Plans Exist to Engage the Tax Preparer Community in Reducing the Tax Gap; However, Enhancements Are Needed
June 10, 2010
Reference Number: 2010-30-061
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 Site |
http://www.tigta.gov
HIGHLIGHTS
Plans Exist to Engage the Tax Preparer Community in Reducing the Tax
Gap; However, Enhancements Are Needed
Highlights
Final
Report issued on June 10, 2010
Highlights of Reference
Number: 2010-30-061 to the Internal
Revenue Service Deputy Commissioner for Services and Enforcement and the Chief Financial Officer.
IMPACT ON TAXPAYERS
Paid preparers prepare more than half of all individual tax
returns filed and have a great deal of influence on taxpayer compliance
levels. Because most taxpayers use
preparers to file their tax returns, adherence to standards and the preparation
of accurate tax returns have a significant effect on taxpayer compliance and
the Internal Revenue Service’s (IRS) efforts to reduce the tax gap.
WHY TIGTA DID THE AUDIT
The individual income tax is the largest single source of
Federal receipts and comprises over 71 percent of the tax gap. TIGTA initiated this review to evaluate the IRS’
efforts to engage the tax practitioner community in a productive partnership to
reduce the tax gap.
WHAT
TIGTA FOUND
The IRS has taken actions to engage the tax preparer
community that could affect tax administration and reduce the tax gap. The IRS developed a Fiscal Years 2009–2013 Strategic Plan to improve
oversight of tax administration. It includes
two key objectives and several strategies that pertain to reducing the tax gap
by engaging the tax preparer community. However,
actions were not taken to ensure previously omitted key components were
included in the existing IRS Strategic Plan.
Without these components, it is unclear how the IRS will effectively
monitor its performance and adherence to the requirements for strategic plans.
The IRS’ Strategic Plan is supported by plans from 10
business divisions and functional offices, with numerous goals and activities to
strengthen the partnership with tax practitioners. Additionally, in June 2009, the IRS Commissioner
launched the Return Preparer Review, which supports the Strategic Plan to
enhance compliance standards for tax preparers.
The Review resulted in a report issued on January 4, 2010, that contained
eight recommendations, including mandatory tax return preparer registration and
competency examination requirements for tax preparers.
Our review found that the IRS’ Strategic Plan does not
contain sufficient measures that will be useful for monitoring its performance
in achieving its goals and objectives to engage the paid preparer community. Also, the plans of the IRS business divisions
and functional offices did not always include outcome measures, baselines, or
targets that could be used to measure whether actions taken would achieve
desired objectives in the Strategic Plan.
WHAT TIGTA RECOMMENDED
TIGTA
recommended that the Chief Financial Officer 1) take steps to update the existing
IRS Strategic Plan and ensure future strategic plans have all key components
and 2) define and include in the Strategic Plan sufficient measures that will
provide data that can be used to monitor the IRS’ efforts to achieve objectives
aimed at strengthening partnerships with tax practitioners and paid preparers
to ensure effective tax administration.
IRS
officials agreed with our recommendations; however, the planned corrective
actions did not address updating the existing Strategic Plan with omitted key
components and sufficient measures to monitor the IRS’ efforts regarding the
paid preparer community.
TIGTA continues to believe the existing Strategic Plan should be updated to ensure the IRS is compliant with the Government Performance and Results Act of 1993. In addition, without an effective process to monitor its performance, the IRS cannot ensure its programs are achieving their objectives and desired outcomes.
June 10, 2010
MEMORANDUM
FOR
DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT
CHIEF FINANCIAL OFFICER
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Plans Exist to Engage the Tax Preparer Community in Reducing the Tax Gap; However, Enhancements Are Needed (Audit # 200930027)
This report presents the results
of our review to evaluate the Internal Revenue Service’s (IRS) efforts to
engage the tax practitioner community in a productive partnership to reduce the
tax gap.[1] The audit was conducted as part of our Fiscal
Year 2010 Annual Audit Plan and addresses the major management challenge of Tax
Compliance Initiatives.
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 Margaret E. Begg,
Assistant Inspector General for Audit (Compliance and Enforcement Operations),
at (202) 622-8510.
A Return
Preparer Review Was Initiated to Enhance Compliance Standards for Tax Preparers
Performance
Measures Are Needed to Monitor Efforts to Engage the Tax Preparer Community
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
V – Glossary of Terms
Appendix
VI – Management’s Response to the Draft Report
Abbreviations
|
FY |
Fiscal Year |
|
IRS |
Internal Revenue Service |
|
TIGTA |
Treasury Inspector General for Tax Administration |
|
Paid
preparers can be self-employed or may work for accounting firms, large tax
preparation services, or law firms and include the following: ·
Licensed professionals,
such as attorneys and Certified Public Accountants. These licensed professionals are regulated
by the State licensing authority. |
|
·
Enrolled agents. These professionals pass an IRS examination
or present evidence of qualifying experience as a former IRS employee and
have been issued an enrollment card.
Enrolled agents are the only taxpayer representatives who receive
their right to practice from the Federal Government. |
|
·
Unenrolled or
unlicensed preparers. These
individuals range from those who might receive extensive training to those
with little or no training. Currently,
only three States— |
The
The individual income tax is the largest single source of
Federal receipts, and tax practitioners
have a great deal of influence to ensure taxpayers comply with tax laws. The individual income tax comprises over 71
percent of the $345 billion gross tax gap.[2]
Since 2006, the Department of the Treasury and the IRS Oversight Board (hereafter referred to as the Board) have developed strategies to address noncompliance. The Department of the Treasury Office of Tax Policy issued A Comprehensive Strategy for Reducing the Tax Gap that referenced coordination with partners and stakeholders.
It suggested that:
Closer coordination is needed between the IRS
and State and Foreign Governments to share information and compliance
strategies. Closer coordination also is
needed with practitioner organizations, including bar and accounting
associations, to maintain and improve mechanisms to ensure that advisors
provide appropriate tax advice. Through
contacts with practitioner organizations, the Department of the Treasury and
IRS learn about recent developments in tax practice and hear directly from
practitioners about taxpayer concerns and potentially abusive practices.
In its Fiscal Year (FY) 2006 Annual Report, the Board recommended six interrelated strategies that it believed would reduce the tax gap. The strategies included simplifying the tax code, improving information reporting and enforcement tools to address underreporting of income, improving customer service, and creating a more productive partnership between the IRS and the tax preparer community.
In its FY 2008 Annual Report, the Board reported that the tax gap was a serious systemic weakness that must be addressed and is a real cost to taxpayers. The Annual Report stated that the tax gap, which is unacceptably high, deprives the nation and its people of $290 billion in tax revenue each year that should be collected. The report further stated that if the tax gap was zero, the Federal Government would have additional revenue each year that it could either spend on programs or refund to taxpayers.
The review was performed at the IRS National Headquarters in Washington, D.C., in the Office of Appeals, Criminal Investigation Division, Large and Mid-Size Business Division, Tax Exempt and Government Entities Division, Office of Professional Responsibility, and Taxpayer Advocate Service; the National Headquarters in New Carrollton, Maryland, for the Small Business/Self-Employed Division; and the National Headquarters in Atlanta, Georgia, for the Wage and Investment Division during the period May 2009 through January 2010. 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 are presented in Appendix I. Major contributors to the report are listed in Appendix II.
Actions Taken to Engage the Tax Preparer Community Could Affect Tax Administration and Reduce the Tax Gap
Because more than half of all tax returns filed are prepared by paid preparers, tax return preparers have a significant effect on taxpayer compliance. In January 2008, Senate Finance Committee Chairman Max Baucus, Democrat-Montana, expressed his concern with the tax gap at Douglas Shulman’s nomination hearing to become the 47th IRS Commissioner. Mr. Shulman agreed that the tax gap was a significant problem and stated he was 100 percent committed to working toward increasing compliance and closing the tax gap.
The IRS developed a
strategic plan to improve oversight of tax administration
During FY 2008, the IRS, the Department of the Treasury, the Board, and a consulting firm identified emerging trends affecting tax administration. A key trend identified included the expanding role of tax practitioners and other third parties in the tax system. The IRS Commissioner and his executives used these trends to develop a Strategic Plan outline, which was shared with IRS senior management in August 2008.
The Board, which is responsible for approving the Strategic Plan, worked with the IRS to update the Strategic Plan for FYs 2009–2013. The Board approved the IRS plan in April 2009. It includes two overall goals related to achieving the IRS’ mission:
Goal 1 – Improve service to make voluntary compliance easier.
Goal 2 – Enforce the law to ensure everyone meets their obligation to pay taxes.
The IRS identified 10 key objectives for both goals—two pertain to reducing the tax gap by engaging the tax community and include the approach to accomplish the objectives. Specifically:
Strategy:
1.
Enable partners to better serve their customers by providing
faster issue resolution and tailored service.
2.
Treat partners as the “first line of compliance” by providing
them with the tools and information to encourage taxpayer compliance and
prevent mistakes.
Strategy:
1.
Develop and implement a coordinated
preparer plan across the IRS and the preparer community.
2.
Administer a fair, diligent, and
effective system of sanctions and penalties for those who fail to follow the
law.
3.
Leverage research to identify fraudulent
return preparers and other areas of abuse and noncompliance by return
preparers.
Actions were not taken to ensure previously omitted key components were included in the strategic plan
In FY 2007, the Treasury Inspector General for Tax Administration (TIGTA) reported[3] that the IRS’ FYs 2005–2009 Strategic Plan did not have all of the information required to be included in its plan. The IRS agreed with our recommendations, and the office of the Chief Financial Officer[4] planned to take corrective actions by April 15, 2008, to ensure future strategic plans included the following:
Review of the existing IRS Strategic Plan showed only 1 (25 percent) of the planned corrective actions was implemented. For the remaining three, one was not addressed, one was partially completed, and there was not sufficient documentation to support that the remaining action was implemented. IRS personnel stated that the lack of timely implementation on the corrective actions occurred for the following reasons: 1) the timetable/schedule was not included because they are expecting a revamping of the Performance Assessment Rating Tool;[5] 2) a request was made for Congress to provide input, but the IRS did not receive a response; and 3) they did not have a reason for not clearly providing instructions for taxpayers to provide comments. We followed up with the appropriate personnel in the Office of Management and Budget and they confirmed that the IRS is still required to measure and gather data while the Performance Assessment Rating Tool is being revamped. In addition, documentation was not available for us to review and confirm that Congress was asked to provide input on the Strategic Plan.
Without these components, it is unclear how the IRS will effectively monitor its performance and adherence to the requirements for strategic plans. The Government Accountability Office guidance regarding audit recommendations suggests that management is responsible for implementing recommendations made to Federal Government agencies.
Ten business divisions and functional offices created individual
plans to support the strategic plan
Workshops with senior IRS management and executives were held to discuss and identify ways to align the Strategic Plan’s goals and objectives with the business operating divisions and functional offices’ processes. We discussed these efforts with IRS personnel and determined this task was accomplished by:
Each IRS
business division and functional office developed plans that showed goals,
programs, and activities to support the IRS’ two key objectives aimed at the
tax preparer community.
Each business division and functional office developed annual multi-year plans and program letters (hereafter referred to as functional plans). A review of the functional plans showed the goals, programs, and activities were consistent and supported the IRS’ objectives to strengthen the partnership with tax practitioners to ensure an effective tax administration and to ensure that all tax practitioners adhere to professional standards and follow the law. For example, the Taxpayer Advocate Service plan includes a goal to explore the role of preparers in bringing taxpayers into compliance by identifying the types and causes of preparer errors and the role of preparers in facilitating noncompliance. In addition, business units and functional offices took the following steps to engage the tax practitioners:
·
Conducted
workshops with tax professionals from Federal advisory committees such as the
Information Reporting Program Advisory Committee, the IRS Advisory Committee,
and the American Institute of Certified Public Accountants to develop scenarios
and testing protocol to study preparer work processes.
·
Completed
a research study on the role of preparers in relation to taxpayer compliance
with Internal Revenue Laws.
·
Initiated
a Preparer Penalty Program to address the following two primary preparer
penalties:
1)
Internal
Revenue Code Section 6694 –
Understatement of taxpayer’s liability by tax return preparer.
2)
Internal
Revenue Code Section 6701 –
Penalties for aiding and abetting understatement of tax liability.
See
Appendix IV for examples of goals, programs, and activities from all 10
business divisions and functional offices.
Recommendation
Recommendation 1: The Chief Financial Officer should take steps to update the existing IRS Strategic Plan and ensure future strategic plans have all of the information in the plans as required by the Government Performance and Results Act of 1993[6] and Office of Management and Budget Circular A-11 (Preparation, Submission, and Execution of the Budget).
Management’s
Response:
IRS management agreed with this recommendation and will
ensure future strategic plans incorporate the requirements in Department of the
Treasury guidance, which includes both the Government Performance and Results
Act of 1993 and Circular A-11.
Office of Audit Comment: While
IRS management agreed with our recommendation, the IRS did not address
modifying its existing Strategic Plan to include omitted key components required
by the Department of the Treasury. We
previously reported these omissions during our 2007 review, and the IRS
responded it would ensure consistency with Treasury guidance in developing its
next strategic plan. However, the current
management response is similar to the IRS’ 2007 response, and we continue to
believe the existing Strategic Plan should be updated to ensure the IRS is
compliant with the Government Performance and Results Acts of 1993. We followed up with IRS management to provide
them an opportunity to reconsider their response; however, we were advised that
their position remained the same.
A Return Preparer Review Was Initiated to Enhance Compliance Standards for Tax Preparers
In June 2009, the IRS Commissioner launched a Return Preparer Review (hereafter also referred to as the Review). The goal of the Review is to help the IRS better leverage the tax return preparer community to increase taxpayer compliance and ensure uniform and high ethical standards of conduct for tax preparers. The Review team was led by the Deputy Commissioner for Operations Support and included senior IRS executives, a designated project manager, and a team of IRS employees.
From June to December 2009, the IRS conducted three public forums with various members of the preparer community and other stakeholders to obtain input on how to meet its objectives. Participants who attended the forums included the Government Accountability Office, TIGTA, selected States,[7] software developers, independent tax preparers, IRS employees, and taxpayers. The IRS received more than 1,050 comments from the public and its employees on specific questions regarding tax preparer activities. A review of the responses showed 53 percent of respondents were in favor of the IRS providing improved oversight and enforcement of tax practitioners and the tax preparer community, while only 42 percent were in favor of a proposed requirement to register all preparers. Some offered methodologies to improve the oversight and enforcement, and others questioned how the IRS would enforce control standards such as signing tax returns for tax professionals and paid preparers who use off-the-shelf tax software. All comments are available for review on the IRS’ website (IRS.gov).
The
expected outcome of the Return Preparer Review was to propose a comprehensive set of recommendations for the IRS Commissioner
to provide to the Secretary of the Treasury and the President by December
2009. On January 4, 2010, the
Commissioner issued the Return Preparer Review (Publication 4832), which included
eight recommendations. Figure 1 reflects
a brief description of the eight Review recommendations.
Figure
1: Return Preparer Review
Recommendations
|
Recommendations |
Description of
Recommendations |
|
Mandatory Tax Return
Preparer Registration |
All individuals
required to sign a Federal tax return as a paid tax return preparer will be
required to register and obtain a preparer tax identification number. The registration will be effective for a 3-year
period and requires tax return preparers to renew their registration every 3 years. |
| Competency Examination
Requirements |
All paid tax return
preparers required to register with the IRS who are not attorneys, certified
public accountants, or enrolled agents will be required to take a competency
test. |
|
Continuing Professional
Education |
All paid tax preparers
who are required to register will be required to take
15 hours of annual continuing professional education, including 3 hours of
Federal tax law updates, 2 hours of tax preparer ethics, and 10 hours of
Federal tax law topics. Attorneys,
certified public accountants, enrolled agents, or others enrolled to practice
before the IRS will be excluded because these individuals generally must
complete continuing education requirements to retain their professional
credentials. |
|
Ethical Standards |
All signing and
nonsigning tax return preparers will be placed under Department of the
Treasury Circular 230.[8] |
| Tax Return Preparer
Enforcement |
The IRS plans to
implement a comprehensive enforcement strategy that includes applying
significant examination and collection resources to tax return preparer
compliance. |
|
Tax Return Preparation
Software |
The IRS plans to
establish a task force that will seek the input of the tax preparation
software industry, State Government representatives, and other relevant
stakeholders to address identified risks associated with the dependence of
tax administration on consumer and commercial tax preparation software and
discuss the possibility of establishing industry standards. |
|
Refund Settlement
Products |
The IRS plans to
convene a working group to review the refund settlement product
industry. Part of this review will
include analyzing opportunities to improve refund delivery options. |
|
Public Awareness and
Service Enhancements |
The IRS plans to
develop a public awareness campaign to educate taxpayers, paid tax return
preparers, and IRS employees about the new standards and requirements for tax
return preparers. In addition, the IRS
will develop a searchable database of tax return preparers who have
registered and passed the competency examination. |
Source: The IRS
Return Preparer Review Report dated January 4, 2010.
The IRS did not provide any time periods for implementation; however, all
but two of the recommendations will be implemented. The IRS will conduct a study to determine if
standards are needed for the recommendations that address tax return preparation
software and delivery options for refund settlement products for the unbanked
taxpayer.
The IRS acknowledges that it does not know how many paid preparers exist and cannot determine the full extent of noncompliance and incompetence within the tax practitioner community. This lack of information hinders the IRS’ efforts to expand its outreach and education initiatives and to identify potentially problematic preparers. Pursuing abusive preparers is part of the IRS’ strategy to reduce the tax gap. While it is too soon to comment whether the suggested recommendations will meet the IRS’ objectives, the recommendations are an effective step in engaging the tax preparer community. The overall estimated cost in conducting the Review is $1.3 million, which includes costs for 2 Federal contractors to provide research and project management activities. The IRS did not consider opportunity costs for the Return Preparer Review and funded the Review from its FY 2009 available and unallocated funds. Also, IRS management stated that existing IRS programs were not negatively impacted (from a resource and productivity perspective) by the undertaking of the Review. The TIGTA is currently conducting a review[9] to evaluate the IRS’ efforts to implement the Review recommendations by the 2011 Filing Season.
Performance Measures Are Needed to Monitor Efforts to Engage the Tax Preparer Community
Existing measures will
not provide IRS executives with data needed to evaluate if the IRS is fairly
applying penalties or effectively leveraging research to identify fraudulent
tax return preparers.
The IRS’ FYs 2009–2013 Strategic Plan does not contain sufficient measures that will be useful for monitoring its performance in achieving IRS goals and objectives to engage the paid preparer community. For example, the existing measures will not provide IRS executives with data needed to evaluate if the IRS is fairly applying penalties or effectively leveraging research to identify fraudulent tax return preparers. We discussed the importance of having useful performance measures with IRS personnel and were advised that specific measures were not needed because the broad measures included in the plan would provide the information needed to assess performance. Figure 2 depicts the IRS’ existing plans for measuring performance to achieve the goals outlined in its Strategic Plan.
Figure
2: The IRS’ Long-Term Measures to
Monitor Performance
|
Measures |
Description of Measures |
|
Voluntary Compliance
Rate |
Measure
the amount of tax that is paid voluntarily and in a timely manner as a
percentage of the corresponding estimate of true tax liability. The compliance rate reflects the impact of
nonfiling, underreporting, and underpayment combined. |
|
American Customer
Satisfaction Index |
Monitor
the American Customer Satisfaction Index score related to the electronic and
paper filing processes for individual income tax returns. |
|
E-File Rate |
Measure
the percentage of all major tax returns filed electronically by individuals,
businesses, and tax-exempt entities.
“Major” tax returns are those on which filers account for income,
expenses, and/or tax liabilities. |
|
Taxpayer Satisfaction With
IRS Services |
Administer
surveys across all types of service to assess whether the taxpayer’s issue
was resolved in a reasonable timeframe. |
|
Enforcement Contacts |
Track all
enforcement contacts including audits, notices, and Automated Underreporter
Program work to arrive at a more complete measure of coverage rate. |
|
Non-Revenue Enforcement
Activity |
Track its
enforcement activities that promote compliance but do not primarily focus on
increasing tax revenue (e.g., tax-exempt compliance programs or Bank Secrecy
Act activities). |
|
Nonfilers |
Analyze
and estimate the number of individuals who do not file income tax returns but
have an obligation to file an income tax return. |
Source: The IRS’ FYs 2009–2013 Strategic Plan.
Paid tax return
preparers are a critical component and stakeholder in tax administration and
represent an important intermediary between taxpayers and the IRS. They are also an important component in IRS
efforts to close the tax gap. In
addition, the tax return preparer community provides a unique opportunity to
affect taxpayer behavior and compliance with the tax laws. Without specific measures and a process to
obtain needed data, the IRS will not be able to monitor the effectiveness of
its strategies to engage paid preparers and their role in reducing the tax gap.
Performance measures were
excluded from the business divisions’ and functional offices’ plans and
business performance reviews
The IRS business divisions’ and functional offices’ business performance reviews and plans did not always include outcomes, outcome measures, baselines, or targets that could be used to measure if actions taken would achieve objectives in the IRS Strategic Plan. We reviewed 10 business divisions’ and functional offices’ plans and business performance reviews for the two strategic plan objectives related to paid preparers and identified the following:
The Government Performance and Results
Act of 1993 was enacted to bring to Federal
Government agencies more accountability in how they spend their budgets and how
well they fulfill their public service roles.
It requires strategic plans to include a mission statement, general
goals, objectives, and strategies and measures.
In addition, the Government Accountability Office guidelines require top-level
reviews of actual performance and the establishment and review of performance
measures because it is critical that plans have a method to measure the
progress and expected outcome of goals and actions. The availability of this data in the IRS Strategic
Plan and in the business divisions’ and functional offices’ plans and business
performance reviews will improve their usefulness and provide information
needed to make better management decisions.
As
the IRS moves forward with it plans to implement the Return Preparer Review
recommendations, it is critical that it considers our results and takes the
necessary steps to document methods to measure and monitor the progress and
expected outcomes for the planned strategies.
The initial care exercised will enable management to better evaluate the
success of its goals and objectives.
Furthermore, the concept of accountability for use of public resources
and government authority is a key component to our nation’s governing
processes. Legislators, government
officials, and the public need to know whether government programs are
achieving their objectives and desired outcomes.
Recommendation
Recommendation 2: The Chief Financial Officer should define and include in the IRS Strategic Plan sufficient measures that will provide data that can be used to monitor the IRS’ efforts to achieve objectives aimed at strengthening partnerships with tax practitioners and paid preparers to ensure effective tax administration. This effort includes coordinating with the business divisions and functional offices to ensure their plans and/or business performance reviews include acceptable measures to assess their progress in achieving the expected outcomes of goals and actions which support the IRS Strategic Plan.
Management’s
Response:
IRS management agreed with this recommendation and will
include in the IRS Strategic Plan measures to assess progress in achieving the
expected goals and objectives that support the IRS Strategic Plan.
Office
of Audit Comment: While IRS management agreed with the
recommendation, the planned corrective actions did not address modifying the
existing Strategic Plan to include sufficient measures that will provide data
that can be used to monitor IRS efforts to achieve objectives aimed at
strengthening partnerships with tax practitioners and paid preparers. For example, we reported that the IRS does not
have a measure to evaluate if the IRS is fairly applying penalties or
effectively leveraging research to identify fraudulent tax return preparers. Also, IRS management did not
address how they plan to coordinate with the business divisions and functional
offices to ensure their plans and business performance reviews include
acceptable measures to assess their progress in achieving the actions/goals specifically
for the tax preparer community. Finally,
IRS management agreed to assess the progress in achieving the expected goals
and objectives which support the Strategic Plan; however, they did not clarify
if the assessment will include all or some of the goals and objectives in all
business divisions and functional offices.
Without an effective process to monitor its performance, the IRS cannot
ensure its programs are achieving their objectives and desired outcomes. We followed up with IRS management to clarify
and provided them the opportunity to reconsider their response; however, we
were advised that their position remained the same.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to evaluate the IRS’ efforts to engage the tax practitioner community in a productive partnership to reduce the tax gap.[10] To accomplish the overall objective, we:
I. Determined whether the IRS Strategic Plan for FYs 2009–2013 was sufficient for items such as goals, objectives, and quantifiable measures to engage the tax practitioner community to reduce the tax gap.
A. Discussed with the IRS office of the Chief Financial Officer the development of the Strategic Plan.
B. Reviewed the IRS Strategic Plan for FYs 2009–2013 to determine if it included the information that was missing from the FYs 2005–2009 Strategic Plan.
C. Determined if the prior recommendations from the TIGTA FY 2007 audit report[11] were implemented.
D. Obtained and reviewed documents from the office of the Chief Financial Officer to determine whether any stakeholders concerns pertaining to partnering with tax practitioners to reduce the tax gap were addressed in the IRS Strategic Plan for FYs 2009–2013.
E. Determined whether the plan contained the critical components required by the Government Performance and Results Act of 1993.[12]
II. Determined if the 10 business divisions and functional offices[13] developed plans to support the IRS’ direction to engage the tax practitioner community to reduce the tax gap, which includes all tax preparers adherence to professional standards and following the law.
A. Determined if the 10 business divisions’ and functional offices’ plans addressed and included specifics to support the IRS’ goals outlined in the IRS Strategic Plan for FYs 2009–2013.
B. Determined if the business divisions’ and functional offices’ plans included the elements required under the Performance Assessment Rating Tool.
C. Identified any other programs not included in the functional plans that engage the tax community to reduce the tax gap and help ensure adherence to professional standards and the law.
III. Determined if IRS management considered the opportunity cost of conducting the Return Preparer Review and determined the impact of diverted resources for the Review on existing IRS programs.
A. Identified and interviewed the Review team to discuss the planning and goals for the Review.
B. Obtained and reviewed documentation that addressed the goals/objectives, resource commitments, impact of the resource commitments on existing IRS programs, planned efforts/activities, expected outcomes, and milestones for the Review.
C. Identified the method the IRS used to monitor the actions/tasks for accomplishing the Review.
Internal controls methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. We determined the following internal controls were relevant to our audit objective: the establishment of a Strategic Plan and its goals and strategies for relevance to engaging the tax preparer community to reduce the tax gap and the performance measures needed to assist in assessing the accomplishment of the Plan goals. We evaluated these controls by interviewing management and reviewing the current Strategic Plan, functional plans that support it, and business performance reviews that reflect the IRS’ performance to accomplish its goals and strategies.
Appendix II
Major Contributors to This Report
Margaret
Begg, Assistant Inspector General for Audit (Compliance and Enforcement
Operations)
Frank
Jones, Acting Director
Marybeth Schumann, Director
Deborah
Drain, Audit Manager
Cindy
Harris, Lead Auditor
John
Chiappino, Senior Auditor
Andrea
McDuffie, Senior Auditor
Lynn
Ross, Senior Auditor
Sylvia
Sloan-Copeland, Auditor
Joel
Weaver, Auditor
Appendix III
Commissioner C
Office
of the Commissioner – Attn: Chief of
Staff C
Deputy
Commissioner for Operations Support OS
Chief,
Appeals AP
Chief,
Criminal Investigation SE:CI
Commissioner,
Large and Mid-Size Business Division
SE:LM
Director,
Office of Professional Responsibility
SE:OPR
Commissioner,
Small Business/Self-Employed Division
SE:S
Commissioner,
Tax Exempt and Government Entities Division
SE:T
Commissioner,
Wage and Investment Division SE:W
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
Liaisons:
Deputy Commissioner
for Operations Support OS
Deputy Commissioner
for Services and Enforcement SE
Chief, Appeals AP
Chief, Criminal
Investigation SE:CI
Chief Financial
Officer OS:CFO
Commissioner, Large
and Mid-Size Business Division SE:LM
Director, Office of
Professional Responsibility SE:OPR
Commissioner, Small
Business/Self-Employed Division SE:S
Commissioner, Tax
Exempt and Government Entities Division
SE:T
Commissioner, Wage and Investment Division SE:W
National Taxpayer Advocate TA
Appendix IV
Examples of Goals, Programs, and Activities
(From 10 Business Divisions and Functional
Offices
That Support the Strategic Plan)
|
Business Divisions and Functional Offices |
Goals, Programs, and Activities |
|
Appeals |
Increase taxpayer
awareness of Alternative Dispute Resolution programs while exploring
opportunities to expand early issue resolution. |
|
Criminal Investigation
Division |
Reach out both alone
and in partnership with other IRS operating divisions to all market segments,
including the tax practitioner community, for the purpose of educating
individuals, businesses, and return preparers about the various types of
fraud committed in their industry and how to recognize, avoid, and report it. |
|
Employee Plans |
Coordinate with the |
|
Exempt Organizations |
Conduct reviews of the
activities of exempt organizations using data on file and publically
available information, without direct involvement with the taxpayer.
These reviews may lead to compliance checks, examinations, or followup in a
later year, thus ensuring that compliance is maintained on an ongoing basis. |
|
Large and Mid-Size Business Division |
Engage taxpayers and their preparers in the development of the facts
and the issue resolution process, using appropriate tools to timely reach
agreement. |
|
Office of Professional Responsibility |
Continue to disclose final case
dispositions on its webpage for reference and guidance. |
|
Small Business/ |
Identify and act on
emerging schemes through approval and development of promoter penalties,
abusive preparer, and participant cases. |
|
Tax Exempt
Bonds |
Continue to utilize the Internal Revenue Code Section 6700,
Tax Promoter Penalty, to target the promoters of abusive transactions and the
lack of diligence by market professionals. |
|
Taxpayer Advocate
Service |
Explore the role
of preparers in bringing taxpayers into compliance. Identify the types of and causes of
preparer errors and the role of preparers in facilitating noncompliance. |
|
Wage and Investment
Division |
Provide improved
training tools through web-based training that links tax law and software
into a single process-based training module. |
Source: The annual and multi-year functional plans of
10 IRS business divisions and functional offices.
Appendix V
American
Customer Satisfaction Index – A customer
satisfaction index that relates expectations and evaluations of quality to
customer satisfaction and is an internationally accepted measure of customer
satisfaction used in over 20 countries.
Business Performance Review – A process which establishes a framework for measuring, reporting, and reviewing a business division’s performance against its functional plans established within the Strategic Planning and Budget process. The Business Performance Review is one of several communication vehicles used to report quarterly performance measures to the IRS Commissioner’s Office.
Gross Tax Gap – An estimated amount determined by the IRS of tax liabilities due in Tax Year 2001 before enforcement efforts and late payments were considered. The estimated amount is $345 billion. The amount of enforcement effort and late payments totaled $55 billion. The difference between the two—$290 billion—is the net tax gap.
Performance Assessment Rating Tool (PART) – A vehicle for achieving the goals of the
Government Performance and Results Act of 1993.[15] It strengthens
and reinforces performance measurement under that act by encouraging careful
development of performance measures for programs according to the
outcome-oriented standards of the law and by requiring that agency goals
include actions with completion dates and designed to improve program results.
Tax Gap – The difference between the annual Federal tax obligation and the amount of tax the taxpayer pays voluntarily and timely. The tax gap consists of those who do not file their returns, do not make their payments on time, and file returns but underreport their income or over report their expenses.
Unbanked Taxpayer – A taxpayer who does not have a bank account.
Appendix VI
Management’s Response to the
Draft Report
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
CHIEF
FINANCIAL OFFICER
May 11, 2010
\
MEMORANDUM FOR MICHAEL R. PHILLIPS
DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Alison L. Doone /S/ Alison L. Doone
Chief Financial Officer
SUBJECT: Draft Audit Report - Plans Exist to Engage the Tax Preparer Community in Reducing the Tax Gap; However, Enhancements are Needed (Audit 200930027)
This is in response to your Draft Audit Report, "Plans Exist to Engage the Tax Preparer Community in Reducing the Tax Gap; However, Enhancements are Needed (Audit # 200930027).
I am pleased with your acknowledgement that the IRS Strategic Plan contains objectives critical to reducing the tax gap by engaging the tax preparer community and that the IRS business divisions and functional offices have plans in place that show goals, programs and activities to support the key objectives aimed at the tax preparer community.
The IRS is pleased with both the IRS Strategic Plan (2009-2013) and the process used to develop it. The plan includes measures that help the IRS monitor progress toward its long-term goals. The IRS tracks hundreds of metrics to ensure effective operations at all levels of the organization.
If you have any questions, please contact Peter Rose, Acting Associate CFO for Corporate Planning and Internal Control, at (202) 622-4508.
Attachment
Attachment
RECOMMENDATION 1
The Chief Financial Officer should take steps to update the existing IRS Strategic Plan and ensure future strategic plans have all of the information in the plans as required by the Government Performance and Results Act of 1993 (GPRA) and Office of Management and Budget Circular A-11 (Preparation, Submission and Execution of the Budget).
CORRECTIVE ACTION
Ensure future strategic plans incorporate the requirements in Department of Treasury guidance which includes both GPRA and Circular A-11.
PROPOSED
IMPLEMENTATION DATE
December 31, 2013
RESPONSIBLE OFFICIAL
Associate Chief Financial Officer, Corporate Planning and Internal Control.
CORRECTIVE ACTION
MONITORING PLAN
N/A
The Chief Financial Officer should define and include in the IRS Strategic Plan sufficient measures that will provide data that can be used to monitor the IRS' efforts to achieve objectives aimed at strengthening partnerships with tax practitioners and paid preparers to ensure effective tax administration. This effort includes coordinating with the business divisions and functional offices to ensure their plans and/or business performance reviews include acceptable measures to assess their progress in achieving the expected outcomes of goals and actions which support the IRS Strategic Plan.
CORRECTIVE ACTION
Include in the IRS Strategic Plan measures to assess progress in achieving the expected goals and objectives which support the IRS Strategic Plan.
IMPLEMENTATION DATE
December 31, 2013
RESPONSIBLE OFFICIAL
Associate Chief Financial Officer, Corporate Planning and Internal Control.
CORRECTIVE ACTION
MONITORING PLAN
N/A
[1] See Appendix V for a glossary of terms.
[2] See Appendix V for a glossary of terms.
[3] The Development of Specific Long-Term Measures and Targets Improved the Internal Revenue Service’s Strategic Plan (2005–2009) (Reference number 2007-10-140, dated August 23, 2007).
[4] The Chief Financial Officer’s Corporate Planning and Internal Control staff leads the development of the IRS’ Strategic Plan and the processes for determining, collecting, analyzing, reviewing, reporting, and communicating the measures of IRS-wide performance, as well as integrating performance and cost information.
[5] Pub. L. No. 103-62, 107 Stat. 285 (codified as amended in scattered sections of 5 U.S.C., 31 U.S.C., and 39 U.S.C.).
[6] Pub. L. No. 103-62, 107 Stat. 285 (codified as amended in scattered sections of 5 U.S.C., 31 U.S.C. and 39 U.S.C.).
[7] The
States of California,
[8] Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers Before the Internal Revenue Service (Treasury Department Circular No. 230, (revised 4‑2008)).
[9] Review of the IRS’ implementation of the Paid Preparer Strategy (Audit # 201040037).
[10] See Appendix V for a glossary of terms.
[11] The Development of Specific Long-Term Measures and Targets Improved the Internal Revenue Service’s Strategic Plan (2005–2009) (Reference number 2007-10-140, dated August 23, 2007).
[12] Pub. L. No. 103-62, 107 Stat. 285 (codified as amended in scattered sections of 5 U.S.C., 31 U.S.C. and 39 U.S.C.).
[13] The 10 offices are: the Criminal Investigation Division; the Large and Mid-Size Business Division; the Office of Appeals; the Office of Professional Responsibility; the Taxpayer Advocate Service; the Wage and Investment Division; the Small Business/Self-Employed Division; and the Employee Plans, Exempt Organizations, and Tax Exempt Bonds functions of the Tax Exempt/Government Entities Division. Since the Tax Exempt/Government Entities Division completed separate annual plans for each office, we counted each office as a separate office.
[14] See Appendix V for a glossary of terms.
[15] Pub. L. No. 103-62, 107 Stat. 285 (codified as amended in scattered sections of 5 U.S.C., 31 U.S.C. and 39 U.S.C.).