a

GAO

United States General Accounting Office

Report to the Chairman and Ranking 

Minority Member, Committee on 

Finance, U.S. Senate

November 2003 INTERNAL REVENUE 

SERVICE

Challenges Remain in 

Combating Abusive 

Tax Schemes

GAO-04-50
Abusive schemes vary in nature, and new ones continually emerge, making it 

very difficult to measure their extent. IRS has been gathering information to 

better define the scope of abusive schemes. In addition to 131,000 

participants linked to abusive schemes between October 1, 2001, and midAugust 2003, IRS officials estimated that several hundred thousand others 

likely are engaged in abusive schemes. However, IRS documented this 

estimate only when GAO asked. Documentation can help policymakers 

judge the appropriateness of IRS resources and strategy in combating the 

high-priority abusive scheme problem. 

IRS’s broad-based strategy for addressing abusive schemes included: 

• targeting promoters to head off the proliferation of abusive schemes and 

to identify taxpayers taking advantage of them; 

• offering inducements to taxpayers to come forth and disclose their use 

of questionable offshore tax practices; and 

• using performance indicators to measure outputs and intending to 

continue down the path it has started and develop long-term process and 

results-oriented performance goals and measures linked to those goals. 

The lack of these latter elements impedes gauging IRS’s progress in 

combating abusive schemes. 

Using a systematic agencywide decision-making process, IRS planned to 

shift significant resources to support its strategy, but the level of resources 

likely to be used in fiscal year 2003 was less than expected due to overly 

optimistic workload forecasts caused by inexperience with the types of 

cases involved. Future resource usage remains to be seen, given uncertainty 

about how much abusive scheme work IRS will have and how long it will 

take to close cases. IRS’s understanding of how many staff will be needed to 

address the problem over what period will continue to evolve as IRS gains a 

better understanding of the problem’s scope.

Fiscal Year 2003 Examination Full-Time Equivalent Resources Devoted to Abusive Schemes, 

as Originally Planned and as Projected If Pace at July 31, 2003 Continued 

Abusive tax avoidance schemes 

could threaten our tax system’s 

integrity and fairness if honest 

taxpayers believe that significant 

numbers of individuals are not 

paying their fair share of taxes. 

Abusive schemes encompass such 

distortions of the tax system as 

falsely describing the law (saying, 

for example, that the income tax is 

unconstitutional), misrepresenting 

facts (for instance, promoting the 

deduction of personal expenses as 

business expenses), or using trusts 

or offshore bank accounts to hide 

income. 

As agreed, this report focuses on 

three objectives. They are to 

(1) describe the nature and scope 

of abusive tax avoidance schemes 

as determined by the Internal 

Revenue Service (IRS), (2) describe 

IRS’s strategy to combat these 

schemes and the performance 

goals and measures IRS uses to 

track its major effort related to 

them, and (3) describe how IRS 

determined the amount and source 

of staff resources to be devoted to 

these schemes in the IRS operating 

division most directly affected. 

GAO recommends that when IRS 

prepares future estimates of the 

size of the abusive scheme 

problem, the Commissioner of 

Internal Revenue document the 

support underlying the estimates. 

In written comments on a draft of 

this report, the Commissioner 

agreed with this recommendation. 

www.gao.gov/cgi-bin/getrpt?GAO-04-50.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Michael 

Brostek at (202) 512-9110 or 

brostekm@gao.gov. 

Highlights of GAO-04-50, a report to the 

Chairman and Ranking Minority Member, 

Committee on Finance, U.S. Senate 

November 2003 

INTERNAL REVENUE SERVICE 

Challenges Remain in Combating 

Abusive Tax Schemes 
Page i GAO-04-50 Challenges in Combating Abusive Tax Schemes

Contents

Letter 1

Results in Brief 2

Background 4

Nature of Abusive Schemes Varies and Their Scope Is Unknown 5

IRS Strategy to Combat Abusive Schemes Is Broad-Based, but Has 

No Long-term Performance Goals or Measures Linked to 

Goals 10

IRS Planned Resource Shifts Are Significant, but Resource Use 

Started Slowly and Future Use Remains to Be Seen 15

Conclusions 23

Recommendation to the Commissioner of Internal Revenue 24

Agency Comments 24

Appendix

Appendix I: Comments from the Internal Revenue Service 26

Tables Table 1: Descriptions of Abusive Scheme Categories 6

Table 2: Comparison of Different Estimates of the Number of 

Taxpayers Involved in Abusive Schemes 9

Table 3: Planned Shift in Revenue Agent and Tax Compliance 

Officer FTE Positions Devoted to Abusive Scheme Priority 

Areas, Fiscal Years 2002-2004 17

Table 4: Planned and Projected Revenue Agent and Tax 

Compliance Officer FTEs Devoted to Abusive Scheme 

Priority Areas, Fiscal Year 2003 20

Table 5: Comparisons of Inventory Developments with Inventory 

Expectations 21

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Page 1 GAO-04-50 Challenges in Combating Abusive Tax Schemes

United States General Accounting Office

Washington, D.C. 20548

A

November 19, 2003 Letr

The Honorable Charles E. Grassley

Chairman

The Honorable Max Baucus

Ranking Minority Member 

Committee on Finance

United States Senate

Abusive tax schemes encompass such distortions of the tax system as 

falsely describing the law (saying, for example, that the income tax is 

unconstitutional), misrepresenting facts (for instance, promoting the 

deduction of personal expenses as business expenses), or using trusts or 

offshore bank accounts to hide income. During an April 2002 hearing 

before the Senate Committee on Finance, we testified about the inexact 

process for estimating the extent of abusive schemes used by individual 

taxpayers.1

 We pointed to Internal Revenue Service (IRS) estimates that 

about 740,000 taxpayers had used certain types of abusive schemes in tax 

year 2000, and that $20 billion to $40 billion in improper tax avoidance or 

tax credit and refund claims had occurred that IRS had not yet been able to 

identify and address. We noted that abusive schemes could threaten our tax 

system’s integrity and fairness if honest taxpayers believe that significant 

numbers of individuals are not paying their fair share of taxes.

The estimated 740,000 taxpayers consisted of estimates of the number of 

taxpayers in four major scheme areas--about 62,000 with frivolous returns, 

105,000 with frivolous refunds, 65,000 using abusive domestic trusts, and 

505,000 using offshore schemes. Of the 505,000 taxpayers estimated to use 

offshore schemes, IRS estimated 500,000 were abusing offshore credit 

cards. In our testimony, we discussed how IRS arrived at its estimates. We 

also understand that some of the estimates reflected high-end numbers, for 

example, the numbers of taxpayers who were associated with a particular 

abusive promoter, but not necessarily reflecting an abusive scheme on their 

tax returns.

The $20 billion to $40 billion estimate of taxes not identified and addressed 

related to offshore schemes. Saying there were no reliable data to predict 

1

U.S. General Accounting Office, Internal Revenue Service: Enhanced Efforts to Combat 

Abusive Tax Schemes—Challenges Remain, GAO-02-618T (Washington, D.C.: Apr. 11, 2002).
Page 2 GAO-04-50 Challenges in Combating Abusive Tax Schemes

tax implications, IRS derived its estimate based on average dollars in other 

parts of the abusive tax scheme program.

As agreed, this report focuses on three objectives. They are to (1) describe 

the nature and scope of abusive tax avoidance schemes as determined by 

IRS, (2) describe IRS’s strategy to combat these schemes and the 

performance goals and measures IRS uses to track its major effort related 

to them, and (3) describe how IRS determined the amount and source of 

staff resources to be devoted to these schemes in the IRS operating division 

most directly affected. To do our work, we (1) analyzed IRS and other 

scheme reports, publications, data, and other documentation providing 

insight into the characteristics, complexity, size, and type of the problem, 

(2) reviewed IRS planning documents with information on IRS strategies, 

measures, milestones, and resources, (3) compared the contents of IRS 

planning documents to Government Performance and Results Act of 19932

(GPRA) criteria on what elements strategic planning should include, and 

(4) interviewed agency officials about their views on, among other things, 

the problem’s nature and scope and IRS’s strategy. We did our work from 

September 2002 through September 2003 in accordance with generally 

accepted government auditing standards.

Results in Brief Abusive schemes vary in nature, and new ones continually emerge, making 

it very difficult to measure their extent. IRS has been gathering information 

to better define the scope of abusive schemes. In addition to 131,000 

participants who were linked to abusive schemes between October 1, 2001, 

and mid-August 2003, IRS officials estimated that several hundred 

thousand additional taxpayers likely are engaged in abusive schemes. 

Officials have not estimated how many tax dollars might be involved 

overall. IRS’s estimate of those involved is primarily based on promoterrelated information developed in the past year and includes only those 

offshore credit card cases where IRS believes individuals’ names are likely 

to be identified. Although they did not originally have documentation 

supporting this estimate, upon request, IRS officials prepared 

documentation for us showing the estimate’s derivation. Documenting the 

basis for key program-related numbers ensures that others can judge their 

reliability and better understand what may account for differences in such 

key numbers over time. IRS continues to believe abusive schemes 

2

P.L. 103-62.
Page 3 GAO-04-50 Challenges in Combating Abusive Tax Schemes

represent a significant compliance problem that deserves considerable 

attention, and schemes remain a top enforcement priority.

IRS’s broad-based strategy for addressing abusive schemes included the 

following: 

• targeting promoters to head off the proliferation of abusive schemes and 

to identify taxpayers taking advantage of them; 

• offering inducements to taxpayers to come forth and disclose their use 

of questionable offshore tax practices; 

• focusing attention on identifying schemes, alerting the public, and 

enforcing the law, including partnering with states to share information 

on abusive schemes;

• promoting the coordination of efforts throughout IRS; and

• using performance indicators to measure outputs and intending to 

continue down the path it has started and develop long-term process 

and results-oriented performance goals and measures linked to those 

goals. The lack of these latter elements impedes gauging IRS’s progress 

in combating abusive schemes.

IRS is in the midst of its efforts to implement its abusive scheme strategy 

and has had to make decisions about staff allocations and what can be 

accomplished on the basis of available information. Using a systematic 

agencywide decision-making process, IRS planned to shift resources, 

significantly in the case of examination resources, to support its strategy, 

but the level of resources used in fiscal year 2003 through July 31 and likely 

to be used in fiscal year 2003 as a whole was less than expected due to 

overly optimistic workload forecasts caused by inexperience with the types 

of cases involved. The extent to which the caseload and resources will 

match each other in the future remains to be seen, given the uncertainty 

about the volume of additional work and the rate at which IRS can close 

abusive scheme examinations. IRS’s understanding of how many staff will 

be needed to address the program and how long staff will take to work 

through the cases will continue to evolve as IRS gains a better 

understanding of the scope of abusive schemes.
Page 4 GAO-04-50 Challenges in Combating Abusive Tax Schemes

To ensure that support for future IRS estimates of the size of the abusive 

scheme problem exists, we are recommending that IRS document the 

support when preparing the estimates.

In written comments, the Commissioner of Internal Revenue agreed with a 

draft of this report. He specifically agreed with the recommendation and 

said that IRS would establish a methodology for documenting the basis for 

the estimates. He also affirmed IRS’s intention to establish measurable 

process and results-oriented goals and said that developing these measures 

is an operational priority for fiscal year 2004.

Background In a June 2002 letter, the Secretary of the Treasury addressed various 

questions posed by the then Ranking Member of the Committee on Finance 

on IRS actions to address abusive schemes. Treasury’s letter pointed to 

IRS’s Small Business/Self-Employed (SB/SE) Division as having primary 

responsibility for abusive schemes marketed to individuals and small 

businesses. 

Within SB/SE, several units have established combating abusive schemes 

as a top priority. The Office of Reporting Enforcement was established in 

2002 to increase program oversight and to help information flow among 

programs that address abusive schemes. SB/SE’s collection component is 

to work closely with the examination function to ensure coordination. Its 

Taxpayer Education and Communication unit has launched a 

countermarketing strategy against abusive tax schemes and their 

promoters. Its Communications and Liaison unit is responsible for 

developing communication messages and strategies to maintain and 

enhance ongoing IRS interaction with internal and external stakeholders. 

Other IRS organizations are also involved with abusive schemes. For 

instance, Criminal Investigation (CI) works closely with SB/SE and 

investigates and pursues promoters and individuals using schemes. The 

Office of Chief Counsel provides legal services, such as publishing 

guidance, working with examination and collection activities, and pursuing 

litigation.
Page 5 GAO-04-50 Challenges in Combating Abusive Tax Schemes

Nature of Abusive 

Schemes Varies and 

Their Scope Is 

Unknown

The nature of abusive tax schemes is both varied and evolving. We testified 

last year that as schemes are often hidden, estimates presented in 2002 of 

the extent of abusive tax avoidance were inexact at best. IRS efforts 

underway to more definitively identify the scope of the problem revealed 

that, for the period from October 1, 2001, until mid-August 2003, 131,000 

participants were involved in abusive schemes. For the 72,600 of these 

participants identified by February 28, 2003, IRS estimated that about 

$1.6 billion in taxes were or might be recaptured, with more to be 

determined. In addition, on the basis of the number of promoters identified 

and the amount of information not yet received or processed, IRS officials 

estimated that hundreds of thousands of other taxpayers were involved in 

abusive schemes, but they did not prepare supporting documentation when 

making the estimate. According to IRS, recent estimates resulted from 

knowledge gained over the last year focusing on more specific information 

than previously used.

Abusive Schemes Vary and 

New Ones Continually 

Emerge 

Abusive schemes include various kinds of arrangements designed to 

circumvent tax laws or evade taxes. As we testified last year, they can run 

from very simple to very complex, from clearly illegal to those carefully 

constructed to disguise the illegality of the scheme. Users of schemes can 

range from those believing their position is correct to those who knowingly 

but willfully file incorrect tax returns. 

As shown in table 1, SB/SE sorts abusive schemes into seven categories. 

They range from trust arrangements to those claiming no legal basis for 

federal income taxes to tax shelters bought by taxpayers that are under 

SB/SE’s auspices. In the case of the latter, SB/SE is responsible for 

investigating abusive shelters used by high-wealth individuals with 

complex tax returns and by businesses with assets of less than $10 million.
Page 6 GAO-04-50 Challenges in Combating Abusive Tax Schemes

Table 1: Descriptions of Abusive Scheme Categories

Source: IRS data compiled by GAO.

According to IRS officials, the popularity of schemes can also vary. 

Officials have seen a decline in slavery reparation schemes over time, and 

they have also become aware of new schemes that abuse corporate “soles” 

(one-member religious entities used to claim that income is tax free) and 

the disabled access credit (used to reduce taxes or create refunds). One 

SB/SE official explained that scheme promoters try to stay in the business 

of tax avoidance; when one type of scheme is discovered and addressed, 

another scheme will take its place.

Scope of Abusive Schemes 

Is Unknown

The full scope of the abusive tax scheme problem is unknown because 

estimates are difficult to make based on imperfect data. As we testified last 

year, estimating the extent of abusive schemes used by individual 

taxpayers is at best an inexact process because these schemes are often 

hidden. 

In fiscal year 2003, SB/SE tried a new approach to improve its information 

about the problem and help with its work planning process. The new 

approach differed from prior efforts in that it focused on what IRS had 

actually found. The effort’s aim was to develop an inventory of abusive 

schemes and related data in order to develop an overall strategy for 

Category of scheme Description of the category

Abusive trust schemes Arrangements featuring layers of trusts, with each trust 

distributing income to the next layer to fraudulently reduce 

taxable income to nominal amounts

Deduction/expense 

schemes

False representations of facts to claim improper deductions

Refund/credit schemes Schemes involving the creation of credits to substantially reduce 

tax or create refunds

Antitax arguments Arguments that entice people to believe collecting federal 

income taxes has no legal basis

Exempt organization 

schemes

Schemes using a tax-exempt entity to obtain unallowable 

benefits

Tax shelters Very complicated transactions that sophisticated tax 

professionals promote, exploiting tax loopholes and reaping 

large and unintended tax benefits

Offshore compliance 

schemes

Schemes in which the true ownership of income streams and 

assets is hidden to improperly shield financial activity from the 

U.S. tax system
Page 7 GAO-04-50 Challenges in Combating Abusive Tax Schemes

addressing abusive schemes and to enhance the work planning process. In 

this context, SB/SE developed a template for organizing information about 

known schemes and known investors. The template took the form of a 

matrix to be used to compare the risks presented by various schemes along 

the lines of factors such as the number of cases available for IRS staff to 

review but as yet unstarted, the number of promoters, the amount of 

money involved, and the number of taxpayers participating. The matrix 

organizes abusive schemes within the seven categories shown above in 

table 1. 

According to a summary of items in the matrix categories and IRS’s work 

with offshore credit cards covering October 2001 through mid-August 2003, 

IRS identified about 131,000 participants in abusive schemes. This number 

included 22,000 participants in the offshore credit card area and, according 

to SB/SE, reflected the best available data, but not a potential universe. It 

updated a previous summary covering October 1, 2001, through February 

2003 that showed 72,600 potential participants. In that summary, SB/SE 

noted that recaptured or potentially recaptured taxes from closed or 

identified reviews totaled almost $1.6 billion, excluding undetermined 

amounts from the credit card work. That summary also included the 22,000 

participants in the offshore area, but IRS was not able to update this figure 

for its later summary because new credit card information had just arrived.

IRS used an estimate in its fiscal year 2005 budget presentation of the 

number of taxpayers it believes are involved in abusive schemes who are 

likely to be identified through its various efforts. IRS estimated that more 

than 400,000 taxpayers fall into this category, generally including the 

approximately 131,000 participants it had identified as of mid-August 2003. 

According to IRS officials, this estimate was included in materials provided 

to the Department of the Treasury and the Office of Management and 

Budget during budget discussions. It was used not as a basis for requesting 

resources sufficient to examine the taxpayers, but to show that the abusive 

scheme problem was large relative to current resources. According to IRS 

officials, this estimate was developed during a series of meetings, but 

documentation showing the basis for the estimate was not prepared at that 

time.

We are unaware of a specific IRS or other policy that requires 

contemporaneous documentation of a figure like the 400,000 estimate of 

taxpayers IRS expects to identify as engaged in abusive schemes. 

Nevertheless, documenting the basis for key numbers related to an 

agency’s programmatic efforts is in line with the thrust of management 
Page 8 GAO-04-50 Challenges in Combating Abusive Tax Schemes

legislation and IRS’s own policies. For example, GPRA stresses not only 

that agencies develop measures of program performance, but also that the 

measures be valid and reliable. IRS too stresses that program managers 

have valid and reliable measures of program performance in its Strategic 

Planning, Budgeting, and Performance Management Process. Although the 

400,000 estimate is not an IRS program performance measure, it is a 

measure that IRS has used in discussions on its fiscal year 2005 budget 

needs. Further, Congress has expressed interest in the specific issue of 

abusive schemes, including through this review, which has focused in part 

on the nature and scope of abusive tax schemes. Documenting the basis for 

key program-related numbers ensures that others can judge their reliability 

and better understand what may account for differences in such key 

numbers over time. 

At our request, IRS prepared a document showing how the estimate of over 

400,000 was derived. IRS based this estimate to a great extent on the 

promoters it had identified, but for which it had not yet received investor 

lists. If each investor list contained only the average number of names 

identified on the very few lists considered so far, a conservative 

assumption according to SB/SE’s Deputy Director, Compliance Policy, 

more than 300,000 taxpayers would be involved. In addition, although IRS 

had not yet processed most of the offshore credit card information it had 

received, staff projected that tens of thousands of abusive credit card users 

were likely to be identified. According to the same official, IRS now 

believes more taxpayers are engaged in various abusive schemes not 

involving offshore credit cards than it did last year but fewer than it 

believed last year are engaged in schemes involving offshore credit cards 

and likely to be identified. Not wanting to overstate the total number of 

taxpayers likely to be identified as involved in abusive schemes, IRS 

adopted a conservative estimate of more than 400,000, emphasizing to us 

that its program is still in the developmental stage and the number is 

probably higher. Table 2 compares how the 400,000 relates to the numbers 

used in our testimony from last year. Because some of the numbers are 

estimates based on limited information and because the specific types of 

cases included in the different categories are not always identical, the 

comparisons are only a general indication of changes in the potential size 

of the scheme categories and the total number of taxpayers involved.
Page 9 GAO-04-50 Challenges in Combating Abusive Tax Schemes

Table 2: Comparison of Different Estimates of the Number of Taxpayers Involved in 

Abusive Schemes

Source: Derived by GAO from IRS data.

a

The types of schemes included in the different categories in the two periods were not consistent, but 

the differences were small relative to the total number of taxpayers involved.

b

These numbers are for fiscal year 2002.

IRS has not associated a dollar amount with its estimate of more than 

400,000 taxpayers, although it believes the amount is substantial. 

According to SB/SE’s Deputy Director, Compliance Policy, IRS is trying to 

be more data-driven in this area and is not tracking dollars associated with 

its projection.

In addition to the estimate of more than 400,000 taxpayers, some IRS units 

collected other information regarding abusive schemes that identified the 

scope of other pieces of the problem. These pieces are not part of SB/SE’s 

examination workload planning effort because they do not involve 

examinations. IRS’s Frivolous Return Program identifies returns and 

refunds for taxpayers whose returns either state an argument that IRS can 

readily identify as frivolous or have characteristics IRS has identified as 

reflecting a frivolous argument. The program stopped about 21,000 

frivolous returns (as shown in table 2) and refunds resulting in about

$619 million in protected tax dollars in fiscal year 2002. CI identified about 

127,000 fraudulent refund claims in fiscal year 2002 and stopped about 

$379 million in fraudulent refunds.

Scheme areaa February 2002 estimate October 2003 estimate

Offshore credit cards and other 

schemes

570,000 More than 400,000

Frivolous returns 62,000 21,000b

Frivolous refunds 105,000 127,000b

Total 737,000 More than 548,000
Page 10 GAO-04-50 Challenges in Combating Abusive Tax Schemes

IRS Strategy to Combat 

Abusive Schemes Is 

Broad-Based, but Has 

No Long-term 

Performance Goals or 

Measures Linked to 

Goals

IRS’s abusive scheme strategy takes a multipart approach to focus 

resources on the most egregious promoters of, and participants in, offshore 

credit card and other schemes. It entails identifying schemes and their 

participants, alerting the public, enforcing the law, and coordinating efforts 

internally and throughout IRS. Although IRS planning documents outline 

an overall strategy for combating abusive schemes, IRS has not yet defined 

long-term performance goals for the effort and the measures it would use 

to track progress in achieving those goals. However, although establishing 

such goals and measures will be challenging, IRS intends to establish 

process and results-oriented goals in the future.3

SB/SE’s Strategy Includes 

Pursuing Egregious 

Promoters As Well As 

Offshore Credit Card and 

Other Abusers

As outlined in planning documents, the SB/SE strategy to combat abusive 

tax schemes focuses on attacking the source of what IRS considers to be 

the most egregious abusive noncompliance. The strategy requires using 

scarce resources to address three high-priority areas—promoters, offshore 

credit card schemes, and other abusive schemes (including offshore 

schemes other than credit card schemes)—all under the jurisdiction of a 

position established in 2002, the Director of Reporting Enforcement. 

Because promoters generate noncompliance by selling tax avoidance 

schemes to others, they represent a top priority in the strategy. By pursuing 

promoters, IRS may leverage its resources and gain access to lists of clients 

who bought the promoters’ products. An SB/SE official stated that the 

focus is to pursue promoters first to stop the growth of abusive schemes. 

IRS can then take enforcement actions against participants in abusive 

schemes.

IRS especially targeted abusive schemes involving credit cards issued by 

offshore banks. Credit cards allow easy access to income hidden in 

accounts in tax haven countries. In October 2000, IRS issued summonses to 

two credit card companies to obtain limited information about U.S. citizens 

holding credit cards issued by banks in three offshore financial centers. 

3

Guidance related to GPRA can provide a framework in developing measurable goals and 

outcome-oriented measures. Although GPRA is generally applied to agencywide strategic 

plans, its framework is useful to guide any type of planning. GPRA requires long-term 

strategic and annual performance goals and associated measures, preferring measures 

relating to outcomes (results) versus outputs (activities). Office of Management and Budget 

guidance says that strategic plans set out long-term goals, outlining planned 

accomplishments and their implementation schedule.
Page 11 GAO-04-50 Challenges in Combating Abusive Tax Schemes

After lengthy negotiations to address one of the company’s concerns and 

reach a compromise for compliance, that company provided information in 

April 2002. In March and August 2002, IRS issued a second round of 

summonses to credit card companies seeking records on cards issued by 

banks in 31 offshore financial centers. The scope of records to be produced 

under these summonses had to be negotiated, with consideration given to 

the burden of requiring full compliance, the balance between the amount of 

information to be produced and the time needed to produce it, and the 

need to focus as much as possible on probable U.S. taxpayers. 

Because IRS could not always identify individuals based on credit card 

company information, it also issued summonses to 123 merchants for 

additional information that could be used in examinations and criminal 

investigations. Analyzing merchant responses was very time consuming, 

requiring follow-up for more information, and IRS still needed to work 

beyond the merchant information provided to identify taxpayers.

On July 30, 2003, IRS announced that as a result of its credit card project, it 

had continuing or completed audits on 2,800 returns, and it had assessed 

more than $3 million in taxes. As of early August 2003, IRS had received 

records from both rounds of credit card company summonses and from 

almost all of the merchant summonses. It needed to go through these 

records before it would begin to have a better idea of the size of the credit 

card problem, keeping in mind that the merchant summonses related only 

to merchants identified by analyzing data produced by one credit card 

company responding to the first summons.
Page 12 GAO-04-50 Challenges in Combating Abusive Tax Schemes

In January 2003, IRS began a voluntary compliance initiative to identify 

promoters and to return to tax law compliance taxpayers who use offshore 

payment cards to hide income. Under the initiative, eligible taxpayers 

stepping forward before April 16, 2003, would not pay certain penalties and 

would not face criminal prosecution, pending acceptance into the program. 

However, they would agree to provide full details on promoters of offshore 

arrangements. They would also pay previously owed taxes, interest, and 

certain other penalties. In addition to this voluntary compliance initiative 

and to the summonses, the Department of the Treasury has entered into tax 

information exchange agreements with offshore financial centers to further 

improve the federal government’s information collection.4

On July 30, 2003, IRS announced that 1,299 taxpayers stepped forward to 

participate in the voluntary compliance initiative, and that analyzing cases 

to date revealed 214 new offshore promoters. According to SB/SE’s Deputy 

Director, Compliance Policy, as of mid-September 2003, the initiative had 

led to collecting more than $100 million in tax, a figure that continues to 

grow. The 1,299 taxpayers who volunteered is a small number compared to 

early reports of the scope of the problem. However, according to IRS 

officials, the reality of promoters being identified by taxpayers gives IRS 

data on the source of the problem and a wealth of information that can be 

used to further investigate abusive schemes. They said IRS was in the early 

stages of receiving and following up on completed packages of 

information, but it had already received valuable information on how 

promoted schemes worked. In addition, instead of stepping forward, IRS 

officials say some taxpayers seem to have filed amended tax returns, 

bringing themselves into compliance in a different way. IRS did not yet 

know the number of amended returns that arrived as a result of the 

initiative.

For the abusive schemes shown in table 1, SB/SE’s fiscal year 2003 plans 

called for developing an inventory of schemes and their status, working out 

a more detailed overall strategy, and developing and implementing a 

process to oversee and manage IRS’s efforts to combat abusive schemes 

and promoters. In general, SB/SE officials saw fiscal year 2003 as a 

transition year in which to build an infrastructure for full implementation 

of a strategy in fiscal year 2004. To develop inventory information, SB/SE 

4

Between November 2001 and November 2002, Treasury entered into agreements with the 

Cayman Islands, Antigua and Barbuda, The Bahamas, the British Virgin Islands, the 

Netherlands Antilles, Guernsey, the Isle of Man, and Jersey.
Page 13 GAO-04-50 Challenges in Combating Abusive Tax Schemes

has been devising a matrix to assess the risk associated with various 

abusive schemes. Although it will not identify the full scope of the problem, 

the matrix is intended to help SB/SE management prioritize the various 

schemes it encounters and decide how much in resources to allocate to 

combat each one. 

SB/SE’s Strategy Includes 

Identifying Schemes, 

Alerting the Public, and 

Enforcing the Law

SB/SE’s strategy to combat abusive schemes includes actions to identify 

schemes, alert the public, and identify and take enforcement action against 

promoters and participants. SB/SE identifies promoters and participants 

through disclosure initiatives, Internet research, investigations, and 

examinations. IRS is also partnering with state tax agencies to combat 

abusive schemes. On September 16, 2003, IRS announced agreements to, 

among other things, exchange information about abusive schemes 

identified at the federal and state levels, have IRS provide leads on 

participants in abusive schemes to states for investigation, and partner on 

training and other educational activities.

SB/SE’s strategy to alert the public includes targeting educational outreach 

and countermarketing strategies to address abusive schemes and their 

promoters. The division’s Taxpayer Education and Communication (TEC) 

unit, in conjunction with the Communications and Liaison and Reporting 

Enforcement units and others, created toolkits for abusive scheme 

outreach and education. The toolkits are for external stakeholders, such as 

professional organizations, to educate their members and clients and also 

for use as internal guidance. 

Enforcement action against promoters and participants can take many 

forms. For example, IRS criminal investigations can lead to indictments 

and convictions. Similarly, IRS conclusions that injunctions are warranted 

can lead to promoters being enjoined from continuing with their 

promotions. As of May 2, 2003, IRS had 464 ongoing criminal investigations 

of scheme promoters and investors, as opposed to 125 in 2001, and 27 

promoter injunctions granted, compared to 1 about a year earlier. IRS can 

also assert civil penalties or use summonses.

SB/SE’s Strategy Is 

Coordinated within SB/SE 

and throughout IRS

Internal coordination is key to SB/SE’s approach for addressing abusive 

schemes. Last year we testified that SB/SE was reorganizing to place its key 

efforts to combat abusive schemes under one executive and better 

integrate them. Now SB/SE’s Deputy Director, Compliance Policy, is 

charged with coordinating the division’s strategy for combating abusive 
Page 14 GAO-04-50 Challenges in Combating Abusive Tax Schemes

schemes and working closely with other IRS operating divisions. IRS has 

also established coordination groups, namely the Abusive Tax Evasion, 

Avoidance Schemes, and Devices Executive Steering Committee and the 

Offshore Credit Card Project Oversight Board, both of which include 

members from different parts of IRS and operate under the auspices of 

IRS’s Enforcement Committee chartered in July 2003. Chaired by the 

Deputy Commissioner for Services and Enforcement, the Enforcement 

Committee is to guide IRS-wide enforcement strategies, focusing on high 

visibility issues involving many divisions or potentially having significant 

compliance impact. 

IRS units coordinate with each other in various ways in planning and 

implementing actions to combat abusive schemes. For example, in April 

2002, SB/SE established the Lead Development Center (LDC) to centralize 

the nationwide receipt of leads on promoters of abusive schemes. Once the 

LDC organizes promoter information from both agencywide and external 

sources, it coordinates with CI to determine who takes the lead in 

promoter cases of interest to SB/SE and CI and at times to work in parallel 

investigations. Another example of two divisions partnering with each 

other was the plan for SB/SE and the Large and Mid-Size Business Division 

to jointly find ways to identify entities used to mask questionable 

transactions and address their abuse. As part of this effort, the two 

divisions planned to develop and implement a strategy to focus on highincome taxpayers investing in flow-through entities used to hide taxable 

income. The planning documents of different IRS divisions had crossreferences to the plans and work of other divisions. 

SB/SE also coordinates internally and with other units in its efforts to alert 

the public. TEC and the SB/SE Communications and Liaison unit 

coordinate with SB/SE Compliance and with CI and the Office of Chief 

Counsel when doing outreach and education. For instance, Counsel 

provides legal assistance with language to try to ensure that public 

messages are legally accurate. As another example, Communications and 

Liaison, Compliance, CI, and Counsel personnel all provided TEC with 

input on components of the toolkits TEC developed.

SB/SE Has No Long-term 

Performance Goals or 

Measures Linked to Goals

Although IRS has outlined and begun to implement a strategy for 

combating abusive schemes, it has not yet defined performance goals for 

the effort and established the measures it would use to track progress in 

achieving those goals. Performance goals define what an organization is 

trying to achieve over time, preferably focusing on the outcome desired 
Page 15 GAO-04-50 Challenges in Combating Abusive Tax Schemes

rather than on activities or outputs. IRS officials recognize that developing 

performance goals and associated measures to track progress is desirable. 

Although given the substantial difficulty in assessing the scope of the 

abusive scheme problem, establishing performance goals and associated 

measures will be challenging, IRS intends to establish process or resultsoriented performance goals in the future.

Using business plans and status reports, SB/SE established some shortterm goals and measures to track its abusive scheme activity. It established 

short-term goals, such as developing alternative treatments and/or a 

settlement strategy for offshore credit card cases by November 1, 2002. (As 

mentioned earlier, IRS actually began its offshore voluntary compliance 

initiative in January 2003.) SB/SE also used measures, such as the number 

of approved investigations. Although establishing these goals and measures 

represents progress, IRS has not developed long-term process and resultsoriented performance goals or measures associated with them. 

SB/SE officials acknowledged the importance of goals and measures and 

are working on improving. As mentioned earlier, one of SB/SE’s fiscal year 

2003 efforts was to develop a detailed overall strategy for addressing the 

abusive schemes described in table 1, including a process to oversee and 

manage the area. SB/SE officials said they would devise measures of 

compliance success once they have their process in hand and gain 

experience. Because the extent of abusive scheme activity is unknown and 

success in addressing it is hard to define, efforts to develop long-term 

performance goals and associated measures are difficult. However, 

consistent with their ongoing efforts to build an infrastructure to address 

abusive schemes, SB/SE management officials expressed their intention to 

establish process and results-oriented goals and measures in the future. 

Progress in developing these elements is crucial to being able to 

communicate progress made in combating abusive schemes.

IRS Planned Resource 

Shifts Are Significant, 

but Resource Use 

Started Slowly and 

Future Use Remains to 

Be Seen

IRS has begun shifting, although more slowly than expected, and plans to 

continue shifting, significant resources into addressing abusive schemes, 

but the potential volume of additional work that may be identified and 

inexperience with the rate at which staff can close cases make it unclear 

whether the additional resources and the caseloads will match each other. 

At the agencywide level, IRS used a systematic decision-making process in 

deciding to make these shifts. At the SB/SE level, executives considered 

resources available and program priorities in significantly increasing SB/SE 

examination staff resources devoted to abusive schemes. In doing so, they 
Page 16 GAO-04-50 Challenges in Combating Abusive Tax Schemes

planned to shift resources out of examining areas such as small 

corporations and nonabusive flow-through entities. 

Overall Budget Trade-offs IRS decided staffing resource levels to be devoted to addressing abusive 

schemes through a systematic planning and budgeting process, albeit one 

that used participants’ experience and judgment in the absence of 

definitive measures of the problem’s size. Early in calendar year 2002, IRS’s 

divisions, including SB/SE, conducted strategic assessments in which they 

studied trends, issues, and priorities affecting their operations. In April 

2002, IRS’s senior management team, including the Commissioner, Deputy 

Commissioner, division heads, and others, went through two rounds of 

considering IRS’s programs to prioritize the needs for new or redirected 

funding for fiscal year 2004. Of 33 programs considered, abusive schemes 

received the second most votes. According to an IRS official, this process 

also informed how funds already requested for fiscal year 2003 would 

actually be spent. 

After the senior management team reached consensus, the Commissioner 

issued overall planning guidance for fiscal years 2003 and 2004 to reflect 

the jointly set strategic direction, and the divisions wrote fiscal year 2003 

and 2004 “strategy and program plans” outlining staff resources needed. 

Showing its intent to focus resources on detecting noncompliance, SB/SE’s 

plan cited an increasing number of abusive schemes, an abusive scheme 

estimate of up to $40 billion, promoters using the Internet as their primary 

way of operating, and the potential for abusive schemes eroding taxpayers’ 

confidence in the tax system’s fairness.

SB/SE Used Priorities to 

Plan for Significant 

Resource Shift

For fiscal years 2003 and 2004, SB/SE significantly increased the 

examination resources it planned to allocate to new priorities, including 

three of its highest: (1) promoters of abusive schemes, (2) offshore credit 

card schemes, and (3) other abusive schemes. As shown in table 3, the 

planned level of resources for these three areas almost quadrupled from 

267 full-time equivalents (FTE) in fiscal year 2002 to 1,020 FTEs the next 

year, and it increased slightly from there to 1,154 FTEs for fiscal year 2004.
Page 17 GAO-04-50 Challenges in Combating Abusive Tax Schemes

Table 3: Planned Shift in Revenue Agent and Tax Compliance Officer FTE Positions 

Devoted to Abusive Scheme Priority Areas, Fiscal Years 2002-2004

Source: IRS data compiled by GAO.

Note: These FTEs include revenue agents and tax compliance officers, but not tax examiners who 

conduct examinations through correspondence. Revenue agents and tax compliance officers usually 

have accounting experience and meet directly with taxpayers during the audit. Correspondence 

examinations do not require tax examiners to meet with the taxpayer in person.

SB/SE arrived at its fiscal year 2003 budget estimates for different 

categories of abusive schemes in different ways. To estimate the number of 

examiner FTEs needed for promoters, it started with the number of 

approved promoter investigations and assumed another 35 investigations 

would be added each month. It also assumed that each investigation would 

take 37.5 hours per month for 8 months, for a total of 300 hours. 

For offshore credit card schemes, SB/SE estimated a potential number of 

participants by extrapolating data from October 2000 summonses to find 

potential credit card abusers. It decided how many participants it could 

actually examine, which was significantly less than the number of 

participants extrapolated, based on the estimated availability of FTEs.

For other abusive schemes, SB/SE estimated a potential number of 

participants by using available data on identified schemes and investor 

lists. It determined how many hours examining relevant returns would take 

by assuming that closing other abusive cases would take certain 

percentages of the time needed for nonabusive returns. Although other 

abusive schemes evolve and past experience will not necessarily bear out 

for the future, for its staff year estimates for other abusive schemes IRS 

officials generally had more relevant experience from prior work on 

abusive schemes to draw upon than they did for promoter and offshore 

credit card staff year estimates. 

Priority area

FY 

2002

FY 

2003

FY 

2004

Percentage increase 

from FY 2002 to 2004

Promoters of abusive schemes 16 150 154 863%

Offshore credit card schemes 0 561 367 -

Other abusive schemes 251 309 633 152%

Total 267 1,020 1,154 332%
Page 18 GAO-04-50 Challenges in Combating Abusive Tax Schemes

In determining its budget estimates for all these areas, SB/SE considered

the allocation to other programs. It did this using input from SB/SE 

executives and examiners in an iterative process. Given the shifts to 

abusive schemes, SB/SE planned to limit the numbers of its traditional 

examinations, such as those of small corporations and nonabusive flowthrough entities. For instance, it scheduled the number of revenue agent 

FTEs devoted to nonabusive flow-through entities to decline from 485 to 

176 between fiscal years 2002 and 2003, translating to a decrease in the 

number of returns examined by revenue agents from 12,318 to 1,078.5

Further, for fiscal year 2003, SB/SE also began directing its most skilled 

examination resources away from national programs, such as claims for 

refunds and cases with tax returns identified as being most likely to have 

their taxes increased upon audit. To cope with this shift in resources away 

from certain areas, IRS planned various mitigating efforts, such as first 

examining individuals for abusive schemes and then pinpointing related 

flow-through and other entities to be audited, rather than first selecting the 

entities to audit. We did not assess how the shifts in resources would affect 

examination coverage in the areas losing staff or IRS’s plans to mitigate 

that effect.

In addition to the increased resources for IRS examination priority areas 

reflected in table 3, other parts of SB/SE and IRS also used or planned to 

use FTEs to address abusive schemes. For instance, within SB/SE, although 

the TEC unit did not specifically allocate FTEs for abusive schemes in 

fiscal year 2002, it planned to devote 54 FTEs to addressing abusive 

schemes in fiscal year 2003 (about 13 had been used as of July 26, 2003) and 

asked for another 125 for fiscal year 2004. Similarly, the collection function 

went from 0 FTEs in fiscal year 2002 to planning for 73 and 81 FTEs in fiscal 

years 2003 and 2004, respectively. According to an SB/SE official in early 

August 2003, SB/SE did not have reliable information on how many FTEs 

the collection function had used to date to address abusive schemes in 

fiscal year 2003.

Outside SB/SE, although CI did not budget staff resources specifically for 

abusive schemes, it used 120 FTEs in fiscal year 2002 just on abusive 

domestic and foreign trusts and expected significant cascading effects on 

its scheme work in the form of referrals from other units. For fiscal year 

5

Nonabusive flow-through entities are entities such as trusts and partnerships that IRS 

examines as part of its broad coverage of taxpayers, even though it has no specific reason to 

think they are abusive.
Page 19 GAO-04-50 Challenges in Combating Abusive Tax Schemes

2004, it also requested 185 FTEs in addition to the 441 already used to 

identify, develop, and analyze potentially fraudulent schemes in its 

Questionable Refund Program and its Return Preparer Program. Other 

SB/SE and IRS areas devoting FTEs to abusive schemes include the 

Frivolous Return Program, SB/SE Communications and Liaison, and the 

Office of Chief Counsel.

Resource Use Differed from 

Expectations, and Future 

Use Remains to Be Seen

As of July 31, 2003, IRS had used fewer examination resources combating 

abusive schemes than it had expected. Although IRS intends to 

significantly shift resources to address abusive schemes, how future 

resources will actually be used remains to be seen. The future volume of 

cases IRS will need to examine and the rate at which IRS will be able to 

close examinations are unclear. Instead of using examination resources to 

the extent intended to address abusive schemes, it has been able to apply 

them to other high-priority programs, such as its Unreported Income 

Discriminant Function effort, and if circumstances warranted, it could do 

so again in the future. 

As shown in table 4, through July 31, 2003, SB/SE was on track to use less 

than half of the 1,020 fiscal year 2003 FTEs designated for abusive scheme 

priority areas. It was on track to use 10 percent of the revenue agent FTEs 

to be devoted to offshore credit card schemes and 30 percent of those to be 

devoted to promoters. IRS officials stated that fiscal year 2003 was a 

transition year and attributed the slower than expected start to overly 

optimistic forecasts for delivering a high level of workable cases to revenue 

agents—forecasts made without the experience needed in the promoter 

and offshore credit card areas to gain insight into how slowly or quickly 

inventory develops. Recent trends of more cases starting per month 

indicate that the available workload is growing.
Page 20 GAO-04-50 Challenges in Combating Abusive Tax Schemes

Table 4: Planned and Projected Revenue Agent and Tax Compliance Officer FTEs 

Devoted to Abusive Scheme Priority Areas, Fiscal Year 2003

Source: IRS data compiled by GAO.

Other data illustrate how difficult it is for IRS to reliably estimate the 

resources that may be needed to work abusive schemes due to uncertainty 

about the volume of cases that it will need to examine and the rate at which 

IRS will be able to close examinations. The data indicate that, at times, the 

actual number of cases identified and the rate at which cases were being 

closed diverged significantly from the estimates used to plan for fiscal year 

2003 FTEs. For example, as shown in table 5, by July 31, 2003, SB/SE did 

not yet have offshore credit card cases lined up for examination that would 

approach the number the budget was intended to cover, and it had closed 

only 18 percent of the cases it had anticipated closing. On the other hand, 

SB/SE had more cases involving other abusive schemes in its queue for 

revenue agents to handle than it had estimated it could work in fiscal year 

2003, but it was closing almost twice as many cases as expected. Having 

budgeted FTEs to work 9,060 complete cases involving other abusive 

schemes, it had enough resources to begin and/or complete work in fiscal 

year 2003 on many of the 20,810 cases it identified by July 31, 2003. It could 

complete many of the unfinished cases in fiscal year 2004, and by that time, 

have identified new cases to work.

Priority area

Planned 

FTEs

Projected FTEs if the 

pace at July 31, 2003 

was maintained

Projected FTEs as a 

percentage of those 

planned

Promoters of abusive 

schemes 150 45 30

Offshore credit card schemes 561 56 10

Other abusive schemes 

worked by revenue agents 275 352 128

Other abusive schemes 

worked by tax compliance 

officers 34 17 51

Total 1,020 470 46
Page 21 GAO-04-50 Challenges in Combating Abusive Tax Schemes

Table 5: Comparisons of Inventory Developments with Inventory Expectations 

Source: Calculated by GAO from IRS data.

a

This calculation entailed adding the number of cases that either started in fiscal year 2003 or were 

identified to be started but had not yet begun by July 31, 2003. To this total, we added cases carried 

over from fiscal year 2002 into 2003, but adjusted the total to reflect that a portion of the casework had 

been completed. For example, if two cases carried into 2003 were half completed, we counted them as 

one case. We relied on IRS estimates of case status to make these adjustments. The resulting totals 

do not represent cases that IRS could necessarily complete in fiscal year 2003 because, we were told, 

many cases could take 2 or 3 years. 

b

SB/SE officials explained that over time IRS would identify additional tax returns related to the 2,208 

offshore credit card cases that had been identified as of July 31, 2003. SB/SE projected that each 

offshore credit card case originally identified would eventually include four tax returns, on average.

SB/SE officials told us that they accommodated shortfalls in cases or in 

budgeted examination resources by shifting examination FTEs among 

different types of abusive scheme examinations and to other priority 

programs. According to them, the offshore credit card cases did not start as 

quickly as anticipated because dealing with the summons process took 

longer than expected. However, this delay allowed more SB/SE resources 

to be used for other abusive schemes.

Although to date SB/SE officials have acted to accommodate unexpected 

differences in the volume of cases and the time needed to work them, 

uncertainties affecting future resource levels are perhaps even greater. 

There is the potential that the volume of cases could grow significantly, but 

it is not clear how much the caseload will grow or how quickly. For 

example, in the offshore credit card scheme area, IRS has not yet assessed 

how many new cases may be identified from the 214 new offshore 

promoters found in its voluntary compliance initiative that closed on April 

Priority area

Number of 

cases identified 

by July 31, 2003a

Number of equivalent 

cases SB/SE 

estimated it could 

cover in FY 2003

Rate at which cases 

expected to be 

closed by July 31, 

2003 actually were 

closed by that time

Promoters 535 569 Not available

Offshore credit card 

schemes 2,208b 9,455 18%

Other abusive 

schemes worked by 

revenue agents 20,810 9,060 193%

Other abusive 

schemes worked by 

tax compliance 

officers 2,607 4,570 44%
Page 22 GAO-04-50 Challenges in Combating Abusive Tax Schemes

15, 2003. Also, by early August 2003, IRS had received records from its 

second round of credit card summonses, which covered credit card 

company records on cards issued by banks in 31 offshore financial centers. 

Efforts like these may potentially expand the caseload but by an unknown 

amount. 

To the extent the potential cases expand, IRS’s experience so far, as alluded 

to earlier, has been that it is taking longer than originally expected to obtain 

all of the information needed to actually identify individuals for potential 

examination and to make informed choices about which cases merit 

examination. IRS found, for example, that the information from credit card 

summonses often was insufficient to identify individuals, and, therefore, it 

had to issue summonses to merchants as well to obtain identifying 

information. Therefore, IRS would be more likely to be able to handle the 

examination caseload if the universe of potential examination cases 

expands, even fairly significantly, but developing those cases to the point 

they can actually be examined stretches out over time, than if a “workable” 

caseload materializes quickly.

The fiscal year 2003 statistics in table 5 also illustrate that the rate at which 

identified cases may be closed is highly uncertain. According to an SB/SE 

official, SB/SE took its time estimates for working on abusive scheme cases 

from its most complex abusive case examinations. SB/SE officials 

explained that IRS had very little history to use in estimating the time 

needed to process promoter, offshore credit card, and other abusive 

scheme cases. The matrix being developed in fiscal year 2003 was designed 

to collect information that will help executives assess resources needed. As 

SB/SE gains experience with current cases, officials said, the planning 

process would become more refined. 

Across the spectrum of IRS’s responsibilities, IRS works varying amounts 

of the identified workload. It has pointed to gaps between what it should be 

doing and what it has the capacity to do in areas ranging from individuals 

to small and large corporations. IRS will make future decisions about the 

portion of abusive scheme cases that it will work as part of its overall 

processes for allocating resources among its many competing priorities.
Page 23 GAO-04-50 Challenges in Combating Abusive Tax Schemes

We have previously raised questions about IRS’s ability to shift compliance 

resources as planned. We recently testified that many parties have 

expressed concern about declining IRS compliance—especially audit—and 

collection trends for their potential to undermine taxpayers’ motivation to 

fulfill their tax obligations.6 Concerned about these trends, IRS has sought 

more resources, including increased staffing for compliance and 

collections, since fiscal year 2001. Despite receiving requested budget 

increases, staffing levels in key occupations were lower in 2002 than in 

2000. These declines occurred for reasons such as unbudgeted expenses 

consuming budget increases and other operational workload increases. 

Conclusions Having designated abusive schemes as a priority enforcement area, IRS has 

made progress in developing an agencywide effort to address schemes. To 

ensure that these efforts are focused and to support both congressional and 

IRS assessments of progress in combating abusive schemes, IRS officials 

must follow through on their intention to develop long-term process and 

results-oriented performance goals and associated measures.

Fiscal year 2003 experience, however, illustrates that IRS likely will need to 

continually adjust its efforts. Although IRS identified many more of some 

types of abusive schemes than it expected it could handle in fiscal year 

2003, the development of a workable inventory of offshore credit card 

scheme cases progressed much more slowly than anticipated. On balance, 

this likely led to IRS using substantially fewer resources for abusive 

scheme work in fiscal year 2003 than anticipated. As with developing longterm goals and measures, officials recognize that they must build a better 

analytic basis for judging the appropriate resources to assign to pursuing 

abusive schemes and intend to do so as they better identify the potential 

workload and how quickly they can close cases. Given that abusive 

schemes are a top priority for IRS and have been the focus of congressional 

attention, the potential size of the problem is a key reference point for 

policymakers in judging whether IRS has appropriate resources and an 

effective strategy over time for combating the schemes. Although 

estimating the potential size of the problem is inherently difficult and must 

rely on assumptions and officials’ judgment, documenting the basis for the 

6

U.S. General Accounting Office, Compliance and Collection: Challenges for IRS in 

Reversing Trends and Implementing New Initiatives, GAO-03-732T (Washington, D.C.: 

May 7, 2003).
Page 24 GAO-04-50 Challenges in Combating Abusive Tax Schemes

estimates can help others judge how to interpret the numbers and use them 

to make decisions.

Recommendation to 

the Commissioner of 

Internal Revenue

We recommend that the Commissioner of Internal Revenue document the 

support underlying future IRS estimates of the size of the abusive scheme 

problem when IRS prepares the estimates. 

Agency Comments In written comments, the Commissioner of Internal Revenue agreed with a 

draft of this report. He specifically agreed with the recommendation and 

said that IRS would establish a methodology for documenting the basis for 

the estimates. He noted that the other information we provided would also 

help IRS improve its abusive scheme program for fiscal year 2004 and 

beyond. In addition, he affirmed IRS’s intention to establish measurable 

process and results-oriented goals and said that developing these measures 

is an operational priority for fiscal year 2004.

The Commissioner also provided other general comments on our draft 

report and an update of activities since the time of our review. For instance, 

he said that as a result of LDC improvements, expedited procedures with 

the Department of Justice, and many other efforts, IRS recently identified 

significant numbers of abusive scheme promoters and participants and 

refined its methods to deal with them. In addition, he noted, a key part of 

the ongoing, infrastructure-building efforts that we describe was forming 

and training 12 cross-functional teams in 2003 to identify traditional or 

alternative strategies for addressing individual schemes. Also, he stated 

that, as of October 2003, 42 states and the District of Columbia had signed a 

memorandum of understanding focusing on exchanging information with 

IRS relating to abusive tax avoidance transactions. Finally, he pointed out 

that given IRS’s inability in 2003 to consistently identify and deliver abusive 

scheme cases to be worked in IRS field offices, IRS policy is to focus on 

other strategic priorities when it does not have an abusive scheme case to 

work.

The full text of the Commissioner’s comments is reprinted in appendix I.

As agreed, unless you publicly announce its contents earlier, we plan no 

further distribution of this report until 30 days from the date of the report. 
Page 25 GAO-04-50 Challenges in Combating Abusive Tax Schemes

At that time, we will send copies to the Commissioner of Internal Revenue, 

the Secretary of the Treasury, and other interested parties. The report will 

also be available at no charge on GAO’s Web site at http://www.gao.gov.

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

Signora May on (404) 679-1920 or me on (202) 512-9110. Melissa Hinton and 

Lawrence Korb were key contributors to this report.

Michael Brostek

Director, Tax Issues
Page 26 GAO-04-50 Challenges in Combating Abusive Tax Schemes

Appendix I

Comments from the Internal Revenue Service AAppenednxidexiIs
Appendix I

Comments from the Internal Revenue Service

(450226) Page 27 GAO-04-50 Challenges in Combating Abusive Tax Schemes
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