United States General Accounting Office

GAO Report to the Ranking Minority Member,

Committee on Governmental Affairs,

U.S. Senate

August 1997 TAX

ADMINISTRATION

Assessment of IRS’

Report on Its Fiscal

Year 1995 Compliance

Initiatives

GAO/GGD-97-158

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-272840 

August 27, 1997

The Honorable John Glenn

Ranking Minority Member

Committee on Governmental Affairs

United States Senate

Dear Senator Glenn:

As part of its fiscal year 1995 appropriation, the Internal Revenue Service

(IRS) received $405 million to fund various compliance initiatives. That

appropriation was intended to be the first installment of a 5-year,

$2.025 billion project, and IRS agreed to report quarterly to Congress on the

progress of the initiatives. However, the initiatives were terminated after

the first year.1

 Thus, the report covering fiscal year 1995 (hereafter called

the “Compliance Initiatives Report”) became the final report.2

IRS originally estimated that the compliance initiatives would generate $9.2

billion in additional enforcement revenue over 5 years, with $331 million

projected for fiscal year 1995.3

 The initiatives were funded on the basis of

this estimate, which is referred to in the Compliance Initiatives Report as

IRS’ “commitment.” Before the start of fiscal year 1995, IRS revised that

estimate after altering its initiatives’ staffing plans. The revised estimate

showed a projected return on investment of $9.6 billion in 5 years, with

$728.3 million coming in fiscal year 1995.4

1

The administration’s budget request for fiscal year 1996 included about $4.5 billion for tax law

enforcement, which was to fund, among other things, the second year of the compliance initiatives.

When Congress reduced that request to about $4.1 billion, IRS terminated the initiatives.

2

IRS FY 1995 Compliance Initiative Final Report (Document 9389, Jan. 1996).

3

IRS expected the first year’s revenue to be relatively small because of the amount of time and cost

involved in hiring and training new staff.

As used in the Compliance Initiatives Report and in this report, “enforcement revenue” includes the

direct revenue resulting from enforcement actions, such as audits, delinquent return investigations, or

efforts to collect delinquent tax debts. According to an IRS official, “enforcement revenue” does not

include any revenue that might result indirectly from those enforcement actions, such as might occur

if voluntary compliance increased as a result of an increase in IRS’ enforcement presence.

4

Although IRS reestimated the revenues to be generated by the compliance initiatives, it did not show

the revised estimate in the Compliance Initiatives Report. Instead, the report compares the results of

the initiatives with IRS’ commitment of $331 million.

Page 1 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
B-272840 

In response to concerns we had raised in reports on compliance initiatives

funded in years before fiscal year 1995,5 IRS developed a new methodology

to estimate the results of the fiscal year 1995 compliance initiatives, as

reported in the Compliance Initiatives Report. Under the new

methodology, which is discussed in more detail later in this report, IRS

starts with total enforcement revenue taken from the Enforcement

Revenue Information System (ERIS). That system, which was designed to

track actual enforcement results in terms of revenue collected, showed

total enforcement revenues of $31,431.3 million in fiscal year 1995. IRS then

used a formula to allocate the total revenue from ERIS between already

existing (or “base”) enforcement programs and new compliance initiatives.

Using the formula, IRS estimated that its base enforcement programs had

generated $30,628.0 million in fiscal year 1995 and that the fiscal year 1995

initiatives had generated another $803.3 million in additional enforcement

revenue that year.

This report responds to your request that we review the Compliance

Initiatives Report. Specifically, we (1) assessed the methodology IRS used

to allocate staff years and revenues between the base enforcement

programs and the compliance initiatives and (2) identified certain caveats

to consider in interpreting IRS’ reported results. As agreed with your office,

this report does not discuss the reliability of ERIS, which was the source of

revenue data in the Compliance Initiatives Report.6

 The reliability of ERIS is

the subject of another assignment currently under way.

Results in Brief IRS could not compile actual revenue results from the fiscal year 1995

compliance initiatives because ERIS only provides information on the total

amount of revenue collected as a result of enforcement activities and

because other systems, such as those that track IRS staffing, also do not

account separately for base enforcement activities and initiative activities.

Therefore, IRS developed a new methodology to allocate fiscal year 1995

enforcement revenues between base programs and the initiatives. That

5

See Tax Administration: IRS’ Implementation of the 1987 Revenue Initiative (GAO/GGD-88-16, Dec. 2,

1987); Tax Administration: Difficulties in Accurately Estimating Tax Examination Yield

(GAO/GGD-88-119, Aug. 8, 1988); Tax Administration: IRS Needs More Reliable Information on

Enforcement Revenues (GAO/GGD-90-85, June 20, 1990); Tax Administration: IRS’ Improved Estimates

of Tax Examination Yield Need to Be Refined (GAO/GGD-90-119, Sept. 5, 1990); Tax Administration:

IRS’ Implementation of Certain Compliance Initiatives (GAO/GGD-92-45FS, Jan. 30, 1992); Tax

Administration: Congress Needs More Information on Compliance Initiative Results

(GAO/GGD-92-118, July 31, 1992).

6

ERIS is an automated database that tracks enforcement cases across functional lines from initial

enforcement action (such as an audit) to resolution (such as collection or abatement).

Page 2 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
B-272840 

methodology represented a significant improvement over past

methodologies.

IRS’ new methodology (1) accounted for the opportunity costs associated

with moving experienced staff off-line to train new staff; (2) provided that

no staff or revenue would be allocated to the initiatives until planned

staffing for base programs had been achieved; and (3) improved the

Compliance Initiatives Report’s usefulness to Congress by including total

staffing and total revenue for the various enforcement programs, allocated

between base and initiatives, along with explanations for variances

between the results anticipated when the initiatives were approved and

the estimated final results.

Although the methodology used for the fiscal year 1995 initiatives is an

improvement over previous methodologies, the results of that

methodology are estimates that are sensitive to assumptions embedded in

the methodology about the productivity of new staff and more

experienced staff.7

 Those assumptions were based on the judgments of IRS

managers rather than empirical data. We do not know what the correct

assumptions are, but our sensitivity analyses showed that a change in

productivity rates could have a significant effect on the reported results.

In considering IRS’ estimates of the fiscal year 1995 compliance initiatives,

there are two other caveats that are relevant. First, the fact that the

initiatives generated a certain amount of revenue in fiscal year 1995 does

not necessarily mean that IRS collected more enforcement revenue in fiscal

year 1995 than it did in fiscal year 1994 but only that IRS collected more

enforcement revenue in fiscal year 1995 than it had estimated it would

collect without the initiatives. In fact, the amount of enforcement revenue

IRS reported collecting in fiscal year 1995 was less than that reported for

fiscal year 1994. Second, because the estimates of revenue attributable to

the compliance initiatives depended on various assumptions, including

how IRS decided to allocate staff, the results in fiscal year 1995 are not

necessarily indicative of what other compliance initiatives would generate

in their first year.

Scope and

Methodology

To assess IRS’ methodology, we

7

Productivity is defined as the amount of dollars collected per staff year.

Page 3 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
B-272840 

• discussed the methodology with officials in the Financial Analysis Division

of the Office of the Chief Financial Officer, which was the division

responsible for preparing the Compliance Initiatives Report;

• determined the extent to which IRS’ methodology addressed the concerns

we had raised in reports on prior years’ compliance initiatives;

• discussed specific assumptions in IRS’ methodology with cognizant staff in

IRS’ enforcement functions;

• assessed the sensitivity of IRS’ results to changes in certain key

assumptions; and

• verified the accuracy of IRS’ computations.

IRS computed the results of the fiscal year 1995 initiatives using data on

planned and actual full-time-equivalent (FTE) staff years and planned and

actual revenues for various enforcement programs. To verify the accuracy

of IRS’ computations, we (1) traced actual FTEs back to reports generated

by IRS’ Automated Financial System, (2) traced actual revenues back to

reports generated by ERIS, (3) interviewed staff from IRS’ enforcement

functions about the methods used to develop planned FTEs and revenues,

(4) recomputed calculations, and (5) resolved any inconsistencies with

cognizant IRS staff. We did not assess the reliability of the reports

generated by ERIS or the Automated Financial System.

We did our work from June 1996 to May 1997 in accordance with generally

accepted government auditing standards. We requested comments on a

draft of this report from the Acting Commissioner of Internal Revenue or

his designated representative. The Acting Commissioner provided

comments in a letter dated July 24, 1997. Those comments are reprinted in

appendix II and are summarized and evaluated at the end of this letter.

IRS Used an Improved

Methodology to

Allocate Enforcement

Revenues Between

Base Programs and

Initiatives, but

Estimates Vary

Depending on

Assumptions

In reviews of past compliance initiatives, we identified several weaknesses

in IRS’ methodology for computing and tracking initiative results. Our past

reviews disclosed, for example, that IRS

• had overstated initiative results by failing to recognize the opportunity

costs associated with moving experienced staff off-line to train new staff

and by failing to adequately account for underrealizations of planned base

staffing,

• was unable to track actual enforcement results, and

• was not providing Congress with enough meaningful information on

initiative results because it was reporting positive results from initiatives

without recognizing negative results from reductions in base activities.

Page 4 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
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Over the years, IRS revised its methodology to address those, and other,

concerns. In preparing its fiscal year 1995 Compliance Initiatives Report,

for example, IRS recognized the impact of opportunity costs, obtained

revenue data from an automated system (ERIS) that was designed to track

actual enforcement results, and improved the report’s usefulness to

Congress by including not only the estimated results of the initiatives but

also the estimated results of the base enforcement programs and

explanations for variances between the results anticipated when the

initiatives were approved and the estimated final results. Also, in

computing the results of the fiscal year 1995 compliance initiatives, IRS

adopted a rule that no FTEs, and thus no revenue, would be allocated to the

initiatives until planned base staffing had been achieved.

Although the methodology used for the fiscal year 1995 initiatives is an

improvement over previous methodologies, the results of that

methodology are estimates that are sensitive to various productivity

assumptions. Those productivity assumptions were not based on empirical

data and could, if they were erroneous, cause IRS’ reported results to be

overstated or understated. Also, in verifying IRS’ calculations, we found

four errors that had a relatively minor effect on IRS’ reported results.

What IRS Reported as the

Initiatives’ Actual Results

Are Estimates

IRS developed and uses ERIS to track the results of enforcement activities.

Assuming ERIS does what it is designed to do, it should provide the total

amount of dollars actually collected as a result of enforcement activities in

fiscal year 1995 (i.e., $31.4 billion). However, as IRS acknowledged in the

Compliance Initiatives Report, ERIS does not distinguish between the

dollars collected from base enforcement activities and the dollars

collected as a result of the initiatives. Similarly, the Automated Financial

System, from which IRS extracted the total number of FTEs spent on

enforcement activities in fiscal year 1995, does not distinguish between

staffing for base activities and for the initiatives.

Because its systems do not distinguish between base and initiative

activities, IRS, as part of its methodology, developed the formula we

describe in appendix I to allocate the $31.4 billion in enforcement revenue

between base and initiative activities. Before implementing its new

methodology, IRS briefed us on the allocation formula. We said then that

because IRS had no initiative-specific data, its formula was a reasonable

approach for identifying initiative results. We continue to believe that.

However, because planned (i.e., estimated) revenue and staffing levels are

Page 5 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
B-272840 

an integral part of that formula, the end results are estimates. Thus the

“actual” initiative results cited in the Compliance Initiatives Report are not

actual results but are estimates of results. IRS did not clearly disclose that

fact in the Compliance Initiatives Report. In tables throughout the report,

for example, IRS refers to “actual,” without clearly explaining the term.

IRS’ Productivity

Assumptions Are Not

Based on Empirical Data

One important set of assumptions embedded in IRS’ methodology relates to

the comparative productivity of new staff versus experienced employees.

IRS used these assumptions in computing planned revenue, which was an

integral part of the methodology. The two primary IRS enforcement

functions, Collection and Examination, approached the issue of relative

productivity differently.8

 Collection assumed that new staff were less

productive than experienced staff, even after they were trained, while

Examination believed that new staff, once trained, were as productive as

experienced employees. Neither of these assumptions was based on

empirical data.

Collection According to IRS officials, to estimate the relative productivity of new

Collection staff, Collection Division officials met in a brainstorming

session and decided, based primarily on their institutional knowledge, that

new staff were generally 50 percent as productive as experienced

employees during their first year on the job.9

 Part of that reduced

productivity assumed by Collection is attributable to the amount of time

new staff spend in training and part to the belief that it takes time for a

new employee to become as productive as an experienced one. (Collection

assumed that new employees do not reach full productivity until their

second or third year, depending on their position).

We have no basis to determine whether Collection’s productivity

assumptions are correct. We do know, however, that changes to the

assumptions could significantly alter the reported results of the

compliance initiatives. To demonstrate the sensitivity of the reported

results to changes in Collection’s productivity assumptions, we arbitrarily

adjusted Collection’s 50-percent assumption by 5 percentage points in

either direction and recalculated the initiatives’ results. Our recalculation

showed that a 5 percentage point change would either increase or

8

According to the Compliance Initiatives Report, these two functions accounted for 97 percent of the

$803.3 million that IRS estimated was generated by the initiatives. Of the $803.3 million, $545.2 million

(68 percent) was attributed to Collection. The other $237.1 million was attributed to Examination.

9

The 50-percent adjustment was used for most Collection FTEs. The only exception was for those

FTEs allocated to work on cases involving delinquent returns. For those FTEs, Collection assumed

that new staff were 64 percent as productive as experienced employees in doing that work.

Page 6 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
B-272840 

decrease IRS’ reported initiative results of $545.2 million by $42 million

(about 8 percent), depending on the direction of the change.

Examination Unlike Collection, the Examination function assumes that new staff are as

productive as experienced staff after they have completed classroom

training. That assumption applies to all of Examination’s enforcement

staff—tax examiners, who audit simple issues by corresponding with

taxpayers; tax auditors, who do more complex audits generally by meeting

with taxpayers at an IRS office; and revenue agents, who do the most

complex audits generally by meeting taxpayers or their representatives at

the taxpayer’s home or place of business.

Examination officials told us that they did not have any empirical data to

support their assumption that new tax examiners are as productive as

experienced tax examiners because Examination’s information systems do

not track individual tax examiner’s accomplishments. Thus, historical data

cannot be separated between experienced and inexperienced tax

examiners. Instead, Examination officials justified their assumption by

noting that tax examiners work on relatively noncomplex issues and

returns and are able to get up to speed fairly quickly. However, according

to an IRS official, after 2 weeks of formal classroom training, tax examiners

are assigned to an on-the-job instructor for 10 weeks. The need for

on-the-job instructors suggests that IRS does not expect new employees to

be able to handle issues and returns as effectively or efficiently, and thus

be as productive, as experienced employees.

Examination officials also said that they did not believe that it was

necessary to assume different productivity levels for experienced revenue

agents and tax auditors and new agents and auditors. The officials

provided two reasons for their position.

• First, Examination adjusts its revenue estimates to consider the amount of

time that new staff must spend in classroom training. Examination

assumes, based on past experience, that the amount of time available to do

audit work is reduced between 19 and 25 percent (it varies between

revenue agents and tax auditors) because of classroom training

requirements. However, that adjustment only affects the amount of time

new staff have to do audits; it does not get at the issue of how productive

new staff are when they are doing audits.

• Second, Examination’s resource allocation model imputes a lower

marginal yield for each additional return audited by initiative revenue

agents and tax auditors. That means, in effect, that Examination assumes

Page 7 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
B-272840 

that each additional return audited will generate less revenue than the

return audited before it.10 However, although IRS assumes a lower yield

with each additional audited return, it does not consider any differences in

the efficiency with which experienced staff and new staff audit tax

returns.

In that regard, the officials said that, after completion of classroom

training, new staff are expected to close the same number of cases in any

year as experienced employees who work the same types of cases. But the

productivity of Examination staff is determined not only by the number of

cases they close in a year but also by the revenue generated from those

cases. Thus, even if new staff were to close as many cases as experienced

staff (Examination officials could provide no evidence to support that

contention), they may or may not achieve comparable dollar results.

According to an Examination official, revenue agents and tax auditors,

during their first year on the job, have 10 weeks and 13 weeks,

respectively, of on-the-job training after their classroom training. The need

for on-the-job training suggests, in our opinion, that new staff may not be

prepared to be as productive as experienced staff, after classroom

training.

Although we did not have data to test the appropriateness of

Examination’s productivity assumption, we tested the sensitivity of IRS’

reported initiative results to changes in that assumption by assuming the

following:

• New tax auditors would be 75 percent as productive as experienced tax

auditors.

• New revenue agents would be 69 percent as productive as experienced

revenue agents.

• New tax examiners would be 95 percent as productive as experienced tax

examiners.

We arrived at the 75-percent and 69-percent figures for tax auditors and

revenue agents, respectively, by using Collection’s productivity

assumption of 50 percent and adjusting it to recognize the fact that

Examination’s assumption already includes a factor for lost productivity

due to training. We assumed only a slight fall-off in productivity for tax

examiners because the correspondence audits they do are straightforward,

and thus, the skills needed to do them can be more quickly learned than

10These estimates of marginal yield per return are based on data collected from the 1988 Taxpayer

Compliance Measurement Program. We did not assess the sensitivity of IRS’ initiative revenue

estimates to changes in the precision of the marginal yield estimates.

Page 8 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
B-272840 

the skills needed by tax auditors and revenue agents. Use of the different

productivity assumptions reduced the initiative results by $12.9 million—a

reduction of about 5 percent from the reported amount of $237.1 million

that IRS estimated was generated by Examination through the initiatives.

Only Minor Errors Were Found

in IRS’ Calculations

We traced the data in the Compliance Initiatives Report back to supporting

documentation and verified the various calculations involved in using IRS’

methodology. We found four relatively minor errors.

The first two errors involved the categorization of FTEs between revenueand nonrevenue-producing FTEs. A portion of the staffing increase

associated with compliance initiatives is for support staff, such as clerks

and secretaries. Those staff, unlike revenue officers, revenue agents, and

other frontline staff, do not directly generate revenue. Thus IRS, in its

calculations, segregated nonrevenue-producing FTEs from

revenue-producing FTEs. In verifying that part of IRS’ calculations, we found

two errors. IRS mistakenly (1) categorized about 140

nonrevenue-producing FTEs in the Collection function as

revenue-producing and (2) included 240 nonrevenue-producing

Examination FTEs in the formula it used to allocate enforcement revenue

between base activities and initiatives. The third error involved the use of

an incorrect average yield figure in computing initiative results for the

Compliance Research program. The fourth error involved a failure to

include about 180 tax examiners in computing the initiative results for the

Collection function.

By our calculations, these four errors—which IRS officials

acknowledged—caused IRS’ reported yield from the initiatives to be

understated by $2.6 million. Absent other changes, correction of the four

errors would increase IRS’ reported yield to $805.9 million.

Caveats to Consider in

Interpreting IRS’

Reported Results

In considering IRS’ estimates of the results of the fiscal year 1995

compliance initiatives, there are two other caveats that are relevant:

(1) the fact that IRS collected a certain amount in fiscal year 1995 as a

result of the initiatives does not necessarily mean that IRS collected more

enforcement revenue in fiscal year 1995 than in fiscal year 1994 but only

that IRS collected more in fiscal year 1995 than it estimated it would have

without the initiatives and (2) the first year’s results from the fiscal year

1995 initiatives are not necessarily indicative of what other compliance

initiatives would generate in their first year.

Page 9 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
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Even With the Positive

Results Reported From the

Initiatives, IRS Collected

Less in Fiscal Year 1995

Than in Fiscal Year 1994

Although IRS reported that the compliance initiatives resulted in additional

collections in fiscal year 1995 of $803.3 million, it does not mean that IRS

brought in $803.3 million more than it did in fiscal year 1994. What it

means is that IRS estimated that it generated $803.3 million more in

enforcement revenue in fiscal year 1995 than it had estimated it would

generate without the compliance initiatives.

According to the Compliance Initiatives Report, IRS collected a total of

$31.4 billion in fiscal year 1995—$30.6 billion from its base programs and

$0.8 billion from the initiatives. Despite the estimated additional revenue

from the initiatives, however, the amount of enforcement revenue

collected in fiscal year 1995 was less than the amount collected in fiscal

year 1994. That is, IRS data indicated that IRS collected about $33.1 billion in

fiscal year 1994, or $1.7 billion more than in fiscal year 1995. According to

IRS officials, a number of factors could make enforcement revenue

decrease even with a staffing increase in the same year. Revenue collected

in one fiscal year is a function not only of that year’s staffing but also of

prior years’ staffing. Much of the revenue impact of a staffing increase or

decrease occurs in subsequent years because of the possibility of appeals,

litigation, and collection activity. In that regard, IRS officials said that

enforcement revenue in fiscal year 1996 increased to $38.0 billion, even

with a staffing decrease, partially as a result of the fiscal year 1995

compliance initiatives.

Results of Fiscal Year 1995

Compliance Initiatives Are

Not Necessarily Indicative

of the Results That Future

Compliance Initiatives

Would Produce

A second caveat to keep in mind is that IRS’ results in fiscal year 1995 are

not necessarily indicative of the results that would be achieved in the first

year of future compliance initiatives. The results achieved for any

compliance initiative depend on many factors that can, and most likely

will, vary from one initiative to another. Two of those factors, both of

which had a significant impact on the results achieved in fiscal year 1995,

are (1) the extent to which new staff must be hired to fill the positions

authorized by the initiatives and (2) how IRS decides to allocate the

initiative positions among its various enforcement programs.

Most of the positions funded with the $405 million provided for the

compliance initiatives in fiscal year 1995 were filled not by new hires but

by staff who were already on board. This happened, at least in part,

because IRS’ fiscal year 1995 appropriation, except for the compliance

initiatives, actually resulted in reductions in IRS’ enforcement staffing.

Thus, many of the positions funded by the $405 million were used to offset

that reduction. According to data provided by IRS, of the 5,470 initiative

Page 10 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
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positions filled as of September 30, 1995, 1,145 were filled by new staff.

The other 4,325 were filled by existing employees either through lateral

reassignments or promotions (such as promoting tax auditors to fill

revenue agent positions). If future initiatives require a greater proportion

of new staff, the results could be different from those in fiscal year 1995

because new staff (1) require more training, which, under IRS’ current

procedures for training new staff, increases the opportunity cost

associated with moving experienced staff off-line to do the training and

(2) generally can be expected to generate less revenue, at first, than

experienced staff.

Decisions on how to allocate staff among enforcement programs also

affects initiative results. The change in IRS’ estimate of how much revenue

would be generated by the fiscal year 1995 initiatives, which we noted at

the beginning of this report, is an example of how staffing decisions can

affect initiative results. IRS’ first estimate was $9.2 billion over 5 years and

$331 million in fiscal year 1995. Then, in an effort to maximize revenues,

IRS decided to allocate more of the $405 million to areas, such as

Automated Collection System sites, that are staffed by lower graded

personnel and to allocate fewer dollars to more costly areas, such as the

Collection Field Function, which is staffed by higher graded revenue

officers.11 This reallocation enabled IRS to fund many more FTEs than

originally expected and resulted in revised estimates of $9.6 billion over 5

years and $728 million in fiscal year 1995.

Conclusions IRS’ methodology for computing the results of the fiscal year 1995

compliance initiatives is a significant improvement over past

methodologies. However, there are productivity assumptions embedded in

the methodology that are not based on empirical data and could cause the

results of an initiative to be overstated or understated. We do not have a

basis for determining what the correct assumptions should be, but our

sensitivity analyses showed that a change in the assumptions used could

have a significant effect on the reported initiative results of $803.3 million.

For example, as discussed earlier, changing Collection’s productivity

assumption by 5 percentage points would either increase or decrease the

reported results by $42 million and changing Examination’s assumptions

to be comparable to Collection’s would decrease the reported results by

11This reallocation of resources was partly in response to a recommendation we had made in a 1993

report entitled Tax Administration: New Delinquent Tax Collection Methods for IRS (GAO/GGD-93-67,

May 11, 1993). In that report, we recommended that IRS restructure its collection organization to

support earlier telephone contact with delinquent taxpayers and determine how to use collection staff

in earlier, more productive phases of the collection cycle.

Page 11 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
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$12.9 million. After adjusting IRS’ reported results for the effect of these

different productivity assumptions and after increasing the results to

account for the $2.6 million in calculation errors, the estimated yield from

the fiscal year 1995 compliance initiatives would fall somewhere between

$751.0 million and $847.9 million.

Agency Comments

and Our Evaluation

We requested comments on a draft of this report from the Acting

Commissioner of Internal Revenue. IRS provided comments in a letter

dated July 24, 1997 (see app. II). Overall, IRS agreed with the findings in the

report, which it said confirmed that IRS accurately tracked and reported on

the results of the compliance initiatives. However, IRS expressed concerns

about two aspects of the observations in the report.

First, IRS took issue with our statement that it did not clearly disclose the

fact that the initiative results cited in the Compliance Initiatives Report

were not “actual” results but rather estimates. To show that it had clearly

disclosed that fact, IRS quoted two passages from the Compliance

Initiatives Report which refer to the allocation of the revenue to base and

initiative activities. In our opinion, the statements IRS quoted, while

informative to a careful reader, do not provide sufficient information to

make clear that the results are estimates, especially when every table in

the final report referred to the results as “actuals.”12

Second, IRS observed that, although we state that we did not assess the

reliability of the data in ERIS, (1) after reviewing the Compliance Initiatives

Report and supporting ERIS data, we have found no indication that ERIS

does not do what it purports to do—accurately accumulate and summarize

enforcement revenue; (2) work done to date on ERIS as part of our

financial audit of IRS had not disclosed any problems; and (3) an ERIS

sample we took as part of an audit of large corporations concluded that

ERIS does what it purports to do. IRS also observed that we have asked for

ERIS data in conjunction with two recently initiated audits.

We appreciate IRS’ viewpoint; however, (1) the scope of our review of the

Compliance Initiatives Report, as discussed earlier, did not include a

specific assessment of ERIS reliability; (2) we have not yet done sufficient

work on ERIS as part of the financial audit to reach any overall conclusion

about data reliability; and (3) the scope of our audit of large corporations

12IRS also quoted similar language in its letter from several other documents to support this point.

However, we do not believe that language in other documents is directly relevant to understanding the

content of the final Compliance Initiatives Report because they would not be available to most

readers.

Page 12 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
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was also not broad enough to reach any overall conclusion about ERIS

reliability. Until such time as ERIS’ reliability can be determined, we

necessarily continue to rely on ERIS data for some of our work because

they are the best data available. However, the standards applicable to our

work require that we disclose that data reliability has not been confirmed.

We are sending copies of this report to the Committee Chairman; the

Chairmen and Ranking Minority Members of the Senate Committee on

Finance, the House Committee on Ways and Means, and the House

Committee on Government Reform and Oversight; various other

congressional committees; the Secretary of the Treasury; the

Commissioner of Internal Revenue; the Director of the Office of

Management and Budget; and other interested parties. We will also make

copies available to others upon request.

Major contributors to this report are listed in appendix III. If you have any

questions, please contact me on (202) 512-9110.

Sincerely yours,

Lynda D. Willis

Director, Tax Policy and

 Administration Issues

Page 13 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
Appendix I 

IRS’ Methodology for Calculating Initiative

Results

According to the Compliance Initiatives Report, IRS estimated the amount

of revenue attributable to the fiscal year 1995 compliance initiatives by

means of a general formula that consists of two components. The first

component is the ratio of total actual yield per FTE (base and initiative

combined) divided by the total planned yield per FTE (base and initiative

combined). This component indicates by how much the average tax yield

was over or under what IRS expected. If IRS accurately predicted the

average yield, the ratio value of the first component would equal 1. If the

actual yield was more or less than what was predicted, the ratio value

would be greater or less than 1. The second component multiplies the

number of “actual” FTEs allocated to the initiatives by the planned yield per

initiative FTE.

The result of the second component is then multiplied by the result of the

first component. If the first component equaled 1, the yield attributable to

the initiatives would be equal to the number of initiative FTEs times what

yield they were predicted, on average, to realize. However, if the first

component was less than 1, implying that the average yield of both base

and initiative staff was less than expected by some percentage, the

expected tax yield per initiative FTE would be reduced by the same

percentage. Conversely, if the ratio value of the first component was

greater than 1, the second component would be increased by the

percentage by which the actual average yield exceeded what was

expected.

To illustrate, assume the following information:

Total actual yield — $70 million

Actual number of FTEs (base and initiative) — 1,800

Actual yield per FTE ($70 million divided by 1,800 FTEs) — $38,889

Planned total yield — $85 million

Planned number of FTEs (base and initiative) — 1,500

Planned yield per FTE ($85 million divided by 1,500 FTEs) — $56,667

First component: $38,889 divided by $56,667 = 0.686 or

68.6 percent.

Planned initiative yield — $5 million

Planned initiative FTEs — 400

Planned yield per initiative FTE — $12,500

“Actual” initiative FTEs — 700

Page 14 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
Appendix I 

IRS’ Methodology for Calculating Initiative

Results

Second component: 700 times $12,500 = $8,750,000.

“Actual” initiative yield: 0.686 times $8,750,000 = $6,002,500.

The above information is an illustration. The numbers and thus the results

would vary among initiatives and even within an initiative. For example,

Examination assigned its initiative staff to various audit classes

(“individual taxpayers who file a Form 1040C showing total gross receipts

of less than $25,000 dollars” is an example of an audit class). For each

audit class, IRS would apply the above formula; and for each audit class,

the numbers and the results would be different.

Page 15 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
Appendix II 

Comments From the Internal Revenue

Service

Page 16 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
Appendix II 

Comments From the Internal Revenue

Service

Page 17 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
Appendix II 

Comments From the Internal Revenue

Service

Page 18 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
Appendix II 

Comments From the Internal Revenue

Service

Page 19 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
Appendix III 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

David J. Attianese, Assistant Director

James A. Wozny, Assistant Director

John Lesser, Evaluator-in-Charge

Charles C. Tuck, Economist

(268739) Page 20 GAO/GGD-97-158 IRS’ FY 1995 Compliance Initiatives
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