Tax Administration: IRS Should Continue to Expand Reporting on Its Enforcement Efforts
Published: 2003-01-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Reported declines in the rate at which the Internal Revenue Service (IRS) audits (also referred to as "examines") individual income tax returns have raised concerns that taxpayers may have a false perception of the true level of IRS's tax enforcement efforts. In addition, many observers are concerned these reported declines may reduce taxpayers' motivation to voluntarily pay their taxes. Because of these concerns, GAO was asked to review a number of issues surrounding IRS's enforcement efforts. GAO determined the trends in the percent of returns filed that are audited (contact rate) compared with similar data on taxpayer contacts through other enforcement programs for fiscal years 1993 through 2002. In addition, GAO reviewed whether IRS's reporting on its enforcement programs should be expanded.
section_title: What GAO Found
paragraphs: IRS's often-cited audit rate has been declining for several years, as shown below. However, the audit rate portrays only a portion of IRS's efforts to enforce tax laws and not all of those efforts have been declining. For IRS's three nonaudit enforcement programs, the contact rates in 2002 compared to 1993, after year to year variations, declined for one, essentially remained the same for one, and significantly increased for one--math error. A complete math error contact trend is unavailable because IRS did not capture one type of data on a substantial number of contacts prior to 1997. For years where complete data are available, IRS has not included all math errors in external reports. IRS officials agreed that all types of errors are identified under the same math error authority and should be similarly counted and reported. IRS annually reports extensive data on audits but only limited, or no, data on its other enforcement programs. This limited reporting does not provide policymakers or taxpayers information on the full extent of IRS's enforcement efforts. To the extent that taxpayers do, as is widely believed, take the level of enforcement into account when self-reporting their tax obligations, the audit rate alone may mislead them. IRS officials believe that more reporting is desirable and intend to report readily available, but incomplete, information on nonaudit programs in future reports.

section_title: Letter
paragraphs: The United States tax system is based on self-reporting and voluntary  compliance by taxpayers. The Internal Revenue Service (IRS) uses various  enforcement programs to check the accuracy of tax returns and contacts  taxpayers if problems are found. IRS makes the contacts through four  major enforcement programs that have existed for many years.
Math Error Program: While tax returns are being processed, this  program uses IRS computers to identify and generate notices to contact  taxpayers about obvious errors such as mathematical errors, omitted or  inconsistent data, or other inconsistencies on the basis of other data  reported on the return or to IRS. These errors must be corrected to  process a tax return.
Document Matching Program: This program matches information on  selected tax issues (usually income) reported on tax returns by individual  taxpayers and reported on information returns by employers, banks, and  other payers of income. Document matching also matches information  returns (schedule K-1) filed by pass-through entities—such as  partnerships, trusts and S-corporations—to individual tax returns. IRS  may contact taxpayers about any reporting discrepancies.
Nonfiler Program: This program identifies and contacts potential  nonfilers of tax returns by using data from information returns and  previously filed income tax returns. The contacts can ask for the missing  return or offer an IRS-generated return to substitute for the missing return.
Audit Program: Also referred to as “examination,” under this program, an  IRS auditor checks compliance in reporting income, deductions, credits  and other issues on tax returns, as well as in paying the correct tax  liability. Audit contacts can be made through correspondence or in   face-to-face meetings with taxpayers at an IRS office or a taxpayer  location.
Widely reported substantial declines in the rate at which IRS audits  income tax returns have triggered concern that the declines could reduce  taxpayers’ motivation to voluntarily pay their taxes. Many view IRS’s  enforcement programs as critical support to our voluntary system—they  help provide taxpayers with confidence that their friends, neighbors, and  business competitors are paying their share of taxes.
Because of your concerns that the declining audit rate may give taxpayers  a misleading perception of the true level of IRS’s tax enforcement efforts  and encourage some taxpayers not to comply, you requested that we  review a number of issues related to how IRS enforces tax laws and  publicly reports on those efforts. This report    compares IRS’s enforcement programs in terms of their legal authority,  and operational characteristics (including IRS staff time), and describes  what is known about taxpayer perceptions of the enforcement programs.    summarizes enforcement contact trends overall and by taxpayer income  and their causes from 1993 to 2002.    determines what IRS knows about the effect of its enforcement programs  on individual taxpayer compliance and the burdens taxpayers experience  when contacted under the programs.    assesses whether and, if so, how IRS should expand reporting on its  enforcement programs.
To address these objectives, our work included interviewing IRS officials  and reviewing documents on the similarities and differences across IRS  enforcement programs. To identify trends in IRS’s enforcement programs  including trends by taxpayer income levels, we analyzed IRS data from  fiscal years 1993 through 2002. To analyze impacts on taxpayers, and  tradeoffs of reporting more data about the enforcement programs, we  interviewed IRS officials and reviewed any available research on how the  programs affect individual taxpayers’ compliance and burden. (See our  scope and methodology section for details on our approach.) In addition,  you asked us to analyze trends in the number of contacts by the specific  programs. Appendix III provides this information.
subsections: section_title: Background
paragraphs: Each year, IRS screens all individual tax returns and selects a small  percentage in which to contact taxpayers about potential noncompliance.  Prior to doing automated checks of tax returns, IRS had relied on its audit  program to contact taxpayers about apparent inaccuracies in reporting  income, deductions, and other issues on their tax returns. For example, to  verify interest income or dependent exemptions claimed by taxpayers, IRS  auditors had to contact taxpayers, request and review documentation.  Thus, if IRS audited the returns of 5 percent of all taxpayers, it could at  most check on the accuracy of interest income for 5 percent of taxpayers.
Since the 1970s, IRS’s ability to verify some items on individual returns  expanded as IRS’s capacity to use automated processes grew and as  Congress enacted laws requiring third parties (like banks, mortgage  finance firms, etc.) to provide information returns to taxpayers and IRS on  income paid. These steps enabled IRS to more universally and efficiently  check taxpayer compliance for those tax issues covered by information  returns. For example, with the initiation of information returns for interest  income and the development of IRS’s automated capacity, IRS began to  check whether every taxpayer for whom it had received an applicable  information return had accurately reported that interest on their tax  return.
As a result, for some wage earners who claim no deductions, IRS can  review the accuracy of all, or nearly all, items reported on their tax return  to the extent that third parties correctly filed all information returns. In  these cases, IRS effectively receives information that should be in  taxpayers “books and records” and no longer needs to use auditors to  obtain such information from taxpayers’ records for these selected issues.
Concurrent with these expansions in IRS’s ability to check the accuracy of  certain issues on taxpayers’ returns, the number of taxpayer returns that  IRS audited began to decline. For example, between fiscal years 1981 and  1992, the number of document matching contacts rose from 1.2 million to  3.8 million and the number of audits dropped from 2.5 million to   1.1 million.
Several GAO reports have discussed IRS audits, other enforcement  contacts, and taxpayer burden as follows:  In 1996, we reported that audit rates fell from 1988 to 1993 and then rose  to a high of 1.67 percent in 1995. In 2001, we reported that audit rates had  steadily dropped from 1996 to 2000, declining to 0.49 percent.
During 2000, we reported that IRS made almost 10 million nonaudit  contacts of taxpayers in 1998 through about 6 million math error notices,   2 million document matching notices, and 2 million soft notices. We  recommended that IRS analyze the data collected for each of the three  major nonaudit contact programs to improve taxpayer compliance and  taxpayer service.
During 2000, we reported on IRS’s efforts to estimate taxpayer compliance  burden for prefiling, filing, and postfiling activities. We found that IRS was  developing two models that, when combined, should provide more reliable  estimates of compliance burden for wage earners.
section_title: Scope and Methodology
paragraphs: To compare audit and other enforcement programs, we obtained  information on their legal and operational characteristics. For legal  authority, we reviewed the Internal Revenue Code (IRC) and IRS  documents. For program operations, we reviewed IRS documents and  interviewed responsible IRS officials to understand how each program  works. For the average time spent on each type of contact, we analyzed  available IRS data for fiscal years 1993 through 2002. For how taxpayers  perceive IRS’s enforcement programs, we interviewed IRS officials;  reviewed tax research studies and press articles; and contacted four large  national organizations representing attorneys, certified public  accountants, enrolled agents, and tax preparers, as well as the largest tax  return preparation firm, and IRS’s national taxpayer advocate.
To summarize trends in the number and rate of individual taxpayer audits  and other enforcement contacts in total and by taxpayer income, we  analyzed available IRS data from fiscal year 1993 to fiscal year 2002 on  each type of contact. To compute the audit contact rate, we used IRS’s  method, which equals the proportion of IRS audits closed in a fiscal year  compared with returns filed in the previous calendar year. IRS has not  stated a method for computing math error, document matching, and  nonfiler rates. For the document matching and nonfiler programs, we  compared the proportion of notices sent in a fiscal year to return filings in  the previous year because these contacts generally occur in the year after  a return is filed. For the math error program, we based the contact rate on  the proportion of math error notices to the returns filed in that year  because the notices are sent to taxpayers as IRS processes tax returns. For  the math error, document matching, and nonfiler programs, we based the  contact rate on the number of initial notices sent to taxpayers rather than  closures because (1) it is the broadest measure of IRS’s enforcement  efforts with taxpayers and (2) the math error and document matching  programs usually conclude the contact with the taxpayer within a few  months after the initial notice is sent. Nonfiler contacts can take  considerably longer to close, making it difficult to know which tax year to  use in computing a contact rate. We used the number of initial notices so  that the nonfiler program could be measured on a consistent basis with  the document matching and math error programs. To understand the  reasons for the trends, we analyzed our previously issued reports and IRS  reports and interviewed IRS staff for each enforcement program.
To determine how audit and other enforcement programs affect individual  taxpayer compliance and burden, we obtained and reviewed available data  such as IRS studies and reports, our previous reports, and other research.  We also interviewed responsible IRS officials.
To assess whether IRS should expand reporting on its enforcement efforts,  we analyzed the types of enforcement data already publicly reported on an  annual basis by IRS. We also analyzed the tradeoffs for two options we  identified—expanding the definition of audit to include the other  enforcement programs and reporting more data on each program. We used  much of the information from the previous objectives and interviews with  IRS officials.
For all objectives, our work focused on the four major enforcement  programs identified by IRS—math error, document matching, nonfiler, and  audit. We attempted to verify the completeness and accuracy of IRS’s data  but could not reconcile all differences given time constraints. As a result,  we either did not report some data or disclosed limitations in the data  being reported. Further, in analyzing audit and document matching rates  by income level, we did not adjust the income levels for the effects of  inflation over the 1993 to 2002 period because detailed data on taxpayer  income was not available during the timeframes for the assignment. All  data used in the report are final except for the number of tax returns filed  in 2002. Because this number is preliminary, the final math error contact  rate for fiscal year 2002 may differ somewhat from what we report. In  addition, you asked us to analyze two newer IRS efforts—voluntary  compliance agreements and soft notices. Appendix IV describes the two  newer efforts.
We did our work at IRS’s national office in Washington, D.C., and offices in  New Carrolton, Maryland, and Atlanta, Georgia, between August 2002 and  December 2002 in accordance with generally accepted government  accounting standards. We requested comments on a draft of this report  from IRS (see app. V).
section_title: Similarities and Differences among IRS Enforcement Programs Depend on the Type of Audit
paragraphs: Whether  audits and other enforcement programs vary from each other  depends on a number of factors. With regard to legal characteristics,  audits and other enforcement programs are all authorized to contact  taxpayers about apparent noncompliance and to determine and adjust  taxpayers’ tax liability. However, audits have the broadest authority to  detect possible noncompliance, significant powers to obtain information,  and the most restrictions on how IRS is to interact with taxpayers. With  regard to operational characteristics, the extent to which audits are  operationally similar to or different from other enforcement programs  varies depending on the type of audit. Audits done in taxpayer locations  and IRS offices are not similar operationally to other enforcement  programs and audits done through correspondence with the taxpayer,  while still different, are more operationally similar to some of the other  programs. IRS officials were unaware of any research on whether  taxpayers perceive differences among IRS’s enforcement programs.  However, looking at audits and other enforcement programs from the  taxpayers’ perspective, IRS officials and officials we interviewed who  represent taxpayers believe that taxpayers may not perceive distinctions  among many of the enforcement programs.
subsections: section_title: Legal Characteristics: Audits Have the Broadest Scope, Significant Powers to Obtain Information, and the Most Detailed Restrictions
paragraphs: In a general sense, the IRC provisions for enforcement are similar in that  they authorize IRS to contact taxpayers about apparent noncompliance  and to determine and adjust taxpayers’ tax liability. However, the IRC  provisions grant IRS the authority to review all matters that may affect a  taxpayer’s tax liabilities under audits but only certain specified tax issues  under other enforcement programs. The IRC also establishes more rules— including significant powers to obtain information as well as restrictions  on those powers—that govern the nature of audit contacts with taxpayers  than for the other programs.
The IRC does not explicitly limit the tax issues to be covered by an audit,  unlike for the other enforcement programs. Under the authority of section  7602, audits can cover any issue on a tax return, including those that the  other programs cover. In contrast, the IRC specifies the scope of legal  authority for the three other enforcement programs. For example, after  five statutory expansions since 1976, math error authority now covers   11 tax issues (see app. I). Document matching—which grew primarily  through the 1980s as Congress authorized more information reporting— now covers over 20 types of individual income as well as certain tax  credits and deductions (see app. II). The IRC also specifically authorizes  the nonfiler program to pursue unfiled tax returns that should have been  filed.
The IRC also establishes more rules governing IRS’s contacts with  individual taxpayers under the audit program than it does for the math  error, document matching, and nonfiler programs. These rules give IRS  significant powers to obtain information needed to determine an  individual’s tax liabilities when doing an audit and, in turn, places  restrictions on the use of those powers. If resolving issues raised under the  other enforcement programs requires that IRS auditors become involved,  the contacts with taxpayers become audits subject to these greater powers  and restrictions. For example, if a taxpayer who receives a math error  notice files a claim for IRS to abate the tax assessment, IRS could audit  that claim. Similarly, if a taxpayer responds to a document matching  notice with materials that cannot be readily and immediately used to settle  the discrepancy, the case could be referred to audit staff.
The greater powers that IRS has under audit compared with the other  programs include the authority to examine books and records and take  testimony for purposes of determining the tax liability of a tax return. IRS  also has the power to use a summons to compel taxpayers and third  parties to provide books and records, and to enter premises to examine  objects subject to taxation.
Given these greater powers, the law also places more restrictions on  audits to protect taxpayer rights. For example, the law restricts IRS from  doing unnecessary audits or generally doing more than one inspection of  taxpayers’ books for each tax year. The law also governs the time and  place of an audit and burden of proof on IRS. In addition, the Internal  Revenue Service Restructuring and Reform Act (RRA) of 1998 (P.L. 105- 206) added several requirements, such as informing taxpayers of their  rights during audits.
On the other hand, RRA also added a provision that creates a legal  similarity for all four enforcement programs because it affects any IRS  employee, including those making audit or nonaudit contacts. Section 1203  of RRA lays out the conditions under which any IRS employee is to be  fired for any of 10 specific acts or omissions. Many of these conditions  involve contacts with taxpayers—such as harassing taxpayers or taxpayer  representatives, violating their civil rights, or threatening to audit a  taxpayer for personal gain. These restrictions were intended to protect  taxpayers in their interactions with IRS.
Another legal provision creates a similarity between audits and two of the  three other programs. Except for the math error program, when IRS  proposes a change in taxpayers’ liabilities, it is required to send a notice  informing taxpayers of their rights, such as the right to appeal additional  taxes that IRS proposes. The IRC does not provide taxpayers a right to  appeal assessments created under math error authority because that  authority generally applies to obvious errors made by taxpayers on their  returns. However, IRS informs taxpayers receiving a math error notice that  they may file a claim to ask IRS to abate (reduce) the tax assessment if  they believe IRS erred.
section_title: Operational Characteristics: Audits at IRS Offices or Taxpayer Locations Differ the Most from Other Enforcement Programs
paragraphs: The extent to which audits are operationally similar to or different from  other enforcement programs varies depending on the type of audit.  Compared with other enforcement programs, audits done in taxpayers’  locations or IRS offices are more likely to deal with multiple and complex  issues, require more skill and judgment by IRS employees, require a  greater number of interactions with taxpayers, and take more IRS staff  time. Correspondence audits also tend to differ from other enforcement  programs in these operational characteristics but to a lesser degree, and in  some cases correspondence audits and document matching contacts with  taxpayers can be very similar in these characteristics. Table 1 provides an  overview of key operational dimensions across the enforcement programs.
Reviewing these operational dimensions helps highlight similarities and  differences across the four types of enforcement.
Contact triggers: All enforcement contacts use computers to identify a  potential compliance issue. However, audits are more likely to be  triggered by other means such as a special compliance project or referrals  from inside or outside of IRS.
Number of contacts: Once any potential compliance issues are found, the  fewest contacts with taxpayers to resolve the issues are likely under the  math error and document matching programs because they have relatively  simple issues. Correspondence audits might need more than one contact,  depending on the complexity of the issue(s) being audited and taxpayers’  responses. The number of contacts in the nonfiler program can vary  depending on whether taxpayers respond to an IRS notice by filing a  return, or explaining why a return was not required. Some may not  respond, possibly leading IRS to send a second notice or create a  substitute return and send it to that taxpayer. Audits at IRS offices or  taxpayer locations are likely to have the most contacts with taxpayers  through meetings, notices, or the telephone because they tend to cover  several, more complex issues.
IRS staff skill and judgment: Audit contacts—especially those done in  IRS offices or in taxpayer locations—require the most staff skill and  judgment to analyze taxpayers’ testimony and books and records. Being  more automated and usually dealing with simpler issues, other  enforcement programs rely on less staff skill and judgment. Document  matching staff might have to analyze taxpayers’ explanations for why they  do not owe more tax but are to refer the case to the audit program if an  explanation requires detailed analysis or includes books and records. The  nonfiler program requires limited skill and judgment when automated  processes send the notices or generate substitute returns. More skill and  judgment is required when IRS staff manually create substitute returns or  when taxpayers respond to a notice by saying that they do not have to file  a return.
Timing of initial contact: Math error contacts are made as the return is  being processed and identify errors that must be corrected to finish  processing the return. Document matching and nonfiler contacts usually  occur within 1 year after the return is filed or is to be filed. Audits usually  start within 1 year after a return is filed but can start later as long as IRS  finishes the audit within 3 years after the return is filed.
Another operational characteristic is the average time spent by IRS staff.  Figure 1 shows that audits use more staff time per case than document  matching contacts. For fiscal years 1993 through 2002, the staff time  ranged from roughly an hour per document matching case to up to   30 hours per field audit. (see Table 9 in app. III for details.) IRS does not  separately track the time spent on math errors from the rest of the returns  filing process or on nonfilers from other work done by collection staff.
Looking across all of these operational dimensions in general, audits that  take place in IRS offices or in taxpayer locations differ the most from  other enforcement programs. They differ primarily because they are more  likely to deal with multiple complex tax issues, require more skill and  judgment by IRS employees, require a greater number of interactions with  taxpayers, and take more IRS staff time. Although correspondence audits  do differ from other enforcement programs on these characteristics, they  do not differ as much from other enforcement programs as do the audits in  IRS field offices or taxpayer locations. The closest similarity between  correspondence audits and the other programs is with the document- matching program. In comparison to the document matching program,  correspondence audits in some cases may deal with about the same  number of issues, have the same number of interactions with taxpayers,  and require similar skill, judgment, and time on the part of IRS staff.  Correspondence audits are less similar to contacts under the math error  and nonfiler programs than to document matching. Math error contacts  deal with straightforward issues that must be corrected as a return is  processed as opposed to contacting the taxpayer up to one year later  about issues in the return. Nonfiler contacts deal with taxpayers who have  not filed a return at all as opposed to seeking to correct issues related to a  filed return.
In addition to the four major enforcement programs, starting in the mid- 1990s, IRS created two new programs intended to help individual  taxpayers file accurate tax returns. IRS sends so-called “soft notices” on  duplicate claims for dependent exemptions and missing self-employment  tax reporting. The soft notices do not require taxpayers to take action but  are intended to educate them about the potential errors and encourage  them to correct their returns, if necessary. The other new program is the  voluntary compliance agreements program. These agreements are  negotiated with certain employers with the goal of increasing their  employees’ compliance in reporting tip income. As discussed in appendix  IV, while these programs attempt to improve compliance, they have  significant differences from the four major enforcement programs and IRS  has little data on their use. However, IRS was able to provide us with data  that it sent taxpayers 1.2 million soft  notices on duplicate dependent  claims in 2002.
section_title: No Research Identifies Whether Taxpayers Perceive Distinctions in Enforcement Programs but Officials Believe That Distinctions May Not Be Made
paragraphs: IRS officials were not aware of any research, and our search of the tax  literature and press did not uncover research, on whether taxpayers  perceive distinctions between audits and other enforcement programs. Of  the four major enforcement program contacts, IRS officials said that they  could see how some taxpayers might view two types of contacts— document matching and correspondence audits—as similar in that both  tend to cover one or two tax issues that are fairly simple, contact  taxpayers through the mail, and give taxpayers the same appeal rights.  Otherwise, these officials did not see how taxpayers could view the  enforcement contacts as similar, especially the math error contacts.
Although they had not surveyed taxpayers, officials we interviewed from  six groups that represent taxpayers or help prepare their tax returns  believed that many individuals perceive no distinction among the  programs. For example, one representative attributed this to the  conclusion that taxpayers view all IRS notices as stating the same   thing—that the taxpayer owes more taxes.
section_title: Enforcement Program Contact Rates Did Not Follow Consistent Patterns
paragraphs: From fiscal years 1993 through 2002, the rates for the four enforcement  programs often did not follow consistent patterns from one program to  another or from year to year within programs. Comparing just 1993 with  2002, the contact rates for two programs—audits and document  matching—were significantly lower, the rate for math errors was  significantly higher, and the rate for nonfilers was essentially the same. By  taxpayer income level, the audit rate for higher and middle income  taxpayers generally declined over the 10-year period—with the sharpest  declines for higher income taxpayers. The rate for the lowest income  taxpayers increased sharply between 1993 and 1995 and then generally  fell, ending virtually the same as in 1993. The document matching contact  rate by income class followed very similar patterns with the rates for all  income levels dropping over the 10-year period. The enforcement contacts  increased or decreased because of several reasons, including statutory  changes, staffing declines, and priorities in the use of staff among the  programs.
subsections: section_title: Enforcement Program Contact Rates Varied from Program to Program and Often from Year to Year within Programs
paragraphs: As figure 2 shows, the math error program contact rates rose or fell from  year to year; however, it’s the only enforcement program that had a  significantly higher contact rate in fiscal year 2002 than in 1993. This is  true even without counting certain math error contacts for which IRS  lacks data over the 10-year period. Using only the math error count, which  is consistent throughout the 10 years, the math error contact rate rose   33 percent (from 3.59 percent to 4.79 percent). Document matching  contact rates went down and up at various times but ended 45 percent  lower (from 2.37 percent to 1.30 percent) in 2002 compared to 1993. The  nonfiler rates also went up and down but ended in 2002 about where they  were in 1993. Comparing 1993 to 2002, the audit contact rate dropped   38 percent (from 0.92 percent to 0.57 percent), even though it rose  significantly between 1993 and 1995. Over the 10 years, the math error rate  exceeded the rate for each of the three other programs, and the audit rate  was the lowest rate, except in fiscal years 1995, 1996, and 1997. The trends  in the number of contacts in all four programs generally follow the trends  in the rates. Appendix III provides details about the contact numbers and  rates for all four programs.
The trend line in Figure 2 shows a revised math error contact rate that  includes masterfile notices IRS had been sending throughout this period  but had not been reporting as math errors. In data made publicly available  on math error contacts, IRS had excluded roughly 2 million masterfile  math error contacts annually for fiscal years 1997 through 2002. When  included, the math error contact rate increases (e.g., from 4.97 percent to  6.5 percent in 1997). These math error contacts arise from IRS’s match of  filed tax returns to its masterfile accounts to identify tax returns that  misreport taxes already paid such as in previous years or estimated tax  payments. IRS officials said that the masterfile errors were not reported as  math errors because they are identified through a different process at a  later time compared to other math errors during the processing of tax  returns. In our discussions, these officials agreed that both types of errors  are identified under the same math error authority, are indistinguishable to  taxpayers being contacted, and should be similarly counted and reported.
IRS also did not include in its published report about 8 million notices sent  in fiscal year 2002 to correct errors in tax returns reporting the rate  reduction credit. If these notices had been included, the math error  contact rate would have nearly doubled to 12.5 percent. The Economic  Growth and Tax Relief Reconciliation Act of 2001 authorized tax rate  reductions as well as an advance tax refund, called the rate reduction  credit. Because the rate reduction credit applied for only 1 year, this error  is unlikely to recur according to IRS officials. As a result, we did not  include this information in figure 2.
section_title: Audit and Document Matching Contact Rates Across Income Levels Have Generally Declined
paragraphs: Figure 3 shows that the contact rates generally declined in the audit and  document matching programs for all taxpayer income levels between  fiscal years 1993 and 2002. For the math error and nonfiler programs, data  on contact rates by income level were not available, and IRS officials said  that it would take some time and effort to develop math error and nonfiler  contact rates by income levels. (See table 7 in app. III for details on  contact rates by income levels.)
As figure 3 shows, because the audit contact rate declined (from   3.89 percent to 0.86 percent) for higher income (more than $100,000)  individuals and remained virtually the same (from 0.77 percent to   0.78 percent) for the lowest income (less than $25,000) individuals  between fiscal years 1993 and 2002, the rates for the highest and lowest  income individuals essentially converged in 2001 and 2002. Over the same  time, the document matching contact rate generally declined for all three  income groups with fairly similar year-to-year patterns and with higher  income individuals being contacted at the higher rate.
section_title: Statutory Changes, Fewer Staff, and Resource Priorities Explain Trends in Math Error, and Other Enforcement Contact rates
paragraphs: The divergent trends between the growing rate of math error contacts and  the declining or relatively stable rates for the other enforcement programs  can be attributed to how the programs have been affected by statutory  changes, fewer enforcement staff, and priorities for using available staff.  Math error contacts grew over the fiscal year 1993 through 2002 period in  part because Congress expanded the types of tax issues covered by the  math error authority. For example, in 1996, Congress gave IRS authority to  shift a number of earned income tax credit issues from its audit program  to its math error program in that year. As a result, in 1997, IRS shifted over  700,000 cases involving missing or invalid social security numbers (SSN)  on tax returns from the audit program to the math error program. Under  this and other statutory expansions, IRS was making hundreds of  thousands of math error contacts with taxpayers by 2002 that were not  made in 1993.
A second statutory change played a role in the diverging trends among the  enforcement programs. In RRA, Congress took steps to better ensure that  taxpayer rights were protected by revising certain audit processes, such as  informing taxpayers about their rights and generally how they were  selected for audit. According to IRS officials, the changes contributed to  the decline in audits because IRS auditors had to spend more time to  handle nonaudit duties, to be trained in new procedures and taxpayers’  enhanced rights, and to do new tasks. Those changes contributed to  reductions in the number of audits that each auditor completed, meaning  they were less productive in closing audit cases.
Finally, declines in enforcement staffing and priorities for using staff also  contributed to trends in enforcement program contacts. IRS has reported  that from 1993 to 2001, enforcement staffing levels declined about   24 percent. These staffing declines affected not only the audit program but  also the document matching and nonfiler programs because those  programs require that IRS staff screen most notices before they are sent  and follow up when taxpayers respond to notices. Given declining staff  resources, IRS has restricted the number of notices sent when it finds  probable noncompliance under the document matching and nonfiler  programs. In contrast, IRS allocated enough resources over this period to  the math error program to continue sending these notices. IRS officials  said that IRS must resolve math errors to process tax returns and adjust  the tax liability so that taxpayers are in compliance.
section_title: Limited Evidence Suggests IRS Enforcement Programs Do Increase Compliance; No Measures Available on Enforcement Program Burden
paragraphs: Although widespread agreement exists that enforcement programs help  ensure voluntary tax compliance, evidence is limited about the degree to  which enforcement overall or by type of program affects taxpayer  compliance. No studies are available that measure the burdens that  taxpayers experience when contacted under IRS’s enforcement programs.
Over the years, many tax practitioners and academics have suggested that  enforcement programs are critical for ensuring voluntary compliance.  However, measuring the effects of enforcement programs on compliance  is a difficult task. IRS officials identified only one study that attempted to  estimate the effects of its enforcement programs on compliance; no more  recent work is underway or planned to measure these effects. Relying on  an econometric analysis of taxpayer behavior—using various assumptions,  IRS and non-IRS data for 1982 through 1991, and alternative measures of  compliance—this IRS study estimated the effects of various IRS programs  across the general taxpayer population. The study suggested that audits  had a positive impact on compliance in reporting information on tax  returns and that document matching had a positive effect on compliance  in filing required returns. We did not have time to analyze the  reasonableness of the study’s approach, assumptions, and results.
To obtain current information on taxpayers’ compliance in filing tax  returns and reporting correctly on them, IRS developed its National  Research Program (NRP). This program is designed to yield reliable  estimates of the compliance levels of individual taxpayers while  addressing concerns about the burden such a measurement program can  impose on taxpayers. NRP’s design was completed in fiscal year 2002, and  IRS will be auditing taxpayers’ returns under the program during fiscal  year 2003. IRS plans to use the NRP results to update tools to select  individual tax returns for audit, to allocate resources, to estimate the  impacts of legislative and administrative changes on voluntary compliance  and tax revenue, and to identify potential ways to improve voluntary  compliance. Although NRP should yield useful data, it was not designed to  measure the effect that each major enforcement program could have on  voluntary compliance.
In addition, IRS has been working to produce more comprehensive  estimates of burden that individual taxpayers face in meeting their tax  obligations. IRS developed a system in 1984 for estimating the burdens  taxpayers face in filing IRS forms, and began efforts during the 1990s to  create a better model for estimating such compliance burdens. IRS  recently announced that the new burden model is ready to be tested and  likely will replace the old model during fiscal year 2003. Although the  model should provide better estimates of individual taxpayer burdens in  completing and filing tax returns, it is not designed to estimate the  postfiling burdens related to IRS’s enforcement efforts. IRS expects to  model these postfiling burdens but does not yet know when that phase of  its burden estimation project will begin.
section_title: IRS’s Public Reporting on Its Enforcement Programs Is Incomplete
paragraphs: IRS’s public reporting on its enforcement programs for individual  taxpayers does not provide a complete perspective on its efforts to  enforce tax laws because that reporting heavily focuses on audits. IRS’s  audit rate is often cited in the press and is often the focus of congressional  and other debates concerning how well IRS is enforcing the tax laws.  However, over time the audit rate has become increasingly less complete  as a measure of IRS’s efforts to enforce tax laws because IRS’s other  enforcement programs have expanded their coverage of issues once  covered under audits.
At least two options exist for expanding reporting: changing the definition  of audits to include other enforcement efforts and reporting more data on  each enforcement program separately. The second option would achieve  more complete and balanced reporting without incurring some of the  disadvantages that could come from expanding the definition of audits.  IRS officials plan to expand public reporting for fiscal year 2002 on IRS’s  major enforcement programs to the extent that data are available and cost  effective to extract.
subsections: section_title: Limited Public Reporting on IRS’s Enforcement Programs
paragraphs: IRS publishes extensive data on audits but only limited data on other  enforcement programs in its Data Book. Table 2 summarizes the data  annually published on the enforcement programs involving individual  taxpayers.
As shown, IRS publishes no data on IRS’s math error program—which  affects millions of individual taxpayers annually. Compared with audits,  public reporting on the document matching and nonfiler programs is much  more limited. IRS officials said that IRS publicly reports more data on  audits because IRS has had a separate audit case-tracking system for many  years that produces such data. Also, they said that requests to publicly  report more data on the other programs had not been made.
IRS has not changed Data Book reporting on its enforcement programs to  keep up with changes in its enforcement programs over the years. With its  focus on audits, the reporting may lead others to focus on audits and  thereby to have an incomplete understanding of IRS’s enforcement efforts.  For example, trends in the audit rate alone are difficult to use to assess  IRS’s enforcement presence because that rate does not measure the same  phenomenon today as it did earlier. Even within the 10-year period we  reviewed, some of the tax issues that formerly had been checked only  under the audit program migrated into the other enforcement programs.  This type of migration was more pronounced in the 1980s as the document  matching program expanded substantially.
Although the scope of what IRS does under audits has changed  considerably over the past few decades, and even within the past 10 years,  the audit rate remains an often-cited statistic when Congress and others  consider how well IRS is enforcing the tax laws. For instance, during  annual oversight hearings on IRS’s performance, members of Congress  often raise questions about changes in the audit rate. Over the past several  years, these hearings have included concerns about the declining audit  rate and its possible affect on taxpayers’ compliance. The IRS  Commissioner also expressed concern about the decline in audits.  However, the Commissioner said that he did not believe the audit rate  needed to increase to the same level as a number of years ago because IRS  has other programs to enforce the tax laws that were not available, or as  broad in scope, in past years.
To the extent that IRS’s audit rate is the major source of information  available to taxpayers on IRS’s enforcement efforts, the public cannot be  fully aware of the extent to which IRS enforces tax laws and thus may  misjudge the chances that noncompliance is likely to be detected.  Taxpayers who are aware only of the audit rate would not be aware that  IRS often contacts more taxpayers under each of its other enforcement  programs—and IRS always contacts far more taxpayers in these other  programs combined—than it does under the audit program. As discussed  earlier, although the degree to which enforcement encourages voluntary  compliance is difficult to measure, it is widely believed that public  knowledge about enforcement efforts helps prompt higher levels of  voluntary compliance. Although he did not specifically cite possible  increases in voluntary compliance, in a letter issued in March 2001, the IRS  Commissioner said that only focusing on audits substantially understates  IRS’s capacity to find errors.
While greater awareness of the scope of IRS’s efforts to enforce the tax  law may encourage compliance, it could also increase taxpayers’  awareness of the trends in these efforts. It is not clear how taxpayers  would interpret and react to the differing trends among IRS’s enforcement  programs. For the period from 1993 through 2002, trends in IRS’s  individual enforcement programs often varied from year to year as well as  between the programs. Therefore, the compliance signals to taxpayers  from publicizing data on the trends in these other programs probably  would be different—and more mixed—than the signal they receive based  exclusively on the audit rate.
In addition, awareness of the fuller range of IRS’s enforcement efforts may  not affect compliance of all groups of taxpayers equally. This could occur,  for example, when the contact rates under the enforcement programs  differ, as they do under the audit and document matching programs for  different income groups. Further, to the extent that taxpayers know that  IRS can only understand their tax situation through a traditional audit,  their compliance might be less affected by fuller reporting on IRS’s other  enforcement efforts. The IRS Commissioner has said that the decline in  the traditional audit rate is of concern in part because a growing portion of  taxpayers and a growing amount of income is not well identified through  such programs as document matching and nonfiler.
section_title: Expanding Public Reporting on Enforcement Programs Does Not Require Redefining Audits
paragraphs: Of two options we identified for expanding public reporting on IRS’s  enforcement efforts, providing data on each major program separately  avoids certain disadvantages of aggregating data into one broad audit  program. After we discussed the tradeoffs of these options with IRS  officials, they said they plan to expand public reporting for each of the  nonaudit enforcement programs.
One option for expanding reporting on IRS’s enforcement programs would  be to define all of IRS’s enforcement programs to be audits for statistical  reporting. If the programs were all defined to be audits, IRS might report a  consolidated “audit rate” that would represent all of IRS’s contacts with  taxpayers. Consolidated reporting might also be done on such things as  the additional tax revenues identified through the contacts and the staff  time invested by IRS.
This option could have several advantages. For instance, it would provide  for more complete reporting on IRS’s overall enforcement efforts in a  single “rate.” Another advantage to expanding the definition of an audit is  that the major enforcement programs have an overall similarity in what  they intend to achieve. Moreover, some document matching and math  error checks now cover some tax issues that had been covered under  audit authority. Thus, because audits do not measure the same thing over  time, expanding the definition would create a more consistent measure of  the extent to which IRS is enforcing tax laws.
However, combining all enforcement programs under one definition poses  a number of potential disadvantages. For example, IRS’s legal authority  and operational rules, as well as taxpayers’ rights, vary across  enforcement programs. If all enforcement programs were called audits,  IRS staff and taxpayers could become confused about the rights and  restrictions that govern contacts with taxpayers. Labeling all enforcement  programs as audits might confuse taxpayers about whether IRS could  examine their books and records for a specific tax year (an action taken  under IRS’s current audit authority) if they had already been contacted  under document matching and/or math error programs.
If all enforcement programs were called audits and aggregate reporting  was done, IRS would face a challenge in ensuring that taxpayers and  others are not misled. For example, a single audit rate would cover the  range from intense audits covering multiple tax issues to the correction of  simple math errors arising from inadvertent miscalculations by taxpayers.  Given the higher number of math errors being detected by IRS over time, if  taxpayers interpreted a revised audit rate as representing the former  rather than the latter situation, they would be misled about IRS’s true level  of tax return scrutiny. Another challenge for IRS would be in reporting  audit results like tax dollars assessed and time spent per audit.  Considerable variability already exists in these results for audit—e.g., field  audits take significantly more staff hours than correspondence audits.  These differences would be more extreme under a consolidated audit  reporting system that included document matching, nonfiler, and math  error contacts. Finally, the IRS would need to account for potential double  counting because taxpayers can be contacted through more than one  enforcement program for the same return.
In addition, labeling all IRS enforcement programs as audits might suggest  that the programs are in some sense substitutable in detecting  noncompliance and encouraging voluntary compliance. Although the  document matching and nonfiler programs do replace part of what had  previously been done by auditors, these programs do not completely  substitute for audits. Math error program contacts are even less of a  substitute for audit. Combining all of these efforts suggests an  equivalence—one math error contact with a taxpayer is equivalent to a  complex, intense audit of a taxpayer books and records—that is not  correct. Therefore, if audits dropped even further than they have in recent  years, but math error contacts rose even faster, some might assume that  IRS is doing better at enforcing tax laws while others might disagree.
Because of such disadvantages, IRS officials said that they do not favor  changing the audit definition to include the other enforcement programs at  this time. Specifically, they said any changes would create confusion about  IRS’s enforcement activities and could distort any comparisons because  the programs significantly differ.
Instead of expanding the audit definition, IRS has already expressed  support for greater reporting on the full range of IRS’s enforcement  efforts. For example, in 2001, the IRS Commissioner stated that IRS’s goal  is to make public reporting on nonaudit enforcement efforts as  informative and meaningful as possible. This approach generally avoids  the disadvantages associated with reporting IRS’s enforcement efforts  under one consolidated, redefined audit program. At the same time, it  would provide more complete reporting to the public.
In December 2002, IRS officials told us that they plan to try to report more  data on other enforcement programs to the extent that the data are  available and cost-effective to extract. Officials expect that this expanded  reporting will begin with the fiscal year 2003 Data Book if the necessary  statistical tables cannot be produced in time for the 2002 edition that is to  be published in early calendar year 2003. The expanded information will  also be available on the IRS Web site.
These officials said that they would attempt to report the number of cases  closed, the staff time expended, and the tax amounts adjusted for  document matching and for the automated substitute for return program  (ASFR) component of the nonfiler program. For document matching, IRS  plans to account for not only the cases in which taxpayers were contacted  but also in which IRS staff resolved the apparent income discrepancy  without contacting taxpayers. For ASFR, IRS is planning to adjust the data  for cases in which IRS abated the additional tax amounts assessed after  taxpayers later filed a tax return. For both programs, IRS officials said that  reporting the data by the taxpayer’s level of income is doubtful. For math  errors, IRS officials said that they could report the number of notices, staff  time, and tax amounts assessed but that reporting other data is  questionable either because the data are not collected or are difficult or  costly to extract. IRS has no plans to analyze whether changes could be  made to cost-effectively extract or collect other data to facilitate  understanding of and comparisons among these nonaudit enforcement  programs.
section_title: Conclusions
paragraphs: Although research is not conclusive about the extent to which taxpayers  comply with the law based on their perception of whether noncompliance  will be caught, it is widely believed that those perceptions do contribute to  the overall level of compliance by taxpayers. On the basis of this belief,  observers in Congress and elsewhere have been concerned as IRS’s oft- cited audit rate has declined in recent years.
To an unknown, but real extent, the long-term decline in the audit rate is  attributable to the movement of some tax issues from IRS’s audit program  into its other enforcement programs. This movement has been facilitated  by changes in technology, and has enabled IRS, for some tax issues, to  more universally check whether taxpayers have accurately reported their  tax liabilities. Although much of the movement of IRS’s audits into other  programs occurred during the 1970s and 1980s, this trend continued  during the fiscal year 1993 through 2002 period.
Given these changes in IRS’s enforcement operations, policymakers in  Congress and elsewhere, as well as taxpayers, would be better informed  about the scope of IRS’s efforts to enforce tax laws if IRS were to expand  its annual public reporting to include the full range of its enforcement  programs. Toward this end, some interest has been expressed in having  IRS report a new audit rate that would aggregate IRS’s various  enforcement programs into a total, revised audit rate. Although such a  measure would attempt to provide a more comprehensive picture of IRS’s  overall effort to detect compliance problems, the advantages of doing so  do not clearly outweigh potential disadvantages. For instance, expanding  the definition of an audit would package enforcement activities that are so  disparate that the consolidated reporting could be misleading.
However, policymakers and taxpayers could be better informed about of  the extent of IRS’s efforts to enforce the tax laws without combining data  on all of IRS’s enforcement programs into one set of aggregate measures.  IRS’s commissioner set fuller reporting of IRS’s enforcement efforts as an  IRS goal, and IRS officials plan to move to fuller reporting of enforcement  program results, perhaps as early as in the 2002 IRS Data Book, which will  be published in early calendar year 2003. IRS officials expect that this  expanded reporting will use only readily available data on the enforcement  programs.
Because the document matching, math error, and nonfiler programs now  cover many tax issues formerly covered by audits and they annually  contact far more taxpayers than audits, expanded reporting on these  programs, using readily available data, is an appropriate first step.  However, the readily available data for the nonaudit programs is  incomplete compared to data reported on audits. For example, the data do  not cover all nonfiler contacts or the results of the programs by taxpayer  income. IRS has no plans to determine whether it could cost-effectively  extract or collect additional data in order to more completely present  program results, and facilitate comparisons across the programs or with  any new programs, as they evolve.
In the case of the math error program, total data that includes math errors  identified during initial processing of tax returns as well as errors found in  comparing tax return data to data in IRS’s masterfiles should be reported.  Excluding data on math errors found in comparing returns to IRS’s  masterfiles materially understates the volume of math error contacts with  taxpayers.
section_title: Recommendations to the Acting Commissioner of Internal Revenue
paragraphs: The Acting Commissioner of Internal Revenue should    determine whether additional data on each nonaudit program can be cost  effectively extracted or collected to make future annual reporting on  enforcement programs more complete and comparable.   provide information on all types of math error contacts when publishing  data on IRS’s math error program.
section_title: Agency Comments
paragraphs: The Acting Commissioner of Internal Revenue provided written comments  on a draft of this report in a January 27, 2003, letter, which is reprinted in  appendix V. The Commissioner agreed with our recommendations. We are  heartened that IRS has already begun to identify additional data to report  on its enforcement programs. Given the differing nature of IRS’s  enforcement programs, we encourage IRS to provide information that is as  comparable as possible among the programs.
As arranged with your office, we plan no further distribution of this report  until 30 days from the date of its issue, unless you publicly announce its  contents earlier. After that period we will send copies to the Chairman and  Ranking Minority Member, House Committee on Ways and Means; and  Chairman and Ranking Minority Member, Senate Committee on Finance.  We will also send copies to the Acting Secretary of the Treasury; Acting  Commissioner of Internal Revenue; the Director, Office of Management  and Budget; and other interested parties. Copies of this report will be  made available to others on request. In addition, the report will be made  available at no charge on the GAO Web site at http://www.gao.gov.
If you have any questions, please contact me or Tom Short on   (202) 512-9110. Key contributors to this report are acknowledged in  appendix VI.
section_title: Appendix I: Development of the Math Error Program
paragraphs: As early as the first codification of the Internal Revenue law in 1939,  Congress granted IRS “math error” authority so that IRS does not have to  provide the taxpayer with a statutory notice of deficiency for math errors.  In general, these are errors that must be corrected for IRS to process the  tax return. A 1976 statutory revision defined the authority to include not  only mathematical errors but other obvious errors such as omissions of  data needed to substantiate an item on a return. In the 1990s, Congress  extended the authority five times to help determine eligibility for certain  tax exemptions and credits. Table 3 summarizes the legislative authority  on math error provisions for individual tax returns.
According to IRS officials, math error authority applies to obvious errors  where most taxpayers do not dispute IRS’s decisions. However, if  taxpayers do disagree with the changes in taxes assessed, they can request  an abatement (reduction) of the additional taxes. The math error process  also generates lower administrative and other costs because it is highly  automated and requires little contact with taxpayers, according to IRS  officials.
section_title: Appendix II: Use of Information Returns and Document Matching at IRS
paragraphs: IRS has endorsed the concept of matching information returns to income  tax returns for the purpose of identifying unreported income since the  1960s. Prior to the 1960s, employers had reported on wages paid to  employees by the name of the employee. To facilitate matching, Congress  required a TIN—generally a social security number for individual  taxpayers—that is unique to each taxpayer, unlike a name. IRS and those  filing information returns (i.e., payers of income) need accurate TINs for  the system to work well. Filing of information returns on magnetic media  or other electronic means combined with greater IRS computer capacity  also has facilitated the matching process.
In 1962, Congress recognized that underreporting of nonwage income,  such as interest and dividend income, was a serious problem. To correct it,  Congress required information reporting on interest and dividend income.  Congress substantially expanded information reporting requirements  during the 1980s and added a few requirements during the 1990s.   Table 4 lists each major statute expanding information returns authority.
IRS did not perform extensive document matching until 1974 when IRS  established a program to match information returns against tax return data  to identify potential income underreporting. Even so, IRS used labor- intensive, paper-driven methods. For example, clerks had to manually  create case files for each potential underreporter, and IRS staff had to  review the case files to determine if income was underreported. Clerks  entered the results of these file reviews into systems, which generated  notices to taxpayers. In 1987, IRS began to automate the document  matching process. At that time IRS established the Automated  Underreporter Program that allows access to computerized information,  reducing the need for hard copy documents and clerks, and enabling a  faster response to taxpayer inquiries.
By tax year 2000, almost 1.5 billion information returns were filed with  IRS. Table 5 lists the major types of information returns filed for 1983 and  2000.
In 2002, IRS re-instituted matching of income reported by flow-through  entities such as trusts, partnerships, and S-corporations on Schedule K-1  to income reported on tax returns by the related partners and  beneficiaries. Schedule K-1 shows the income distributed to partners and  beneficiaries, who receive a copy as well as IRS. According to IRS,  information provided on Schedule K-1 is important for determining  whether recipients of flow-through income have properly reported that  income on their tax returns. IRS expects the matching of Schedule K-1  data to increase accurate reporting of trust income on future tax returns  by providing information that IRS can use to detect possible unreported  income and to induce taxpayers to voluntarily comply. Under K-1  matching, IRS sent 69,097 notices to taxpayers in 2002 for tax year 2000. In  most cases, the taxpayers did not owe additional tax for various reasons  (e.g., taxpayers reported the income differently than expected). IRS does  not yet have complete results from this new matching program. IRS  officials told us that K-1 matching has been suspended for one year to  analyze the matching criteria and results.
section_title: Appendix III: Individual Audit and Other Enforcement Program Data
paragraphs: IRS did not publish data on revenue officer examiner audits prior to 1998.
Data for math error masterfile notices do not exist prior to fiscal year 1997.
The number of math error (revised) contacts are the same as the number of math error contacts for  fiscal years 1993 through 1996 because data for the number of masterfile notices does not exist for  these years.
section_title: Appendix IV: Soft Notices and Voluntary Compliance Agreements
paragraphs: In addition to the four major enforcement programs, IRS started two  programs in the mid-1990s to help ensure that taxpayers file timely and  accurate returns, and to minimize the need for enforcement.
Through the soft notice program, IRS has been sending notices for  apparent errors on two tax issues—duplicate claims for one allowable  dependent exemption and unfiled self-employment tax returns. IRS uses  soft notices when it has information to indicate that some taxpayer made  an error but not enough information to know for sure, such as which  taxpayer overclaimed a dependent. Soft notices are intended to stimulate  taxpayers to correct the error without IRS having to invest audit time.
In addition, IRS uses the voluntary compliance agreements program to  address known compliance problems in reporting tip income. To improve  compliance of employees in industries where tip income is a part of  wages, IRS had been auditing the tax returns of tipped employees, which  burdened the employees and employers as well as IRS. To minimize these  burdens while also addressing the compliance problems, IRS began to  explore new methods to achieve voluntary compliance by tipped  employees, such as voluntary compliance agreements. IRS has negotiated  three types of agreements with certain employers (e.g., restaurants) to  improve compliance by their individual employees in reporting tip income.  These three types of agreements follow.
The Tip Rate Determination Agreement (TRDA) requires that IRS and the  business agree upon a tip rate for various occupations in the business and  that at least 75 percent of employees in the business agree to report at that  rate on their income tax return.
The Tip Reporting Alternative Commitment (TRAC) does not require a tip  rate to be determined, but does require that the business create written  statements to record employee tips and send the statements to IRS. This  agreement covers all employees and requires that the business educate  employees about their obligation to report their tip income.
The Employer-designed Tip Reporting Alternative Commitment  Agreement (EmTRAC) requires that businesses establish tip reporting  procedures and prepare a statement on a regular basis (no less than  monthly) to reflect all tips for each employee. The business must establish  an education program to train employees about their obligation to report  tip income.
In general, these two programs are similar to the four major enforcement  programs in that they attempt to correct noncompliance. They differ  because, rather than enforcing the tax laws, both attempt to reduce the  need for enforcement. In sum, their differences tend to outnumber their  similarities, as discussed below.
Similar to the four enforcement programs, IRS sends soft notices to inform  taxpayers of potential errors. However, the soft notice does not require  taxpayers to take any action, and IRS takes no action to verify the error or  assess tax. Instead, the notice asks taxpayers to examine the potential  error and file an amended return if they confirm the error. Also, the notice  informs taxpayers that IRS will monitor these types of errors and might  contact them if they do not alter their reporting in the future.
The similarity between the voluntary compliance agreements and the  other enforcement programs is that they attempt to correct  noncompliance. Unlike the other programs, these agreements occur  before a return is filed and do not involve sending any notices to  taxpayers. IRS believes that these agreements enhance voluntary  compliance so that IRS can avoid the need to take enforcement action and  assess additional taxes after a return is filed. IRS assures the businesses  that IRS will not audit their books and records as long as they abide by the  agreement. However, IRS may still audit the books and records of a tipped  employee and report any changes to the business. IRS officials said that  current procedures require follow-up to check adherence to these  agreements, but the officials were not sure about the extent to which this  has been occurring.
IRS has limited data for the soft notice and voluntary compliance  agreement programs, as follows.
In 2002, IRS sent 1.2 million soft notices to taxpayers on duplicate  dependent claims on 2001 tax returns; in 1998, IRS sent 1.6 million soft  notices on these duplicate claims and on self-employment tax for 1996 and  1997 returns. This involved 329,000 notices sent to taxpayers who  reported self-employment income but had not filed a schedule SE or paid  self-employment tax. IRS did not provide data on these notices for any  later years.
Through 2001, TRDAs and TRACs covered 48,348 establishments in the  casino, beauty, and food and beverage industries. IRS did not have data on  the number of individual taxpayers covered by these agreements because  the agreements are made with employers rather than directly with the  individual taxpayers.
section_title: Appendix V: Comments from the Commissioner of Internal Revenue
section_title: Appendix VI: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to those named above Susan Baker, Grace Coleman,   Susan Conlon, Brendan Culley, Michele Fejfar, Leon Green, Marshall  Hamlett, Shirley Jones, and Jay Pelkofer made key contributions to this  product.
section_title: Related GAO Products
paragraphs: U.S. General Accounting Office. Tax Administration: Advance Tax  Refund Program Was a Major Accomplishment, but Not Problem Free.  GAO-02-827. Washington, D.C.: August 2, 2002.
U.S. General Accounting Office. Tax Administration: New Compliance  Research Effort Is on Track, but Important Work Remains. GAO-02-769.  Washington, D.C.: June 27, 2002.
U.S. General Accounting Office. Tax Administration: Impact of  Compliance and Collection Program Declines on Taxpayers. GAO-02-674.  Washington, D.C.: May 22, 2002.
U.S. General Accounting Office. IRS Audit Rates: Rate for Individual  Taxpayers Has Declined But Effect on Compliance Unknown. GAO-01- 484. Washington, D.C.: April 25, 2001.
U.S. General Accounting Office. Tax Administration: Information on  Selected IRS Tax Enforcement and Collection Efforts. GAO-01-589T.  Washington, D.C.: April 5, 2001.
U.S. General Accounting Office. Tax Administration: IRS’ Use of  Nonaudit Contacts. GAO/GGD-00-7. Washington, D.C.: March 16, 2000.
U.S. General Accounting Office. Tax Administration: IRS Is Working to  Improve Its Estimates of Compliance Burden. GAO/GGD-00-11.  Washington, D.C.: May 22, 2000.
U.S. General Accounting Office. IRS Audits: Weaknesses in Selecting and  Conducting Correspondence Audits. GGD-99-48. Washington, D.C.: March  31, 1999.
U.S. General Accounting Office. Tax Administration: IRS’ Audit and  Criminal Enforcement Rates for Individual Taxpayers Across the  Country. GAO/GGD-99-19. Washington, D.C.: December 23, 1998.
U.S. General Accounting Office. Internal Revenue Service: Results of  Nonfiler Strategy and Opportunities to Improve Future Efforts.  GAO/GGD-96-72. Washington, D.C.: May 13, 1996.
U.S. General Accounting Office. Tax Administration: Audit Trends and  Results for Individual Taxpayers. GAO/GGD-96-91. Washington, D.C.:  April 26, 1996.
Statement of Johnny C. Finch, Senior Associate Director, General  Government Division, GAO, Before the Subcommittee on Commerce,  Consumer, and Monetary Affairs, Committee on Government Operations,  House of Representatives, on IRS’ Information Returns Matching Program,  April 29, 1986.