TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
MANAGEMENT ADVISORY REPORT: EVALUATION OF REDUCTION IN THE INTERNAL REVENUE SERVICE'S COMPLIANCE ACTIVITIES
Reference No. 2000-30-075
The Internal Revenue Service (IRS) has been experiencing considerable changes in recent years. In 1997, the IRS was criticized at Senate hearings when taxpayers testified that they were harassed and mistreated. Subsequently, the IRS Restructuring and Reform Act of 1998 (RRA 98) was passed to give taxpayers more rights and protection and to place greater emphasis on providing better service to taxpayers. In September 1998, the Commissioner announced a new mission statement to "Provide America’s taxpayers top quality service. . . ." Over the past several years, the number of IRS employees has steadily decreased due to budget limitations. Correspondingly, the number of employees assigned to examine tax returns and collect delinquent taxes also decreased.
Our overall objective was to evaluate the reduction in compliance activities. We analyzed statistics regarding staff resources and related compliance results for Fiscal Years (FY) 1996 through 1999. We also determined what is being done to measure the impact of the reduced compliance activity and increased customer service activity.
The number of district office employees examining tax returns and collecting taxes has decreased since FY 1996, causing decreases in related compliance results such as the number of returns examined and the number of delinquent accounts closed. IRS management and many stakeholders, including some members of the Congress, are concerned about the reduction in resources and the related decrease in business results. In addition, the IRS does not have a reliable method to measure voluntary compliance or the impact that increased customer service and decreased enforcement are having on voluntary compliance.
Fewer Resources Are Being Applied to Compliance Activities
The number of district office employees examining tax returns decreased 19 percent over the past 4 years, while the number of district employees collecting taxes and securing delinquent returns also decreased 19 percent. In the meantime, the number of tax returns filed increased by almost 5 percent. Many employees who normally examine tax returns or collect taxes were detailed to the Customer Service function to answer taxpayer questions and assist taxpayers in preparing their returns. Significant staff resources were also required during the last 2 years to implement the many provisions of the RRA 98.
Compliance Results Have Decreased
The total amount collected by the IRS as a result of specific compliance activities decreased 13 percent during the past 4 years, while total accounts receivable owed to the IRS increased 19 percent. Because of limited resources, the IRS cannot work all of its collection cases; while awaiting assignment, these cases are held in an unassigned inventory. The dollar value of the delinquent accounts in this inventory increased 156 percent to $7.6 billion during the past 4 years, and the inventory of investigations to secure unfiled returns increased almost 300 percent. At the same time, the number of enforcement actions such as federal tax liens, levies, and seizures decreased by 78 percent, 84 percent, and 98 percent, respectively.
The Examination function experienced similar decreases in accomplishments over the past 4 years. The number of returns examined by district office revenue agents and tax auditors in face-to-face audits decreased from 775,000 in FY 1996 to 392,000 in FY 1999 (a decline of 49 percent). The number of returns examined through correspondence decreased from 1,353,000 in FY 1996 to 829,000 in FY 1999 (a decline of 39 percent).
Various Stakeholders Are Concerned With the Reduction in Compliance Resources
Some members of the Congress, IRS management, and IRS employees are concerned with decreases in Collection and Examination activities. During a 1999 survey of employees and managers, 69 percent of Collection employees, 43 percent of Customer Service employees, and 62 percent of mid- and top-level management felt that "too little emphasis is placed on collecting revenue." The news media have had numerous stories presenting statistical information regarding the reductions in Examination coverage and Collection enforcement activity. Recognizing these concerns, the President’s budget proposal for FY 2001 requests additional resources for compliance activities.
The Internal Revenue Service Does Not Have an Effective Measurement System to Determine Impact on Voluntary Compliance
In theory, the audit of tax returns and an effective collection process should encourage taxpayers to file their returns and pay the correct amount of tax. However, the IRS does not have a reliable system to measure this impact, nor does it have a method to determine whether improved customer service would, in fact, increase voluntary compliance. Without a measurement system, management will not know whether this strategy has been successful.
Summary of Recommendations
This report is advisory in nature and is being provided for informational purposes to aid IRS management in making decisions regarding the allocation of compliance resources and the development of new management information systems. Consequently, we are not making any recommendations.