United States General Accounting Office

GAO Report to the Commissioner of Internal

Revenue

October 1996 TAX

ADMINISTRATION

FedState Efforts Offer

Opportunities but

Program Needs

Improvement

G O A

years

1921 - 1996

GAO/GGD-97-16

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-260174 

October 31, 1996

The Honorable Margaret Milner Richardson

Commissioner of Internal Revenue

Dear Ms. Richardson:

The income tax laws of many states are built upon the federal tax code.

Consequently, cooperation between the Internal Revenue Service (IRS) and

state tax agencies offers opportunities for helping to achieve IRS’ strategic

goals of increasing taxpayers’ compliance with tax laws, improving

taxpayer service, reducing burden on taxpayers, and increasing the

efficiency of tax administration. IRS and the states are aware of the

advantages of working together and have been involved in a federal/state

(FedState) cooperative program for years. This report discusses the

potential benefits of the FedState program, conditions that may impede

the success of the program, and concerns raised by state officials

regarding the potential impact of IRS’ latest reorganization of the FedState

program.

Background IRS and state revenue offices are both charged with responsibility for

collecting taxes. More than half of the states have based their income tax

systems on the federal tax system, with an overlap of many taxpayers.1

 For

the most part, this common customer base is dealt with separately by IRS

and the state agencies. Given their common roles and customer bases,

opportunities for collaboration among IRS and states’ revenue offices exist.

IRS is facing budget reductions and downsizing. Because of decreasing

resources, it becomes even more important to identify ways that IRS and

the states can cooperate to improve efficiencies and maximize their return

on investment.

IRS and the states have been involved in cooperative tax administration

efforts since the 1920s. By engaging in cooperative efforts, state agencies

and the federal government have attempted to achieve greater compliance

and efficiency than they could by working separately. Early cooperative

efforts involved the sharing of taxpayer income and tax liability

information. In 1957, these activities became governed by formal

agreements between IRS and the states to specify the types of tax

information to be shared. In 1978, IRS fixed responsibility for the exchange

of federal and state tax information with the disclosure officers in its

1

See app. I for a listing of states with income taxes and their conformity with federal income tax

system requirements.

Page 1 GAO/GGD-97-16 FedState Program Improvements Needed
B-260174 

regional and district offices.2 IRS also charged its district directors with

responsibility for working personally with state tax agencies to establish

and conduct FedState cooperative projects. In 1991, the Office of FedState

Relations was established in the National Office to facilitate cooperative

tax administration and foster joint projects. IRS originally assigned a senior

executive and five staff to this office. IRS chose to not provide full-time

field staff to facilitate and foster projects. District directors continued to

be responsible for liaison and personal involvement. Most disclosure

officers were assigned responsibility for coordinator and facilitator duties

on a part-time basis. As of November 1995, 49 states were participating in

the FedState program, and, according to IRS officials, approximately 600 to

700 projects were ongoing or proposed.

In recent years, IRS and the Department of the Treasury have drafted and

proposed legislation to further the FedState program. In June 1995, the

President announced that he would submit to Congress proposed

legislation to facilitate additional FedState cooperative efforts to

streamline tax administration, such as joint filing and processing of return

information. The proposed legislation would allow IRS and state taxing

agencies to delegate tax administration powers and compensate one

another pursuant to agreements. The most recent version of the legislation

was submitted to Congress in March 1996. No action has been taken yet.

In 1978 and 1985, we issued reports on the FedState program.3

 The 1978

report to the Joint Committee on Taxation concluded that the program

had a low priority within IRS and had no unified direction because

responsibility for the program was not fixed. In response, IRS assigned

program responsibility to the Office of Disclosure Operations. Both the

1978 and 1985 reports concluded that IRS and the states were not using

much of their exchanged data and were not sharing other potentially

useful information. In response, IRS established reviews to determine if

states needed and used the confidential return information provided by

IRS.

Results in Brief Potential benefits of the FedState program include increasing taxpayers’

compliance with tax laws, improving taxpayer service, reducing burden,

and improving the efficiency of tax administration functions. For example,

2

Disclosure officers are responsible for overseeing the access to taxpayer data, which is protected

under Section 6103 of the Internal Revenue Code.

3

See Better Management Needed in Exchanging Federal and State Tax Information (GAO/GGD-78-23,

May 22, 1978); and TAX ADMINISTRATION: The Federal/State Tax Information Exchange Program

(GAO/GGD-86-8, Dec. 13, 1985).

Page 2 GAO/GGD-97-16 FedState Program Improvements Needed
B-260174 

joint federal and state taxpayer education efforts can reduce taxpayer

burden by making it easier for taxpayers to get information about tax

requirements.

To ensure optimal use of the FedState program by local IRS and state

offices, IRS’ Office of FedState Relations is responsible for providing

guidance and monitoring program accomplishments. A primary

responsibility of the director of the office is to plan and direct a program

involving the integration and coordination of IRS resources devoted to

FedState activities, and evaluating these overall activities to ensure

optimum results. Although IRS has undertaken many different types of

FedState projects, IRS’ FedState office has made little effort to ensure that

the current project mix constitutes the optimal use of FedState program

resources. FedState projects were generally initiated at the local IRS

district office or state level without the benefit of an overarching strategic

planning function to help identify areas where the greatest potential

contributions could be made. Similarly, the Office of FedState Relations

provided little guidance to the local units. Changes in the organizational

location, turnover of staff, and fluctuating staffing levels for the Office of

FedState Relations may have affected the consistency of the FedState

efforts. Also, the FedState program lacks the performance-based data

needed to monitor project accomplishments.

According to the state officials we spoke with, the success of FedState

cooperative efforts has hinged on the good working relationships

established over time by IRS officials and their counterparts in state

agencies. Some state officials have raised concerns about how the latest

IRS reorganization—which reduces the number of IRS district offices and

shifts IRS senior managers out of many states—could affect FedState

arrangements and the future success of the program. Some state and IRS

officials we spoke with said that personal commitment to the program is

important for developing a productive FedState program. In this regard,

IRS has developed a transition plan to respond to states’ concerns about

the reorganization. Because of the recency of the reorganization, it is too

early to determine whether the plan will adequately address the states’

concerns.

Objectives, Scope,

and Methodology

Our review of the FedState program arose from a December 9, 1994,

hearing on compliance costs and taxpayer burden held by the

Subcommittee on Oversight of the House Committee on Ways and Means.

At that hearing, the Subcommittee expressed interest in how the states

Page 3 GAO/GGD-97-16 FedState Program Improvements Needed
B-260174 

and the federal government could work together to reduce taxpayer

burden. Our objectives for this report were to (1) identify the potential

benefits of FedState cooperative efforts; (2) determine what, if any,

conditions may impede the success of the program; and (3) determine

what, if any, FedState program concerns the states have with IRS’ planned

reorganization.

To achieve our interrelated objectives, we interviewed IRS officials

responsible for the FedState program in IRS’ national and southeast

regional offices, as well as its Albany, NY; Atlanta, GA; Baltimore, MD;

Columbia, SC; Phoenix, AZ; and St. Paul, MN, district offices. We

interviewed state revenue department officials knowledgeable of FedState

activities in Arizona, Georgia, Maryland, Minnesota, New York, and South

Carolina. These locations were selected on the basis of their proximity to

our offices or because IRS officials said they were characterized by a high

level of FedState activity.

We also (1) reviewed FedState documents, such as the 1994 FedState

Cooperative Ventures Catalog and the FedState Concept of Operations

Report from IRS, and program reports from state department of revenue

offices we visited; (2) collected detailed information, such as project

descriptions and any data on costs and benefits, on FedState projects in

the states we visited; and (3) reviewed various legislative proposals related

to FedState activities.

We interviewed Federation of Tax Administrators (FTA) officials

knowledgeable of the FedState program. FTA represents state tax

administrators and is actively involved in promoting effective working

relationships among IRS and state tax agencies. We held a group discussion

with and surveyed state tax administrators on their views regarding

cooperative FedState efforts at the June 1995 FTA conference in Cleveland,

OH. Participation in the discussion and survey was voluntary.

Our work was done between January 1995 and April 1996 in accordance

with generally accepted government auditing standards. We provided a

draft of this report to the Commissioner of Internal Revenue and the

Executive Director, FTA, for their comments. We met with FTA on

August 15, 1996, and with IRS officials on September 4, 1996, to discuss this

report. Their comments are summarized and evaluated beginning on page

13 and incorporated into this report where appropriate.

Page 4 GAO/GGD-97-16 FedState Program Improvements Needed
B-260174 

Fedstate Cooperative

Efforts Offer

Opportunities to

Improve Compliance,

Improve Taxpayer

Services, Reduce

Burden, and Improve

Tax Administration

Due to the similarities in the functions of IRS and state revenue

departments, numerous opportunities exist to improve tax administration

efficiencies through FedState cooperative efforts. For example, taxpayer

data tape exchanges can improve compliance and enforcement by

enabling IRS and the states to identify noncompliant taxpayers and take

appropriate action. Similarly, joint federal and state taxpayer education

and assistance efforts can reduce taxpayer burden by making it easier for

taxpayers to obtain information about tax requirements. More

sophisticated technology provides additional ways for IRS and the states to

reduce taxpayer burden. For example, in one district the state and IRS can

automatically transfer telephone taxpayer assistance calls to each other to

respond to taxpayers more quickly and efficiently.

Data limitations prevented us from ascertaining whether the existing mix

of FedState projects has helped IRS toward meeting its goals of improving

compliance, increasing efficiency, and reducing taxpayer burden. A

project designed to increase compliance may also have the positive effect

of reducing burden or increasing efficiency. An official in IRS’ Office of

FedState Relations told us that four of the most common efforts have been

taxpayer data tape exchanges, federal/state joint electronic filing

programs, state refund offset programs, and the joint dyed diesel fuel

program.

Taxpayer Data Tape

Exchanges

Taxpayer data tape exchanges, which began in the 1960s, constitute one of

the oldest FedState cooperative efforts. According to IRS, currently almost

all states participate in tape and information exchanges. By exchanging

tapes that include taxpayer return data, IRS and the states have been able

to identify taxpayers who failed to file returns or who filed returns but

owed more taxes. Although comprehensive data on the revenues collected

through this effort have not been systematically tracked, the data collected

by some states and IRS districts demonstrate that computer tape exchanges

have increased revenues. For example, one state billed taxpayers for

$37.5 million in 1990 state income taxes on the basis of data in IRS tapes

that showed IRS adjustments to taxpayers’ federal taxes. The state billed

those taxpayers who had failed to report and pay additional state income

tax due as a result of the federal adjustments.

Federal/State Joint

Electronic Filing

The joint electronic filing effort—which was initiated in 1991 as a limited

research test with the South Carolina Tax Commission—is an initiative

among IRS and the states to allow taxpayers to simultaneously file state

Page 5 GAO/GGD-97-16 FedState Program Improvements Needed
B-260174 

and federal returns electronically. According to IRS, 31 states will

participate in the 1996 FedState Electronic Filing program. Electronic

returns go to IRS, which then is to send the states their portions of the

filing. While no systematic effort has been made to assess the benefits of

joint electronic filing, IRS believes that joint filing increases efficiency

because it encourages electronic filing and thus eliminates the costs of

processing and storing paper returns. Also, according to IRS, electronic

filing reduces administrative costs to both IRS and the states because

mathematical errors are detected electronically and transcription errors

are eliminated. Finally, IRS said that joint electronic filing reduces taxpayer

burden by enabling taxpayers to submit their state and federal returns in a

single electronic transmission, thus avoiding corresponding mathematical

errors.

State Refund Offset

Program

The state refund offset program, also referred to as the State Income Tax

Levy Program (SITLP), allows IRS to levy state tax refunds to fulfill federal

tax debts. According to IRS, a levy is more efficient than other collection

enforcement actions. The program has been in operation since 1985.

According to an IRS official, 31 states participated in SITLP, which in 1995

netted IRS $81.7 million in due taxes.

Joint Dyed Diesel Fuel

Program

To increase the efficiency of its motor fuels compliance efforts, IRS is part

of the dyed diesel fuel program, which was established in 1994 and

involves sampling fuel in storage and vehicles to ensure that red-dyed fuel,

which is tax free, is not used as taxable fuel on highways. According to IRS,

15 states have contracted with IRS to sample and test diesel fuel in vehicles

used on highways. IRS believes the program has increased compliance. IRS’

preliminary data indicate that diesel fuel excise tax collections increased

by about $1.2 billion, or 22.5 percent, from calendar year 1993 to 1994.

Other FedState Efforts In addition to these four common efforts, numerous efforts have been

initiated at the IRS district and state levels. For example, IRS and 1 state

revenue department conducted a joint video conference seminar linked to

19 locations statewide to inform tax practitioners of changes in the tax

laws. IRS and the state hoped this combined video conference would

(1) improve taxpayer service by informing a greater number of

practitioners in more remote locations and (2) increase efficiency by

reducing the amount of time and money IRS and state employees spent

traveling to such seminars. Another IRS district and state tax agency

Page 6 GAO/GGD-97-16 FedState Program Improvements Needed
B-260174 

targeted a localized group of nonfiling and underreporting self-employed

taxpayers. To increase efficiency, IRS and the state tax agency each audited

a segment of such taxpayers’ returns and assessed taxes, shared audit

results, and based assessments on each other’s audits. According to an IRS

official, this effort yielded approximately $5 million in state and federal

taxes and added 400 filing taxpayers. Other examples of joint efforts are

included in appendix II.

Additional FedState

Program Actions

Could Increase

Potential Benefits

While the FedState program offers opportunities for increasing taxpayer

compliance, improving taxpayer service, reducing the burden on the

taxpayer, and increasing the efficiency of tax administration, IRS has not

developed an overall strategy to guide FedState projects to better assure

the most efficient use of IRS resources. The Office of FedState Relations

was established to foster and facilitate FedState cooperative efforts. The

Director of the Office of FedState Relations has been responsible for

planning and directing FedState efforts that involve the integration and

coordination of IRS resources, and reviewing and evaluating FedState

activities to ensure optimum results. However, IRS has not developed an

overall strategy for the Office of FedState Relations to fulfill its purpose, to

link FedState efforts with IRS’ overall agency goals and objectives, or to

establish an evaluation mechanism for the program.

Strategic planning at the program level offers a framework for tying

agency goals and objectives with program-level actions. This helps to

ensure that budget trade-offs at the program level are directly tied to the

agency’s overall strategy. In the absence of such planning efforts, the

agency will lack assurance that the individual programs in which it

participates represent the best choices for achieving its overall goals and

objectives.

Weaknesses in the

FedState National Office

Currently, FedState efforts vary from state to state. While these variances

generally reflect differences in state and regional operating agendas, they

also underscore a weakness in IRS’ FedState efforts—namely, the lack of a

centralized strategic planning function. Currently, no unit within IRS is

responsible for providing a strategic framework for the projects. While IRS’

Office of FedState Relations is responsible for facilitating cooperative

projects between IRS and the states, the office offers little guidance to help

local units choose the most productive projects, nor does it help local

units to determine whether their project efforts are helping IRS to achieve

its strategic goals. For example, such guidance to local units might identify

Page 7 GAO/GGD-97-16 FedState Program Improvements Needed
B-260174 

FedState efforts that are most beneficial to both IRS and state offices,

efforts that link strategically to IRS’ main goals, and efforts that help ensure

that IRS resources are most efficiently used. Absent such guidance, local

units may be missing out on projects that offer greater benefits or

operating projects that are not worthwhile.

We found that most decisionmaking about FedState programs occurred at

the district level, where IRS district and state officials worked together to

identify and initiate projects. The local level was a natural decisionmaking

location since participation by the district or state was voluntary and

depended on the project. State and IRS officials told us that it is important

to maintain the local focus of the efforts because of the variation in needs,

resources, and taxpayer issues. According to the IRS district and state

officials we interviewed, the level of FedState activity that existed

between district IRS offices and state tax agencies was highly dependent on

the working relationship between their respective managers and the top

managers’ commitment to the FedState program. To assist in developing

this working relationship, it seems to us that local districts and state

agencies could benefit from guidance to help ensure that they are pursuing

the FedState efforts that would benefit them the most.

The Office of FedState Relations views its role as an advocate for the

program and as a clearinghouse for project ideas. In addition, IRS officials

said the Office of FedState Relations worked to develop legislation

designed to make it easier for state revenue offices and IRS to engage in

joint or reciprocal tax administration functions such as filing of returns

and processing of returns and return information. The most recent version

of the legislation was submitted to Congress in March 1996, and no

subsequent action has been taken yet. The proposed legislation would

authorize IRS to enter into tax agreements with the states and to delegate

tax administration responsibilities and compensate each other for

activities. As a clearinghouse, the Office of FedState Relations provided

information to districts on existing and proposed projects, primarily

through a catalog that included descriptions of FedState projects provided

by the IRS districts themselves. According to IRS, the catalog was not

intended to be comprehensive and did not include information on such

things as status, costs, and results.

IRS has not developed a strategic framework for achieving FedState’s

purpose of facilitating and fostering cooperative efforts between IRS and

the states. Without a strategic plan, IRS cannot be assured that FedState

resources are being focused on those projects that will contribute most to

Page 8 GAO/GGD-97-16 FedState Program Improvements Needed
B-260174 

IRS’ mission. Nor has the office set performance goals to guide cooperative

efforts or determine how well its programs are doing. Setting performance

goals is an integral part of managing for results and is a current

organizational emphasis in IRS. IRS also has not provided guidance as to

what types of FedState efforts have the greatest potential to further IRS’

mission.

Organizational and Staffing

Changes May Affect the

Consistency of FedState

Efforts

The Office of FedState Relations has undergone several organizational and

staff changes. As a result, the office has not had the benefit of stable and

continuous support and direction in terms of resources and staffing. In the

past 2 years, at least six different individuals have held the position of

FedState director or acting director and the organizational location of the

office has changed twice. According to IRS officials, the size of the staff has

fluctuated between 5 and 21 people. Further, the director position has

been downgraded from a senior executive position to a GS-15 position.

According to an official in the Office of FedState Relations, the current

staff comprises 19 individuals, most at the GS-12 level or higher. Four of

these staff persons were transferred to the Office of FedState Relations

because their former offices were reorganized or their positions were

abolished. IRS officials said that further staffing changes may take place.

FedState Program Does

Not Monitor or Assess

Cooperative Efforts

Neither IRS nor the states have systematically monitored or assessed the

results of individual FedState projects. With performance-based data, IRS

national and district offices could make more informed decisions on

resource allocations and program priorities. Such data might also provide

support for IRS’ national office to encourage broader participation by IRS

district and state revenue offices. Currently, IRS does not have the project

information needed to ensure that the FedState program is managed in a

way that maximizes resource investments. In 1994, IRS compiled a

FedState catalog of projects that listed more than 280 proposed or actual

FedState efforts. FedState officials told us that this listing was not

comprehensive. Further, the FedState office generally does not have

information on the status of these projects, such as project

implementation dates, the resources required to operate the projects, or

project benefits.

Quantitative, results-focused data have been collected for some FedState

projects. Of the 126 projects we reviewed in 6 districts, data to monitor or

assess the projects were collected on 31, or 25 percent. Further, none of

the 126 projects we reviewed was evaluated in terms of total project costs.

Page 9 GAO/GGD-97-16 FedState Program Improvements Needed
B-260174 

Of the 31 measured projects, few provided measures that linked project

outcomes to IRS’ main goals of increasing compliance, reducing burden,

and improving tax administration efficiency. The most common measure

was the amount of additional revenue generated by the projects. For the

remaining 95 projects, success was measured intuitively or projects were

just assumed to provide benefits.

IRS has recognized the need to evaluate the results of FedState projects.

However, the results of these efforts have been limited. For example, in

1994, a former Director of the Office of FedState Relations said the office

planned to create an information-sharing cost model to show the benefits

of the FedState program and generate greater interest in FedState projects

among the states. However, this model has not been created. According to

the current Director of the Office of FedState Relations, the project was

terminated due to a lack of resources.

In another effort to evaluate FedState projects, in 1994 the Office of

FedState Relations instituted a best-practices approach that encouraged

local offices to submit information on their most successful FedState

projects. The office developed guidance for local offices to use in

describing projects, resources required, and results achieved. Thus far,

only two projects have been selected as best practices, according to IRS

officials. IRS has sent descriptions of the projects, along with

implementation guidelines, to its local offices nationwide in the hope that

they will be widely adopted.

According to IRS officials, the Office of FedState Relations also planned to

work with field FedState staff to complete plans by November 1995 to

measure the benefits of selected FedState projects. According to an IRS

official, few measurement plans have been submitted because FedState

field staff were overwhelmed by the demands of measuring projects,

coordinating ongoing FedState projects, and handling staffing changes and

duties related to IRS’ reorganization. IRS did not provide more specific

details on the nature of the issues and the impact of staffing and

organizational changes on IRS’ ability to measure program results.

In addition, IRS’ Western Region Internal Audit group reviewed federal and

state information sharing in the Western Region. In May 1994, it reported

that district management could not accurately identify and track the costs

or accomplishments of FedState activities and that current systems did not

capture this type of data. The review also found that without accurate

tracking techniques, the districts could not address the effectiveness of

Page 10 GAO/GGD-97-16 FedState Program Improvements Needed
B-260174 

FedState projects in reducing taxpayer burden, increasing compliance,

and improving quality. In response, the Western Region’s Chief

Compliance Officer created a working group to develop a cost/benefit

model to measure the success of FedState projects. They later rolled this

project into a National Office Research and Analysis plan.

IRS’ Reorganization

Has Caused Concern

Among Some States

About the Future of

FedState Operations

The FedState program’s ability to contribute significantly to IRS’ strategic

objectives relies considerably on the participation of IRS districts and

states. Due to the voluntary nature of the program, the quality of the

relationships among the states and IRS district offices is a critical

component of the decision to initiate projects. However, because of IRS’

latest reorganization, some states have voiced concerns about the possible

deterioration of FedState relationships that have developed over the years.

In May 1995, IRS announced a planned reorganization of its field office

structure to reduce the number of IRS district offices from 63 to 33 and the

number of regions from 7 to 4 by the end of fiscal year 1996. Before the

reorganization, each state had at least one district office. Along with a

district director, most district offices had part-time FedState coordinators

who acted as liaisons to the states. With the reduction in the number of

districts, IRS plans to put the area covered by the districts to be eliminated

under consolidated management of another district. IRS staff is to remain

in locations that were formerly district offices; however, the district

director and other management positions are to be eliminated.

Concerns About IRS’

Reorganization on

FedState Relationships

In our discussions with state officials, many expressed concern about the

effect that reorganization would have on their relationships with IRS. To

help better understand these concerns, we held a joint meeting with

representatives from nine state tax agencies. Many participants told us

that they placed a high premium on the personal commitment of top

managers at IRS district offices. They also said that they viewed the good

lines of communications that they had developed through ongoing

personal contacts and close working relationships with their district IRS

counterparts as being important to the success of FedState activities. The

participants said that the elimination of district offices in some states may

impede FedState cooperation because (1) there may be no IRS

counterparts for state officials in those states that have lost IRS district

offices and (2) the geographical distance between state offices and some

district directors may tend to discourage the development of a close

working relationship. In essence, these participants were concerned about

Page 11 GAO/GGD-97-16 FedState Program Improvements Needed
B-260174 

the continuation of ongoing FedState projects and the prospect of future

projects.

IRS’ Response to the

States’ Concerns

In 1995, the IRS Transition Executive, responsible for overseeing IRS’

reorganization, produced a transition plan that, according to officials from

the Office of FedState Relations, will be implemented. The plan addresses

the states’ concerns by recommending to regional IRS commissioners that a

full-time FedState coordinator and a full-time disclosure officer be

established in each of the continuing district and regional offices. In the

past, district FedState coordinators were not full-time positions; rather,

FedState activities were typically considered a collateral duty of the

district disclosure officer. Some IRS officials had expressed concern about

disclosure officers being given the role of coordinator, since their primary

responsibility is to safeguard data, not to look for ways to share it.

According to IRS officials, the highest-level official remaining in each

district office scheduled to be closed will be designated FedState liaison as

a collateral duty. It is too early to assess whether the plan will address the

states’ concerns because of the recency of the reorganization.

Conclusions FedState cooperative efforts provide IRS and the states with opportunities

to increase taxpayer compliance, improve taxpayer service, reduce

taxpayer burden, and improve the efficiency of tax administration

activities. However, IRS has not provided the strategic framework,

guidance, and performance goals for the FedState program that would

enable it to take fuller advantage of these opportunities. Specifically, IRS’

Office of FedState Relations has not provided guidance to local IRS

districts and states, and the level and types of efforts undertaken appear to

rely primarily on the commitment of IRS district management and the state.

It is important to maintain the local focus of the efforts because of the

variation in needs, resources, and taxpayer issues. At the same time, data

that identify best practices would better enable IRS to promote the

practices’ adoption on a wider scale.

Further, IRS has not developed performance goals for the FedState

program and has not collected data on most programs to monitor or assess

program progress and results. Consequently, IRS national and district

offices do not have the information needed to manage and assess the

FedState program as a whole and make informed decisions about

individual FedState projects. As a result, IRS may be missing opportunities

to target program efforts and maximize potential program benefits.

Page 12 GAO/GGD-97-16 FedState Program Improvements Needed
B-260174 

Finally, some state tax officials are concerned that IRS’ reorganization of its

district offices may impede or even end the long-standing relationships

with IRS district officials that have made cooperative FedState projects

possible. It is too early to determine what impact the reorganization will

have on the program.

Recommendations to

the Commissioner of

Internal Revenue

To enhance opportunities for increased benefits from the FedState

program we recommend that you

• develop and monitor, in conjunction with the states, implementation of a

strategic framework that links FedState project objectives to IRS and state

mission objectives; and

• establish performance goals and ways to monitor and assess program

results.

Agency Comments

and Our Evaluation

We requested comments on a draft of this report from you or your

designated representatives. Responsible IRS officials, including the

Director, Governmental Liaison and Disclosure, and the Director, Office of

FedState Relations, provided comments and supplementary documents in

a September 4, 1996, meeting and additional comments dated

September 27, 1996. We have incorporated modifications in response to

their comments in this report where appropriate. FedState officials

emphasized that the conditions identified in our report related to the way

the program operated before they took charge. They are in the process of

making changes they think will improve the program and they said our

concerns would be addressed in that process.

In response to our recommendation to develop a strategic framework,

Office of FedState Relations officials said they believed they had already

undertaken important steps toward a strategic plan, in particular by

establishing FedState plans and procedures in Spring 1996. By definition,

they said, the program focuses on the identification, exploration, and

implementation of innovative solutions to mutual challenges at the local

level. Further, they commented that while they recognized the importance

of strategic planning at the national level, IRS will continue to look to IRS

executives to leverage these opportunities with their state counterparts at

the local level.

IRS officials said they have established plans and procedures that will link

FedState project objectives to IRS and state mission objectives. For

Page 13 GAO/GGD-97-16 FedState Program Improvements Needed
B-260174 

example, they told us they established the National FedState Steering

Committee. Among other responsibilities, the Committee has been

developing FedState policies and procedures to ensure that specific

FedState goals are consistent with IRS goals. The Committee developed

FedState project guidelines which were forwarded to IRS regional offices

in August 1996. This guidance is responsive to our recommendation and

should help IRS improve its program.

The Office of FedState Relations also has been developing a “FedState

Program Letter” for fiscal year 1997. According to IRS officials, the

Program Letter will provide general guidance about the FedState program,

its objectives, current priorities, and other information. FedState officials

said the Program Letter will outline long-range objectives as well as set

priorities for fiscal year 1997. Further, they commented that they have

stabilized the management team and have filled director positions with

permanent, top-level managers which should help to overcome concerns

about the instability of the Office. We believe that IRS has taken important

steps toward a strategic framework, but it is too early to assess the

effectiveness of these steps because they were recently implemented or

have not been finalized.

IRS officials also agreed with our recommendation to establish

performance goals and ways to monitor and assess program results. They

said steps to improve in these areas have already been taken. For example,

the Office of FedState Relations distributed guidance to district and

service center FedState coordinators on how to report the results of

individual FedState projects. The guidance requests that coordinators

quarterly report information on their FedState projects, including baseline

measures for new initiatives and specific results for ongoing projects.

Also, in August 1996, the Office of FedState Relations provided FedState

coordinators guidelines on how to develop projects and propose projects

that might be replicated nationwide. Among other things, these guidelines

request that coordinators specify how projects results are to be measured

and how the measurements relate to the goals of the project. We believe

that, when fully implemented, these steps may provide more of the

information IRS needs to manage and assess the program.

We are encouraged by the enthusiasm and commitment current IRS

officials show for the FedState program. However, during our review

various FedState officials have told us about plans or procedures to

develop FedState program and project measures. Many of these were

abandoned or were never fully realized. To be successful, IRS’ current

Page 14 GAO/GGD-97-16 FedState Program Improvements Needed
B-260174 

plans to develop a strategic framework and measures must be fully

implemented and supported by the appropriate IRS officials at the national

and local levels.

In a meeting on August 15, 1996, we obtained comments on a draft of this

report from Federation of Tax Administrators (FTA) officials responsible

for FedState-related issues, including the Executive Director and

Government Affairs Associate. The officials generally agreed with our

recommendations. However, the officials said that the strategic framework

must allow enough flexibility for state taxing agencies and local IRS

officials to decide which FedState projects they will pursue. Also, the

officials said FTA conducted a study that showed the revenue benefits to

the states from IRS’ taxpayer data tape exchange program. FTA issued its

report on September 25, 1996.

The head of a federal agency is required by 31 U.S.C. 720 to submit a

written statement on actions taken on these recommendations to the

Senate Committee on Governmental Affairs and the House Committee on

Government Reform and Oversight not later than 60 days after the date of

this report. A written statement must also be sent to the House and Senate

Committee on Appropriations with the agency’s first request for

appropriations made more than 60 days after the date of this report.

We are sending copies of this report to interested congressional

committees, including the Chairman and Ranking Minority Member of the

House Committee on Ways and Means and its Subcommittee on Oversight,

the Chairman and Ranking Minority Member of the Senate Finance

Committee, the Secretary of the Treasury, and other interested parties.

Copies will also be made available to others upon request. Major

contributors to this report are listed in appendix III. Please contact me on

(202) 512-9110 if you have any questions concerning the report.

Sincerely yours,

Lynda D. Willis

Director, Tax Policy and

 Administration Issues

Page 15 GAO/GGD-97-16 FedState Program Improvements Needed
Contents

Letter 1

Appendix I 

States With an Income

Tax and the Degree of

Conformity to Federal

Income Tax

18

Appendix II 

Type, Description, and

Illustrative Examples

of FedState Projects

20

Appendix III 

Major Contributors to

This Report

22

Abbreviations

AGI adjusted gross income

EP/EO employee plans/exempt organizations

FTA Federation of Tax Administrators

FTI federal taxable income

IRS Internal Revenue Service

SITLP State Income Tax Levy Program

Page 16 GAO/GGD-97-16 FedState Program Improvements Needed
Page 17 GAO/GGD-97-16 FedState Program Improvements Needed
Appendix I 

States With an Income Tax and the Degree

of Conformity to Federal Income Tax

State State income tax?

Degree of conformity to

federal income tax

Alabama Yes None

Alaska No Not applicable

Arizona Yes Adjusted gross income

(AGI)

Arkansas Yes None

California Yes AGI

Colorado Yes Federal taxable income (FTI)

Connecticut Yes AGI

Delaware Yes AGI

District of Columbia Yes AGI

Florida No Not applicable

Georgia Yes AGI

Hawaii Yes FTI

Idaho Yes FTI

Illinois Yes AGI

Indiana Yes AGI

Iowa Yes AGI

Kansas Yes AGI

Kentucky Yes AGI

Louisiana Yes AGI

Maine Yes AGI

Maryland Yes AGI

Massachusetts Yes AGI

Michigan Yes AGI

Minnesota Yes FTI

Mississippi No None

Missouri Yes AGI

Montana Yes AGI

Nebraska Yes AGI

Nevada No Not applicable

New Hampshire Yes Only interest and dividends

are taxed

New Jersey Yes None

New Mexico Yes AGI

New York Yes AGI

North Carolina Yes FTI

(continued)

Page 18 GAO/GGD-97-16 FedState Program Improvements Needed
Appendix I 

States With an Income Tax and the Degree

of Conformity to Federal Income Tax

State State income tax?

Degree of conformity to

federal income tax

North Dakota Yes State tax calculated as a

percentage of federal

liability

Ohio Yes AGI

Oklahoma Yes AGI

Oregon Yes FTI

Pennsylvania Yes None

Rhode Island Yes State tax calculated as a

percentage of federal

liability

South Carolina Yes Based on FTI

South Dakota No Not applicable

Tennessee Yes Only certain interest and

dividends are taxed

Texas No Not applicable

Utah Yes FTI

Vermont Yes State tax calculated as a

percentage of federal

liability

Virginia Yes AGI

Washington No Not applicable

West Virginia Yes AGI

Wisconsin Yes AGI

Wyoming No Not applicable

Note: If a state’s income tax conforms to the federal income tax, its “starting point” will be

(1) federal adjusted gross income (AGI); (2) federal taxable income (FTI); or (3) federal tax

liability, with certain modifications to deal with areas where the state may wish to differ from

federal rules.

Source: Significant Features of Fiscal Federalism, Volume I - Budget Processes and Tax Systems

(1994), Advisory Commission on Intergovernmental Relations, June 1994, pages 58-60.

Page 19 GAO/GGD-97-16 FedState Program Improvements Needed
Appendix II 

Type, Description, and Illustrative Examples

of FedState Projects

Type Description Example

Assistance to taxpayers The development of materials and the

provision of customer service by all

functions.

IRS and a state revenue agency opened a

“New Business Assistance Center” to

inform new business owners of their

federal and state tax responsibilities and

how to comply.

Initial processing of returns The receipt and processing of tax returns,

payments, and information documents,

both paper and electronic.

To prevent erroneous Earned Income

Credit refunds, a state obtained a list from

IRS of taxpayers with freezes on their

accounts that they used to determine

whether to also freeze a taxpayer’s

account.

Adjustments to accounts Account adjustments to tax, penalties, and

interest, including amended returns,

taxpayer requests, claims, and

service-initiated changes.

In one state, after IRS audits a taxpayer’s

return, it informs the taxpayer that any

changes to federal tax liability may affect

state tax liability and the taxpayer may be

required to file an amended state tax

return.

Document matching and nonfiler programs The matching of information documents

against tax returns and accounts to identify

nonfilers.

IRS obtained state tax filing records to

identify taxpayers filing a state income tax

return but not a federal income tax return.

Examinations and determinations The selection and examination of income,

excise, employment, employee

plans/exempt organizations (EP/EO), and

estate and gift returns to determine tax

liability (including appellate review). Also

includes EP/EO determinations.

IRS and a state conducted a joint sweep of

auto dealerships to determine whether

they were filing IRS Form 8300s and

reporting state sales tax for cash sales

over $10,000.

Collections Includes all efforts to secure payment of

tax liabilities.

In some states, if a taxpayer owes both the

IRS and state revenue agency, the

taxpayer can go to either IRS or the state

revenue agency and set up an installment

agreement to resolve both accounts.

Investigations Encompasses all civil and criminal

investigative activities.

Two IRS districts and a state department of

revenue have a project to identify and

conduct joint investigations of individuals

who are filing fraudulent tax returns

electronically.

Information systems The development and maintenance of

information systems, including

telecommunications, systems security and

privacy, and systems standards.

A state department of revenue provides

one IRS district with all information the

state receives on fuel sales, purchases,

licenses, and distributors’ reports. Using

this information, the district created an

automated database to promote and

monitor compliance in the motor fuel

industry.

Resources Financial, human resource, and asset

management.

In several states, IRS and the state

revenue office share training resources.

For example, an IRS district trained state

revenue employees on federal corporate

tax laws.

(Table notes on next page)

Page 20 GAO/GGD-97-16 FedState Program Improvements Needed
Appendix II 

Type, Description, and Illustrative Examples

of FedState Projects

Source: IRS FedState Cooperative Ventures Catalog, 1994; and information gathered in GAO

visits to IRS offices between January 1995 and April 1996.

Page 21 GAO/GGD-97-16 FedState Program Improvements Needed
Appendix III 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

Harriet C. Ganson, Assistant Director

 Tax Policy and Administration Issues, (202) 512-9045

Anthony Assia, Assignment Manager

Kelsey M. Bright, Senior Evaluator

Rodney F. Hobbs, Senior Evaluator

Atlanta Field Office Ronald W. Jones, Evaluator-in-Charge

Troy D. Thompson, Evaluator

(268668) Page 22 GAO/GGD-97-16 FedState Program Improvements Needed
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 6015

Gaithersburg, MD 20884-6015

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100