New
Regulations Are Needed to Take Full Advantage of the Opportunities Offered by
Filing Large Corporate Income Tax Returns Electronically
May 2003
Reference Number: 2003-30-123
This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.
May
30, 2003
MEMORANDUM FOR
COMMISSIONER EVERSON
FROM: Gordon C. Milbourn III /s/ Gordon C.
Milbourn III
Acting Deputy Inspector General
for Audit
SUBJECT: Final Audit Report – New Regulations Are
Needed to Take Full Advantage of the Opportunities Offered by Filing Large
Corporate Income Tax Returns Electronically (Audit # 200230005)
This
report presents the results of our review of the planned electronic filing
system for large corporate income tax returns.
Our objectives were to assess (1) the benefits of implementing an
electronic filing system for large corporate taxpayers, (2) the Internal
Revenue Service’s (IRS) progress towards overcoming barriers to allow large
corporate taxpayers to file electronically, and (3) the implications to the IRS
if the system is not successfully implemented.
In summary, the IRS may
never be able to significantly improve its services and operations devoted to
large corporations unless it is able to take full advantage of the efficiencies
offered by electronic filing. Despite
positive organizational changes and reengineered business processes, without
electronic filing, a wide gap will likely remain between large corporate
taxpayer expectations for efficient, modern service and the IRS’ performance. While the planned electronic filing system
for corporations is poised to close this gap and deliver other more modest
benefits, such as reduced return processing and storage costs, a significant
barrier needs to be addressed. Specifically, there are no guarantees that the system
will be used once it is available, which could be a major barrier to achieving
the efficiencies offered by electronic filing.
To take advantage of electronic processing
efficiencies and maximize the return on the over $33 million investment in the
electronic filing system, we recommended that the Commissioner, Large and
Mid-Size Business (LMSB) Division, initiate the actions needed to require large
corporate taxpayers to file electronically.
To realize benefits similar to those in the LMSB Division, we
recommended that the Commissioner, Small Business/Self-Employed (SB/SE)
Division, perform a study to determine the costs and benefits of mandatory
electronic filing for SB/SE corporations.
Management’s
Response:
IRS
management agreed with the recommendations presented in the report. The Commissioner, LMSB Division, will
consult with the Office of Chief Counsel and the Department of the Treasury to
evaluate the feasibility and impact of legally mandating corporate electronic
filing. The SB/SE Division will study
the feasibility of mandating electronic filing of its corporate tax returns. This study will include an internal
cost/benefit analysis and external stakeholder input. Management did not agree with the outcome measures in Appendix IV
without an assessment of the impact of electronic filing on corporate returns
(Forms 1120 and 1120S), believing it is impossible to state the monetary
benefits until they have the opportunity to analyze a sample of corporate
electronic returns. Management’s
complete response to the draft report is included as Appendix V.
Copies
of this report are being sent to the IRS managers who are affected by the
recommendations. Please contact me at
(202) 622-6510 if you have questions or Richard Dagliolo, Acting Assistant
Inspector General for Audit (Small Business and Corporate Programs), at (631)
654-6028.
Electronic
Filing Is Poised to Reduce Lengthy Examinations and Deliver Other Benefits
Appendix I – Detailed Objectives, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Outcome Measures
Appendix V – Management’s Response to the Draft Report
The Congress recognized in the Internal Revenue Service (IRS) Restructuring and Reform Act of 1998 (RRA 98) that the IRS’ ability to effectively administer the nation’s tax system largely depends on how successful it is in converting to an electronic environment and reducing its reliance on paper. The RRA 98 provides that the IRS should develop and implement a plan to have at least 80 percent of all Federal tax returns filed electronically by 2007. The RRA 98 also stipulates that, to the extent possible, all returns prepared on a computer should be filed electronically by 2003. To support the agency-wide effort in meeting the RRA 98 and to meet its future business vision of greatly improving services and operations devoted to large corporations, the IRS’ Large and Mid-Size Business (LMSB) Division is spearheading the effort to implement an 1120 electronic filing (e-file) system.
The 1120 e-file system the IRS is developing will accept corporate income tax returns filed by both small and large corporations. In 2002, the IRS received approximately 5.5 million Forms 1120 and U.S. Income Tax Returns for S Corporations (Form 1120S). The IRS’ Small Business/Self-Employed (SB/SE) Division serves approximately 5.4 million corporations and the LMSB Division serves approximately 76,000 corporations that file Forms 1120 and Forms 1120S. While the approximately 76,000 large corporations served by the LMSB Division are minimal when compared to other return types, the over $33 million and 5-year time investment to achieve 1120 e-filing is pivotal to the LMSB Division’s strategy to address corporate compliance issues and reduce taxpayer burden. If implemented as envisioned, the 1120 e-file system will change the way the IRS receives, processes, stores, and retrieves information needed to provide customer service and will enhance the IRS’ ability to identify strategic compliance issues, trends, and problems for corporate taxpayers.
The 1120 e-file project is part of a much larger effort to modernize IRS computer systems. This larger effort, known as the Business Systems Modernization (BSM), receives funding from a special account established by the Congress called the Information Technology Investment Account. The 1120 e-file system funding decisions are not made by the LMSB Division; therefore, we did not include funding issues in the scope of our audit.
Like other BSM projects, the original 1120 e-file system requirements have changed to better meet the needs of the systems users and to take advantage of new technologies. The original blueprint called for modifying the system that the IRS currently uses to receive individual tax returns electronically so it would accept corporate returns. However, the MITRE Corporation recommended building a new system that could take advantage of Extensible Markup Language. As a result, the 1120 e-file system is now expected to cost in excess of $33 million by the time it is fully implemented in 2005. This is considerably more than the original cost estimate of $8.5 million and a year later than the originally planned implementation date. One of the advantages of the 1120 e-file development is that it will form the basis for the next generation of electronic returns, including the 1040 e-file system.
To meet our objectives, we relied on the IRS’ internal
management reports, but did not establish the reliability of the data in them
because extensive data validation tests were outside the scope of this
audit. Aside from this one exception,
our work was conducted in accordance with Government Auditing Standards
between November 2001 and November 2002 at the LMSB Division Headquarters in
Washington, D.C. Detailed information
on our audit objectives, scope, and methodology is presented in Appendix
I. Major contributors to the report are
listed in Appendix II.
Positive organizational changes and reengineered business processes have removed barriers that could hamper the success of the 1120 e-file project. According to the General Accounting Office (GAO) and others, before implementing information technology projects such as the 1120 e-file project, organizations almost always need to redesign or reengineer critical work processes. Otherwise, organizations risk encountering significant barriers to achieving desired improvements and wasting millions of dollars implementing information technology solutions that automate existing inefficient processes.
Although important work remains, the approach the IRS is taking to implement the 1120 e-file system follows the lead other organizations have used in successfully leveraging technology to gain significant long-term benefits. In response to the RRA 98 and taxpayer demands to address long-standing problems, the IRS began analyzing how to modernize operations by revamping business processes and practices. At issue for large corporate taxpayers were the problems of extensive time lags between filing a tax return and resolving tax issues, and the need to reduce the number of examinations that resulted in a “no change.”
Since the implementation of the RRA 98, many changes have been made to address these problems. In 2000, the IRS developed a vision that called for organizational, operational, and technological changes affecting the way it provides service and ensures compliance for large corporations. Simply put, the vision calls for:
· Making taxpayer interactions less difficult, less time-consuming, less expensive, and less contentious.
· Ensuring compliance and achieving increased efficiencies in examinations.
Organizationally, an important first step towards achieving the vision was establishing the LMSB Division and structuring it along five major industry segments. The change was intended to foster a closer working relationship between the Division and corporations to ensure timely examinations.
Since we reported on the successful “stand-up” of the LMSB Division in Fiscal Year (FY) 2000, Division officials have focused attention on assessing and making needed changes to critical work processes at the operational level. Several new strategies and initiatives are being developed, tested, and implemented to address decades-old problems, such as lengthy examinations and the high number of examinations that result in a no change.
For example, the Pre-Filing Agreement (PFA) Program allows taxpayers to request examination of specific issues relating to a tax return before it is filed. The PFA process can resolve some tax issues more effectively and efficiently than a post-filing examination because the taxpayer and the IRS have more timely access to the relevant records and personnel. The PFA can also shorten post-filing examinations because there will be fewer issues left to examine.
In another effort to improve compliance and reduce taxpayer burden, the LMSB Division is emphasizing that examiners focus on specific material issues, such as abusive tax shelters, rather than examining the whole tax return. Abusive corporate tax shelters cost the Federal Government billions of dollars in taxes and have been identified as the highest compliance risk.
The Division is also testing statistical models under the Discriminant Analysis System (DAS). The objective of the DAS project is to prioritize returns for examination based on the probability that an examination would detect tax liability changes. Table 1 provides a brief description of other new strategies and initiatives in the LMSB Division.
|
Strategies/Initiatives |
Description |
|---|---|
|
Issue Management Strategy |
A group of initiatives focused on early issue resolution. |
|
Compliance Risk Strategy |
A group of initiatives aimed at ensuring the most
productive returns are examined. |
|
Information Document Request Management Process |
A process for obtaining complete, timely information
during examinations. |
|
Fast Track Dispute Resolution Program |
An opportunity for taxpayers to appeal issues earlier in the dispute resolution process. |
|
Risk Analysis Process |
A process focused on shortening examinations by
targeting high-risk issues. |
|
Industry
Issue Resolution Program |
A program that resolves, other than through an examination, contentious issues affecting a large number of taxpayers. |
Source: Treasury Inspector
General for Tax Administration (TIGTA) analysis of IRS data.
Changed business practices by the LMSB Division have been well received by large corporate taxpayers. However, the overall problems of extensive time lags between filing a tax return and closing all the issues on an examination, and the need to reduce the number of examinations that result in a no change will likely remain a problem until a technical solution is implemented. The 1120 e-file system provides large corporate taxpayers and the IRS with the technical solution to address these decades-old problems.
According to IRS data and a December 2001 report prepared by a national consulting firm for the IRS, use of an 1120 e-file system could eventually reduce the estimated $13.6 million spent annually to process and store paper returns for both large and small corporations. The 1120 e-file system will also provide the IRS a more accurate return and thus reduce the need for correspondence between the IRS and corporate taxpayers to correct transcription and similar types of errors identified during processing. However, these are modest benefits compared to the opportunity electronic filing offers for reducing the time span from when returns are filed until issues are resolved and for minimizing the number of examinations that result in a no change.
Electronic filing has significant potential to reduce lengthy examination cycle time
The IRS began studying large corporate examinations in the 1970s and on the basis of these studies announced numerous changes to its examination processes in July 1990. Some changes were intended to substantially improve the timeliness of examinations. However, reducing the length of large corporate examinations remains a challenge despite the 1990 changes and the IRS’ long-standing policy of striving to complete examinations in a timely manner.
The LMSB Division divides corporate examinations into Industry Cases (IC) and Coordinated Industry Cases (CIC). The IC corporate examinations are generally assigned to one examiner while CIC corporate examinations are conducted by teams of examiners. In FY 2002, IC and CIC corporate examinations averaged 35 and 60 months, respectively, from the time the returns were filed until the cases were closed (this is known as cycle time). LMSB Division officials indicated that they would have liked to see IC cycle time be within 31 months and CIC cycle time be within 57 months. Likewise, corporate taxpayers have also expressed dissatisfaction with the examination process. In testimony before the IRS Oversight Board in January 2002, the president of the Tax Executives Institute (TEI) stated in part that:
Some of the
most significant burdens imposed on taxpayers relate to the requirement that
extensive records be maintained in respect of taxable years subject to
audit. Although taxpayers clearly have
a responsibility to maintain records to support positions taken on their tax
returns, much can be done to minimize the burden that currently exists
(especially for those taxpayers that have many years open for IRS
examinations). Record retention burdens
can best be reduced by increasing the currency of audits; if taxable years are
closed in a more timely manner, there will be less need to retain records
relating to those years.
One of the primary reasons IRS officials have not been more successful in reducing the length of large corporate examinations is the labor-intensive system used to process corporate returns. Before a return is available for examination, current procedures for processing paper corporate returns can take as long as 20 months.
Today, all large corporate returns are initially received and processed in the IRS Submission Processing Site in Ogden, Utah. Upon receipt in the Site, IRS personnel:
1. Separate the returns with payments attached from those with no payment attached and ensure checks are deposited.
2. Check each return for completeness, code for data entry, and control each return with a unique 14-digit number.
3. Enter selected data into the IRS computers so they can be posted to taxpayer accounts.
4. File the returns so they can be forwarded to the IRS Statistics of Income (SOI) Division upon request. Once in the SOI Division, all the information on all the returns is input into databases and eventually used by governmental and private entities for analytical purposes.
To determine about how long the IRS takes to process corporate income tax returns before they are available for examination, we matched two IRS databases. Our match extracted 16,088 records of large corporate returns that were filed with the IRS between Calendar Years 1999 and 2002. From the 16,088 records, we determined that, on average, it is taking the IRS approximately 7 months (209 days) to process large corporate returns. Table 2 summarizes our analysis of the time periods for processing large corporate income tax returns.
|
Corporate Asset Size |
Number of Returns Analyzed |
|
|
|
|---|---|---|---|---|
|
$10 to under |
9,005 |
57-539 |
205 |
185 |
|
$50 to under |
2,382 |
55-469 |
192 |
182 |
|
$100 to under |
2,088 |
65-559 |
207 |
185 |
|
$250 million |
2,613 |
65-608 |
241 |
225 |
|
Totals |
16,088 |
55-608 |
209 |
188 |
Source:
TIGTA analysis based on IRS data.
Because processing a return electronically eliminates all manual steps, once a return is filed it will be virtually ready for examination, thereby reducing cycle time by approximately 7 months.
Electronic filing provides complete return data to better target those returns and issues that present the greatest compliance risk
The IRS examines income tax returns to determine whether corporations and other taxpayers have voluntarily complied with tax laws and reported the proper amount of tax. To use its resources productively, the LMSB Division attempts to minimize the number of examinations that result in a no change by identifying and examining returns with the greatest likelihood of noncompliance. Minimizing no change examinations also avoids burdening compliant taxpayers who voluntarily reported the correct amount of tax.
Although LMSB Division officials have also been concerned about the number of no change IC corporate examinations, reducing the number of no change examinations remains a challenge.
In FY 2002, the LMSB Division completed 5,274 examinations of IC corporate returns and recommended approximately $1.62 billion in additional taxes. While the return on these examinations appears high (approximately $307,330 per return), the number of returns examined without any changes is still a concern. Table 3 shows that approximately 21 percent, or 1,105 of the 5,274 IC corporate returns examined, were no changes.
|
Corporate Asset Size |
|
|
Percentage of No-Changes |
Examiner No-Change Hours |
|---|---|---|---|---|
|
$10
to under $50 million |
2,199 |
618 |
28% |
81,480 |
|
$50 to under $100 million |
735 |
161 |
22% |
26,100 |
|
$100
to under $250 million |
968 |
156 |
16% |
25,260 |
|
$250 million and over |
1,372 |
170 |
12% |
33,620 |
|
Totals |
5,274 |
1,105 |
21% |
166,460 |
Source:
TIGTA analysis based on Examination Program Monitoring Report, Table 37,
for FY 2002.
Unlike the scoring systems used to select other corporate and individual returns, the IRS’ approach for selecting IC corporate returns for examination has traditionally relied more on the experience and judgment of examiners. As a result, it is more labor-intensive and more subjective, and has shown less consistency in minimizing the number of no change examinations.
LMSB Division officials have recognized that they need a
more structured system for identifying and selecting returns for examination. As discussed earlier, they have initiatives
underway to improve the return selection and examination processes. However, the success of these initiatives
depends on having timely access to complete return data, which has been
problematic for the LMSB Division.
Unlike electronic filing that will provide 100 percent of the return
data, currently the IRS computers capture only 151 items on the corporate
return. Large corporate returns,
however, can contain thousands of items and thousands of pages.
Using complete, up-to-date
electronic data to further minimize the number of examinations that result in a
no change by better targeting resources to the issues that pose the greatest
compliance risk could have a significant effect on tax revenues. To illustrate the
potential revenue effect, we analyzed how various percentage reductions in the
number of no change examinations might affect the amount of additional
recommended taxes over a 5-year period.
The estimates begin in FY 2005 when the 1120 e-file system is
expected to be fully implemented and are based on the average amount of
additional taxes that were recommended for each return examined in FY
2002.
Table 4 shows that when using 2002
constant dollars, the additional recommended taxes over the 5-year period ranged from $182.7 million
to $914 million. The analysis in Table 4 also shows that even a relatively
small 2 percent reduction in the return selection process allowed by electronic
filing will return the over $33 million investment in the system in about 1
year.
|
Percentage Reductions |
|||||
|---|---|---|---|---|---|
|
Fiscal Year |
|
|
|
|
|
|
2005 |
$34.8 million |
$69.6 million |
$104.4 million |
$139.3 million |
$174.1 million |
|
2006 |
$35.7 million |
$71.3 million |
$107 million |
$142.6 million |
$178.3 million |
|
2007 |
$36.5 million |
$73.1 million |
$109.6 million |
$146.1 million |
$182.7 million |
|
2008 |
$37.4 million |
$74.9 million |
$112.3 million |
$149.8 million |
$187.2 million |
|
2009 |
$38.3 million |
$76.7 million |
$115 million |
$153.4 million |
$191.7 million |
|
Totals |
$182.7 million |
$365.6 million |
$548.3 million |
$731.2 million |
$914 million |
Source:
Projections based on TIGTA analysis of Examination Program Monitoring,
Table 37, for FY 2002.
Despite positive organizational changes and reengineered business processes, without the 1120 e-file system, a wide gap will likely remain between large corporate taxpayer expectations for efficient, modern service and the IRS’ performance. While the 1120 e-file system is poised to close this gap and deliver other more modest benefits, such as reduced processing and storage costs, a significant barrier needs to be addressed. Specifically, there are no guarantees that the system will be used once it is available, which could be a major barrier to achieving the efficiencies offered by the 1120 e-file system.
Even though the project is being led by the LMSB Division, approximately 5.4 million taxpayers who filed Forms 1120 in Calendar Year 2002 are served by the SB/SE Division. Similar to the LMSB Division, the SB/SE Division could reduce taxpayer burden by receiving more accurate e-filed taxpayer returns and reducing taxpayer contacts to correct errors.
To remove the barrier of corporations not voluntarily using the new system, we believe that new Treasury Regulations need to be initiated under Internal Revenue Code Section (I.R.C. §) 6011 that would require all corporations to file electronically. The regulations would ensure maximum return on the over $33 million investment in the system while potentially avoiding an estimated $1 million in FY 2004 marketing expenditures to encourage voluntary participation in 1120 e-filing. To date, marketing campaigns designed to encourage voluntary participation in electronic filing have had mixed results in meeting expectations of officials in both the Canada’s Customs and Revenue Agency (CCRA) and the IRS.
In 1995, the CCRA began a 5-year effort to offer its estimated 1.5 million corporate taxpayers an option to file returns electronically. Canadian officials told us that their effort involved significant expense and a formal marketing strategy that included focus group testing and numerous communication products. However, only a few of the estimated 1.5 million Canadian corporations chose to use the system when it was implemented in 2000. Among the factors that hampered the popularity of the effort were advances in technology, including the growth of Internet-based transactions, and CCRA’s decision to offer it as an option instead of pursuing a legislative mandate that corporations file electronically. CCRA is currently redesigning their system so taxpayers can transmit their corporate tax returns through the Internet.
Similar to the Canadian effort, the IRS has also relied on marketing campaigns to promote and encourage electronic filing since it was first introduced as a filing option in the 1980s. For 2001, the IRS spent approximately $9 million on advertising to encourage individuals to file electronically. However, the number of individuals that choose to file electronically fell short of expectations. The GAO reported in its assessment of the IRS’ 2001 Filing Season that:
About 31 percent of all individual income tax returns
were filed electronically in 2001 – an increase of 13.7 percent compared to
2000. That rate of increase was below
IRS’ goal of 20 percent and lowest percentage increase since 1996. This declining growth rate occurred despite
various IRS efforts to identify and eliminate impediments to electronic filing
and reduces the likelihood that IRS will achieve its long-range goal of having 80
percent of individual income tax returns filed electronically by 2007.
For 2002, the IRS spent approximately $15 million on advertising to encourage individuals to file electronically. The IRS received about 46 million individual income tax returns electronically, or about 35 percent of all individual income tax returns filed during the 2002 Filing Season. However, the Electronic Tax Administration Advisory Committee (ETAAC) May 2002 report to the Congress noted that the trend of electronic filing is clearly towards lower growth rates. The ETAAC also noted that the IRS is not likely to achieve its electronic filing goals by 2007.
Although the I.R.C. prohibits the IRS from requiring individuals, estates and trusts to file electronically, there are no restrictions against requiring that corporate and other types of returns be filed electronically. To take advantage of electronic processing efficiencies, boost compliance, and increase revenue, there have been numerous regulatory changes affecting how and what needs to be reported by taxpayers on other types of returns. For example, there are regulations prescribing that partnerships with more than 100 partners must file electronically and for determining which information returns (e.g., Forms W-2 and 1099) must be filed with the IRS on electronic media. The use of electronic media enabled the IRS’ Underreporter Program to more efficiently match information returns with other tax returns, which led to the assessment of $1.9 billion in additional taxes in FY 2001 and higher levels of compliance.
1. The LMSB Commissioner should work with the IRS Chief Counsel and the Department of the Treasury’s Office of Tax Policy to determine whether requiring mandatory electronic filing for all LMSB corporations through regulations is appropriate. In the event that regulatory provisions cannot be used to make electronic filing mandatory, then these Offices should prepare a proposal for the Congress to enact legislation that requires all LMSB corporations file electronically.
Management’s Response: The IRS Commissioner stated that the IRS’ top priority is to successfully develop and implement a state-of-the-art corporate e-file system with e-services, which will enable corporate taxpayers to carry out transactions directly with the IRS over the Internet. The first offering of e-services will begin with the rollout of the corporate e-file system.
As the IRS continues to develop the e-file system, the LMSB Division will consult with the Office of Chief Counsel and the Department of the Treasury to evaluate the feasibility and impact of legally mandating corporate electronic filing.
2. The Commissioner, SB/SE Division, should complete a study as required under the Small Business Regulatory Enforcement Fairness Act of 1996 to determine which SB/SE corporations should be included in the mandatory 1120 e-file regulations and develop a plan to phase-in small corporate taxpayers.
Management’s Response: The SB/SE Division will study the feasibility of mandating electronic filing of its corporate tax returns. This study will include an internal cost/benefit analysis and external stakeholder input.
Appendix I
Our objectives were to assess (1) the benefits of implementing an electronic filing system for large corporate taxpayers, (2) the Internal Revenue Service’s (IRS) progress towards overcoming barriers to allowing large corporate taxpayers to file electronically, and (3) the implications to the IRS if the system is not successfully implemented. To meet our objectives, we relied on the IRS’ internal management reports. We did not establish the reliability of these data because extensive data validation tests were outside the scope of this audit and would have required extensive resources and time.
Except as noted above, our work was conducted in accordance with Government Auditing Standards. Our specific audit tests included the following:
I.
Consulted
with officials from the United States Securities and Exchange Commission and
Canada’s Customs and Revenue Agency and assessed whether their experiences with
information technology projects could offer insights that could be used to
better ensure the IRS’ efforts are successful.
II.
Used the
“best practices” outlined in the General Accounting Office’s (GAO) Executive
Guide: Improving Mission Performance
Through Strategic Information Management and Technology to assess how well
the IRS’ Business Systems Modernization effort has positioned the agency to
take advantage of the benefits offered by electronic filing.
III.
Analyzed
reports that were prepared either by or for the IRS, including a consulting
firm’s study, to identify the benefits, costs, risks, and barriers to
implementing the electronic filing system.
IV.
Participated
in meetings with internal and external stakeholders and reviewed the project’s
plan documentation to assess the progress made against the cost and schedule
developed for implementing the electronic filing system.
V.
Analyzed
the steps and amount of time taken to process 16,088 large corporate returns
that were filed with the IRS between Calendar Years 1999 and 2002 to determine
the impact electronic filing may have in reducing examination cycle time. We derived the 16,088 corporate tax returns
by matching the taxpayer identification numbers and tax periods from an extract
of the Statistics of Income Automated Return Tracking System (STARTS)
containing 49,556 records with the Fiscal Year (FY) 2002 Audit Information
Management System (AIMS). The STARTS
extract contained data about large corporate tax returns that the Statistics of
Income (SOI) Division sampled, processed, and released during FY 2002. The AIMS file provided the dates when tax
returns were filed with the IRS. By
analyzing the two databases we determined the time period to process 16,088
corporate tax returns from the date the tax returns were filed with the IRS
until the returns completed SOI processing.
VI.
Analyzed
results from 5,274 large corporate examinations that were closed in FY 2002 to
determine the impact electronic filing may have on reducing the number of
examinations that result in a no change. The 5,274 examinations represent the entire
universe of examinations for corporations with assets of $10 million or more as
reported on the Examination Program Monitoring Report, Table 37, for FY
2002.
VII.
Interviewed
IRS officials who are either involved with or affected by electronic filing to
obtain their opinions about the agency’s modernization efforts, including how
electronic filing will better meet the needs of large corporate taxpayers while
ensuring their compliance.
VIII.
Reviewed
information related to electronic filing, including reports issued by the GAO,
Treasury Inspector General for Tax Administration, and Electronic Tax
Administration Advisory Committee, to assess the implications to the IRS if
electronic filing does not meet expectations.
IX.
Reviewed
the Internal Revenue Code and Treasury Regulations to determine if there were
any restrictions against the IRS requiring large corporations to file electronically.
Appendix II
Major Contributors to This Report
Richard Dagliolo,
Acting Assistant Inspector General for Audit (Small Business and Corporate
Programs)
Philip Shropshire,
Director
Frank Dunleavy, Audit Manager
Lisa
Stoy, Senior Auditor
Richard
Turner, Senior Auditor
Appendix III
Deputy
Commissioner N:DC
Commissioner, Large
and Mid-Size Business Division LM
Commissioner, Small
Business/Self-Employed Division S
Commissioner, Wage
and Investment Division W
Deputy Commissioner, Large and Mid-Size Business Division LM
Acting Deputy Commissioner, Small Business/Self-Employed Division S
Deputy Commissioner, Wage and Investment Division W
Associate Commissioner, Business Systems Modernization M:B
Director, Strategy, Research, and Program Planning LM:SR
Director, Business Systems Planning LM:BSP
Director, Electronic Tax Administration W:ETA
Director, Development Services W:E:D
Chief Counsel CC
National Taxpayer Advocate TA
Director, Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk
Analysis N:ADC:R:O
Office of Management Controls N:CFO:AR:M
Audit Liaisons:
Commissioner N:C
Commissioner,
Large and Mid-Size Business Division LM
Commissioner,
Small Business/Self-Employed Division S
Commissioner,
Wage and Investment Division W
Associate
Commissioner, Business Systems Modernization
M:B
Appendix
IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to the Congress.
Type and Value of Outcome Measure:
· Taxpayer Burden – Potential; 5.5 million corporate taxpayer accounts affected annually (see page 1).
Methodology Used to Measure the Reported Benefit:
According to the Internal Revenue Service’s (IRS) Data Books, approximately 5.5 million corporate taxpayers filed U.S. Corporation Income Tax Returns (Forms 1120) and U.S. Income Tax Returns for S Corporations (Forms 1120S) in Calendar Year (CY) 2002. The benefits of mandating that these returns be filed electronically include greater assurances that (1) all tax returns are mathematically accurate, (2) all information on the returns is accurately posted to accounts in IRS records, and (3) all tax returns are available for examination sooner because of reduced processing time. More accuracy and faster processing means potentially fewer contacts with these taxpayers to correct errors and shorter cycle time if their returns are selected for examination, which have been identified as burden issues by either the IRS or its external stakeholders.
Type and Value of Outcome Measure:
· Increased Revenue – Potential; $182.7 million in additional recommended taxes over 5 years based on a 2 percent reduction in the no change rate for Industry Case (IC) Corporate Examinations (see page 6).
Methodology Used to Measure the Reported Benefit:
To estimate the increased revenue, we analyzed how various percentage reductions in the number of no change IC corporate examinations might affect the amount of additional recommended taxes over a 5-year period beginning in Fiscal Year (FY) 2005 when the system is expected to be in place. In estimating the additional taxes each year, we started with the average amount of additional taxes that were recommended for each IC corporate return examined in FY 2002 according the IRS’ Examination Program Monitoring, Table 37. Next, we multiplied the average FY 2002 recommended additional taxes by the Consumer Price Index inflation conversion factors to determine the value of 2002 tax dollars in 2005 through 2009. Our final step involved multiplying the converted FY 2002 recommended additional taxes by the number of returns associated with the various percentage reductions in the number of no change examinations.
We found that the amount of additional recommended taxes that could be generated over a 5-year period ranged from $182.8 million to $914 million, depending on whether a 2, 4, 6, 8, or 10 percent reduction in no change examinations is achieved. However, we conservatively limited the benefit to the additional recommended taxes that could be generated with a 2 percent reduction in the number of no change IC corporate examinations.
Type and Value of Outcome Measure:
Funds Put to Better Use – Potential; $1 million that may be spent encouraging corporations to voluntarily file electronically in FY 2004 (see page 12).
Methodology Used to Measure the Reported Benefit:
To estimate the potential funds that could be put to better use by requiring corporate taxpayers to file electronically, we allocated the approximately $18 million that the IRS is planning to spend for its FY 2004 e-file marketing activities among the individuals that have not filed electronically in the past, corporations, and other business taxpayers. In allocating the potential dollars that may be spent encouraging corporations to file electronically, we followed a five-step process.
First, we used the Calendar Year Return Projections for the United States and IRS Centers: 2001-2008 (Document 6186, December 2001) to determine the total number of individual (131,991,400) and business taxpayers (11,498,300) who filed tax returns with the IRS in CY 2002. Second, we calculated the percentage of business taxpayers among the population of total taxpayers (business and individual), excluding the number of individual taxpayers already filing electronically (47,384,913 or 35.9 percent). Third, we multiplied the $18 million budgeted for FY 2004 marketing activities by the percentage of business taxpayers (11.96 percent) and arrived at $2.1 million. We performed this calculation because the IRS provided us the total FY 2004 e-file marketing budget figure but was unable to further divide the total budget figure into marketing dollars allocated specifically to individual and business taxpayers. Fourth, we used the number of corporate taxpayers (5,495,800) from Document 6186 and calculated the percentage of corporate taxpayers among the population of business taxpayers. Fifth, we applied this percentage (47.80 percent) to the $2.1 million to determine the estimated $1 million that could be put to better use.
Appendix V
Management’s Response to
the Draft Report
The response
was removed due to its size. To see the
complete response, please go to the Adobe PDF version of the report on the
TIGTA Public Web Page.