capabilities, such as filing a tax return on the agency's website and offering electronic chats between revenue agency employees and taxpayers (see figure). The U.S. Internal Revenue Service's and Three Foreign Revenue Agencies' Online Services IRS has long-term planning documents which detail online services it intends to develop, which include services to communicate digitally with taxpayers, to achieve its goal of modernizing the taxpayer experience. However, GAO found that IRS has not sufficiently considered taxpayer input in the prioritization process for these new services and instead prioritizes services primarily based on the potential benefit to IRS operations or how quickly a service might be developed. Without considering taxpayer input on user needs and preferences, IRS risks developing services that taxpayers do not use. A group of private sector tax preparation companies known as Free File, Inc., has a long-standing agreement with IRS in which the companies provide free electronic tax preparation and filing services to eligible taxpayers in exchange for IRS not offering its own filing capability. However, few taxpayers use these services and GAO found that IRS has given inadequate consideration to the full benefits and costs of the Free File agreement to all parties. Not considering these costs and benefits has implications for the future evolution of IRS's online services, including helping taxpayers electronically file amended returns. Why GAO Did This Study IRS recognizes that taxpayers want more choices in how they interact with IRS, including through online services. GAO was asked to review IRS's online services—those which allow IRS and individual taxpayers to exchange personalized information electronically. This report (1) examines what is known about how IRS's current online services are meeting taxpayers' needs, and provides information about selected foreign and state revenue agencies' online services; (2) evaluates the extent to which IRS's strategy for identifying and prioritizing the development of new online services is consistent with relevant requirements and leading practices; and (3) examines how IRS is addressing key challenges in providing online services. GAO assessed IRS's online services against relevant requirements, agency goals, and leading practices; interviewed IRS officials; and identified additional services and practices from six foreign and state revenue agencies selected for offering multiple online services for exchanging personalized information with taxpayers. What GAO Recommends GAO is making seven recommendations to IRS, including measuring and reporting on the effect of online services on satisfaction and taxpayer burden and setting a target for reducing burden, considering taxpayer input when prioritizing new online services, and ensuring that any renewal of the Free File agreement reflects benefits and costs. IRS agreed with six recommendations, but disagreed on setting a target to reduce burden. GAO continues to believe IRS should set such a target. For more information, contact Jessica Lucas-Judy at (202) 512-9110 or 20lucasjudyj@gao.gov. Thu, 19 Dec 2019 00:00:00 -0500 https://www.gao.gov/products/GAO-20-159 What GAO Found In GAO's opinion, the Internal Revenue Service's (IRS) fiscal years 2019 and 2018 financial statements are fairly presented in all material respects, and although controls could be improved, IRS maintained, in all material respects, effective internal control over financial reporting as of September 30, 2019. GAO's tests of IRS's compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements detected no reportable instances of noncompliance in fiscal year 2019. Limitations in the financial systems IRS uses to account for federal taxes receivable and other unpaid assessment balances, as well as other control deficiencies that led to errors in taxpayer accounts, continued to exist during fiscal year 2019.These control deficiencies affect IRS's ability to produce reliable financial statements without using significant compensating procedures. In addition, unresolved information system control deficiencies from prior audits, along with application and general control deficiencies that GAO identified in IRS's information systems in fiscal year 2019, placed IRS systems and financial and taxpayer data at risk of inappropriate and undetected use, modification, or disclosure. IRS continues to take steps to improve internal controls in these areas. However, the remaining deficiencies are significant enough to merit the attention of those charged with governance of IRS and therefore represent continuing significant deficiencies in internal control over financial reporting related to (1) unpaid assessments and (2) financial reporting systems. Continued management attention is essential to fully addressing these significant deficiencies. Why GAO Did This Study In accordance with the authority conferred by the Chief Financial Officers Act of 1990, as amended, GAO annually audits IRS's financial statements to determine whether (1) the financial statements are fairly presented and (2) IRS management maintained effective internal control over financial reporting. GAO also tests IRS's compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements. IRS's tax collection activities are significant to overall federal receipts, and the effectiveness of its financial management is of substantial interest to Congress and the nation's taxpayers. What GAO Recommends Based on prior financial statement audits, GAO made numerous recommendations to IRS to address internal control deficiencies. GAO will continue to monitor and will report separately on IRS's progress in implementing prior recommendations that remain open. Consistent with past practice, GAO will also be separately reporting on the new internal control deficiencies identified in this year's audit and providing IRS recommendations for corrective actions to address them. In commenting on a draft of this report, IRS stated that it continues its efforts to improve its financial reporting systems controls and internal controls over unpaid assessments. For more information, contact Cheryl E. Clark at (202) 512-3406 or clarkce@gao.gov. Fri, 08 Nov 2019 00:00:00 -0500 https://www.gao.gov/products/GAO-20-138R What GAO Found The procedures that GAO agreed to perform on fiscal year 2019 net excise tax distributions to the Airport and Airway Trust Fund (AATF) and the Highway Trust Fund (HTF) and the results of those procedures are described in the enclosures to this report. The sufficiency of these procedures is solely the responsibility of the Department of Transportation (DOT) Office of Inspector General (OIG). The Internal Revenue Service (IRS) is responsible for certifying quarterly net excise tax collections to be distributed to the AATF and the HTF. The Department of the Treasury's Office of Tax Analysis (OTA) is responsible for developing reasonable estimates of net excise tax collections to be distributed to the AATF and the HTF. These IRS certifications and OTA estimates are the bases of the net excise tax distributions to the AATF and the HTF. GAO was not engaged to perform, and did not perform, an examination or review. Accordingly, GAO does not express such an opinion or conclusion. This report is solely for the use of the DOT OIG and is not suitable for any other purpose. IRS agreed with the findings related to the procedures performed concerning excise tax distributions to the AATF and the HTF during the fiscal year 2019. OTA stated that it had no comments on the report. Why GAO Did This Study GAO performed agreed-upon procedures solely to assist the DOT OIG in ascertaining whether the net excise tax revenue distributed to the AATF and the HTF for the fiscal year ended September 30, 2019, is supported by underlying records. The DOT OIG is responsible for the sufficiency of these agreed-upon procedures to meet its objectives, and GAO makes no representation in that respect. The procedures GAO agreed to perform were related to (1) transactions that represent the underlying basis of amounts distributed from the General Fund to the AATF and the HTF during fiscal year 2019, (2) IRS's quarterly AATF and HTF excise tax receipt certifications prepared during fiscal year 2019, (3) OTA's estimates of excise tax amounts to be distributed to the AATF and the HTF for the fourth quarter of fiscal year 2019, and (4) the amount of net excise taxes to be distributed to the AATF and the HTF for fiscal year 2019. For more information, contact Cheryl E. Clark at (202) 512-3406 or clarkce@gao.gov. Thu, 07 Nov 2019 00:00:00 -0500 https://www.gao.gov/products/GAO-20-122 What GAO Found The Department of Energy's (DOE) payments in lieu of taxes (PILT)—payments made to some local communities that host DOE sites—vary considerably across the sites and have generally increased over time. Communities at 11 DOE sites received PILT payments in fiscal year 2017 (the most recent fiscal year for which complete data were available), totaling approximately $23 million (see figure). Payments to communities at the Hanford and Savannah River sites accounted for approximately 70 percent of that total, while payments to six sites combined accounted for less than 5 percent. Total PILT payments have more than doubled since 1994, primarily because of growth in payments to communities at the Hanford and Savannah River sites and because communities at other sites began receiving payments since 1994. Payments in Lieu of Taxes Grouped by Department of Energy Site in Fiscal Year 2017 (Dollars in Thousands) DOE intentionally allows for variations of payments across sites so that payments may reflect the revenues communities would have received had the property remained on the tax rolls in the condition in which it was acquired, which DOE officials stated is a goal of PILT. However, DOE's PILT order's lack of requirements has limited DOE's ability to provide adequate assurance that payments consistently meet this and other PILT goals. The PILT order does not require documentation of the key determinants that went into the calculation of payments, or an independent review process to determine whether payment calculations are consistent with PILT goals. The PILT order also lacks specificity about payment determinations in certain scenarios. Without updates to the PILT order to strengthen DOE's internal controls, DOE will continue to lack adequate assurance that payments meet PILT goals. Why GAO Did This Study The Atomic Energy Act, as amended, authorizes DOE to make PILT payments to communities that host DOE sites that meet specific criteria. PILT is discretionary financial assistance that provides payments to communities based on the property taxes they would have received had the property remained on their tax rolls. House Report 115-230 accompanying a bill for the Energy and Water Development and Related Agencies Appropriations Act of 2018 included a provision for GAO to review DOE PILT. This report assesses (1) how PILT payments vary, if at all, by site and over time, and (2) reasons for variations in payments and the extent to which DOE is providing assurance that payments meet PILT goals. GAO analyzed data on DOE payments to communities that DOE reported as having received PILT payments between 2008 and 2017. GAO compared 2017 data across sites and identified changes in payments to those communities between 1994 and 2017. GAO reviewed PILT's authorizing statute, DOE's PILT order, and PILT documentation. GAO interviewed officials from DOE, communities, and community organizations. What GAO Recommends GAO is making three recommendations that DOE update its PILT order to: improve collection and documentation of key determinants of PILT payments, implement a review process, and clarify how communities should calculate payment requests. DOE neither agreed nor disagreed and plans instead to further study PILT. We believe our report supports implementation of these recommendations. For more information, contact David Trimble at or TrimbleD@gao.gov. Tue, 29 Oct 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-664 What GAO Found State tax credit scholarship (TCS) programs—programs that offer state tax credits for donations that can fund scholarships for students to attend private elementary and secondary schools—have established various key requirements for the scholarship granting organizations (SGO) that collect donations and distribute awards. For example, all 22 TCS programs in operation as of January 2019 require SGOs to register with or be approved by the state and limit the percentage of donations they can use for non-scholarship expenses. In addition, almost all of these programs—which received over $1.1 billion in donations and awarded approximately 300,000 scholarships in 2017—also require SGOs to undergo annual financial audits or reviews (19 programs). Fewer programs have requirements about SGO fundraising practices (9 programs) or the qualifications of SGO leadership personnel (10 programs), such as restrictions on officials having previous bankruptcies. States also have various key requirements that apply to private schools that enroll students with TCS scholarships. For example, private schools in most of the 22 programs must follow certain academic guidelines related to curriculum content (18 programs) and instructional time (19 programs), and have staff undergo background checks (18 programs). Schools in fewer programs are required to conduct academic testing (11 programs), ensure their teachers have specified qualifications (12 programs), or undergo an annual audit or financial review (4 programs). Images of Three Private Schools That Participate in State Tax Credit Scholarship Programs The three states with the largest TCS programs—Arizona, Florida, and Pennsylvania—implement and oversee their programs in different ways. In all three states, state agencies administer the tax credits while SGOs are generally responsible for managing donations and awarding scholarships; the details of these processes varied based on the requirements of each program. For example, Arizona and Pennsylvania's programs allow donors to recommend that funds go to specific schools, which can affect how SGOs solicit donations and award scholarships. Florida does not permit recommendations. All three states require SGOs to report on operations and undergo annual financial audits or reviews, while the states differ in how participating private schools are overseen. Florida's TCS programs use multiple monitoring methods, while all Arizona programs and one of two Pennsylvania programs generally rely on SGOs to confirm that schools comply with program requirements. Why GAO Did This Study All TCS programs are state programs. States develop program policies and requirements, including establishing the roles and responsibilities of SGOs and participating private schools. The President's fiscal year 2020 budget request included a proposal for federal tax credits for donations to state-authorized SGOs. GAO was asked to review key characteristics related to accountability in state TCS programs that can fund K-12 educational expenses. This report examines (1) key requirements state TCS programs have chosen to establish for SGOs, (2) key requirements for private schools participating in state TCS programs, and (3) how selected states implement TCS programs and assess whether SGOs and participating private schools are following key state requirements. GAO identified key requirements states may choose to establish related to accountability for SGOs and schools based on relevant research and prior work. GAO also reviewed program documents from all 22 TCS programs to identify whether they had these key requirements as of school year 2018-2019 and then verified this information with state program officials. GAO did not conduct an independent review of state laws and regulations. GAO visited Arizona, Florida, and Pennsylvania, which have the largest TCS programs. In each of these states, GAO reviewed program documents and interviewed officials at state agencies and staff at selected SGOs and private schools (selected to provide variation in size and other characteristics). For more information, contact Jacqueline M. Nowicki at (617) 788-0580 or nowickij@gao.gov. Tue, 24 Sep 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-491 What GAO Found Taxpayers have used a variety of abusive tax schemes involving tax-exempt entities. In some schemes, the tax-exempt entity is complicit in the scheme, while in others it is not. For example, an abusive tax scheme could involve multiple donors grossly overvaluing charitable contributions, where the tax-exempt entity is not part of the scheme. Conversely, some patient assistance programs—which can help patients obtain medical care or medications—have been used by pharmaceutical manufacturers to make charitable donations that can be viewed as furthering private interests. Internal Revenue Service (IRS) audits of abusive tax schemes are trending downward, as the figure below shows audits by IRS's Large Business and International division. This trend has occurred amid generally declining IRS resources and corresponds with an overall decrease in audit activity by IRS over recent years. IRS has a variety of programs working collectively to identify abusive tax schemes involving tax-exempt entities, but some internal control weaknesses exist in its approach. For example, GAO found three ways that IRS data or programs were inconsistent with internal control standards for using quality information. First, database project codes used for identifying data on abusive tax schemes are not linked across IRS's audit divisions and do not consistently identify whether a tax-exempt entity was involved. Second, IRS has not leveraged a database with cross-divisional information to facilitate its analysis and monitoring of audit data across divisions. Finally, IRS has not used existing analytic tools to mine the narrative fields of tax forms. Doing so could provide audit leads on abusive schemes involving tax-exempt entities. These deficiencies inhibit IRS's ability to identify abusive tax schemes and develop responses to those schemes. Large Business and International Abusive Transaction Audits, Fiscal Years 2008 through 2017 Why GAO Did This Study Abusive tax schemes contribute to the tax gap and threaten the tax system's integrity. When abusive tax schemes involve tax-exempt entities, they also can erode the public's confidence in the charitable sector. GAO was asked to review what is known about abusive transactions involving tax-exempt entities and how IRS addresses them. This report, among other things, (1) describes ways in which taxpayers have abused an entity's tax-exempt status; (2) examines trends in IRS's compliance efforts; and (3) assesses how IRS identifies emerging abusive tax schemes involving tax-exempt entities. GAO reviewed research on tax schemes involving tax-exempt entities, and interviewed relevant professionals and researchers about tax schemes involving tax-exempt entities; compiled statistics from IRS audit and disclosure data; and compared documentation and testimony from IRS officials on IRS programs and guidance from its operating divisions with certain internal control and GAO fraud framework criteria. What GAO Recommends GAO is making five recommendations to IRS to strengthen its internal controls, including that it link data across operating divisions, test the ability of a database to facilitate analysis of audit data, and use existing analytic tools to further mine information on tax forms. In commenting on a draft of this report, IRS agreed with all of GAO's recommendations. For more information, contact James R. McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov. Thu, 05 Sep 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-474R What GAO Found During its audit of the Internal Revenue Service's (IRS) fiscal years 2018 and 2017 financial statements, GAO identified new deficiencies in information system security controls that along with unresolved control deficiencies from prior audits collectively represent a significant deficiency in the agency's internal control over financial reporting systems. Specifically, GAO identified 14 new deficiencies in information system security controls over certain IRS financial and tax processing systems that are relevant to internal control over financial reporting. Of the 14 new deficiencies, eight were related to access controls, four were related to configuration management, one was related to segregation of duties, and one was related to contingency planning. In a separately issued LIMITED OFFICIAL USE ONLY report, GAO communicated to IRS management detailed information regarding the 14 new information system security control deficiencies and made 20 recommendations to address them. In addition, GAO found that as of September 30, 2018, IRS had completed corrective actions to address information system security control deficiencies associated with 46 of the 154 recommendations resulting from GAO's financial audits, and as a result, these recommendations were closed. GAO closed one additional recommendation that was no longer relevant because of changes in the agency's operating environment. In the LIMITED OFFICIAL USE ONLY report, GAO communicated to IRS management the status of previously reported recommendations as of September 30, 2018. As a result, IRS has 127 GAO recommendations to address—the 107 remaining open recommendations from GAO's prior financial audits and the 20 new recommendations GAO made in the LIMITED OFFICIAL USE ONLY report. Until these new and continuing control deficiencies are fully addressed, IRS financial reporting and taxpayer data will remain unnecessarily vulnerable to inappropriate and undetected use, modification, or disclosure. Status of GAO Recommendations to IRS for Addressing Information System Security Control Deficiencies  Information system security control area Open recommendations from prior audits  Prior recommendations closed as of September 30, 2018 New recommendations resulting from FY 2018 audit Total  remaining open recommendations    Access controls 106 24 11 93 Configuration management 32 13 7 26 Segregation of duties 1 1 1 1 Contingency planning 2 2 1 1 Information security program 13 7 — 6 Total 154 47 20 127 Legend: FY = fiscal year; — = no recommendation made. Source: GAO analysis of Internal Revenue Service (IRS) data.  |  GAO-19-474R Why GAO Did This Study This report presents the new information system security control deficiencies identified during GAO's audit of IRS's fiscal years 2018 and 2017 financial statements based on its fiscal year 2018 testing of controls over certain IRS financial and tax processing systems relevant to internal control over financial reporting. This report also includes the results of GAO's fiscal year 2018 follow-up on the status of IRS's corrective actions to address information system control deficiencies and associated recommendations contained in GAO's prior years' reports that were open at the beginning of GAO's fiscal year 2018 audit. What GAO Recommends In a separately issued LIMITED OFFICIAL USE ONLY report, GAO made 20 recommendations to address the 14 new information system security control deficiencies related to access controls, configuration management, segregation of duties, and contingency planning. In commenting on a draft of the separately issued LIMITED OFFICIAL USE ONLY report, IRS agreed with our recommendations and stated that it will ensure that its corrective actions include root cause analysis for sustainable fixes that implement appropriate security controls. GAO will evaluate the effectiveness of IRS's efforts to address these deficiencies during its audit of IRS's fiscal year 2019 financial statements. For more information, contact Cheryl E. Clark at (202) 512-9377 or clarkce@gao.gov or Nancy R. Kingsbury at (202) 512-2700 or kingsburyn@gao.gov. Thu, 18 Jul 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-467 What GAO Found Large federal excise tax disparities among similar tobacco products after enactment of the Children's Health Insurance Program Reauthorization Act (CHIPRA) of 2009 led to immediate market shifts (see figure). Specifically, CHIPRA created tax disparities between roll-your-own and pipe tobacco and between small and large cigars, creating opportunities for tax avoidance and leading manufacturers and consumers to shift to the lower-taxed products. Following the market shifts after CHIPRA, the lower-taxed products have sustained their dominant position in their respective markets. U.S. Sales of Roll-Your-Own and Pipe Tobacco and of Small and Large Cigars, Both Domestic and Imported, before and after the Children's Health Insurance Program Reauthorization Act (CHIPRA) of 2009 Market shifts to avoid increased tobacco taxes following CHIPRA have continued to reduce federal revenue. GAO estimates that federal revenue losses due to market shifts from roll-your-own to pipe tobacco and from small to large cigars range from a total of about $2.5 to $3.9 billion from April 2009 through September 2018, depending on assumptions about how consumers would respond to a tax increase. Federal revenue would likely increase if Congress were to equalize the tax rate for pipe tobacco with the rates currently in effect for roll-your-own tobacco and cigarettes. GAO estimates that federal revenue would increase by a total of approximately $1.3 billion from fiscal year 2019 through fiscal year 2023 if the pipe tobacco tax rate were equalized with the higher rate for roll-your-own tobacco and cigarettes. While equalizing federal excise taxes on small and large cigars should raise revenue based on past experience, the specific revenue effect is unknown because data for conducting this analysis are not available. These data are not collected by the Department of the Treasury because such data are not needed to administer and collect large cigar taxes under the current tax structure. Why GAO Did This Study In 2009, CHIPRA increased and equalized federal excise tax rates for cigarettes, roll-your-own tobacco, and small cigars but did not equalize tax rates for pipe tobacco and large cigars—products that can be cigarette substitutes. GAO reported in 2012 and 2014 on the estimated federal revenue losses due to the market shifts from roll-your-own to pipe tobacco and from small to large cigars. This report updates GAO's prior products by examining (1) the market shifts among smoking tobacco products since CHIPRA, (2) the estimated effects on federal revenue if the market shifts had not occurred, and (3) what is known about the revenue effects if Congress were to eliminate current tax disparities between smoking tobacco products. GAO analyzed data from the Department of the Treasury and U.S. Customs and Border Protection to identify sales trends for domestic and imported smoking tobacco products, to estimate the effect on tax collection if market substitutions had not occurred, and to model the effects of equalizing tax rates for smoking tobacco products. What GAO Recommends In its 2012 report, GAO recommended Congress consider equalizing tax rates on roll-your-own and pipe tobacco and consider options for reducing tax avoidance due to tax differentials between small and large cigars. Treasury generally agreed with GAO's conclusions and observations. As of May 2019, Congress had not passed legislation to reduce or eliminate tax differentials between smoking tobacco products. Treasury also generally agreed with this report's findings. For more information, contact David B. Gootnick at (202) 512-3149 or gootnickd@gao.gov. Thu, 13 Jun 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-495 What GAO Found The Department of Labor (DOL) has a process to grant administrative exemptions for individual retirement account (IRA) transactions that would otherwise be prohibited by law, such as an IRA buying investment property from the IRA owner. DOL evaluates applications using statutory criteria and follows administrative procedures codified in regulations. Applications for proposed transactions that are substantially similar to certain other transactions previously granted exemptions may follow an expedited process. Prohibited Transaction Exemption Applications for Individual Retirement Accounts Processed by the Department of Labor (DOL), January 1, 2006 through May 16, 2017 Application status Individual EXPROa Withdrawn 28 28 Granted 20 28 Denied 11 5 Closed administratively or other 4 n/a Total 63 61 Source: GAO analysis of DOL data. | GAO-19-495 aEXPRO is the common name for a class exemption that allows DOL to authorize relief from the prohibited transactions rules on an expedited basis, generally a shorter period of time than it takes to review individual applications. As shown in the figure, GAO found that roughly half (56) of the IRA prohibited transaction exemption applications it reviewed were withdrawn by the applicant before the review process was completed. In reviewing processed applications, GAO found that most of the prohibited transactions for which an exemption was sought involved the sale of IRA assets. With regard to DOL's application review process, GAO found that DOL has not sufficiently documented internal policies and procedures to help ensure effective internal control of its process. Documenting procedures could increase transparency about how applications are handled, reduce the risk of DOL employees carrying out their duties inconsistently, and provide a means to retain organizational knowledge should key personnel leave unexpectedly. Although DOL and the Internal Revenue Service (IRS) share some information as part of their oversight responsibility for prohibited IRA transactions, no formal mechanism exists to help guide collaboration between the agencies. Of the 124 IRA applications GAO reviewed, only eight reflected DOL contact with IRS. GAO found that DOL has information about requested exemptions to prohibited IRA transaction rules that could be useful to IRS in carrying out its oversight responsibilities. For example, DOL does not share information on denials—information that could be useful as prohibited transaction examples for IRS examiner training and educational outreach to IRA owners. In prior work on interagency collaboration, GAO has found that formal agreements, such as a memorandum of understanding, can help agencies monitor, evaluate, and update interagency collaboration. Formalizing the sharing of information between DOL and IRS regarding IRA prohibited transaction exemptions could help the agencies better support their current coordination efforts and identify additional opportunities for greater collaboration. Why GAO Did This Study IRA owners are able to invest in a wide variety of assets, but they are prohibited from engaging in certain transactions involving IRA assets. IRA owners who engage in prohibited transactions may incur increased income tax liability, additional taxes, and the loss of the tax-advantaged status of their accounts. DOL can grant exemptions from the prohibited transaction rules. IRS enforces tax laws relating to IRAs and can assess additional taxes. GAO was asked to examine (1) DOL's process for granting exemptions for prohibited IRA transactions and outcomes of that process, and (2) the extent to which DOL and IRS collaborate on oversight of prohibited transaction rules for IRAs. GAO reviewed relevant federal laws and regulations; examined agency guidance, exemption process documentation, and application case files; assessed interagency coordination using internal control standards and prior work on interagency collaboration; and interviewed DOL and IRS officials. What GAO Recommends GAO is recommending that DOL and IRS establish a formal means—such as a memorandum of understanding or other mechanism—to collaborate on oversight of prohibited IRA transaction exemptions. GAO is also recommending that DOL document policies and procedures for managing the exemptions process. DOL and IRS generally agreed with GAO's recommendations. For more information, contact James R. McTigue, Jr. at (202) 512-9110 or  mctiguej@gao.gov, or Charles A. Jeszeck at (202) 512-7215 or jeszeckc@gao.gov. Fri, 07 Jun 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-558T What GAO Found The Internal Revenue Service's (IRS) latest tax gap estimate (2016) found that taxpayers voluntarily and timely paid about 81.7 percent of owed taxes for tax years 2008-2010, leaving an annual gross tax gap of $458 billion. IRS estimated a net tax gap—after late payments and enforcement actions—of $406 billion. IRS's Annual Average Tax Gap Estimate for Tax Years 2008-2010 GAO's work has found that three important factors contribute to the tax gap. Limited third party information reporting. The extent to which individual taxpayers accurately report their income is closely aligned with whether third parties (e.g., employers) report income (e.g., wages) to them and to IRS. IRS resource tradeoffs. IRS's budget and staffing levels have fallen over the past decade, and IRS faces increasing responsibilities, such as implementing Public Law 115-97—commonly known as the Tax Cuts and Jobs Act—which involved significant changes to tax law. Tax code complexity. The federal tax system contains complex rules that may be necessary to appropriately target tax policy goals; however, this can engender errors and lead to underpaid taxes. GAO's work has demonstrated that no single approach will fully and cost-effectively address noncompliance since the problem has multiple causes and spans different types of taxes and taxpayers. In light of these challenges, GAO has made numerous recommendations to IRS—some of which have not yet been implemented—such as developing and documenting a strategy that outlines how IRS will use data to update compliance approaches to help address the tax gap. Reducing the tax gap will also require targeted legislative actions. For example, expanding third-party information reporting could increase voluntary compliance and providing IRS with the authority to regulate paid tax return preparers could improve the accuracy of the tax returns they prepare. Why GAO Did This Study The tax gap—the difference between tax amounts that taxpayers should have paid and what they actually paid voluntarily and on time—has been a persistent problem for decades. The tax gap estimate is an aggregate estimate of the five types of taxes that IRS administers—individual income, corporation income, employment, estate, and excise taxes. For each tax type, IRS attempts to estimate the tax gap based on three types of noncompliance: (1) underreporting of tax liabilities on timely filed tax returns; (2) underpayment of taxes due from timely filed returns; and (3) nonfiling, when a taxpayer fails to file a required tax return on time or altogether. This testimony discusses factors contributing to the tax gap and strategies to reduce it. This testimony is based on prior GAO reports on the tax gap and enforcement of tax laws, including those with open recommendations or matters for congressional consideration that could help reduce the tax gap. Enforcement of tax laws has been on GAO's High Risk List since its inception in 1990, and GAO has made various recommendations to IRS and suggestions to Congress to reduce the tax gap that have resulted in improvements. For example, GAO recommended that IRS consider comparing individuals' tax returns with the information educational institutions report to verify taxpayers' education tax benefits claims and suggested that Congress require brokers to report to both taxpayers and IRS the adjusted cost of the securities sold by taxpayers. These actions resulted in billions of dollars in additional revenue. For more information, contact James R. McTigue, Jr. at (202) 512-9110 or McTiguej@gao.gov. Thu, 09 May 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-412R What GAO Found During its audit of the Internal Revenue Service's (IRS) fiscal years 2018 and 2017 financial statements, GAO identified continuing control deficiencies related to IRS's accounting for federal taxes receivable and other unpaid assessments that collectively represent a significant deficiency in IRS's internal control over unpaid tax assessments as of September 30, 2018. GAO also identified new control deficiencies in IRS's internal control over financial reporting that although not considered a material weakness or significant deficiency, nonetheless, warrant IRS management's attention. These control deficiencies concern IRS's nationwide strategy for safeguarding taxpayer receipts and associated information, physical security policies and procedures, review of visitor access logs, transmission of taxpayer receipts, designations of unit security representatives, review of automated tax refund information prior to certification for payment, review of refund schedule numbers for manual refunds, and review of suspicious and questionable tax returns in Examination. In addition, for six of the 32 recommendations from GAO's prior reports related to control deficiencies in IRS's internal control over financial reporting, GAO found that IRS implemented corrective actions during fiscal year 2018 that resolved the deficiencies, and as a result, these recommendations were closed. GAO closed one additional recommendation that related to unpaid assessments, by making a new recommendation that is better aligned with the remaining deficiencies that collectively represent a significant deficiency in internal controls over this area as of September 30, 2018. As a result, IRS currently has 37 GAO recommendations to address—the previous 25 open recommendations and the 12 new recommendations GAO is making in this report. Why GAO Did This Study The purpose of this report is to present those internal control deficiencies identified during GAO's audit of IRS's fiscal years 2018 and 2017 financial statements for which GAO did not already have any recommendations outstanding. This report provides new recommendations to address these internal control deficiencies and also presents the status, as of September 30, 2018, of IRS's corrective actions taken to address GAO's recommendations from its prior financial audits that remained open as of September 30, 2017. What GAO Recommends GAO is making 12 recommendations to address the identified control deficiencies. These recommendations are intended to improve IRS's internal controls over financial reporting as well as to bring IRS into conformance with its own policies and Standards for Internal Control in the Federal Government. IRS stated that it is committed to implementing appropriate improvements to ensure that it maintains sound financial management practices. IRS agreed with GAO's 12 new recommendations and described planned actions to address each recommendation. For more information, contact Cheryl E. Clark at (202) 512-9377 or clarkce@gao.gov. Thu, 09 May 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-340 What GAO Found Federal law and guidance require that the Internal Revenue Service (IRS) protect the confidentiality, integrity, and availability of the sensitive financial and taxpayer information that resides on its systems. However, taxpayer information held by third-party providers—such as paid tax return preparers and tax preparation software providers—generally falls outside of these requirements, according to IRS officials. In 2018, about 90 percent of individual taxpayers had their tax returns electronically filed by paid preparers or used tax preparation software to prepare and file their own returns. How Individual Tax Returns Were Filed, Calendar Year 2018 IRS seeks to help safeguard electronic tax return filing for various types of third-party providers through requirements under its Authorized e-file Provider program. However, IRS’s efforts do not provide assurance that taxpayers’ information is being adequately protected. Paid Preparers. IRS has not developed minimum information security requirements for the systems used by paid preparers or Authorized e-file Providers. According to IRS’s Office of Chief Counsel, IRS does not have the explicit authority to regulate security for these systems. Instead, the Internal Revenue Code gives IRS broad authority to administer and supervise the internal revenue laws. The Department of the Treasury has previously requested additional authority to regulate the competency of all paid preparers; GAO has also suggested that Congress consider granting IRS this authority. Congress has not yet provided such authority. Neither the Department of the Treasury request nor the GAO suggestion included granting IRS authority to regulate the security of paid preparers’ systems. Having such authority would enable IRS to establish minimum requirements. Further, having explicit authority to establish security standards for Authorized e-file Providers’ systems may help IRS better ensure the protection of taxpayers’ information. Tax Software Providers. As part of a public-private partnership between IRS and the tax preparation industry, 15 tax software providers voluntarily adhere to a set of about 140 information security controls developed using guidance from the National Institute of Standards and Technology (NIST). However, these controls are not required, and these providers represent only about one-third of all tax software providers. Additionally, IRS established six security, privacy, and business standards for providers of software that allows individuals to prepare their own tax returns (as opposed to software that paid preparers use). However, IRS has not substantially updated these standards since 2010, and they are, at least in part, outdated. For example, IRS cites an outdated encryption standard that NIST recommends not using due to its many known weaknesses. A key factor contributing to missed opportunities to address third-party cybersecurity is IRS’s lack of centralized leadership. Consequently, IRS is less able to ensure that third-party providers adequately protect taxpayers’ information, which may result in identity theft refund fraud. Example of Successful Identity Theft Refund Fraud Attempt IRS monitors compliance with its electronic tax return filing program requirements for those paid preparers who electronically file returns; however, IRS’s monitoring has a limited focus on cybersecurity issues. For example, the monitoring techniques largely focus on physical security (e.g., locked filing cabinets) rather than verifying that preparers have an information security policy consistent with NIST-recommended controls. Without effective monitoring of cybersecurity controls, IRS has limited assurance that those paid preparers’ systems have adequate controls in place to protect clients’ data. IRS recently began collecting information on high-risk security incidents, such as hackers infiltrating third-party provider systems. Reported incidents increased from 2017 to 2018, the only years for which IRS has data. However, IRS does not have a full picture of the scope of incidents because of inconsistent reporting requirements, including no reporting requirements for paid preparers. Reported High-Risk Security Incidents at Paid Preparers and Tax Software Providers, 2017 and 2018   2017 2018 Number of security incidents 212 336 Number of taxpayer accounts affected 180,557 211,162 GAO analysis of Internal Revenue Service data. | GAO-19-340 Why GAO Did This Study Third-party providers, such as paid tax return preparers and tax preparation software providers, greatly impact IRS’s administration of the tax system. If these third parties do not properly secure taxpayers’ personal and financial information, taxpayers will be vulnerable to identity theft refund fraud and their sensitive personal information will be at risk of unauthorized disclosure. IRS estimates that it paid out at least $110 million in identity theft tax refund fraud during 2017, and at least $1.6 billion in identity theft tax refund fraud during 2016. GAO was asked to review IRS’s efforts to track, monitor, and deter theft of taxpayer information from third parties. Among other things, this report assesses what is known about the taxpayer information security requirements for the systems used by third-party providers, IRS’s processes for monitoring compliance with these requirements, and IRS’s requirements for third-party security incident reporting. GAO analyzed IRS’s information security requirements, standards, and guidance for third-party providers and compared them to relevant laws, regulations, and leading practices, such as NIST guidance and Standards for Internal Control in the Federal Government. GAO reviewed IRS’s monitoring procedures and its requirements and processes for third-party reporting of security incidents, and compared them to Internal Control Standards and GAO’s A Framework for Managing Fraud Risk in Federal Programs. GAO also interviewed IRS and tax industry group officials. What GAO Recommends GAO suggests that Congress consider providing IRS with explicit authority to establish security requirements for paid preparers’ and Authorized e-file Providers’ systems. GAO is also making eight recommendations, including that the Commissioner of Internal Revenue Develop a governance structure or other form of centralized leadership to coordinate all aspects of IRS’s efforts to protect taxpayer information while at third-party providers. Require all tax software providers to adhere to prescribed information security controls. Regularly review and update security standards for tax software providers. Update IRS’s monitoring programs to include basic cybersecurity issues. Standardize incident reporting requirements for all types of third-party providers. IRS agreed with three recommendations, including the above recommendations to regularly review and update security standards for tax software providers, and standardize incident reporting requirements. IRS disagreed with five recommendations—including the other three listed above—generally citing the lack of clear and explicit authority it would need to establish security requirements for the information systems of paid preparers and Authorized e-file Providers. GAO believes that IRS can implement these recommendations without additional statutory authority. For more information, contact Jessica Lucas-Judy at 202-512-9110 or lucasjudyj@gao.gov. Thu, 09 May 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-243 What GAO Found The five selected agencies GAO reviewed have control activities—such as policies and procedures—to help ensure they consider qualifying federal tax debts as defined by Federal Acquisition Regulation (FAR) § 52.209-11 and § 52.209-5 before awarding contracts. However, these controls were potentially ineffective in ensuring compliance with relevant laws and regulations. According to GAO's analysis, in 2015 and 2016 the Departments of Energy, Health and Human Services, and Veterans Affairs, and the Army and Navy, awarded 1,849 contracts to contractors that reported qualifying federal tax debts, such as delinquent debts over $3,500 (see table). When a contractor reports qualifying tax debts under these regulations, the contracting officer must take several actions, including notifying the agency suspension and debarment official (SDO). However, SDOs at all five agencies told GAO they did not receive any notifications of contractors reporting tax debt in this period. As a result, these contracts may have been awarded without potential required actions, indicating potential violations of federal regulations and, in some cases, appropriations law. Number of Contract Awards to Contractors Reporting Qualifying Tax Debt under FAR § 52.209-11 and § 52.209-5 in Calendar Years 2015 and 2016, by Selected Agency Agency Contract awards under § 52.209-11 Contract awards under § 52.209-5 Department of Defense, Army 73 324 Department of Defense, Navy 54 266 Department of Energy 0 22 Department of Health and Human Services 7 78 Department of Veterans Affairs 9 1,016 Total 143 1,706 Source: GAO analysis of General Services Administration data. | GAO-19-243 GAO's nongeneralizable review of seven contracts illustrate two cases where contractors were collectively awarded more than $510,000 in contract obligations while having more than $250,000 in tax debt, including tax penalties for willful noncompliance with tax laws. Officials from the selected agencies were unable to explain why their control activities were potentially ineffective without reviewing each contract to determine whether FAR requirements were applicable and whether control activities were applied. Understanding why existing control activities did not operate effectively will help these agencies enhance controls to avoid future misuses of appropriated funds. GAO plans to provide information on the instances of potential noncompliance GAO identified to the selected agencies. Of the over 2,700 executive-branch contractors GAO found to have likely qualifying federal tax debt as of December 2016, the Internal Revenue Service (IRS) had identified over 2,000 for levy through its automated Federal Payment Levy Program (FPLP). However, the FPLP cannot levy all contractors because not all payments are processed by the system the FPLP uses. The data the IRS receives from agencies does not allow it to readily identify payments made using other systems—information the IRS needs for agency outreach about inclusion in the FPLP and to more quickly initiate a manual levy. With this information, the IRS may be able to improve its levy capacity and enhance tax collections. Why GAO Did This Study The federal government obligated approximately $507 billion on contracts in fiscal year 2017. Businesses, including federal contractors, pay billions of dollars in taxes each year. Some businesses, however, do not pay owed taxes, contributing to what is known as the tax gap. Federal contractors owe some of the taxes that contribute to the tax gap, and, since 2015, federal law prohibits agencies, under certain circumstances, from using appropriated funds to contract with those who have qualifying tax debt. The IRS also has authority to levy certain payments of contractors with qualifying federal tax debt. GAO was asked to review issues related to federal contractors and tax debt. Among other things, GAO examined whether, in calendar years 2015 and 2016, (1) selected federal agencies had control activities that ensured contractors' reported federal tax debts were considered before contract award and (2) the IRS levied selected federal contractors' payments. GAO analyzed contract and IRS data from 2015 and 2016 (the most-recent data available), reviewed five agencies that represent 51 percent of contract obligations, and reviewed seven awards to contractors reporting tax debt. What GAO Recommends GAO is making 12 recommendations, including that selected agencies enhance controls for considering contactors' qualifying federal tax debt before awarding contracts and that the IRS evaluate options to obtain comprehensive contract-payment information. All the agencies generally agreed with GAO's recommendations. For more information, contact Rebecca Shea at (202) 512-6722 or shear@gao.gov. Mon, 15 Apr 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-269 What GAO Found Trends in the market for tax-time financial products since 2012 include the decline of refund anticipation loans (short-term loans subject to finance charges and fees), the rise in use of refund transfers (temporary bank accounts in which to receive funds), and the introduction of refund advances (loans with no fees or finance charges). More recent product developments include increased online access to products for self-filers, higher refund advance amounts, the introduction of new products, and for tax year 2019, the reintroduction of fee-based loans. However, GAO identified some limitations in Internal Revenue Service (IRS) data on product use, including over- or under-counting of certain types of products. IRS has not communicated these data issues to users and has not updated guidance to tax preparers on how to report new product use. As a result, data users (including federal agencies and policymakers) have inaccurate information to inform their findings and decision-making. Lower-income and some minority taxpayers were more likely to use tax-time financial products, according to GAO analysis of 2017 data from IRS, the Bureau of the Census, and the Federal Deposit Insurance Corporation. Specifically, taxpayers who made less than $40,000 were significantly more likely to use the products than those who made more. African-American households were 36 percent more likely to use the products than white households. Product users tend to have immediate cash needs, according to studies GAO reviewed. For these users, tax-time financial products generally provide easier access to cash and more cash at a lower cost than alternatives such as payday, pawnshop, or car title loans. GAO's undercover visits with nine tax preparers, its review of selected provider websites, and review of documents obtained from selected banks and tax preparers found disclosures generally followed requirements for disclosing fees. However, disclosure practices by some paid tax preparers may pose challenges for consumers. For example: Preparers in GAO's review generally indicated that they present taxpayers with almost all of the documents with fee information after their tax returns have been prepared and the preparers determined the taxpayers qualified for a tax-time financial product. The timing of these disclosures would pose a challenge for taxpayers looking to compare prices for different providers. During six of nine undercover visits, GAO investigators explicitly requested literature on product fees but were not provided such information. Refund transfer fee information on websites GAO reviewed sometimes was presented only after the tax preparation process started, was in small print, or could be found only after navigating several pages. As a result, taxpayers may face challenges comparing prices. Why GAO Did This Study American taxpayers spent at least half a billion dollars in 2017 on financial products—issued by banks, through paid tax return preparers—to help them file taxes and get advances or loans against tax refunds. GAO was asked to review tax-time financial products. Among other things, GAO (1) described market trends and examined IRS data, (2) described characteristics of product users and factors that influence product use, and (3) described product disclosure practices. GAO reviewed fee and product usage data; conducted a multivariate regression analysis to determine user characteristics; and analyzed disclosures of selected providers that are national chains and those of their bank partners. GAO conducted nongeneralizeable undercover visits of nine randomly selected tax preparers in the Washington, D.C. area to understand how they communicate fees and terms to taxpayers. Preparers were selected to ensure a mixture of regulatory jurisdictions, among other factors. GAO reviewed laws, regulations, and guidance on the products, and interviewed IRS and other government officials and a nongeneralizeable selection of product and service providers, tax preparation companies, consumer groups, and academics. What GAO Recommends GAO is making two recommendations to IRS to make the collection of product use data more accurate and make data limitations known to users of the data. IRS concurred with both recommendations. For more information, contact Michael E. Clements at (202) 512-8678 or clementsm@gao.gov. Fri, 05 Apr 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-324SP What GAO Found In March 2018, GAO identified 16 priority recommendations for the Internal Revenue Service (IRS). Since then, IRS has implemented one of those recommendations by using more complete performance information to make decisions that justify the use of resources to audit certain types of tax issues and returns. In March 2019, GAO identified eight additional priority recommendations for IRS, bringing the total number to 23. These recommendations involve the following areas: Improving payment integrity Reducing tax fraud  Improving resource investment decision-making and oversight Improving information security  Improving audit effectiveness  Improving taxpayer services IRS's continued attention to these issues could lead to significant improvements in government operations. Why GAO Did This Study Priority recommendations are open GAO recommendations that warrant priority attention from heads of key departments or agencies because their implementation could save large amounts of money; improve congressional and/or executive branch decision making on major issues; eliminate mismanagement, fraud, and abuse; or ensure that programs comply with laws and funds are legally spent, among other benefits. Since 2015 GAO has sent letters to selected agencies to highlight the importance of implementing such recommendations. For more information, contact James R. McTigue, Jr. or Jessica Lucas-Judy at (202) 512-9110 or mctiguej@gao.gov or lucasjudyj@gao.gov. Thu, 04 Apr 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-180 What GAO Found Data quality and management issues have limited the effectiveness of the Internal Revenue Service's (IRS) efforts to improve taxpayer compliance using foreign financial asset data collected under the Foreign Account Tax Compliance Act (FATCA). Specifically, IRS has had difficulties matching the information reported by foreign financial institutions (FFI) with U.S. taxpayers' tax filings due to missing or inaccurate Taxpayer Identification Numbers provided by FFIs. Further, IRS lacks access to consistent and complete data on foreign financial assets and other data reported in tax filings by U.S. persons, in part, because some IRS databases do not store foreign asset data reported from paper filings. IRS has also stopped pursuing a comprehensive plan to leverage FATCA data to improve taxpayer compliance because, according to IRS officials, IRS moved away from updating broad strategy documents to focus on individual compliance campaigns. Ensuring access to consistent and complete data collected from U.S. persons—and employing a plan to leverage such data—would help IRS better leverage such campaigns and increase taxpayer compliance. Due to overlapping statutory reporting requirements, IRS and the Financial Crimes Enforcement Network (FinCEN)—both within the Department of the Treasury (Treasury)—collect duplicative foreign financial account and other asset information from U.S. persons. Consequently, in tax years 2015 and 2016, close to 75 percent of U.S. persons who reported information on foreign accounts and other assets on their tax returns also filed a separate form with FinCEN. The overlapping requirements increase the compliance burden on U.S. persons and add complexity that can create confusion, potentially resulting in inaccurate or unnecessary reporting. Modifying the statutes governing the requirements to allow for the sharing of FATCA information for the prevention and detection of financial crimes would eliminate the need for duplicative reporting. This is similar to other statutory allowances for IRS to disclose return information for other purposes, such as for determining Social Security income tax withholding. According to documents GAO reviewed, and focus groups and interviews GAO conducted, FFIs closed some U.S. persons' existing accounts or denied them opportunities to open new accounts after FATCA was enacted due to increased costs, and risks they pose under FATCA reporting requirements. According to Department of State (State) data, annual approvals of renunciations of U.S. citizenship increased from 1,601 to 4,449—or nearly 178 percent—from 2011 through 2016, attributable in part to the difficulties cited above. Treasury previously established joint strategies with State to address challenges U.S. persons faced in accessing foreign financial services. However, it lacks a collaborative mechanism to coordinate efforts with other agencies to address ongoing challenges in accessing such services or obtaining Social Security Numbers. Implementation of a formal means to collaboratively address burdens faced by Americans abroad from FATCA can help federal agencies develop more effective solutions to mitigate such burdens by monitoring and sharing information on such issues, and jointly developing and implementing steps to address them. Why GAO Did This Study Concerns over efforts by U.S. taxpayers to use offshore accounts to hide income or evade taxes contributed to the passage of FATCA in 2010, which sought to create greater transparency and accountability over offshore assets held by U.S. taxpayers. House Report 114-624 included a provision for GAO to evaluate FATCA implementation and determine the effects of FATCA on U.S. citizens living abroad. GAO—among other things—(1) assessed IRS's efforts to use FATCA-related information to improve taxpayer compliance; (2) examined the extent to which Treasury administers overlapping reporting requirements on financial assets held overseas; and (3) examined the effects of FATCA implementation unique to U.S. persons living abroad. GAO reviewed applicable documentation; analyzed tax data; and interviewed officials from IRS, other federal agencies and organizations, selected tax practitioners, and more than 20 U.S. persons living overseas. What GAO Recommends GAO is making one matter for congressional consideration to address overlap in foreign asset reporting requirements. GAO is making seven recommendations to IRS and other agencies to enhance IRS's ability to leverage FATCA data to enforce compliance, address unnecessary reporting, and better collaborate to mitigate burdens on U.S. persons living abroad. State and Social Security Administration agreed with GAO's recommendations. Treasury and IRS neither agreed nor disagreed with GAO's recommendations. For more information, contact James R. McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov. Mon, 01 Apr 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-193 What GAO Found The Internal Revenue Service (IRS) documented objectives and proposed measures for its private debt collection (PDC) program for sending tax debt cases to private collection agencies, but the objectives are not clearly defined and their linkages with program measures are unclear. For example, one objective is to provide taxpayers an opportunity to understand and resolve their tax debts, but the proposed measure focuses on taxpayer satisfaction with collection agencies rather than taxpayers' understanding. The objectives also do not include some key program risks, such as scams. Without clearly defined objectives and measures, IRS will have limited ability to assess program results. IRS's reports to Congress on the PDC program have not provided complete financial information. For example, as of September 2018, IRS reported program revenue collections of about $89 million and costs of $67 million, suggesting a positive balance of $22 million for the general fund of the Treasury (the Treasury). However, the report did not clarify that about $51 million collected went to the Treasury and the remaining $38 million were retained by IRS in two special funds to pay current and future program costs. Without this information, Congress has an incomplete picture of the program's true costs and revenues. IRS has not analyzed PDC program results to identify the types of cases that should not be assigned to collection agencies because they do not result in collections. GAO's analysis of IRS data shows that between April 2017 and September 2018 about 73,000 of 111,000 cases closed by collection agencies had little or no revenue collected because the collection agencies were unable to contact the taxpayer or collect the debt, among other reasons. Given the costs associated with managing these cases, without such analyses, IRS may continue to use resources inefficiently and assign cases with little or no potential for revenue collection, or miss opportunities to assign other cases that could produce more revenue. IRS has identified and taken steps to mitigate some PDC program risks that could harm taxpayers. However, IRS has not completed the process of identifying and documenting all risks nor has it fully assessed risks to taxpayers from the program or its response to these risks. Specifically, GAO found that IRS identified and documented 6 taxpayer risks related to the PDC program, such as scammers impersonating collection agencies, but had not identified an additional 10 risks that GAO did, such as taxpayers agreeing to debt payments they cannot afford. IRS had not consistently assessed the impact or likelihood of the identified risks. As a result, IRS's responses to mitigate risks were broad in nature, and were not prioritized or aligned to address specific risks. IRS monitors a sample of collection agencies' telephone calls with taxpayers and reviews taxpayer complaints, but these methods do not provide information on whether IRS's responses to risks are effective. Without addressing these risk management issues, IRS cannot ensure it has fully identified PDC program risks and effectively responded to protect taxpayers from them. Why GAO Did This Study IRS attempts to collect tax debts to promote tax compliance but does not have resources to pursue all debts. A 2015 law required IRS to contract with private collection agencies for certain tax debts. However, stakeholders such as the National Taxpayer Advocate have noted that safeguards are needed to protect taxpayers from risks, such as scammers impersonating collection agencies. GAO was asked to review IRS's PDC program. This report assesses the extent to which IRS (1) documented program objectives and measures, (2) documented revenue collection and cost results data, (3) used data to improve the program and meet its objectives, and (4) addressed risks to prevent or address scams and other harmful effects on taxpayers. GAO analyzed IRS's documents on PDC program administration and planning; collections and costs reporting; and managing risks. GAO interviewed officials from IRS and external groups that represent taxpayer interests. What GAO Recommends GAO makes 12 recommendations, including that IRS improve PDC program objectives and measures, revenue and cost reporting, analysis to assign cases, and management of taxpayer risks. IRS agreed with nine recommendations, partially agreed with GAO's recommendation on improving objectives—which GAO clarified in response—and disagreed with two recommendations to include certain costs in reporting and analyze data to identify cases not collectible. GAO maintains the recommendations would more fully report PDC program federal costs and prevent waste. For more information, contact Jessica Lucas-Judy at (202) 512-9110 or lucasjudyj@gao.gov. Fri, 29 Mar 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-176 What GAO Found The Internal Revenue Service (IRS) has scaled back strategic workforce planning activities in recent years. IRS officials told GAO that resource constraints and fewer staff with strategic workforce planning skills due to attrition required IRS to largely abandon strategic workforce planning activities. However, a number of indicators, such as increasing rates of retirement eligible employees and declining employee satisfaction, led IRS to determine that continuing to make short-term, largely nonstrategic human capital decisions was unsustainable. One way IRS sought to address these issues was to develop a strategic workforce plan and associated workforce planning initiative. Initiative implementation, however, is behind schedule and on hold. IRS attributed the delay to a combination of: 1) personnel resources redirected to implement Public Law 115-97—commonly referred to as the Tax Cuts and Jobs Act, 2) lack of workforce planning skills within its Human Capital Office, and 3) delayed deployment at the Department of the Treasury (Treasury) related to a new workforce planning system. As a result, IRS lacks information about what mission critical skills it has on board, where skills gaps exist, and what skills will be needed in the future. IRS staffing has declined each year since 2011, and declines have been uneven across different mission areas. GAO found the reductions have been most significant among those who performed enforcement activities, where staffing declined by around 27 percent (fiscal years 2011 through 2017). IRS attributed staffing declines primarily to a policy decision to strictly limit hiring. Agency officials told GAO that declining staffing was a key contributor in decisions to scale back activities in a number of program and operational areas, particularly in enforcement, where the number of individual returns audited from fiscal years 2011 through 2017 declined by nearly 40 percent. IRS has skills gaps in mission critical occupations, and the agency's efforts to address these skills gaps do not target the occupations in greatest need, such as tax examiners and revenue officers. However, the results of an interagency working group effort that began in 2011, and was intended to address skill gaps among IRS revenue agents and other occupations with skills gaps across the government, may hold important lessons for addressing skills gaps in other mission critical occupations at IRS. IRS's Human Capital Office has limited staffing capacity to hire employees in hard to fill positions, which holds risks for the agency's ability to implement the Tax Cuts and Jobs Act. IRS is undertaking a variety of activities to improve its hiring capacity, but has not determined how each activity will be evaluated and will contribute to increased hiring capacity or associated outcomes. In addition, changes in the agency's hiring processes have been confusing to managers and contributed to hiring delays. Clear guidance on hiring request requirements would better position IRS to avoid the risk of hiring delays for mission critical occupations. Why GAO Did This Study IRS faces a number of challenges that pose risks to meeting its mission if not managed effectively. Key to addressing IRS's challenges is its workforce. Cultivating a well-equipped, diverse, flexible, and engaged workforce requires strategic human capital management. GAO was asked to review IRS's enterprise-wide strategic workforce planning efforts. GAO assessed (1) how IRS defines its workforce needs and develops strategies for shaping its workforce; (2) the extent to which IRS identified the critical skills and competencies it will require to meet its goals, and its strategy to address skills gaps in its workforce; and (3) the extent to which IRS's Human Capital Office has the capacity to hire employees in hard to fill positions. GAO analyzed trends in staffing across IRS and in selected mission critical occupations; compared IRS strategic workforce management processes, practices, and activities with federal regulations and leading practices; analyzed IRS documents and interviewed agency officials. What GAO Recommends GAO is making six recommendations to IRS that include implementing its delayed workforce planning initiative, evaluate actions to improve the agency's hiring capacity, and address changes in its processes that have contributed to hiring delays. IRS agreed with GAO's recommendations. GAO also recommends Treasury clarify guidance to IRS on a forthcoming workforce planning system. Treasury agreed with the recommendation. For more information, contact James R. McTigue, Jr. at (202) 512-9110 or McTigueJ@gao.gov. Tue, 26 Mar 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-81 What GAO Found A U.S. multinational corporation (MNC) operating in a foreign country is subject to taxes in that country as well as in the United States. The U.S. MNC's tax return may be audited by the United States or the other country. Such audits can result in an adjustment to the U.S. MNC's taxable income that may result in income being subject to tax in both countries. If the U.S. MNC disagrees with the adjustment, it can ask the United States Competent Authority (USCA) within the Internal Revenue Service (IRS) to help resolve the dispute through the mutual agreement procedure (MAP). Generally, disputes are resolved by one country withdrawing some or all of the adjustment and the other country providing other relief to the MNC to address double taxation of income. The following figure provides an overview of the dispute resolution process. IRS U.S. Competent Authority Mutual Agreement (USCA) Procedure (MAP) Process Dispute resolution assistance is available to U.S.MNCs that need it and USCA provides comprehensive technical information on its website on how to request assistance. However, because USCA's website does not provide an overview or plain language guidance on the MAP process U.S. MNCs may not have clear information on how to navigate the process. USCA has taken a number of steps to ensure efficient management of MAP cases including assigning staff with requisite background and skills to cases according to their complexity and organizing staff into teams that specialize by countries. However, GAO identified a number of weaknesses that impact USCA's management of MAP cases. These include the following key data are not tracked and existing data are not used to assess the effective allocation of resources for the program, few controls have been established to monitor and ensure the reliability of the data in the case management database, and lack of trend analyses on dispute case characteristics that could help inform management decision making and the more efficient operation of the program. Why GAO Did This Study With increasing globalization, multinational corporations can take advantage of differences in countries' corporate tax systems to reduce their overall tax liabilities. However, globalization can also lead to disputes about the correct tax liability for U.S. MNCs in different countries. GAO was asked to review how the United States administers the process for resolving international tax disputes when a U.S. MNC disagrees with a tax determination of another country. This report (1) describes IRS's dispute resolution process, (2) assesses the information IRS provides to taxpayers about the process, and (3) assesses the extent to which IRS evaluates its management of dispute resolutions cases. GAO reviewed IRS guidance on the MAP process, interviewed IRS officials and compared IRS actions to federal standards for internal control and GAO's criteria for a good tax system. GAO analyzed MAP data for cases closed from 2013 to 2017 as well as a stratified random sample of MAP case files. What GAO Recommends GAO is making a total of eight recommendations, including that IRS improve the clarity of information on the dispute resolution process, track and use dispute resolution case data, ensure the quality of case data, and analyze trends in dispute case characteristics. IRS agreed with GAO's recommendations and said it will provide detailed corrective action plans. For more information, contact James R McTigue at (202) 512-9110 or mctiguej@gao.gov. Wed, 13 Mar 2019 00:00:00 -0400 https://www.gao.gov/products/GAO-19-88 What GAO Found Millions of dollars in retirement savings are transferred to states as unclaimed property, only some of which is later claimed by owners. Of the 22 states responding to GAO's survey, 17 states provided data indicating that $35 million in unclaimed retirement savings was transferred to them from employer plans and individual retirement accounts (IRAs) in 2016. When account owners do not claim money from retirement savings accounts or cash checks from their plans, the funds may be transferred to state unclaimed property offices (see fig.). Assets and uncashed checks from employer plans (such as 401(k) plans), were the most common form of retirement savings transferred to states. After funds are transferred, owners can claim their savings from the state. According to the 15 states providing data on this, owners claimed about $25 million in retirement savings in 2016: $601, on average, from 401(k) plan checks, and $5,817, on average, from traditional lRAs. States reported using a range of strategies to maintain the value of retirement savings while holding these funds, such as applying interest. States also reported various efforts to locate owners. However, not all savings will be claimed because, among other reasons, owner information is not always associated with transferred savings when the amount is small, which complicates state efforts to locate some owners. Stakeholders Described How Retirement Savings Are Transferred to and Claimed from States The Internal Revenue Service (IRS) and the Department of Labor (DOL) have issued guidance on transferring retirement savings to states; however, IRS has not clarified certain responsibilities or ensured that the retirement savings that owners claim from states can be rolled over into other tax-deferred retirement accounts. IRS is responsible for communicating and enforcing tax responsibilities, but has not specified whether 401(k) plan providers should report state transfers to IRS as distributions and withhold federal income taxes. IRS officials said the agency has not issued guidance to clarify this issue because of competing priorities. As a result, 401(k) plan provider practices vary—some providers withhold taxes when transferring savings to states while others do not. This makes the IRS less likely to collect federal income taxes that may be due if transfers are taxable events. IRS also has not taken action to ensure that individuals who claim 401(k) savings from a state can roll over these savings to other tax-deferred retirement accounts after IRS's 60-day deadline. IRS allows individuals to roll over savings after 60 days for several reasons, none of which include claiming 401(k) savings from a state. Federal law seeks to protect the interests of participants in retirement plans. Account owners who are unable to roll over their reclaimed savings forgo the opportunity to continue investing the funds on a tax-deferred basis. Why GAO Did This Study Over the course of individuals' careers, their retirement savings can be spread across multiple retirement accounts and they can change jobs, both of which can cause their savings to become unclaimed and even lost. Prior GAO work has found that unclaimed retirement savings are sometimes transferred to the states. GAO was asked to review such transfers. This report examines (1) how much in retirement savings is transferred to states as unclaimed property and what happens to those savings once transferred and (2) the steps IRS and DOL have taken to oversee these transfers and what improvements are needed. GAO interviewed federal and state officials, industry representatives, and other stakeholders, and surveyed all 50 states and the District of Columbia (and received 22 responses). GAO also surveyed 401(k) plan service providers and IRA trustees regarding the volume of retirement savings transferred to states and their federal tax reporting and withholding practices for those transfers. What GAO Recommends GAO is making three recommendations, including that IRS should consider clarifying whether transfers from employer-based plans (such as 401(k) plans) to states constitute reportable and taxable distributions and consider modifying its list of permitted reasons for rolling over savings after the 60-day rollover deadline. IRS agreed with our recommendations and noted that it will work with the Department of the Treasury to address them. For more information, contact Charles Jeszeck at (202) 512-7215 or jeszeckc@gao.gov. Fri, 18 Jan 2019 00:00:00 -0500 https://www.gao.gov/products/GAO-19-150 What GAO Found In GAO's opinion, the Internal Revenue Service's (IRS) fiscal years 2018 and 2017 financial statements are fairly presented in all material respects, and although controls could be improved, IRS maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018. GAO's tests of IRS's compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements detected no reportable instances of noncompliance in fiscal year 2018. During fiscal year 2018, IRS continued to make important progress in addressing a long-standing material weakness in internal control over unpaid assessments. These efforts included enhancing data quality and improving controls over the complex statistical process that IRS uses to estimate the amounts of taxes receivable, compliance assessments, and write-offs for financial reporting purposes. Based on the cumulative effects of these and other efforts, GAO no longer considers the remaining deficiencies to represent a material weakness. However, the remaining control deficiencies collectively are significant enough to merit attention by those charged with governance, and therefore represent a significant deficiency in internal control over unpaid assessments. Further enhancements to IRS's financial systems are needed to address continuing issues with the accuracy of tax records, enable IRS to rely on its systems to record reliable taxes receivable transaction detail, improve IRS's ability to effectively manage taxpayers' accounts, and reduce taxpayer burden. During fiscal year 2018, IRS also continued to make progress in addressing deficiencies in internal control over its financial reporting systems. However, continuing and newly identified control deficiencies in IRS's information security placed IRS systems and data at risk. Collectively, these deficiencies represent a significant deficiency in IRS's internal control over financial reporting systems. Until IRS takes the necessary steps to address these deficiencies in controls, its financial reporting and taxpayer data will remain at increased risk of inappropriate and undetected use, modification, or disclosure. In addition to its internal control deficiencies, IRS faces significant ongoing financial management challenges related to (1) safeguarding taxpayer receipts and associated information, (2) preventing and detecting fraudulent refunds based on identity theft, and (3) implementing the tax-related provisions of the Patient Protection and Affordable Care Act. Why GAO Did This Study In accordance with the authority conferred by the Chief Financial Officers Act of 1990, as amended, GAO annually audits IRS's financial statements to determine whether (1) the financial statements are fairly presented and (2) IRS management maintained effective internal control over financial reporting. GAO also tests IRS's compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements. IRS's tax collection activities are significant to overall federal receipts, and the effectiveness of its financial management is of substantial interest to Congress and the nation's taxpayers. What GAO Recommends Based on prior financial statement audits, GAO made numerous recommendations to IRS to address internal control deficiencies. GAO will continue to monitor and will report separately on IRS's progress in implementing prior recommendations that remain open. Consistent with past practice, GAO will also be separately reporting on the new internal control deficiencies identified in this year's audit and providing IRS recommendations for corrective actions to address them. In commenting on a draft of this report, IRS stated that it continues to increase its focus on information security and internal controls. For more information, contact Cheryl E. Clark at (202) 512-3406 or clarkce@gao.gov. Fri, 09 Nov 2018 00:00:00 -0500 https://www.gao.gov/products/GAO-19-151R What GAO Found The procedures that GAO agreed to perform on fiscal year 2018 net excise tax distributions to the Airport and Airway Trust Fund (AATF) and the Highway Trust Fund (HTF) and the results of those procedures are described in the enclosures to this report. The sufficiency of these procedures is solely the responsibility of the Department of Transportation (DOT) Office of Inspector General (OIG). The Internal Revenue Service (IRS) is responsible for certifying quarterly net excise tax collections to be distributed to the AATF and the HTF that are supported by underlying records. The Department of the Treasury's Office of Tax Analysis (OTA) is responsible for developing reasonable estimates of net excise tax collections to be distributed to the AATF and the HTF. These IRS certifications and OTA estimates are the bases of the net excise tax distributions to the AATF and the HTF. GAO was not engaged to perform, and did not perform, an examination or review. Accordingly, GAO does not express such an opinion or conclusion. This report is solely for the use of the DOT OIG and is not suitable for any other purpose. IRS agreed with the findings related to the procedures performed concerning excise tax distributions to the AATF and the HTF during the fiscal year 2018. OTA stated that it had no comments on the report. Why GAO Did This Study GAO performed agreed-upon procedures solely to assist the DOT OIG in ascertaining whether the net excise tax revenue distributed to the AATF and the HTF for the fiscal year ended September 30, 2018, is supported by underlying records. The DOT OIG is responsible for the sufficiency of these agreed-upon procedures to meet its objectives, and GAO makes no representation in that respect. The procedures GAO agreed to perform were related to (1) transactions that represent the underlying basis of amounts distributed from the General Fund to the AATF and the HTF during fiscal year 2018, (2) IRS's quarterly AATF and HTF excise tax receipt certifications prepared during fiscal year 2018, (3) OTA's estimates of excise tax amounts to be distributed to the AATF and the HTF for the fourth quarter of fiscal year 2018, and (4) the amount of net excise taxes to be distributed to the AATF and the HTF during fiscal year 2018. For more information, contact Cheryl E. Clark at  (202) 512-9377 or clarkce@gao.gov.   Thu, 08 Nov 2018 00:00:00 -0500 https://www.gao.gov/products/GAO-19-108R What GAO Found In 2014, during a period of budget reductions and aging information technology systems at the Internal Revenue Service (IRS), IRS officials began discussing a new longer-term vision of tax administration that came to be known as the IRS Future State. This vision proposed a more interactive relationship between taxpayers and IRS to improve taxpayer service, enforcement, and operations. IRS launched this Future State vision to respond to external and internal factors that were requiring changes to its current taxpayer services and operations, such as the increasing complexity of the Federal tax system and evolving expectations of IRS services. To guide the vision, IRS narrowed 19 objectives from its Strategic Plan to a core set of objectives that it then used to develop six strategic themes, such as "facilitate voluntary compliance by empowering taxpayers with secure and innovative tools and support" and "drive more agility, efficiency, and effectiveness in IRS operations." IRS officials described the Future State as a set of guiding principles rather than a plan to transform the agency. The ideas and concepts under the Future State vision are now being pursued as part of IRS's strategic plan for fiscal years 2018 to 2022--issued in May 2018--and IRS has been phasing out the use of the term Future State. The six strategic plan goals closely resemble the six Future State themes. IRS officials characterized this shift as more of a rebranding than a policy change because work that was part of the Future State vision will continue. IRS officials said it made sense to merge the Future State vision with the new strategic plan to create a single consistent IRS vision. In August 2018, IRS officials stated that they were preparing public communications about the transition from the Future State to the new strategic plan and its implementation. Why GAO Did This Study Funding the federal government depends largely upon the IRS's ability to collect taxes. This includes providing taxpayer services that make voluntary compliance easier, and enforcing tax laws to ensure compliance with tax responsibilities. For several years, GAO has recommended that IRS develop strategies to improve taxpayer services such as a long-term strategy for providing web-based services to taxpayers. GAO was asked to describe the changes that IRS plans under the Future State. This report describes: (1) the Future State, its objectives and its history; and (2) the current status of the Future State. To answer these objectives, GAO reviewed IRS public and internal documents about the Future State, and interviewed relevant IRS officials. For more information, contact James R. McTigue, Jr., at 202-512-9110 or McTigueJ@gao.gov. Wed, 03 Oct 2018 00:00:00 -0400 https://www.gao.gov/products/GAO-18-698 What GAO Found Prior to February 9, 2018, when Congress enacted a statutory change requiring the Internal Revenue Service (IRS) to include penalties for Report of Foreign Bank and Financial Accounts (FBAR) violations in calculating whistleblower awards, IRS interpreted the whistleblower law to exclude these penalties from awards. However, GAO found that some whistleblowers provided information about FBAR noncompliance to IRS. In a sample of 132 whistleblower claims closed between January 2012 and July 2017, GAO found that IRS assessed FBAR penalties in 28 cases. It is unknown whether the whistleblower's information led IRS to take action in all of these cases. These penalties totaled approximately $10.7 million. Had they been included in whistleblower awards, total awards could have increased up to $3.2 million. Over 97 percent of the FBAR penalties collected from these 28 claims came from 10 cases with willful FBAR noncompliance, for which higher penalties apply. Report of Foreign Bank and Financial Accounts (FBAR) Penalties and Potential Whistleblower Awards for Selected IRS Whistleblower Claims Closed between January 1, 2012, and July 24, 2017 FBAR penalty type Number of claims FBAR penalty amount (dollars) Maximum potential whistleblower awarda (dollars) Willful penalty 10 10,485,847 3,145,754 Non-willful & negligent penalty 18 263,039 78,912 Total 28 10,748,886 3,224,666 Source: GAO analysis of IRS data. | GAO-18-698 a Maximum potential award is defined as 30 percent of the FBAR penalty amount. IRS forwards whistleblower allegations of FBAR noncompliance to its operating divisions for further examination. However, IRS Form 11369, a key form used for making award determinations, does not require examiners to include information about the usefulness of a whistleblower's information FBAR and other non-tax issues. After Congress enacted the statutory change, IRS suspended award determinations for 1 week, but resumed the program before updating the form or its instructions, or issuing internal guidance on new information required on the Form. As of June 28, 2018, IRS had not begun updating the Form 11369 or its instructions. The lack of clear instructions on the form for examiners to include information on FBAR and other non-tax enforcement collections may result in relevant information being excluded from whistleblower award decisions. IRS maintains FBAR penalty data in a standalone database. It uses these data for internal and external reporting and to make management decisions. Because of the change in statute, IRS will need these data for determining whistleblower awards. GAO found that IRS does not have sufficient quality controls to ensure the reliability of FBAR penalty data. For example, IRS staff enter data into the database manually but there are no secondary checks to make sure the data entered are accurate. Without additional controls for data reliability, IRS risks making decisions, including award determinations, with incomplete or inaccurate data. This is a public version of a sensitive report issued in August 2018. Information on the FBAR Database that IRS deemed to be sensitive has been omitted. Why GAO Did This Study Tax whistleblowers who report on the underpayment of taxes by others have helped IRS collect $3.6 billion since 2007, according to IRS. IRS pays qualifying whistleblowers between 15 and 30 percent of the proceeds it collects as a result of their information. However, until February 9, 2018, IRS did not pay whistleblowers for information that led to the collection of FBAR penalties. GAO was asked to review how often and to what extent whistleblower claims involve cases where FBAR penalties were also assessed. Among other objectives, this report (1) describes the extent to which FBAR penalties were included in whistleblower awards prior to the statutory change in definition of proceeds; (2) examines how IRS used whistleblower information on FBAR noncompliance, and how IRS responded to the statutory change in definition of proceeds; and (3) describes the purposes for which IRS collects and uses FBAR penalty data, and assesses controls for ensuring data reliability. GAO reviewed the files of 132 claims closed between January 1, 2012, and July 24, 2017, that likely included FBAR allegations; analyzed IRS data; reviewed relevant laws and regulations, and IRS policies, procedures and publications; and interviewed IRS officials. What GAO Recommends GAO recommends IRS update IRS Form 11369 and improve controls for the reliability of FBAR penalty data. IRS agreed with all of GAO's recommendations. For more information, contact James R. McTigue, Jr., at (202) 512-9110 or mctiguej@gao.gov. Fri, 28 Sep 2018 00:00:00 -0400 https://www.gao.gov/products/GAO-18-702T What GAO Found The Internal Revenue Service (IRS) has identified over 100 interactions requiring taxpayer authentication based on potential risks to IRS and individuals. IRS authenticates millions of taxpayers each year via telephone, online, in person, and correspondence to ensure that it is interacting with legitimate taxpayers. IRS's estimated costs to authenticate taxpayers vary by channel. Taxpayers Authenticated for Selected IRS Programs, 2017 Notes: Numbers are rounded to the nearest hundred and represent successful authentications. Cost information is rounded to the nearest dollar unless otherwise noted. Data are for IRS's Taxpayer Protection Program, Get Transcript, Identity Protection Personal Identification Number, and taxpayer online accounts. IRS has made progress on monitoring and improving authentication, including developing an authentication strategy with high-level strategic efforts. However, it has not prioritized the initiatives supporting its strategy nor identified the resources required to complete them, consistent with program management leading practices. Doing so would help IRS clarify relationships between its authentication efforts and articulate resource needs relative to expected benefits. Further, while IRS regularly assesses risks to and monitors its online authentication applications, it has not established equally rigorous internal controls for its telephone, in-person, and correspondence channels, including mechanisms to collect reliable, useful data to monitor authentication outcomes. As a result, IRS may not identify current or emerging threats to the tax system. IRS can further strengthen authentication to stay ahead of fraudsters. While IRS has taken preliminary steps to implement National Institute of Standards and Technology's (NIST) new guidance for secure digital authentication, it does not have clear plans and timelines to fully implement it by June 2018, as required by the Office of Management and Budget. As a result, IRS may not be positioned to address its most vulnerable authentication areas in a timely manner. Further, IRS lacks a comprehensive process to evaluate potential new authentication technologies. Industry representatives, financial institutions, and government officials told GAO that the best authentication approach relies on multiple strategies and sources of information, while giving taxpayers options for actively protecting their identity. Evaluating alternatives for taxpayer authentication will help IRS avoid missing opportunities for improving authentication. Why GAO Did This Study This testimony summarizes the information contained in GAO's June 2018 report, entitled Identity Theft: IRS Needs to Strengthen Taxpayer Authentication Efforts (GAO-18-418). For more information, contact James R. McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov.   Wed, 26 Sep 2018 00:00:00 -0400 https://www.gao.gov/products/GAO-18-659 What GAO Found The Internal Revenue Service (IRS) has a standard process to resolve a diverse array of taxpayer requests to appeal IRS proposed actions to assess additional taxes and penalties or collect taxes owed. The process begins with a taxpayer filing an appeal with the IRS examination or collection unit proposing the compliance action and ends with a decision from the Office of Appeals (Appeals). Appeals must have staff with expertise in all areas of tax law to review taxpayer appeals. However, its staffing levels declined by nearly 40 percent from 2,172 in fiscal year 2010 to 1,345 in fiscal year 2017. Appeals anticipates a continued risk of losing subject matter expertise given that about one-third of its workforce was eligible for retirement at the end of last fiscal year. Appeals monitors the number of days to resolve taxpayer appeals of examination, collection, and other tax disputes. However, IRS does not monitor the timeliness of transfers of all incoming appeal requests. GAO analysis showed that the time to transfer appeal requests from compliance units varied depending on the type of case (see table below). Collections workstreams —taxpayer appeals where IRS (1) filed a notice of federal tax lien or proposed a levy (collection due process) or (2) rejected an offer to settle a tax liability for less than owed (offer in compromise). The Internal Revenue Manual (IRM), IRS's primary source of instructions to staff, requires transfer to Appeals within 45 days for the largest collection workstream. With manager approval, collection staff may have an additional 45 days to work with the taxpayer. Nearly 90 percent of collection appeals closed in fiscal years 2014 to 2017 were transferred to Appeals within 90 days. Examination workstreams —taxpayer appeals of additional tax and penalty assessments IRS proposed based on its auditing of tax returns over a wide range of examination issues. IRS does not have an IRM requirement with guidelines and procedures for timely transfer for examination appeals. Accordingly, more than 20 percent of examination appeals closed in fiscal years 2014 to 2017 took more than 120 days to be transferred to Appeals. Delays in transferring appeals can result in increased interest costs for taxpayers. Average Days for Compliance Review by Workstream, Fiscal Years 2014-2017   Average number of days   Appeal workstream Compliance transfer to Appeals Total appeal resolution time Compliance share of total appeal resolution time Collection workstreams       Collection due process 59 252 23% Offer in compromise 61 240 26% Examination workstreams       Large case examination 108 637 17% Examination 105 337 31% Innocent spouse 30 249 12% Penalty appeals 100 220 45% Other workstream 39 101 38% Source: GAO analysis of Appeals Centralized Database System I GAO-18-659 Although Appeals maintains data on total appeal resolution time—from IRS receipt to Appeals' decision—such information is not readily transparent to IRS compliance units or the public. GAO analysis of IRS data found that, for fiscal years 2014 to 2017, about 15 percent of all appeal cases closed within 90 days (see figure below). About 85 percent of all cases were resolved within one year of when the taxpayer requested an appeal. Total resolution times differed by case type. However, without easily accessible information on resolution times, taxpayers are not well informed on what to expect when requesting an appeal. Total Appeal Resolution Time by Workstream, Fiscal Years 2014-2017 Although Appeals has customer a service standard and conducts a customer satisfaction survey, its standard and related performance results are not readily available to the public. Under the GPRA Modernization Act of 2010 (GPRAMA) and Executive Orders, the Department of the Treasury is responsible for customer service performance. Appeals conducts outreach to the tax practitioner community but does not regularly solicit input before policy changes. Without a mechanism, such as leveraging existing IRS advisory groups or alternatively developing its own advisory body, Appeals is missing an opportunity to obtain public input on policy changes affecting the taxpayer's experience in the appeal process. Why GAO Did This Study The Taxpayer Bill of Rights entitles taxpayers with the right to appeal a decision of the Internal Revenue Service (IRS) in an independent forum. GAO was asked to review this administrative appeal process within IRS. Among other things, this report (1) describes the IRS appeal process and staffing; (2) assesses how IRS monitors and manages the time to receive and resolve taxpayer appeals cases; and (3) evaluates the extent to which Appeals communicates customer service standards and assesses taxpayer satisfaction with the appeal process. GAO reviewed IRS guidance, publications, and documentation on the appeal process. GAO analyzed IRS data for administrative appeal cases closed in fiscal years 2014 through 2017 to compare appeal case resolution time for different types of cases. GAO interviewed IRS officials and a non-generalizable sample of external stakeholders, including attorneys and accountants, knowledgeable about the appeal process. Among other things, GAO compared IRS actions to federal standards for internal control and customer service. What GAO Recommends GAO makes seven recommendations to help enhance controls over and transparency of the IRS appeals process (several of the recommendations are detailed on the following page). GAO recommends, among other things, that the Commissioner of Internal Revenue Establish timeframes and monitoring procedures for timely transfer of taxpayer appeals requests by examination compliance units to the Office of Appeals. Direct the Office of Appeals to regularly report and share with each compliance unit the data on the time elapsed between when a taxpayer requests an appeal to when it is received in the Office of Appeals. Provide more transparency to taxpayers on historical average total appeal resolution times. GAO recommends, among other things, that the Secretary of the Treasury, consistent with its responsibilities under GPRAMA and Executive Orders for customer service, ensure that the Commissioner of Internal Revenue develops a mechanism to solicit and consider customer feedback on a regular basis on current and proposed IRS appeal policies and procedures. Treasury and IRS agreed with GAO's recommendations, and IRS said it will provide detailed corrective action plans. For more information, contact Jessica Lucas-Judy at (202) 512- 9110 or lucasjudyj@gao.gov. Fri, 21 Sep 2018 00:00:00 -0400 https://www.gao.gov/products/GAO-18-679 What GAO Found In 2018, there were 22 tax credit scholarship (TCS) programs authorized across 18 states, which provide state tax credits for individual and business donations that fund scholarships for students to attend elementary and secondary private schools (see figure). Tax Credit Scholarship Programs by State, Authorized as of January 2018 Note: Each state has one program, except for Pennsylvania and Arizona, which have two and four programs, respectively. Alaska and Hawaii are not included in the map because neither has a program. Florida authorized a second program which was set to go into effect on July 1, 2018 and that program is outside the scope of GAO's review. To determine the eligibility of students for these scholarships, most TCS programs use household income and have various approaches to determine scholarship award amounts. Income limits vary widely among programs, ranging from approximately $32,000 to $136,500 per year for students from a four-person household in school year 2017-2018. Programs have different requirements for how students can use their scholarships and different methods for calculating scholarship amounts. More than half of the programs (13 of 22) allow students to use their scholarship money for costs like transportation and books in addition to tuition, whereas the remaining programs (9 of 22) require scholarships funds to be used for tuition only. Average scholarship awards in school year 2016-2017 ranged from $500 to $5,468 per student among the 16 programs that published or provided GAO with such information. The effect of TCS donations on donors' tax liability depends on program characteristics and donors' financial circumstances. Specifically, half of the 22 programs allow eligible donors to claim 100 percent of their donations as state tax credits, meaning that for each dollar donated, state taxes owed are reduced by a dollar, up to any maximum set by the state. The remaining 11 programs allow donors to claim from 50 to 85 percent of their donations as state tax credits. Programs often specify a maximum tax credit that may be claimed each year by a donor, by all donors combined, or both. Individual donors may also reduce their federal tax liabilities through the federal deduction for charitable contributions, depending on their financial circumstances and applicable tax provisions. Why GAO Did This Study TCS programs offer state tax credits to individuals or businesses that donate to scholarship funds for students to attend private elementary and secondary schools. Through these credits, donors may reduce the amount they owe in state taxes by the full or a partial amount of their donation, depending on each program's rules. Designing a TCS program requires that many decisions be made, such as which students will be eligible to receive scholarships and the effect donations will have on donors' state taxes. GAO was asked to review key characteristics of TCS programs. This report examines (1) state TCS programs' policies regarding student eligibility and scholarship awards, and (2) how donating to a TCS program could affect the amount of state and federal taxes owed by donors. For both objectives, GAO reviewed publicly-available documents about student eligibility and tax provisions for all 22 programs authorized as of January 2018 and verified the accuracy of the information with state program officials. GAO did not conduct an independent legal review of state laws and regulations. GAO also interviewed federal officials and reviewed relevant federal guidance and policy documents. For more information, contact Jacqueline M. Nowicki at (617) 788-0580 or nowickij@gao.gov. Tue, 18 Sep 2018 00:00:00 -0400 https://www.gao.gov/products/GAO-18-637 What GAO Found GAO identified wide variation in development costs and several cost drivers for Low-Income Housing Tax Credit (LIHTC) projects completed in 2011–2015. Across 12 selected allocating agencies, median per-unit costs for new construction projects ranged from about $126,000 (Texas) to about $326,000 (California). Within individual allocating agencies, the variation in per-unit cost between the least and most expensive project ranged from as little as $104,000 per unit (Georgia) to as much as $606,000 per unit (California). After controlling for other characteristics, GAO estimates that larger projects (more than 100 units) cost about $85,000 less per unit than smaller projects (fewer than 37 units), consistent with economies of scale. projects in urban areas cost about $13,000 more per unit than projects in nonurban areas. projects for senior tenants—nearly one-third of all projects—cost about $7,000 less per unit than those for other tenants, potentially due to smaller unit sizes. Allocating agencies use measures such as cost and fee limits to oversee LIHTC development costs, but few agencies have requirements to help guard against misrepresentation of contractor costs (a known fraud risk). LIHTC program policies, while requiring high-level cost certifications from developers, do not directly address this risk because the certifications aggregate costs from multiple contractors. Some allocating agencies require detailed cost certifications from contractors, but many do not. Because the Internal Revenue Service (IRS) does not require such certifications for LIHTC projects, the vulnerability of the LIHTC program to this fraud risk is heightened. Weaknesses in data quality and federal oversight constrain assessment of LIHTC development costs and the efficiency and effectiveness of the program. GAO found inconsistencies in the types, definitions, and formats of cost-related variables 12 selected agencies collected. allocating agencies did not capture the full extent of a key indirect cost—a fee paid to syndicators acting as intermediaries between project developers and investors that IRS requires be collected. IRS does not require allocating agencies to collect and report cost-related data that would facilitate programwide assessment of development costs. Further, Congress has not designated any federal entity to maintain and analyze LIHTC cost data. Even without a designated federal entity, opportunities exist to advance oversight of development costs. In particular, greater standardization of cost data would lay a foundation for allocating agencies to enhance evaluation of cost drivers and cost-management practices. Why GAO Did This Study LIHTCs encourage private investment in low-income rental housing and have financed about 50,000 housing units annually since 2010.The LIHTC program is administered by IRS and credit allocating agencies (state or local housing finance agencies). The program has come under increased scrutiny following reports of high or fraudulent development costs for certain LIHTC projects. GAO was asked to review the cost-efficiency and effectiveness of the LIHTC program. This report examines (1) development costs for selected LIHTC projects and factors affecting costs, (2) allocating agencies' oversight of costs, and (3) factors limiting assessment of costs. GAO compiled and analyzed a database of costs and characteristics for 1,849 projects completed in 2011–2015 (the most recent data available when compiled) from 12 allocating agencies. The agencies span five regions and accounted for about half of the LIHTCs available for award in 2015. GAO also reviewed the most recent allocating plans and related documents for 57 allocating agencies and reviewed federal requirements. What GAO Recommends Congress should consider designating a federal agency to maintain and analyze LIHTC cost data. GAO also makes three recommendations to IRS to enhance collection and verification of cost data. IRS disagreed with the recommendations and said it lacked certain data collection authorities. GAO maintains the recommendations would strengthen program oversight and integrity and modified one of them to allow IRS greater flexibility in promoting data standards. For more information, contact Daniel Garcia-Diaz at (202) 512-8678 or garciadiazd@gao.gov. Tue, 18 Sep 2018 00:00:00 -0400 https://www.gao.gov/products/GAO-18-471 What GAO Found The Internal Revenue Service (IRS) generally improved its customer service during the 2018 filing season compared to prior years and managed multiple return processing challenges. For the third year in a row, IRS improved its telephone service by answering 80 percent of calls seeking live assistance and reducing wait times to about 5 minutes, as of the end of the 2018 filing season. This compares to 37.5 percent of calls answered with an average wait time of about 23 minutes during the 2015 filing season. Taxpayer use of online services also increased, including irs.gov and its online account tool for taxpayers to view their balances due. However, answering taxpayer correspondence remains a challenge—IRS was late responding to about 37 percent of correspondence as of the end of the 2018 filing season compared to about 26 percent at the same time in 2017. In 2015, GAO recommended that the Department of the Treasury (Treasury) include timeliness in handling taxpayer correspondence as part of its performance goals, but as of June 2018 Treasury had not done so. Overall, despite multiple challenges including mid-filing season changes to tax law and a computer system failure, IRS met its processing targets for individual tax returns. In 2018, IRS began taking steps to implement significant tax law changes from Public Law 115-97—commonly referred to by the President and many administrative documents as the Tax Cuts and Jobs Act. To implement the changes, IRS established a centralized office to coordinate implementation across IRS offices and divisions. IRS officials cited the broad scope and complexity of the changes—which will require extensive changes to tax forms, publications, and computer systems—along with the 1 year time frame as key implementation challenges. Although IRS has taken steps to address these challenges, such as developing a project planning tool, GAO found that the new coordination office did not initially fully include the Human Capital Office (HCO), the division responsible for managing the agency's workforce. Based on GAO's discussions with IRS officials, representatives from HCO now attend weekly coordination meetings discussing and planning the tax law changes. Involving HCO in these discussions will better position IRS to hire new employees and train them and the existing workforce. It will also help HCO better understand training requirements and staffing needs ahead of the 2019 filing season. IRS Steps to Implement the Tax Cuts and Jobs Act Why GAO Did This Study During the tax filing season, generally from January to mid-April, IRS processes over 100 million individual tax returns and provides telephone, correspondence, online, and in-person service to tens of millions of taxpayers. In 2018, IRS had to begin taking steps to implement major tax law changes passed in what is commonly referred to as the Tax Cuts and Jobs Act that affect both individuals and businesses. GAO was asked to review IRS's performance during the 2018 filing season and its efforts to implement the Tax Cuts and Jobs Act. GAO assessed IRS's (1) performance providing service to taxpayers and processing individual tax returns and (2) early efforts to implement the Tax Cuts and Jobs Act. GAO analyzed IRS documents and data and interviewed IRS officials. What GAO Recommends Because HCO is now attending the weekly meetings, GAO is not making a related recommendation. In addition, GAO believes that its 2015 recommendation to Treasury to include timeliness in handling correspondence as part of its performance goals, which Treasury neither agreed or disagreed with, is still valid. IRS generally concurred with GAO's findings but noted concerns with interpreting the percentage of correspondence considered “overage” (more than 45 days old). GAO clarified its report but notes that while the open inventory of overage correspondence at the end of the fiscal year is not representative of total overage items for the year, the overage rates are relatively consistent throughout the year. For more information, contact Jessica Lucas-Judy at (202) 512-9110 or lucasjudyj@gao.gov. Mon, 10 Sep 2018 00:00:00 -0400 https://www.gao.gov/products/GAO-18-548 What GAO Found Generally, employers are required to withhold income taxes on employee pay, but employees can exclude part of their pay from withholding. Currently, the amount of an employee's pay to be excluded from withholding is determined by multiplying the number of withholding allowances an employee claims by a set dollar value. Internal Revenue Service (IRS) guidance directs employees to claim withholding allowances that match their personal circumstances, such as any tax deductions they plan to take and tax credits they plan to claim when filing their tax returns. Employers then subtract excluded amounts from employees' pay; the rest of the employees' pay is subject to withholding. Prior to 2018, the withholding allowance value was prescribed by law. Public Law 115-97, enacted in December 2017, gave the Department of the Treasury (Treasury) authority to set the value of a withholding allowance for 2018. According to Treasury officials, Treasury's goals for choosing a withholding allowance value for 2018 included increasing accurate withholding (where taxpayers' withholding matches their tax liability) and not increasing instances of underwithholding or overwithholding (where taxpayers' withholding is less than or greater than their tax liability, respectively). Treasury assessed how alternative values for the 2018 withholding allowance might affect taxpayers' withholding and chose a value of $4,150, what the allowance value would have been under prior law. According to Treasury, it chose the $4,150 value because there was no other value it tested that better achieved Treasury's goals. Treasury and IRS officials described to GAO how the withholding tables were updated, both before 2018 and for 2018. According to the officials, before 2018, IRS adjusted items such as the withholding allowance value and income tax brackets for inflation, as prescribed by law and attained Treasury approval before they were published. Treasury officials stated that for 2018, after choosing the withholding allowance value, the process for updating the withholding tables followed the process for a typical year. Although Treasury and IRS described to GAO the process for updating the withholding tables, limited documentation of that process exists. For example, there is limited documentation of Treasury's and IRS's roles and responsibilities. According to IRS officials, IRS did not document the process to update the withholding tables because it was routine and straightforward. However, federal internal control standards require agencies to document responsibilities through policies. Documenting the process for updating withholding tables will help Treasury and IRS ensure that it is implemented consistently in the future, for example, if staff with experience in updating the tables were to leave Treasury and IRS. Treasury and IRS conducted outreach to encourage taxpayers to reassess their withholding and IRS monitored key metrics to assess the effectiveness of that outreach. IRS reported it (1) updated and created pages on its website; (2) used IRS email listservs and social media; and (3) shared withholding materials with partners including tax-related groups, large employers, employer associations, and organizations representing small businesses. To assess the effectiveness of its outreach, IRS monitored key metrics and asked for feedback from partners. Why GAO Did This Study Withholding helps the federal government collect taxes year-round and prevents some individual taxpayers from owing large amounts when they file their tax returns. Public Law 115-97—referred to by the President and many administrative documents as the Tax Cuts and Jobs Act—made a number of changes that affect individual taxpayers beginning in 2018 and gave Treasury authority to establish new rules governing federal tax withholding. IRS publishes withholding tables for employers to use to determine how much tax to withhold from an employee's pay. GAO was asked to review the revised federal tax withholding tables for 2018. This report examines (1) Treasury's and IRS's processes for developing federal tax withholding tables; and (2) the outreach Treasury and IRS conducted on withholding and how they assessed the effectiveness of that outreach. GAO reviewed Treasury and IRS documentation and analysis, interviewed Treasury and IRS officials, and compared federal standards of internal control to Treasury and IRS processes. GAO interviewed a nongeneralizable sample of selected organizations representing audiences IRS identified for outreach on withholding. What GAO Recommends GAO is recommending that Treasury and IRS document roles and responsibilities for updating the tax withholding tables. Treasury and IRS agreed with the recommendation. For more information, contact James R. McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov. Tue, 31 Jul 2018 00:00:00 -0400