IRS to work more closely with states on tax compliance

The Internal Revenue Service is hoping to expand the number of states who share data with the IRS as part of a joint federal and state program that’s trying to crack down on tax evasion.

A new report by the Treasury Inspector General for Tax Administration examines ways the IRS can more effectively address tax noncompliance by making better use of the Fed/State Program. The report noted that the IRS already collaborates with state and local government agencies to increase tax compliance, enforcement and taxpayer services. One way the IRS accomplishes this is through the Fed/State Program.

Under the program, the IRS Governmental Liaison function (which is part of the IRS’s Office of Privacy, Governmental Liaison, and Disclosure) facilitates and expands joint tax administration relationships between the IRS and state tax authorities. But TIGTA found the IRS can more effectively address noncompliance and underreporting by better using the State Audit Report Program. For the report, TIGTA analyzed information from the program on people who didn’t file tax returns for fiscal years 2013 through 2016 and found the IRS had dropped 39,142 records for taxpayers who were either repeat nonfilers, high-income nonfilers or both, with estimated tax liabilities not collected totaling approximately $285 million.

A man walks past the IRS headquarters in Washington, D.C.
The IRS headquarters in Washington, D.C.

So far, only 12 states participate in the State Audit Report Program, and there’s a lack of coordination and knowledge regarding the IRS’s agreements with the state agencies who do participate. The report found that more coordination is needed between the IRS’s Office of Privacy, Governmental Liaison, and Disclosure and its Small Business/Self Employed Division for development and tracking of such agreements.

TIGTA recommended the IRS expand its State Audit Report Program to other state agencies, evaluate high-income and repeat nonfilers before dropping them from the State Audit Report Program nonfiler inventory, and document its analysis. In addition, the report said the IRS’s Office of Privacy, Governmental Liaison, and Disclosure should coordinate with the Small Business/Self-Employed Division to ensure that all federal and state agreements are accounted for in the IRS Agreement Database, and routinely review and validate the database for all federal and state agreements.

An IRS official said in response to the report that the agency has already been doing more outreach to other state tax authorities in an effort to expand the program. “Within the Fed/State Program, the State Audit Report Program (SARP) initiative identifies potential underreporters and nonfilers based on state audit information,” wrote Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division. “Earlier this year, we contacted all nonparticipating state agencies to request information about their willingness and ability to share information. State participation is voluntary and cannot be mandated by us. Collaboration among our agencies can also present challenges such as the format, quality and compatibility of the data to be exchanged. We are currently analyzing the information gathered and identifying those agencies with which it may be appropriate to begin data sharing.”

The IRS agreed with two of TIGTA’s recommendations and partly agreed with one. The IRS plans to do more outreach to state agencies about data transfer to expand the State Audit Report Program, and evaluate and make improvements, if necessary, to the ranking process of the State Audit Report Program nonfiler inventory and formalize a process to document all non-selected nonfiler cases. On top of that, the IRS Office of Privacy, Governmental Liaison, and Disclosure will make sure all Small Business/Self-Employed Division Fed/State agreements are accurately recorded in the IRS Agreement Database and will annually validate that the database is current for all active Small Business/Self-Employed Division Fed/State agreements. The IRS Office of Privacy, Governmental Liaison, and Disclosure will also develop written procedures for conducting this annual review.

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