Better implementation by the Internal Revenue Service of two 2008 laws involving reporting of cost basis and transaction settlement could increase taxpayers’ voluntary compliance, according to a new government report.
The report, by the Government Accountability Office, noted that the two laws require reporting to the IRS and taxpayers of the cost basis of sales of certain securities and of transaction settlement information, such as merchants’ income from payment cards or third-party networks.
In response to a congressional request, the GAO assessed the IRS’s implementation plans for the laws, and determined the extent to which the IRS issued timely regulations and guidance and did outreach with taxpayers. The GAO report also examined how the IRS would use the new data to improve compliance; and analyzed the IRS’s plans to assess the implementation efforts and measure the performance and outcomes.
To compile the report, the GAO compared the IRS’s implementation plans to criteria in past GAO work and other sources. The GAO also interviewed industry groups and agency officials, and reviewed rulemaking documents; examined the IRS’s plans to use the new data; and compared the IRS’s measures and evaluation plans to GAO criteria.
The IRS is implementing cost basis and transaction settlement reporting through a new Information Reporting and Document Matching program in its Small Business/Self Employed, or SB/SE, and Modernization and Information Technology Services, or MITS, divisions. The Information Reporting and Document Matching, or IRDM, program plans show several elements of effective program management, but do not document coordination with some related IRS projects such as the Workforce of Tomorrow.
The IRS estimated the IRDM costs, but the MITS’s estimate does not reflect some best practices, such as adjusting for inflation. In addition, the IRDM did not use substantiated tax form volume projections in some budget and risk decisions.
To date, the IRS has spent about $28 million on the IRDM program and requested approximately $82 million more for the program. IRS outreach with industry stakeholders was thorough early in the rulemaking process, but the IRS missed its target dates for issuing regulations by about one year. That was due, according to IRS officials, to the time needed to learn about complex industries such as securities trading.
After the IRS released the final regulations, industry stakeholders sought clarification of certain issues. But the IRS did not release additional written guidance until after the regulations’ effective dates, which industry stakeholders said might affect their implementation of the new reporting requirements.
While the IRS released drafts of the newly required or revised forms, the agency did not release draft instructions prior to the regulations’ effective dates. To use the new data, the IRS is developing systems that are expected to improve the IRS’s existing matching of information returns to individual tax returns and expand matching to business taxpayers.
The initial enhancements are to become operational in 2012. The IRDM plans to conduct research and test the quality of the data, and it regularly documents the lessons it has learned, the GAO noted. However, the IRDM has not assigned responsibility or established procedures to use those lessons. The IRDM also has developed preliminary performance measures to assess the implementation and outcomes, including the effects on revenue and compliance. However, the IRDM has not documented a plan to finalize the performance measures, such as a methodology.
The GAO recommended, among other things, that the IRS improve its cost estimation, form volume projections, stakeholder communication and performance management.
The IRS generally agreed with the GAO’s recommendations, but did not describe plans to release draft form instructions or communicate target guidance release dates, both of which would help with industry implementation.
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