The Internal Revenue Service, currently under fire in Congress for its screening of applications for tax exempt status by conservative groups, could also use some improvement in the way it conducts examinations of individual tax returns, according to a new government report.
The report, released Friday by the Government Accountability Office, looked at the IRS’s National Research Program, which has helped test or develop practices that have been used in operational examinations of individual tax returns, according to IRS officials. These NRP practices include, for example, helping test IRS's remote learning system and helping IRS adopt new examination support software.
One way that the IRS works to understand taxpayer compliance is by operating the NRP, which conducts audits or examinations of individual tax returns in a research sample. NRP examinations are fewer in number but more detailed than the IRS’s regular, operational examinations, which focus on the tax returns most likely to have substantive noncompliance. For its report, the GAO was asked to study whether NRP procedures could improve the IRS’s operational examinations.
The examiners that the GAO interviewed cited four additional ways that NRP practices could improve operational examinations.
The first two concern using more data in classification, the IRS’s initial review of tax returns to select issues for examination. Operational classifiers do not have access to as much tax return data as NRP classifiers, the GAO noted. The NRP transcribes more data from paper-filed tax returns. Without the additional data, operational examiners cannot make optimal decisions about what issues to classify, raising the risk of needlessly examining compliant taxpayers. To make data in operational classification better match NRP levels, examiners suggested transcribing more data from paper-filed returns, and using all data from electronically filed returns.
However, additional transcription imposes costs, the GAO pointed out. For example, the IRS estimated that it would cost $8 million annually to transcribe more expense data from individual business tax returns. The magnitude of this type of item (for example, an estimated $103 billion was claimed in 2010 for “other expenses” alone) and the high rate of non-compliance (55 percent in the most recent data) make it likely that better targeted examinations could bring in enough added revenue to justify the cost.
In addition, the IRS could acquire more data for classification by revising its policy of treating electronically and paper-filed returns the same. However, the change would only affect classification and not examination. Examinations of paper-filed returns and electronically filed returns are based on all the data. Using more data from electronically filed returns in classification would probably reduce the chances that the IRS would conduct unnecessary examinations of compliant electronic returns, according to the GAO.
The third way involves clarifying how to save examination case files electronically. Operational examiners have less specific guidance on saving case files than NRP examiners. Clarifying the key files to be saved electronically would be a way to minimize costs and could help make case sharing and other examiner duties more efficient.
The fourth way concerns leveraging NRP for examination staff development. Compared to operational examinations, NRP examinations require more detailed documentation and are broader in scope. Examiners told the GAO that such NRP experiences help develop the skills of relatively new staff. However, the IRS has no official guidance specifically on when NRP examinations could be used to help develop staff.
The GAO recommended that the IRS transcribe additional data from paper-filed returns, use all electronically filed data, clarify guidance on saving examination case files electronically, and develop guidance on when examiners can work NRP cases.
The IRS generally agreed with the recommendations but did not specifically comment on transcribing more data from paper-filed returns.
Outgoing IRS acting commissioner Steven T. Miller, who faced harsh questioning from congressional critics in a series of hearings in the past week, responded to the GAO report on May 9, before the results of a separate report by the Treasury Inspector General for Tax Administration on the IRS’s screening of applications for tax-exempt status by filtering out “Tea Party” and “patriot” groups provoked a furor (see IRS Hearings Express Lawmakers’ Outrage).
“We endeavor to leverage our usage of data wherever possible and we appreciate its value in giving our tax return screeners and examiners more complete information,” Miller wrote in response to the GAO report. “In our current limited budget situation, we face difficult fiscal choices for technology improvements, but we will continue to look for opportunities enhance our existing enforcement activities. Moreover, as the number of electronically filed returns from individuals now exceeds 80 percent of all returns filed, we intend to review our policy of treating data from electronically and paper filed returns in a similar fashion.”
Comptroller General Gene Dodaro, who heads the GAO, spoke at a luncheon during the American Institute of CPAs’ Spring Meeting of Council in Washington, D.C., on Monday. During a question-and-answer period after his speech, Dodaro was asked by Accounting Today whether the GAO had been asked to investigate either the IRS tax-exempt application scandal or another recent scandal involving the Justice Department’s accessing of Associated Press reporters’ phone records. “Not as yet,” he replied.