The Small Business/Self-Employed Division Has Made
Significant Changes to Enhance the Automated Substitute for Return Program, but
Opportunities Exist for Further Improvement
April 2005
Reference Number: 2005-30-073
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.
April
28, 2005
MEMORANDUM FOR
COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for
Audit
SUBJECT: Final Audit Report - The
Small Business/Self-Employed Division Has Made Significant Changes to Enhance
the Automated Substitute for Return Program, but Opportunities Exist for
Further Improvement
(Audit
# 200430003)
This
report presents the results of our review to determine
whether the Small Business/Self-Employed (SB/SE) Division Automated Substitute
for Return (ASFR) Program is effectively administered to achieve the desired
program results and promote taxpayer compliance with the tax laws. The ASFR Program focuses on high-income taxpayers who have
not filed individual income tax returns but appear to owe significant income
tax liabilities based on available Information Reporting Program
information. Internal Revenue Code (I.R.C.)
Section (§) 6020(b) provides the Internal
Revenue Service (IRS) with the authority to make a return for a nonfiling taxpayer
if the taxpayer appears to be liable for the return, the person required to
file the return does not file it, and attempts to secure the return fail. For Tax Year 2001, the IRS estimated the portion of the tax
gap attributable to the nonfiling of individual income tax returns was $28.1
billion.
In
summary, the SB/SE Division ASFR Program
is having an increasingly positive effect on closing a significant portion of
the nonfiling tax gap. For example, from
Fiscal Years (FY) 2002 through 2004, the number of ASFR Program returns with
tax assessments increased by 216 percent.
During the same period, the total net dollars assessed amount increased
by 101 percent, and the number of 30-day letters issued increased by 337 percent.
While the IRS has taken or
planned several important initiatives to increase the effectiveness of the
SB/SE Division ASFR Program and to improve the efficiency of the ASFR Program work
processes, we identified opportunities for
further improvement. One, the SB/SE Division does not have in
place for its ASFR Program an established measure that can be used to routinely
compare productivity from period to period.
Management information data showed the number of ASFR Program closures per
Full-Time Equivalent (FTE) had declined by 36 percent from FYs 2002 to 2004.
Two, opportunities exist to address
repeated filing noncompliance. Although
the ASFR Program is designed to bring nonfilers back into compliance with the
expectation they will file without IRS intervention in subsequent years, the
subsequent voluntary filing compliance rates for individual taxpayers that are
treated by the ASFR Program are not tracked and reported by the IRS. In addition, the limited use of backup
withholding does not encourage future voluntary filing compliance for those
nonfilers whose cases were unsuccessfully resolved by the ASFR Program.
Three,
the National Quality Review System (NQRS) data for the ASFR Program was
insufficient to provide management with reliable information for evaluating
overall program quality, detecting error trends, or identifying possible
systemic problems. In FY 2004, the ASFR
Program was expected to close about 141,000 cases. Yet, because ASFR Program cases did not represent a separate product line and were
included in the samples of completed work selected from various compliance
programs, only about 11 ASFR Program cases per month were
selected for quality review.
Finally,
the inventory of ASFR Program reconsideration cases that
were considered over-age ranged from 13 to 38 percent from March through
September 2004. Reconsideration cases are considered over-age if they
remain unresolved more than 45 days after they are received by the IRS. Many taxpayers contested ASFR Program assessments
by providing completed tax returns or other information to various IRS offices
throughout the country. As a result, more
than one-half of the 7,032 reconsideration cases received at the Brookhaven
Campus from other IRS offices during the last 7 months of FY 2004 were already over-age.
We recommended the Commissioner, SB/SE Division, establish measures to routinely gauge the productivity and efficiency of
ASFR Program operations; develop a tracking and reporting mechanism to measure the subsequent voluntary filing compliance
rates of the individual taxpayers treated by the ASFR Program; conduct a study to
determine the feasibility of expanding the use of backup withholding to
encourage future voluntary filing compliance, and if necessary, coordinate with
the Office of Chief Counsel to draft legislation to amend I.R.C. §
3406; separate the ASFR Program from
other compliance programs for purposes of NQRS sampling to provide a better
overall measure of program quality; provide guidance to all SB/SE Division collection offices that contribute to the over-age
ASFR Program reconsideration inventory, establish service level agreements with the offices
most responsible for routing delays to set guidelines for timely submission of
ASFR reconsideration returns, and examine whether systemic solutions could be
developed to reduce the percentage of over-age reconsideration inventory.
Management’s Response: The Commissioner, SB/SE Division, concurred
with the recommendations. The
Commissioner, SB/SE Division, will review the current performance measures and
determine the potential for establishing additional measures that gauge program
productivity. The Commissioner, SB/SE
Division, also agreed that changing taxpayer behavior is a key component and
will take a subsequent look at voluntary compliance rates of individuals
treated in the ASFR Program for the purpose of developing other strategies for
dealing with nonfilers. In addition, the
Commissioner, SB/SE Division, has established for FY 2005, separate workgroup
codes, separate weighted reports, and a separate sample available for
review. In FY 2007, the ASFR Program
will be developed as a Specialized Product Review Group on the NQRS. The Commissioner, SB/SE Division, will also revisit
the procedures and develop processes for monitoring and handling ASFR Program cases
to reduce the percentage of over-age reconsideration inventory.
While the Commissioner, SB/SE Division, agreed to explore the feasibility
of the revision/expansion of the backup withholding definition to include
nonwage income, review the options, and proceed in the best interest of sound
tax administration, the Commissioner disagreed with the outcome measure. The Commissioner, SB/SE Division, is
uncertain whether the potential increase of $45 million in revenue could be
realized over 5 years from an increase in backup withholding, as revenue is
already collected from backup withholding on cases meeting criteria. Further, the Commissioner, SB/SE Division,
stated the intent of the ASFR Program is to encourage taxpayers to file
outstanding returns or determine whether a tax liability exists, rather than to
raise revenue. Management’s complete
response to the draft report is included as Appendix V.
Office of
Audit Comment: While we are
encouraged the Commissioner, SB/SE Division, will explore the feasibility of revising/expanding
backup withholding treatment, we disagree that additional revenue could not be
realized from an expanded application of backup withholding. The ASFR Program is a critical tool used to combat
tax noncompliance, a top priority for the IRS.
Applying backup withholding treatment to all nonwage income sources that
form the basis for the nonfiling condition worked by the ASFR Program would
increase revenue and deter noncompliance, allowing for earlier intervention and
a reduction of subsequent enforcement actions.
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.
Program Effectiveness Measures Show
Improvement
Productivity and Efficiency Measures Are Needed
Opportunities Exist to Address Repeated Filing Noncompliance
Limited Quality Assurance Data Are Available on Closed Case Work
Over-age Reconsideration Case Inventory Has Been Reduced but Remains at a High Level
Appendix
I – Detailed Objective, 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
The individual
nonfiling population has been growing at nearly twice the rate of the
individual filing population. For example, between TYs 1994 and 2001,
there was a 65 percent increase in the number of individual accounts with no
return filed while the filing population increased only 33 percent. Because the IRS does not have the resources
to address every identified case of potential taxpayer noncompliance, case
creation criteria have been established to prioritize the universe of
identified nonfilers and the type(s) of compliance action to be taken on each
case. The IRS generally works those nonfiler cases
that are judged to have the best potential to result in significant net taxes
due.
Internal Revenue Code (I.R.C.) Section (§) 6020(b) provides the IRS with the authority to make a return for a nonfiling
taxpayer if the taxpayer appears to be liable for the return, the person
required to file the return does not file it, and attempts to secure the return
fail. For nonfiled individual income tax
returns, the IRS uses this
authority in its Automated Substitute for Return (ASFR) Program. The ASFR Program focuses on high-income taxpayers
who have not filed individual income tax returns but appear to owe significant
income tax liabilities based on available Information Reporting Program (IRP) information.
The ASFR Program is an automated deficiency
assessment process which generates a notice of proposed assessment (30-day
letter) based on the IRP data. Taxpayers
may respond in one of several ways.
First, a taxpayer could respond by filing a tax return. Second, a taxpayer could reply with an
explanation about why he or she is not liable to file a tax return. Third, a taxpayer could agree to the
assessment as proposed. Finally, a taxpayer
could reply with information different from that used to compute the proposed
assessment, based on changes to filing status, dependents, credits, and
deductions. When a taxpayer does not satisfactorily respond to the 30-day
letter, the IRS confirms that the taxpayer receives mail at the address of
record and issues a Statutory Notice of Deficiency (90-day letter) as
authorized by I.R.C. § 6212. The
taxpayer may respond as above for the 30-day letter or file a petition in Tax
Court to contest the proposed assessment.
If the taxpayer does not satisfactorily respond and does not petition the
Tax Court, the deficiency is assessed, and the taxpayer is billed.
The scope of this review was limited to the ASFR Program
administered by the SB/SE Division. The review
was performed during the period March through October 2004 at the SB/SE Division
Headquarters office in New Carrollton, Maryland, and at the SB/SE Division
consolidated ASFR Program site at the Brookhaven Campus in
Several key performance effectiveness measures show the
SB/SE Division ASFR Program is having an increasingly positive effect on
closing a significant portion of the nonfiling tax gap. As shown in Figure 1, for example, the number
of ASFR Program returns with tax assessments increased by 216 percent from
Fiscal Years (FY) 2002 through 2004. During
the same 3-year period, the number of noncompliant taxpayers who were affected by
an ASFR Program enforcement action increased by 224 percent.
Figure 1: Selected ASFR Program Effectiveness Measures FYs 2002-2004, SB/SE Division
Figure 1 was removed due to its size. To see Figure 1, please go to the Adobe PDF
version of the report on the TIGTA Public Web Page.
Figure 2 shows the total net dollars assessed amount, which considers assessments for taxes, penalties, interest, and any prepaid credits, increased by 101 percent from FYs 2002 to 2004.
Figure 2: ASFR
Program Monetary Performance Measure FYs 2002-2004, SB/SE Division
Figure 2 was removed due to its size. To see Figure 2, please go to the Adobe PDF
version of the report on the TIGTA Public Web Page.
Various work activity measures for the SB/SE Division ASFR Program
also show important increases from FYs 2002 through 2004. As shown in Figure 3, the number of 30-day
letters issued, which is the ASFR Program’s first contact with noncompliant
taxpayers, increased by 337 percent, and the number of Full-Time Equivalents (FTE)
applied to ASFR Program cases increased by 178 percent. In addition, Figure 3 shows the number of ASFR
Program reconsideration case receipts, which involve taxpayer-initiated contact
with the IRS after the ASFR Program case has been closed, declined by 13
percent. Reconsideration cases provide taxpayers with an opportunity to file a
tax return after an ASFR Program default
assessment has been made. To the
extent the number of reconsideration cases can be reduced, resources are
available to work additional ASFR Program cases. During this 3-year period, the number of FTEs
applied by the SB/SE Division to ASFR Program reconsideration cases decreased by
19 percent.
Figure 3: Selected
ASFR Program Work Activity Measures
FYs 2002-2004, SB/SE Division
|
Activity |
FY 2002 |
FY 2003 |
FY 2004 |
|
Number of 30-Day
Letters Issued |
74,446 |
161,548 |
325,276 |
|
FTEs Applied to |
53.9 |
104.2 |
149.6 |
|
ASFR Program Reconsideration
Case Receipts |
25,816 |
15,674 |
22,593 |
|
FTEs Applied to ASFR Program
Reconsideration Cases |
38.8 |
25.2 |
31.5 |
Source: SB/SE Division management information reports.
New initiatives have been implemented or planned to improve the ASFR Program
During the past 3 years, the IRS has taken or planned several important organizational and procedural initiatives to increase the effectiveness of the SB/SE Division ASFR Program and to improve the efficiency of the ASFR Program work processes.
· Schedule K-1 cases – Taxpayers who received income from flow-through entities, such as partnerships and Subchapter S corporations, were first included in the SB/SE Division’s nonfiler selection codes for TY 2001. If unresolved, these cases are designated for ASFR Program treatment. This was a significant expansion of the potential inventory for the SB/SE Division ASFR Program because, for TY 2001, there were over 2.1 million partnerships with a total of more than 14.2 million partners and almost 3 million Subchapter S corporations that had a total of nearly 5.4 million shareholders.
· Nonemployee compensation cases – Nonfiler cases involving self-employed individuals with nonemployee compensation were added to the ASFR Program in May 2003. This was another important expansion of the ASFR Program for the SB/SE Division because, historically, tax compliance among independent contractors who earn nonemployee compensation has been significantly lower than that of wage earners whose taxes are withheld by their employers.
· Increased funding – For FY 2004, the funding for the SB/SE Division’s ASFR Program was increased by 66 positions. For FY 2005, an additional 37 FTEs are planned, although the uncertainty of the IRS budget for FY 2005 could prevent this from occurring. For FY 2006, the IRS is planning for an additional 65 FTEs for the SB/SE Division ASFR Program.
· Consolidation of the ASFR Program campus sites – In January 2004, the ASFR Program work processes were consolidated at the Brookhaven Campus from the SB/SE Division’s four other campus locations. This consolidation was expected to improve the efficiency of the ASFR Program operations and improve customer satisfaction through easier and more personalized access.
· Refund Hold Program cases – In January 2004, refund hold cases were added to the ASFR Program and made the top work priority. Prior to that time, the Automated Collection System (ACS) function worked most Refund Hold Program cases; however, its effectiveness was limited because the ACS function did not have the authority to make Substitute for Return assessments. The Refund Hold Program delays issuing an income tax refund while the IRS investigates a return delinquency on another tax year. The primary reason for holding a refund is the IRS believes there will be a balance due on the delinquent return when filed and the refund will be applied to the liability. Internal controls are in place in the ASFR Program to assure refund credits are transferred to the nonfiled tax periods. Also, a systemic change is planned to automatically move the refund credits to the nonfiled tax periods at the time the 90-day letter is issued to the taxpayer.
· Postal tracer checks – Redundant postal tracer checks were eliminated from the ASFR Program work processes in March 2004. This action was designed to reduce ASFR Program case processing time and eliminate the number of erroneous “unable to locate” ASFR Program dispositions.
· Power-of-Attorney (POA) checks – A programming change was requested in May 2004 to systemically provide POA information prior to mailing the 30-day and 90-day letters. This programming change, which is expected to be operational by March 2005, will free the ASFR Program tax examiners from time-consuming manual research to locate the POAs authorized to receive copies of the 30-day and 90-day letters.
· Delinquent account checks – Another programming change was requested in May 2004 to check for the presence of a delinquent account for the same taxpayer. When identified, the potential ASFR Program case will be automatically transferred to the ACS function rather than being shown as a failed error condition on the ASFR Program’s weekly error listing. This change is scheduled to be operational in March 2005.
· Systemic ASFR Program closures – A third programming change, requested in May 2004, will systemically close a case off of the ASFR Program system if the weekly update shows the ASFR Program Taxpayer Delinquency Investigation (TDI) was closed (e.g., the taxpayer filed the return) prior to issuance of the 30-day letter. This change is also expected to be operational in March 2005.
· Predictive dialer – The IRS plans to use a predictive dialer in working ASFR Program cases in 2005. This technology enhancement has the potential to substantially improve ASFR Program effectiveness and efficiency. The ASFR Program has traditionally communicated with taxpayers through written correspondence. During the last 2 quarters of FY 1998, the IRS tested the effectiveness of telephonically contacting taxpayers during the 30-day and 90-day letter process. The test data showed a 40 percent taxpayer response rate compared to 23 percent in FY 1997, 26 percent in FY 1996, and 31 percent in FY 1995 when telephone contact was not used. The test data also showed a 33 percent return-secured rate compared to 13 percent in FY 1997, 10 percent in FY 1996, and 5 percent in FY 1995.
The existence of productivity and efficiency measures ensures compliance with the Government Accountability Office’s Standards for Internal Control in the Federal Government that requires agencies to establish and monitor performance measures and indicators. The SB/SE Division does not have in place for its ASFR Program an established measure that can be used to compare productivity from period to period. While ad hoc studies can be made to determine the levels of productivity, IRS management advised us there was a reluctance to establish a permanent productivity measure because of the fear that these measures could be misused and possibly violate the IRS Restructuring and Reform Act of 1998.
However, without sufficient measures to analyze business results, management does not have a clear picture of the effectiveness of the ASFR Program. Earlier in this report, we cited positive increases in the number of ASFR Program returns with assessments, number of taxpayers affected, net dollars assessed, etc. However, further analysis to evaluate ASFR Program productivity and effectiveness shows the improvements may not be quite so positive. For example, we analyzed the number of ASFR Program closures with assessments per FTE (i.e., the labor cost), the number of ASFR Program reconsideration closures per FTE, and the number of ASFR Program closures per FTE. While the number of ASFR Program returns assessed per FTE has increased, the other measures have declined from FYs 2002 to 2004.
Figure 4 shows the number of ASFR Program returns assessed
per FTE in FY 2004 increased 14 percent in comparison to FY 2002, and the
number of ASFR Program reconsiderations closed per FTE decreased by 26 percent.
Figure 4: Selected ASFR Program Productivity Measures FYs
2002-2004, SB/SE Division
Figure 4 was removed due to its size. To see Figure 4, please go to the Adobe PDF
version of the report on the TIGTA Public Web Page.
Similarly, Figure 5 shows that the number of ASFR Program closures per FTE in FY 2004 declined by 36 percent from FY 2002 levels.
Figure 5: ASFR Program
Closures per FTE FYs 2002-2004, SB/SE Division
Figure 5 was removed due to its size. To see Figure 5, please go to the Adobe PDF
version of the report on the TIGTA Public Web Page.
According to IRS management, several factors contributed to the decline in productivity in FY 2004:
· In preparation for the ASFR Program consolidation in January 2004, the 4 campuses that discontinued ASFR Program processing ceased to mail 30-day letters to taxpayers after March 2003, to minimize taxpayer burden in responding to multiple IRS locations.
· The ASFR Program computer system was down from about December 9, 2003, until February 9, 2004, due to the Taxpayer Information File (TIF) consolidation and the consolidation of all of the SB/SE Division ASFR Program activities at the Brookhaven Campus.
· The consolidation of the ASFR Program at one site in January 2004 required significant time in training new employees.
The Commissioner, SB/SE Division, should:
1. Establish measures to provide management with the means to routinely gauge the productivity and efficiency of ASFR Program operations and to effectively assess the impact of changes to ASFR Program policy or work processes.
Management’s Response: The Commissioner, SB/SE Division, will review
the current performance measures and determine the potential for establishing
additional measures that gauge program productivity.
The success of
the
The ASFR Program lacks a measure of effectiveness in promoting subsequent voluntary compliance
The ASFR Program is designed to bring nonfilers back into compliance with the expectation that they will file without IRS intervention in subsequent years. However, the subsequent voluntary filing compliance rates for individuals that are treated by the ASFR Program, a key and essential measure of the long-term success of the ASFR Program, is not tracked and reported by the IRS. As a result, the IRS is unable to evaluate whether the ASFR Program goal to promote voluntary filing compliance is being achieved.
In 2003, the IRS completed a study that showed the subsequent voluntary filing compliance by individuals treated by the ASFR Program for TYs 1996 and 1997 averaged 41 percent for the first year and 37 percent for the second year following the disposition of the ASFR Program case. The study concluded that, if an individual does file subsequent to ASFR Program treatment, it appears that he or she continues to file for multiple years. However, the voluntary filing rate does decline in the subsequent years.
For FY 2004, the SB/SE Division ASFR Program resulted in net tax assessments of more than $1.509 billion. If the same 41 percent subsequent year filing compliance rate identified by the IRS study continues to exist, the IRS can expect to voluntarily collect approximately $619 million from the taxpayers that were treated by the SB/SE Division ASFR Program in FY 2004. This leaves approximately 59 percent, or $890 million, that may not be voluntarily filed with and paid to the IRS.
Backup withholding could be expanded to reduce repeated filing noncompliance
The tax laws provide for backup
withholding in certain circumstances.
Backup withholding may be imposed, for example, when taxpayers underreport
their interest or dividend income or failed to file a tax return reporting such
income when required. Once identified by the IRS as potential
subjects to backup withholding, taxpayers who underreport their interest or
dividend income are sent several notices asking that the problem be
corrected. The final notice informs the taxpayers
they are now subject to backup withholding and the IRS is notifying the payors to
begin withholding (at a rate of 28 percent).
However, the issuance of the ASFR Program’s initial contact letter requesting a filed return from the taxpayer suspends backup withholding treatment. Generally, backup withholding treatment remains suspended until an assessment with a significant dollar amount is made. When a taxpayer responds to ASFR Program contact by submitting a filed return, an assessment can be made using the information from the return. Often, though, the taxpayer does not respond to ASFR Program contacts and remains noncompliant. In such instances, a default assessment is made based on income information available from third parties.
In May 2004, the IRS transferred responsibility for its Backup Withholding Program from the Wage and Investment (W&I) Division to the SB/SE Division because of limited program results. At the time we completed our review, the SB/SE Division was researching the tax laws and regulations as a first step in evaluating the application of the backup withholding authority to the ASFR Program.
At present, backup withholding is primarily limited
to interest or dividend income. This
limitation prevents IRS from encouraging future voluntary filing compliance for
those nonfilers whose cases were unsuccessfully resolved by the ASFR Program. If backup withholding treatment was expanded
to cover all sources of nonwage income (e.g., pensions, annuities, etc.) that
form the basis for the nonfiling condition, we estimate the IRS could expect to
collect an additional $9 million per year, or an additional $45 million over
the next 5 years. See Appendix IV for
details.
To assist the IRS in its efforts to improve voluntary filing compliance, the Commissioner, SB/SE Division, who has the overall responsibility for the SB/SE Division compliance programs, should:
2.
Develop a tracking and reporting
mechanism to measure the subsequent voluntary filing compliance rates of the individual
taxpayers treated by the ASFR Program.
Management’s
Response: The Commissioner,
SB/SE Division, agreed that changing taxpayer behavior is a key component and
will take a subsequent look at voluntary compliance rates of individuals
treated in the ASFR Program for the purpose of developing other strategies for
dealing with nonfilers.
3.
Conduct a study to determine the feasibility of expanding backup withholding treatment to all
nonwage income sources that form the basis for the nonfiling condition, and if
necessary, coordinate with the Office of Chief Counsel to draft legislation to amend
I.R.C.
§ 3406. To ensure equal treatment of taxpayers in
similar situations, consideration in implementing this recommendation should
also take the W&I Division ASFR Program into account.
Management’s Response: The Commissioner, SB/SE Division, stated nonfilers are considered for backup withholding under current Internal Revenue regulations; however, the Commissioner, SB/SE Division, will explore the feasibility of the revision/expansion of the backup withholding definition to include nonwage income, review the options, and proceed in the best interest of sound tax administration. The Commissioner, SB/SE Division, disagrees with the potential increase of $45 million in revenue over 5 years as revenue is already collected from backup withholding on cases meeting the criteria. Further, the Commissioner, SB/SE Division, stated the intent of the ASFR Program is to encourage taxpayers to file outstanding returns or determine whether a tax liability exists, rather than to raise revenue.
Office of Audit Comment: While we are encouraged the
Commissioner, SB/SE Division, will explore the feasibility of revising/expanding
backup withholding treatment, we disagree that additional revenue could not be
realized from an expanded application of backup withholding. The ASFR Program is a critical tool used to
combat tax noncompliance, a top priority for the IRS. Applying backup withholding treatment to all
nonwage income sources that form the basis for the nonfiling condition worked
by the ASFR Program would increase revenue and deter noncompliance, allowing
for earlier intervention and a reduction of subsequent enforcement actions.
The SB/SE Division FY 2003 and FY 2004 Compliance Operations Program Letters emphasized the IRS goal to provide top-quality service to each taxpayer in every interaction and to all taxpayers through fair and uniform application of the law. To determine the degree to which this goal is being achieved, management needs quality measurement systems in place that provide statistically valid results. Quality review data is also needed by management to provide a basis for measuring and improving program effectiveness.
The IRS uses the National Quality Review System (NQRS) to measure the accuracy rates achieved by a multitude of compliance programs at its various campus locations. However, ASFR Program cases do not represent a separate product line and are included in the quality review samples selected from various other compliance programs. Therefore, an extremely small number of ASFR Program cases is selected for quality review in any one time period.
The ASFR Program involves three distinct types of cases: proposed assessment cases, reconsideration cases, and refund hold cases. In FY 2004, the ASFR Program was expected to close about 141,000 cases. As of July 2004, only 109 ASFR Program cases, or an average of 11 cases per month, had been selected for NQRS sampling. These included 72 proposed assessment cases, 37 reconsideration cases, and zero refund hold cases. This limited sampling is insufficient to provide management with reliable information for evaluating overall ASFR Program quality, detecting error trends, or identifying possible systemic problems.
The NQRS results for the ASFR Program varied significantly from the quality review results determined by the ASFR Program managers in evaluating the individual performance of the ASFR Program tax examiners. As of July 2004, for example, the 2 measures for timeliness varied by 13 percent and the 2 measures for customer accuracy varied by 10 percent. The samples of cases selected for managerial reviews were significantly larger than the samples of ASFR Program cases selected for the NQRS.
Due to the consolidation of the ASFR Program at one site, management at the Brookhaven Campus has requested that the NQRS treat ASFR Program cases as a separate product line. At the time we completed our review, a final decision on this request had not been made.
The Commissioner, SB/SE Division, who
is responsible for the overall ASFR Program, should:
4. Separate the ASFR Program from other compliance programs for purposes of the NQRS sampling, as suggested by the Brookhaven Campus, to provide a statistically valid measure of program quality and to provide ASFR Program management with a sound basis for taking actions that affect policies, procedures, and operational practices.
Management’s Response: The Commissioner, SB/SE Division, has established for FY 2005, separate workgroup codes, separate weighted reports, and a separate sample available for review. In FY 2007, the ASFR Program will be developed as a Specialized Product Review Group on the NQRS.
Reconsideration is
the process the IRS uses when a taxpayer contests an ASFR Program assessment by filing an original delinquent
return. The reconsideration cases result
from defaulted assessments (e.g., a taxpayer did not respond to the 30-day letter or 90-day letter). The
reconsideration cases usually occur when the unpaid accounts enter the enforced
collection stage and the taxpayers are finally motivated to send the IRS a
completed tax return or other information to reduce the ASFR Program assessment.
This can happen months or up to 2 years after the defaulted ASFR Program
assessment is made.
The untimely resolution of ASFR Program
reconsideration cases could adversely
affect taxpayer relations and result in additional taxpayer interest costs
being incurred. Reconsideration cases
are considered over-age if they remain unresolved more than 45 days after they are
received by the IRS. The Brookhaven Campus
has monitored
over-age ASFR Program reconsideration cases on a weekly basis
since the week of March 3, 2004. From March
to September 2004, the inventory of reconsideration cases ranged from 1,660 to
4,531 cases, and the percentage of over-age cases ranged from 13 to 38 percent.
Many taxpayers
contested ASFR Program default
assessments by providing completed tax returns or other information to various
IRS offices throughout the country. As a
result, the ASFR Program reconsideration
cases are frequently over-age by the time they are received at the Brookhaven Campus. To address this over-age problem, ASFR Program
national policy staff initiated the generation of transcripts. One transcript is forwarded to the SB/SE
Division’s consolidated ASFR Program site, the Brookhaven Campus, alerting
management that a taxpayer filed a return with the IRS. The other transcript goes to the IRS site
where the taxpayer filed the return, informing the Files unit to pull the
return and route it to the appropriate site.
Beginning in March 2004, the Brookhaven Campus began monitoring ASFR Program
reconsideration cases received from other IRS offices. For the last 7 months of FY 2004, this
monitoring showed that 3,903 (56 percent) of the 7,032 cases were already over-age
at the time they were received at the Brookhaven Campus. The percentage of over-age reconsideration
cases received from other IRS offices ranged from 25 to 79 percent.
To achieve the lowest over-age percentage
possible, ASFR Program management
at the Brookhaven Campus has been determining the specific sites that are delaying
shipment of the reconsideration work. Brookhaven
Campus ASFR Program management
has coordinated with the sending sites and the Brookhaven policy staff to
improve shipping timeliness and has revised operating procedures for
identifying and mailing ASFR Program reconsideration cases. While the
national/local initiatives have helped to reduce the ASFR Program reconsideration over-age inventory from 38
percent in June 2004 to 13 percent in September 2004, the over-age inventory
remains at a high level.
To further reduce the percentage of ASFR Program reconsideration
inventory that is over-age and thus improve IRS
service to taxpayers by more timely resolving cases in which the taxpayers are
making an attempt to become compliant, the Commissioner, SB/SE Division,
should:
5.
Provide guidance to all SB/SE Division collection
offices that contribute to the over-age ASFR Program reconsideration inventory,
establish service level agreements with the offices most responsible for the
routing delays to set guidelines for timely submission of ASFR Program reconsideration
returns, and examine whether systemic solutions could be developed to reduce
the percentage of over-age reconsideration inventory.
Management’s Response: The
Commissioner, SB/SE Division, stated the ASFR Program was centralized in
January 2004, but agreed there are additional actions which can be taken to
clarify the processing for the ASFR Program reconsideration returns. The Commissioner, SB/SE Division, will
revisit the procedures and develop processes for monitoring and handling ASFR Program
cases to reduce the percentage of over-age reconsideration inventory.
Appendix I
Detailed Objective, Scope, and Methodology
The
overall objective of the audit was to determine whether the Small
Business/Self-Employed (SB/SE) Division Automated Substitute for Return (ASFR)
Program is effectively administered to achieve the desired program results and
promote taxpayer compliance with the tax laws.
The audit objective was accomplished by interviewing Internal Revenue
Service (IRS) managers and program analysts at the SB/SE Division Headquarters
office and at the Brookhaven Campus, conducting a walk-through of ASFR Program and
ASFR Program reconsideration campus activities, and reviewing management
information system reports and other documentation related to ASFR Program and
ASFR Program reconsideration activities.
To accomplish
our objective, we:
I. Determined whether the ASFR Program is effectively designed
and used to support the IRS strategies, plans, policies, and procedures for
ensuring filing compliance and for achieving the desired program results.
A. Reviewed the SB/SE Division Fiscal Year (FY) 2004 – FY 2005 Strategy and
Program Plan, SB/SE Division FY 2003 and FY 2004 Compliance Operations Program
Letters, FY 2004 IRS Annual Performance Plan, SB/SE Division Compliance FY 2004
Business Plan, ASFR Consolidation Action Plan, SB/SE Research
study Automated Substitute for Return Subsequent
Fact of Filing, and IRS’ Statistics of Income study Nonfiler Profiles, Fiscal Year 1993: A Focus on Repeaters.
B.
Interviewed SB/SE Division Headquarters
Compliance Policy’s Return Delinquency analysts and Centralized Workload and
Selection Development analysts and SB/SE Division Headquarters Compliance
Services analyst.
C.
Interviewed the SB/SE Division Headquarters Nonfiler analyst and
ASFR Program analysts and the SB/SE Division Brookhaven Campus Compliance
Services Campus Operations (CSCO) manager and ASFR Program department managers
to evaluate the effectiveness of the case selection process for assigning cases
to the ASFR Program.
D.
Interviewed SB/SE Division Brookhaven Campus ASFR Program department
managers, reviewed Internal
Revenue Manual (IRM) section 5.18.1 ASFR
Program, and analyzed the Brookhaven Campus ASFR Program
weekly reports for the period February 25 to September 29, 2004, to identify
key processing stages of ASFR Program activities and to evaluate timeliness and
quantity standards used for the ASFR Program.
E.
Interviewed the SB/SE Division Headquarters Strategy Research and
Performance Management analyst and Brookhaven Campus SB/SE Division CSCO
manager and Planning and Analysis manager/analysts and reviewed the October
2003 through July 2004 ASFR Program managerial and nonmanagerial quality
reviews to determine whether the quality assurance data is sufficient to
monitor the ASFR Program.
II. Determined whether the management information
reports the IRS uses to monitor and evaluate the SB/SE Division ASFR Program activities
are sufficient.
III.
Determined whether the actions IRS management has taken to deal with high-income
nonfilers has had the desired effect of reducing high-income filing
noncompliance.
Appendix II
Major Contributors to This
Report
Philip Shropshire,
Acting Assistant Inspector General for Audit (Small Business and Corporate
Programs)
William E. Stewart,
Audit Manager
E. John Thomas, Lead
Auditor
Carole E. Connolly,
Senior Auditor
Gwendolyn S. Gilboy,
Senior Auditor
Appendix III
Commissioner C
Office of the
Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and
Enforcement SE
Deputy Commissioner, Small
Business/Self-Employed Division SE:S
Director, Campus Compliance Services, Small
Business/Self-Employed Division SE:S:CCS
Director, Communications, Government Liaison &
Disclosure, Small Business/Self-Employed Division SE:S:CGL&D
Chief Counsel CC
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 Liaison: Commissioner, Small Business/Self-Employed
Division SE:S
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective action will have on tax administration. This benefit will be incorporated into our Semiannual Report to the Congress.
Type and Value of Outcome Measure:
Methodology Used to Measure the Reported Benefit:
The following is a general summary of the methodology used to measure the reported benefit.
Increased Revenue: Backup withholding.
Our estimate of increased revenue is based on the belief that long-term return filing compliance by those taxpayers subject to Automated Substitute for Return (ASFR) Program compliance treatments could be improved by expanding the backup withholding compliance tool. For Fiscal Year (FY) 2004, the Small Business/Self-Employed (SB/SE) Division ASFR Program generated net tax assessments of $1.509 billion. An Internal Revenue Service (IRS) study for Tax Years 1996 and 1997 showed that, in the year following the ASFR Program compliance treatment, 41 percent of taxpayers voluntarily filed their tax returns while the other 59 percent remained noncompliant. If these filing compliance percentages and the net ASFR Program assessments remain the same for FY 2005, the IRS can expect to voluntarily collect 41 percent of the ASFR Program assessments, or $618,690,000 ($1,509,000,000 x 41 percent). This leaves the remaining 59 percent, or $890,310,000 ($1,509,000,000 x 59 percent), that will require IRS intervention and/or IRS collection enforcement action. These estimates assume the taxpayers that voluntarily file their tax returns will also pay the amount due in full, which may be overly optimistic since these taxpayers have been noncompliant in the past.
Assuming 1 percent of the $890,310,000 can be collected through expanded authority of backup withholding, the additional IRS collections would be $8,903,100 ($890,310,000 x 1 percent) for 1 year, or $44,515,500 ($8,903,100 x 5) over 5 years. The 5-year estimate may represent the low end for both the amounts collected and the amounts requiring an IRS intervention or collection enforcement action because the SB/SE Division ASFR Program production goals and Full-Time Equivalents (FTE) are expected to increase in FY 2005 and later years. For example, theFY 2004 production goal was 141,490 cases while the FY 2005 production goal is396,392 cases, an increase of 180 percent. The SB/SE Division applied 181 FTEs to its ASFR Program in FY 2004, while the planned increase for FY 2005 is 37 FTEs, an increase of 20 percent. The planned increase for FY 2006 is an additional 65 FTEs, an increase of 58 percent over the FY 2004 level.
The 1 percent improvement factor we used to calculate the additional yearly revenues as a result of expanding the backup withholding compliance tool was arrived at by considering the improved filing compliance rate achieved during the IRS study of using a predictive dialer to call taxpayers to advise them of a pending ASFR Program action. This study resulted in a secured return rate of 33 percent. This represented a 20 percent increase over FY 1997, a 23 percent increase over FY 1996, and a 28 percent increase over FY 1995 when the predictive dialer was not used.
In our view, an expanded backup withholding compliance tool represents a stronger leverage action because withholding payments will be made to the IRS at the time of payor distributions for all nonwage income sources. Since the IRS will collect a portion or all of the taxes due, taxpayers should be more likely to timely file their tax returns. The 1 percent improvement factor may be a conservative estimate because the predictive dialer tests showed improvements significantly greater. Also, a private sector study of 327 entities that had undergone reengineering initiatives in 2002 showed that 54 percent of the participants expected improvements of over 30 percent. In addition, to address the principle of equal treatment of taxpayers in similar situations, consideration in evaluating the recommendation also needs to be given to the Wage and Investment Division ASFR Program, which had net ASFR Program assessments of $2.505 billion in FY 2004.
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.