The Internal Revenue Service (IRS) implemented the Employment Tax Adjustment Program (ETAP) in 1986 to deal with the increasing number of employers who were shifting the classification of their workers to self-employed or independent contractors. The ETAP Program is driven by audit leads from unemployment tax audits performed by states with which the IRS has agreements for the exchange of tax information. The IRS uses the state audit results to propose adjustments to Federal employment tax returns.

Our original objective was to determine whether IRS management has taken effective corrective actions to the prior audit findings and recommendations that pertained to the ETAP. Based on our early discussions with IRS executives, however, we modified the focus of the audit to consider other more significant issues that were impacting the operation of the ETAP Program at the Detroit computing center (Dcc).

Our review confirmed that there are significant legal and operational issues that exist which seriously undermine the continued existence of the ETAP Program at the DDc. These issues include:

• The current ETAP Program requires significant modifications to comply with recently enacted legislation and, even then, will be limited to processing only agreed adjustment cases. No response cases and unagreed or partially agreed cases will have to be referred to the field for processing under examination deficiency procedures.
• The current ETAP Program structure and process, originally designed in 1986, is not consistent with current Examination Program guidelines which call for the pursuit of worker classification issues ****2d,2e****
• IRS contacts with employers made through the ETAP Program that result in no adjustment may be potentially creating prior audit safe harbors under Section 530 of the Revenue Act of 1978.
• A serious shortage of state audit leads has steadily eroded productivity over the past three years and has created an inequitable taxpayer compliance program that is primarily focused on employers in one state.
• The existing systems of internal control do not provide reasonable assurances that the ETAP Program operates in an effective and efficient manner. controls are lacking for screening leads, making quality adjustments, processing remittances, generating accurate management information reports, and correcting prior audit findings.

The centralized ETAP Program should be discontinued at the Dcc. In our opinion, this action would be the most effective and efficient means to eliminate all the legal and operational concerns listed above. Terminating the program would enable the IRS to minimize taxpayer burden and divert resources into more productive compliance programs or tax education programs. Having the leads evaluated and worked, if appropriate, as part of the employment tax examination programs in field offices would place the IRS in a better position to ensure that taxpayer rights are protected, Section 530 determinations are made, and the various technical differences that exist between state and Federal employment tax laws are effectively applied.

Management concurred with the recommendation and has taken action to terminate the ETAP Program at the Dcc in an orderly fashion. All production was ceased and the ETAP Program was to be totally dismantled by October 1, 1998.

2d = Law Enforcement Technique(s)
2e = Law Enforcement Procedure(s)