TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION
The
Internal Revenue Service Needs a Coordinated National Strategy to Better Address
an Estimated $30 Billion Tax Gap Due to Non-filers
November 2005
Reference Number: 2006-30-006
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 |
202-927-7037
Email Address | Bonnie.Heald@tigta.treas.gov
Web Site
| http://www.tigta.gov
November 22, 2005
MEMORANDUM FOR DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – The Internal Revenue Service Needs a Coordinated National Strategy to Better Address an Estimated $30 Billion Tax Gap Due to Non-filers (Audit # 200530011)
This report presents the results of our review of the Internal
Revenue Service’s (IRS) implementation of initiatives under the Non-filer Strategy
for current and past fiscal years.
Synopsis
According to a study released by the IRS in March 2005,[1]
individual, estate, and gift tax non-filers accounted for about 10 percent of
the total tax gap[2]
for Tax Year (TY) 2001. The IRS study,
together with previous IRS studies, indicates
the tax gap for individual non-filers tripled from $9.8 billion in TY 1985 to
over $30 billion[3] in TY 2001.
In the past, the IRS had several strategies
for reducing the tax gap attributable to individual non-filers. The most recent National Non-filer Strategy,
which was developed for Fiscal Years (FY) 2001 through 2003, was made
obsolete in July 2002 when the IRS was reorganized. Since then, each IRS business division has
been responsible for tracking and monitoring completion of its own action items. Consequently, there has been no formal system
in place for coordinating and tracking all actions across all IRS divisions.
As increasing voluntary compliance remains a
Service-wide effort, the individual business divisions within the IRS have
taken steps to improve efficiency in working non-filer cases. The actions taken by business divisions include:
However, these are
not coordinated activities that have been planned and controlled within the
framework of a comprehensive strategy. Since
FY 2001, each business division has independently directed its own non-filer activities. Currently, the IRS does not have a
comprehensive, national non-filer strategy or an executive who is charged with
overseeing each business division’s non-filer efforts. The IRS needs better coordination among its
business divisions to ensure resources are being effectively used to bring
non-filers into the tax system and ensure future compliance. The Executive Steering Committee that was
previously established to monitor and coordinate activities among the business
divisions last met in August 2002; coordinated meetings involving all
business divisions were not conducted between September 2004 and April 2005.
The IRS also needs an organization-wide tracking system to monitor the progress of each business division’s actions. The IRS does not have a formal system in place for monitoring progress or changes to each business division’s non-filer plans (e.g., a decision to eliminate or discontinue an action item).
In addition to better coordination and an organization-wide tracking system, the IRS also needs measurable program goals. For example, three measurable goals that could be established are:
·
The
number of returns secured from non-filers.
·
Total
payments received.
·
The
recidivism (repeater) rate.
Without such measurable program goals, management is unable to determine whether efforts to improve program efficiency and effectiveness are achieving desired results.
Finally, according to the National Taxpayer Advocate,[7] the IRS needs to know whether its current outreach and education activities are maximizing voluntary compliance and minimizing the tax gap. The IRS needs to have information to support whether the outreach and education programs are effective in bringing non-filers into compliance and reducing the recidivism rate.
Recommendations
We recommended the IRS Commissioner establish a Non-filer Program Office with a position for a Non-filer Executive or
a permanent multidivisional group with responsibilities for developing strategy,
implementing management control systems, and providing accountability for all the
IRS non-filer efforts.
The Deputy Commissioner for Services and Enforcement should ensure each
business division develops measurable program goals to determine the success of
its non-filer efforts and creates a decision support system for aggregating
data concerning the effectiveness of non-filer programs to improve the
voluntary compliance levels of non-filers.
Consideration should be given to the development of an organization-wide
tracking system to monitor the progress of each business division’s non-filer strategy
action items. Additionally, a schedule
for future meetings for the Non-filer
The Director, Communications, Liaison, and Disclosure (CLD), SB/SE
Division, should
ensure research is conducted on the indirect effect of outreach and education
activities on voluntary compliance to determine whether education and outreach
are effective tools to combat non-filing. Finally, a study
should be considered to devise
an effective outreach and education strategy.
Response
IRS management agreed with the recommendations presented. IRS management has established a multidivisional executive group, the Collection Governance Council (CGC), whose responsibilities include developing initiatives, implementing management control systems, and providing accountability for all IRS non-filer efforts. The Council is meeting regularly to provide oversight for non-filer initiatives and to discuss emerging non-filer issues. A Non-filer subteam, which consists of representatives from each division and reports to the CGC, has been formed to ensure planned actions are accomplished. The subteam is also meeting on a regular basis.
For FY 2006, the IRS developed its first comprehensive non-filer work plan. The CGC will partner with the SB/SE Division Office of Research to identify sources and types of data, gather the data and standardize the metrics, and develop a methodology for decision making. A cross-functional action plan has been developed that includes the responsible individuals and status of completion. Actions are being completed, with results and activity monitored by the Non-filer subteam and the CGC. The CGC will evaluate the effectiveness of the current monitoring system and make changes as necessary to ensure adequate oversight and control.
The CLD function will partner with the SB/SE Division Office of Research to analyze and summarize existing research on the effect of outreach and education activities on voluntary compliance. Based upon study findings, the CLD function will develop appropriate outreach and education strategies. Management’s complete response to the draft report is included as Appendix IV.
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 Curtis Hagan, Assistant Inspector General for Audit (Small Business and Corporate Programs), at (202) 622‑3837.
The Internal Revenue
Service Has Taken Steps to More Efficiently Deal With Individual Non-filers
Information on
Outreach and Education Efforts Is Needed to Determine the Effect on Recidivism
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Management’s Response to the Draft Report
Section (§) 6012 of the Internal Revenue Code (I.R.C.)[8] requires individuals, businesses, and other taxable entities with income over certain threshold amounts to file income tax returns. Most individuals and businesses comply with this requirement. However, an estimated 7.4 million individual taxpayers did not voluntarily file a tax return in Tax Year (TY) 2003.[9]
Individual non-filers are defined as individuals who are legally required to file and for whom returns
have not been filed by the due date of the return or extended due date. For businesses, non-filers are defined as entities
that have a filing requirement and for which returns have not been received by
the due dates of the returns, or extended due dates, and are usually 90 days
past due.
The timely
filing of required tax returns is critical to the
The Internal Revenue
Service (IRS) considers non-filing to be an egregious problem because it can
cause compliant taxpayers to lose faith in the fairness of the tax system. When taxpayers pay their taxes, they want to
be confident that their neighbors and competitors are doing the same. One of the goals in the IRS Strategic Plan
for 2005 through 2009 is to discourage and deter noncompliance with emphasis on
corrosive activity by corporations, high-income individual taxpayers, and other
contributors to the tax gap.
The IRS identifies individual non-filers by using historical filing information and third-party data. For example, the IRS requires employers, financial institutions, and other business entities to submit income and various other types of tax-related information to the IRS. These third-party data are then matched with filed returns. Non-filers are identified when third-party data for a tax year cannot be matched with a return for that tax year.
In March 2005, the IRS reported[10]
that individual non-filers accounted
for an estimated $30 billion[11] of the total tax gap[12] for Fiscal Year (FY) 2001. This report, together with previous IRS studies, indicates the tax gap for individual
non-filers tripled from $9.8 billion in TY 1985 to over $30 billion in TY
2001.
The rate of growth accelerated
from TYs 1998 to 2001 as the individual non-filer tax gap grew from $22.6
billion to $30 billion, an increase of 33 percent over 3 years. These estimates are based on other tax gap
estimates and track along with the growth in those areas. The estimates are not the result of direct
identification of non-filer taxes owed. This
is illustrated in Chart 1.
Chart 1: Tax Gap Amounts
Attributable to Individual Non-filers
Chart 1 was removed due to its size. To see Chart 1, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Note: These
amounts do not take into account the amount owed by the cash or underground
economy.[13]
According to a January 2005 study conducted by Bear Stearns Asset
Management, Inc.,[14] the
We conducted our audit during the period March through May 2005 at the Small Business/Self-Employed (SB/SE) Division Headquarters in New Carrollton, Maryland; Large and Mid-Size Business Division Headquarters in Washington, D.C.; Wage and Investment (W&I) Division Headquarters in Atlanta, Georgia; Criminal Investigation (CI) Division in Washington, D.C.; and Tax Exempt and Government Entities Division Headquarters in Washington, D.C. The audit was conducted in accordance with Government Auditing Standards. 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 has estimated
that 2,183 Full-Time Equivalents (FTE)[15] were directed to the identification and
working of non-filer cases in FY 2004. As
illustrated in Chart 2, this was a net increase of 10 percent from 1,982 FTEs
in FY 2003.
Chart
2: Estimated FTEs Expended for Non-filer
Cases by Business Division
|
Division |
FTEs in FY 2003 |
FTEs in FY 2004 |
Percentage
Change From 2003 to 2004 |
|
CI |
540.00 |
554.00 |
2.59% |
|
Large and Mid-Size Business |
13.35 |
11.50 |
-13.86% |
|
SB/SE |
1,108.64 |
1,251.12 |
12.85% |
|
Tax Exempt and Government Entities |
1.00 |
1.00 |
0.00% |
|
W&I |
318.95 |
365.75 |
14.67% |
|
Totals |
1,981.94 |
2,183.37 |
10.16% |
Source: IRS business
divisions.
Since
FY 2001, the IRS has taken steps to more efficiently deal with individual non-filers. Actions
taken by business divisions include:
As illustrated in Chart 3, these actions may have resulted in fewer non-filers since 2001. This is not certain because IRS methods for identifying this population change yearly.[19] The apparent decrease in non-filers since 2001 could be due to a change in estimating methods.
Chart
3: National Inventory of Identified
Individual Non-filers[20]
Chart 3 was
removed due to its size. To see Chart 3,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
During the 3-year period from FYs 1993 through 1995, a multifunctional, National Non-filer Strategy focused on using the Collection function’s open inventory. The IRS had a large non-filer population and used higher grade Examination function staff to eliminate a backlog in the non-filer inventory. The IRS considered this a success because of the reduction in the non-filer inventory, elimination of unproductive cases, and increase in the number of returns filed. However, there was no measure of the effect on voluntary compliance, and there were no cost data for determining the return on investment.
Another national non-filer strategy was developed for FYs
2000 and 2001. However, it was
terminated because of the IRS reorganization.
Subsequently, the National Non-filer Strategy for FYs 2001 through 2003
was developed. This Strategy was updated yearly based on the overall strategic
business plan. It relied on a combined
approach of outreach and compliance efforts.
While the SB/SE Division had overall responsibility for its
implementation, the National Non-filer Strategy was a coordinated, Service-wide
effort to improve filing compliance.
Extensive studies by the SB/SE Division Office of Research contributed
to development of the Strategy.
Key elements of the Strategy included improved and reengineered processes and work streams, expanded/centralized compliance/enforcement activities, and outreach and education.