# Recent Reports

Reports News from the GAO

- IRS Direct File: Actions Needed during Pilot to Improve Information on Costs and Benefits What GAO FoundThe Internal Revenue Service (IRS) reported to Congress in May 2023 that it estimated the annual costs of a Direct File tax system could range from $64 million to $249 million depending on the number of taxpayers served and the complexity of tax situations supported. IRS also described assumptions used to estimate costs—a best practice for cost estimation. For example, IRS noted that it assumed a Direct File system would start with a limited tax scope. IRS also included elements of a sensitivity analysis, another best practice for cost estimation, to examine how changes in assumptions may affect cost estimates. IRS described how costs were expected to change depending on the number of taxpayers served and the complexity of tax situations supported.However, IRS's cost estimates did not address other recommended best practices, such as ensuring all costs were included and documented. GAO and the Treasury Inspector General for Tax Administration found that IRS had no documentation to support the underlying data, analysis, or assumptions used for Direct File cost estimates. Further, IRS officials told GAO that the cost estimates did not include start-up costs, such as technology for a novel system, which could be substantial. A best practice for cost estimation is to include development costs as part of a complete cost estimate. Without a comprehensive accounting of costs, IRS's estimates could understate the full amount of resources required to develop and maintain a permanent Direct File program.A Direct File pilot provides opportunities for IRS to improve its cost estimates. IRS officials stated that they will update the cost estimates after the pilot. However, GAO found insufficient documentation to provide reasonable assurance that the pilot will capture the necessary data to inform more complete cost estimates. IRS officials reported that their current focus is to evaluate critical operational aspects of the pilot. However, IRS officials risk missing time-sensitive opportunities to inform cost estimates in such categories as customer service costs, potential costs of integrating a federal Direct File system with additional state-level direct file systems, and incremental costs of expanding the system's capabilities to assist taxpayers with additional tax situations. Complete cost information informs decisions about program design tradeoffs such as what additional tax situations to support.The Direct File pilot also provides opportunities for IRS to estimate potential benefits for taxpayers and for improving tax administration. IRS estimates that the Direct File pilot for the 2024 tax filing season will save taxpayers $21 million in compliance costs. In addition, IRS identified other potential benefits of Direct File, such as making it easier for eligible taxpayers to claim credits and deductions, reducing the volume of paper returns, and reducing errors. However, IRS evaluation documents did not consistently identify relevant metrics for measuring these potential benefits.IRS officials told GAO in February 2024 that senior leadership has not decided on the future of the pilot beyond the 2024 tax filing season. IRS officials reported that the time required to continue Direct File would depend on several factors, such as the size of the team working on the program. They noted that hiring new employees to replace outgoing employees is a lengthy process. Thus, IRS officials will have a short amount of time to analyze cost and benefit information before making decisions about the pilot for the 2025 tax filing season.Why GAO Did This StudyIRS is piloting an online tax filing system to allow certain taxpayers to prepare and file their tax returns on an IRS website for free using a question-and-answer format during the 2024 tax filing season. Once mature, a government-run tax filing system could save taxpayers time and money, make it easier to claim tax benefits, and provide several benefits to IRS. Questions have been raised about how much funding will be required to support such a system, including providing a sufficient level of customer service.The Inflation Reduction Act of 2022 appropriated funds for IRS to study the cost of developing and running a free Direct File tax return system. IRS submitted its report to Congress in May 2023. The act also includes a provision for GAO to oversee the distribution and use of such funds. For this report, GAO evaluated IRS's estimates of the costs and benefits of Direct File and opportunities to use the pilot to collect data to improve those estimates to inform future decisions. GAO compared IRS's initial cost and benefit estimates against best practices for cost estimation and an IRS strategic goal of ensuring a Direct File system is cost effective.
- Information Technology: IRS Needs to Complete Planning and Improve Reporting for Its Modernization Programs What GAO FoundIn April 2023, the Internal Revenue Service (IRS) issued its agency-wide strategic operating plan outlining its vision to use billions of dollars contained in the Inflation Reduction Act of 2022 appropriation to transform the administration of the tax system and services provided to taxpayers. The plan identified five objectives, including a technology objective underpinning the other four.Figure: Inflation Reduction Act Strategic Operating Plan Transformation ObjectivesThe IRS plan, among other things, states that it will use the technology objective to retire and replace legacy systems and update programming languages, give taxpayers tools to access their data and use online services, and ensure continued security and privacy of taxpayer data. IRS identified eight initiatives and 38 key projects for the technology objective but noted the list of projects was not comprehensive. This is consistent with the Treasury Inspector General for Tax Administration 2023 report stating that the technology objective had a total of 142 projects. These 142 represent about 30 percent of the 475 projects for all five objectives.Projects under the technology objective include ongoing modernization programs that have been modified to account for the new appropriations. However, plans showing changes to the scope of future work, milestones, and efforts to retire legacy systems have not yet been updated. IRS officials stated that updating these plans is contingent on completing a roadmap to implement the strategic plan. These officials added that the first version of the roadmap was completed in December 2023. However, this roadmap did not include the technology objective. They said that this objective would be included in version two of the roadmap which they expected would be completed very soon. Completing the roadmap and then updating ongoing IT modernization plans to reflect revisions driven by the strategic plan are essential to the transformation's success.Regarding cost and schedule performance of IT modernization programs, IRS reported meeting most of its quarterly targets for fiscal years 2022 and 2023. These reports, however, could be improved by including programs' historical cost and schedule goals and how quarterly performance compares to overall program goals. For example, GAO previously reported that a key IT investment was within schedule estimates for 2019 and 2020 but that IRS had changed its overall program plans several times. These changes led to a 9-year milestone delay--from 2014 to 2023. However, the quarterly reports did not show this lengthy delay because they do not include programs' historical cost and schedule goals.Why GAO Did This StudyIRS relies extensively on IT to annually collect trillions of dollars in taxes, distribute hundreds of billions of dollars in refunds, and carry out its mission of providing service to America's taxpayers in meeting their tax obligations. In August 2022, Congress appropriated tens of billions to IRS through fiscal year 2031 to bolster taxpayer services and enforcement of the tax code, and modernize IT, among other things.The Joint Explanatory Statements accompanying the Financial Services and General Government Appropriations Bills for 2022 and 2023 include provisions for GAO to review the status of IRS's IT investments. This report, among other things, summarizes the technology objective of IRS's strategic plan, determines the extent to which the agency has updated plans for its IT modernization programs, and assesses IRS progress made on its modernization programs in fiscal years 2022 and 2023.GAO reviewed IRS's strategic operating plan and associated program documentation. In addition, GAO assessed IRS's progress on its reported modernization program cost and schedule performance for fiscal years 2022 and 2023. GAO also interviewed cognizant IRS officials.
- IRS Reform: Following Leading Practices and Improving Cost Estimation Policies Could Benefit Agency Efforts What GAO FoundAfter years of significant declines in Internal Revenue Service (IRS) funding, COVID-19 relief funding in fiscal years (FY) 2020 and 2021 and the Inflation Reduction Act (IRA) of 2022 reversed this trend. Specifically, annual appropriations, adjusted for inflation, declined about 15 percent from $15.6 billion in FY 2012 to $13.2 billion in 2019. Supplemental funding for COVID-19 relief—appropriated in FYs 2020 and 2021, with portions available through FY 2023—was about $3.1 billion. IRS also experienced a 12 percent decline in staff between FY 2012 and 2022 with attrition outpacing new hires. IRS's hiring of enforcement staff has been a particular challenge during this period.IRA provided tens of billions in funding for IRS through FY 2031. In April 2023, IRS released its IRA Strategic Operating Plan (SOP), which describes a high-level vision and leadership structure for IRA implementation. It also articulates five transformation objectives with specific initiatives and projects.Figure: Internal Revenue Service's Inflation Reduction Act Transformation ObjectivesIn prior work, GAO identified leading practices for agency reforms, such as those that IRS is undertaking. IRS officials indicated they have, or plan to, implement the practices but did not provide supporting evidence. These practices can help IRS operationalize the vison outlined in the SOP and achieve its stated objectives. For example, one of the practices focuses on establishing outcomes and performance measures.To estimate costs in its SOP and spend plans, IRS used different processes for non-IT projects, which consist primarily of labor, and IT projects. IRS does not have a comprehensive policy for non-IT cost estimation. Instead, for the SOP and spend plans, it relied on processes and tools used for annual budget estimates and an estimation template for projects. IRS used existing policies for estimating IT initiatives in the SOP. These policies met or substantially met, four of the 12 steps outlined in GAO's cost estimation best practices. For example, these policies met Step 1 by requiring that estimates define a purpose. However, these IT cost estimation policies partially or minimally met the other eight steps, for example the policies did not require sensitivity analysis. The policies are also not included in the Internal Revenue Manual, IRS's official guidance compendium. Aligning these policies with best practices can help ensure that cost estimates are reliable. Given the size of the IRA investment in IRS and the importance of an effective and efficient tax system, reliable estimates are important to the success of IRS's reform efforts.Why GAO Did This StudyThe IRA included funding for IRS to bolster taxpayer services and enforcement of the tax code, among other purposes. Enforcement of tax laws has remained on GAO's High-Risk List since 1990.The IRA also includes a provision for GAO to oversee the distribution and use of IRA funds. In this report GAO (1) analyzes IRS's resource levels over the past 10 years; (2) describes IRS's plans for using IRA appropriations; (3) determines whether IRS had developed plans to apply agency reform practices; and (4) assesses the extent to which IRS policies for estimating the costs of IRA-funded projects and initiatives align with best practices in GAO's Cost Guide.GAO reviewed IRS budget data from FYs 2012 through 2023 and staffing data through FY2022. GAO also reviewed IRS's SOP and GAO's prior work on practices for agency reforms. GAO compared IRS cost estimation policies with the 12 steps in GAO's Cost Guide. GAO also interviewed IRS officials about budget data, the SOP and other plans, and cost estimation.
- Tax Compliance: Opportunities Exist to Improve IRS High-Income/High-Wealth Audits What GAO FoundGAO analyzed the results of Internal Revenue Service (IRS) audits of individual returns with $500,000 or more in total positive income (TPI)—all positive income amounts on the tax return—closed in fiscal years 2012 to 2022. GAO found that, as income increased, IRS recommended more taxes per audit, on average, but generally closed fewer audits.Average Additional Tax Recommended per Audit, Fiscal Years 2012 to 2022In 2020, the Department of the Treasury directed IRS to audit at least 8 percent of returns filed each year by individuals with $10 million or more in income. In response, IRS established two initiatives to increase the audit rate of returns with $10 million or more TPI. GAO found that IRS is on track to meet the 8 percent audit rate goal for tax years 2018 to 2020. However, GAO's analysis of preliminary results (2 fiscal years) found that the subset of audits under these initiatives recommended less additional tax per audit, in contrast to other audits of taxpayers of similar income. IRS officials attributed the initiatives' preliminary results to auditors gaining experience with these audits, as well as closing simpler audits earlier and said that results may change over time.IRS has taken steps to improve high-income/high-wealth auditing. However, GAO identified additional areas for improvement. For example:Assessing data sufficiency. IRS has taken steps to improve its research of high income/high wealth taxpayers and their returns but could not demonstrate that its research is sufficient to understand the complexity and compliance of such returns. For example, IRS now measures compliance for three new high-income/high-wealth categories—$1 million to $5 million, $5 million to $10 million, and $10 million and above—rather than one combined income level of $1 million or more. However, according to IRS and other researchers, the audits that generate these data do not effectively identify all types of high-income/high-wealth tax evasion. IRS has not yet determined how to address these limitations.Evaluating selection models. IRS relies on several computer models to select high-income/high-wealth returns to audit. IRS officials said they are in varying stages of developing, updating, and evaluating these models. However, IRS could not provide documented plans for evaluating these models. Until these evaluations are completed, IRS may be unnecessarily burdening compliant taxpayers and missing opportunities to address noncompliance.Assessing hiring and training needs. IRS officials said that between 2010 and 2023, one IRS division lost more than half of its primary high-income/high-wealth audit workforce. IRS plans to hire and train staff for various auditing positions. However, it has not used a data-driven approach to assess what staffing and skills gaps may exist specifically for high-income/high-wealth audits or developed strategies for filling any gaps.Establishing centralized management. Multiple IRS divisions collaborate on high-income/high-wealth audit efforts. However, IRS divides management responsibilities for these audits across two IRS divisions. Without centralized management for these audits, IRS may be less able to understand and improve audit results.IRS has acknowledged the need to enhance its high-income/high-wealth audit efforts. Additional focus in the above areas could help IRS better understand the types and prevalence of noncompliance on high-income/high-wealth returns, maintain accountability for achieving objectives, and further its mission to fairly enforce the tax law.Why GAO Did This StudyIRS audits tax returns to ensure that taxpayers are properly reporting their taxes. In recent years, IRS has audited a decreasing proportion of individual tax returns. GAO was asked to review IRS's audits of high-income/high-wealth individuals. This report examines, among other objectives, the results of these audits and IRS's efforts to audit more high-income/high-wealth individuals.GAO analyzed IRS data on individual audits closed in fiscal years 2012 to 2022, the most recent complete year available at the time of its analysis. For the purposes of this report, GAO analyzed high-income/high-wealth taxpayer data at two different TPI thresholds—$500,000 or more and $10 million or more—and across four different TPI categories. GAO also reviewed IRS documents related to high-income/high-wealth audit efforts and compared IRS's efforts to key practices. GAO held 10 discussion groups with IRS staff who conduct or manage high-income/high-wealth audits and interviewed IRS officials.
- Private Debt Collection Program: IRS Could Improve Results and Better Promote Equitable Outcomes for Taxpayers What GAO FoundThe Internal Revenue Service (IRS) assigns taxpayers with certain inactive tax debts to private collection agencies—rather than IRS's collection function—under its Private Debt Collection (PDC) program. The majority of individual and business taxpayers IRS assigned to the PDC program owed $5,000 or less and did not file income tax returns. Of individual taxpayers who did file, generally more than half filed as single, had no dependents, or reported an income of $50,000 or less.IRS allocates a portion of the payments recovered under the PDC program to its Special Compliance Personnel Program Fund. It uses the fund to hire IRS personnel to work other, non-PDC collection cases. The fund balance grew to over $160 million in fiscal year 2022. IRS has not established clear goals for managing this fund, which could help it optimize the fund's performance.IRS's Special Compliance Personnel Program Fund Balance Growth and HiresNote: Fund data for 2023 were not publicly available as of January 2024.Department of the Treasury and IRS have established policies that call for IRS to evaluate enforcement equity, but IRS has not yet established measurable standards related to the PDC program, such as for comparing rates that different demographic groups are assigned to the program. Doing so would better position IRS to determine whether taxpayers with debt get equitable services, information, and opportunities to meet their tax obligations.Certain taxpayers are legally excluded from the program, including more than 1 million taxpayers with limited financial means. Excluded taxpayers receive one mailed notice per year with mostly boilerplate language about unpaid taxes. Without tailored information, these taxpayers may not be aware of their cases' statuses, the consequences of not resolving their debts, and the best options to resolve their debts. In addition, IRS has not yet addressed two GAO recommendations from 2019, which if implemented, could improve PDC program efficiency and enhance revenue collection.Why GAO Did This StudyIRS attempts to collect tax debts to help reduce the tax gap and promote voluntary compliance. A 2015 law establishing the PDC program requires IRS to contract with private collection agencies for certain tax debts, including those IRS determined it lacked resources to pursue.GAO was asked to review the PDC program. This report (1) identifies characteristics of taxpayers in the program, and (2) assesses the extent to which IRS is effectively managing the program and promoting equitable outcomes among taxpayers.GAO used IRS data to identify characteristics of taxpayers assigned to the PDC program from calendar years 2017 through 2023. GAO reviewed documentation and interviewed IRS officials about IRS's PDC program management and efforts to promote equitable outcomes.
- 2023 Tax Filing: IRS Improved Customer Service, but Could Further Improve Processing and Evaluate Expedited Hiring What GAO FoundThe Internal Revenue Service (IRS) made progress in resolving prior year challenges with processing returns during the 2023 tax filing season. By April 22, 2023, IRS had processed all prior year returns and had a backlog of 6.1 million current year returns, 10.3 million fewer than at the same point in 2022. IRS also generally reduced the average number of days to process paper returns, which vary by type. However, GAO found that IRS missed its processing time goals for some returns. In addition, some IRS monitoring reports contained data errors because IRS lacked a designated official to ensure accuracy of the reports. Furthermore, although IRS introduced efforts to improve processing, the rate of errors staff made when processing returns continued to gradually increase.Tax Documents in the IRS Kansas City, MO Processing Center, May 2023IRS generally improved its customer service to taxpayers, especially telephone service, but continued to struggle in providing correspondence services. IRS customer service representatives answered 7.7 million calls during the 2023 filing season—a 65 percent increase compared to 2022—and the average time to answer a call improved from 28 to 3 minutes. However, IRS responses to taxpayer inquiries via mail continue to be delayed, with 61 percent of inquiries considered late as of the end of the filing season. Addressing GAO's 2022 recommendation to estimate time frames for resolving these delays will better set expectations for, and potentially reduce repeat inquiries from, taxpayers.During fiscal years 2022 and 2023, IRS hired about 26,000 employees for its filing season workforce. IRS used funding from COVID-19 supplemental appropriations and the Inflation Reduction Act, along with an expedited hiring authority, to fill many of these positions. IRS has requested continued use of this authority but has not evaluated its recent expanded use. Doing so could help IRS inform efforts aimed at improving its usage of this flexibility.Why GAO Did This StudyDuring the annual tax filing season, IRS processes more than 160 million individual and business tax returns. IRS also provides telephone, correspondence, online, and in-person services to tens of millions of taxpayers. Partly as a result of the COVID-19 pandemic, IRS has faced challenges in recent years processing tax returns and refunds, meeting taxpayer service demands, and hiring employees. The Inflation Reduction Act of 2022 provided IRS tens of billions of dollars in funding to improve these and other areas.GAO was asked to review IRS's performance during the 2023 filing season. This report assesses IRS's performance on (1) processing tax returns, (2) providing customer service to taxpayers, and (3) hiring staff to support filing season operations. GAO analyzed IRS documents and filing season performance data related to tax return processing, customer service, and hiring. GAO also visited two IRS processing facilities and held discussion groups with IRS staff.
- Low-Income Housing Tax Credit: Opportunities to Improve Oversight The Big PictureThe U.S. has a widespread shortage of affordable housing. The Low-Income Housing Tax Credit (LIHTC) is the largest source of federal assistance for developing affordable rental housing. It provides tax credits typically through state and local housing finance agencies to developers and private investors to develop affordable housing.Overview of Low-Income Housing Tax Credit Process The Internal Revenue Service (IRS) administers the tax credit at the federal level and housing finance agencies administer and oversee the program in states and localities. These agencies develop Qualified Allocation Plans, which identify priority housing needs and contain selection criteria for awarding the tax credits. The agencies evaluate proposed projects against their plans and award tax credits to developers. Agencies can use the plan's selection criteria to influence the types of projects developers propose and build.Projects awarded tax credits must remain affordable to qualifying low-income households for at least 30 years. Developers often try to attract investors willing to contribute financing in return for an ownership interest in a project (a process known as buying tax credits). A  syndicator  can be used to facilitate this process. Projects often require additional financing to cover development costs. Gaps in funding may be filled by private sources or federal, state, or local affordable housing programs such as the  Housing Trust Fund  .What GAO’s Work ShowsOur  2018  report identified areas for improving the oversight of the tax credit, including development costs. We also issued reports in  2015  and  2016  on the tax credit's administration and oversight.Despite LIHTC's size and complexity, federal oversight of the tax credit has been minimal. This is in part because IRS is the only federal agency that administers the program. According to IRS, the agency does not have the authority or resources to collect and report detailed information on the tax credit. The Department of Housing and Urban Development (HUD) collects some data on the program, but it does not have the authority to collect cost data.In 2018, we determined the per-unit cost of 1,849 LIHTC projects in selected locations. Project characteristics such as construction type (new construction or rehabilitation), number of units, target income level (low-income or mixed), location (urban, suburban, or rural), and local housing market conditions explained some cost differences across projects. Due to differences in these characteristics, we found that costs varied widely among the 12 housing finance agencies in our study.Adjusted Development Costs for Rental Housing That Received Low-Income Housing Tax Credits, Selected States, 2011–2015 Note: We adjusted project costs to 2023 dollars using the Calendar Year Chain-Weighted Gross Domestic Product Price Index.Our analysis was limited to selected variables we were able to consistently collect and that were similarly defined across the selected housing finance agencies. Housing finance agencies have flexibility in what cost-related data to collect, how to maintain these data, and how to define variables for evaluating the program. Inconsistency in how agencies collect cost-related data results in data limitations and constrains oversight and analysis of the program's efficiency and effectiveness.➢ We recommended that Congress consider designating an agency to regularly collect and maintain specified cost-related data from housing finance agencies and periodically assess and report on the tax credit's development costs.➢ We also recommended that IRS encourage housing finance agencies and other tax credit stakeholders to collaborate on developing standardized cost data.Our work also analyzed how housing finance agencies use their Qualified Allocation Plans to select projects to develop. Section 42 of the Internal Revenue Code requires that plans give preference to certain projects, including those that serve the lowest income tenants. It also specifies some selection criteria, such as project location and tenant populations with special housing needs. Housing finance agencies have flexibility to create their own methods for scoring developers' applications and can include selection criteria appropriate to local conditions. For example, agencies commonly included proximity to transit and energy efficiency as criteria. Other criteria included qualifications of the project development team, cost-effectiveness, and leveraging other federal or state programs.Challenges and OpportunitiesLIHTC is a key federal program for addressing the shortage of affordable housing, but it is difficult to compare cost drivers and trends across locations because federal oversight of cost data is limited and data collection is inconsistent. Designating an agency to collect and report on project development costs could more efficiently address existing oversight challenges. Further, greater standardization of cost data would allow better analysis of cost drivers and cost-management practices, which could help increase the program's efficiency.More from GAO's PortfolioLow-Income Housing Tax Credit:  GAO-18-637  ,  GAO-16-360  ,  GAO-15-330  ,  GAO-17-285r  ,  GAO-13-66 Affordable Housing:  GAO-23-105647  ,  GAO-23-106628  ,  GAO-23-105370 Manufactured Housing:  GAO-23-105615 HUD Rental Assistance:  GAO-23-106339  ,  GAO-23-105083 For more information, contact&nbsp;Jill Naamane at (202) 512-8678 or NaamaneJ@gao.gov.
- Economic Downturns: Effects of Automatic Spending Programs and Taxes What GAO FoundStudies GAO reviewed showed that automatic stabilizers—mechanisms that alter tax and spending levels in response to changes in economic conditions without direct intervention by policymakers—reduced the detrimental effects of recent economic downturns. Automatic stabilizers include taxes—such as the individual income tax, where taxpayers owe less as their income declines—as well as benefit programs—such as unemployment insurance, where more people become eligible during economic downturns. These automatic stabilizers prevented the economy from getting worse by generating additional economic activity.Studies showed that during economic downturns, programs with an automatic stabilizer component had various positive effects on the wellbeing of individuals and families, such as alleviating poverty and supporting positive health outcomes such as improved nutrition and healthy birthweights. However, it is difficult to isolate the effects of automatic stabilizers, because studies frequently did not separately analyze the automatic portions of these programs and discretionary changes made by policymakers to address economic downturns.Automatic stabilizers contributed to federal deficits in the wake of recent economic downturns, according to Congressional Budget Office (CBO) analysis. However, automatic stabilizers are not the key driver of debt over the long-term. Rather, the growth in debt over the long-term results from borrowing to finance increasingly large annual budget deficits, which occur because spending is increasing more than revenue. Over the long term, this spending is driven by increases in Medicare, other federal health care, and Social Security program spending along with increases in interest costs to service the growing debt. We have previously reported that the federal government faces an unsustainable long-term fiscal future. Debt held by the public is expected to exceed its historical high of 106 percent of gross domestic product within the next 10 years.Why GAO Did This StudyDuring economic downturns, the federal government can use tax and spending policies to support economic growth and limit the detrimental effects on individuals and families through the use of automatic stabilizers. For example, in an economic downturn—when incomes and the employment level fall—tax liabilities may decrease, and more people may become eligible for certain government benefits, such as unemployment insurance and food assistance. Conversely—when incomes and the employment level rise—tax liabilities may rise, and fewer people may be eligible for government benefits.GAO was asked to review several issues related to automatic stabilizers. This report examines the effects of automatic stabilizers on the economy, the wellbeing of individuals and families, and the federal government's fiscal condition.GAO conducted an extensive review of academic and government literature; reviewed data and analysis from CBO, National Bureau of Economic Research, Bureau of Economic Analysis, and the Bureau of Labor Statistics; and spoke with CBO and Federal Reserve staff.For more information, contact Jeff Arkin at (202) 512-6806 or arkinj@gao.gov.
- Sole Proprietor Compliance: Treasury and IRS Have Opportunities to Reduce the Tax Gap What GAO FoundThe Department of the Treasury and the Internal Revenue Service (IRS) have not developed an overall tax gap strategy that includes specific approaches to address sole proprietor noncompliance, as GAO recommended in July 2007. Sole proprietor underreporting is one of the largest segments of the tax gap (the difference between federal income taxes owed and the amount paid). Sole proprietors are individuals who own an unincorporated business by themselves.Examples of Sole Proprietor IndustriesGAO identifies 17 options to improve sole proprietor tax compliance. The options involve tradeoffs and would best be considered as part of an overall tax gap strategy. However, Treasury officials said they have no plans to develop a strategy. Also, IRS has not taken steps to allow for voluntary withholding on payments to independent contractors, including sole proprietors, as GAO recommended in May 2020. Without voluntary withholding, these workers may find making quarterly tax payments burdensome, which may reduce compliance.IRS's strategic operating plan outlines its priorities for the coming years, but neither this plan nor other IRS documents provide an approach specifically to improve sole proprietor compliance. While IRS has some methods to assess noncompliance risk, they are not complete or specific to sole proprietors. A risk assessment would allow IRS to make strategic decisions related to enforcement and outreach priorities to help it reduce sole proprietors' share of the tax gap.IRS has a communications plan for platform workers, who are one type of sole proprietor. However, it does not have a coordinated communications plan focused on informing the wide variety of sole proprietors about their tax and reporting responsibilities. Such a plan would help sole proprietors meet their tax obligations and navigate tax law changes. According to stakeholders GAO spoke with, some sole proprietors are unaware of their tax obligations on income earned through online platforms. Additionally, stakeholders told GAO that they found the existing guidance overly technical and difficult to understand.Why GAO Did This StudyIRS attributes approximately $80 billion in unpaid taxes to sole proprietors underreporting income each year. This comprises 16 percent of the estimated annual $496 billion tax gap. In tax year 2019, roughly 27.8 million sole proprietors filed tax returns, which accounted for about 18 percent of all individual taxpayers.GAO was asked to review the tax compliance of sole proprietors. This report (1) reviews options for IRS to close the tax gap by increasing sole proprietor compliance, (2) evaluates IRS efforts to assess the risk of sole proprietor noncompliance, and (3) assesses IRS efforts to conduct outreach to improve voluntary compliance among sole proprietors.GAO reviewed literature and conducted a nongeneralizable survey of 25 experts and stakeholders on options to improve sole proprietor compliance. GAO also analyzed IRS tax gap and statistical data, reviewed agency documentation, and interviewed agency officials.
- Tax Enforcement: IRS Can Improve Use of Information Returns to Enhance Compliance The billions of W-2s and other information returns that IRS receives are key to ensuring that taxpayers correctly pay their taxes. In prior reports, we’ve recommended ways for IRS to improve how it uses these returns to ease the burden on taxpayers and ensure they pay their taxes.The Big PictureThe Internal Revenue Service (IRS) received more than 5 billion W-2s and other “information returns” in 2022. These forms are a vital component of the U.S. tax system.Information returns are filed by third parties (e.g., employers, businesses, banks). Examples include Form W-2 for employee wages, 1099-NEC for nonemployee compensation (such as gig economy work), and 1099-K for payment card and third-party settlement organizations—intermediaries between buyers and sellers of goods or services (e.g., Uber, Venmo, and eBay).Volume of Information Returns, 2022 Taxpayers can use information returns to complete their tax returns. IRS uses them to verify self-reported income and tax on returns filed by taxpayers.Overview of IRS's Process for Matching Information Returns Not all income is reported on information returns. When there is little or no third-party information reporting, taxpayers report their incomes incorrectly about 50 percent of the time. For example, there are gaps in information reporting on rental real estate income. We have found that half of taxpayers with such income did not accurately report their income and expenses on their tax returns.What GAO’s Work ShowsIRS Lacks Centralized Leadership to Make Strategic Decisions about Information Returns IRS compliance programs use information returns to help identify potential fraud and noncompliance, and taxpayers who fail to file tax returns but should have.Examples of IRS Compliance Programs that Use Information Returns and Associated Tax Assessments, Fiscal Year 2022 			Program									Cases closed									Dollar value								Automated Underreporter: Identify potential underreported income or unwarranted deductions									1,582,131									$8.7 billion								Automated Substitute for Return: Estimate tax liability when taxpayers do not file returns									295,577									$2.9 billion					Source: GAO analysis of Internal Revenue Service (IRS) information. | GAO-24-107095However, IRS lacks centralized leadership to make strategic decisions related to the use of information returns across the agency. For example, IRS has not analyzed information returns comprehensively to determine if the returns' characteristics (e.g., deadlines) meet IRS's needs. While information returns support multiple IRS compliance programs, no office is responsible for coordinating these efforts.New Form 1099-K Reporting Threshold May Exacerbate Taxpayer ConfusionThe American Rescue Plan Act of 2021 lowered the reporting threshold for Form 1099-K. Previously, reporting was required if a taxpayer had annual payments of $20,000 and 200 transactions. Beginning in 2023, reporting is required if a taxpayer has total annual payments exceeding $600.Many taxpayers will receive Form 1099-Ks who did not in the past, which may help some taxpayers comply. But, despite IRS communication efforts, it also may exacerbate confusion among some taxpayers, such as gig workers, who may not understand the taxability of their payments and taxes owed. For example, some of these taxpayers may not know how to calculate profit or loss and may not understand the information reported on the form. This puts them at risk of inaccurately reporting their incomes to IRS or not meeting their tax obligations.IRS expects to receive about 44 million Form 1099-Ks in 2024—an increase of about 30 million. However, this estimate may change as IRS receives more information from large filers and states. IRS does not have a plan to analyze these data to inform enforcement and outreach priorities. This limits its understanding of changes in taxpayer burden.Challenges and OpportunitiesIRS's information reporting system is an extensive network with complex requirements that facilitates compliance checks on tax returns. To that end, it is important that IRS balance information collection with reporting burden to effectively enhance compliance and help taxpayers understand their responsibilities.IRS plans to build a unified compliance organization that enhances planning and strategy and has taken steps to improve its use of information returns, including developing a platform that will help IRS modernize the electronic intake and processing of these forms. However, it is important that IRS implement our recommendations to:develop a  collaborative mechanism  to coordinate among the internal information return stakeholders, as well as to improve outreach to external stakeholders;	research and develop potential recommendations to  expand third-party information reporting on sole   proprietor   s   '   income and expenses;	develop a plan to  systematically evaluate information returns  to improve compliance, and reduce fraud and reporting burden;	work to  determine the most appropriate thresholds for payment information reporting  , including Form 1099-K; and	analyze existing and forthcoming 1099-K data  to better understand and gain insights into noncompliance and taxpayer burden to make enforcement and outreach decisions.We also have recommended that Congress consider:requiring all  taxpayers with rental real estate activity   to   be   subject to the same information reporting requirements  as other taxpayers operating a trade or business.For more information, contact James R. McTigue, Jr., at (202) 512-6806 or McTigueJ@gao.gov.
- Financial Audit: IRS's FY 2023 and FY 2022 Financial Statements What GAO FoundIn GAO's opinion, the Internal Revenue Service's (IRS) fiscal years 2023 and 2022 financial statements are fairly presented in all material respects, and although internal controls could be improved, IRS maintained, in all material respects, effective internal control over financial reporting as of September 30, 2023. GAO's tests of IRS's compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements disclosed no instances of reportable noncompliance in fiscal year 2023.Limitations in the systems IRS uses to account for federal taxes receivable and other unpaid assessment balances, as well as other control deficiencies that led to errors in taxpayer accounts, continued to exist during fiscal year 2023.These control deficiencies affect IRS's ability to produce reliable financial statements without using significant compensating procedures. In addition, new and continuing information system control deficiencies in such areas as the use of multifactor authentication, encryption of sensitive data, and management of configuration settings for certain platforms increase the risk of unauthorized access to, modification of, and disclosure of sensitive data and programs, as well as the disruption of critical operations.IRS continues to take steps to address deficiencies in its internal control over financial reporting. However, the remaining deficiencies are significant enough to merit the attention of those charged with governance of IRS and therefore represent continuing significant deficiencies in internal control over financial reporting related to (1) unpaid assessments and (2) information system controls. Continued management attention is essential to fully addressing these significant deficiencies. In commenting on a draft of this report, IRS noted its intention to continue working to improve its internal control.Why GAO Did This StudyIn connection with fulfilling GAO's requirement to audit the consolidated financial statements of the U.S. government, and consistent with its authority to audit statements and schedules prepared by executive agency components, GAO has audited IRS's financial statements because of the significance of IRS's tax collections to the consolidated financial statements of the U.S. government. GAO annually audits IRS's financial statements to determine whether (1) the financial statements are fairly presented and (2) IRS management maintained effective internal control over financial reporting. GAO also tests IRS's compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements.IRS's tax collection activities are significant to overall federal receipts, and the effectiveness of its financial management is of substantial interest to Congress and the nation's taxpayers.For more information, contact Dawn B. Simpson at (202) 512-3406 or simpsondb@gao.gov.
- Tax Administration: IRS Has Opportunities to Address Longstanding Challenges What GAO FoundThe Internal Revenue Service (IRS) has struggled with longstanding challenges in providing taxpayer service, processing returns, safeguarding sensitive information, and replacing legacy IT systems. In 2022, IRS was appropriated tens of billions in funding over 10 years to modernize its operations and improve service, among other purposes. IRS developed a strategic operating plan outlining steps it will take to make these improvements. GAO has previously identified several areas to improve IRS operations that align with IRS's strategic operating plan.Service and processing Communicating time frames for resolving backlogs: In 2022, GAO reported that IRS continue d to struggle meet ing taxpayer service needs, including balancing telephone and correspondence services. For example, IRS was late responding to taxpayer correspondence more than half the time.	Digitizing information and improving electronic filing: GAO also reported that in 2021 and 2022 IRS's reliance on manual processing significantly affected its performance in processing tax returns and delayed refunds.	Improving workforce planning: As GAO reported in 2022, IRS has challenges hiring staff to process tax returns. While IRS used an expedited hiring authority to help fill critical filing season positions, it has a high attrition rate.Data safeguards and information technology Increasing contractor oversight: Taxpayers expect IRS to protect their sensitive personal and financial information. While IRS has safeguards to protect taxpayer information, in 2023, GAO identified several weaknesses. For example, contractors assigned training courses related to protecting taxpayer information had low training completion rates for fiscal year 2021.	Addressing control weaknesses: In 2023, GAO identified five new deficiencies in IRS's internal control over financial reporting related to information system controls, tax refunds, and safeguarding assets. GAO also determined that 32 prior related recommendations remained open as of the end of fiscal year 2022.	Updating time frames for disposing of legacy systems: In 2023, GAO found that IRS suspended two initiatives associated with replacing the 60-year-old Individual Master File (IMF). IMF is the authoritative data source for individual tax account data. However, IMF uses software written in an archaic language and requires specialized skills. IRS has been working to replace IMF for well over a decade. According to IRS, as of April 2023, the two suspended initiatives were still inactive. However, IRS's strategic operating plan identified a new retirement date of fiscal year 2028 for IMF.GAO previously made recommendations in these areas.Why GAO Did This StudyIRS's mission is to provide taxpayers with top-quality service by helping them understand and meet their tax responsibilities. To meet its mission, IRS must timely process tax returns and respond to taxpayers. It must also protect sensitive taxpayer and financial information, and modernize information technology.GAO was asked to testify about IRS service and processing, data safeguards, and information technology. Specifically, this testimony summarizes GAO's prior reports on challenges that IRS has faced in carrying out its mission and on opportunities for the agency to improve.To do so, GAO reviewed its issued reports identifying challenges and opportunities to improve IRS service, data safeguards and information system controls, and IT modernization, and incorporated information on the agency's actions in response to related GAO recommendations.
- Security of Taxpayer Information: IRS Needs to Address Critical Safeguard Weaknesses What GAO FoundThe Internal Revenue Service (IRS) has implemented access controls and other safeguards to help mitigate risks to taxpayer information. However, continuing weaknesses pose a risk. Among its safeguards, in July 2022, IRS began requiring certain employees to seek senior executive approvals to gain access to taxpayer information. IRS employees also met the agency-wide 97 percent completion goal for training on protecting taxpayer information. However, IRS did not have a training goal for contractors, who had training completion rates well below employee completion rates—less than 75 percent. For example, 66 percent of the approximately 14,000 contractors assigned the Insider Threat Awareness training completed the course. As a result, IRS contractors are at increased risk of being unprepared to handle taxpayer information.IRS Contractor and Employee Training Completion Rate, Fiscal Year 2021In certain circumstances, IRS faces challenges ensuring taxpayer information it shares—as authorized by law—is properly protected. Federal tax law gives IRS the authority to inspect safeguards for agencies that receive taxpayer information from IRS in certain circumstances. However, in other cases where IRS shares taxpayer information pursuant to different statutory authority, it does not have direct authority to inspect agency safeguards. For these cases, Congress could provide IRS with direct authority to inspect agencies' safeguards, which would give IRS additional assurance that information will be protected sufficiently.IRS policy requires the agency to maintain an inventory of its systems that store taxpayer information and to mitigate weaknesses in systems that lead to a higher risk of unauthorized disclosure of federal tax information or UNAX—the willful unauthorized access, attempted access, or inspection of federal tax information. However, as of December 2022, IRS omitted seven tax processing systems from its inventory. This limits its monitoring of UNAX prevention efforts.GAO found that multiple IRS offices oversee contractors but IRS does not have overall oversight efforts related to IRS contractor UNAX. As a result, IRS has limited insight into contractor UNAX trends and assumes greater risk of missing opportunities to improve the agency's prevention efforts.Weaknesses in IRS's information security controls present risks to taxpayer information. For example, IRS did not assess the risks of its method for transferring taxpayer information to contractors. Until IRS remediates these weaknesses, it will have limited assurance that taxpayer information is protected appropriately.GAO and the Treasury Inspector General for Tax Administration (TIGTA) have previously reported on deficiencies in IRS's safeguards over taxpayer information. They have both made recommendations aimed at improving these safeguards. Since fiscal year 2010, GAO has made 451 recommendations to strengthen IRS safeguards for taxpayer information in areas such as governance for protecting taxpayer information; authentication and access to tax processing systems; and IRS monitoring of programs that process taxpayer information.GAO's recommendations cover the five National Institute of Standards and Technology (NIST) cybersecurity core functions that provide a strategic view of life cycle management of cybersecurity risk. A majority of the recommendations cover the  protect  core function (74 percent)—actions related to developing and implementing appropriate safeguards. The remaining recommendations are in the other core functions—  identify,  detect,  recover, and  respond.IRS had implemented 83 percent of GAO recommendations as of March 2023.Status of GAO Recommendations Related to Protecting Taxpayer Information and NIST Cybersecurity Core Function, Fiscal Years 2010–March 2023Since fiscal year 2019, TIGTA has made 246 recommendations to IRS related to protecting taxpayer information. As of April 2023, according to IRS, it has taken steps to address 202 of them—including implementing controls to manage IT supply chain risks—reducing the risk for disruptions to IRS's operations.While IRS has taken substantial action to implement GAO recommendations, IRS did not always do so timely. For example, five recommendations have been open for more than 7 years. Additionally, IRS has yet to implement two recommendations GAO identified as high priority—updating a system modernization plan to more fully assess risk and developing a guidance structure to better protect taxpayer information while at third-party providers. Addressing the remaining GAO recommendations could help IRS better manage system security risks, implement safeguards to ensure protected service delivery, and identify cybersecurity events and incidents.Why GAO Did This StudyThe U.S. tax system is based largely on voluntary compliance. One factor that may influence taxpayers' willingness to voluntarily comply is the confidence that IRS is protecting their personal and financial information.GAO was asked to review IRS's safeguards for taxpayer information. This report evaluates the extent to which IRS is following its tax safeguards for protecting taxpayer information.To address this objective, GAO analyzed mandatory training and UNAX data for IRS employees and contractors, reviewed IRS and TIGTA documentation, and interviewed IRS and TIGTA officials at selected offices. In addition, GAO reviewed federal law authorizing other federal agencies to receive taxpayer information.GAO also identified and tested selected management, operational, and technical controls on selected IRS systems that store or process taxpayer information, and observed controls in operation. GAO also has ongoing work assessing IRS's efforts to protect the confidentiality of taxpayer information, including its implementation of technical controls and breach response processes. GAO will publish this work in a subsequent report with limited distribution.Further, GAO reviewed previously issued reports and recommendations, including those issued by TIGTA. GAO categorized them according to the five core security functions described in the NIST cybersecurity framework.
- Priority Open Recommendations: Internal Revenue Service What GAO FoundIn June 2022, GAO identified 25 priority recommendations for the Internal Revenue Service (IRS). Since then, IRS has implemented four of those recommendations by, among other things, reporting improper payment estimates for the Premium Tax Credit, and migrating 30 applications onto its new online taxpayer authentication platform. GAO closed one other recommendation for IRS to revise its estimated time frames for resolving the backlog of work from the 2020 tax filing season as not implemented because IRS reported it has cleared this inventory.In July 2023, GAO identified four additional priority recommendations for IRS, bringing the total number to 24. These recommendations involve the following areas:Ensuring cybersecurity	Improving taxpayer services	Reducing tax fraud and improper payments	Enhancing information reporting	Improving audit effectiveness	Enhancing strategic human capital managementIRS's continued attention to these issues could lead to significant improvements in government operations.Why GAO Did This StudyPriority open recommendations are the GAO recommendations that warrant priority attention from heads of key departments or agencies because their implementation could save large amounts of money; improve congressional and/or executive branch decision-making on major issues; eliminate mismanagement, fraud, and abuse; or ensure that programs comply with laws and funds are legally spent, among other benefits. Since 2015 GAO has sent letters to selected agencies to highlight the importance of implementing such recommendations.For more information, contact James R. McTigue, Jr. or Jessica Lucas-Judy at (202) 512-6806 or mctiguej@gao.gov or lucasjudyj@gao.gov.
- Tax Enforcement: IRS Audit Processes Can Be Strengthened to Address a Growing Number of Large, Complex Partnerships What GAO FoundIn tax year 2019, there were 20,052 large partnerships, increasing nearly 600 percent since tax year 2002. Eighty-four percent of large partnerships reported providing finance and insurance services or real estate and rental leasing. Large partnerships can be complex with income or business expenses passing through multiple levels such that a partnership could be a partner in another partnership.The Internal Revenue Service (IRS) audits few large partnerships—54 in tax year 2019—and the audit rate has declined since 2007. More than 80 percent of the audits resulted in no change to the return on average from tax years 2010 to 2018, double the rate of large corporate audits. For those that did change, the average adjustment was negative $264,000. IRS officials attributed the declining audit rate to resource constraints. The Inflation Reduction Act of 2022 (IRA) provided IRS with $45.6 billion for enforcement activities through the end of fiscal year 2031, and in response IRS identified large partnerships as an enforcement priority. About $1.4 billion of this funding was rescinded in 2023 with a White House briefing reporting an agreement to reduce future funding by $20 billion.Audit Rate for Large Partnerships, 2007–2019As part of its audit selection process, IRS uses statistical models to help review partnership returns for potential noncompliance, but the models were developed without using representative samples of returns and with untested assumptions. Additionally, IRS has not developed a plan to incorporate feedback from audit results into the models. Addressing these modeling issues could improve IRS's ability to better identify and audit noncompliant partnerships.IRS planning documents state that it will expand enforcement efforts related to large, complex partnerships using IRA funding. However, IRS has not defined complexity or size in terms specific enough to guide enforcement efforts. IRS also has not developed measures to ensure that additional audits focus on these entities. Developing such a definition and specific outcome measures would help IRS develop plans, track resources used, and assess the results of these new investments in large partnership audits.Why GAO Did This StudyBusiness activity has increasingly shifted toward legal structures known as partnerships and away from C corporations subject to the corporate income tax. A partnership is generally an unincorporated organization with two or more members that conducts a business and divides profits. Partnerships usually do not pay income taxes as entities but pass the net income or losses to partners, such as individuals or corporations, who then report the income and pay any applicable taxes.GAO was asked to examine trends in large partnerships and IRS auditing of them. This report (1) summarizes the number and characteristics of large partnerships; (2) describes the resources used and results of audits of large partnerships; and (3) assesses IRS's efforts to identify potential noncompliance risks in large partnerships. For purposes of this report, large partnerships are defined as having $100 million or more in assets and 100 or more total partners.GAO analyzed IRS data pertaining to business and audit activity for tax years 2002 through 2019, the most recent year for which complete data were available; compared IRS statistical models to relevant statistical modeling standards; interviewed agency officials; and held discussion groups with IRS staff.
- Steel and Aluminum Tariffs: Agencies Should Ensure Section 232 Exclusion Requests Are Needed and Duties Are Paid What GAO FoundImporters can submit exclusion requests to the Department of Commerce's Bureau of Industry and Security (BIS) to seek relief from Section 232 steel and aluminum tariffs. GAO found that importers had used a small proportion of the quantities that BIS had approved (see figure). BIS implemented measures to ensure exclusion requests are needed, but has not evaluated the results. In December 2020, BIS reported that unneeded exclusion requests burdened the approval process, and began requiring requesters to certify that they expect to use the entire quantity if approved. Without evaluating the requirement's results, BIS lacks key information about whether it has helped ensure exclusion requests are needed and has improved the efficiency of the exclusion approval process.Use of Approved Section 232 Exclusion Quantities, March 2018–September 2021Note: This figure presents exclusion use data available as of November 2021.GAO found that BIS and the Department of Homeland Security's Customs and Border Protection (CBP) had inconsistent data for about 5 percent of the nearly 207,000 exclusions approved through September 2021. BIS transfers data about approved exclusions to CBP for use in the Automated Commercial Environment (ACE), the system importers use to bring goods into the U.S. BIS provides CBP partial data about the parameters, which requires CBP to derive additional information, such as the exclusion's validity period, for use in ACE. Without a more consistent data transfer process, CBP faces challenges in administering exclusions as BIS intends, creating a continuing risk of error and invalid use.GAO's analysis shows that importers generally used tariff exclusions consistent with BIS's approved parameters. However, GAO identified an estimated $32 million in unpaid duties resulting from invalid exclusion use as of November 2021. CBP officials said that when they programmed the Section 232 functionality in ACE, they did not have the time or resources to program automatic deactivation once the importer reaches the approved quantity. Instead, CBP has manually deactivated exclusions. However, the lag time between when importers reach approved quantities and CBP's manual deactivation allows importers to overclaim exclusions and not pay duties on the overage. Until CBP implements more effective controls to prevent overclaiming and to recover duties owed, the U.S. government is at risk of losing millions of dollars in revenue.Why GAO Did This StudyIn March 2018, citing national security concerns, the President placed tariffs of 25 percent on some imported steel and 10 percent on some imported aluminum products, under Section 232 of the Trade Expansion Act of 1962. At the same time, Commerce established a process to provide relief, or exclusion, from the tariffs. Requesters apply to BIS for tariff exclusion. If BIS approves, the requester may import specific products without paying those tariffs. BIS transmits data about the specific parameters of the approved exclusions to CBP, which determines if an importer may use an exclusion.  GAO was asked to review how Section 232 exclusions are administered. This report examines (1) BIS's measures to ensure Section 232 exclusion requests are needed, (2) the extent to which BIS and CBP maintain consistent data in order to administer the exclusions, and (3) the extent to which importers invalidly used exclusions. GAO defines invalid use as the claiming of an exclusion in ACE in a way that does not comport with BIS's parameters.GAO analyzed agency data, and reviewed agency documents related to the exclusion approval and import processes. GAO also interviewed BIS and CBP officials and spoke with industry stakeholders.
- Tax Enforcement: IRS Could Better Manage Alternative Dispute Resolution Programs to Maximize Benefits [Reissued with revisions on Jun. 7, 2023] What GAO FoundThe Internal Revenue Service (IRS) offers six alternative dispute resolution (ADR) programs providing mediation to expedite resolution and avoid lengthy traditional appeals and litigation processes. ADR can potentially benefit both IRS and taxpayers by reducing the time and costs to resolve disputes while increasing certainty for taxpayers in meeting their tax obligations.From fiscal year 2013 to 2022, IRS used ADR programs to resolve disputes in less than half of one percent of all cases reviewed by its Independent Office of Appeals, which is responsible for tracking and implementing all IRS ADR programs. During that period, use of ADR fell by 65 percent. Beyond these data on ADR usage, IRS does not have the data necessary to manage the ADR programs, such as data on taxpayer requests to use ADR; IRS' acceptance or rejection of those requests; and the results from using ADR, including rate of resolution, time, and costs. Although IRS does not know definitively why ADR usage has declined, potential reasons include that taxpayers do not perceive the benefits of using ADR, according to IRS officials.Alternative Dispute Resolution (ADR) Cases Closed Annually, Fiscal Years 2013 to 2022IRS is missing opportunities to use several management practices for its ADR programs to help increase taxpayers' willingness to use ADR as well as maximize the programs' benefits. IRS does not have clear and measurable objectives for its ADR programs that contribute to achieving IRS's strategic goals and objectives, such as its ability to resolve disputes over specific tax issues and reduce the investment of time and money to do so. IRS does not analyze data to assess whether ADR is achieving benefits such as resolving disputes over specific tax issues and reducing the investment of time and money to do so. IRS has not regularly monitored the taxpayer experience with ADR to address problems in real-time. Absent this information, IRS cannot assess how to improve taxpayers' willingness to use ADR as well as their experience in resolving tax disputes. In addition, IRS cannot take action on these missed opportunities to maximize ADR benefits because IRS has not established specific responsibilities and related tasks for consistently managing all elements of the ADR programs.Why GAO Did This StudyIRS's ADR programs are intended to resolve disputes over taxes owed and to be paid between IRS enforcement staff and taxpayers more quickly and at lower cost than using the IRS appeals process or litigation. The National Taxpayer Advocate has reported that the use of ADR programs has steadily declined, while resolving disputes through the IRS appeals process is taking longer.GAO was asked to review how IRS manages its ADR programs. This report describes IRS's ADR programs and evaluates ADR data as well as IRS's management of its ADR programs. GAO reviewed IRS ADR procedures, guidance and data; interviewed IRS and other government agency officials; and held focus groups with taxpayer representatives.
- Management Report: Improvements Needed in IRS's Financial Reporting and Information System Controls What GAO FoundDuring its audit of the Internal Revenue Service’s (IRS) fiscal years 2022 and 2021 financial statements, GAO identified five new deficiencies in internal control over financial reporting. Two new deficiencies related to information system controls, specifically in access controls and configuration management, and contributed to GAO’s reported continuing significant deficiency in IRS’s internal control over financial reporting systems. In addition, two deficiencies related to tax refunds and one deficiency related to safeguarding assets. Although these deficiencies are not considered material weaknesses or significant deficiencies, they nevertheless warrant IRS management’s attention. GAO is making three new recommendations in this report to address the control deficiencies related to tax refunds and safeguarding assets. In the LIMITED OFFICIAL USE ONLY report, GAO is making 16 new recommendations to address the control deficiencies related to information systems.In addition, GAO determined that IRS had completed corrective actions on 28 of 60 recommendations from GAO’s prior years’ reports related to internal control over financial reporting that remained open as of September 30, 2021. IRS’s actions addressed five transaction cycle recommendations, 17 information system recommendations, and six safeguarding assets recommendations.This report provides the status of 19 previously reported recommendations that are not sensitive in nature and IRS’s corrective actions as of September 30, 2022. The LIMITED OFFICIAL USE ONLY report contains the status of the 60 previously reported sensitive and nonsensitive recommendations and IRS’s corrective actions as of September 30, 2022.IRS has 51 open GAO recommendations related to internal control over financial reporting to address:seven transaction cycle recommendations (including two that are new),	40 information system recommendations (including 16 that are new), and	four safeguarding assets recommendations (including one that is new).The new and continuing control deficiencies related to information systems and safeguarding assets increase the risk of unauthorized access to, modification of, or disclosure of financial and sensitive taxpayer data and disruption of critical operations. The new and continuing control deficiencies related to transaction cycles increase the risk of misstatements on the financial statements. IRS mitigated the potential effect of these control deficiencies primarily through compensating controls that management designed to help detect potential misstatements on the financial statements.Why GAO Did This StudyGAO audits IRS's financial statements annually. As part of these audits, GAO assesses IRS's key financial reporting controls, including information system controls.This report presents the new deficiencies in internal control over financial reporting identified during GAO's audit of IRS's fiscal years 2022 and 2021 financial statements. This report also includes the results of GAO's fiscal year 2022 follow-up on the status of IRS's corrective actions to address recommendations contained in GAO's prior years' reports related to internal control over financial reporting that were open as of September 30, 2021.
- Tax Administration: IRS Oversight of Hospitals' Tax-Exempt Status What GAO FoundHospitals must satisfy three sets of requirements for a nonprofit tax exemption (see figure) but hospital community benefits are not defined in law.Requirements for Nonprofit Hospitals to Obtain and Maintain a Tax ExemptionIn 1969, the Internal Revenue Service (IRS) identified factors that can demonstrate community benefits, but they are not requirements. IRS does not have authority to specify activities hospitals must undertake and makes determinations based on facts and circumstances. As a result, tax-exempt hospitals have broad latitude to determine the community benefits they provide, but the lack of clarity creates challenges for IRS in administering tax law.Additionally, the form on which hospitals report community benefits solicits that information inconsistently, resulting in a lack of transparency. For example, hospitals may describe the use of surplus funds to improve facilities, equipment, and patient care narratively. This qualitative reporting format does not require tax-exempt hospitals to specify the amount of surplus funds used to improve facilities, equipment, and patient care. It could also result in incomplete information on how hospitals are providing community benefits.GAO’s 2020 analysis of IRS data identified 30 hospitals that reported no spending on community benefits in 2016. According to IRS officials, hospitals with little to no community benefit expenses would indicate potential noncompliance. IRS is required to review hospitals’ community benefit activities at least once every 3 years, but was unable to provide evidence that it did so because it did not have a well-documented process to ensure those activities were being reviewed. Consistent with GAO’s September 2020 recommendations, in 2021 IRS updated its overall guidance instructing its employees to document whether a hospital organization satisfies the community benefit standard and established an audit code to track that review.Why GAO Did This StudySlightly more than half of the approximately 5,000 community hospitals in the United States are private, nonprofit organizations. IRS and the Department of the Treasury have recognized the promotion of health as a charitable purpose and have specified that nonprofit hospitals are eligible for a tax exemption. IRS has further stated that these hospitals can demonstrate their charitable purpose by providing services that benefit their communities as a whole.In 2010, Congress and the President enacted PPACA, which established additional requirements for tax-exempt hospitals to maintain a tax exemption.This testimony discusses the requirements for a nonprofit hospital to qualify for tax-exempt status and challenges with verifying compliance with some of those requirements, and is based on a report that GAO issued in September 2020. This testimony reflects updated information GAO obtained from IRS regarding its implementation of the recommendations made in that report.
- Payment Integrity: Additional Coordination Is Needed for Assessing Risks in the Improper Payment Estimation Process for Advance Premium Tax Credits What GAO FoundControl activities for preventing improper advance premium tax credit eligibility determinations varied among the selected state-based marketplaces. Selected states verified most key eligibility criteria for enrollment in the program using the Centers for Medicare &amp; Medicaid Services' (CMS) Federal Data Services Hub. The Patient Protection and Affordable Care Act (PPACA) and CMS's regulations grant marketplaces flexibilities in the eligibility verification process. GAO found that all five selected states exercised certain flexibilities in their eligibility-verification processes, as detailed in the table below. However, CMS did not coordinate with the states to conduct a risk assessment to evaluate the likelihood of improper eligibility determinations when exercising these flexibilities. As such, states were not aware of residual risks—risks that remain after existing control activities have mitigated inherent risks—or whether additional risk-mitigation strategies were needed. Until CMS coordinates with the states to identify any residual risks, neither CMS nor the states will know if additional guidance or other actions are needed to mitigate these potential residual risks.State-Based Marketplaces' Key Control Activities for Verifying Eligibility Requirements for the Advance Premium Tax Credit beyond Self-Attestation			Key control activities&nbsp;beyond self-attestation									California									Colorado									Nevada									New Jersey									Pennsylvania								Verifying identity on mail applications									N									Y									Y									Y									Y								Verifying residency									N									N									N									N									N								Identifying duplicate coverage through nonfederal employer-sponsored insurance									N									N									N									N									N								Identifying duplicate coverage through Medicaid in other states									N									N									N									N									N					Legend: N = Did not perform additional verifications; Y = Performed additional verificationsSource: GAO analysis of the selected state's information. | GAO-23-105577Although CMS has developed a reliable methodology to estimate improper advance premium tax credit payments, it was limited to the 33 states that use the federally facilitated marketplace and did not consider the 18 states that operate their own. CMS has a process to engage with the states on the best way to incorporate them into the improper payment measurement program and on the related requirements. However, CMS's process does not consider residual risks in the state-based marketplaces' processes for verifying and determining eligibility. Without additional coordination with these marketplaces that includes assessing and identifying any residual risks to which they may be vulnerable, CMS's process for estimating improper payments may not reflect significant program risks. As such, the resulting improper payment estimate may be incomplete and provide a less useful basis for developing effective corrective action plans.Why GAO Did This StudyTo help taxpayers cover the cost of health insurance premiums, PPACA provides advance premium tax credits for individuals who meet certain eligibility requirements. For fiscal year 2022, the Department of Health and Human Services (HHS) reported an estimated $256 million in improper payments for the federally facilitated marketplace.GAO was asked to review advance premium tax credit payment integrity efforts. This report examines (1) key control activities selected states and CMS implemented to prevent providing advance premium tax credits to ineligible individuals through the state-based marketplaces and (2) the extent to which CMS developed a reliable methodology to estimate improper payments in the program.GAO analyzed policies and procedures for determining eligibility in plan year 2022 from CMS, and selected states to include those with the highest average monthly payment amounts and those with new and more established marketplaces (California, Colorado, Nevada, New Jersey, and Pennsylvania). GAO also reviewed CMS's improper payment estimation methodology for the advance premium tax credit for fiscal year 2022.
- Tax Gap: Modest Reductions in the Gap Could Yield Large Fiscal Benefits The Big PictureThe Internal Revenue Service (IRS) estimated the tax gap—the difference between tax amounts that taxpayers should have paid and what they actually paid voluntarily and on time—to be $496 billion per year for tax years 2014-2016. The tax gap is a complex problem that requires a multipart solution. A small reduction in the gap could yield major fiscal benefits to the federal government.IRS's Annual Average Tax Gap Estimate for Tax Years 2014-2016 IRS uses several approaches to estimate the different components of the tax gap, but these approaches have limitations. Estimates can have measurement and sampling error and can vary in the quality of information available. Further, the estimates do not fully reflect all areas of the tax system. For example, foreign or illegal activities, digital assets, and some corporate income tax are not fully included because data are either not reliable or not available.Despite those limitations, IRS’s estimate provides useful insights into the sources of the tax gap. For example, IRS found underreporting of tax liabilities makes up 80 percent of the gross tax gap. Individual underreporting alone represents more than half (56 percent) of the gross tax gap. The individual underreporting category includes estimates related to income from sole proprietorships, partnerships, S Corporations, estates, and trusts, among others.Estimated Average Annual Gross Tax Gap by Type of Noncompliance and Tax (Tax Years 2014-2016)What GAO’s Work ShowsOur work identified issues that contribute to the tax gap.Limited third party information reporting. The extent to which individual taxpayers accurately report their income is closely aligned with whether third parties (e.g., employers) report income to them and to IRS. Increased information reporting could help improve compliance, especially related to sole proprietors who continue to represent the largest share of the individual underreporting tax gap.	Declines in audit rates. Audit rates of individual income tax returns decreased for all income levels for tax years 2010 to 2019. IRS officials attributed this decline primarily to reduced staffing because of decreased funding.IRS's Audits Decreased across All Income Levels Taxpayer service. Good customer service can help make it easier for taxpayers to comply with their tax responsibilities. However, taxpayers often have trouble reaching IRS by phone and can wait for months for mail to be answered. Taxpayers with limited-English proficiency face challenges getting tax information in their languages. Taxpayers could benefit from additional options to file returns for free. IRS does not have clear performance goals for improvements in the taxpayer experience.	Tax code complexity. The federal tax system’s complexity may help to target tax policy goals. However, this complexity also imposes record keeping, planning, computing, and filing requirements on taxpayers and can lead to errors and under or overpaid taxes. Other changes in the economy, such as the growing platform or gig workforce, could pose problems as taxpayers try to understand how to calculate their taxes.	Abusive tax shelters. Tax shelters, such as offshore insurance products, can be designed to hide U.S. taxpayers’ assets or to falsely claim federal income tax benefits. Promoters can also market abusive tax schemes which are designed to circumvent tax laws or evade taxes. IRS could improve its ability to identify and deter promoters and stop abusive tax schemes.Challenges and OpportunitiesThe tax gap has multiple causes and spans different types of taxes and taxpayers. So, multiple strategies are needed to reduce it. IRS’s budget and staffing levels have fallen over the past decade. IRS has also faced increasing responsibilities, such as implementing stimulus payments to taxpayers during the COVID-19 pandemic. Congress provided IRS with nearly $80 billion to modernize taxpayer service and enforce tax laws. IRS will need to plan for and manage these resources effectively to bring about needed improvements.We have recommended that IRS shouldre-establish specific quantitative goals to reduce the tax gap and document a plan for using data to update compliance strategies;	research, evaluate, and develop recommendations to expand third-party information reporting;	implement a cost-effective method to digitize taxpayer-provided paper return information, making it more available for IRS’s tax enforcement programs; and	amend the “Dirty Dozen” list to tell taxpayers how to refer information to IRS on preparers and promoters involved in abusive tax schemes.We have also recommended Congress considergranting IRS the explicit authority to establish professional requirements for paid preparers to help increase the accuracy of tax returns;	expanding third-party information reporting for certain payments that rental real estate owners make to service providers, such as contractors making repairs;	providing IRS with expanded authority—with appropriate safeguards—to correct errors and discrepancies between what the taxpayer reported and other government information; and	requiring that returns prepared electronically but filed on paper include a scannable code.For more information, contact James R. McTigue, Jr. at (202) 512-6806 or MctigueJ@gao.gov.
- Information Technology: IRS Needs to Complete Modernization Plans and Fully Address Cloud Computing Requirements What GAO FoundThe Internal Revenue Service's (IRS) legacy IT environment includes applications, software, and hardware, which are outdated but still critical to day-to-day operations. Specifically, GAO's analysis showed that about 33 percent of the applications, 23 percent of the software instances in use, and 8 percent of hardware assets were considered legacy. This includes applications ranging from 25 to 64 years in age, as well as software up to 15 versions behind the current version. As GAO has previously noted, and IRS has acknowledged, these legacy assets will continue to contribute to security risks, unmet mission needs, staffing issues, and increased costs.Modernization best practices call for documenting plans that include three key elements: milestones, work to be performed, and disposition of legacy systems. As of August 2022, IRS had documented plans for the 21 modernization initiatives that were underway, including nine associated with legacy systems. All 21 plans addressed two key elements. However, the plans for six of the nine initiatives did not address the disposition of legacy systems (see table). Officials stated they would address this key element at the appropriate time in the initiatives' lifecycle; however, they did not identify time frames for doing so.GAO Assessment of the Internal Revenue Service's (IRS) Modernization Plans as of August 2022			Modernization plan element 									Yes 									No 									Not applicable 								Includes milestones									21									0									0								Describes work to be performed									21									0									0								Includes disposition of legacy systems									3									6									12a					Source: GAO analysis of IRS documents. | GAO-23-104719aThese initiatives were not associated with legacy systems.IRS recently suspended operations of six initiatives, including two which are essential to replacing the 60-year old Individual Master File (IMF). The IMF is the authoritative data source for individual tax account data. GAO has reported that IRS has been working to replace IMF for well over a decade. According to officials, the suspensions were due to IRS's determination to shift resources to higher priorities; staff members working on these suspended initiatives were reassigned to other projects. As a result, the schedule for these initiatives is now undetermined. Accordingly, the 2030 target completion date for replacing the IMF that IRS announced last year is now unknown. This will lead to mounting challenges in continuing to rely on a critical system with software written in an archaic language requiring specialized skills.IRS's cloud computing efforts fully addressed 11, partially addressed one, and did not address two requirements identified in the Office of Management and Budget's June 2019 cloud computing strategy. Key shortfalls include IRS not conducting regular evaluations of customer experiences and user needs. Until IRS fully addresses all cloud computing requirements, it will have less assurance that it is adopting cloud solutions that efficiently and effectively help it meet its mission needs and protect sensitive taxpayer information.Why GAO Did This StudyIRS relies extensively on IT to annually collect trillions of dollars in taxes, distribute hundreds of billions of dollars in refunds, and carry out its mission of providing service to America's taxpayers in meeting their tax obligations. This reliance on IT includes a significant amount of outdated legacy systems that pose risks. At the same time, IRS has increasingly used internet-based computing services (i.e., cloud services) to address its IT modernization needs.GAO was asked to review IRS's legacy environment and cloud computing implementation. This report, among other things, 1) describes IRS's legacy IT environment; 2) assesses IRS's modernization plans; and 3) evaluates its cloud computing efforts.To do so, GAO analyzed legacy applications, software, and hardware data; assessed plans for 21 modernization initiatives against practices identified in prior GAO work; and compared IRS's cloud computing documentation to relevant federal requirements. GAO also interviewed knowledgeable IRS officials.
- Abusive Tax Schemes: Additional Steps Could Further IRS Efforts to Detect and Deter Promoters What GAO FoundThe Internal Revenue Service (IRS) has taken steps to identify and stop promoters who arrange and market abusive tax schemes. Such schemes involve various kinds of arrangements designed to circumvent tax laws or evade taxes. IRS's investigations into promoters vary in complexity and may span across different organizational units within IRS, as shown in the figure below. In fiscal years 2021 and 2022, IRS conducted hundreds of investigations that resulted in tens of millions of dollars in penalties assessed.Principal IRS Organizational Units Involved in Abusive Tax Scheme Promoter InvestigationsCurrently, IRS is aware of over 40 types of abusive tax schemes involving promoters. One method IRS uses to identify these promoters is information referrals from the public. GAO found that the public can refer information to IRS on a number of forms, few of which can be submitted online. GAO previously recommended that IRS take steps to improve its referral programs by developing a consolidated, online referral submission tool.Additionally, one of IRS's key public communication tools for abusive tax schemes, its annual Dirty Dozen list, does not include information on how to report promoters of suspected abusive tax schemes. Adding instructions to the Dirty Dozen list about how to submit information on promoters may allow IRS to better leverage information from the public and increase its ability to identify and stop promoters of abusive tax schemes.IRS created the Office of Promoter Investigations in 2021 to coordinate IRS's response to promoters of abusive tax schemes. The office works to design, develop, and deliver the major activities that help detect and deter abusive tax schemes and their promoters. Although the office has developed strategic goals to fulfil its mission, it has not yet finalized and communicated outcome-oriented performance goals and measures within IRS. Finalizing outcome-oriented performance goals and measures will allow the Office of Promoter Investigations to better evaluate its efficacy and ensure it is meeting its mission.Why GAO Did This StudyAbusive tax schemes threaten our tax system's integrity and contribute to the tax gap—the difference between taxes owed and paid. Often, abusive tax schemes are marketed by promoters and include complex, multi-layer transactions to attempt to conceal the true nature and ownership of the taxable income or assets. To address abusive tax schemes and their promoters, IRS created the Office of Promoter Investigations in 2021.GAO was asked to review IRS actions to address abusive tax schemes and those who promote and enable them. This report (1) describes how IRS conducts promoter investigations and presents summary data on these investigations; (2) evaluates how IRS educates taxpayers about referring information on promoters to IRS; and (3) evaluates to what extent IRS's reorganization plan for promoter investigations was consistent with key practices and the extent to which IRS is prepared to evaluate the performance of its new office.
- Corporate Income Tax: Effective Rates Before and After 2017 Law Change What GAO FoundIn each year from 2014 to 2018, about half of all large corporations had no federal income tax liability. For the purposes of this report, GAO considers “large corporations” to be those that filed Internal Revenue Service (IRS) Schedule M-3. This form is required for corporations with $10 million or more in assets. Among profitable large corporations, on average, 25 percent had no tax liability. Corporations may have no federal income tax liability for a number of reasons. For example, not all corporations are profitable in any given year or may have losses or credits from other years that can be used to offset current-year tax liabilities. Among large corporations, from 2014 through 2018, an average of approximately 44 percent reported a loss in a given year.Effective tax rates measure tax liability as a proportion of income and are typically lower than the statutory tax rate because they reflect deferrals, credits, and other tax benefits. Among profitable large corporations, average effective tax rates varied between 2014 and 2018. The effective tax rates based on actual tax liability was as high as 16 percent in 2014 and as low as 9 percent in 2018. Tax rates based on corporations' financial reports (known as book tax) followed similar trends.Average Effective Tax Rates for Profitable Large Corporations, 2014 to 2018In December 2017, Congress passed Public Law 115-97—commonly known as the Tax Cuts and Jobs Act (TCJA). Among many changes, TCJA lowered the top statutory corporate tax rate from 35 percent to 21 percent. While effective tax rates decreased in 2018, total tax liability among profitable large corporations was slightly higher in both 2017 ($278 billion) and 2018 ($267 billion) than it was in 2016 ($262 billion). TCJA increased foreign-sourced income subject to tax in the U.S. and increased repatriations of income previously held offshore. However, TCJA often taxed this income at reduced rates. These changes may have contributed to a lower effective tax rate in 2018, but also generated tax liability from income that was previously not taxable under U.S. law.Why GAO Did This StudyIn 2016, prior to TCJA's passage, GAO reported that, from 2008 to 2012, between 18 percent and 24 percent of all profitable large corporations had no federal income tax liability. GAO also reported that those same corporations generally had effective tax rates between 13 percent and 16 percent of pretax book income.GAO was asked to provide an update on effective tax rates after TCJA was enacted. In this report, GAO describes (1) the percentage of large corporations that had no federal income tax liability, (2) average effective tax rates of large corporations, and (3) changes in TCJA that may have affected corporate effective tax rates.To conduct this work, GAO reviewed relevant literature, and analyzed IRS data for tax years 2014 to 2018 (the most recent data available). This includes the financial and tax information that corporations report on Schedule M-3. GAO also interviewed IRS officials and subject matter experts.For more information, contact Jessica Lucas-Judy at (202) 512-6806 or LucasJudyJ@gao.gov.
- Transforming Aviation: Congress Should Clarify Certain Tax Exemptions for Advanced Air Mobility What GAO FoundAdvanced air mobility is an emerging form of air transportation that may use aircraft with electrified propulsion systems, increased levels of automation, and vertical take-off and landing capabilities to transport people and cargo. Stakeholders GAO interviewed said that individual infrastructure projects to support such operations (such as take-off and landing sites at airports, hospitals, and parking garages), could cost between $500,000 and more than $10 million apiece. These costs may vary by each project's location, scope of construction, and electrification needs.Stakeholders expect private funding to play a prominent role in initial infrastructure, though they anticipate public funding may increase over time. Stakeholders noted the balance of public and private funding could affect (1) the speed and ingenuity of infrastructure development; (2) the interoperability of infrastructure; and (3) communities' access to advanced air mobility services.Taxes applicable to airspace users that fund the aviation system will apply to advanced air mobility operations. However, it is unclear how exemptions for some of these taxes would apply to these operations. For example, eligibility for some tax exemptions depends on the type of aircraft used, such as whether it is a helicopter versus a fixed-wing aircraft. However, “helicopter” and “fixed-wing” are not defined in tax law, and advanced air mobility aircraft can share features with both (see figure).Shared Features of Proposed Advanced Air Mobility Aircraft and Typical AircraftWhile the current aviation financing system has been amended over time, existing tax law does not address how to classify some emerging advanced air mobility aircraft. Internal Revenue Service (IRS) officials said that in the absence of congressional clarification, the agency might face challenges in determining the applicability of tax exemptions for these operations when they begin. Officials said that congressional clarification would provide a framework for the agency to administer the tax law efficiently and effectively. For example, such clarity would facilitate more consistent tax treatment and reduce litigation that the federal government might otherwise face.Why GAO Did This StudyAdvanced air mobility manufacturers are currently testing their aircraft, with a few companies planning to begin commercial operations in 2025. The Federal Aviation Administration (FAA) will have to certify and integrate these aircraft into the national airspace system. Most of FAA's budget flows from a trust fund supported by various taxes paid by aviation users. Federal tax law administered by the IRS determines whether taxpayers qualify for exemptions to these taxes.GAO was asked to review funding and infrastructure issues associated with advanced air mobility. This report examines (1) the anticipated capital costs of advanced air mobility infrastructure, (2) stakeholder considerations for infrastructure funding, and (3) the extent to which taxes that support the aviation trust fund apply to advanced air mobility, among other topics.GAO reviewed laws, regulations, case law, revenue rulings, and other memorandums associated with aviation taxes. GAO interviewed FAA and IRS officials and 25 stakeholders, including academics, trade associations, and aircraft manufacturers. GAO identified these stakeholders through a literature search and consultations with internal and external subject matter experts.
- 2022 Tax Filing: Backlogs and Ongoing Hiring Challenges Led to Poor Customer Service and Refund Delays What GAO FoundIn its third filing season since the COVID-19 pandemic began, the Internal Revenue Service (IRS) prioritized processing its backlog of tax returns but its current inventory of unprocessed returns remains high. At the end of 2021, IRS had a backlog of about 10.5 million paper returns and returns stopped for errors. As shown in the figure, IRS addressed its backlog of 2021 paper returns. However, as of late September 2022, IRS had about 12.4 million returns to process, resulting in refund delays for millions of taxpayers. GAO previously recommended that IRS improve paper processing by digitizing more paper returns and addressing barriers to e-filing.Total IRS Returns Inventory in Process, February to September 2022From January to September 2022, IRS reduced its prior year backlog of taxpayer correspondence from about 5 million to about 400,000. IRS used a combination of strategies to work through this inventory, including reassigning staff from answering phones to processing correspondence. However, partly as a result, IRS answered less than one in five calls during the filing season. Addressing GAO's prior recommendation to modernize its online “Where's My Refund” application will help IRS better serve taxpayers and reduce the burden of additional calls and letters on IRS staff.As of September 2022, IRS met its hiring goals for fiscal year 2022 through a combination of direct and traditional hiring. IRS's direct hire authority allows it to make on-the-spot job offers to applicants. However, this authority did not start until a month after the filing season began. As a result, about 95 percent of direct hires did not start working until after the 2022 filing season ended. IRS officials said their recent hiring efforts will help prepare IRS for a strong 2023 filing season.Why GAO Did This StudyDuring the annual tax filing season, IRS processes more than 150 million individual and business tax returns. IRS also provides telephone, correspondence, online, and in-person services to tens of millions of taxpayers. Partly as a result of the COVID-19 pandemic, IRS has faced significant return processing backlogs and a decline in customer service since 2020.GAO was asked to review IRS's performance during the 2022 filing season. This report assesses IRS's performance on (1) processing tax returns, (2) providing customer service to taxpayers, and (3) hiring staff to support filing season operations.GAO analyzed IRS documents and filing season performance data related to customer service, inventory processing, and hiring. GAO also interviewed cognizant IRS officials.
- Paid Tax Return Preparers: IRS Efforts to Oversee Refundable Credits Help Protect Taxpayers but Additional Actions and Authority Are Needed What GAO FoundThe Internal Revenue Service (IRS) designed the Refundable Credits Return Preparer Strategy program to address improper payments associated with refundable tax credits and other benefits. This program includes tailored education and enforcement actions for paid preparers identified as having returns filed with a high probability of errors. The program aims to change the behavior of paid preparers and their clients and improve the accuracy of returns claiming these credits.IRS has yet to develop a long-term plan that identifies and links long-term goals, objectives, activities, and performance measures for this program. Instead, program officials have focused on the operation of the program on a year-to-year basis. This includes ensuring preparers at risk of noncompliance are assigned to appropriate compliance actions. However, a long-term plan would provide a road map to help ensure that decisions align with program goals and inform budget requests and resource decisions. Without a long-term plan, program officials will continue to be limited in their ability to plan strategically.IRS identified a need for an IRS-wide tax return preparer strategy that would ensure consistent treatment of all preparers across different compliance programs. However, progress on the IRS-wide strategy stalled. Thus, how the Refundable Credits Return Preparer Strategy program fits into a broader service-wide strategy remains unclear. IRS officials noted that the strategy cannot be finalized until the IRS-wide reorganization is completed. IRS received significant additional funding as part of the Inflation Reduction Act of 2022. The agency is developing a detailed spend plan for these funds. Officials reported that the IRS-wide strategy was still under consideration within IRS's reorganization. However, until the IRS reorganization is complete and the IRS-wide preparer strategy is implemented, IRS may be missing opportunities to capitalize on prior planning efforts.While the Refundable Credits Return Preparer Strategy program helps encourage preparer compliance with due diligence requirements, the challenge with preparer accuracy is much broader. IRS data show the program can reach a small fraction—less than 2 percent in 2021—of preparers with education and enforcement activities. Further, tax preparers are not held to uniform standards because IRS lacks the authority to establish professional requirements for all types of preparers. This puts some taxpayers at risk of receiving insufficient or incompetent tax preparation services and potentially burdensome enforcement actions. Providing IRS with the authority to establish requirements for all paid preparers would allow IRS to target its resources more efficiently on noncompliant preparers.Why GAO Did This StudyMillions of taxpayers claim refundable tax credits each year. About half of taxpayers use a paid preparer, according to the Department of the Treasury. However, these credits have complex eligibility rules that can be difficult to follow. This can result in errors and improper claims. For fiscal year 2021, IRS estimated that it paid $115 billion in refundable tax credits, but $26 billion were improperly paid.GAO was asked to examine IRS's Refundable Credits Return Preparer Strategy program. This report assesses (1) the extent to which the program incorporates key elements of program design, and (2) how, if at all, IRS could broaden the effect of its strategy to reduce improper payments, among other objectives.GAO reviewed IRS program data and documentation. GAO also interviewed IRS officials, paid preparers, and industry groups. Further, GAO compared IRS's efforts to guidance on key program elements from the Office of Management and Budget's Circular No. A-11 and IRS's Strategic Plan.
- Internal Revenue Service: Information about Funding, Financial Reporting Controls, and GAO Recommendations What GAO FoundThe Inflation Reduction Act of 2022 (Public Law 117-169) provided the Internal Revenue Service (IRS) with $79.4 billion in funding over 10 years to enhance IRS resources and improve taxpayer compliance, among other purposes. This substantial amount of new funding will need effective IRS planning, prioritization, and management to help reduce the gap between taxes owed and taxes paid on time.Limitations in the systems IRS uses to account for federal taxes receivable and other unpaid assessment balances continued to exist during fiscal year 2022. In addition, continuing information system control deficiencies in areas such as encryption and configuration of security settings increase the risk of unauthorized access to, modification of, or disclosure of sensitive financial and taxpayer data and disruption of critical operations.GAO has made numerous recommendations to IRS that, if fully implemented, could address the enforcement of tax laws high-risk area and significantly improve IRS operations. As of November 2022, IRS has a total of 176 unimplemented recommendations. This includes 25 recommendations considered high priority.Why GAO Did This StudyIRS estimates that the annual net tax gap—the difference between taxes owed and taxes paid on time—averaged $428 billion for tax years 2014-2016 (latest available).This report addresses (1) IRS funding, (2) IRS financial reporting and information system controls, and (3) IRS high-risk areas and related GAO recommendations. GAO reviewed its prior work on IRS, including GAO High Risk reports, the latest priority recommendation letter to IRS, and recent audits of IRS's financial statements. GAO also reviewed its ongoing efforts to assess IRS's implementation of recommendations.
- Remote Sales Tax: Federal Legislation Could Resolve Some Uncertainties and Improve Overall System What GAO FoundThe 2018 U.S. Supreme Court decision,  South Dakota v. Wayfair, held that states could require out-of-state (or remote) businesses to collect sales taxes even without a physical presence, such as a store or warehouse in the state. States responded quickly with new remote sales tax requirements, resulting in a complex patchwork of requirements with wide variation. For example, states established different monetary and transactional (or economic nexus) thresholds exempting some small businesses from remote sales tax requirements and different rules for calculating those thresholds.Sales Tax Economic Nexus Thresholds for Remote Sellers, as of September 2022Based on state-reported data, GAO estimates 2021 nationwide remote sales tax collections to be about $30 billion. Businesses reported that they incurred software costs to expand their multistate tax collection capabilities, audit and assessment costs associated with increased tax jurisdiction exposure, and costs to stay current with legal requirements in multiple jurisdictions.GAO found that the overall remote sales tax system raises concerns regarding all three criteria for a good tax system. For example:An accepted principle of equity is that similarly situated taxpayers should receive similar treatment. GAO found that post-  Wayfair  multistate sellers must grapple with the patchwork of different requirements across the taxing jurisdictions with which they have economic nexus, whereas brick-and-mortar sellers generally must grapple only with the requirements of the jurisdictions in which they are physically located, regardless of the states in which their customers live.	Economic efficiency is achieved where resources are used to provide the greatest possible benefit or well-being to society. GAO found that remote sellers made behavioral changes arising from the need to divert resources away from business operations and investments and toward tax compliance, such as limiting the number of states into which they sell or the amount of sales into some states to avoid some states' remote sales tax requirements.	Simplicity, transparency, and administrability are interrelated but distinct features of a good tax system. GAO found that businesses are devoting substantial amounts of time and resources to multistate remote sales tax compliance; that the numerous requirements and variations across taxing jurisdictions made it difficult for businesses to understand their remote sales tax obligations; and that the administrative costs are borne in large part by businesses collecting from purchasers on behalf of the taxing jurisdictions.GAO identified various proposals for remote sales tax reform, ranging from incremental to comprehensive. Whereas the proposals for comprehensive reform are intended to be adopted on a nationwide basis, some of the proposals for incremental reform may be adopted by states independent of one another or on a broader multistate basis.For example, one proposal for incremental reform is that a state adopt a single statewide point of registration, filing, administration, and audit. One proposal for comprehensive reform is that states be required, as a condition of taxing remote sales, to participate in an interstate collaborative mechanism through which states agree on uniform standards and centralized processes.Some states and multistate organizations have taken some steps toward implementing some of the proposed incremental reforms, but a comprehensive approach has yet to be adopted. While individual state actions may assist certain businesses in complying with a particular state's remote sales tax requirements, they do not alleviate the multistate complexities that exist. To date, there is no comprehensive approach in place that addresses multistate complexities and includes all states seeking to tax remote sales.In addition, substantial uncertainty currently exists regarding to what extent remote sales taxation is legally permissible for states and localities. For example, uncertainty exists regarding what connection (or nexus) a business must have with a state before the state may require the business to collect sales taxes on its behalf; when remote sales tax requirements violate the Constitution's prohibition on state laws that discriminate against or impose an undue burden on interstate commerce; and under what circumstances locally-administered remote sales tax requirements are constitutionally permissible.One effect of this uncertainty is that legal disputes over state and local authority to require sales tax collection have developed. Such disputes can be expensive for parties to litigate and can lead to prolonged and uncertain outcomes for all involved. Without a comprehensive approach in place, courts are left to address these issues on a piecemeal basis.While the right of states to levy taxes, and to empower their localities to do the same, is a well-founded principle of state sovereignty, under the Constitution's Commerce Clause, Congress has the authority to regulate interstate commerce. The Supreme Court has stated that Congress has the “ultimate power to resolve” issues with taxation of remote sales. Federal legislation which puts nationwide parameters in place for state taxation of remote sales could help address the uncertainties and multistate complexities and improve the overall system.Why GAO Did This StudyElectronic commerce (e-commerce) sales have grown rapidly over the past quarter century. However, until recently, states could not require e-commerce and other businesses operating out of state to collect taxes on sales to residents of their states unless the business had a physical presence in the state.Two fundamental objectives of tax policy are (1) to raise revenue sufficient to fund projected government spending, and (2) to do so in a manner consistent with three long-standing and widely accepted criteria for a good tax system: equity; economic efficiency; and a combination of simplicity, transparency, and administrability. In the more than 4 years since the  Wayfair  decision, concerns have been raised regarding the extent to which the overall remote sales tax system aligns with these criteria.GAO was asked to examine the effects of states' expanded authority to collect remote sales tax. This report examines (1) the current landscape of state remote sales tax requirements, (2) the number of businesses subject to these requirements and the amount of revenue states have generated as a result, (3) the types of costs businesses have incurred complying with these requirements, and (4) the extent to which the overall remote sales tax system aligns with the criteria for a good tax system.To conduct this work, GAO administered a survey to revenue agencies in all 45 states with a statewide sales tax and the District of Columbia. Forty-three states and the District of Columbia responded, for a response rate of more than 95 percent. GAO also interviewed multiple organizations representing states and businesses, as well as businesses engaged in e-commerce and multistate taxation, selected to represent a broad range of perspectives.
- Financial Audit: IRS's FY 2022 and FY 2021 Financial Statements What GAO FoundIn GAO's opinion, the Internal Revenue Service's (IRS) fiscal years 2022 and 2021 financial statements are fairly presented in all material respects, and although internal controls could be improved, IRS maintained, in all material respects, effective internal control over financial reporting as of September 30, 2022. GAO's tests of IRS's compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements disclosed no instances of reportable noncompliance in fiscal year 2022.Limitations in the systems IRS uses to account for federal taxes receivable and other unpaid assessment balances, as well as other control deficiencies that led to errors in taxpayer accounts, continued to exist during fiscal year 2022. These control deficiencies affect IRS's ability to produce reliable financial statements without using significant compensating procedures. In addition, continuing information system security control deficiencies in such areas as encryption and configuration of security settings increase the risk of unauthorized access to, modification of, or disclosure of sensitive financial and taxpayer data and disruption of critical operations.IRS continues to take steps to address deficiencies in its internal control over financial reporting. However, the remaining deficiencies are significant enough to merit the attention of those charged with governance of IRS and therefore represent continuing significant deficiencies in internal control over financial reporting related to (1) unpaid assessments and (2) financial reporting systems. Continued management attention is essential to fully addressing these significant deficiencies. In commenting on a draft of this report, IRS noted its intention to continue working to improve its internal controls.Why GAO Did This StudyIn connection with fulfilling GAO's requirement to audit the consolidated financial statements of the U.S. government, and consistent with its authority to audit statements and schedules prepared by executive agency components, GAO has audited IRS's financial statements because of the significance of IRS's tax collections to the consolidated financial statements of the U.S. government. GAO annually audits IRS's financial statements to determine whether (1) the financial statements are fairly presented and (2) IRS management maintained effective internal control over financial reporting. GAO also tests IRS's compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements.IRS's tax collection activities are significant to overall federal receipts, and the effectiveness of its financial management is of substantial interest to Congress and the nation's taxpayers.For more information, contact Dawn B. Simpson at (202) 512-3406 or simpsondb@gao.gov.