EMPLOYMENT 

TAXES

Timely Use of 

National Research 

Program Results 

Would Help IRS 

Improve Compliance 

and Tax Gap 

Estimates

Report to the Committee on Finance, 

U.S. Senate

April 2017

GAO-17-371

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-17-371, a report to the 

Committee on Finance, U.S. Senate.

April 2017

EMPLOYMENT TAXES

Timely Use of National Research Program 

Results Would Help IRS Improve Compliance 

and Tax Gap Estimates

What GAO Found

The Internal Revenue Service (IRS) uses its National Research Program (NRP) 

to study tax compliance issues. These NRP studies generally rely on detailed 

examinations of a random sample of tax returns and use different practices 

(including tools and procedures) than IRS’s routine operational examinations. 

IRS recently completed the examinations for an NRP study on employment tax 

returns filed from tax years 2008 to 2010. This study was the first IRS had done 

on employment taxes in over 30 years. Based on IRS guidance, NRP results are 

intended to factor into IRS decisions about compliance areas and to be used to 

estimate the tax gap—the difference between taxes owed and those voluntarily 

paid on time. Although the examinations for the study are done, IRS has not

developed formal plans to analyze the results to (1) identify areas of 

noncompliance, (2) address such noncompliance, or (3) update its employment 

tax gap estimate. IRS officials said they have not developed such formal plans 

due to competing research priorities and limited resources, and because the 

NRP results have not yet been finalized. Without completed analysis of the NRP 

employment tax results, IRS risks using outdated data to make decisions about 

compliance and areas of the tax gap to pursue. 

GAO reviewed the available NRP study results on noncompliance and found that 

taxable wages for worker classification and fringe benefits were among the most 

frequently misreported and led to the highest wage adjustment amounts on 

average. Worker classification issues arise when employers misclassify 

employees as independent contractors or other nonemployees. If employees are 

misclassified, the employer’s obligation to withhold and pay employment taxes is 

not established and goes unpaid. Fringe benefits issues involve property, a 

service, or cash received that should be treated as taxable wages but are not. 

IRS carried over certain NRP practices to operational employment tax 

examinations, including tools to help plan, document, and report the results of 

examinations but IRS examiners who responded to GAO’s survey identified 

additional improvements that could be made to operational examinations. 

• More than 90 percent of examiners said that they would like to have a 

certain tool—electronic data on the information returns of employers—when

operational examinations start instead of on request, which they said would 

help identify issues to examine sooner and put fewer burdens on taxpayers. 

Although IRS officials said that providing the tool when all examinations 

start would not be a good use of IRS resources, they did not have data to 

evaluate whether and when providing this tool would improve examinations.

• Half of IRS examiners who were asked about two specific NRP tools in

GAO’s survey were not aware of how to request them for use during 

operational examinations. According to IRS officials, these tools may only 

be used infrequently during employment tax examinations. However, 

ensuring IRS examiners are aware of how to access them would be in line 

with IRS’s strategic goal of empowering employees with tools and training. 

Without examiners being aware of these tools and able to utilize them when 

needed, they may be limited in their ability to effectively examine 

employment tax returns.

View GAO-17-371. For more information, 

contact Jessica Lucas-Judy at (202) 512-9110 

or LucasJudyJ@gao.gov.

Why GAO Did This Study

Employers report employment taxes

for Social Security, Medicare, 

unemployment insurance, and 

income taxes to IRS. In fiscal year 

2016, these totaled almost $2.28

trillion. Each year, IRS examines a 

small percentage of employment tax 

returns to check employer 

compliance (known as operational 

examinations).

GAO was asked to review how 

practices from NRP examinations

could improve operational 

examinations. This report (1) 

evaluates how IRS plans to analyze 

the NRP results, (2) describes

GAO’s review of available NRP data,

and (3) describes NRP practices IRS 

applied to operational examinations

and assesses whether additional 

improvements could be made to 

operational examinations. GAO 

reviewed documentation, interviewed 

officials, and reviewed the NRP 

results. GAO also surveyed all IRS 

examiners who completed both NRP 

and operational examinations on 

ideas for improving operational 

examinations.

What GAO Recommends

GAO recommends that IRS develop 

plans to analyze the NRP results in 

2017 to address areas of 

noncompliance identified, and 

update its employment tax gap 

estimates; determine whether and 

when to provide certain data upfront 

before an examination starts; and 

periodically remind IRS examiners 

how they can access certain tools.

IRS agreed with GAO’s

recommendations.
Page i GAO-17-371 Employment Taxes

Letter 1

Background 5

IRS Has Not Finished Analyzing the NRP Data or Used the 

Results to Improve Employment Tax Compliance Efforts 10

Noncompliance Varied across Employment Tax Issues and 

Employer Size 12

IRS Business Units Applied Aspects of NRP Examination 

Practices to Operational Employment Tax Examinations 19

IRS Examiners See Benefits to NRP Practices for Operational 

Employment Tax Examinations, but Half Were Unaware They 

Could Request Access to Certain Practices 23

Conclusions 31

Recommendations for Executive Action 32

Agency Comments 32

Appendix I Objectives, Scope, and Methodology 34

Appendix II Data on Results of National Research Program Employment Tax 

Examinations 42

Appendix III Results from GAO Survey of Internal Revenue Service Examiners 52

Appendix IV Comments from the Internal Revenue Service 54

Appendix V GAO Contact and Staff Acknowledgments 58

Tables

Table 1: Key Differences between National Research Program 

(NRP) and Operational Employment Tax Examinations 10

Table 2: Overview of Frequently Examined National Research 

Program Employment Tax Issues 13

Contents
Page ii GAO-17-371 Employment Taxes

Table 3: Employment Tax National Research Program (NRP) 

Examination Practices Applied to Operational 

Examinations 21

Table 4: Crosswalk of Combined and Individual National Research 

Program Employment Tax Examination Issues 36

Table 5: Overview of Frequently Examined National Research 

Program Employment Tax Issues 42

Table 6: Annual Internal Revenue Service National Research 

Program Examination Issues from 2009 through 2010 43

Table 7: Annual Internal Revenue Service National Research 

Program Examination Issues for Small Business/SelfEmployed (SB/SE) Observations from 2009 through 2010 43

Table 8: Annual Internal Revenue Service National Research 

Program Examination Issues with Wage Adjustments from 

2009 through 2010 44

Table 9: Annual Internal Revenue Service National Research 

Program Examination Issues with Wage Adjustments for 

Small Business/Self-Employed (SB/SE) Observations 

from 2009 through 2010 44

Table 10: Annual Internal Revenue Service National Research 

Program Percent of Examination Issues Resulting in 

Wage Adjustments from 2009 through 2010 45

Table 11: Annual Internal Revenue Service National Research 

Program (NRP) Wage Adjustments from 2008 through 

2010 (dollars) 46

Table 12: Annual Internal Revenue Service National Research 

Program (NRP) Average Wage Adjustment Amount For 

Issues Adjusted from 2008 through 2010 (dollars) 47

Table 13: Annual Employers Represented by Internal Revenue 

Service National Research Program (NRP) 2008 through 

201048

Table 14: Annual Number of Employees Represented by Internal 

Revenue Service National Research Program (NRP) 2008 

through 2010 48

Table 15: Annual Total Compensation Represented by Internal 

Revenue Service National Research Program (NRP) 2008 

through 2010 49

Table 16: Annual Wage Adjustments Represented by Internal 

Revenue Service National Research Program (NRP) 2008 

through 2010 49

Table 17: Miscellaneous Annual Estimates from Internal Revenue 

Service National Research Program 2008 through 2010 50
Page iii GAO-17-371 Employment Taxes

Table 18: Internal Revenue Service (IRS) Examiners Who Used 

National Research Program (NRP) Practices on 

Operational Examinations since Completing NRP 

Employment Tax Study By IRS Business Unit 52

Table 19: Internal Revenue Service Examiners Views on 

Helpfulness of National Research Program (NRP) 

Practices on Operational Examinations (very to extremely 

helpful) 52

Table 20: Internal Revenue Service Examiners Views on Having 

National Research Program Practices on Operational 

Examinations 53

Table 21: Internal Revenue Service (IRS) Examiners Awareness 

of Requesting and Regularly Having National Research 

Program Practices on Operational Examinations 53

Figures

Figure 1: Key Steps in Employment Tax Examination Process 7

Figure 2: Frequency of Certain Employment Tax Issues and 

Percentage of Issues Requiring Tax Adjustments for Tax 

Years 2009 through 2010 15

Figure 3: Wage Adjustments by Tax Examination Issue for Tax 

Years 2008 through 2010 16

Figure 4: Internal Revenue Service Staff Preferences for Access 

to Practices Used in the National Research Program 

(NRP) 24

Figure 5: Extent to Which Internal Revenue Service Survey 

Respondents Believe Selected Practices Used in the 

National Research Program Are Helpful 25

Figure 6: Extent to Which Examiners Were Aware of Ability to 

Request National Research Program Practices for 

Operational Employment Tax Examinations 30
Page iv GAO-17-371 Employment Taxes

Abbreviations 

CDW Compliance Data Warehouse

DCI Data Collection Instrument

ETLS Employment Tax Lead Sheet

EO Exempt Organizations

FICA Federal Insurance Contribution Act

FSLG Federal, State, and Local Governments

FUTA Federal unemployment insurance

GS General Schedule

IRAS Information Return Analysis System

IRM Internal Revenue Manual

IRS Internal Revenue Service

LB&I Large Business & International

NRP National Research Program

RAAS Office of Research, Applied Analytics, and

 Statistics

SB/SE Small Business/Self-Employed division

TE/GE Tax Exempt and Government Entities

TIN Taxpayer Identification Number

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

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necessary if you wish to reproduce this material separately.
Page 1 GAO-17-371 Employment Taxes

441 G St. N.W.

Washington, DC 20548

April 18, 2017

The Honorable Orrin G. Hatch

Chairman

The Honorable Ron Wyden

Ranking Member

Committee on Finance

United States Senate

Every year, the federal government forgoes hundreds of billions of dollars 

of tax revenue through the gross tax gap—the difference between taxes 

owed and taxes voluntarily paid on time. The Internal Revenue Service 

(IRS) estimated that the annual average gross tax gap for tax years 2008 

to 2010, the most recent estimate, totaled $458 billion. One portion of the 

gross tax gap, estimated to be $16 billion (3.5 percent), is due to 

taxpayers underreporting employment taxes that employers are to 

withhold and remit to cover liabilities for Social Security, Medicare, and 

federal unemployment insurance. In fiscal year 2016, federal revenue 

from employment taxes to cover these liabilities totaled more than $1

trillion. Employers also withheld federal income tax totaling almost $1.27

trillion. IRS examines only a small fraction of the employment tax returns 

that employers file given its resource limitations.1 In fiscal year 2016, IRS 

examined about 54,600 employment tax returns, which covered 0.2 

percent of all employment tax returns filed in calendar year 2015. 

Because such a small percentage of employment returns are examined, 

IRS must especially ensure that the examinations are as efficient and 

effective as possible.

One source for improving examinations is IRS’s National Research 

Program (NRP). IRS carries out detailed NRP studies to measure 

different types of taxpayer compliance.2 The NRP study of employment 

tax returns from tax years 2008 through 2010 represents its first effort to 

measure employment tax reporting compliance in over three decades. 

This NRP study involved detailed examinations of a random, 

 1

An examination is a review of an organization’s or individual’s accounts and financial 

information to ensure information is reported correctly on the tax return according to the 

tax laws and to verify the reported amount of tax is correct.

2

For example, IRS carries out NRP studies of individual tax returns. See GAO, Tax 

Administration: IRS Could Improve Examinations by Adopting Certain Research Program 

Practices, GAO-13-480 (Washington, D.C.: May 24, 2013).

Letter
Page 2 GAO-17-371 Employment Taxes

representative sample of Form 941, Employers Quarterly Federal Tax 

Return, which IRS selected from employers who filed at least one return 

for tax years 2008 through 2010.3 The in-depth NRP examinations 

provide crucial data for measuring noncompliance. The NRP 

examinations also provide IRS an opportunity to review the practices (i.e., 

tools, data, information systems, procedures, and lessons learned) used 

during NRP examinations that can then be applied to improve IRS’s 

everyday employment tax examinations—known as operational 

examinations.

You asked us to assess IRS’s actions to apply examination practices from 

the NRP employment tax study to operational employment tax 

examinations. In this report, we (1) evaluate how IRS plans to analyze the 

NRP data (2) review the NRP data available on areas of noncompliance, 

(3) describe NRP examination practices that IRS applied to operational 

employment tax examinations, and (4) assess additional NRP 

examination practices that could be applied to operational employment 

tax examinations.

To evaluate IRS’s plans to analyze the NRP data and use the NRP 

results on noncompliance areas, we interviewed IRS research and 

examination officials about their plans to analyze and use the NRP data. 

We gathered documentation, such as research and analysis plans, when 

available. We compared IRS’s plans to analyze and use the NRP data to 

IRS’s strategic plan and the Internal Revenue Manual (IRM).4

To review NRP data available, we compared the noncompliance for 

issues on employment tax returns in terms of the frequency by which the 

issues examined were adjusted and the resulting wage adjustment 

amounts. We also reviewed the data by characteristics that help identify 

reporting noncompliance, such as the payroll size, number of employees, 

 3

IRS’s NRP Employment Tax Study excluded certain employer groups (see appendix I). 

The resulting sample sizes were 2,507, 2,387 and 2,318 employers for tax years 2008, 

2009 and 2010, respectively.

4

IRM is an official compilation of internal guidelines for IRS personnel. It is available at: 

https://www.irs.gov/irm/ (last visited Feb. 27, 2017). Internal Revenue Service, Strategic 

Plan: FY2014-2017 (Washington, D.C.: 2014).
Page 3 GAO-17-371 Employment Taxes

and IRS business unit. We discussed our results with relevant IRS

officials.5

To describe NRP examination practices that IRS applied to operational 

employment tax examinations, we interviewed examination staff from the 

Small Business/Self-Employed division (SB/SE) and Tax Exempt and

Government Entities (TE/GE) business units who were responsible for 

NRP examinations during the employment tax study.6 To confirm the 

application of those NRP practices to operational employment tax 

examinations, we gathered available documentation. We also collected 

available documentation on the costs and benefits of carrying over NRP 

practices to operational employment tax examinations, and discussed the 

costs and benefits with the SB/SE and TE/GE staffs.

To assess additional NRP examination practices that could be applied to 

operational employment tax examinations, we conducted four group 

discussions with examiners who had completed both types of 

examinations. During these discussions, we gathered input on NRP 

examination practices that examiners thought could be applied to 

operational employment tax examinations. We discussed differences 

between NRP and operational employment tax examinations with 

program staff in SB/SE and TE/GE. Based on the list of additional NRP 

examination practices, we developed and fielded a web-based survey of 

all IRS examiners who had completed both NRP and operational 

employment tax examinations. The survey obtained their views on having 

access to the NRP examination practices during their operational 

employment tax examinations, if and why they found them helpful, and if 

they were aware of how to access them on operational examinations. The 

survey was sent to the complete list of 269 examiners identified by IRS 

officials as of July 2016 that were thought to meet the criteria of

examiners with NRP and operational examination experience. Of those 

examiners, 23 were determined to not meet this criteria according to their 

responses to screening questions (1) on if they had completed both NRP 

and non-NRP examinations and (2) if they had completed a non-NRP 

 5

See appendix I for a further discussion of our analysis of the NRP results as well as the 

steps we took to assess the reliability of the data and identify errors that were 

communicated to IRS. 

6

The Large Business & International (LB&I) business operating division was initially 

responsible for a small portion of the sample in the study. In 2012, IRS merged the 

employment tax functions within LB&I and within SB/SE. All open NRP and operational tax 

examinations were moved with the examiners to SB/SE.
Page 4 GAO-17-371 Employment Taxes

examination since completing a non-NRP examination. We received a 

response rate of 85 percent, with 209 of the 246 examiners completing 

the survey who met our criteria. We discussed summary survey 

responses with relevant IRS officials. Where appropriate information was 

available, we compared the NRP practices with criteria on whether the 

practices would help IRS identify noncompliance, improve examination 

efficiency, reduce taxpayer burden, and meet other needs. We also 

compared the utility of the NRP practices identified to IRS’s strategic 

plan.7

We assessed the reliability of the NRP study data by reviewing relevant 

documentation, interviewing knowledgeable IRS officials, and electronic 

testing of the data to identify obvious errors or outliers.8 We determined 

that the data used in our analysis were sufficiently reliable for our 

objectives. For additional details on our scope and methodology, see 

appendix I.

We conducted this performance audit from April 2016 to April 2017 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

 7

Internal Revenue Service, Strategic Plan: FY2014-2017 (Washington, D.C.: 2014). 

8

The NRP study includes about 7,200 observations over the tax years 2008 through 2010. 

The results for our analysis reflect NRP study data as of July 18, 2016.
Page 5 GAO-17-371 Employment Taxes

For federal tax purposes, employers generally are required to withhold 

and remit two types of taxes from their employees’ salaries:

1. Federal income tax withholding. Income tax is withheld from the pay 

of most employees. Pay includes regular pay, bonuses, commissions, 

and vacation allowances as well as reimbursements and other 

expense allowances paid. The amount of income tax that employers 

withhold depends on the amount earned and the information on the 

employee’s Form W-4.9

2. Federal Insurance Contribution Act (FICA) taxes. These taxes include 

Old-Age, Survivors and Disability Insurance (Social Security) and 

hospital insurance (Medicare) taxes. In 2016, the FICA taxes to be 

withheld consisted of 6.2 percent of an employee’s taxable earnings 

up to $118,500 for Social Security taxes and an additional 1.45 

percent of the taxable earnings for Medicare not subject to a wage 

cap.10 Employers are required to match the amounts withheld from an 

employee’s salary for Social Security and Medicare taxes.

Employers must also pay a federal unemployment insurance (FUTA) 

payroll tax. This tax is equal to 6 percent of the total wages of (up to 

$7,000) each employee.11 This tax is not withheld and remitted from an 

employee’s wages. Taken all together, federal income tax withholding, 

FICA, and FUTA comprise employment taxes.

In general, employers who withhold federal income tax and Social 

Security and Medicare taxes report to IRS either quarterly on Form 941 

 9

Other individual income tax payments are received from individuals as part of their 

annual tax return filings. In fiscal year 2016, these totaled almost $519 billion. 

10Beginning January 1, 2013, employers are responsible for withholding the 0.9 percent 

additional Medicare tax on an employee’s wages and compensation that exceeds a 

threshold amount based on the employee’s filing status. The threshold amount, not 

indexed for inflation, is $250,000 for a jointly-filed return, $125,000 for a married individual 

filing a separate return, and $200,000 for other filing statuses (unmarried individual, head 

of household, or surviving spouse).

11Federal unemployment insurance payroll taxes are to be used to fund programs 

maintained by states to benefit unemployed workers. Additionally, these taxes were 

designed to encourage the states to enact unemployment insurance plans that would 

provide benefits to workers during periods of temporary unemployment.

Background

Employment Taxes
Page 6 GAO-17-371 Employment Taxes

(Employer’s Quarterly Federal Tax Return) or annually on Form 944 

(Employer’s Annual Federal Tax Return).12 Form 941 includes the tax 

liabilities of the employers (the employer share of FICA) as well as the tax 

liabilities of employees (withheld income tax and the employee share of 

FICA) that are required to be withheld by the employer and paid to the 

government on the employee’s behalf. Employers report their annual 

FUTA tax to IRS on Form 940, (Employer’s Annual Federal 

Unemployment Tax Return). In fiscal year 2016, almost 30.5 million 

employment tax returns were filed.

Taxes withheld by employers are a significant portion of federal revenue. 

In fiscal year 2016, of revenue remitted by employers, almost $1.27 trillion 

came from income taxes, $1 trillion came from FICA employment taxes, 

and $8 billion from FUTA taxes.

IRS’s SB/SE and TE/GE divisions both have responsibility for ensuring 

that employers comply with employment taxes. While some differences 

exist for how operational employment tax examinations take place in 

SB/SE and TE/GE, they generally follow the steps in figure 1.

 12Agricultural employers file Form 943-Employer’s Annual Federal Tax Return for 

Agricultural Employees.

Operational Employment 

Tax Examinations
Page 7 GAO-17-371 Employment Taxes

Figure 1: Key Steps in Employment Tax Examination Process

Note: RAAS stands for the Office of Research, Applied Analytics, and Statistics.

These represent the key steps in the IRS employment tax examination 

process, but differences exist in the process between the TE/GE-Exempt 

Organizations (EO), TE/GE-Federal, State, and Local Governments 

(FSLG), and SB/SE business units. For example, TE/GE-EO focuses its 

examinations on the Form 990 (Return of Organization Exempt From 

Income Tax) and does not select returns exclusively for employment tax 
Page 8 GAO-17-371 Employment Taxes

examinations. Returns are inspected and a separate employment tax 

examination may be necessary if the inspection does not reveal 

compliance. By contrast, TE/GE-FSLG examinations of government 

entities focus only on employment tax issues and SB/SE has a specialty

group that focuses exclusively on employment tax issues.

Other differences exist between the latter two business units. The key 

difference tends to be the extent to which SB/SE and TE/GE-FSLG “build 

the case file” for examiners before the examination starts. TE/GE-FSLG 

tends to include more information upfront whereas SB/SE offers the 

information on request, noting that examiners are able to determine if 

they need additional information for specific identified issues.

IRS carries out detailed research studies of different types of taxpayer 

compliance through NRP. For example, IRS completes an annual NRP 

study of individual income tax returns, which we have previously 

evaluated.13 Data for the NRP studies come from detailed examinations 

that strive to verify information reported on filed returns in addition to 

taxes that may have been under- or over-reported. According to the IRM, 

IRS seeks to use NRP data to increase public confidence in the fairness 

of the tax system by helping identify compliance problems and direct 

resources to efficiently address them.14 The IRM also states that IRS is 

supposed to use NRP data to better estimate the tax gap, update 

methods for selecting returns for examination, and improve strategic 

planning, among other benefits.

IRS’s NRP study of employment taxes for tax years 2008, 2009, and 

2010 was its first on employment taxes since a study for tax year 1984. 

IRS started the NRP study in February 2010 and IRS officials said that 

they completed most of the examinations by May 2016. IRS selected a 

random sample of about 7,200 taxpayers that filed Form 941 employment 

tax returns from tax years 2008 to 2010. The NRP data are therefore a 

representative sample of only certain types of employer entities, which 

includes exempt organizations, government entities, and businesses 

(appendix I lists types of entities not included in the sample). NRP 

estimates can be analyzed to learn about the level of taxpayer 

 13GAO, Tax Administration: IRS Could Improve Examinations by Adopting Certain 

Research Program Practices, GAO-13-480 (Washington, D.C.: May 24, 2013).

14Internal Revenue Manual (IRM) Part 4, Chapter 22, Section 1.3.

National Research 

Program Studies and 

Examinations
Page 9 GAO-17-371 Employment Taxes

compliance on filed returns, such as the difference between the correct 

amount of employment taxes and the amount reported on employment 

tax returns.

IRS’s Office of Research, Applied Analytics, and Statistics (RAAS) is 

responsible for the NRP, which includes designing the studies, collecting 

and housing the data, and analyzing the results of the studies. The two 

business units that administered the NRP employment tax examinations, 

TE/GE and SB/SE, also have internal research functions that could 

analyze the NRP results.

RAAS houses various types of compliance data, including the results 

from its NRP studies, in the Compliance Data Warehouse (CDW). Data in 

CDW are made available to staff across IRS and the Department of the 

Treasury for research and analysis purposes. RAAS is responsible for 

ensuring that the final NRP dataset provided to CDW is consistent and 

accurate, and represents the examination results. According to IRS 

officials, ensuring that the data meet these outcomes is an iterative

process, meaning data from an NRP study might be initially posted to 

CDW, but could continue to change as staff working with the data identify 

inconsistencies and errors. RAAS began this iterative process for the 

NRP employment tax study in the spring of 2016.

The NRP employment tax examination process generally follows the 

same process as operational employment tax examinations, discussed in 

figure 1 above. Given the purpose of NRP and its data-driven nature, 

NRP examinations differ from operational examinations by examining a 

wider breadth of issues, documenting all adjustments and using the data 

differently as shown in table 1.15

 15The differences in table 1 do not apply to TE/GE-Exempt Organizations, as it focuses on 

the Form 990 in the examination rather than on employment taxes. 
Page 10 GAO-17-371 Employment Taxes

Table 1: Key Differences between National Research Program (NRP) and Operational Employment Tax Examinations

Differences NRP Examinations Operational Examinationsb

Classificationa NRP examinations cover all employment tax issues. Identifies issues that examiners must review, using 

their professional judgment on the depth and scope 

of their examination. 

Case building Examiners are provided a case file built before the 

examination starts. It includes information such as the 

taxpayer’s compliance history, information returns, and 

cash transactions. 

Tax Exempt and Government Entities -Federal, State, 

and Local Governments case building largely mirrors 

that for NRP while Small Business/Self-Employed 

provides limited information upfront.

Documentation of 

examination 

adjustments 

All adjustments are recorded. Adjustments to a taxpayer’s return below certain 

amounts generally do not apply. 

Quality review Examinations are to have in-depth reviews of:

• whether all NRP examinations met NRP 

requirements,

• the accuracy of the examination data, and

• examination and data quality.

Examinations are to be reviewed to ensure they are 

procedurally and technically correct. 

Data analysis Data are to be used to make statistically valid estimates 

for the population of the NRP study. 

Data are generally used to measure program 

effectiveness and achievement of goals.

Source: GAO analysis of Internal Revenue Service information. l GAO-17-371

a

Classification identifies the examination potential of returns and issues on the return to be examined.

b

These differences do not apply to the Internal Revenue Service’s Tax Exempt and Government 

Entities-Exempt Organizations group, as it focuses on the Form 990 in the examination.

Neither RAAS nor the business units (TE/GE and SB/SE) that completed 

the NRP examinations have finished analyzing the results from the study, 

according to IRS officials. They also do not have specific documented 

plans to analyze the NRP employment tax study data or use the results to 

improve employment tax compliance programs. Instead, IRS officials 

described high-level concepts of what they would like to do with the NRP 

results in 2017 or beyond. For example, RAAS officials said that they 

intend to complete and release the next tax gap estimates by 2019, and 

conduct other research on employment tax compliance that responds to 

recommendations from our prior report.16

Similarly, TE/GE and SB/SE officials said they plan to partner to explore 

and summarize the NRP data and are developing analysis plans for this 

work, but had no timeline for when the plans would be ready. According 

 16GAO, Tax Gap: IRS Could Do More to Promote Compliance by Third Parties with 

Miscellaneous Income Reporting Requirements, GAO-09-238 (Washington, D.C.: Jan. 28, 

2009). According to RAAS officials, these tax gap estimates will cover tax year 2011 to 

2013.

IRS Has Not Finished 

Analyzing the NRP 

Data or Used the 

Results to Improve 

Employment Tax 

Compliance Efforts
Page 11 GAO-17-371 Employment Taxes

to officials, TE/GE has a statistician on detail who will be devoted almost 

exclusively to summarizing and analyzing study results. TE/GE officials 

said they are updating the programming code developed after year 1 of 

the study to analyze all 3 years of the NRP results. SB/SE officials said 

that after an NRP study, their normal process has been to identify 

emerging compliance issues, update return selection criteria and 

processes, explore ways to refine classification, and evaluate the need for 

research projects as well as for reallocation of examination resources. 

SB/SE officials also said they intend to use the NRP data to enhance 

examiner training, edit audit technique guides, and clarify or reinforce 

examiner procedures as necessary.

However, for the efforts and plans described above, IRS did not have 

documentation outlining the detailed objectives and the specific NRP data 

to be analyzed and used. IRS officials described these efforts and plans 

to us in meetings and then provided a list of them in writing with little 

additional detail. RAAS officials said they have not developed specific 

plans to analyze the data due to competing priorities and limited 

resources. TE/GE officials cited similar reasons for not developing such 

plans, but TE/GE and SB/SE officials added they are waiting for the final 

NRP data to be made available before they develop detailed analysis 

plans.17 RAAS officials noted that the data initially were available as of fall 

2016, and that as of February 2017 the data were still being evaluated 

and corrected for inconsistencies, such as duplicate numbers, missing 

information, and other errors, which according to IRS has delayed its 

ability to analyze the results.18 According to RAAS officials, updated study 

data are expected to be delivered in 2017. RAAS officials said they likely 

will continue to evaluate and correct the data as staff in RAAS, SB/SE, 

and TE/GE begin to work with the data.

Analyzing and using the NRP study results is important for various 

reasons. The NRP’s primary benefit, according to the IRM, is to improve 

workload selection systems, such as how IRS selects returns to examine. 

The IRM notes that the NRP program seeks to increase public confidence 

in the fairness of our tax system by helping IRS identify where compliance 

problems occur so that IRS can efficiently use its resources to address 

 17Upon request, we provided a copy of our plan for analyzing the NRP employment tax 

data to IRS in January 2017.

18Those data inconsistencies were identified in part because of our work cleaning and 

reviewing the NRP data set. See appendix I for details regarding our cleaning of the NRP 

data. 
Page 12 GAO-17-371 Employment Taxes

those problems. IRS also uses the NRP data to help update its estimate 

of the tax gap. IRS’s most recent employment tax gap for FICA and FUTA 

are projections based on compliance data from 1984.19 In addition, 

analyzing the NRP employment tax study results would align with IRS’s 

strategic plan, which includes an objective to identify trends, detect highrisk areas of noncompliance and prioritize enforcement approaches by 

applying research and advanced analytics.20

By not developing detailed plans to analyze and use the results of NRP, 

IRS is missing an opportunity to identify compliance problems on 

employment tax returns as well as identify solutions to address these 

problems. Implementing those detailed plans can guide IRS efforts to 

identify and correct data inconsistencies. For example, IRS found a 

number of errors within the data as a result of our attempts to analyze the 

NRP data. Moreover, by not analyzing these data, IRS will not have 

current tax gap estimates, continuing to rely on outdated information.

Given that IRS has not completed its own analysis, we reviewed the NRP 

employment tax results for tax years 2008 through 2010 to identify 

areas—known as issues—of noncompliance in terms of the examination 

proposing adjustments to the amount of taxable wages. We reviewed 1) 

issues that were most frequently adjusted, 2) the amounts by which 

wages were adjusted for these issues, and 3) employer groups that were 

more noncompliant.

 19See Federal Tax Compliance Research: Gross and Net Employment Tax Gap Estimates 

for 1984-1997, Internal Revenue Service (Washington, D.C.: October 1993).

20Internal Revenue Service, Strategic Plan: FY2014-2017 (Washington, D.C.: 2014).

Noncompliance 

Varied across 

Employment Tax 

Issues and Employer 

Size
Page 13 GAO-17-371 Employment Taxes

By reviewing the results from the NRP employment tax examinations for 

tax years 2008 through 2010, we identified issues where employers were 

noncompliant in reporting taxable wages. We analyzed the frequently 

examined issues through NRP, which are described in table 2.

Table 2: Overview of Frequently Examined National Research Program Employment Tax Issues

Issue Description 

Fringe benefits A fringe benefit is any property, service or cash received from the employer in addition to regular 

compensation, such as an employer paying for an employee’s moving expenses. Whether a fringe benefit 

is taxable depends on whether a statutory exclusion applies to the benefit. The fair market value of taxable 

fringe benefits must be included in the pay of employees in the Form W-2 as well as reported for 

independent contractors on Form 1099-MISC and for partners on Schedule K-1 (Form 1065).

Backup withholding Generally, any payor must withhold a tax of 28 percent on reportable payments of interest, dividends, and 

other compensation if the payee fails to furnish his or her correct taxpayer identification number to the 

payor, as required, at the time the reportable threshold is met.

Payment

 re-characterization

Certain payments made from employers to employees should have been reported on the Form W-2. 

These payments may have been reported using Form 1099. Once payments are recharacterized as 

wages, the employer also becomes liable for the taxes they previously failed to withhold and their own 

portion that are assessed during the examination. Future wages would be subject to withholding. An 

example of payment re-characterization is when employers pay employees for overtime using Form 1099, 

instead of on the employees’ W-2.

Worker classification Worker classification issues arise when employers misclassify employees as independent contractors or 

other nonemployees such as shareholders and corporate officers. When employees are misclassified, the

employer’s obligation to withhold and pay employment taxes is not established and therefore, goes unpaid.

Tip income Tips are considered wages for purposes of the Federal Insurance Contributions Act (FICA) and federal 

income tax withholding for cash tips of $20 or more received in a calendar month. Once an employee 

reports tips received to the employer, they are considered wages for purposes of FICA and federal income 

tax withholding. The employer is to withhold the employee’s share of FICA and federal income tax 

withholding, and deposit those shares with the employer’s share of FICA.

Source: Internal Revenue Service information. l GAO-17-371

Our review of such issues focused on employer noncompliance in 

reporting the correct amount of taxable wages and proposed adjustments 

to the reported taxable wage amount for employees.21 These wage 

 21These results from the NRP employment tax study represent estimates for the employer 

population. Certain segments of the employer population are not represented by the NRP 

employment tax study, including certain exempt organizations and large federal agencies 

and corporations as discussed in appendix I.

Worker Classification and 

Fringe Benefits Were 

Among the Most Frequent 

Issues of Noncompliance 

and Led to Highest 

Percentage of Wage 

Adjustments
Page 14 GAO-17-371 Employment Taxes

adjustments, in turn, affect the amount of taxes withheld and paid by 

employers and employees.22 Overall, the NRP study examined an 

estimated 15.7 million employment tax issues, of which an estimated 6.7

million issues resulted in wage adjustments.

Based on our review of the NRP examination results for tax years 2009 

through 2010, figure 2 shows the employment tax issues that were the 

most frequently examined and adjusted. For example, fringe benefits, 

payment recharacterization, and worker classification issues were the 

most frequently examined issues (see table 6), representing 38 percent, 

24 percent, and 20 percent of all issues that were examined. These 

issues were also among those most frequently requiring adjustments (see 

table 8)—representing an estimated 33 percent, 20 percent, and 19 

percent of issues that required adjustments, respectively. The issue most 

likely to result in an adjustment when examined was backup withholding, 

where an estimated 1.4 million (74 percent) of the 1.9 million backup 

withholding issues required adjustments (see table 10).

 22Wage adjustments from the NRP employment tax study include all taxable wage 

adjustments, including de minimis adjustments.
Page 15 GAO-17-371 Employment Taxes

Figure 2: Frequency of Certain Employment Tax Issues and Percentage of Issues 

Requiring Tax Adjustments for Tax Years 2009 through 2010

Notes: Certain National Research Program employment tax examination issues are excluded from 

the estimated 15.7 million issues because they may have been temporary, could have resulted in 

double counting of issues, and did not directly adjust employment tax liability. For example, we 

exclude 2.4 million issues examined by Internal Revenue Service (IRS) to determine whether 

employers were protected from paying tax adjustments for worker classification issues through the 

safe harbor provision of Section 530 of the Revenue Act of 1978, as amended, Pub. L. No. 95-600, 

92 Stat. 2763 (Nov. 6, 1978). Also, we exclude 4.6 million issues IRS examined to determine whether 

taxpayers met the reasonable cause and good faith exception, which would allow taxpayers to avoid 

certain penalties associated with their noncompliance.

We combined some employment tax examination issues. For instance, fringe benefits represent both 

executive and nonexecutive fringe benefits. Therefore, if the same employer was examined for both 

executive and nonexecutive fringe benefits, then the employer would be counted as having two fringe 

benefits issues.

Other issues include alien employment, U.S. citizens and residents living abroad, and excess benefit 

transactions.

The NRP examination adjustments to taxable wages for employment tax 

obligations represent billions of dollars. For our review, we focused on the 

wage adjustments because the NRP tax adjustments include various tax 

relief provisions available to employers and, therefore, underestimate the 

level of employment tax noncompliance. For example, the safe harbor 

provision through Section 530 of the Revenue Act of 1978 prevents IRS 

from examining protected employers for worker classification issues.23

 23About 1.5 million workers for 80,500 employers qualified for Section 530 safe harbor 

protection on $26.6 billion in payments, and about 10.1 million workers for 2.1 million 

employers did not qualify for Section 530 protection on $141 billion in payments. Revenue 

Act of 1978, as amended, Pub. L. No. 95-600, 92 Stat. 2763 (Nov. 6, 1978).
Page 16 GAO-17-371 Employment Taxes

The NRP data only provides compliance information on worker 

classification issues when Section 530 safe harbor protection does not 

apply. Two other examples of employment tax relief include the worker 

classification settlement program (CSP) and income tax withholding 

relief.24

Our review of wage adjustments by issue is shown in figure 3. The 

highest wage adjustment amounts involved worker classification, fringe 

benefit, and payment recharacterization issues (see table 11).

Figure 3: Wage Adjustments by Tax Examination Issue for Tax Years 2008 through 

2010

Note: Other issues in the figure include some National Research Program employment tax 

examination issues such as for alien employment, U.S. citizens and residents living abroad, and 

excess benefit transactions.

 24For NRP examinations of employers eligible to use CSP to reduce their employment tax 

liability if they prospectively treat certain workers as employees, an estimated $11 billion 

of the wage adjustments from worker classification issues per tax year qualified for either 

a partial or total reduction in tax adjustment due to the CSP agreement. For employers 

examined for income tax withholding relief eligibility, NRP examinations resulted in an 

estimated $54 billion in wage credits for qualified employers.
Page 17 GAO-17-371 Employment Taxes

The estimated average wage adjustment for all adjusted issues (see table 

12) is $32,747. The two issues with the highest average wage 

adjustments were worker classification and tip income. Worker 

classification issues included reclassifications involving corporate officers, 

statutory employees such as drivers who distributed certain food items

and the factors that may be used to determine whether the worker was an 

independent contractor or employee based on, among other things, 

whether the employer controlled how the worker was to provide the 

service, such as through written contracts and training.25 The tip income 

issue included employers in industries that reported tip income, such as

restaurants and gaming activities.

Our review of these study results suggests that smaller SB/SE employers 

are more noncompliant than larger ones using a couple of different size 

measures.26 We focused on results of NRP examinations involving SB/SE 

employers because, as we have previously reported, small businesses 

tend to have more compliance problems than other taxpayers.27 In 

addition, tax compliance burdens can be greater for small businesses due 

to economies of scale.28 To the extent that these burdens affect tax 

compliance of taxpayers, smaller businesses likely would be more 

noncompliant than larger ones.

We estimate using the NRP data that 2.9 million of the 6.4 million 

examined issues (46 percent) for SB/SE employers with three or less 

employees resulted in adjustments, compared to 3.3 million of the 7.9 

million examined issues (42 percent) for employers with four or more 

 25Other statutory employees include life insurance sales agents; individuals who work at 

home on goods that are supplied by and must be returned to an employer; and sales 

persons with service contracts under which the seller provides the service on a continuing 

basis for the same payer and is not a substantial investor in the materials used to perform 

the service. 26 U.S.C. § 3121(d). 

26The NRP sample of SB/SE employers represents a majority of the employers, an 

estimated 5.6 million (or 91 percent) of the 6.1 million employers on average from tax 

years 2008 through 2010. See appendix II for information about and the data used for this 

section, including estimates for the total and average wage adjustments by size 

measures.

27GAO, Small Business: Taxpayers Face Many Layers of Requirements, 

GAO/T-GGD-99-76 (Washington, D.C.: Apr. 12, 1999).

28GAO, Small Businesses: IRS Considers Taxpayer Burden in Tax Administration, but 

Needs a Plan to Evaluate the Use of Payment Card Information for Compliance Efforts, 

GAO-15-513 (Washington, D.C.: June 30, 2015).

NRP Study Results for 

SB/SE Employers Suggest 

Noncompliance May Be 

Higher for Smaller 

Employers than for Larger 

Employers
Page 18 GAO-17-371 Employment Taxes

employees.29 We also estimate that SB/SE employers with three or less 

employees represent 44 percent of SB/SE wage adjustments, but only 

employ 6 percent of SB/SE employees. Conversely, larger SB/SE 

employers (four or more employees) account for 56 percent of the SB/SE 

wage adjustments and employ 94 percent of SB/SE employees. This 

comparison suggests greater noncompliance for smaller SB/SE 

employers than for larger employers on a per employee basis.

Similarly, our review indicates that smaller SB/SE employers are more 

noncompliant than larger employers on a basis of total compensation. For 

example, we estimate using the NRP data that 2.6 million of the 5.6 

million examined issues (47 percent) for SB/SE employers paying total 

compensation of $78,500 or less resulted in adjustments, compared to 

3.6 million of the 8.7 million examined issues (41 percent) for SB/SE 

employers that pay more than $78,500 in total compensation.30 In 

addition, SB/SE employers paying total compensation of $78,500 or less 

represent about 37 percent of the SB/SE wage adjustments, but only pay 

4 percent of SB/SE total compensation. Conversely, larger SB/SE 

employers (pay more than $78,500 in total compensation) account for 63 

percent of the SB/SE wage adjustments and pay 96 percent of SB/SE 

total compensation. The disproportionate level of wage adjustments 

suggests greater noncompliance for smaller SB/SE employers than for 

larger employers on a basis of total compensation.

 29We considered SB/SE employers who employ three employees or less to represent 

smaller employers and SB/SE employers who employ more than three employees to 

represent larger employers. This threshold represents the median number of employees 

for SB/SE employers within the data.

30As an alternative measure of employer size, we considered SB/SE employers that paid 

$78,500 or less in total compensation to represent smaller employers and SB/SE 

employers that paid more than $78,500 in total compensation to represent larger 

employers. This threshold represents the median value of total compensation for SB/SE 

employers within the data.
Page 19 GAO-17-371 Employment Taxes

Certain practices that were used for NRP examinations were carried over 

and are now used for operational employment tax examinations by the 

three business units that participated in the NRP study.31 These practices 

fell into three categories: planning, documentation, and reporting.

• Planning: IRS carried over NRP practices that help examiners plan 

the issues to examine.

• Information Return Analysis System (IRAS): A program that

analyzes electronic versions of information returns, such as Form 

W-2s and Form 1099s, to test if income was treated as 

nontaxable, and if certain employees were incorrectly treated as 

exempt from employment taxes or received both a Form W-2 and 

Form 1099, among other tests. The results from these tests can 

help IRS examiners identify potential examination issues. 

According to IRS officials and examiners, IRAS allows examiners 

to analyze a substantial number of information returns quickly.

• Notice CP2100: A notice taxpayers receive that provides 

information on improperly filed Form 1099s with an invalid 

Taxpayer Identification Number (TIN), no TIN, or mismatched TIN. 

It indicates if the employer may be subject to backup withholding, 

which requires income tax withholding of 28 percent from certain 

payments if the employee fails to furnish the correct TIN. 

According to IRS examiners, this tool allowed them to identify 

these issues early in NRP examinations.

 31SB/SE and TE/GE were the two IRS business units who completed the NRP 

employment tax examinations. Within TE/GE, its Exempt Organizations group and 

Federal, State, and Local Governments group completed the study.

IRS Business Units 

Applied Aspects of 

NRP Examination 

Practices to 

Operational 

Employment Tax 

Examinations

NRP Examinations Led to 

Changes in Planning, 

Documenting, and 

Reporting of Operational 

Employment Tax 

Examinations
Page 20 GAO-17-371 Employment Taxes

• Data Collection Instrument (DCI)-1: A workbook that contains data 

about the taxpayer, an issue summary, and issue specific lead 

sheets that IRS examiners used in the NRP study. The workbook 

is used to plan the examination steps. For operational 

examinations, the Employment Tax Lead Sheet (ETLS) is now 

used, which is based on the DCI-1.

• Related Entity Return Information. According to IRS examiners, 

having the related income tax return, the Exempt Organization 

return, or specific lines of information from those returns help to 

identify issues to examine.

• Documentation: The DCI-1 was also used in the NRP examinations 

to allow examiners to document their findings on examined issues. In 

our group discussions with examiners, a number of them mentioned 

that the DCI-1 provided a roadmap for documenting the examination 

steps, such as the questions posed to the taxpayer, the information 

requested, and the support for the examination findings. For 

operational examinations, ETLS is now used, which is based on the 

DCI-1.

• Reporting: The DCI-2 is a workbook used in the NRP examinations 

to complete the employment tax report. The DCI-2 calculates the tax 

adjustments as a result of examination findings and presents them in 

closing reports to the taxpayer.32 In addition, IRS officials said that the 

DCI-2 helped examiners to automatically make complex calculations 

to determine additional taxes and penalties due, instead of making 

them by hand. For operational examinations, the workbook is known 

as the Employment Tax Examiner’s Report, which is based on the 

DCI-2.

Table 3 shows the specific practices that SB/SE, TE/GE-EO, and TE/GEFSLG each carried over from NRP examinations to operational 

employment tax examinations, and whether those practices are provided 

upfront as part of the case file or on request.

 32The Form 4667, Examination Changes—Federal Unemployment Tax, the Form 4668, 

Employment Tax Examination Changes Report, and the Form 2504, Agreement to 

Assessment and Collection of Additional Tax and Acceptance of Overassessment (Excise 

or Employment Tax) as well as variants of those forms.
Page 21 GAO-17-371 Employment Taxes

Table 3: Employment Tax National Research Program (NRP) Examination Practices Applied to Operational Examinations

IRS Business 

Unit

Electronic 

Case File

Information 

Return 

Analysis 

System

CP2100 Related 

Entity 

Return 

Information

Taxpayer’s

Examination 

History

Cash 

Transaction 

Data

Employment 

Tax Lead 

Sheets

Employment 

Tax 

Examiner’s 

Report 

Small 

Business/ 

SelfEmployed

Available on 

request 

Available on 

request

Available on 

request

Available on 

request

Available on 

request

Available on 

request

Available on 

request

Tax Exempt

and

Government 

Entities –

Exempt 

Organizations

Available on 

request

Available on 

request

Provided 

upfront in 

case file 

Available on 

request

Available on 

request

Available on 

request

Available on 

request

Tax Exempt

and

Government 

Entities –

Federal, 

State, and 

Local 

Governments

Provided 

upfront in 

case file

Provided 

upfront in 

case file

Provided 

upfront in 

case file 

Available on 

request

Available on 

request

Practice carried over due to NRP employment tax study.

Practice already in place prior to NRP employment tax study.

Not Applicable to Internal Revenue Service business unit.

Not currently used for employment tax examinations. 

Source: GAO analysis of Internal Revenue Service documentation. l GAO-17-371

As seen in table 3, the only NRP practice carried over to all business 

units was IRAS. However, only FSLG offers IRAS data upfront in the case 

file, as done for NRP examinations. FSLG also offers the CP2100 upfront. 

In contrast, the NRP practices carried over by SB/SE and TE/GE-EO 

were made available to examiners on request. Other practices, such as 

the taxpayer’s examination history, were in place in all three business 

units before IRS started the NRP study.

In general, the business units decided which NRP practices to carry over 

to operational employment tax examinations based on annual feedback 

sessions held with their staff involved in the study as well as informal 

discussions among those staff. The annual feedback sessions were 

organized by the RAAS division, which designed the NRP employment 

tax study. The feedback sessions were mainly held to improve the 

operations of the study. However, during the feedback sessions, 

examiners identified NRP practices, such as IRAS, that they found 
Page 22 GAO-17-371 Employment Taxes

helpful, but they did not have access to or access to in the same manner 

on operational examinations.

Beyond this feedback, officials in SB/SE and TE/GE said that they carried 

over NRP practices to operational employment tax examinations based 

on the resources each unit had available. They also said they considered 

those “best practices” that were helpful and made sense on the 

operational side. IRS officials said that they did not analyze the benefits of 

NRP practices carried over to operational examinations. IRS officials said 

that the purpose of the NRP employment tax study was not to improve 

the operational examination process, but to improve tax gap estimates 

and identify noncompliance areas. They also said they had no baseline 

data before the NRP study to compare changes made to operational 

examinations after the NRP study. Therefore, IRS was unable to analyze 

the effects of making these changes.

TE/GE-FSLG did not carry over some NRP practices because they were 

not applicable to its examinations. For example, TE/GE-FSLG 

government entities do not have a related return, which is why that 

practice was not carried over to operational examinations, according to 

officials.
Page 23 GAO-17-371 Employment Taxes

IRS examiners who have worked on both NRP employment tax 

examinations and operational employment tax examinations identified 

NRP practices that they would like to have access to when operational 

employment tax examinations start. Their responses to our survey, which 

asked about a number of the NRP practices, indicated that the majority of 

them would like to have access to all of the practices used in NRP 

examinations as well as electronic case files upfront when the operational 

examination starts.33 See figure 4.

 33See appendix III for a summary of our survey responses. 

IRS Examiners See 

Benefits to NRP 

Practices for 

Operational 

Employment Tax 

Examinations, but 

Half Were Unaware 

They Could Request 

Access to Certain 

Practices

Examiners Would Like 

Access to NRP Practices 

at the Start of Operational 

Examinations but IRS 

Officials Raised Concerns
Page 24 GAO-17-371 Employment Taxes

Figure 4: Internal Revenue Service Staff Preferences for Access to Practices Used 

in the National Research Program (NRP)

Note: The total number of respondents varies among the National Research Program (NRP)

practices above because some respondents may have answered “not applicable” if a certain practice 

was already in place in that business unit. In addition, if survey respondents answered “don’t know” or 

“not applicable” to a prior question asking if they have used that practice on operational examinations 

since the NRP examinations were completed, they were skipped to the next set of questions asking 

about a different practice.

The NRP practice that most IRS examiners said they wanted upfront in 

the case file and also found to be most helpful were the data used in 

IRAS and IRAS itself. Specifically, 181 of 200 (90.5 percent) respondents 

wanted access to IRAS and the IRAS data upfront, and 98 of 105 
Page 25 GAO-17-371 Employment Taxes

respondents stated that having IRAS and the IRAS data prior to starting 

an examination was very or extremely helpful.34 See figure 5.

Figure 5: Extent to Which Internal Revenue Service Survey Respondents Believe Selected Practices Used in the National 

Research Program Are Helpful

 34A higher number of survey respondents wanted the taxpayer’s previous examination

history upfront (191 of 203) than IRAS data, but a smaller number found the taxpayer’s 

previous examination history extremely or very helpful (73 of 113). Survey respondents 

were asked about the degree of helpfulness if they had used the practice on operational 

examinations since completing NRP examinations, which is why the number of 

respondents asked about helpfulness varies. In addition to the IRAS data on information 

returns, IRAS itself provides the ability to analyze these data. 
Page 26 GAO-17-371 Employment Taxes

As noted earlier, only TE/GE-FSLG includes the IRAS data in the case 

file sent to the examiner at the start of the examination. TE/GE FSLG 

officials noted that establishing a case on its systems and requesting the 

IRAS data as well as other data such as from the CP2100 and taxpayer’s 

examination history can take their one case preparer 60 to 90 minutes, 

and that receiving the requested IRAS data takes 1 to 2 weeks depending 

on the day of the week the request is made.

As for the other two units, TE/GE-EO does not include the IRAS data in a 

case file since the examination focuses on the Form 990, and 

employment tax issues are examined only to the extent the examiners 

uncover potential noncompliance when checking those issues. SB/SE 

provides the IRAS data if requested by the examiner. In our survey, 87 of 

100 SB/SE examiners said they were aware that they could request IRAS 

data for operational examinations. However, 91 of the 100 SB/SE 

examiners in our survey preferred to have IRAS data in the case file when 

an examination starts rather than on request. In addition, of the SB/SE 

examiners who have used IRAS on operational examinations since the 

NRP examinations, 46 of 50 survey respondents found it very or 

extremely helpful.

For a May 2013 report on a different NRP study, we developed a set of 

criteria for evaluating whether NRP practices should be applied to 

operational examinations.35 These criteria include:

• Would the change be likely to help examiners correctly identify more 

noncompliance?

• Is it likely to make the examination more efficient—(i.e., reduce the 

cost of conducting an examination, increase benefits for the same 

cost, or increase benefits commensurate with justifiable or no 

increase in costs)?

• Is it likely to reduce taxpayer burden?

• Would the change meet any other IRS need?

For this review, we planned to apply these criteria to determine if the NRP 

employment tax practices that IRS examiners wanted the most and found 

most helpful would be applicable to operational examinations, such as 

providing IRAS and the data used in it upfront. However, SB/SE had 

 35GAO, Tax Administration: IRS Could Improve Examinations by Adopting Certain 

Research Program Practices, GAO-13-480 (Washington, D.C.: May 24, 2013).
Page 27 GAO-17-371 Employment Taxes

limited data and information that aligned with the criteria. Therefore, we 

relied on our survey of examiners and interviews with IRS officials as 

discussed below.

In the survey, examiners said that having IRAS data upfront is helpful 

because it allows them to better plan the examination and identify issues 

sooner. IRAS does so by allowing them to electronically match and 

analyze a large number of W-2s and information returns. The 

identification of examination issues, in turn, facilitates their initial interview 

and contact with the taxpayer. It can also reduce taxpayer burden and 

make the examination more efficient, according to IRS examiners. These 

benefits align with IRS’s strategic plan to deliver high-quality and timely 

service to reduce taxpayer burden and encourage voluntary 

compliance.36

TE/GE-FSLG officials said that providing IRAS and the IRAS data upfront 

has improved efficiency by helping examiners plan the examination and 

reduce the need to ask taxpayers to provide information. They added that 

they do not have data to document their views. In addition, TE/GEFSLG’s examinations only focus on employment tax liabilities, which 

covered 2,003 returns in fiscal year 2015.

When we shared our survey results with SB/SE officials, they were 

concerned about providing IRAS data upfront for all operational 

examinations as was done for NRP examinations. Specifically, SB/SE’s 

employment tax examination caseload is much higher as SB/SE 

examined 41,554 Form 941 returns in fiscal year 2015. Given this 

caseload, SB/SE officials raised concerns about providing the data 

upfront through case building. One concern they raised is that returns 

sent to an IRS campus for case building or assigned for examination from 

the campus may not be examined. As a result, having the campus pull 

IRAS data for all returns will risk that the data may not be used for some. 

Similarly, SB/SE officials added that many of their large examinations 

could involve many corporate subsidiaries of which only a handful are 

examined. Thus, requiring SB/SE to include the IRAS data for all 

subsidiaries would be burdensome. Beyond these large examinations, 

these officials noted that many SB/SE examinations involve employers 

with 10 or fewer information returns, which are too few to merit using 

 36Internal Revenue Service, Strategic Plan: FY2014-2017 (Washington, D.C.: 2014).
Page 28 GAO-17-371 Employment Taxes

IRAS. IRS did not have data on examinations by the numbers of 

subsidiaries or information returns.

SB/SE officials also said that providing IRAS data in all case files upfront 

would move the cost burden from the examiner to an administrative office 

at IRS’s Cincinnati campus, which helps prepare the cases. According to 

IRS officials, the support staff at the Cincinnati campus is shared between 

SB/SE’s specialty groups for employment tax and excise tax. In fiscal 

year 2015, less than one full-time equivalent employee was devoted to 

building employment tax cases for SB/SE at the campus. The 

administrative staff who prepare the cases are generally on the General 

Schedule (GS)-7 pay scale, whereas the examiners tend to have more 

technical experience and a higher GS grade, and can determine whether 

the IRAS information would be helpful. The SB/SE examiners who 

participated in our survey were GS-11 or higher. IRS officials added that 

many support organizations in IRS are operating with smaller staffs due 

to budget constraints, and their desire is to maximize the use of resources 

for meeting face-to-face with taxpayers.

While we recognize that resource constraints can be an important 

consideration, none of the business units who have offered IRAS on 

request or upfront in case files had evaluated whether providing the IRAS 

data upfront made sense in line with the criteria we identified in May 2013 

for making such decisions.37 Nor did SB/SE have data on the type of 

examinations, such as just those with large numbers of information 

returns, in which IRAS would be more or less applicable. Without having 

these necessary data, IRS is limited in determining whether and when to 

provide IRAS data upfront in line with criteria we have identified in our 

prior work on evaluating the applicability of practices used in an NRP 

study.

IRS examiners we surveyed also found it helpful to have electronic case 

files and related return information upfront. For example, 108 of 133 

survey respondents found electronic case files extremely or very helpful 

while 84 of 94 found related return information similarly helpful. They cited 

a number of benefits for both.

According to IRS examiners, electronic case files enhance efficiency by 

making it easier to do tasks, such as recording, updating, organizing, and 

 37GAO-13-480. 
Page 29 GAO-17-371 Employment Taxes

transmitting the examination information. However, IRS officials added 

that in some instances, such as if a case is appealed by the taxpayer, 

paper case files have to be completed in addition to electronic case files. 

TE/GE FSLG and TE/GE-EO already have fully electronic case files while 

SB/SE uses partially electronic case files. SB/SE officials noted that they 

are considering moving to fully electronic case files by the middle of 2017 

or later. SB/SE officials noted that it would take that long given the 

complexity of aligning various IRS information systems and limited IRS 

resources for information technology.

Similarly, for related return information, examiners noted that having the 

information upfront helps plan the work and identify issues. SB/SE does 

not provide the related return when the examination starts, but SB/SE 

examiners are able to access an electronically filed related entity return 

shortly after an employment examination starts.

In contrast, for the CP2100 and cash transaction data, a much smaller 

number of IRS examiners used them on operational employment tax 

examinations since completing the NRP employment tax study. According 

to IRS officials, the low use could be due to examinations where the 

CP2100 or cash transaction data were not necessary. For example, 28 of 

209 survey respondents had used the CP2100 and 11 of 181 survey 

respondents had used the cash transaction data on operational 

examinations since completing examinations for NRP employment tax 

study. This may be because the data on the CP2100 and cash 

transactions infrequently apply to related employment tax issues.

When the CP2100 and cash transaction data did apply, survey 

respondents who used both types of data on operational employment tax 

examinations since completing the NRP study generally found them 

helpful. According to IRS examiners, the CP2100 can help narrow the

scope and better plan the examination, and the cash transaction data can 

help understand the operations of the business under examination.

Over half of IRS examiners in our survey asked if they were aware how to 

request two NRP practices for operational examinations—the CP2100 

and cash transaction data—answered no. See figure 6.

Half of IRS Examiners 

Were Unaware They 

Could Request Certain 

NRP Practices For 

Operational Employment 

Tax Examinations
Page 30 GAO-17-371 Employment Taxes

Figure 6: Extent to Which Examiners Were Aware of Ability to Request National 

Research Program Practices for Operational Employment Tax Examinations

All NRP practices in our survey are available for request (SB/SE and 

TE/GE-EO) or provided upfront (TE/GE-FSLG).38 However, examiners 

are not always aware of how to access each NRP practice. This is 

inconsistent with IRS’s strategic plan to empower employees with the 

tools and training to further develop skill proficiency and improve business 

performance.39

 38TE/GE-EO provides the related return upfront for its examinations.

39Internal Revenue Service, Strategic Plan: FY2014-2017 (Washington, D.C.: 2014).
Page 31 GAO-17-371 Employment Taxes

IRS officials said examiners may be unaware of how to request CP2100 

and cash transaction data because the related employment tax issues are 

infrequently examined. Our survey results showed that a small portion of 

our survey respondents had used either NRP practice on operational 

employment tax examinations since completing the NRP examinations. 

Even so, examiners found these two types of data to be helpful when they 

did apply to the examination. 

Instructions to examiners for requesting CP2100 and cash transaction 

data are in the IRM, which can be accessed at the examiner’s discretion. 

However, IRS does not uniformly remind all examiners how to access 

them. For example, TE/GE-FSLG made examiners aware of how to 

access the CP2100 in a quarterly newsletter, which may explain why 22 

of 26 survey respondents from FSLG were aware of how to access it, 

compared to 19 of 79 for TE/GE-EO and 47 of 96 for SB/SE. Prior to the 

survey, TE/GE-EO had not provided examiners any reminders about how 

to access the CP2100, but did so afterwards through an informal training, 

which is also available to examiners through a shared computer drive 

along with instructions for using CP2100. SB/SE has training on backup 

withholding that instructs examiners how to request a CP2100.

Without examiners being aware of these practices and able to utilize them 

when needed, they may be limited in their ability to effectively examine 

employment tax returns. While survey respondents said CP2100 and 

cash transaction data were not used frequently, these practices can be 

helpful when needed. IRS examiners said CP2100 can help an examiner 

narrow the scope and better plan the examination. Cash transaction data 

can help the examiner understand the operations of the business under 

examination.

IRS’s first NRP study on employment tax returns since 1984 provides a 

valuable opportunity to identify what noncompliance areas are 

contributing to the $16 billion annual employment tax gap, and better 

align IRS resources with the most prevalent areas of noncompliance. As 

our analysis shows, the NRP results present a rich overview of 

examination issues—like worker classification and fringe benefits—and 

their estimated prevalence. The study results also provide the opportunity 

to analyze those issues by various descriptive statistics such as employer 

size and compensation. However, IRS has no specific plans to study the 

results and assess issues of noncompliance, or update the current 

estimate of the employment tax gap, and has not completed any analysis 

of the results.

Conclusions
Page 32 GAO-17-371 Employment Taxes

In addition, the NRP study provides IRS with an opportunity to improve 

the operational examination process. Ensuring that examiners are given 

the opportunity to access certain NRP practices—and are aware of how 

to do that—once they move from NRP examinations to operational 

examinations could reduce the burden placed on taxpayers and help 

examiners identify examination issues. As practices such as the CP2100 

and cash transaction data are less frequently used, examiners may need 

reminders or easily accessible information about how to access them. In 

some instances, using certain NRP practices when the operational 

examination starts may help examiners to identify examination issues 

sooner. If IRS does not pursue these opportunities to maximize its NRP 

investment, IRS is missing a chance to improve operational examinations.

To help ensure that IRS leverages lessons learned from the NRP 

examinations and effectively completes operational employment tax 

examinations, we recommend that the Commissioner of Internal Revenue 

take the following five actions:

1. Develop and document plans to analyze the results in 2017 of the 

NRP employment tax study to identify the major issues of 

noncompliance.

2. Develop and document plans for addressing the noncompliance 

identified in IRS’s analysis of the NRP employment tax results.

3. Develop and document plans for assessing the results of the NRP 

employment tax study to estimate the current state of the employment 

tax gap.

4. Determine whether and when to provide IRAS upfront for SB/SE 

operational examinations based on criteria such as whether it would 

help identify more noncompliance, reduce taxpayer burden, and 

improve audit efficiency by reducing overall IRS costs (examiner 

versus campus costs).

5. Regularly remind employment tax examiners how they can access 

and request the CP2100 and cash transaction data for operational 

employment tax examinations.

We provided a draft of this report to the Commissioner of Internal 

Revenue. In its comments, reproduced in appendix IV, IRS generally 

agreed with all five of our recommendations. We also received technical 

comments from IRS, which we incorporated where appropriate. IRS also 

provided additional documentation during its review of our draft report that 

Recommendations for 

Executive Action

Agency Comments 
Page 33 GAO-17-371 Employment Taxes

led us to modify the first recommendation to reflect that IRS has begun 

preliminary analysis of NRP study results.

We appreciate IRS’s response to our report, which highlighted that 

addressing the data issues we identified in the NRP data should make the 

analysis of it more accurate and that IRS is considering additional 

changes to its examination procedures. We look forward to additional 

details on the actions and timelines that IRS plans to take in response to 

our recommendations.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Chairmen and 

Ranking Members of other Senate and House committees and 

subcommittees that have appropriation, authorization, and oversight 

responsibilities for IRS. We will also send copies of the report to the 

Commissioner of Internal Revenue and other interested parties. In 

addition, this report will be available at no charge on the GAO website at 

http://www.gao.gov.

If you or your staff have any questions about this report please contact 

me at (202) 512-9110 or lucasjudyj@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made key contributions to this 

report are listed in appendix V.

Jessica Lucas-Judy

Acting Director, Tax Issues

Strategic Issues
Appendix I: Objectives, Scope, and 

Methodology

Page 34 GAO-17-371 Employment Taxes

Our objectives were to (1) evaluate how the Internal Revenue Service 

(IRS) plans to analyze the National Research Program (NRP) data, (2) 

review NRP data available on areas of noncompliance, (3) describe NRP 

examination practices that IRS applied to operational employment tax 

examinations, and (4) assess additional NRP examination practices that 

could be applied to operational employment tax examinations.

To evaluate IRS’s plans to analyze the NRP data and use the NRP 

results on noncompliance areas, we interviewed IRS research and 

examination officials about their research and analysis plans and 

gathered documentation where available. These research and 

examination officials represented Research, Applied Analytics, and 

Statistics (RAAS) and Tax-Exempt/Government Entities (TE/GE) and 

Small Business/Self-Employed (SB/SE). We gathered and reviewed 

documentation, if available, to confirm any IRS plans to analyze and use 

the data. We compared this testimonial and documentary evidence to 

IRS’s strategic plan and the Internal Revenue Manual (IRM).1

To review NRP data available on noncompliance areas for employment 

taxes, we obtained the NRP data set on completed examinations of the 

employer’s Form 941 - Employer’s Quarterly Federal Tax Return as of 

July 18, 2016. Each return selected and examined in the study consisted 

of any of the four quarters filed or required for a tax year. IRS’s final 

sample sizes for the study were 2,507, 2,387 and 2,318 for tax years 

2008, 2009 and 2010, respectively. The sample stratification included 14 

strata across the four participating business units (TE/GE-Exempt 

Organization (EO), TE/GE-Federal, State, and Local Governments 

(FSLG), SB/SE, and Large Business and International (LB&I)) that served 

as the primary stratifying variable; other stratifying variables included the 

employer’s total wages and the mean number of employees.2 RAAS 

initially estimated that the NRP employment tax study size should be 

approximately 20,000 returns. However, according to IRS, this would not 

be possible based on resources available for the study. The limitations of 

the sample size were pointed out by the Treasury Inspector General for 

Tax Administration, which noted that the examination results for the 

 1

The IRM is an official compendium of internal guidelines for IRS personnel. It is available 

at: https://www.irs.gov/irm/ (last visited April 10, 2017). Also see Internal Revenue Service,

Strategic Plan: FY2014-2017 (Washington, D.C.: 2014). 

2

The sample included a single stratum for government entities during 2008, which was 

split into two strata based on the level of total wages during 2009 and 2010—resulted in 

the sample having 15 total strata during 2009 and 2010.

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 35 GAO-17-371 Employment Taxes

sampled taxpayers may not enable IRS to fully estimate compliance 

levels for business taxpayers, among other findings.3

Unlike other IRS examinations, NRP examinations can be used to 

estimate taxpayer reporting compliance, such as for reporting 

employment tax liabilities. The NRP employment tax study represents 

employers that filed at least one quarterly Form 941 return for the study 

year. However, certain types of employers were excluded from the study 

sample. For example, any nonfilers and other employment tax reporting 

businesses such as agricultural businesses (Form 943), household 

employers (Schedule H), or businesses with less than $1,000 in annual 

employment taxes due (Form 944) were excluded from the sample. 

Additional exclusions from the sample included federal governments, 

large corporations with assets of $250 million or more, foreign 

subsidiaries, Indian Tribal Governments, and maritime employers. 

Furthermore, the TE/GE-EO division excluded all church cases from the 

2008 study year due to an unresolved legal issue; churches were 

included in the study for tax years 2009 and 2010. Since the study 

excluded some government entities and large businesses, the NRP 

results may not reflect the full and accurate level of compliance for 

government and large business employers.

We analyzed and estimated the issues examined as well as the wage 

adjustments made as a result of the examination, if any. We were not 

able to estimate the tax adjustments associated with certain issues being 

examined because the workpapers used for the NRP examinations 

spread across two data collection instruments (DCIs). The DCI-1 included 

the issues (lead sheets) examiners had to examine as part of the NRP 

employment tax study as well as the wage adjustments to be documented 

from examining those issues. All wage adjustments were required to be 

recorded for the study. The DCI-2 included the employment tax reports 

that were shared with taxpayers as a result of the examination. The DCI-2 

calculated the tax adjustments to a taxpayer’s tax liability (based on the 

wage adjustments in the DCI-1), but did not break out the tax adjustment 

by issues, similar to the DCI-1. We also analyzed and estimated the 

SB/SE employers’ wage adjustments by the number of employees and 

the total compensation.

 3

Treasury Inspector General for Tax Administration, Limitations in the Sample Size for the 

Internal Revenue Service’s Employment Tax Study May Impact the Ability to Determine 

Compliance Levels, 2011-10-034 (Washington, D.C.: May 17, 2010).
Appendix I: Objectives, Scope, and 

Methodology

Page 36 GAO-17-371 Employment Taxes

Our analysis also combined similar issues into higher level groups. For 

example, we combined examination results on fringe benefits for 

executives and nonexecutives, meaning that the same employer could be 

examined for both of these fringe benefit issues. See table 4 for how the 

employment tax examination issues were combined. IRS reviewed our 

combining of issues and provided suggestions, which we incorporated.

Table 4: Crosswalk of Combined and Individual National Research Program Employment Tax Examination Issues

Combined Issues Individual Issues 

Fringe benefits • Fringe benefits for executives

• Fringe benefits for non-executives

Payment re-characterization • Re-characterization of payments to corporate officers when W-2 was issued

• Payment recharacterization (e.g., 1099 payment re-characterization to W-2)

Worker classification • Corporate officer reclassification when W-2 was not issued

• Statutory employee

• Common law factors

Backup withholding • Backup withholding

Tip income • Restaurants

• Nonrestaurants

• Gambling activity

Other issues • Alien employment

• Citizens or residents of the United States living abroad

• Other payment re-characterization (payments to partners, math errors, etc.)

• Section 4958 – Excess benefit transaction

Source: GAO analysis of Internal Revenue Service data. l GAO-17-371

Note: Other issues were not included due to temporary or infrequent occurrences or because the 

issues are for information purposes only. See appendix II for more information on the combined 

issues used for this analysis.

IRS officials described the quality review and data reliability process they 

used for data collected from the NRP examinations. In terms of data 

validations, IRS officials said that they used various consistency and 

validation checks when the examination was complete to determine if 

certain fields were blank or not blank, to ensure certain questions were 

answered based on the response to a prior element, and to check all 

entries in the DCI-1 against rules they created. This process took place at 

the end of examination before data were transmitted to the database.

During our analysis of the NRP data, we conducted several reliability 

tests to ensure the data excerpts were sufficiently complete. For example, 

we electronically tested the data for obvious errors. Additionally, we 
Appendix I: Objectives, Scope, and 

Methodology

Page 37 GAO-17-371 Employment Taxes

shared our results with IRS officials to ensure that the data excerpts we 

used were complete and accurate for our purposes. We identified a 

number of inconsistencies that needed to be corrected before we could 

do our analysis. These included the identification of a number of 

questionable results for both the total number of employees and the 

amount of compensation. The inconsistencies included the numbers of 

employees showing “999999” for some cases, or very large numbers that 

were the same as the total compensation. Other inconsistencies might 

show similar numbers of employees for three of the quarters and a 

substantially different number of employees for the other quarter. In 

certain instances a fourth quarter value for number of employees or total 

compensation would be missing. IRS officials said the potential missing 

fourth quarter data represent the difference in time when the return was 

filed and when it was selected for the study. In these instances, we 

replaced the missing values for the number of employees and total 

compensation with the average value for the three quarters that were not 

missing.

We shared these inconsistencies and our corrections with IRS officials, 

who agreed with our changes and said they were working on correcting 

these inconsistencies as of February 2017. IRS officials said that the NRP 

employment tax study presented unique challenges in ensuring data 

reliability, which took significantly longer than previous NRP studies 

because they were dealing with three business units (SB/SE, TE/GE, and 

LB&I) that use different systems to track examinations issues.

We reviewed documentation on the NRP data, interviewed IRS officials 

about the data, and conducted several reliability tests discussed above. 

We report average annual estimates for 2008 through 2010 where data 

were available. For example, the variables we used to indicate whether 

issues were examined during each NRP audit are missing for 2008. 

However, other examination information, including wage adjustment 

information, is available by examination issue for all three years of the 

study. Therefore, we report NRP estimates using data for only 2009–2010 

when addressing which issues were examined, while NRP estimates 

using data for 2008–2010 are used to report wage adjustments amounts 

by issue and information used to reflect the compliance of SB/SE 

employers of different sizes. Generally, the precision of estimates 

increases with more observations. Because a probability procedure 

based on random selections was used, the sample was only one of a 

large number of samples that might have been drawn. Since each sample 

could have provided different estimates, we express our confidence in the 

precision of our particular sample’s results as a 95 percent confidence 
Appendix I: Objectives, Scope, and 

Methodology

Page 38 GAO-17-371 Employment Taxes

interval (e.g., +/- 7 percentage points). This is the interval that would 

contain the actual population value for 95 percent of the samples that 

could have been drawn. See appendix II for the specific estimates of this 

analysis and information about their sampling errors. Based on the steps 

we undertook, we concluded that the data were sufficiently reliable for the 

purposes of this report.

To describe NRP examination practices that IRS has applied to 

operational employment tax examinations, we interviewed RAAS staff 

who administered the NRP employment tax study on the key differences 

between NRP and operational examinations. We also interviewed 

examination staff from the SB/SE division and the TEGE division—who 

were responsible for NRP examinations during the employment tax study. 

Within TE/GE, these included examination staff from EO and FSLG 

groups. Based on those discussions, we gathered documentation, to the 

extent it was available, to confirm the NRP examination practices carried 

over to operational employment tax examinations. We also discussed and 

gathered documentation, if available, on the costs and benefits of carrying 

over NRP practices to operational employment tax examinations, and 

discussed the benefits with the SB/SE and TE/GE staffs.

To assess the extent that additional improvements could be made to 

operational employment tax examinations based on IRS’s NRP 

experience, we used a three-step process. First, we interviewed IRS 

officials and examiners who completed NRP and operational 

examinations to identify potential improvements to operational 

examinations from using NRP practices. Second, we sent a survey to all 

IRS examiners who worked on NRP and operational examinations to get 

their views on additional potential improvements. Third, we discussed the 

practices that IRS examiners favored with IRS examination staff. We 

compared those ideas against a set of criteria to the extent data were 

available to determine whether the ideas warranted further action. We 

discuss these three steps in more detail below.

We held discussions with RAAS staff as well as SB/SE and TE/GE 

examination staff who participated in the NRP study to get their views on 

additional NRP practices that could improve operational employment tax 

examinations. To get similar views, we held four group discussions (one 

with FSLG, one with EO, and two with SB/SE) with IRS examiners who 

had worked both operational examinations and NRP examinations. These 

examiners were identified by IRS. The practices identified included (1) 

NRP practices that examiners would like to have, but were not carried 

over to the operational examinations; or (2) NRP practices that examiners 
Appendix I: Objectives, Scope, and 

Methodology

Page 39 GAO-17-371 Employment Taxes

were not aware they had access to on operational examinations, but 

would like to have that access.

Based on these discussions, we identified a set of NRP practices that (1) 

could be applied to operational examinations, but have not yet been 

applied across IRS business units involved in the study; or (2) IRS 

examiners were not aware they could access. We developed a set of 

specific, close-ended, and open-ended questions that addressed those 

topics and had multiple pretests to ensure that the questions were 

understandable and answerable. We then administered the web-based 

survey to all IRS examiners in SB/SE and TE/GE who had experience 

completing operational and NRP employment tax examinations. The 

survey asked the same set of questions for six NRP practices we 

identified as well as demographic information about the examiners. These 

questions included if they would like to have access to these NRP 

practices on operational examinations, if and why they found them 

helpful, and if they are aware they had access to those NRP practices on 

operational employment tax examinations. The survey was sent to the 

complete list of 269 examiners identified by IRS officials as of July 2016 

that were thought to meet the criteria of examiners with NRP and 

operational examination experience. Of those examiners, 23 were 

determined to not meet this criteria according to their responses to two 

screening questions to ensure IRS examiners had applicable experience 

to fill out the survey. These included:

1. According to IRS records, you have completed both NRP employment 

tax examinations and non-NRP employment tax examinations. Is this 

correct? (yes/no)

2. Have you completed a non-NRP employment tax examination since 

completing an NRP employment tax examination? (yes/no).

If the survey respondents answered no to either question, they were sent 

to the conclusion section of the survey, and did not provide responses to 

the remaining demographics questions and questions about the six NRP 

practices. We received a response rate of 85 percent, with 209 of the 246 

examiners who met our criteria completing the survey. We also reviewed 

the raw data of the survey and made changes to ensure the skip patterns 

in the survey were adhered to by the respondents. We analyzed the 

survey data by the IRS business unit, current position, and key case year 

of NRP returns on which the respondent worked.

For each of the six NRP practices, we also asked an open-ended 

question about why they thought the NRP practice was helpful. We also 
Appendix I: Objectives, Scope, and 

Methodology

Page 40 GAO-17-371 Employment Taxes

asked an open-ended question on whether the respondents had any 

other views to share at the end of the survey. To analyze the responses 

to these questions, one of our analysts reviewed the responses and 

coded them to identify themes for the seven opened-ended responses 

with a second analyst reviewing those themes and the coded responses; 

we reconciled any disagreements through discussion.

After analyzing the closed-ended and open-ended data from the survey, 

we discussed the IRS examiners’ summary responses with IRS 

examination staff in SB/SE and TE/GE. Specifically, we discussed 

applying the six NRP examination practices to operational employment 

tax examinations. To help lead those discussions with IRS examination 

staff, we used the following criteria, which were used for our prior work 

evaluating the NRP individual study.4

• Would the change be likely to help examiners correctly identify more 

noncompliance?

• Is it likely to make the examination more efficient—(i.e., reduce the 

cost of conducting an examination, increase benefits for the same 

cost, or increase benefits commensurate with justifiable or no 

increase in costs)?

• Is it likely to reduce taxpayer burden?

• Would the change meet any other IRS need?

Where available, we asked for documentation on the criteria above to 

assess whether to apply those NRP practices to operational 

examinations. These criteria generally are based on our 2005 report, 

Understanding the Tax Reform Debate (GAO-05-1009SP),5 Office of 

Management and Budget Circular A-94, and the Internal Revenue 

Manual.6 IRS officials agreed that these criteria were valid. As noted in 

our 2005 report, the criteria may conflict with each other, and as a result, 

trade-offs are to be considered among the criteria when evaluating a 

particular proposal. In those cases, we used our professional judgment in 

 4

GAO, Tax Administration: IRS Could Improve Examinations by Adopting Certain 

Research Program Practices, GAO-13-480 (Washington, D.C.: May 24, 2013).

5

GAO, Understanding the Tax Reform Debate: Background, Criteria, and Questions, 

GAO-05-1009SP (Washington, D.C.: Sept. 1, 2005).

6

Office of Management and Budget, Circular A-94 Guidelines and Discount Rates for 

Benefit-Cost Analysis of Federal Programs (Washington, D.C.: September 2005). Also, 

the IRM can be accessed at: https://www.irs.gov/irm/.
Appendix I: Objectives, Scope, and 

Methodology

Page 41 GAO-17-371 Employment Taxes

weighing the relative importance of these criteria in making our 

recommendations. We discussed these criteria with IRS to get its 

feedback. To the extent data were available on additional NRP practices 

that could be used in operational employment tax examinations, we used 

that data and information to evaluate those NRP practices using the 

criteria above as well as relevant sections from the IRS strategic plan.7

We conducted this performance audit from April 2016 to April 2017 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

 7

Internal Revenue Service, Strategic Plan: FY2014-2017 (Washington, D.C.: 2014).
Appendix II: Data on Results of National 

Research Program Employment Tax 

Examinations

Page 42 GAO-17-371 Employment Taxes

Table 5: Overview of Frequently Examined National Research Program Employment Tax Issues

Issue Description 

Fringe benefits A fringe benefit is any property, service or cash received from the employer in addition to regular 

compensation, such as an employer paying for an employee’s moving expenses. Whether a fringe benefit is 

taxable depends on whether a statutory exclusion applies to the benefit. The fair market value of taxable 

fringe benefits must be included in the pay of employees in the Form W-2 as well as reported for 

independent contractors on Form 1099-MISC and for partners on Schedule K-1 (Form 1065).

Payment recharacterizationCertain payments made from employers to employees should have been reported on the Form W-2. These 

payments may have been reported using Form 1099. Once payments are recharacterized as wages, the 

employer also becomes liable for the taxes they previously failed to withhold and their own portion that are 

assessed during the examination. Future wages would be subject to withholding. An example of payment 

recharacterization is when employers pay employees for overtime using Form 1099, instead of on the 

employees’ W-2.

Worker classification Worker classification issues arise when employers misclassify employees as independent contractors or 

other nonemployees such as shareholders and corporate officers. When employees are misclassified, the 

employer’s obligation to withhold and pay employment taxes is not established and therefore, goes unpaid.

Backup withholding Generally, any payor must withhold a tax of 28 percent on reportable payments of interest, dividends, and 

other compensation if the payee fails to furnish his or her correct taxpayer identification number to the payor, 

as required, at the time the reportable threshold is met.

Tip income Tips are considered wages for purposes of the Federal Insurance Contributions Act (FICA) and federal 

income tax withholding for cash tips of $20 or more received in a calendar month. Once an employee reports 

tips received to the employer, they are considered wages for purposes of FICA and federal income tax 

withholding. The employer is to withhold the employee’s share of FICA and federal income tax withholding, 

and deposit those shares with the employer’s share of FICA.

Source: Internal Revenue Service information. l GAO-17-371

Appendix II: Data on Results of National 

Research Program Employment Tax 

Examinations
Appendix II: Data on Results of National 

Research Program Employment Tax 

Examinations

Page 43 GAO-17-371 Employment Taxes

Table 6: Annual Internal Revenue Service National Research Program Examination Issues from 2009 through 2010

Number of 

Examined Issues

Estimate as a 

Percentage of 

Total Issuesa

95 Percent Lower 

Confidence Limit

95 Percent Upper 

Confidence Limit

Margin of 

Error as a 

Percentage of 

Estimate

Fringe Benefits 5,986,191 38 5,782,534 6,189,848 3

Payment 

Recharacterization

3,701,977 24 3,548,779 3,855,176 4

Worker Classification 3,080,484 20 2,910,656 3,250,313 6

Backup Withholding 1,933,931 12 1,817,045 2,050,818 6

Tip Income 455,659 3 389,837 521,480 14

Other Issues 510,185 3 433,923 586,447 15

Total Issues 15,668,427 100 15,187,585 16,149,269 3

Source: GAO analysis of Internal Revenue Service National Research Program data. l GAO-17-371.

a

The margin of error for the estimate as a percentage of the total issues is within +/- 1 percentage 

point.

Table 7: Annual Internal Revenue Service National Research Program Examination Issues for Small Business/Self-Employed

(SB/SE) Observations from 2009 through 2010

Number of Total Issues 

Examined

95 Percent Lower 

Confidence Limit

95 Percent Upper 

Confidence Limit

Margin of Error as 

a Percentage of 

Estimate

Total Issues—SB/SE 

Observations Only

14,281,275 13,809,531 14,753,018 3

SB/SE—3 or less 

employees

6,389,696 6,014,120 6,765,272 6

SB/SE—4 or more 

employees

7,891,578 7,529,451 8,253,706 5

SB/SE—total 

compensation of 

$78,500 or less

5,622,931 5,258,690 5,987,172 6

SB/SE—total 

compensation greater 

than $78,500

8,658,344 8,317,928 8,998,760 4

Source: GAO analysis of Internal Revenue Service National Research Program data. l GAO-17-371.
Appendix II: Data on Results of National 

Research Program Employment Tax 

Examinations

Page 44 GAO-17-371 Employment Taxes

Table 8: Annual Internal Revenue Service National Research Program Examination Issues with Wage Adjustments from 2009 

through 2010

Number of 

Examined Issues 

with Adjustments

Estimate as a 

Percentage of 

Total Issuesa

95 Percent Lower 

Confidence Limit

95 Percent Upper 

Confidence Limit

Margin of 

Error as a 

Percentage of 

Estimate

Fringe Benefits 2,213,720 33 2,081,144 2,346,296 6

Payment 

Recharacterization

1,323,248 20 1,213,079 1,433,417 8

Worker Classification 1,275,165 19 1,159,920 1,390,410 9

Backup Withholding 1,431,902 21 1,326,249 1,537,556 7

Tip Income 242,651 4 195,907 289,395 19

Other Issues 238,078 4 191,179 284,978 20

Total Issues 6,724,763 100 6,424,342 7,025,183 4

Source: GAO analysis of Internal Revenue Service National Research Program data. l GAO-17-371.

a

The margin of error for the estimate as a percentage of the total issues with wage adjustments is 

within +/- 2 percentage points.

Table 9: Annual Internal Revenue Service National Research Program Examination Issues with Wage Adjustments for Small 

Business/Self-Employed (SB/SE) Observations from 2009 through 2010

Number of Examined 

Issues with Adjustments

95 Percent Lower 

Confidence Limit

95 Percent Upper 

Confidence Limit

Margin of Error 

as a Percentage 

of Estimate

Total Issues—SB/SE 

Observations Only

6,207,620 5,911,621 6,503,618 5

SB/SE—3 or less 

employees

2,919,465 2,684,934 3,153,996 8

SB/SE—4 or more 

employees

3,288,155 3,083,993 3,492,318 6

SB/SE—total 

compensation of 

$78,500 or less

2,624,806 2,401,324 2,848,288 9

SB/SE—total 

compensation greater 

than $78,500

3,582,814 3,377,339 3,788,289 6

Source: GAO analysis of Internal Revenue Service National Research Program data. l GAO-17-371.
Appendix II: Data on Results of National 

Research Program Employment Tax 

Examinations

Page 45 GAO-17-371 Employment Taxes

Table 10: Annual Internal Revenue Service National Research Program Percent of Examination Issues Resulting in Wage 

Adjustments from 2009 through 2010

Percentage of 

Examined Issues with

Adjustments 

95 Percent Lower 

Confidence Limit

95 Percent Upper 

Confidence Limit

Margin of Error as a 

Percentage Point

Fringe Benefits 37 35 39 2

Payment 

Recharacterization

36 33 38 3

Worker Classification 41 39 44 3

Backup Withholding 74 71 77 3

Tip Income 53 46 61 8

Other Issues 47 39 54 8

Total Issues 43 42 44 1

Small Business/Self-Employed (SB/SE) Observations Only

Total Issues—SB/SE 

Observations Only

43 42 45 2

SB/SE—3 or less employees 46 43 48 3

SB/SE—4 or more employees 42 40 43 2

SB/SE—total compensation 

of $78,500 or less

47 44 49 3

SB/SE—total compensation 

greater than $78,500

41 40 43 2

Source: GAO analysis of Internal Revenue Service National Research Program data. l GAO-17-371.
Appendix II: Data on Results of National 

Research Program Employment Tax 

Examinations

Page 46 GAO-17-371 Employment Taxes

Table 11: Annual Internal Revenue Service National Research Program (NRP) Wage Adjustments from 2008 through 2010 

(dollars)

Amount of Wage 

Adjustments

95 Percent Lower 

Confidence Limit

95 Percent Upper 

Confidence Limit

Margin of Error 

as a Percentage 

of Estimate

Fringe Benefits 34,411,535,192 25,767,376,821 43,055,693,564 25

Payment 

Recharacterization

26,316,953,736 20,170,218,901 32,463,688,570 23

Worker Classification 44,264,158,719 37,671,312,321 50,857,005,116 15

Tip Income 7,576,750,613 5,897,460,267 9,256,040,960 22

Other Issuesa -1,196,930,079 -6,622,528,539 4,228,668,381 453a

Other Issues 

(Increases Only)

6,291,187,760 4,074,193,270 8,508,182,251 35

Other Issues 

(Decreases Only)

-7, 488,117,839 -12,432,204,167 -2,544,031,511 66

Total Wage Adjustments 111,372,468,181 97,171,008,981 125,573,927,380 13

Small Business/Self-Employed (SB/SE) Observations Only

Total Issues—SB/SE 

Observations Only

97,908,053,717 85,937,673,817 109,878,433,617 12

SB/SE—3 or less 

employees

42,959,995,130 35,159,310,032 50,760,680,229 18

SB/SE—4 or more 

employees

54,948,058,586 45,745,097,773 64,151,019,399 17

SB/SE—total 

compensation of $78,500 

or less

35,842,230,264 29,415,555,423 42,268,905,106 18

SB/SE—total 

compensation greater 

than $78,500

62,065,823,452 51,898,449,156 72,233,197,749 16

Source: GAO analysis of Internal Revenue Service National Research Program data. l GAO-17-371.

a

Other issues include some NRP employment tax examination issues such as for alien employment, 

U.S. citizens and residents living abroad, and excess benefit transactions, which can be positive or 

negative. When computing the margin of error as a percentage of estimates for positive or negative 

total wage adjustments only, the margin of error as a percentage of the estimate is within +/- 35–65 

percentage points.
Appendix II: Data on Results of National 

Research Program Employment Tax 

Examinations

Page 47 GAO-17-371 Employment Taxes

Table 12: Annual Internal Revenue Service National Research Program (NRP) Average Wage Adjustment Amount For Issues 

Adjusted from 2008 through 2010 (dollars)

Average Wage 

Adjustment Amount 

for Adjusted Issues

95 Percent 

Lower 

Confidence Limit

95 Percent Upper 

Confidence Limit

Margin of Error as a 

Percentage of Estimate

Fringe Benefits 18,362 13,783 22,941 25

Payment 

Recharacterization

23,553 18,282 28,824 22

Worker Classification 38,690 33,431 43,949 14

Tip Income 33,683 27,085 40,280 20

Other Issuesa -2,785 -15,416 9,845 453a

Other Issues 

(Increases Only)

18,455 12,225 24,685 34

Other Issues 

(Decreases Only)

-84,312 -138,557 -30,066 64

Total Issues 32,747 28,652 36,842 13

Small Business/Self-Employed (SB/SE) Observations Only

Total Issues—SB/SE 

Observations Only

30,944 27,256 34,631 12

SB/SE—3 or less 

employees

27,518 22,753 32,282 17

SB/SE—4 or more 

employees

34,280 28,672 39,888 16

SB/SE—total 

compensation of $78,500 

or less

24,606 20,420 28,792 17

SB/SE—total 

compensation greater than 

$78,500

36,351 30,540 42,161 16

Source: GAO analysis of Internal Revenue Service data. l GAO-17-371.

a

Other issues include some NRP employment tax examination issues such as for alien employment, 

U.S. citizens and residents living abroad, and excess benefit transactions, which can be positive or 

negative. When computing the margin of error as a percentage of estimates for positive or negative 

total wage adjustments only, the margin of error as a percentage of the estimate is within +/- 35–65 

percentage points.
Appendix II: Data on Results of National 

Research Program Employment Tax 

Examinations

Page 48 GAO-17-371 Employment Taxes

Table 13: Annual Employers Represented by Internal Revenue Service National Research Program (NRP) 2008 through 2010

Number of 

Employers

Estimate as a 

Percentage of 

SB/SE 

Employersa

95 Percent Lower 

Confidence Limit

95 Percent Upper 

Confidence Limit

Margin of Error as 

a Percentage of 

Estimate

All NRP 6,127,281 N/A 6,110,456 6,144,107 < 1

Small Business/SelfEmployed (SB/SE)5,558,975 100 5,543,543 5,574,407 < 1

SB/SE—3 or less 

employees

2,963,433 53 2,897,847 3,029,020 2

SB/SE—4 or more 

employees

2,595,542 47 2,530,502 2,660,582 3

SB/SE—total 

compensation of 

$78,500 or less

2,780,137 50 2,733,311 2,826,964 2

SB/SE—total 

compensation greater 

than $78,500

2,778,838 50 2,732,890 2,824,785 2

Source: GAO analysis of Internal Revenue Service National Research Program data. l GAO-17-371.

a

The margin of error for the estimate as a percentage of SB/SE employers is within +/- 1 percentage 

point.

Table 14: Annual Number of Employees Represented by Internal Revenue Service National Research Program (NRP) 2008 

through 2010

Number of 

Employees

Estimate as a 

Percentage of 

SB/SE 

Employeesa

95 Percent Lower 

Confidence Limit

95 Percent Upper 

Confidence Limit

Margin of Error as 

a Percentage of 

Estimate

All NRP 143,120,427 N/A 104,431,919 181,808,935 27

Small Business/SelfEmployed (SB/SE)60,427,220 100 38,824,775 82,029,664 36

SB/SE—3 or less 

employees

3,521,080 6 3,353,007 3,689,153 5

SB/SE—4 or more 

employees

56,906,139 94 35,302,333 78,509,946 38

Source: GAO analysis of Internal Revenue Service National Research Program data. l GAO-17-371.

a

The margin of error for the estimate as a percentage of SB/SE employees is within +/- 2 percentage 

points.
Appendix II: Data on Results of National 

Research Program Employment Tax 

Examinations

Page 49 GAO-17-371 Employment Taxes

Table 15: Annual Total Compensation Represented by Internal Revenue Service National Research Program (NRP) 2008 

through 2010

Total Compensation Estimate as a 

Percentage of 

SB/SE Total 

Compensationa

95 Percent Lower 

Confidence Limit

95 Percent Upper 

Confidence Limit

Margin of 

Error as a 

Percentage of 

Estimate

All NRP 5,300,037,782,831 N/A 3,965,327,556,574 6,634,748,009,087 25

Small 

Business/SelfEmployed 

(SB/SE)

1,915,371,480,176 100 1,584,480,962,106 2,246,261,998,246 17

SB/SE—total 

compensation of 

$78,500 or less

83,766,453,387 4 80,536,334,425 86,996,572,349 4

SB/SE—total 

compensation 

greater than 

$78,500

1,831,605,026,789 96 1,500,693,956,017 2,162,516,097,560 18

Source: GAO analysis of Internal Revenue Service National Research Program data. l GAO-17-371.

a

The margin of error for the estimate as a percentage of SB/SE total compensation is within +/- 1 

percentage point.

Table 16: Annual Wage Adjustments Represented by Internal Revenue Service National Research Program (NRP) 2008 

through 2010

Wage Adjustments Estimate as a 

Percentage of 

SB/SE Wage 

Adjustmentsa

95 Percent Lower 

Confidence Limit

95 Percent Upper 

Confidence Limit

Margin of Error 

as a 

Percentage of 

Estimate

All NRP 111,372,468,181 N/A 97,171,008,981 125,573,927,380 13

Small 

Business/SelfEmployed (SB/SE)

97,908,053,717 100 85,937,673,817 109,878,433,617 12

SB/SE—3 or less 

employees

42,959,995,130 44 35,159,310,032 50,760,680,229 18

SB/SE—4 or more 

employees

54,948,058,586 56 45,745,097,773 64,151,019,399 17

SB/SE—total 

compensation of 

$78,500 or less

35,842,230,264 37 29,415,555,423 42,268,905,106 18

SB/SE—total 

compensation 

greater than 

$78,500

62,065,823,452 63 51,898,449,156 72,233,197,749 16

Source: GAO analysis of Internal Revenue Service National Research Program data. l GAO-17-371.
Appendix II: Data on Results of National 

Research Program Employment Tax 

Examinations

Page 50 GAO-17-371 Employment Taxes

a

The margin of error for the estimate as a percentage of SB/SE wage adjustments is within +/- 6 

percentage points.

Table 17: Miscellaneous Annual Estimates from Internal Revenue Service National Research Program 2008 through 2010

Estimate 95 Percent Lower 

Confidence Limit

95 Percent Upper 

Confidence Limit

Margin of Error 

as a 

Percentage of 

Estimate

Number of Employers Where 

Section 530 was Relevant Issue

2,415,437 2,318,914 2,511,959 4

Number of Employers 

Determined to Have Section 530 

Protection

80,531 59,488 101,574 26

Number of Employees 

Determined to be Protected 

Under Section 530

1,504,822 354,244 2,655,400 76

Amount of Payments (in $) 

Determined to be Protected 

Under Section 530

26,582,738,321 -7,880,027,002 61,045,503,645 130

Number of Employers 

Determined Not to Have Section 

530 Protection

2,066,558 1,973,407 2,159,709 5

Number of Employees 

Determined Not Protected Under 

Section 530

10,061,772 8,093,113 12,030,432 20

Amount of Payments (in $) 

Determined Not Protected Under 

Section 530

141,333,212,528 118,049,799,787 164,616,625,270 16

Number of Employers Where 

Determination of Reasonable 

Cause was Relevant Issue

4,605,621 4,520,005 4,691,236 2

The Number of Employers that 

Qualified for a 25% 

Classification Settlement 

Program (CSP) Offer

34,454 21,328 47,580 38

Amount of Wage Adjustments 

that Qualified for a 25% CSP 

Offer

1,996,751,116 522,851,284 3,470,650,949 74

Amount of Wage Adjustments 

that Qualified for a no 

adjustment CSP Offer

9,027,580,636 2,517,076,965 15,538,084,307 72

Amount of Wage Adjustments 

that Qualified for a 25% or no 

adjustment Classification 

Settlement Program (CSP) Offer

11,024,331,753 4,350,684,743 17,697,978,762 61
Appendix II: Data on Results of National 

Research Program Employment Tax 

Examinations

Page 51 GAO-17-371 Employment Taxes

Estimate 95 Percent Lower 

Confidence Limit

95 Percent Upper 

Confidence Limit

Margin of Error 

as a 

Percentage of 

Estimate

Number of Employers 

Considered for Section 3402(d) 

Relief from Income Tax 

Withholding

1,102,994 1,029,360 1,176,628 7

Number of Employers that 

Received Section 3402(d) Relief

851,060 785,818 916,302 8

Amount of Wage Credit 

Received on Form 941 (in $) Due

to Section 3402(d) Relief

5,949,630,815 4,316,398,731 7,582,862,900 27

Amount of Wage Credit 

Received on Form 945 (in $) Due 

to Section 3402(d) Relief

48,000,877,263 13,095,613,271 82,906,141,255 73

Amount of Wage Credit 

Received (in $) Due to Section 

3402(d) Relief

53,950,508,078 19,011,249,603 88,889,766,554 65

Number of SB/SE employers as 

a percent of all employers

91 91 91 < 1a

Source: GAO analysis of Internal Revenue Service National Research Program data. l GAO-17-371.

a

For this estimate, the margin of error and the margin of error as a percentage of the estimate are 

both within +/- 1 percentage point. 
Appendix III: Results from GAO Survey of 

Internal Revenue Service Examiners

Page 52 GAO-17-371 Employment Taxes

Table 18: Internal Revenue Service (IRS) Examiners Who Used National Research Program (NRP) Practices on Operational 

Examinations since Completing NRP Employment Tax Study By IRS Business Unit

Small Business/Self 

Employed

Federal, State, and Local 

Governments

Exempt Organizations Total 

Electronic Case Files 60 of 100 23 of 27 50 of 82 133 of 209

Information Return Analysis 

System 

50 of 100 27 of 27 28 of 82 105 of 209

CP2100 11 of 100 13 of 27 4 of 82 28 of 209

Taxpayer’s Examination 

History

46 of 100 19 of 27 49 of 82 114 of 209

Cash Transaction Data 11 of 100 N/A 0 of 81 11 of 181

Related Return Information 51 of 98 N/A 45 of 81 96 of 179

Source: GAO analysis of survey data of Internal Revenue Service examiners. l GAO-17-371.

Notes: Survey respondents were given the option of answering “Yes,” “No,” “Don’t know,” or “Not 

Applicable” to this question. If respondents answered “No” they skipped the question in table 19 on 

helpfulness and were sent to the question covered in table 20. If they answered “Don’t know” or “Not 

applicable” they were skipped to these same set of questions asking about the next NRP practice.

Table 19: Internal Revenue Service Examiners Views on Helpfulness of National Research Program (NRP) Practices on 

Operational Examinations (very to extremely helpful)

Small Business/Self 

Employed

Federal, State, and Local 

Governments

Exempt Organizations Total 

Electronic Case Files 45 of 60 21 of 23 42 of 50 108 of 133

Information Return Analysis 

System 

46 of 50 26 of 27 26 of 28 98 of 105

CP2100 8 of 11 11 of 13 4 of 4 23 of 28

Taxpayer’s Examination 

History

28 of 46 16 of 18 29 of 49 73 of 113

Cash Transaction Data 7 of 11 N/A 0 of 0 7 of 11

Related Return Information 47 of 51 N/A 37 of 43 84 of 94

Source: GAO analysis of survey data of Internal Revenue Service examiners. l GAO-17-371.

Note: Respondents were only asked if they question if they answered “Yes” to the question in table 

18 above. Respondent could also answer if they found the NRP practice “moderately helpful,”

“somewhat helpful,” or “not at all helpful.”

Appendix III: Results from GAO Survey of 

Internal Revenue Service Examiners
Appendix III: Results from GAO Survey of 

Internal Revenue Service Examiners

Page 53 GAO-17-371 Employment Taxes

Table 20: Internal Revenue Service Examiners Views on Having National Research Program Practices on Operational 

Examinations

Small Business/Self 

Employed

Federal, State, and Local 

Governments

Exempt Organizations Total 

Electronic Case Files 60 of 99 17 of 27 52 of 78 129 of 204

Information Return 

Analysis System 

91 of 100 25 of 26 65 of 78 181 of 204

CP2100 85 of 96 24 of 26 58 of 79 167 of 201

Taxpayer’s Examination 

History

88 of 96 26 of 26 77 of 81 191 of 203

Cash Transaction Data 66 of 98 N/A 56 of 77 122 of 175

Related Return 

Information

90 of 100 N/A 64 of 78 154 of 178

Source: GAO analysis of survey data of Internal Revenue Service examiners. l GAO-17-371.

Note: IRS Federal, State, and Local Governments business unit notified us that the cash transaction 

data and related return information is not applicable to government entities.

Table 21: Internal Revenue Service (IRS) Examiners Awareness of Requesting and Regularly Having National Research 

Program Practices on Operational Examinations

Small Business/Self 

Employment

Federal, State, and Local 

Governments

Exempt Organizations Total 

Information Return 

Analysis System 

87 of 100 27 of 27 48 of 77 162 of 204

CP2100 47 of 96 22 of 26 19 of 79 88 of 201

Taxpayer’s Examination 

History

55 of 98 18 of 26 45 of 81 118 of 205

Cash Transaction Data 49 of 98 N/A 30 of 78 79 of 176

Related Return 

Information

80 of 100 N/A 57 of 81 137 of 181

Source: GAO analysis of survey data of Internal Revenue Service examiners. l GAO-17-371.

Note: IRS Federal, State, and Local Governments business unit notified us that the cash transaction 

data and related return information is not applicable to government entities. Electronic case files were 

not asked about for this question because their use cannot be requested. IRS business units either 

use or do not use electronic case files.
Appendix IV: Comments from the Internal 

Revenue Service

Page 54 GAO-17-371 Employment Taxes

Appendix IV: Comments from the Internal 

Revenue Service
Appendix IV: Comments from the Internal 

Revenue Service

Page 55 GAO-17-371 Employment Taxes
Appendix IV: Comments from the Internal 

Revenue Service

Page 56 GAO-17-371 Employment Taxes
Appendix IV: Comments from the Internal 

Revenue Service

Page 57 GAO-17-371 Employment Taxes
Appendix V: GAO Contact and Staff 

Acknowledgments

Page 58 GAO-17-371 Employment Taxes

Jessica Lucas-Judy, (202) 512-9110 or lucasjudyj@gao.gov

In addition to the contact named above, Tom Short (Assistant Director), 

Jehan Chase, Karen O’Conor, Steven Flint, Robert Gebhart, Donna 

Miller, Robert MacKay, Cynthia Saunders, Albert Sim, Sonya Vartivarian, 

and Jason Vassilicos made significant contributions to this report.

Appendix V: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(100804)
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