Improvements Are Needed for Processing Income Tax Returns of
Controlled Corporate Groups
September 2004
Reference Number: 2004-30-170
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.
September
21, 2004
MEMORANDUM FOR
DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT
FROM: Gordon C. Milbourn III /s/ Gordon C.
Milbourn III
Acting Deputy Inspector General
for Audit
SUBJECT: Final Audit Report - Improvements Are
Needed for Processing Income Tax Returns of Controlled Corporate Groups (Audit
# 200330035)
This
report presents the results of our review to evaluate the Internal Revenue
Service’s (IRS) effectiveness in processing the income tax returns of
controlled corporate groups and to evaluate taxpayers’ and tax preparers’
understanding of the filing requirements for members of controlled corporate
groups.
Corporations
are classified as members of a controlled group if they are connected through
certain stock ownership. All corporate
members of a controlled group are treated as one single entity for tax
purposes. However, each member of the
group can file its own tax return rather than the group filing one consolidated
return. The controlled group of
corporations is subject to limitations on tax benefits to ensure the benefits
of the group do not amount to more than those to which one single corporation
would be entitled. A previous audit
report discussed how taxes on corporate tax returns for members of controlled
corporate groups were not being correctly assessed because of inadequate
processing controls and insufficient taxpayer information.
In
summary, the IRS has developed a computer program to identify returns
potentially liable for additional taxes and has established procedures for its
employees to correspond with taxpayers for missing or insufficient
information. These controls, if
functioning properly, would improve the processing of tax returns for
controlled corporate groups. However,
additional improvements to processing controls and instructions to return
preparers are needed.
From
a statistical sample of tax returns filed for controlled corporate groups, we
determined nearly 70 percent contained taxpayer or preparer errors, and 14
percent were processed incorrectly by IRS employees. We determined the IRS’ criteria for
identifying returns potentially liable for additional taxes was set too
high. This allowed controlled corporate
groups with individual taxable incomes below the level liable for additional
taxes, but with combined taxable incomes above that level, to go undetected if
they failed to pay the additional taxes.
We also determined the IRS required some information from members of
controlled corporate groups that was not necessary to process the tax returns
or to determine the correct tax liabilities.
We
recommended the Commissioners, Large and Mid-Size Business (LMSB) and Small
Business/Self-Employed (SB/SE) Divisions, consider requiring a standard form
for the apportionment plan which will meet the needs of their compliance
functions as well as the needs of their submission processing functions. The Director, Customer Account Services,
SB/SE Division, should stress during training the importance of following
existing processing instructions for tax returns of members of controlled
corporate groups and should consider requesting revisions to computer
programming to lower the threshold to systemically identify those returns
warranting manual review and verification.
Finally, the Division Counsels/Associate Chief Counsels (LMSB) and
(Corporate) working with the Director, Tax Forms and Publications, Wage and
Investment (W&I) Division, should evaluate the necessity for each item now
required in the apportionment plan and determine whether items can be
eliminated.
Management’s
Response:
The Commissioner, SB/SE Division, agreed
with our findings and is planning to implement several corrective actions and
to complete an analysis of the feasibility of implementing the other recommendations. The Commissioner, SB/SE Division, stated that
further review of our samples would be necessary before the IRS could comment
on our estimate that the recommendations in this report will provide over $5.93
million annually in potential increased revenue and over $448,000 annually in taxpayer
rights and entitlements.
Specifically,
the LMSB Division will work with the Chief Counsel, the SB/SE Division Compliance
function, and the W&I Division Tax Forms and Publications function to
review Treasury Regulation 1.1561-3(b) and determine the feasibility of
requiring a standard form to be filed annually for the apportionment plan. The Commissioner, SB/SE Division, noted that
employee training material will be clearly stated and that analysts will
participate in employee training to stress the importance of following the
training instructions and manually verifying the tax when processing controlled
corporate group returns. The Director,
Customer Account Services, SB/SE Division, will conduct a study of controlled
corporate groups to determine the feasibility of revising computer programming
to systemically identify returns potentially liable for additional tax. Results of the study will include a cost-benefit
analysis to determine the feasibility of lowering the threshold. Finally, the Associate Chief Counsel
(Corporate) will work with the LMSB Division, SB/SE Division Compliance
function, and W&I Division Tax Forms and Publications function to determine
information that is required with respect to controlled corporate group
consents and apportionment plans in light of the apportionment information the
IRS needs. Management’s complete
response to the draft report is included as Appendix V.
Copies
of this report are also being sent to the IRS managers affected by the report
recommendations. Please contact me at
(202) 622-6510 if you have questions or Philip Shropshire, Acting Assistant
Inspector General for Audit (Small Business and Corporate Programs), at (215)
516-2341.
Taxpayer Burden Could Be Reduced by Requiring Less Information on Apportionment Plans
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
Corporations are classified as members of a controlled group if they are connected through certain stock ownership. A parent-subsidiary controlled group consists of one or more chains of corporations connected through stock ownership with a common parent corporation. A brother-sister controlled group exists if five or fewer persons commonly own two or more corporations.
All corporate members of a controlled group are treated as
one single entity for tax purposes (i.e., only one set of graduated income tax
brackets and respective tax rates applies to the group’s total taxable
income). However, each member of the
group can file its own tax return rather than the group filing one consolidated
return. The controlled group of
corporations is subject to limitations on tax benefits to ensure the benefits
of the group do not amount to more than those to which one single corporation
would be entitled.
This review was performed during the period May 2003 through February 2004 through analysis and review of tax return information processed at the Ogden and Cincinnati Internal Revenue Service (IRS) Submission Processing Sites. The audit was conducted in accordance with Government Auditing Standards. Detailed information on our audit objectives, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
A previous audit report discussed how taxes on corporate tax returns for members of controlled corporate groups were not being correctly assessed because of inadequate processing controls and insufficient taxpayer information. As a result of that report, the IRS developed a computer program to identify returns with taxable income over a certain dollar threshold for verification of certain items such as the calculation of tax, the applicability of any additional tax, and the presence of necessary schedules. The IRS also established processing procedures for employees to correspond with taxpayers for missing or insufficient information on these returns.
These controls, if all functioning properly, would
improve the processing of tax returns for controlled corporate groups. However, additional improvements to
processing controls and instructions to taxpayers and preparers are needed.
Corporations are normally taxed at graduated rates that range from 15 percent to 35 percent. The tax brackets increase at taxable incomes over $50,000, $75,000, and $10 million. Any income exceeding $10 million is taxed at the maximum rate of 35 percent.
In addition, corporations with taxable incomes in excess of $100,000 and $15 million are subject to an additional 5 percent tax, not to exceed $11,750, and an additional 3 percent tax, not to exceed $100,000, respectively (see Table 1).
A controlled group of corporations filing separate returns is allowed only one set of graduated income tax brackets and respective tax rates that is applied to the group’s total taxable income. All members of the controlled corporate group must share the graduated tax bracket amounts equally unless all members elect otherwise. All members are also treated as one corporation for purposes of determining whether the additional taxes are applicable.
Table 1: Corporate Tax
Rate Schedule
|
Taxable Income |
Tax Rate |
Amount Subject to This Rate |
|---|---|---|
|
$0 - $50,000 |
15% |
$50,000 |
|
$50,001 - $75,000 |
25% |
$25,000 |
|
$75,001 - $10,000,000 |
34% |
$9,925,000 |
|
Over $10,000,000 |
35% |
Unlimited |
|
Additional Tax |
||
|
$100,001 - $335,000 |
5% |
$235,000 |
|
$15,000,001 - $18,333,333 |
3% |
$3,333,333 |
Source: Summarized from Instructions for U.S. Corporation Income Tax Returns (Forms 1120 and 1120-A).
Taxpayers indicate they are members of a controlled corporate group by marking a box on the tax computation schedule of the income tax return. If the corporate members elect to apportion the graduated tax brackets and/or additional tax amounts unequally, all members must consent to an apportionment plan and attach a signed copy of the plan to their corporate tax returns. The apportionment plan must be signed by an authorized person and include the name, address, Taxpayer Identification Number, tax year, amount apportioned, and IRS Submission Processing site at which the original apportionment plan is to be filed.
IRS employees are responsible for placing the proper codes (controlled corporate group codes) on the returns and accurately entering them and any taxpayer amounts into the computer system when taxpayers have marked the box. The IRS uses the information indicated by the taxpayer to calculate and assess income tax.
Taxpayers do not always properly file income tax returns for all corporate members of the group
Using a computer program, we identified 36,354 Forms 1120 filed in Calendar Year 2002 with net taxable income greater than $6,666 for which IRS records indicated the taxpayers filed as a member of a controlled corporate group. We reviewed a statistically valid sample of 73 of these returns and found nearly 70 percent had some taxpayer or preparer errors.
· Fifteen (20 percent) did not have an apportionment plan when it was required.
· Thirty-six (49 percent) contained inaccuracies because of errors in completing or apportioning the graduated tax bracket amounts, failing to determine the additional tax applicable to the controlled corporate group, or failing to provide all the information related to the apportionment plan.
A significant part of the IRS’ mission is to help taxpayers understand and meet their tax responsibilities. The instructions provided by the IRS for filing tax returns for controlled corporate groups were unclear and may have contributed to taxpayers’ errors. The instructions did not provide taxpayers with a clear explanation of a controlled corporate group or apportionment plan requirements but instead provided references to sections of the Internal Revenue Code. In addition, the IRS did not provide or require a standard tax form or schedule to document either a controlled corporate group’s tax computation or the apportionment of the graduated tax brackets among all members of a controlled corporate group.
Because of this, taxpayers did not prepare apportionment plans or used a wide variety of methods to document their tax calculations or apportionments. Their documentation often had incomplete information and contained errors. The taxpayers often failed to consider taxable income levels for all members of the group and overlooked the applicability of the additional taxes. Further, IRS regulations are ambiguous regarding whether a copy of the apportionment plan should be attached with the tax return each year.
Without properly prepared tax apportionment schedules, the IRS cannot correctly identify all members of a controlled corporate group or their respective taxable income levels and apportioned tax bracket amounts and cannot verify each member’s computed tax and additional tax. Processing of inaccurately prepared or incomplete returns can be delayed while IRS employees attempt to correct inaccuracies or obtain more information. If these returns are not corrected, the taxes paid by the corporations will not be correct. Eleven of the tax returns in our sample contained incorrect tax amounts. Based on the results of our sample, we estimate that controlled corporate groups inaccurately filed approximately 5,400 Tax Year 2002 tax returns, resulting in underpaid taxes of over $5.93 million and overpaid taxes of over $448,000.
IRS employees did not always properly process controlled corporate group income tax returns
Of the 73 tax returns included in our sample, 10 (14 percent) were incorrectly processed by the IRS.
The IRS has established controls to systemically identify controlled corporate group returns that are potentially liable for additional tax amounts. The controls include the computerized identification of any return from a controlled corporate group with taxable income over a certain dollar threshold for manual verification of tax computations by IRS employees and the requirement for any controlled corporate group with unequal apportionment of the tax brackets to include an apportionment plan with its return.
All 10 of the returns processed incorrectly had taxable income of more than the threshold and were subject to verification by IRS employees. However, IRS employees did not take the appropriate action to process these 10 returns. In these instances, taxpayers made errors or did not include all required information on their tax computation schedules or apportionment plans; however, IRS employees did not correct the errors or contact the taxpayers for the missing information or plans.
Possible causes for the IRS employee errors include:
· Employees encounter tax returns from members of controlled corporate groups much less often than other tax returns and may not be as familiar with the processing procedures.
· Employees can easily bypass the processing controls requiring validation of information on returns meeting the threshold criteria by taking no action and simply placing the return back into the processing stream.
The threshold for manual verification of
controlled corporate group returns allows errors to go undetected
The IRS’ computer program to automatically identify a tax return that may be liable for additional taxes is set at the specific threshold at which the entire controlled corporate group becomes liable for the additional taxes.
Since information to tie all the members of a controlled corporate group together is not entered into IRS computers, the only way to determine whether the group is liable for the additional tax or has properly filed all schedules is through manual review of the tax computation and apportionment plan for the group. The additional tax applies when the total taxable income of all the corporations in the controlled corporate group together reaches the threshold amount. Therefore, setting the criteria for manual verification of tax computations at that specific level allows controlled corporate groups whose individual members have taxable income of less than the threshold amount, but the total group taxable income is more than that amount, to omit paying the additional tax without their errors being detected by the IRS.
For our population of 36,354 tax returns for controlled corporate groups, we determined that over 60 percent would not be identified by themselves (without adding the taxable income of other members) as potentially liable for additional tax amounts and, therefore, would not be systemically identified during processing.
In our sample of 73 returns, 6 (8 percent) had taxable income below the threshold amount that, when combined with the taxable income of other members of the group, exceeded the threshold. In two of these six cases, the controlled corporate group did not pay the additional tax.
1.
The Commissioner,
Large and Mid-Size Business (LMSB) Division, and the Commissioner, Small
Business/Self-Employed (SB/SE) Division, should consider requiring a standard
form for the apportionment plan which will meet the needs of their compliance
functions as well as the needs of their submission processing functions. The Commissioners should coordinate with the
Director, Tax Forms and Publications, Wage and Investment (W&I) Division,
regarding the requirements of the form.
In addition, they should consider changing instructions to require a
copy of the apportionment plan form to be attached to the return each
year. This form should include
information required to process the return, including taxable income amounts and
apportionment of additional 5 percent or 3 percent tax amounts for all members
of the group.
Management’s Response: The LMSB Division will
work with the Chief Counsel, SB/SE Division Compliance function, and the W&I
Division Tax Forms and Publications function to review Treasury Regulation
1.1561-3(b) and determine the feasibility of requiring a standard form to be
filed annually for the apportionment plan, which will meet the needs of the
IRS’ compliance functions as well as the needs of its submission processing
functions. Additionally, the
Commissioners, LMSB and SB/SE Divisions, will coordinate the requirements of
the proposed form and necessary revisions to Form 1120 instructions with the Chief
Counsel and the Director, Tax Forms and Publications, W&I Division.
2.
The
Director, Customer Account Services, SB/SE Division, should stress during
training the importance of following existing processing instructions for
smaller volume business return programs.
This training should emphasize processing procedures and instructions
for controlled corporate group returns such as manual verification of tax (and
corresponding with taxpayers when necessary) and the impact these actions have
on the processing of returns.
Management’s Response: Customer Account
Services function analysts will coordinate with the course developers to ensure
the relevant section in the training material is clearly stated prior to
distribution to the field. In addition,
the analysts will participate in employee training to stress the importance of
following the training instructions and manually verifying the tax when processing
controlled corporate groups. Internal
Revenue Manual instructions will also be revised to simplify the steps in the
manual verification process.
3.
The Director, Customer
Account Services, SB/SE Division, should consider requesting revisions to
computer programming to lower the threshold to systemically identify returns
potentially liable for additional taxes and to identify returns without
properly filed apportionment plans.
Management’s Response: The Director,
Customer Account Services, SB/SE Division, will conduct a study of controlled
corporate groups to determine the feasibility of revising computer programming
to systemically identify returns potentially liable for additional tax. The study will thoroughly analyze a valid
sample of returns with a controlled corporate group 1 edited on returns and
filed during Tax Year 2005. Results of
the study will include a cost-benefit analysis to determine the feasibility of
lowering the threshold.
As discussed earlier, the apportionment plan for a
controlled corporate group must be signed by an authorized person and include
the name, address, Taxpayer Identification Number, tax year, amount
apportioned, and IRS Submission Processing site at which the original
apportionment plan is to be filed. Much
of this information is available elsewhere on the tax return or is not needed
to process the tax return.
It is important that tax returns contain all information
necessary to complete proper processing.
However, requiring unnecessary information results in additional
taxpayer burden. The IRS Office of
Taxpayer Burden Reduction has focused its efforts on reducing unnecessary
taxpayer burden, including current requirements that taxpayers provide the same
information more than one time, that taxpayers provide information not used by
the IRS, or that taxpayers provide information which gives only minimal
assistance in determining the accuracy of a return.
When determining what should be required on the
apportionment plan, the IRS did not take into consideration the availability of
the information already included with the return or limit the requested
information to that which is needed to process the return or determine the
correct tax liability.
Taxpayer burden is increased when taxpayers must provide
information that is already available to the IRS elsewhere or that is not
required for return processing.
4.
The Division Counsel/Associate Chief Counsel
(LMSB) and Associate Chief Counsel (Corporate), working with the Director, Tax
Forms and Publications, W&I Division, should evaluate
the necessity for each item now required in the apportionment plan and determine
whether items can be eliminated. They
should also provide input to the Commissioners, LMSB and SB/SE Divisions,
regarding the recommendation to require a copy of the apportionment plan to be
attached to the tax return of each member of the controlled corporate group
each year.
Management’s Response: The Associate
Chief Counsel (Corporate) will work with the Director, Strategy, Research, and
Program Planning, LMSB Division; the SB/SE Division Compliance function; and the
W&I Division Tax Forms and Publications function to determine information
that is required with respect to controlled corporate group member consents,
and apportionment plans, in light of the apportionment information the IRS
needs.
Appendix I
Detailed
Objectives, Scope, and Methodology
Our overall objectives were to evaluate the Internal Revenue Service’s (IRS) effectiveness in processing the income tax returns of controlled corporate groups and to evaluate taxpayers’ and tax preparers’ understanding of the filing requirements for members of controlled corporate groups. To accomplish our objectives, we:
I.
Determined whether the
IRS had an effective process in place to identify, control, and correct
processing problems related to income tax returns for controlled corporate
groups.
A.
Identified and
evaluated controls in place within the Processing Division of the IRS campuses.
1.
Obtained and reviewed the
Internal Revenue Manual (IRM) and local procedures used for identifying and
processing controlled corporate group returns.
2.
Obtained and reviewed
applicable letters, notices, error resolution error codes and explanations, and
math error taxpayer notice codes related to issues for controlled corporate
group returns.
3.
Determined whether
explanations and wording in letters and notices clearly and accurately
explained the error or issue to the taxpayer.
4.
Discussed with local
employees, managers, and analysts within the various processing functions any
concerns or problems they are experiencing with processing controlled corporate
group returns.
5.
Evaluated IRM
procedures, local procedures, and concerns or problems identified to determine
whether they are effective to accurately identify and process controlled
corporate group returns.
B.
Identified and
evaluated controls in place nationally to identify, control, and correct
processing-related issues and problems related to controlled corporate
groups.
1.
Determined whether
there were any national procedures, instructions, etc. (other than the IRM)
used by the operating divisions to identify and process controlled corporate
group returns.
2.
Reviewed applicable
web sites and other IRS documentation to identify issues or problems that
related to controlled corporate group returns.
3.
Determined whether tax
forms, publications, and applicable instructions given to taxpayers filing
controlled corporate group returns were accurate and provided sufficient
information to allow taxpayers to accurately file income tax returns.
4.
Reviewed the business
Functional Specification Package for all applicable U.S. Corporation Income Tax
Returns (Form 1120) processing to determine whether programming to process
controlled corporate group returns is accurate.
II.
Determined whether
corporation returns for members of controlled corporate groups were properly
processed and accurately filed.
A.
Determined whether the
IRS was properly processing and assessing the correct amount of tax on
corporation returns for members of controlled corporate groups.
1.
Identified from the
IRS Business Returns Transaction File (BRTF) 45,729 returns processed during
Calendar Year 2002 with a control group code 1, indicating they are a member of
a controlled corporate group. We
verified that all return information was accurate by comparing the data on 10
returns against information from the IRS’ records.
2.
Stratified the
population of 45,729 returns into 36,354 returns with net taxable income
greater than $6,666 (a potential income tax effect of at least $1,000 with a
tax rate of 15 percent). We reviewed a
statistical sample of 73 of these returns to determine whether the IRS computed
the correct income tax using the correct tax rate, taxable income and tax
computations were considered for all members of the controlled corporate group,
and the IRS accurately identified and corrected return errors. Our sample size was determined based on a 95
percent confidence level, an expected error rate of 25 percent, and a precision
of +/- 10 percent. A statistical sample was taken because we
wanted to estimate the number of returns the IRS inaccurately processed.
B.
Determined whether
taxpayers were properly filing returns and paying the correct amount of income
tax.
1.
Reviewed a statistical
sample of 73 of the 36,354 returns to determine whether taxpayers used the
correct income tax rate and computed the correct tax, problems existed in the
allocation of income tax brackets among all members of the controlled corporate
group, and taxable income and tax computations were considered for all members
of the controlled corporate group. Our
sample size was determined based on a 95 percent confidence level, an expected
error rate of 25 percent, and a precision of +/- 10 percent. A statistical sample
was taken because we wanted to estimate the number of returns with taxpayer
filing errors.
Appendix II
Major Contributors to This
Report
Philip
Shropshire, Acting Assistant Inspector General for Audit (Small Business and
Corporate Programs)
Richard J.
Dagliolo, Director
Kyle R. Andersen,
Audit Manager
Kyle D. Bambrough,
Lead Auditor
W. George Burleigh,
Senior Auditor
Layne
Powell, Information Technology Specialist
Appendix III
Commissioner C
Office of the
Commissioner – Attn: Chief of Staff C
Commissioner, Large
and Mid-Size Business Division SE:LM
Commissioner, Small
Business/Self-Employed Division SE:S
Commissioner, Wage
and Investment Division SE:W
Chief Counsel CC
Assistant Deputy
Commissioner for Services and Enforcement
SE
Deputy
Commissioner, Large and Mid-Size Business Division SE:LM
Deputy
Commissioner, Small Business/Self-Employed Division SE:S
Deputy
Commissioner, Wage and Investment Division
SE:W
Deputy Chief
Counsel (Operations) CC
Director,
Communications and Liaison, Small Business/Self-Employed Division SE:S:CL
Director, Customer
Account Services, Small Business/Self-Employed Division SE:S:CAS
Director, Strategy and Resources Management, Wage and Investment Division SE:W:S
Director, Strategy,
Research, and Program Planning, Large and Mid-Size Business Division SE:LM:SR
Director, Tax Forms
and Publications, Wage and Investment Division
SE:W:CAR:MP:T
Associate Chief
Counsel (Corporate) CC:CORP
Division
Counsel/Associate Chief Counsel (Large and Mid-Size Business) CC:LMSB
Field Director,
Submission Processing (
Field Director,
Submission Processing (
Staff Assistant,
Small Business/Self-Employed Division
SE:S
National Taxpayer Advocate TA
Director, Office of Legislative
Affairs CL:LA
Director, Office of Program Evaluation
and Risk Analysis RAS:O
Office of Management Controls OS:CFO:AR:M
Audit Liaisons:
Deputy
Commissioner for Services and Enforcement
SE
Chief
Counsel CC:PA:LPD:LU
Commissioner,
Large and Mid-Size Business Division
SE:LM
Commissioner,
Small Business/Self-Employed Division
SE:S:COM
Commissioner, Wage and Investment Division SE:W:S:PA
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:
· Increased Revenue – Potential; $5,934,666 annually ($29.67 million over 5 years) in additional taxes for 3,984 taxpayers (see page 2).
Methodology Used to Measure the Reported Benefit:
Selection of Sample -
We identified from the Internal
Revenue Service (IRS) Business Returns Transaction File (BRTF) 45,729 returns
processed during Calendar Year 2002 with a control group code 1, indicating
they are a member of a controlled corporate group. We then stratified our population of returns
identified into 36,354 returns with net taxable income greater than $6,666 (a
potential income tax effect of at least $1,000 with a tax rate of 15
percent). We selected a statistically
valid sample of 73 of these returns at a 95 percent confidence level, an
expected error rate of 25 percent, and a precision of +/- 10 percent. We
obtained tax returns and reviewed them to determine whether the IRS correctly
processed the returns and computed the correct income tax using the correct tax
rate and whether taxpayers correctly filed the returns and computed taxes at
the correct rate.
Sample Results –
We determined taxpayers incorrectly filed 8 of the 73 returns and underpaid income taxes by $11,917. The remaining returns were correctly filed, had no determinable tax effect, or had an overpayment of income taxes.
Projection of Sample Results –
$5,934,666 - Additional taxes to be assessed by the IRS annually. In our sample of 73 cases, we found that income taxes were underpaid by $11,917. Using the average dollar error of the sample, we estimate there was a total of $5,934,666 in underpaid income tax in our population of returns ($11,917 divided by 73, multiplied by the population of 36,354).
3,984 - Taxpayers filing incorrect returns. In our sample of 73 cases, we found that there were 8 returns incorrectly filed by taxpayers with underpayment of taxes. Using the same percentage of occurrence for our sample and population, we estimate that, in our population, there were 3,984 returns on which the taxpayers may be filing with an underpayment of taxes (8 divided by 73, multiplied by the population of 36,354).
Type and Value of Outcome Measure:
· Taxpayer Rights and Entitlements – Potential; $448,200 annually ($2.24 million over 5 years) in overpayment of taxes for 1,494 taxpayers (see page 2).
Methodology Used to Measure the Reported Benefit:
Selection of Sample -
See Selection of Sample on
previous page.
Sample Results –
We determined taxpayers incorrectly filed 3 of the 73 returns and overpaid income taxes by $900. The remaining returns were correctly filed, had no determinable tax effect, or had an underpayment of income taxes.
Projection of Sample Results –
$448,200 - Overpayment of taxes by taxpayers annually. In our sample of 73 cases, we found that income taxes were overpaid by $900. Using the average dollar error of the sample, we estimate there was a total of $448,200 in overpaid income tax in our population of returns ($900 divided by 73, multiplied by the population of 36,354).
1,494 - Taxpayers filing incorrect returns. In our sample of 73 cases, we found that there were 3 returns incorrectly filed by taxpayers with overpayment of taxes. Using the same percentage of occurrence for our sample and population, we estimate that, in our population, there were 1,494 returns on which the taxpayers may be filing with an overpayment of taxes (3 divided by 73, multiplied by the population of 36,354).
Appendix V
Management’s
Response to the Draft Report
The response was removed due to its
size. To see the response, please go to
the Adobe PDF version of the report on the TIGTA Public Web Page.