«Testimony of The Honorable J. Russell George Treasury Inspector General for Tax Administration February 25, 2015 Washington, D.C. TESTIMONY OF THE ...»
The sharing of these workstations could allow the IRS to reduce its long-term office space needs by almost one million square feet, resulting in potential rental savings of approximately $111 million over five years. The IRS agreed with our recommendations and indicated it would revise interim and long-range portfolio strategies for future space needs at sites to include workstation sharing as appropriate.18 In September 2014, TIGTA also reported that potential cost savings could be achieved from expanded electronic filing of business returns. 19 IRS efforts have resulted in considerable growth in the electronic filing of individual tax returns, which was at an 81 percent rate in Processing Year 2012. In comparison, the electronic filing rate of business tax returns in Tax Year 2012 was 41 percent. Employment tax returns provide the most significant opportunity for growth in business electronic filing. For Tax Year 2012, more than 21.1 million (71 percent) employment tax returns were paper-filed. The Electronic Federal Tax Payment System (EFTPS) has been used in the past to facilitate the e-filing of employment tax returns for Federal agencies. TIGTA recommended that the IRS consider this option for business taxpayers. Providing businesses the ability to electronically file their tax returns concurrently with payment of their tax due on the same system could provide one-stop service which would benefit business filers.
The IRS did not agree to implement this recommendation and offered as an explanation that the Modernized e-File system has been established as the system for receiving employment tax returns electronically. This system provides taxpayers with the ability to remit tax payments when submitting their returns. Notwithstanding this explanation, the implementation of this system has not resulted in a significant increase in the e-filing rate for these tax returns. Moreover, this system does not accept quarterly employment tax deposits.
In September 2014, TIGTA reported that the IRS does not effectively manage
TIGTA, Ref. No. 2012-10-100, Significant Additional Real Estate Cost Savings Can Be Achieved by Implementing a Telework Workstation Sharing Strategy (Aug. 2012).
TIGTA, Ref. No. 2014-40-084, A Service-Wide Strategy Is Needed to Increase Business Tax Return Electronic Filing (Sep. 2014).
server software licenses and is not adhering to Federal requirements and industry best practices. Until the IRS addresses these issues, it will continue to incur increased risks in managing software licenses. TIGTA estimates that the inadequate management of server software licenses potentially costs the Government between $81 million and $114 million based on amounts spent for licenses and annual license maintenance that were not being used.20 While the IRS agreed with our recommendation to improve the management of server software licenses, it believes it has subsequently mitigated some of these issues.
Finally, TIGTA estimates that the IRS may have issued more than $439 million in potentially erroneous tax refunds claimed on 187,421 amended returns in FY 2012.
Currently, amended tax returns can only be filed on paper and are manually processed.
TIGTA’s review of a statistical sample of 259 amended tax returns identified 44 tax returns (17 percent) with questionable claims. TIGTA reported that the processes the IRS uses to verify originally filed tax returns would have identified most of the 44 questionable amended returns TIGTA identified as needing additional scrutiny before the refund was paid. TIGTA forecasts using these same processes could prevent the issuance of more than $2.1 billion in erroneous refunds associated with amended tax returns over the next five years. In addition, TIGTA reported that the IRS could have potentially saved $17 million in FY 2012 if it allowed taxpayers to electronically file amended tax returns.21 The IRS agreed with TIGTA’s recommendation to expand electronic filing of amended tax returns.
The IRS Could Take Actions to More Efficiently Use Its Limited Resources
TIGTA has identified other opportunities for the IRS to more efficiently use its available resources. For example, TIGTA identified potential improvements in the efficiency of the ACS.22 The ACS plays an integral role in the IRS’s efforts to collect unpaid taxes and secure unfiled tax returns. ACS employees are responsible for collecting unpaid taxes and securing tax returns from delinquent taxpayers who have not complied with previous notices. The number of ACS contact representatives in FY 2013 was 39 percent less than in FY 2010 due either to attrition or reassignment, because resources are needed to answer incoming telephone calls and work identity theft cases. This resulted in fewer resources available to devote to the collection of TIGTA, Ref. No. 2014-20-042, The Internal Revenue Service Should Improve Server Software Asset Management and Reduce Costs (Sep. 2014).
TIGTA, Ref. No. 2014-40-028, Amended Tax Return Filing and Processing Needs to Be Modernized to Reduce Erroneous Refunds, Processing Costs, and Taxpayer Burden (Apr. 2014).
TIGTA, Ref. No. 2014-30-080, Declining Resources Have Contributed to Unfavorable Trends in Several Key Automated Collection System Business Results (Sep. 2014).
unpaid taxes. However, the IRS’s overall collection inventory practices were not changed to reflect the reduced workforce and, as a result, new inventory continued to be sent to the ACS without interruption, even though inventory was infrequently worked. This has a substantial impact on the amount of Federal taxes that remain uncollected.
The IRS agreed with our recommendations to re-examine the ACS’s role in the collection workflow process, including inventory delivery to the ACS as well as case retention criteria, and align ACS resources accordingly. In addition, the IRS also agreed to establish performance metrics for ACS call data to measure the impact that answering taxpayer calls has on compliance business results. Capturing these data could allow ACS management to assess the impact of prioritizing call handling versus working inventory and limiting enforcement actions in order to reduce the volume of incoming calls to the ACS.
TIGTA also found that the IRS’s fieldwork collection process is not designed to ensure that cases with the highest collection potential are identified, selected, and assigned to be worked.23 Although the IRS has begun some initiatives intended to improve the workload selection process, TIGTA believes further action is warranted. 24 With significant growth in delinquent accounts and a reduction in the number of employees, it is essential that the field inventory selection process identifies the cases that have the highest risk and potential for collection.
TIGTA is currently following up on our recommendations regarding inappropriate criteria the IRS used to identify organizations applying for tax-exempt status for review in the area of political campaign intervention. TIGTA has determined that the IRS has taken significant actions to (1) eliminate the selection of potential political cases based on names and policy positions, (2) expedite processing of Internal Revenue Code Section 501(c)(4) social welfare applications, and (3) eliminate unnecessary information requests.25 Better Processes and Information Would Assist the IRS in Making Informed Decisions The IRS’s Collection function has the primary responsibility for collecting delinquent taxes and tax returns while ensuring that taxpayer rights are protected.
TIGTA, Ref. No. 2014-30-068, Field Collection Could Work Cases With Better Collection Potential (Sep. 2014).
TIGTA, Audit Number 201410009, Status of Actions Taken to Improve the Processing of Tax-Exempt Applications Involving Political Campaign Intervention, report planned for April 2015.
TIGTA has also identified areas in which the IRS could make more informed business decisions when determining how to use its limited resources. For example, the IRS eliminated or reduced services at Taxpayer Assistance Centers, or TACs. This move was completed to balance taxpayer demand for services with the IRS’s anticipated budget cuts, redirect taxpayers to online services, enable assistors to dedicate more time to answer tax account-related inquiries, and offer other services at the TACs, such as identity theft services and acceptance of payments. Although the IRS stated that the services eliminated or reduced were, in part, the result of the IRS’s anticipated budget cuts, TIGTA reported that the IRS’s plans did not show to what extent the service cuts would lower the costs.
The services the IRS reduced or eliminated at the TACs include preparation of tax returns, refund inquiries, transcript requests, and assistance with tax law questions.26 These services were reduced or eliminated without evaluating the burden that the changes would have on the low-income, elderly, and limited-English-proficient taxpayers who seek face-to-face service. For example, management decided to stop providing tax transcripts at the TACs, informing customers that they should use its online application “Get Transcript.” However, this decision was made with no analysis of the anticipated increase in traffic to this online application to ensure that it could meet the increased demand. In February 2014, IRS management modified its plan to stop providing transcripts at the TACs, based on concerns of the expected volume of online requests for transcripts as well as concerns raised regarding the launch of another Federal Government website. Management subsequently changed its position, alerting assistors at the TACs to encourage taxpayers to use the “Get Transcript” application but also indicated it will not turn away taxpayers who request transcripts.
Furthermore, we reported that a process has not been developed to expand Virtual Service Delivery, which integrates video and audio technology to allow taxpayers to see and hear an assistor located at remote locations. Taxpayers can use this technology to obtain many of the services available at the TACs. The IRS’s stated goals for Virtual Service Delivery are to enhance the use of IRS resources, optimize staffing, and balance its workload. We recommended that the IRS establish a process to identify the best locations for virtual face-to-face services. However, the IRS did not agree to follow through on this recommendation because, in its view, it has established a process to identify the best locations for virtual face-to-face services. However, we believe that the IRS’s geographic coverage methodology does not identify optimal underserved areas across the country that would benefit the most from Virtual Service TIGTA, Ref. No. 2014-40-038, Processes to Determine Optimal Face-to-Face Taxpayer Services, Locations, and Virtual Services Have Not Been Established (June 2014).
TIGTA also found that the IRS’s use of cost/benefit information in managing its enforcement resources could be significantly improved. 27 The allocation of enforcement resources represents an increasingly complex challenge for the IRS in light of significant reductions in its budget. Return on investment (ROI) information, including both estimated ROI for new enforcement initiatives and cost/benefit calculations based on actual program results and costs, is an important tool available to assist IRS senior executives in managing enforcement resources. Although cost/benefit information is considered in making resource allocation decisions, the IRS does not document how or to what extent it uses the information and has no policies or procedures to guide this process. TIGTA also found that the IRS continues to be unable to measure actual revenue from new enforcement initiatives funded in prior years.
We also determined that the IRS’s processes do not ensure that corporations accurately claim carryforward general business credits.28 During Processing Year 2013, corporate filers claimed more than $93 billion in general business credits. These credits offset taxes owed by more than $21 billion. TIGTA identified 3,285 e-filed Forms 1120, U.S. Corporation Income Tax Return, filed in Processing Year 2013 on which corporations claimed potentially erroneous carryforward credits totaling more than $2.7 billion. We recommended the IRS develop processes to address the deficiencies identified in our report. The IRS does not plan to implement this recommendation due to lack of information technology resources and competing priorities.
In addition, TIGTA recently reported that the IRS hired some former employees with prior substantiated conduct or performance issues.29 The act of rehiring former employees with known conduct and performance issues presents increased risk to the IRS and taxpayers. For example, TIGTA found that nearly 20 percent of the rehired former employees TIGTA sampled with prior substantiated or unresolved conduct or performance issues had new conduct or performance issues after being rehired. This is significant because the time spent by IRS managers addressing performance and conduct issues is time taken away from serving taxpayers and enforcing the law.
TIGTA, Ref. No. 2013-10-104, The Use of Return on Investment Information in Managing Tax Enforcement Resources Could Be Improved (Sep. 2013).
The general business credit is offered as an incentive for a business to engage in certain kinds of activities considered beneficial to the economy or the public at large and is used to reduce a corporation’s regular tax liability. A carryforward is the amount of the general business credit that is unused because of the tax liability limit for claiming the credit.
TIGTA, Ref. No. 2015-10-006, Additional Consideration of Prior Conduct and Performance Issues Is Needed When Hiring Former Employees (Dec. 2014).
The IRS is also dedicating significant resources towards addressing what it believes to be the most significant risks to compliance, such as the challenge presented by taxpayers’ increasing use of flow-through entities, such as partnerships.30 In the IRS’s 2014–2017 Strategic Plan,31 one of its stated goals is to ensure compliance with tax responsibilities and to combat fraud, and one of its stated measures of success is an increase in voluntary compliance by three percent from 83 percent to 87 percent by 2017.
TIGTA continues to audit the efficiency and effectiveness of the IRS’s efforts to reduce the Tax Gap32 and improve voluntary tax compliance. In the area of partnership compliance, for example, the IRS initiated its Partnership Strategy in July 2012 to improve the partnership audit process in light of the significant increase in partnership filings and complexities associated with auditing partnership returns. TIGTA recently completed a review of the partnership audit program and found that the IRS has no effective way to assess the productivity of its partnership audits since many complex partnerships have multiple layers of flow-through entities.33 The IRS uses a decades’ old system to track partnership audits that is unable to provide information on the total amount of taxes that are ultimately assessed to the taxable partners as a result of adjustments made to the partnership returns. Therefore, the IRS is unable to assess the full impact of its partnership compliance activities.
The IRS agrees that this is a significant problem but asserts that a new information technology system is the only means to obtain the necessary information on the productivity of its partnership compliance program. Until such time that the IRS decides to make upgrading in its systems a priority, however, TIGTA believes the IRS could make better use of the significant research capacity within the IRS to address this formidable tax compliance challenge. Although the IRS has requested over $16 million as part of its FY 2016 budget request to increase the number of agents with specialized experience in auditing large partnerships, it has not taken the steps to improve the tracking of the results of its partnership audits so that it can make the best use of its resources devoted to this area.
More Timely Third-Party Reporting and Correctable Error Authority
Between 2008 and 2012, the number of business partnership filings increased by 21 percent.
IRS Strategic Plan FY 2014-2017.
The Tax Gap is the difference between what all taxpayers owe and what they pay. The IRS estimated the net tax gap (after factoring in forced collections) to be approximately $385 billion annually.