The Internal Revenue Service could significantly increase the revenues it collects from taxpayers by targeting its enforcement resources better, especially by using correspondence exams, according to a new report.
The IRS spends most of its enforcement resources on examinations, the report from the Government Accountability Office noted. Correspondence exams of individual tax returns, which target fewer and simpler compliance issues, are significantly less costly on average than the broader and more complex field exams.
The GAO estimated that the average cost (including overhead) of correspondence exams opened in 2007 and 2008 was $274, compared to an average of $2,278 for field exams.
The IRS spent nearly 20 percent of the $1.6 billion per year that it devoted to exams on returns from taxpayers with positive income of at least $200,000, even though such returns accounted for only 3 percent of the 136 million individual returns filed per year. (Positive income, a measure that IRS uses to classify returns for exam planning purposes, disregards losses that may offset this income).
For the two years of cases reviewed by the GAO, exams (both correspondence and field) of taxpayers with positive incomes of at least $200,000 produced significantly more direct revenue per dollar of cost than exams of lower-income taxpayers, however.
Across income groups, correspondence exams were significantly more productive than field exams in terms of discounted direct revenue per dollar of cost. The GAO estimated that the average direct revenue yield per dollar of cost across all correspondence exams of individual taxpayers was $7. In contrast, the average direct yield per dollar for field exams of individual taxpayers was $1.80.
In its report, the GAO demonstrated how these estimates could be used to inform resource allocation decisions. For example, a hypothetical shift of a small share of resources (about $124 million) from exams of tax returns in less productive groups shown to exams in the more productive groups could have increased direct revenue by $1 billion over the $5.5 billion per year IRS actually collected (as long as the average ratio of direct revenue to cost for each category of returns did not change). These gains would recur annually, relative to the revenue that IRS would collect if it did not change its resource allocation. This particular resource shift would not reduce exam coverage rates significantly and, therefore, should have little, if any, negative effect on voluntary compliance.
In response to the report, IRS acting commissioner Steven T. Miller pointed out that it would take years to develop improved data systems and estimation techniques for using average direct revenue-to-cost ratios as the basis for resource allocation. “The IRS is committed to the optimal allocation of our enforcement resources,” he wrote. “That is why we select workload strategically. It is also why we account for factors other than just direct return on investment when allocating resources across programs or categories of work.”
4 Comments
Sorry, last sentence should have started out with "Otherwise"
Posted by: tego@verizon.net | January 7, 2013 10:01 PM
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The overlooked problems with correspondence audits are reaching the auditor by phone for some clarification, photocopying dozen, if not hundreds of pages, when business expenses along with diary's are questioned (never sent originals), and the lower level of training of the auditors. Invariably one has to wait for the 90 day letter, petition the Tax Court, get a response from appeals, and then settle the case amicably as should have been, and would have been done in a face to face meeting in a matter of very few hours.
Correspondence audit should be limited to Real Estate Taxes (a check or a bank statement would do), Contributions (some checks plus required letters from the Charities themselves will suffice, along with and necessary appraisals. Of course clothing items, etc., are a problem but only for relatively large amounts), Medical Expenses (which can be high but a usually limited in number), and perhaps a few other similar provable deductions.
Other an office/field audit by a competent auditor will take the least amount of IRS time and expense.
Posted by: tego@verizon.net | January 7, 2013 9:59 PM
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Maybe they should focus on EIC & HOH filings for compliance. With the ease of online filing for low income folks, I bet they would be surprised at what they find.
Posted by: MJK1000 | January 7, 2013 12:38 PM
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This article makes me wonder what the ratio of direct revenue per dollar of cost is for the OVDI programs. I have read accounts of several participants, most of whom spent at least 2 years in the program before the end of the review. One person settled for $25k. It doesn't take much to see that that ratio could not be considered cost effective.
The failure of former commissioner Shulman to differentiate how much of the $5bn collected was due to FBAR fines and how much was actually tax recovery continues to muddle just how effective the heavy-handed, penalty-oriented approach is in bringing US citizens abroad into compliance. One would expect a reasonable explanation that would demonstrate the effectiveness of the program.
The larger question to be answered however, is whether FATCA will be at all worth the cost to foreign FFI's etc. It isn't at all clear what IRS intends to do with the information received. With regard to Americans abroad, how do they purport to collect anything? Or are they just developing files with the intent of levying a wealth tax and later on, estate tax for those with non-US heirs?
Perhaps the next commissioner will discover that focusing more on resource allocation and reducing the severity of the onerous penalties associated with OVDI, is far likelier to achieve an effective rate of compliance.
Posted by: nobledreamer | January 4, 2013 4:14 PM
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