Limitations in the Sample Size for the Internal Revenue
Service’s Employment Tax Study May Impact the Ability to Determine Compliance
Levels
May 17, 2010
Reference Number: 2011-10-034
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 | TIGTACommunications@tigta.treas.gov
Web Site |
http://www.tigta.gov
HIGHLIGHTS
LIMITATIONS IN THE SAMPLE SIZE FOR the INTERNAL
REVENUE SERVICE’S Employment Tax STUDY May Impact the
Ability to DETERMINE Compliance Levels
Highlights
Final
Report issued on May 17, 2011
Highlights of Reference Number 2011-10-034
to the Internal Revenue Service Director for the Office of Research, Analysis
and Statistics.
IMPACT ON TAXPAYERS
The Internal Revenue Service (IRS) Office of Research, Analysis and
Statistics initiated the Employment Tax Study (the Study) to update estimates
of the Tax Gap (the difference between taxes owed and taxes timely paid)
attributable to business employers. However,
the audit results for the taxpayers included in the Study may not enable IRS
management to fully estimate compliance levels for business taxpayers. Having a more complete understanding of these
filers is essential for the IRS to focus its limited resources in areas where it
could be most productive, which should ultimately reduce the burden on
compliant taxpayers and result in more accurate Tax Gap data.
WHY TIGTA DID THE AUDIT
The
audit was initiated because employment taxes are a
major source of revenue for the Federal Government, and it has been more
than 25 years since the IRS conducted a comprehensive review of employer tax
compliance. Some IRS officials believe
the current Tax Gap estimate is significantly understated. In February 2010, the IRS began its first
Employment Tax Study to better estimate the Tax Gap for underreported
employment taxes and determine compliance rates for business taxpayers.
Results
from other studies indicate there are several underlying factors that contribute
to the underreporting of employment taxes.
As a result, the
employment tax audits included in the Study are expected to be comprehensive in
nature.
The
overall objective of this review was
to determine whether the sampling methodology developed by the Office of
Research, Analysis and Statistics to conduct the Study will provide a valid representation of employment tax
compliance rates for business taxpayers.
WHAT TIGTA FOUND
The IRS selected the sample of employers to include in the
Study based on available resources.
However, the audit results for the sampled taxpayers may not enable IRS
management to fully estimate compliance levels for business taxpayers. As a result, IRS management indicated that
additional audits may be required after the Study is completed.
In
addition, the IRS plans to sample only 50 large/international business
taxpayers in each year of the Study, which may be too small of a sample to
provide meaningful compliance estimates for these taxpayers. Further, IRS management specifically excluded
some larger employers due to the time necessary to complete these complex
audits. As a result, the Study will not
provide any information about the compliance levels of these employers.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the IRS develop an action plan for any future employment tax
study that outlines management’s strategy to achieve their goal of updating the
employment Tax Gap estimates, determine the percentage of the total population that the excluded entities
represent, and evaluate whether future employment tax studies should include
the large employers excluded in this Study.
In
their response to the report, IRS officials agreed with our
recommendations. IRS management agreed
to develop
goals and project plans during the design phase of every IRS reporting
compliance research study. In addition,
they plan to document the findings related to the excluded entities as
companion data to the Study results.
Finally, management agreed to reevaluate whether future
employment tax studies should include the large employers.
May 17, 2011
MEMORANDUM FOR DIRECTOR, RESEARCH, ANALYSIS AND STATISTICS
FROM: Michael
R. Phillips /s/ Michael R. Phillips
Deputy
Inspector General for Audit
SUBJECT: Final
Audit Report – Limitations in the Sample Size for the Internal Revenue
Service’s Employment Tax Study May Impact the Ability to Determine Compliance
Levels (Audit # 201110001)
This report presents the results of our review of the sampling methodology developed by the Internal Revenue Service (IRS) Office of Research, Analysis and Statistics (RAS) to conduct the Employment Tax Study. Our overall objective was to determine whether the sampling methodology developed by the IRS Office of RAS to conduct the Study will provide a valid representation of employment tax compliance rates for business taxpayers. This audit is part of the Treasury Inspector General for Tax Administration’s Fiscal Year 2011 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 V.
Copies of this report are also being sent to the IRS managers affected by the report recommendations.
Please contact me at (202) 622-6510 if you have questions
or Nancy A. Nakamura, Assistant Inspector General for Audit (Management
Services and Exempt Organization), at (202) 622-8500.
Appendices
Appendix I – Detailed Objective, Scope,
and Methodology
Appendix II – Major Contributors to
This Report
Appendix III – Report Distribution
List
Appendix IV – Stratified Sample for Calendar
Year 2008
Appendix V – Management’s Response to
the Draft Report
Abbreviations
|
FY |
Fiscal
Year |
|
IRS |
Internal
Revenue Service |
|
LB&I |
Large
Business and International |
|
RAS
|
Office
of Research, Analysis and Statistics |
|
SB/SE
|
Small
Business/Self-Employed |
|
TE/GE |
Tax
Exempt and Government Entities |
In 2005, the Internal Revenue Service (IRS)
released preliminary results of a major research effort to quantify the Tax Gap
using data from Tax Year 2001 and before.[1] The
IRS estimated the Tax Gap was $345 billion in 2001. This equates to a voluntary compliance rate
of almost 84 percent. Late payments
and IRS enforcement action reduced this to a net Tax Gap of $290 billion.
The last
employment tax study was completed in 1984.
Because of outdated information, the Tax Gap estimate attributed to
underreporting of employment taxes of $15 billion may be significantly
understated. In February 2010, the IRS
began audits under a new Employment Tax Study.
The IRS plans to audit approximately 2,200 employers annually
The three components of the Tax Gap are:
Underreported tax liability ($285 billion)
comprises
83 percent of the gross Tax Gap ($345 billion).
Of this underreported amount, $54 billion (19 percent) is related to
underreported employment taxes. This
estimate is comprised of:
·
Federal Unemployment Tax – $1
billion.
·
Social Security and Medicare
Taxes – $14 billion.
·
Self-Employment Taxes – $39 billion.[2]
The $15 billion estimated Tax Gap for Federal
Unemployment Tax and Social Security and Medicare Taxes is considerably
outdated, and some IRS officials believe it is significantly understated.[3] The
IRS has not conducted a comprehensive study of business taxpayers’ compliance
with employment taxes since 1984.
Further, less than one-quarter of 1 percent (0.25)
of employment tax returns were audited based on Calendar Year 2009 data.[4] In
February 2010, the IRS began its first Employment Tax Study (hereafter referred
to as the Study) in 25 years[5] to better estimate the Tax Gap for
underreported employment taxes and determine compliance rates for business
taxpayers. The overall goals of the Study
are to:
·
Secure statistically valid information
to determine the employment Tax Gap.
·
Determine compliance rates of employers
to focus IRS resources on the most noncompliant areas.
·
Improve examination workload selection
models (for future audits).
The Study calls for audits of randomly
selected employers who filed an Employer’s Quarterly Federal Tax Return (Form
941) for any quarter during Calendar Years 2008, 2009, or 2010. The IRS plans to audit approximately 6,600 of
the estimated 6.1 million employers filing Forms 941 beginning in Fiscal Year
(FY) 2010.[6]
The sample of employers
will be selected and the audit results will be compiled by the IRS Office of
Research, Analysis and Statistics (RAS).
At the conclusion of the Study, the IRS hopes to have a better
understanding of which industries and employers are at the highest risk for
underreporting their employment taxes.
The methodology used to identify and select employers for the Study is
important to achieve the most accurate results.
The individual audits will be conducted by employees within three IRS operating
divisions: Small Business/Self-Employed
(SB/SE), Large Business and International (LB&I),[7] and Tax Exempt and Government Entities
(TE/GE).
This review was
performed at the IRS National Headquarters in Washington, D.C., in the Office
of RAS during the period August 2010 through January 2011. 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.
We relied on published data and other
information provided by the Office of RAS and the United States Department of
the Treasury and audit reports issued by the Treasury Inspector General for Tax
Administration and the Government Accountability Office. The information obtained from published data
and provided directly by the Office of RAS was not independently verified or
validated by the Treasury Inspector General for Tax Administration. Detailed information on our audit objective,
scope, and methodology is presented in Appendix I. Major contributors to the report are listed
in Appendix II.
The IRS selected the
sample of employers to include in the Study based on available resources. However, the audit results for the sampled
taxpayers may not enable IRS management to fully estimate compliance levels for
business taxpayers. As a result, IRS
management indicated that additional audits may be required after the Study is
completed to improve the IRS’s estimates of business taxpayers’ reporting
compliance.
Specifically,
management will not fully know the usefulness of the Study’s results until FY
2015, when all audits are completed and the results are compiled. As a result of the relatively small total
sample size that can be addressed by IRS resources, there is a risk that the IRS
may not collect sufficient data to provide reasonable estimates of compliance
levels and the Tax Gap. In addition, the
IRS plans to sample only 50 large/international business taxpayers in each year
of the Study, which may be too small of a sample to provide meaningful
compliance estimates for these taxpayers.
Further, IRS
management specifically excluded some larger employers (e.g., the Federal
Government; corporations with assets greater than $250 million, etc.) from the Study
due to the time necessary to complete these more complex audits. As a result, the IRS will not obtain any data
for these taxpayers related to trends and patterns of noncompliance.
Until the IRS
obtains complete and updated data on areas of employment tax noncompliance,
management will not have accurate information about the employers that are the
most likely to underreport their taxes.
Having a more complete understanding of these filers is essential for
the IRS to focus its limited resources in areas where they could be most
productive, which should ultimately reduce the burden on compliant taxpayers
and result in more accurate Tax Gap data.
The Internal Revenue Service Is
at an Early Stage in Its Efforts to Improve Compliance Estimates for Business
Taxpayers
RAS management stated that, due to the lack of updated employment tax compliance data, they consider the Study a pilot project and will not definitively know the usefulness of the test results until after the audits are completed.[8] Because of the time needed to conduct the audits, it is likely the IRS will not fully know the usefulness of the Study until FY 2015, when all of the audits should be completed.
Results from prior
studies indicate that there are several underlying factors that contribute to
the underreporting of employment taxes. As a result, the employment tax audits that comprise the Study are expected to be
comprehensive in nature, and auditors will focus on the underlying issues that ultimately
determine the wages paid and employment tax liabilities. For example, since employers may incorrectly
classify certain workers as independent contractors to avoid liability for
employment taxes, auditors are expected to determine the worker’s correct
employment status so that the correct wages and taxes are reported. The IRS identified four areas that are
considered high risk for noncompliance that auditors
are expected to address when applicable:[9]
1)
Worker classification issues.
2)
Fringe benefits.
3)
Reimbursed expenses.
4)
Officer compensation.
To fully address these
(and other) issues, auditors will need to expand the scope of the audits beyond
the information provided on the Form 941 selected for the sample. For the employers selected, the audits will
focus on the wages paid for an entire calendar year (this will include Forms
941 for all four quarters). Other
(employment and nonemployment tax) returns will also be examined to support the
amounts reported on the employment tax returns.
This could include unemployment, corporate, partnership, nonprofit, and information
returns.[10] As a
result, each audit is expected to take approximately 2 years to complete. RAS management anticipates that the final
results will not be available until FY 2015, as shown in Figure 1.
Figure 1: Fiscal
Year Timeline for the Audits
and Availability of Results
|
Year Selected Returns Are to Be Assigned |
Availability of |
Availability of |
|
2010 (2008 Returns) |
2012 |
2013 |
|
2011 (2009 Returns) |
2013 |
2014 |
|
2012 (2010 Returns) |
2014 |
2015 |
Source:
RAS management, December 2010.
The independent contractor employed by the IRS
to review the sample design noted that the Study results will not be readily
available for several years. As a
result, the IRS will not have adequate data available during the course of the Study
to refine the sampling methodology as needed to help identify the most
noncompliant taxpayers. The contractor
identified three options to address this issue:
1)
Continue to sample returns under the current
design for 1 to 2 years beyond the Calendar Year 2010 returns.
2)
Refine the sampling methodology without using
the initial results from the audits.
3)
Suspend data collection after review of Calendar
Year 2010 audit results until a satisfactory new design can be developed.
RAS management
indicated it would be optimal to continue the Study to include additional
years, much like a rolling study to achieve more precise results.[11] However, this will require the three IRS
operating divisions involved in the Study to continue to provide the resources
needed to perform additional audits beyond the current 3-year commitment.
The Study Will Not Enable the Internal Revenue Service to Fully Estimate Compliance for Large Employers
During the Study, the IRS plans to sample only 50 large/international
business taxpayers in each year of the Study, which may be too small of a
sample to provide meaningful compliance estimates for these taxpayers. Further, IRS management specifically excluded
some larger employers (e.g., the Federal Government, corporations with assets
greater than $250 million, etc.) from the Study due to the time necessary to
complete these more complex audits. As a
result, the IRS will not obtain any data for these taxpayers related to trends
and patterns of noncompliance.
The Sample does not include a sufficient number of
large employers to estimate compliance levels
Based on the Study’s methodology, approximately 68 percent of the
planned audits represent small business employers. In addition, over 25 percent of the planned
audits relate to tax exempt employers. The
Study will provide the most meaningful results to estimate compliance levels
for these types of employers. However,
only slightly more than 2 percent of the Study’s planned audits (50 per year)
relate to large employers. As a result, Study
data will be of limited use in determining the compliance behavior for these
employers.
The original sample
design broken out by IRS operating division is shown in Figure 2.
Figure 2: Proposed Annual Sample for Calendar Year 2008
(Year 1 of the Sample) by IRS Operating Division
|
IRS Operating Division |
Sample Size |
Percent of
Sample |
|
SB/SE Small Business/Self-Employed |
1,500 |
68.97% |
|
TE/GE Tax Exempt Organizations[12] |
535 |
24.60% |
|
TE/GE Government Entities[13] |
90[14] |
4.14% |
|
LB&I Large Business & International |
50 |
2.30% |
|
Total |
2,175 |
100%[15] |
Source: RAS management, September 2010.
The IRS estimates there are over 5.5 million small businesses[16] with employees that represent 90 percent of
the total employer population. In FY
2008, the IRS estimated that small business employers filed more than 85
percent of all employment tax returns.
However, large employers accounted for over 45 percent of the total United
States payroll.[17]
The outside research
firm that RAS management consulted indicated that, although the overall
sampling plan was adequate for a pilot Study, they were concerned about the
small size of the LB&I and the TE/GE Government Entities samples. They expressed concern that “if compliance is
as high as earlier estimates suggest, these samples will provide mere handfuls
of noncompliant returns, too few to illuminate patterns or highlight
significant new forms of noncompliance.”[18]
While the IRS
doubled the sample size for Government Entities for Calendar Year 2009, no
additional plans have been made to increase the size of the LB&I Division sample
from the 50 per year originally planned.
As part of our review, we consulted with an independent statistician who
confirmed the plan was adequate, but also expressed concern that the LB&I Division
sample size might be too small to analyze and identify noncompliant
employers.
RAS management
agreed that the sample size is smaller than preferable; however, they advised
us that since the IRS conducts ongoing audits of the largest businesses, many
of these employers are already subject to review. As a result, RAS management indicated that
they may use the results of ongoing audits to assist in estimating compliance
levels for these taxpayers. They also
stated that these taxpayers may be more compliant than smaller employers;
however, they could not provide documentation to support their assumption.
While we concur that
many of the larger businesses are already subject to ongoing examinations, it
is not apparent how many of these audits actually involve employment tax issues
or how results from these audits will be incorporated into the Study. Further, we have no basis to concur with the
RAS assertion that larger employers are more likely to be compliant with their
employment tax obligations. As such, we
are concerned that the small LB&I Division sample size could prevent the
IRS from identifying patterns of noncompliance among the largest
employers. Consequently, this could
impair the IRS’s ability to measure compliance and effectively plan future
audit studies for this segment of employers.
Recommendation
The Director, RAS,
should:
Recommendation 1: Develop an action plan for any future employment tax study that
outlines management’s strategy to achieve their goal of updating the employment
Tax Gap estimates and focusing IRS resources on the most noncompliant
areas.
Management’s Response:
Management agreed
with this recommendation and indicated they plan to continue to develop goals
and project plans during the design phase of every IRS reporting compliance research
study. IRS management plans to monitor
the delivery of the 3 tax years of the Study and incorporate any lessons
learned into the plans for future research efforts.
The
Study will not provide any information related to the compliance levels of some
tax exempt and large employers
The Study will not
give the IRS complete information about the employment tax community because
some types of employers are excluded from the Study. Specifically, the IRS elected to exclude
Federal Government agencies, the three largest State Governments,[19] and many of the largest corporations (which
would require a team of IRS auditors to conduct the audits)[20] because of concerns about the audit
resources required to complete these large-scale audits. In addition, Indian Tribal governments,
foreign subsidiaries, and maritime employers are also excluded from the Study.
Figure 3 shows the
segments of the population excluded from the Study.
Figure 3: Form 941 Employers
Excluded From the Study
|
IRS Operating Division |
Segment of the Population Excluded |
|
SB/SE |
No Specific Exclusions |
|
TE/GE – Tax Exempt Entities |
Church Entities (2008 only)[21] |
|
TE/GE – Government Entities |
Three Largest State Governments (California, New York, and Texas) |
|
TE/GE – Government Entities |
Federal Government |
|
TE/GE – Government Entities |
Indian Tribal Governments |
|
LB&I (LMSB) |
Coordinated Industry Cases |
|
LB&I |
Foreign Subsidiaries |
|
LB&I |
Maritime Industry |
Source: RAS management.
As a result of the
various exclusions, the Study will not address noncompliance within these
groups of employers, and any conclusions drawn from the Study will be limited
to the employer populations reviewed.
RAS management agreed that any Tax Gap projections would be limited to
the populations studied and that they would disclose any limitations in any
reports summarizing the results of the Study.
We asked RAS
management how many employers were excluded from the Study, but they were
unable to provide this information. As a
result, we were not able to quantify the percentage of the total population
that the excluded entities represented (either as a percentage of the total
number of employers or the total wages paid).
Recommendations
The Director, RAS, should:
Recommendation
2:
Determine the percentage of the total
population that the excluded entities represent (either as a percentage of the
total number of employers or the total wages paid) and ensure this information
is documented in the Study results.
Management’s
Response: Management agreed
with this recommendation and plans to document the findings related to the
excluded entities as companion data to the Study results.
Office of Audit Comment: During our fieldwork, we reviewed a report from the independent contractor, indicating that all State Governments were excluded from the Study. When we discussed this with RAS management, they advised us that the three largest State Governments were excluded from the Study because of the time that would be required to conduct these audits. However, after we issued our draft report, RAS management informed us the information they had previously provided about the State Governments was incorrect. Management clarified that their sample design for the 50 largest businesses was inclusive of all State Governments, but none were selected for the sample.
Recommendation
3: Evaluate whether future employment tax
studies should include the large employers excluded in this Study.
Management’s Response: Management agreed with the recommendation and plans to reevaluate
whether future employment tax studies should include the large employers.
Appendix I
Detailed Objective, Scope, and Methodology
Our overall
objective was to determine whether the sampling methodology developed by the
IRS Office of RAS to conduct the Employment
Tax Study (the Study) will provide a valid
representation of employment tax compliance rates for business taxpayers. To accomplish the objective, we:
I.
Interviewed RAS management to determine
the goals and strategic objectives of the Study and how the results will be
used to measure business taxpayers’ compliance with employment taxes.
II. Interviewed
RAS management to determine the specific sampling methodology used to select
the employers for the Study.
A. Determined
the types of tax returns included in the population for the sample.
B. Determined
which segments of the population were intentionally excluded from the sample
selection and why.
III. Evaluated
the validity of the sampling process developed for the Study.
A. Consulted with an independent statistician to
determine whether the sampling methodology used by the Office of RAS is
adequate for its stated objectives.
B.
Determined whether the sample methodology is
statistically valid to project the results to the population of employment tax
filers.
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 assess internal controls because doing
so was not applicable within the context of our audit objective.
We relied on published data and other
information provided by the Office of RAS and the United States Department of
the Treasury[22] and audit reports issued by the Treasury
Inspector General for Tax Administration[23] and the Government Accountability Office.[24] The
information obtained from published data and provided directly by the Office of
RAS was not independently verified or validated by the Treasury Inspector
General for Tax Administration.
Appendix II
Major Contributors to This Report
Nancy A. Nakamura, Assistant Inspector
General for Audit (Management Services and Exempt Organizations)
Jeffrey M. Jones, Director
Janice M. Pryor, Audit Manager
Mary F. Herberger, Lead Auditor
Theresa M. Berube, Senior Auditor
Mark A. Judson, Senior Auditor
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and
Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaison: Director, Office of Research, Analysis and Statistics RAS
Appendix IV
Stratified Sample for Calendar Year
2008
The Office of Research,
Analysis and Statistics designed the Calendar Year 2008 sample based on input
from the IRS operating divisions. The
sample size of each division is determined by the employees available to
complete the audits.
|
Form
941 – Proposed Strata for SB/SE |
||||||||
|
Strata Definition
( Annual Wages Paid) |
Number
of Employees |
Population |
Initial Sample |
|||||
|
Total Wages
<= $20,000 |
1,441,792 |
175 |
||||||
|
$20,000 <
Total Wages <= $50,000 |
1,044,511 |
175 |
||||||
|
$50,000 <
Total Wages <= $100,000 |
864,670 |
200 |
||||||
|
$100,000
<Total Wages <= $200,000 |
780,522 |
225 |
||||||
|
$200,000 <
Total Wages <= $500,000 |
< 50 |
733,580 |
200 |
|||||
|
>= 50 |
8,046 |
50 |
||||||
|
Total Wages
> $500,000 |
< 50 |
485,573 |
225 |
|||||
|
|
>= 50 |
146,431 |
250 |
|||||
|
Total |
5,505,125 |
1,500 |
||||||
|
Form
941 ‑ Proposed Strata for TE/GE Exempt Organizations |
||||||||
|
Total Wages
<= $75,000 |
174,988 |
100 |
||||||
|
$75,000 <
Total Wages <= $250,000 |
97,760 |
100 |
||||||
|
$250,00 <
Total Wages <= $1,000,000 |
65,176 |
150 |
||||||
|
Total Wages
> $1,000,000 |
44,785 |
185 |
||||||
|
Total |
382,709 |
535 |
||||||
|
Form
941 ‑ Proposed Strata for TE/GE Government Entities[25] |
||||||||
|
All
Government Entities |
74,398 |
90 |
||||||
|
Form
941 ‑ Proposed Strata for LB&I |
||||||||
|
All
LB&I |
134,634 |
50 |
||||||
Appendix V
Management’s Response to the Draft Report
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE"
WASHINGTON, D.C. 20224
April 22. 2011
MEMORANDUM FOR MICHAEL R PHILLIPS
DEPUTY INSPECTOR GENERAL AUDIT
FROM: Rosemary D Marcuss 35RNB
Director, Research, Analysis and Statistics
SUBJECT: Draft Audit Report - Limitations in the Sample Size for the IRS’s Employment Tax Study May Impact the Ability to Determine Compliance Levels (Audit# 201110001)
Thank you for the opportunity to review your draft report titled: “Limitations in the Sample Size for the IRS's Employment Tax Study May Impact the Ability to Determine Compliance Levels (Audit#201110001)". Your report acknowledges NRP's efforts to conduct a multi-year research study of employment tax compliance which should aid in informing Tax Gap estimation and support other research efforts. The report reflects our approach to balance the requirements of statistical precision and the resources available to generate these research data. The stakeholders recognized these limitations during the Employment Tax study design, as well as the impact on our resulting compliance estimates. We are exploring the possibility of expanding the overall sample size by adding additional tax years to the study. In addition to furthering the understanding of compliance research, NRP studies have additional benefits, e.g., this study has unified the tools the participating IRS Operating Divisions use to capture employment tax audit data and has led to important examination enhancements that will benefit any examination of employment tax issues.
We were unable to correct some additional points in the report during earlier discussions. First, although the design team considered excluding several larger states, the NRP sample does not exclude any state governments. Second, while we anticipate each study to last approximately two years, the individual audits within each study will vary from the average due to the complexity of the returns involved.
We have accepted your recommendations and will implement appropriate corrective actions.
Attached are our comments to your specific recommendations. If you have any questions, please contact me, or a member of your staff may contact Justin Allen of the National Research Program on 617-316-2265.
Attachment
Attachment
The Director, Research, Analysis and Statistics, should:
RECOMMENDATION
1:
Develop an action plan for any future
employment tax study that outlines management's strategy to achieve
their goal of updating the employment Tax Gap estimates and focusing IRS resources on the most noncompliant areas.
CORRECTIVE
ACTION
We agree with this
recommendation. We develop goals and project plans during the design phase of every
IRS reporting compliance research study. We will continue to monitor the delivery of
the three tax years of the employment
tax study and will incorporate any lessons learned into the plans for future
research efforts.
RESPONSIBLE
OFFICIAL
Director, Research,
Analysis, and Statistics
IMPLEMENTATION
DATE
Evaluation and
project planning for future studies will occur at the inception of those studies.
RECOMMENDATION
2:
Determine
the percentage of the total population that the excluded entities represent
(either as a percentage of the total number of employers or the total wages
paid), and ensure this information is
documented in the Study results.
CORRECTIVE
ACTION
We agree with this
recommendation. We will document
findings related to excluded entities as companion
data to the NRP study results.
RESPONSIBLE
OFFICIAL
Director,
Research, Analysis, and Statistics
IMPLEMENTATION
DATE
December 30, 2011
RECOMMENDATION
3:
Evaluate whether future employment tax studies should include the large employers excluded in this Study.
CORRECTIVE
ACTION
We agree with the recommendation. We had this discussion during the design phase
of this study. Factors to be
considered include the availability of resources. For future employment tax studies, we will re-evaluate whether those studies should include the
large employers.
RESPONSIBLE
OFFICIAL
Director, Research,
Analysis, and Statistics
IMPLEMENTATION
DATE
October 15, 2011
[1] The Tax Gap is the difference between taxes owed and taxes actually paid on a timely basis.
[2] Employment tax compliance related to self-employed taxpayers (with no employees) was not addressed in this Study. The underreporting of Self-Employment Taxes is estimated to be $39 billion based on studies of individual reporting compliance.
[3] The Self-Employment Taxes estimate is more current and is considered to be a more reliable estimate.
[4] Based on the number of returns examined in Fiscal Year 2009 as a percentage of all employers with a filing requirement in Calendar Year 2008.
[5] The IRS Headliner Volume 280, dated November 9, 2009.
[6] See Appendix IV for additional information on the sample size by type of employer.
[7] The Large and Mid-Size Business Division reorganized in FY 2010 and is now the LB&I Division.
[8] A pilot project is typically a small-scale preliminary study conducted before the main research in order to check the feasibility or to improve the design of the research.
[9] Not all audits will involve all four focus areas, and some will address more issues.
[10] Information returns such as the Wage and Tax Statement (Form W-2) or the Miscellaneous Income (Form 1099‑MISC.) are required to report various types of payments made by businesses throughout the calendar year.
[11] A rolling study is a multi-year project in which results are updated as more current data become available.
[12] Nonprofit organizations are exempt from income tax under Internal Revenue Code Section 501 and can include charities, religious organizations, business leagues, or social clubs.
[13] Government entities are exempt from income tax and are comprised of three distinct customers: Federal, State, and local governments; Indian Tribal governments; and Tax Exempt Bonds. Although not subject to Federal income tax, these entities are responsible for income tax withholding and employment taxes.
[14] The number of TE/GE government entities in the sample doubled for Calendar Year 2009.
[15] The total exceeds 100 percent due to rounding.
[16] A “small” business generally has total assets under $10 million.
[17] A “large” business has total assets greater than $10 million.
[18] An Evaluation of the Sample Design and
Methodology for the National Research Program Employment Tax Reporting
Compliance Study, Mathematica Policy Research, Inc., Final Report dated
January 29, 2010.
[19] The excluded State Governments are California, New York, and Texas.
[20] A team examination approach is required on “coordinated industry cases” assigned to the LB&I Division, which involve businesses (and their effectively controlled entities) with assets of $250 million or more.
[21] IRS management indicated that 2009 and 2010 returns would be included in the Study.
[22] Update on Reducing the Federal Tax Gap and Improving Voluntary Compliance, United States Treasury Department Report (dated July 8, 2009).
[23] An Appropriate Methodology Has Been
Developed for Conducting the National Research Program Study to Measure the
Voluntary Compliance of Individual Income Taxpayers (Reference Number
2009-30-086, dated June 2009) and An
Improved Management Process Is Needed to Measure the Impact of Research Efforts
on Tax Administration (Reference Number 2009-10-095, dated July 21, 2009).
[24]
Better Compliance Data and Long-term Goals Would Support a More Strategic IRS
Approach to Reducing the Tax Gap (GAO-05-753, dated July 2005).
[25] The number of TE/GE Government entities sampled doubled for Calendar Year 2009.