Office of Audit
A SIGNIFICANTLY REDUCED AUTOMATED SUBSTITUTE FOR RETURN PROGRAM NEGATIVELY AFFECTED COLLECTION AND FILING COMPLIANCE
Final Report issued on September 29, 2017
Highlights of Reference Number: 2017-30-078 to the Internal Revenue Service Commissioner for the Small Business/Self-Employed Division.
IMPACT ON TAXPAYERS
The IRS is authorized under Internal Revenue Code Section 6020(b) to use third-party information to determine and assess a tax liability for taxpayers who have a filing requirement but fail to file a tax return. These cases are primarily worked in the Automated Substitute for Return (ASFR) Program. The IRS attempts to bring noncompliant taxpayers into compliance to ensure fairness and reduce the burden on the vast majority of taxpayers who fully pay their taxes on time.
WHY TIGTA DID THE AUDIT
ASFR inventory receipts and 30-day letter issuances decreased by 89 and 98 percent, respectively, between Fiscal Years 2009 and 2016. This audit was initiated to evaluate the effect of the ASFR Program on enforcement yield and nonfiler compliance and to determine whether it effectively processed its workload.
WHAT TIGTA FOUND
The Internal Revenue Manual describes the ASFR Program as a key compliance program, but due to significant resource reductions, it has been cut back substantially. Normal attrition and the inability to hire, reduced nonfiler case creation, reallocation of staff to other collection work, and changes to ASFR inventory selection/work priorities have all contributed to the reduction of ASFR inventory receipts and 30-day letter issuances.
Management prioritized ASFR cases involving Refund Holds over cases with potential high–net tax due ($100,000 or more) even though the average dollars collected per case is five times higher than all other cases. TIGTA estimates that the IRS could collect $843 million over the next five years if it replaced 9 percent of Refund Hold inventory with high–net tax due cases.
Our analysis of 21,533 Refund Hold cases worked in the ASFR Program between June 2011 and November 2016 identified 12,872 (60 percent) cases that were not resolved within six months, and a refund was released to the taxpayer in 8,115 cases. If the IRS held these refunds until the ASFR process was completed, it could have potentially applied $45 million to the taxpayers’ accounts.
Our analysis of 103 randomly sampled ASFR cases determined that 9 percent of ASFR inventory could be eliminated if previously filed tax return and other information was considered during the inventory selection process.
Finally, ASFR Program performance measures are generally limited to employee direct time percentages, types and numbers of closures, and closure rates. Additional comparative measures such as the abatement rates and collection dollars for cases would provide management with information to make informed strategic decisions.
WHAT TIGTA RECOMMENDED
TIGTA made several recommendations to improve the ASFR Program, including: revising the ASFR case selection strategy to prioritize more high–net tax due cases; extending the six‑month refund hold deadline for cases worked in the ASFR Program; and incorporating prior filing information, including allowable exemptions, deductions, and credits, into the nonfiler case creation process.
In response to the report, IRS management plans to take corrective actions relating to five of our recommendations. Management disagreed with two recommendations, in one instance, due to limited resources, and in the other, due to its view that the refund hold period is sufficient when the ASFR Program is operating as intended.
READ THE FULL REPORT
To view the report, including the scope, methodology, and full IRS response, go to:
Phone Number / 202-622-6500
E-mail Address / TIGTACommunications@tigta.treas.gov
Website / https://www.treasury.gov/tigta