TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

 

 

Most Automated Underreporter Program Notices Are Correct; However, Additional Oversight Is Needed

 

 

 

September 25, 2008

 

Reference Number:  2008-40-180

 

Redaction Legend:

1 = Tax Return/Return Information

 

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.

 

Phone Number   |  202-622-6500

Email Address   |  inquiries@tigta.treas.gov

Web Campus           |  http://www.tigta.gov

 

 

September 25, 2008

 

 

MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION

 

FROM:                            Michael R. Phillips /s/ Michael R. Phillips

                                         Deputy Inspector General for Audit

 

SUBJECT:                    Final Audit Report – Most Automated Underreporter Program Notices Are Correct; However, Additional Oversight Is Needed (Audit # 200840003)

 

This report presents the results of our review to determine whether the information provided to taxpayers in notices issued by the Wage and Investment Division Automated Underreporter Program (hereafter referred to as the AUR Program or the Program) are complete and accurate.  This audit was conducted as part of our Fiscal Year (FY) 2008 Annual Audit Plan and addresses the Taxpayer Protection and Rights management challenge.

Impact on the Taxpayer

The AUR Program is an important component of the Internal Revenue Service’s (IRS) efforts to ensure voluntary taxpayer reporting compliance.  This Program uses third-party payer information (such as that from banks and brokers) to determine whether taxpayers have reported all of their income.  Notices are sent advising taxpayers of additional tax on any unreported income.  While most AUR Program notices were correct, some taxpayers were negatively affected by inaccurate information on the notices.  We believe these taxpayers agreed to inaccurate assessments as a result of the confusion caused by the complexity of the notices.

Synopsis

The Computer Paragraph (CP) 2000 notice is the primary notice that the IRS issues to taxpayers as a result of underreporting discrepancies.  During FY 2007, the Wage and Investment Division AUR Program closed approximately 1.3 million cases after sending notices to taxpayers for underreporting discrepancies identified on their Tax Year 2005 returns.

To evaluate whether the notices are accurate, we selected and analyzed a statistically valid random attribute sample of AUR Program notices sent to 138 taxpayers by the Wage and Investment Division in FY 2007 and found that 7 (5.1 percent) taxpayers were sent inaccurate information on CP 2000 notices.  In our sample, employee errors on CP 2000 notices resulted in taxpayers being both overassessed $18,968 and underassessed $1,146 in tax.  Based on our analysis, we estimate that in FY 2007, 48,669 taxpayers received CP 2000 notices with inaccurate information that might have resulted in overassessments of tax.  We also estimate that an additional 19,468 taxpayers might have been erroneously underassessed tax as a result of CP 2000 notices with inaccurate information.  If the numbers of AUR Program notices issued by the Wage and Investment Division remain constant over the next 5 years, we estimate that 243,345 taxpayers might be overassessed tax and 97,340 taxpayers might be underassessed tax based on erroneous information in the CP 2000 notices.

During our discussions with the IRS, AUR campus[1] site management stated that these problems resulted from employee mistakes.  However, we believe that the complexity of the CP 2000 notices might also be a contributing factor.  In fact, during FY 2007, customer satisfaction surveys for the Wage and Investment Division AUR Program indicated that, depending on the survey quarter, 24 percent to 32 percent of the taxpayers stated that their primary reason for calling the IRS was to have someone explain the CP 2000 notice to them.  The complexity of the CP 2000 notice could be why some taxpayers do not question the information provided on the notice even when that information is incorrect.

In addition, although required by the Internal Revenue Manual, some of the Wage and Investment Division AUR Program campus site managers did not always comply with the requirement to submit a corrective action plan when the weekly notice quality review error rate exceeded 10 percent.  During the first 7 months of FY 2008, there were 12 occasions when the campus sites should have submitted corrective action plans to the Program Office because their weekly notice error rates exceeded 10 percent.  However, the sites submitted only 5 (41.7 percent) corrective action plans, and only 3 (25 percent) of these corrective plans were submitted within the 2-day requirement.[2]

Although the IRS has established a quality review process for identifying employee errors on notices, Wage and Investment Division AUR Program management has not ensured that campus site managers consistently take action to address notice inaccuracies.  In addition, as of September 2007, 261 (28.6 percent) of the 911 employees in the Wage and Investment Division AUR campus sites had fewer than 2 years experience.

Wage and Investment Division AUR Program management stated that increased oversight of the quality program has led their sites to become more involved in establishing corrective action plans, developing error tracking reports, and resolving procedural issues with their employees.  However, we believe that more action is needed.  The combination of inexperienced staff and site managers who were not adequately addressing employee errors has resulted in a higher rate of inaccurate CP 2000 notices being issued to taxpayers.

Recommendations

We recommended that the Director, Compliance, Wage and Investment Division, 1) ensure that AUR Program management incorporates additional information on notice review procedures and quality service expectations into its refresher training for Program employees, 2) coordinate with the Small Business/Self-Employed Division to simplify the CP 2000 notices issued by the Program, and 3) ensure that Program management monitors campus site compliance with requirements to submit and implement corrective action plans when notice review error rates exceed 10 percent.

Response

IRS management agreed with all of the report recommendations.  AUR Program management is finalizing Continuing Professional Education training materials that include a lesson on quality notice review procedures and quality service expectations.  This training will be provided as part of the FY 2009 mandatory training and delivered during the first quarter of FY 2009.  In addition, the Wage and Investment Division will coordinate with the Small Business/Self-Employed Division, Office of Taxpayer Burden; the Notice Task Force Team; and other key stakeholders to improve the clarity, readability, and accuracy of the CP 2000 notices they issue.  This process will likely span 2 or 3 years based on prior CP 2000 notice revisions and will require input via external and internal focus groups, notice design, and testing prior to full implementation.

IRS management has issued to the AUR campus sites a reminder of the Internal Revenue Manual requirement to timely develop, implement, and submit corrective action plans when notice review error rates exceed 10 percent.  They will follow up on this requirement during periodic meetings with the campuses.  The AUR Program management staff will create a site on the Compliance function shared drive for the 3 AUR campus sites to post weekly notice review results and action plans when the error rate exceeds 10 percent, allowing prompt notification to AUR Headquarters.  The web site will be fully implemented after completion of briefing sessions with site management and quality coordinators.

While IRS management agreed with our recommendations and conclusions, they did not believe that our sample size was large enough to make reliable projections to the population.  As a result, the IRS disagreed with some of the outcome measures in Appendix IV of this report.  We believe that our sample size was appropriate and our projections accurate.  The purpose of audit sampling is to identify potential problems and to quantify their effect to the extent possible.  We balance the cost of audit oversight with the fiscal expectations of Congress and the taxpaying public.  While a larger sample might identify less common errors, our sample was adequate to identify and quantify the issues found with the accuracy of AUR Program CP 2000 notices that our recommendations and related outcome measures address.  Management’s complete response to the draft report is included as Appendix VI.

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 Michael E. McKenney, Assistant Inspector General for Audit (Wage and Investment Income Programs), at (202) 622-5916.

 

 

Table of Contents

 

Background

Results of Review

In Some Instances, the Complexity of the Computer Paragraph 2000 Notices Might Have Resulted in Taxpayers Agreeing to Erroneous Tax Assessments

Recommendations 1 and 2:

Additional Program Oversight Is Needed to Reduce Automated Underreporter Program Notice Errors

Recommendation 3:

Appendices

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 – Example of a CP 2000 Notice

Appendix VI – Management’s Response to the Draft Report

 

 

Abbreviations

 

AUR

Automated Underreporter

CP

Computer Paragraph

FY

Fiscal Year

IRS

Internal Revenue Service

 

 

Background

 

The Automated Underreporter Program (hereafter referred to as AUR Program or the Program) is an important component of the Internal Revenue Service’s (IRS) efforts to ensure voluntary taxpayer reporting compliance.  During Fiscal Year (FY) 2007, nearly 3.5 million taxpayers were contacted by the AUR Program, resulting in more than $5 billion in additional tax assessments.

Twice a year, the AUR Program matches taxpayer income and deductions submitted on information returns by third parties (e.g., employers, banks, brokerage firms, and other payers) against amounts reported by taxpayers on their individual income tax returns.  The 2 matches identify approximately 15 million potential underreporter cases.  However, due to resource constraints, the Program can work only about 4.5 million cases annually, with approximately one-half of these cases being worked in the Wage and Investment Division and the remainder in the Small Business/Self-Employed Division.

Once selected, the AUR Program cases are distributed to six campus sites[3] for processing.  When the campus sites receive their inventory, tax examiners manually review each case.[4]  After analyzing the tax returns, tax examiners are sometimes able to immediately resolve the underreporting discrepanciesno further actions are taken with these cases.

In the remaining cases, tax examiners will request additional information from taxpayers by sending a Computer Paragraph (CP) 2501 and/or a CP 2000 notice.[5]  Figure 1 shows how the IRS adjusts the taxpayer’s income as a result of an identified underreporting issue, as well as proposes a corresponding tax assessment on the CP 2000 notice.  Appendix V provides an edited example of a complete CP 2000 notice that would be issued to a taxpayer.

Figure 1:  Hypothetical Example of Information Contained in a
CP 2000 Notice

3. Changes to Your Return

Note:  We only show the items that have been affected by the information we received in the following chart.  All other items are correct as shown on your return.  Unless noted, line numbers always refer to the line number on your tax return.

Changes to Your Income and Deductions

Shown on Return

Reported to IRS or as Corrected

Difference

SECURITIES

$ 0

$ 23,000

$ 23,000

 

Income Net Difference

$ 23,000

Total Change to Taxable Income

 $ 23,000

 

Changes to Your
Tax Computation

Shown on Return

As Corrected
by IRS

Difference

Taxable Income, line 43

$ 204,000

$ 227,000

$ 23,000

Tax, line 44

$ 48,000

$ 55,500

$ 7,500

Alternative minimum tax, line 45

$ 4,000

 $ 3,900

$ -100

Total Tax, line 63

$ 52,000

$ 59,400

$ 7,400

 

Net Tax Increase

$ 7,400

 

Summary of
Proposed Changes

 

Amount of Tax Increase

 

$ 7,400

Accuracy-Related Penalty, IRC Section 6662(a)

 

$ 1,500

Interest, IRC Section 6601, From 04/02/2006 To 05/01/2007

 

$ 800

Total Amount You Owe

 

$ 9,700

Source:  IRS-provided copy of a CP 2000 notice.  We added numerical information for illustrative purposes only.

If the taxpayer provides supporting documentation and the tax examiner determines that the income, credits, and/or deductions reported on the tax return are correct, the case is closed with no changes to the taxpayer’s account.  However, if the examiner determines that the income, credits, and/or deductions reported on the tax return are not correct and the taxpayer agrees, the IRS will assess additional tax based on the CP 2000 notice and close the case as agreed.  If the taxpayer does not agree or does not respond to the CP 2000 notice within the required time period, the IRS will issue a Statutory Notice of Deficiency[6] and assess additional tax.  Figure 2 compares the number of Statutory Notices issued to the number of default assessments against taxpayers who did not respond to CP 2000 notices in FYs 2006 and 2007.

Figure 2:  Comparison of Statutory Notices Issued to Default Assessments for FYs 2006 and 2007

Fiscal Year

2006

2007

Statutory Notices Issued

2,980,619

3,340,951

Default Assessments

1,752,841

2,145,715

Rate of Default Assessments

59 percent

64 percent

Source:  Wage and Investment Division AUR Program Office.

The IRS estimates that for FY 2007, 91.8 percent of the AUR Program notices issued to taxpayers were accurate.  However, in June 2007, the IRS Oversight Board[7] raised concerns about taxpayers receiving AUR Program notices with inaccurate information.  These issues included capital gains, dividend income, and State income tax refunds reported on individual tax returns.

This review was performed at the Wage and Investment Division AUR Program Office in Atlanta, Georgia, and the AUR campus sites in Atlanta, Georgia; Austin, Texas; and FresnoCalifornia, during the period November 2007 through May 2008.  We conducted this performance audit in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective.  We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.  Detailed information on our audit objective, scope, and methodology is presented in Appendix I.  Major contributors to the report are listed in Appendix II.

  

Results of Review

 

In Some Instances, the Complexity of the Computer Paragraph 2000 Notices Might Have Resulted in Taxpayers Agreeing to Erroneous Tax Assessments

The CP 2000 notice is the primary notice that the IRS issues to taxpayers as a result of underreporting discrepancies.  It is a complex, multipage document that compares income, credit, and/or deduction information reported to the IRS by third parties to the information provided by the taxpayer on his or her tax return.  During FY 2007, the Wage and Investment Division AUR Program closed more than 1.3 million cases after sending notices to taxpayers for underreporting discrepancies identified on their Tax Year 2005 returns.

From this population, we selected and analyzed a statistically valid random attribute sample of AUR Program notices sent to 138 taxpayers and found that 7 (5.1 percent) were sent inaccurate information on CP 2000 notices in FY 2007.  Figure 3 lists the types of employee errors that resulted in inaccurate information being sent to taxpayers on CP 2000 notices issued by the Wage and Investment Division.

Figure 3:  Types of IRS Errors Found on CP 2000 Notices Issued by the Wage and Investment Division in FY 2007

1) Erroneously disallowed taxes withheld.

2) Ignored reported losses on the tax return.

3) Erroneously duplicated taxpayer income when making tax assessments.

4) Ignored information that was properly reported on the tax return.

5) Made a miscalculation that resulted in a lower tax assessment.

6) Did not assess tax on additional income claimed by taxpayer.

Source:  Our analysis of sampled CP 2000 notices issued in FY 2007.

In our sample, employee errors on 5 CP 2000 notices issued by the Wage and Investment Division resulted in taxpayers being overassessed $18,968 in taxes.  In ****1**** cases, these taxpayers did not question the information provided on the CP 2000 notices even though the information was incorrect.  We believe that the complexity of the CP 2000 notice may be the reason why taxpayers agreed to the inaccurate information.  However, not all employee errors in our sample of notices resulted in taxpayers being overassessed tax.  In some cases, employee errors resulted in taxpayers not being properly assessed all the taxes they owed.  ****1****

During our discussions with the IRS, AUR campus site management stated that these problems resulted from employee mistakes.  However, we believe that the complexity of the CP 2000 notice might also be a contributing factor.  Taxpayers have long complained about the complexity of the CP 2000 notice.  In November 2004, the IRS revised the CP 2000 notice in an effort to reduce taxpayer confusion and improve taxpayers’ understanding of why the IRS was contacting them about their underreporting discrepancies.  While the IRS has provided more information in the revised CP 2000 notice, we believe that the complexity of the notice continues to be a major source of taxpayer confusion.

For example, the IRS measures taxpayer satisfaction with its various programs through periodic customer satisfaction surveys.  These surveys allow taxpayers to provide feedback and rate their satisfaction level (i.e., satisfied, dissatisfied, or neither satisfied nor dissatisfied) with the customer service provided by the IRS.  Even though the IRS revised the CP 2000 notice, the level of taxpayer satisfaction with the ease of understanding notices issued by the Wage and Investment Division AUR Program based on the customer satisfaction surveys has not changed significantly.  In fact, depending on the survey quarter, 24 percent to 32 percent of the taxpayers responding to these surveys in FY 2007 stated that their primary reason for calling the IRS was to have someone explain the AUR Program notice to them.  Figure 4 compares the level of taxpayer satisfaction with the ease of understanding the AUR Program notices for FYs 2004 through 2007.

Figure 4:  Comparison of Taxpayer Satisfaction With the Ease of Understanding AUR Program Notices Issued by the
Wage and Investment Division

Fiscal Year

Percentage of Taxpayers Who Are Dissatisfied

Percentage of Taxpayers Who Are Neither Satisfied Nor Dissatisfied

Percentage of Taxpayers Who Are Satisfied

2004

21%

26%

53%

2005

18%

30%

52%

2006

17%

28%

54%

2007

15%

30%

55%

Source:  Wage and Investment Division AUR Customer Satisfaction Surveys for FYs 2004-2007.  Due to rounding, not all percentages add to 100 percent.

Those taxpayers who replied on the Wage and Investment Division customer satisfaction surveys that they were dissatisfied with the ease of understanding the AUR Program notices were asked why they responded negatively.  Some taxpayers expressed confusion resulting from the complexity of the AUR Program notices.

  • ****1****
  • ****1****
  • ****1****
  • ****1****
  • ****1****
  • ****1****

Other taxpayers commented on the lack of clarity with the information contained in the AUR Program notices.

  • ****1****
  • ****1****
  • ****1****
  • ****1****
  • ****1****
  • ****1****

Therefore, the complexity of the CP 2000 notice could be why some taxpayers do not question the information provided on the notice even when that information is incorrect.  These taxpayers pay whatever the IRS tells them they owe.

Based on our analysis of a sample of FY 2007 AUR Program notices issued by the Wage and Investment Division, we estimate that 48,669 taxpayers received CP 2000 notices with inaccurate information that might have resulted in overassessments of tax.  We also estimate that an additional 19,468 taxpayers might have been erroneously underassessed tax as a result of CP 2000 notices with inaccurate information.  If the numbers of AUR Program notices issued by the Wage and Investment Division remain constant over the next 5 years, we estimate that 243,345 taxpayers might be overassessed tax and 97,340 taxpayers might be underassessed tax based on erroneous information in the CP 2000 notices.

Recommendations

The Director, Compliance, Wage and Investment Division, should:

Recommendation 1:  Ensure that Wage and Investment Division AUR Program management incorporates additional information on notice review procedures and quality service expectations into its refresher training for Program employees.

Management’s Response:  IRS management agreed with this recommendation.  AUR Program management is finalizing Continuing Professional Education training materials that include a lesson on quality notice review procedures and quality service expectations.  This training will be provided as part of the FY 2009 mandatory training and delivered during the first quarter of FY 2009.

Recommendation 2:  Coordinate with the Small Business/Self-Employed Division to simplify the CP 2000 notices issued by the AUR Program.

Management’s Response:  IRS management agreed with this recommendation.  The Wage and Investment Division will coordinate with the Small Business/Self-Employed Division, Office of Taxpayer Burden; the Notice Task Force Team; and other key stakeholders to improve the clarity, readability, and accuracy of the CP 2000 notices they issue.  This process will likely span 2 or 3 years based on prior CP 2000 notice revisions and will require input via external and internal focus groups, notice design, and testing prior to full implementation.

While IRS management agreed with the above recommendations, they did not believe that our sample size was large enough to make reliable projections to the population.  As a result, the IRS disagreed with the projected outcome measures in Appendix IV—Taxpayer Rights and Entitlements for 243,345 taxpayers and Increased Revenue for 97,340 taxpayers.

Office of Audit Comment:  We are pleased that IRS management agreed to implement our recommendations.  However, we do not agree with management’s assessment that our sample size was not large enough to make projections.  We believe that our sample size was appropriate and our projections accurate.  The purpose of audit sampling is to identify potential problems and to quantify their effect to the extent possible.  We balance the cost of audit oversight with the fiscal expectations of Congress and the taxpaying public.  While a larger sample might identify less common errors, our sample was adequate to identify and quantify the issues found with the accuracy of AUR Program CP 2000 notices that our recommendations and related outcome measures address.

Additional Program Oversight Is Needed to Reduce Automated Underreporter Program Notice Errors

The Internal Revenue Manual[8] requires AUR campus sites to perform a weekly quality review of a statistically valid sample of CP 2000 notices.  During this quality review process, tax examiners rework the in-process cases and review the CP 2000 notices for accuracy and overall quality prior to the notices being issued.  The weekly notice quality review provides campus site management with information on current trends and accuracy to enable immediate corrective actions on problems as they are identified.  The results of these weekly quality reviews are to be forwarded monthly to the AUR Program Office.  However, if during these weekly reviews the number of errors discovered that affect the total balance due on the notices exceeds 10 percent of the sample, then campus site managers are required to submit a corrective action plan within 2 days to the AUR Program Office.

Corrective action plans are to provide specific details on the steps that site management plans to take to correct the problems identified during the weekly notice quality reviews.  For example, a corrective action plan might include having the manager provide specific feedback to the employee who made the error, having the identified error trends and their corrective actions informally discussed during team meetings, or providing more formalized training to the site based on the types and complexity of errors identified.

We determined that some of the Wage and Investment Division AUR campus site managers did not always comply with the requirement to submit a corrective action plan when the weekly notice quality review error rate exceeded 10 percent.  During the first 7 months of FY 2008, there were 12 occasions when the sites should have submitted corrective action plans to the Program Office as a result of their weekly notice error rates exceeding 10 percent.  However, the sites submitted only 5 (41.7 percent) corrective action plans, and only 3 (25 percent) of these corrective plans were submitted within the 2-day requirement.[9]

Although the IRS has established a quality review process for identifying employee errors on notices, Wage and Investment Division AUR Program management has not ensured that campus site managers consistently take action to address notice inaccuracies.  In addition, as of September 2007, 261 (28.6 percent) of the 911 employees in the Wage and Investment Division AUR campus sites had less than 2 years experience.

Wage and Investment Division AUR Program management stated that increased oversight of the quality program has led their sites to become more involved in establishing corrective action plans, developing error tracking reports, and resolving procedural issues with their employees.  However, we believe that more action is needed.  The combination of inexperienced staff and campus site managers who were not adequately addressing employee errors has resulted in a higher rate of inaccurate CP 2000 notices being issued to taxpayers.

Taxpayers voluntarily file and pay taxes based on their confidence in the tax system.  Our review showed that taxpayers are negatively affected by inaccurate information on CP 2000 notices.  While some taxpayers will expend the time and money needed to resolve inaccurate issues raised by the IRS, others might not question the information on the notices and pay taxes that are not owed.

Recommendation

Recommendation 3:  The Director, Compliance, Wage and Investment Division, should ensure that AUR Program management monitors campus site management compliance with requirements to submit and implement corrective action plans when notice review error rates exceed 10 percent.

Management’s Response:  IRS management agreed with this recommendation.  They have issued to the AUR campus sites a reminder of the Internal Revenue Manual requirement to timely develop, implement, and submit corrective action plans when notice review error rates exceed 10 percent.  They will follow up on this requirement during periodic meetings with the campuses.  The AUR Program management staff will create a site on the Compliance function shared drive for the 3 AUR campus sites to post weekly notice review results and action plans when the error rate exceeds 10 percent, allowing prompt notification to AUR Headquarters.  The web site will be fully implemented after completion of briefing sessions with the site management and quality coordinators.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

The overall objective of this review was to determine whether the information provided to taxpayers in notices issued by the Wage and Investment Division AUR Program are complete and accurate.  Unless otherwise noted, our limited tests of the reliability of data obtained from the Master File[10] did not identify any errors.  We validated the reliability of computer-processed data by scanning the data received for blank, incomplete, illogical, or improper data.  In addition, we traced a judgmental sample of each data set to IRS source files to ensure accuracy.  We did not perform any testing of internal controls over the systems that were the sources of our data due to the scope of the review.  To accomplish the audit objective, we:

I.                   Determined whether the Wage and Investment Division effectively monitors and measures the completeness and accuracy of AUR Program notices issued to taxpayers.

A.    Interviewed AUR Program management and reviewed documentation that establishes Program goals for the accuracy of Program notices issued to taxpayers.

B.     Interviewed AUR Program management and reviewed documentation that establishes Program policy and practices for notice quality.

C.     Reviewed customer satisfaction surveys for the Wage and Investment Division AUR Program to determine whether taxpayers have expressed concerns about the ease of understanding the Program notices they received.

II.                Determined whether taxpayers are provided with complete and accurate information on AUR Program notices.

A.    Selected a statistically valid random attribute sample of AUR Program notices sent to 138 taxpayers by the Wage and Investment Division in FY 2007 from a population of 1,343,258 taxpayers with closed Tax Year 2005 AUR Program cases.  Our sample size was determined based on a 95 percent confidence level, an estimated error rate of 10 percent, and a precision of ±5 percent.  Our sampling methodology was sufficient enough to allow us to project our sample results to the population.

B.     Analyzed the cases in our sample to determine whether the notices sent to taxpayers by the Wage and Investment Division AUR Program were complete and accurate.

 

Appendix II

 

Major Contributors to This Report

 

Michael E. McKenney, Assistant Inspector General for Audit (Wage and Investment Income Programs)

Marybeth Schumann, Director

Bryce Kisler, Audit Manager

Sharon Summers, Lead Auditor

David Hartman, Senior Auditor

Kristi Larson, Senior Auditor

Alan Lund, Senior Auditor

 

Appendix III

 

Report Distribution List

 

Commissioner  C

Office of the Commissioner – Attn:  Chief of Staff  C

Deputy Commissioner for Services and Enforcement  SE

Deputy Commissioner, Wage and Investment Division  SE:W

Director, Compliance, Wage and Investment Division  SE:W:CP

Director, Strategy and Finance, Wage and Investment Division  SE:W:S

Director, Reporting Compliance, Wage and Investment Division  SE:W:CP:RC

Chief, Performance Improvement, Wage and Investment Division  SE:W:S:PI

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 Internal Control  OS:CFO:CPIC:IC

Audit Liaison:  Senior Operations Advisor, Wage and Investment Division  SE:W:S

 

Appendix IV

 

Outcome Measures

 

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 Congress.

Type and Value of Outcome Measure:

·         Taxpayer Rights and Entitlements – Potential; 243,345 taxpayers over a 5-year period who received from the Wage and Investment Division AUR Program CP 2000 notices[11] with inaccurate information that might have resulted in overassessments of tax (see page 4).

Methodology Used to Measure the Reported Benefit:

We computed the potential number of taxpayers who were overassessed tax based on the results of our statistically valid random attribute sample of 138 taxpayers who were issued AUR Program notices by the Wage and Investment Division in FY 2007.  The sample was selected from a population of 1,343,258 taxpayers who were issued notices in FY 2007 for Tax Year 2005.  Our sample size of 138 taxpayers was determined based on a 95 percent confidence level, an estimated error rate of 10 percent, and a precision of ±5 percent.  Our sample identified seven taxpayers who were sent CP 2000 notices with inaccurate information.

For five of these taxpayers, the inaccurate information on the CP 2000 notices resulted in proposed overassessments of tax.  To calculate the number of taxpayers potentially affected by proposed overassessments of tax resulting from inaccurate information on the CP 2000 notices, we applied the ****1****[12]

Projecting this over a 5-year period, 243,345 taxpayers could be overassessed tax as a result of inaccurate information on CP 2000 notices issued by the Wage and Investment Division AUR Program (****1****5 years).

Type and Value of Outcome Measure:

·         Taxpayer Rights and Entitlements – Actual; $18,968 in erroneous overassessments of tax in CP 2000 notices issued to taxpayers from our sample of FY 2007 notices (see page 4).

Methodology Used to Measure the Reported Benefit:

Based on the results of our sample, we computed the actual increased taxpayer rights and entitlements if the Wage and Investment Division AUR Program had ensured that the CP 2000 notices were accurate.  The sample disclosed ****1**** taxpayers who were overassessed $18,968 in total taxes.[13]  We did not project the dollar amount to the population because of the variability of the dollar amounts in the sample.

Type and Value of Outcome Measure:

·         Increased Revenue – Potential; 97,340 taxpayers over a 5-year period who received from the Wage and Investment Division AUR Program CP 2000 notices with inaccurate information that might have resulted in underassessments of tax (see page 4).

Methodology Used to Measure the Reported Benefit:

We computed the potential number of taxpayers who were underassessed taxes based on the results of our statistically valid random attribute sample of 138 taxpayers issued AUR Program notices by the Wage and Investment Division in FY 2007.  The sample was selected from a population of 1,343,258 taxpayers issued notices in FY 2007 for Tax Year 2005.  Our sample size of 138 taxpayers was determined based on a 95 percent confidence level, an estimated error rate of 10 percent, and a precision of ±5 percent.  Our sample identified seven taxpayers who were sent CP 2000 notices with inaccurate information.

****1****To calculate the number of taxpayers potentially affected by underassessments of tax resulting from inaccurate information on the CP 2000 notices, we applied the ****1****[14]

Projecting this over a 5-year period, 97,340 taxpayers could be underassessed tax as a result of inaccurate information on CP 2000 notices issued by the Wage and Investment Division AUR Program (****1**** 5 years).

Type and Value of Outcome Measure:

·         Increased Revenue – Actual; $1,146 in erroneous underassessments of tax in CP 2000 notices issued to taxpayers from our sample of FY 2007 notices (see page 4).

Methodology Used to Measure the Reported Benefit:

Based on the results of our sample, we computed the actual increase in revenue if the Wage and Investment Division AUR Program had ensured that the CP 2000 notices were accurate.  The sample disclosed ****1**** We did not project the dollar amount to the population because of the variability of the dollar amounts in the sample.

 

Appendix V

 

Example of a CP 2000 Notice[15]

 

The Notice was removed due to its size.  To see the Notice, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Appendix VI

 

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.



[1] Campuses are the data processing arm of the IRS.  The campuses process paper and electronic submissions, correct errors, and forward data to the Computing Centers for analysis and posting to taxpayer accounts.

[2] The Austin AUR campus site did not have a weekly notice error rate exceeding 10 percent during the first 7 months of FY 2008.

[3] Campuses are the data processing arm of the IRS.  The campuses process paper and electronic submissions, correct errors, and forward data to the Computing Centers for analysis and posting to taxpayer accounts.  The six AUR campus sites include Atlanta, Georgia; Austin, Texas; and Fresno, California, in the Wage and Investment Division and Brookhaven, New York; Ogden, Utah; and Philadelphia, Pennsylvania, in the Small Business/Self-Employed Division.

[4] Tax examiners analyze more than 95 percent of the cases worked by the AUR Program.  The remaining cases are systemically processed without any tax examiner review.

[5] The CP 2000 notice is an IRS letter sent to a taxpayer to resolve discrepancies between income, credits, and/or deductions claimed on a tax return and those reported by a third party, as well as to propose an additional tax assessment.  In some cases, a CP 2501 notice will be issued before a CP 2000 notice.  The CP 2501 notice is similar to the CP 2000 notice in that it is used by the IRS to resolve discrepancies between income, credits, and/or deductions claimed on a tax return and those reported by a third party.  However, the CP 2501 notice does not propose an additional tax assessment.  If the taxpayer agrees with the CP 2501 notice or does not respond, the IRS will issue a CP 2000 notice.

[6] An IRS letter sent to taxpayers notifying them of an increase in the amount of taxes they owe.

[7] The nine-member IRS Oversight Board was created by Congress under the IRS Restructuring and Reform Act of 1998 [Pub. L. No. 105-206, 112 Stat. 685 (codified as amended in scattered sections of 2 U.S.C., 5 U.S.C. app., 16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.)].  The Board’s responsibility is to oversee the IRS in its administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws.

[8] Internal Revenue Manual Section 4.19.3.21.

[9] The Austin AUR campus site did not have a weekly notice error rate exceed 10 percent during the first 7 months of FY 2008.

[10] The IRS database that stores various types of taxpayer account information.  This database includes individual, business, and employee plans and exempt organizations data.

[11] The CP 2000 notice is an IRS letter sent to a taxpayer to resolve discrepancies between income, credits, and/or deductions claimed on a tax return and those reported by a third party, as well as to propose an additional tax assessment.

[12] This figure is rounded to the nearest whole number.

[13] ****1****

[14] This figure is rounded to the nearest whole number.

[15] All dates, monetary, and taxpayer identifying information contained in this example are hypothetical.