Plans for Evaluating the Use of Soft Notices in Addressing Underreporting Can Be Enhanced
August 27, 2010
Reference Number: 2010-30-089
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 for
Evaluating the Use of Soft Notices in Addressing Underreporting Can Be Enhanced
Highlights
Final
Report issued on August 27, 2010
Highlights of Reference Number:
2010-30-089 to the Internal Revenue Service Commissioners for the Small
Business/Self-Employed Division and the Wage and
Investment Division.
IMPACT ON TAXPAYERS
Improving
service to taxpayers is one of the highest priorities for the Internal Revenue
Service (IRS). Guided by its strategic
plan, the IRS’ vision is to make it easier for taxpayers to fulfill their civic
responsibility to pay taxes by providing them with world-class service, taking
proactive steps to better understand issues from the taxpayer’s perspective,
and reducing taxpayer burden.
Consequently, it will be important for the IRS to understand and
minimize the time and resources taxpayers spend dealing with soft notices to
increase the likelihood of achieving its vision for improving service to
taxpayers.
WHY TIGTA DID THE AUDIT
This audit was initiated because the IRS is involved
in a multi-year initiative (the Initiative) to determine if soft notices can
address underreporting discrepancies. Briefly stated, the notices ask the taxpayer
to review their return and if they underreported their income to file an
amended return.
If determined
to be successful, the Initiative could result in permanently using soft notices
in the IRS Automated Underreporter (AUR) Program to address a large number of
taxpayers each year that would not ordinarily be contacted by the IRS due to
resource constraints. Given the fact that
the notices do not require any taxpayer action, questions can be raised about why
the IRS would incur costs to send the notices and risk unnecessarily burdening taxpayers,
especially those that result in little or no tax change.
WHAT TIGTA FOUND
This report
focused on the IRS’ planning activities for the Initiative. In the next phase of the review, TIGTA will
assess how well the plan was implemented and managed and if reliable results
were produced for deciding to expand, modify, or terminate the use of soft
notices in the AUR Program.
To their
credit, the IRS team responsible for conducting the Initiative addressed many
key issues during their planning activities. However, TIGTA does have observations in two
areas that the team may find useful. The
areas involve enhancing the credibility of results and the support information for
deciding whether to incorporate soft notices into the AUR Program on a
permanent basis.
WHAT TIGTA RECOMMENDED
TIGTA
recommended that the IRS establish criteria for determining what will
constitute success for the Initiative and ensure all costs are quantified for
determining the net benefit of implementing the soft notice process in the AUR
Program.
IRS management
agreed with the recommendations and plans to develop the metrics in the coming
year to measure and report soft notice results. As for determining the net benefit of the soft
notice process, IRS management responded that the large-scale rollout will be
fully costed and that no corrective action is necessary. TIGTA is pleased that IRS management agreed
with this recommendation. However, the
absence of specific commitment on when the full-scale rollout will take place
could diminish the effectiveness of an important control for assuring that key issues
were considered before using soft notices in the AUR Program on a permanent
basis.
August 27, 2010
MEMORANDUM FOR COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Plans for Evaluating the Use of Soft Notices in Addressing Underreporting Can Be Enhanced (Audit # 200930038)
This report presents the results of our review to determine whether the Automated Underreporter Program Soft Notice Initiative was effectively designed and managed to provide Internal Revenue Service (IRS) officials with reliable information for deciding whether the Initiative should be expanded, modified, or terminated. While our Fiscal Year 2010 Annual Audit Plan originally envisioned reporting and evaluating the IRS’ experience under this Initiative during Fiscal Year 2010, the late start of pilot testing provided limited time for a full assessment. Accordingly, we are providing an interim report that is focused on the IRS’ planning activities for the Initiative. In the next phase of the review, we will assess how well the plan was implemented and managed and if reliable results were produced for deciding to expand, modify, or terminate the use of soft notices in the Automated Underreporter Program. This review 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.
Soft Notices May Further Enhance
Automated Underreporter Program Results
Most Key Issues Were
Addressed in Planning the Soft Notice Initiative
Plans for Evaluating the
Initiative’s Results Could Be Improved
Appendices
Appendix
I – Detailed Objectives, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Recommended Approach for Business Process Changes
Appendix V
– Example of a Computer Paragraph 2057 Notice
Appendix
VI – Management’s Response to the Draft Report
Abbreviations
|
AUR |
Automated Underreporter Program |
|
CP |
Computer Paragraph |
|
FY |
Fiscal Year |
|
GAO |
Government Accountability Office |
|
IRS |
Internal Revenue Service |
|
TY |
Tax Year |
One purpose of the Automated Underreporter Program (hereafter referred to as the AUR or the AUR Program) is to resolve income discrepancies between the information taxpayers report to the Internal Revenue Service (IRS) on tax returns and related information employers and financial institutions provide the IRS on information returns. Once discrepancy cases are identified, the IRS decides how many cases it believes it has sufficient resources to investigate out of the total number identified.
Once
selected, AUR cases are distributed to six IRS campuses[1]
where tax examiners manually review each case.
After analyzing the tax returns, tax examiners are sometimes able to
immediately resolve the discrepancies, in which case no further actions are
taken. For the remaining AUR cases, tax
examiners may request additional information from taxpayers by sending a
Computer Paragraph (CP) 2000 notice.[2]
If the taxpayer provides supporting documentation and the tax examiner determines the information resolves the discrepancy, the case is closed with no changes to the taxpayer’s account. However, if the examiner determines the information does not resolve the discrepancy and the taxpayer agrees with the examiner’s determination, the IRS will assess additional tax based on the CP 2000 notice and close the case as agreed. When a taxpayer does not agree or does not respond to the CP 2000 notice within the required time period, a Statutory Notice of Deficiency[3] will be issued to assess additional tax.
Because IRS resources cannot investigate all areas of noncompliance, including AUR discrepancies, the IRS is increasingly using alternative approaches to resolve compliance issues outside its traditional processes. In the AUR Program, where millions of discrepancy cases were not investigated for Tax Year (TY) 2007, officials selected approximately 31,000 cases for mailing AUR soft notices to taxpayers.
The soft notices are called a CP 2057[4] and do not require that the taxpayer pay more tax, provide documentation, or file an amended return. Instead, they are designed to serve as an educational tool, encourage self‑correction, and improve voluntary compliance. Although the notice requests the taxpayer to file an amended return if appropriate, it is not required. By comparison, the CP 2000 is primarily focused on compliance and indicates that the IRS has made, or is proposing, a tax change and that the taxpayer owes additional tax.
The review was performed at the IRS Wage and Investment Division
Headquarters Office in
In the AUR Program, where millions of cases with a potentially
significant amount of unreported taxes are not investigated each year, an IRS team
is involved in the AUR Program Soft Notice Initiative (the Initiative). It is a multi-year initiative to determine if
soft notices can address compliance issues among taxpayers that would not
otherwise be subject to an AUR contact due to resource constraints. To their credit, the team responsible for carrying
out the Initiative addressed many key issues recommended by the Government
Accountability Office (GAO) for establishing new business processes or
improving existing ones.
However, in two areas of the team’s evaluation plan, we have
observations that they may find useful.
The first area involves the team defining what would constitute success
for the Initiative. The second area involves ensuring all costs the IRS has or will
incur are quantified and considered in the plan for determining the net benefit
of implementing soft notices into the AUR process. By taking such actions, the team can enhance
the creditability of the Initiative’s results and assure senior IRS executives
that important issues were considered before deciding whether to incorporate
soft notices into the AUR Program on a permanent basis.
Soft Notices May Further Enhance Automated Underreporter Program Results
In Fiscal
Years (FY) 2004 through 2009, IRS statistics showed the AUR Program assessed $29.4
billion in taxes from closing 18.5 million cases involving discrepancies
between the information taxpayers reported on tax returns and the related
information reported by third parties. This
condition indicates that, in FYs 2004 through 2009, each AUR case averaged about
$1,589 in additional assessments. Despite
the seemingly high return from AUR cases, resource constraints have
historically limited the AUR Program’s ability to working a relatively small
portion (about one-third) of the discrepancies identified each year. However, recent IRS tests
have shown that it has successfully leveraged its limited resources to address
noncompliance in various areas by sending soft notices that ask taxpayers to
voluntarily fix their misreporting by filing an amended return or not repeating
the action in the next year.
The IRS Wage and
Investment Division successfully demonstrated it can use soft notices to help
address issues involving duplicate Taxpayer Identification Numbers[6]
Researchers in the IRS Wage and Investment Division
assessed the impact of using soft notices as early as TY 2002 in a project that involved 820,111 taxpayers of an estimated 2.4
million taxpayers who claimed a duplicate Social
Security Number for a dependent to obtain an exemption, Earned Income Tax Credit,
or child tax credits. According to the researchers’ Calendar Year
2005 report,[7] the IRS received amended returns from 11.4
percent of the population that received soft notices. In addition, researchers reported that 84.9
percent of the taxpayers did not repeat the same mistake in the 2 subsequent
tax years (2003 and 2004).
Because the soft notices appeared to have altered noncompliant behavior, researchers estimated that approximately $218 million in tax revenue may have been saved after fewer Earned Income Tax Credit and/or dependency exemptions were claimed in TY 2003 by taxpayers who received soft notices. In addition, the IRS moved beyond testing soft notices on this segment of filers and now sends millions of soft notices as part of its regular business processes that address issues with duplicate Social Security Numbers.
The IRS Small Business/Self-Employed Division reported that soft notices in the AUR Program can have a beneficial impact on taxpayer behavior
In the AUR Program, researchers in the Small Business/Self-Employed Division reported positive results in November 2008 from a project called the AUR Self-Correct Letter Test. The project followed up on an earlier AUR soft notice test but incorporated statistical sampling techniques in assessing whether soft notices affect the compliance behavior of taxpayers identified as underreporting income and who are served by the Small Business/Self-Employed Division. In March 2008, the soft notices were sent to 500 randomly selected taxpayers who underreported income on their TY 2006 returns. In addition, a randomly selected control group of 500 taxpayers, who underreported income, were similarly selected but were not sent a soft notice.
According to their Calendar Year 2008 report,[8] researchers identified four factors supporting their conclusion that soft notices can have a beneficial impact on the reporting behavior of Small Business/Self-Employed Division taxpayers. First, the soft notices generated amended returns from 46 (9 percent) of the 500 taxpayers, of which 26 owed additional taxes ranging from $7 to $7,560. Second, only 2 of the 500 taxpayers in the control group filed an amended return. Third, after receiving a soft notice, 147 (29 percent) of the 500 taxpayers called the IRS seeking assistance with completing and filing an amended return. Fourth, all but one of the amended returns filed addressed the discrepancy noted in the soft notice.
Besides concluding that soft notices can have a beneficial
impact on taxpayer behavior, the researchers made several recommendations to
IRS executives based on lessons learned from their work. Specifically, the recommendations were aimed
at strengthening support data for using soft notices in the AUR Program and
included 1) partnering with the Wage and Investment Division in conducting a
new project involving more taxpayers served by the Divisions, 2) using control
groups and statistical sampling techniques to cover all categories of income
discrepancies, 3) modifying the soft notice so it informs taxpayers of the
potential consequences of not filing an amended return, 4) staggering the
issuance of the soft notices to reduce the volume of calls from taxpayers
seeking assistance, and 5) ensuring IRS personnel are better prepared to
respond to taxpayer inquires. In response to the recommendations, the IRS
formed a team to conduct a multi-year initiative to assess if soft
notices can address compliance issues among taxpayers that would not otherwise
be subject to an AUR contact because of resource constraints.
Most Key Issues Were Addressed in Planning the
Soft Notice Initiative
One of the best practices for developing and implementing new business processes, or for improving existing ones, is to establish an overall approach that contains detailed steps for carrying out the various phases of an initiative. For example, the GAO developed and used a 20-step approach to evaluate[9] earlier improvement initiatives in the IRS Small Business/Self-Employed Division. The approach is based on its Business Process Reengineering Assessment Guide[10] and discussions with managers in private industry as well as in other Federal agencies. According to the GAO, the 20 steps included in its approach help ensure potential obstacles are considered in planning, problems are pinpointed and addressed through pilot testing, and results are evaluated accurately.
We used GAO’s 20-step approach as criteria to assess how
closely the team considered each of the recommended steps during their planning
activities for the Initiative. In making
our assessment, it is important to recognize that the first six steps in the approach
deal, in large part, with understanding the problem and using empirical data as
the basis for deciding to implement a new process or improve an existing one. Since the team was convened after the
decision was made to expand soft notice testing in the AUR Program, we used IRS
statistics, the Internal Revenue Manual,[11] strategic
planning documents, and research results to make our judgment about these
items. We believe it is equally
important to recognize that, according to the GAO, a degree of discretion is
involved in making judgments about each of the steps and some steps will not be
appropriate for every project. As shown
in Figure 1, except for the two areas indicated with an empty bubble,
the team did a good job overall of planning the Initiative. Appendix IV provides additional details for each of the items in
the GAO approach.
Figure
1: Assessment of the AUR Program Soft
Notice Initiative
Using Key Best Practices
|
Steps |
Included |
Comments |
|
Map current
process |
● |
|
|
Identify
productivity baselines |
● |
|
|
Identify
causes of poor performance |
● |
|
|
Include
complexity and quality in productivity measures |
● |
|
|
Measure gap
between current and desired productivity |
● |
|
|
Compare
current productivity to internal and external benchmarks |
P |
Internal but not
external benchmarks considered. |
|
Use best
practices |
P |
Used best practices from
within, but not outside the IRS. |
|
Design
process to close productivity gap |
О |
Intended outcomes for
success not quantified. |
|
Analyze alternatives |
● |
|
|
Obtain
executive support |
● |
|
|
Assess
barriers to implementing changes |
● |
|
|
Assess
resource needs and availability |
● |
|
|
Conduct
pilot tests |
● |
|
|
Adjust
process based on pilot |
● |
|
|
Define
roles and responsibilities |
● |
|
|
Steps |
Included |
Comments |
|
Establish
employee expectations |
N/A |
Employee roles and
responsibilities not anticipated to change.
|
|
Monitor and
evaluate the new process |
о |
Intended
outcomes for success not quantified. |
|
Establish a
change management strategy |
● |
|
|
Establish a
transition team |
● |
|
|
Develop workforce
training plans |
● |
|
|
● Full P Partial о No |
||
Source: Our analysis of GAO’s 20-step approach to evaluate
process improvement and data provided by the IRS.
By addressing most
of the steps in planning, the team is better positioned to produce the data
needed for making a more informed decision about whether the use of soft
notices in the AUR Program should be expanded, modified, or terminated. For
example, in the planning phase of the Initiative, we found evidence of IRS officials
participating in and supporting expanded testing of soft notices in the AUR
Program. As reflected in the IRS 2008
Tax Forums,[12] efforts were also
made to build support and momentum for the Initiative. During the Forums, IRS officials provided an
overview of the Initiative to thousands of tax return preparers and others who
attended the presentations offered in major cities throughout the country.
Potential barriers were also assessed as well as resource needs,
availability, and costs. For example, the
Initiative originally called for coordinating with the IRS Modernization
and Information Technology Services organization in automating the issuance of some 250,000 soft
notices. When the computer programming
resources were not available, the team decided instead to reduce the number of
soft notices and issue them manually to help keep the project on track.
Notably, the team also incorporated some best practices recommended from, but not consistently used in, previous soft notice pilot tests. For example, the Initiative’s first pilot test, called the TY 07 Soft Notice Test, involves significantly more taxpayers and includes representative samples from each of the major categories of discrepancies covered by the AUR Program. The samples for both the soft notices and the control group were randomly drawn from the population of TY 2007 discrepancies that were not included in the AUR Program’s inventory due to resource constraints. Statisticians for both the IRS and the Treasury Inspector General for Tax Administration confirmed the validity of the sampling methodology so the results should be able to be projected to the population as a whole. Figure 2 provides details on the number sampled from each discrepancy type.
Figure
2: TY 2007 AUR Program Inventory for the
Initiative
|
Discrepancy Categories |
Population |
Soft Notice |
Control Sample |
Percentage of the
Population |
Percentage of the Sample
Total |
|
Advanced Earned Income Credit |
15,043 |
684 |
684 |
4.5% |
2.2% |
|
Pension and retirement income |
705,438 |
2,748 |
2,748 |
.4% |
8.9% |
|
Payments from States |
326,249 |
766 |
766 |
.2% |
2.5% |
|
Investment income |
3,031,656 |
8,622 |
8,622 |
.3% |
28.0% |
|
Withholding differences |
260,478 |
767 |
767 |
.3% |
2.5% |
|
Income from rent and royalties |
273,310 |
1,528 |
1,528 |
.6% |
5.0% |
|
Mortgage interest |
1,698,767 |
2,113 |
2,113 |
.1% |
6.9% |
|
Agricultural subsidies |
8,587 |
649 |
649 |
7.6% |
2.1% |
|
Gambling winnings |
219,276 |
767 |
767 |
.3% |
2.5% |
|
Wages |
1,793,576 |
2,194 |
2,194 |
.1% |
7.1% |
|
Nonemployee compensation |
700,426 |
1,135 |
1,135 |
.2% |
3.7% |
|
Self-Employed |
142,839 |
766 |
766 |
.5% |
2.5% |
|
Other |
3,465,087 |
8,081 |
8,081 |
.2% |
26.2% |
|
Total |
12,640,732 |
30,820 |
30,820 |
|
*100.0% |
Source: Our analysis
of IRS-provided data on AUR Program Soft Notice Initiative population for
sampling and selected samples.
* = Column does not add
precisely due to rounding.
To their credit, the team developed an evaluation plan that includes a
combination of performance measures for assessing the Initiative’s
outcomes. According to the GAO, good
performance measures are needed for weighing the costs of the process against
expected benefits, determining whether a process is achieving desired results,
and assessing if further improvements are needed.
Plans for Evaluating the Initiative’s
Results Could Be Improved
The team’s evaluation plan calls for collecting and measuring data on the
impact soft notices have on the IRS’ revenue, staff, and compliance
coverage. Importantly, data will also be
collected and assessed on the time and resources (burden) taxpayers spend
dealing with the soft notices. Careful
collection and assessment of taxpayer burden issues are vital because AUR soft
notices may ultimately be sent to millions of taxpayers. In this regard, the team plans to collect and
evaluate various aspects of the issue through three measures.
The first measurable item, called the screen-out rate, involves manually
reviewing discrepancies identified by IRS computers before issuing a soft notice
that may not be warranted. A
discrepancy, for example, can be identified by IRS computers but a manual
review may identify something the computer could not, such as an income item
mistakenly reported on the incorrect line of a tax return. The practice of screening notices is
routinely used for regular AUR notices (CP 2000) and annually results in
eliminating hundreds of thousands of unnecessary notices that would have
otherwise been sent to taxpayers.
The second measureable item, called the no-change rate, measures the
percentage of notices that are issued to taxpayers but closed without making
additional tax changes. Contacts that
end with no change to taxes owed could have adjustments (e.g., reduced a
reported loss but not enough to produce a tax liability). From the IRS’ perspective, a closure with
adjustments is viewed as a productive contact, while one without any changes is
viewed as unproductive and burdensome to the taxpayer. The third item the team intends to measure is
the percentage of taxpayers that sought the assistance of a paid tax preparer
in dealing with the soft notice and, therefore, incurred the additional related
expense.
Enhancements can be made
by defining what would constitute success for the Initiative and including
information about the total costs the IRS will incur
Although the team’s evaluation plan includes a combination of
performance measures, it could be enhanced in two areas that are typically part
of a sound assessment methodology. The
first area involves the team defining what it would consider a success within
each of the measureable items and/or how much weight the various factors being
measured will have in determining the overall success of the Initiative. Making such determinations
can enhance the credibility of the Initiative’s results while helping avoid any
perception of bias.
The second area involves ensuring all costs the IRS has or will incur are
quantified and considered in the plan for determining the net benefit of
implementing soft notices into the AUR process.
During our early discussions with IRS officials about this Initiative,
we learned a contractor was heavily involved in designing the management
information system that is being used to capture, track, and analyze taxpayer
responses to the soft notices.
Consequently, it will be important to ensure contractor expenses are
considered as well as the costs associated with preparing and issuing the notices.
While the preparation and issuance of the notices is expected to be largely automated, these costs could rise substantially if the IRS needs to process payments and amended returns because of the additional processing involved with mail sorting, computer data input, data verification, and deposit. In addition, costs will be incurred when the receipt of the notice by the taxpayer generates further correspondence between taxpayers and the IRS. In these instances, there will be costs associated with IRS personnel responding directly to the taxpayer regarding the correspondence or the information provided.
By specifying all costs in their plan, as well as benefits, the team can establish an important control for assuring IRS senior executives that important issues were considered before deciding to incorporate soft notices into the AUR Program on a permanent basis. Moreover, reliable cost-benefit information may help alleviate concerns that could be raised about why the IRS incurs the costs associated with sending the notices, particularly when those notices result in no or small tax changes, because they do not require any taxpayer action.
Recommendations
The Director, Compliance, Wage and Investment Division,
and the Director, Campus Compliance Services, Small Business/Self-Employed
Division, should coordinate actions to:
Recommendation 1: Establish criteria for determining what will constitute a
success for the Initiative, including the relative weight, if any, that will be
given to the various performance measures and whether there are specific
thresholds that must be achieved to be considered successful.
Management’s Response: IRS management agreed that criteria for measuring success are
important. They will continue to refine
case selection criteria each year to identify the best candidates for soft
notices. In the coming year, the IRS
will develop the metrics and establish the criteria necessary to measure and
report soft notice results.
Recommendation 2: Ensure all costs the IRS has or
will incur are quantified and considered in the plan for determining the net
benefit of implementing soft notices into the AUR process.
Management’s Response: IRS management agreed with this recommendation but
responded that no corrective action is necessary. According to IRS management, the large-scale
rollout will be fully costed as a budget initiative for the Wage and Investment
Division Submission Processing and Accounts Management functions. According to the response, all costs will be
captured for measuring success and reporting the cost-benefit of soft notices to
the AUR Program.
Office of Audit Comment: We are pleased that IRS management agreed with the
recommendation and recognized the need for measuring success and reporting the
cost-benefit of soft notices to the AUR Program. However, the absence of specific commitment
on when the full-scale rollout will take place could diminish the effectiveness
of an important control for assuring that key issues were considered before
deciding to incorporate soft notices into the AUR Program on a permanent basis.
Appendix I
Detailed Objectives, Scope, and Methodology
The overall objectives of this review were to determine whether the AUR Program Soft Notice Initiative (the Initiative) was effectively designed and managed to provide IRS officials with reliable information for deciding whether the Initiative should be expanded, modified, or terminated. As part of the review, we relied on databases provided to us by the IRS and did not audit the source systems. Unless otherwise noted, our limited tests of the reliability of data obtained from the IRS did not identify any errors. We tested the reliability of the data by scanning the data received for blank, incomplete, illogical, or improper data. In addition, we traced a judgmental sample of the data to the source information on the IRS Individual Master File[13] to ensure accuracy. To accomplish our objectives, we:
I. Determined if the IRS developed a business case or its elements for the AUR Program Soft Notice Initiative, took steps to identify obstacles, and implemented the Initiative with good management practices in place.
A. Obtained and analyzed prior IRS research studies related to soft notices.
B. Interviewed AUR Program management to identify the purpose and goals of the AUR Program Soft Notice Initiative. We secured and evaluated the elements of the business case that were developed for the AUR Program Soft Notice Initiative to determine whether agency priorities and direction were addressed.
C. Interviewed AUR Program management and obtained documentation for review to evaluate whether steps were taken to ensure potential implementation obstacles were considered in planning the AUR Program Soft Notice Initiative and whether results were monitored and evaluated.
D. Determined if the IRS addressed key design issues in the Initiative using the GAO process reengineering approach as criteria (see Appendix IV).
E. Determined if the AUR Program Soft Notice Initiative was implemented with good management practices. We analyzed the methodology used to measure the results of the Initiative.
F. Obtained AUR Program business result statistics related to inventory and case closures for background purposes.
II. Assessed the statistical validity of the IRS’ sampling methodology and analyzed the population and sampled taxpayers by discrepancy type.
A. Obtained from the IRS the sampling model developed by the Statistics of Income Division.
B. Obtained confirmation on the validity of the sampling methodology from statisticians working for the IRS and the Treasury Inspector General for Tax Administration.
C. Analyzed the overall population of cases identified by the AUR Program as having an income discrepancy for TY 2007 from which the soft notice and AUR control samples were selected.
D. Analyzed the soft notice and AUR control samples’ composition by discrepancy type and percentage of the population.
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 did not review internal
controls in this review because our scope was limited to evaluating the planning
of the AUR Program Soft Notice Initiative.
Appendix II
Major Contributors to This Report
Margaret
E. Begg, Assistant Inspector General for Audit (Compliance and Enforcement
Operations)
Frank
Dunleavy, Director
Steven
Stephens, Audit Manager
Alan
Lund, Acting Audit Manager
Kristi
Larson, Senior Auditor
Julia
Tai, Senior Auditor
William
Tran, 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
Deputy Commissioner, Wage and Investment Division SE:W
Director, Campus Compliance Services, Small Business/Self Employed Division SE:S:CCS
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:PRA:
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:
GAO/TIGTA
Liaison, Small Business/Self-Employed Division SE:S
Senior Operations Advisor, Wage and Investment
Division SE:W:S
Appendix IV
Recommended Approach for Business
Process Changes
The three figures in this appendix present summary
information on the criteria the GAO developed for use when considering,
planning, and implementing new or improving existing business processes. The GAO developed the approach based on its Business Process Reengineering Assessment
Guide and discussions with top-level managers in private industry as well
as in other Federal agencies.
Figure
1: Recommended Steps in Considering a
Potential Process Change
|
Steps |
Description |
|
Map current
process |
Similar to
flowcharting, process mapping is a graphical representation of the various
activities, procedures, roles, and responsibilities within one or more
business processes. Its purpose is to
help present a clear picture of the current processes to help identify the
root causes for under performance and achieve the desired level of
improvement. |
|
Identify
productivity baselines |
Baseline data are needed
to provide measures from the current processes to use in comparing the level
of improvement achieved by the new process. |
|
Identify
causes of poor performance |
This step involves
identifying the factors or combination of factors that are causing the poor performance
in the current process. Examples could
include a lack of resources and/or regulatory requirements. |
|
Include
complexity and quality in productivity measures |
Productivity measures
the efficiency with which a process uses resources to produce a product or
service, such as the number of audits an IRS examiner completes in a
month. To be accurate, a combination
of measures is generally needed and consideration needed to be given to the
level of difficulty involved. |
|
Measure gap
between current and desired productivity |
Ideally, the level of
performance improvement desired should be achievable and based on empirical
data that define where a particular performance level is and where the level
of improvement is sought. |
|
Compare
current productivity to internal and external benchmarks |
Benchmarks are measures
from which performance improvement can be quantified. They provide reference points that can be
used to help identify and close performance gaps between processes used in
other organizations and/or in different functions within the same
organization. |
Source: The GAO and our analysis of the GAO Business
Process Reengineering Assessment Guide (May 1997).
Figure 2: Recommended Steps for Planning
a Process
|
Steps |
Description |
|
Use best practices |
Identifying and using best practices is a form of
benchmarking that involves adapting practices of others to reach new
improvement levels. It is especially
recommended that government agencies use business organizations in private
industry for this purpose. |
|
Design process to close |
Quantitative data are needed to support changing to
a new process that shows the change will narrow the gap between current
performance and the desired level of performance level. To add credibility and avoid any perception
of bias in making the change, the desired level of performance sought should
be specified. |
|
Analyze alternatives |
Alternative process changes that may produce the
same level of improvement should be explored in terms of their relative costs
and benefits. Such exploration can be
done through limited testing and may identify a more cost-effective approach
to achieving the same or similar results. |
|
Obtain executive support |
Executive support and oversight throughout a process
change is important for a number of reasons that include ensuring resources
are available, securing support from internal and external stakeholders, and
approving proposed recommendations for implementation. |
|
Assess barriers to implementing changes |
Identifying and assessing the costs of overcoming
potential barriers to implementing a change is important because it may
ultimately prove to be too great a burden.
Examples of barriers could include laws, regulations, employee union
agreements, lack of resources, current political environment, and/or lack of
executive support. |
|
Assess resource needs and availability |
Before initiating a process improvement project, it
is important to ensure the resources are available to design, plan, and
implement the change. Otherwise, there
is a risk the new change will only be partially implemented. |
Source: The GAO and our analysis of the GAO Business
Process Reengineering Assessment Guide (May 1997).
Figure 3: Recommended
Steps for Implementing a Process Change
|
Steps |
Description |
|
Conduct pilot tests |
In short, pilot testing is designed to
show intended benefits from a change can in fact be realized. It involves evaluating how well the process
change works in practice, pinpointing and correcting problems, and refining
performance measures. Importantly, it
can also strengthen executive and other stakeholder support for moving from
testing to full-scale operation. |
|
Adjust process based on pilot |
This step is designed to incorporate
and test needed changes to the new process based upon lessons learned in
earlier pilot testing. |
|
Define roles and responsibilities |
To ensure accountability, it is vital
to designate the specific personnel who will be responsible for making the
process improvement. |
|
Establish employee expectations |
Developing and issuing new performance
expectations needs to be considered and developed if the new process causes
traditional roles, responsibilities, and expectations to change for
employees. |
|
Monitor and evaluate the new process |
An evaluation plan is one of the first
steps needed for evaluating the success of process change and needs to
include a combination of performance measures for weighing the costs of the
new process against expected benefits, determining whether the process is
achieving desired results, and assessing if further improvements are
needed. To enhance credibility and
avoid potential bias, the criteria about what would
constitute a success needs to be defined. |
|
Establish a change management strategy |
Change management is a structured
approach for how best to address the transitional issues associated with
moving to a new process. These issues,
among others, include addressing resistance that may be encountered within an
organization or work unit to a new way of conducting business. The approach should be designed to build
support and positive attitudes for the change. |
|
Establish a transition team |
Typically, a transition team is
responsible for managing the implementation of a new process. As such, the team should develop a plan
that communicates the various aspects of the new process, its goals, and how
it will be implemented. |
|
Develop workforce training plans |
In general, employee training plans
need to be considered and developed if the change is going to significantly
alter traditional roles and responsibilities.
For example, employees may need training to learn new technical or
communication skill sets if they are going to successfully take on new
responsibilities or be expected to work more independently under the new
process. |
Source: The GAO
and our analysis of the GAO Business Process Reengineering Assessment Guide
(May 1997).
Appendix V
Example of a Computer Paragraph 2057 Notice[14]
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
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
COMM1SSIONER
WAGE AND INVESTMENT DIVISION
JULY 19, 2010
MEMORANDUM FOR MICHAEL R. PHILLIPS
DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Richard Byrd. Jr. /s/ Richard Byrd
Commissioner, Wage and Investment Division
SUBJECT: Draft Audit Report
– Plans for Evaluating the Use of Soft Notices in Addressing Underreporting Can
Be Enhanced (Audit #200930038)
We have reviewed the subject draft report and
appreciate your acknowledgement that the IRS team conducting the initiative did
a good job overall. We also agree that
our planning addressed most key issues, recommended by the Government
Accountability Office, for establishing new business processes or improving
existing ones. We share your view that recent IRS tests have shown we can
effectively leverage our scarce Automated Underreport Program (AUR) resources
by sending soft notices to taxpayers so that they can voluntarily self-correct
any misreported or underreported income.
This will also assist in avoiding repeat errors in subsequent years. As
noted in your report, these tests also clearly indicate soft notices have a
beneficial impact on taxpayer reporting behavior, and produce savings in tax
revenue without the need for direct IRS enforcement action.
We also appreciate your recommendations for
enhancing our plans for evaluating the soft notice initiative results. With regard to establishing criteria for
measuring success, it is important to note that starting with our first
comprehensive soft notice pilot for Tax Year (TY) 2007, IRS has had a set of
six objectives, and one or more accompanying measures for each objective, for a
total of 17 measures. We will use these measures for TY 2008 and TY 2009 as we
continue to refine case selection to identify the best candidates for soft
notices. In addition, beginning with TY
2009, taxpayer responses to AUR soft notices will be processed by the Wage and
Investment Division (W&I) Submission Processing and Accounts Management
staffs. There are currently no readily
available means to capture data, from these Functions, on the revenue generated
from amended returns or from changes in subsequent year behavior, specifically
attributable to soft notices. As a result, in the coming year, we will develop
the metrics and establish the criteria necessary to measure and report soft notice
results.
Regarding the recommendation to ensure all
costs are quantified, we had measurements in place to track costs for the TY
2007 pilot, and are also using them for the small scale soft notice issuances
for TY 2008 and TY 2009. The large scale
rollout will be fully costed as a budget initiative for Submission Processing
and Accounts Management. Therefore, this
corrective action is unnecessary.
If you have any questions, please contact me,
or a member of your staff may contact R. Ray Johnson, Acting Director,
Reporting Compliance, Wage and Investment Division, at (404) 338-8983.
Attachment
The Director, Compliance, and Wage Investment
Division, and the Director, Campus Compliance Services, Small
Business/Self-Employed Division, should coordinate actions to:
,
RECOMMENDATION
1
Establish criteria for what will constitute a
success for the initiative, including the relative weight, if any, that will be
given to the various performance measures and whether there are specific
thresholds that must be achieved to be considered successful.
CORRECTIVE
ACTION
We agree that criteria for measuring success
is important. We have developed, and are using, measurements to refine case
selection for the small scale soft notices issuances. We will uses these measures
for tax Year (TY) 2008 and TY 2009 as we continue to refine case selection to
identify the best candidates for soft notices. In addition, beginning with TY
2009, taxpayer responses to Automated Underreporter Program (AUR) soft notices
will be processed by the Wage and Investment Division (W&I) Submission
Processing and Accounts Management staffs. There are currently no readily
available means to capture data, from these Functions, on the revenue generated
from amended returns or from changes in subsequent year behavior, specifically
attributable to soft notices. As a result, in the coming year, we will develop
the metrics and establish the criteria necessary to measure and report soft
notice results.
IMPLEMENTATION
DATE
January 15, 2012
RESPONSIBLE
OFFICIALS
Director, Reporting Compliance, Wage and
Investment Division
Director, Reporting Compliance, Small
Business/Self-Employed Division
CORRECTIVE
ACTION MONITORING PLAN
We will monitor this corrective action as
part of our internal management control system.
RECOMMENDATION
2
Ensure all costs the IRS has or will incur
are quantified and considered in the plan for determining the net benefit of
implementing soft notices into the Automated Underreporter process.
CORRECTIVE
ACTION: We agree with the recommendation, but no
corrective action is necessary. The large scale rollout will be fully costed as
a budget initiative for W&I Submission Processing and Accounts Management
functions. All costs, including contractor expenses, if any, will be captured
and included in the above mentioned plan for measuring success and reporting
the cost-benefit of soft notices to the AUR.
IMPLEMENTATION
DATE
Completed.
RESPONSIBLE
OFFICIALS
Director, Reporting Compliance, Wage and
Investment Division
Director, Submission Processing, Wage and
Investment Division
Director, Accounts Management, Wage and
Investment Division
CORRECTIVE
ACTION MONITORING PLAN
N/A
[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 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.
[3] An IRS letter sent to taxpayers notifying them of an increase in the amount of taxes they owe.
[4] See Appendix V for an example of the CP 2057 notice.
[5] The IRS database that maintains transactions or records of individual tax accounts.
[6] A nine-digit number assigned to taxpayers for identification purposes. Depending upon the nature of the taxpayer, the Taxpayer Identification Number is either an Employer Identification Number, a Social Security Number, or an Individual Tax Identification Number.
[7] Soft Notice for Duplicate TINS for Tax Years 2002, 2003 and 2004 Level 2 Report (Wage and Investment Division Research Project Number 6-05-12-2-030E, dated November 29, 2005).
[8] AUR Self-Correct Letter Test (Project Identification Number: DEN0081, dated November 2008).
[9] Tax Administration: Planning for IRS’s Enforcement Process Changes Included Many Key Steps but Can Be Improvement (GAO-04-287, dated January 2004).
[10] GAO/AIMD-10.1.15, dated May 1997.
[11] A manual containing IRS internal guidelines.
[12] The IRS Tax Forums are annual seminars given by the IRS at various locations around the country. They are used to communicate current information from IRS leadership and experts in the fields of tax law, compliance, and ethics to tax preparers and other interested individuals.
[13] The IRS database that maintains transactions or records of individual tax accounts.
[14] All dates, monetary, and taxpayer identifying information contained in this example are hypothetical.