Following the release of an independent vulnerability assessment in September 1993, the Congress and the Internal Revenue Service (IRS) became interested in identifying the nature of tax filing fraud and abuse problems. In 1993, the IRS acknowledged the problem of filing fraud and estimated tax fraud and abuse to be in the millions of dollars. Since February 1995, the General Accounting Office (GAO) has identified filing fraud as a high-risk area for the IRS.

To combat the return filing fraud and abuse, the IRS implemented the Revenue Protection Strategy (RPS). The RPS was comprised of individual initiatives to improve taxpayer compliance. These initiatives were developed and implemented by various IRS functional areas such as the Examination and the Criminal Investigation (CI) Divisions. Examples of these initiatives include prevention efforts focused on validating Social Security Numbers (SSN) and Taxpayer Identification Numbers (TIN), identifying fraudulent refund schemes for referral to CI field offices, and conducting suitability requirements for practitioners’ entry into the electronic filing system.

The overall objective of this review was to determine whether the IRS has an effective process to assess the impact of the RPS on improving taxpayer compliance.

In April 1994, the IRS established the Office of Refund Fraud (ORF), headed by the Director of Investigations within the CI Division, to set broad service-wide policy and respond to the challenges the IRS faced in the detection and prevention of tax filing refund fraud and abuse. The ORF established an RPS that focused efforts primarily on the Earned Income Credit (EIC) and electronic filing fraud and abuse. The ORF worked with various IRS functions as well as other governmental agencies, such as the Social Security Administration, to develop new ways for addressing filing fraud and abuse. There was a big emphasis on the RPS, and the ORF received executive support.

In 1997, the Congress appropriated over $700 million over a 5-year year period, beginning with Fiscal Year (FY) 1998, to fund initiatives to improve EIC compliance. In 1998, the IRS established the EIC Program Office to oversee and coordinate the IRS’ EIC program. The establishment of this appropriation and office caused a major shift in focus from the ORF to the new EIC Program Office. Despite the shift in focus, the ORF continued to address filing fraud and abuse issues, including the EIC.

As a result of the RPS, the IRS implemented additional checks in its return processing procedures to improve taxpayer compliance. For example, it: (1) expanded the number of up-front filters in the electronic filing system that are designed to screen electronically filed returns for problems, (2) employed math error procedures for missing or incorrect TINs, and (3) employed due diligence requirements for EIC preparers. These processing checks resulted in increased revenue protection by detecting tax filing schemes and abuse and by preventing the IRS from issuing many erroneous refunds.

However, the management of these initiatives has been fragmented. Each functional area has its own results measure, and there is no overall goal and performance measure to gauge the impact of these initiatives on reducing noncompliance. The individual initiatives alone are not enough to ensure the IRS is effectively addressing filing fraud and abuse. Additional efforts are needed to ensure goals and objectives are established and that actual performance can be compared against these goals and objectives to enable management to make decisions about the effectiveness of these initiatives, future outcomes, and how they can be best accomplished.

While the IRS has implemented individual revenue protection initiatives, it does not have a documented multi-year strategy with clearly defined goals and objectives. As increased emphasis has been placed on customer service and taxpayer education, compliance resources have been reallocated to support these activities. Since inception of the RPS, a significant number of RPS initiatives have focused on the EIC, and the IRS has concentrated its efforts on maintaining and refining the prior years’ initiatives. These factors have contributed to a complacence in the development of long-term goals and the design of a long-term strategy to achieve those goals.

Sound management practices require that program activities be planned over the long term and documented to improve program performance. Without a long-term strategy, the IRS risks not being able to direct well-organized and effective responses in areas of actual fraud and abuse.

From FYs 1996 to 1999, an RPS communication package was published to educate internal and external parties about each current year’s revenue protection initiatives and report the results of the past year in terms of the numbers of returns selected or adjustments to refunds. Although the IRS reported the results of each initiative in the communication packages, no evaluation of the impact of these initiatives on reducing noncompliance was performed. In the past, the IRS measured noncompliance through its Taxpayer Compliance Measurement Program (TCMP). The last TCMP involved Tax Year (TY) 1988 returns.

In an attempt to measure compliance within one segment of the taxpaying population, the IRS conducted compliance studies on taxpayers claiming the EIC. A TY 1994 study showed a 25.8 percent overclaim rate. A subsequent study was commissioned by the IRS on TY 1997 returns. This study, released August 2000, indicated that of the estimated $30.3 billion in EIC claims, approximately $7.8 billion should not have been paid.

In addition, the Congress included a provision in the IRS Restructuring and Reform Act of 1998 (RRA 98) requiring a joint study on noncompliance. The provision required the Secretary of the Treasury and the IRS Commissioner to complete the study within 1 year after enactment of the law (July 22, 1998). This study is in draft and will soon be released.

With the elimination of the TCMP, the IRS has not been able to measure noncompliance and, therefore, is unable to measure the impact of the individual initiatives on improving taxpayer compliance. IRS management informed us that changes every year with respect to laws, budget, resources, and abuse patterns make it difficult to measure the success of these initiatives. Furthermore, in its report Major Challenges and Program Risks: Department of the Treasury (GAO/OCG-99-14), the GAO identified system weaknesses, and the lack of adequate data as affecting the IRS’ ability to identify delinquencies for targeting compliance and enforcement initiatives.

To support results-oriented management, the Government Performance and Results Act of 1993 (GPRA) requires agencies to develop strategic plans, set performance goals, and report annually on actual performance as compared to those goals. The GAO stated during testimony before the Congress, "Regularly measuring progress in voluntary compliance is important to gauge whether the IRS is accomplishing a key aspect of its mission. Also, information about taxpayers to be generated as part of measuring voluntary compliance should help the IRS identify the characteristics of taxpayers who have difficulty understanding and meeting their tax responsibilities. The IRS must better understand the problems of noncompliant taxpayers and the sources of their problems so that it can develop better products and services to meet the needs of those taxpayers." Without an effective process for assessing the impact of the initiatives on compliance, the IRS will be unable to evaluate program accomplishments and analyze resource and budgetary allocation to reduce taxpayer noncompliance.

The Chief, CI, should develop a comprehensive RPS with established measurable goals and objectives to evaluate the effectiveness of the Strategy. Until the RPS is developed and implemented, the Chief, CI, should develop a process to measure the effectiveness of individual initiatives on reducing noncompliance. The RPS should also contain provisions for measuring the effect of its components on reducing noncompliance.

Management’s Response: The IRS recently implemented a Strategic Planning and Budgeting process that will produce a comprehensive compliance strategy. Strategic Program plans will provide direction, goals and objectives, and balanced performance measures. In addition, the IRS has established a multi-functional Compliance Council to oversee the Strategic Planning and Budgeting process. The new process places responsibility for the compliance strategy for each taxpayer segment with the corresponding operating division commissioner. Further, the IRS will look into measuring the effectiveness of their EIC outreach efforts. Management's comments have been incorporated into the report where appropriate, and the full text of their comments is included as Appendix IV.