User Fees: Additional Guidance and Documentation Could Further Strengthen IRS's Biennial Review of Fees
Published: 2011-11-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The President's fiscal year 2012 budget proposal requests $13.6 billion to fund the Internal Revenue Service (IRS), including $204 million in spending funded through user fee collections. Well-designed and well-implemented user fees can reduce taxpayer burden by funding portions of IRS services that provide special benefits to users beyond what is normally provided to the public. As such, GAO was asked to (1) describe the types and amounts of IRS user fees and how IRS collects and uses them, (2) assess how IRS sets and reviews existing user fees, and (3) assess how IRS identifies additional areas where new fees could be justified. GAO reviewed relevant laws, guidance, and literature on user fee design and implementation. GAO reviewed IRS documents and cost estimates and interviewed IRS officials in the Chief Financial Officer's (CFO) office and program divisions.
section_title: What GAO Found
paragraphs: Although user fee collections fund less than 2 percent of IRS's budget, fee collections are expected to reach $309 million in fiscal year 2012 and recently involved nearly 20 million transactions with taxpayers. IRS charges user fees for various activities that include assisting taxpayers in complying with their tax liabilities, clarifying the application of the tax code to particular circumstances, and ensuring the quality of paid preparers of tax returns, among others. In fiscal year 2010, two fees accounted for more than 80 percent of total retained user fee collections: (1) Installment agreements (IA): Provides taxpayers who cannot pay their full tax liability the option to pay their full tax liability with smaller monthly payments over a period of time for up to 60 months. This service is offered to most taxpayers for $105 with lower rates for low-income taxpayers and those who opt for a direct debit agreement. This service generated $198 million, or 68 percent of IRS's total retained user fee collections. (2) Income verification express services (IVES): Provides 2-business-day processing and electronic delivery of tax return transcripts for users, such as mortgage lenders and other financial market entities, to confirm the income of a borrower (taxpayer) during the processing of a loan application. IRS charged a fee of $2.25 for each IVES transcript request. This service generated $40 million, or 14 percent of total retained fee collections. IRS conducts a review of its user fees biennially (or every 2 years) and has taken steps to improve its estimates of the cost of providing its user fee services, with particular attention to its largest fee. For example, IRS hired a contractor to evaluate, update, and simplify the IA user fee cost estimate. However, for a few of IRS's smaller fee programs, GAO found that IRS omitted fees from its biennial review, did not clearly document assumptions to be used in some cost estimates, and lacked documentation of factors considered in setting some fees. For example, one user fee has not been reviewed or updated since fiscal year 1996, while program managers for another user fee were uncertain about salary assumptions. GAO also found that while officials stated that they consider factors other than cost (such as potential effects on taxpayer compliance and administrative burden) in setting fee rates, they did not thoroughly document these factors or corroborate anecdotal support with analysis. Finally, GAO found that IRS did not fully document final decisions made on fee rates as a result of its biennial review. IRS has implemented several new user fees in recent years, but it may not be taking full advantage of its process for identifying new user fees. As directed by Office of Management and Budget Circular A-25, IRS's CFO requests that each division review its programs and provide proposals for new user fees on a biennial basis. However, officials in some divisions or offices said that they had no formal solicitation process for employees to suggest new user fee proposals. Further, IRS does not clearly refer staff to consider established guidelines identified in the Internal Revenue Manual or other resources when identifying potential new user fees during its biennial review. GAO was unable to determine the extent to which IRS staff considered these guidelines.
section_title: What GAO Recommends
paragraphs: GAO recommends that the Commissioner of Internal Revenue take steps to include certain additional fees in IRS's biennial review, improve guidance on estimating costs of user fees, and improve the documentation of assumptions used, factors considered, and decisions made during the setting and reviewing of existing fees. In addition, steps should be taken to provide clear, specific, and direct guidelines for IRS employees and managers to follow in identifying potential new fee opportunities. In written comments, IRS agreed with our recommendations.

section_title: Letter
paragraphs: The President’s fiscal year 2012 budget proposal requests $13.6 billion to  fund the Internal Revenue Service’s (IRS) administration of the tax laws,  which includes providing taxpayer services to make voluntary compliance  easier and enforcing tax laws to ensure that taxpayers meet their tax  obligations. This amount includes $204 million funded through user fee  collections. IRS collects user fees to help offset the costs of providing  services to specific beneficiaries, including services that help taxpayers  meet their tax obligations, such as installment agreements and offers in  compromise, among others. Although user fees fund less than 2 percent  of IRS’s fiscal year 2012 budget request, fee collections are expected to  reach approximately $309 million in fiscal year 2012 and recently  approached nearly 20 million transactions with taxpayers.
Well-designed and well-implemented user fees can fund IRS services that  provide special benefits beyond those provided to the general public and  thereby reduce the burden on taxpayers not using those services. The  Office of Management and Budget (OMB) provides guidance on how  executive branch agencies should set and implement user fees through  Circular No. A-25. Further, the circular and the Chief Financial Officers  (CFO) Act of 1990 direct federal agencies to review their user fees every  2 years and make recommendations about the fees charged. The  circular also states that each agency should review its programs to  determine whether it could charge new fees for its services, noting that if  imposing such fees is prohibited or restricted by law, agencies should  recommend legislative changes as appropriate.
In response to your request, this report (1) describes the types and  amounts of IRS user fees and how IRS collects and uses them,   (2) assesses how IRS sets and reviews existing user fees, and   (3) assesses how IRS identifies additional areas where new user fees  could be justified.
To address these objectives, we reviewed user fee legislation and  guidance, agency and budget documents, prior GAO work and other  relevant literature on user fee design and implementation characteristics,  and cost estimates for user fees that were included in IRS’s biennial  review process. We also interviewed and obtained written responses from  IRS officials in the various divisions and offices who were responsible for  overseeing the various user fees. We obtained information about IRS’s  internal controls for the revenue and volume data we used and  determined that the data were sufficiently reliable for the purposes of this  report. For further details on our scope and methodology, see appendix I.
We conducted this performance audit from February 2011 through  November 2011 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: User Fee Definition and Design Principles
paragraphs: A user fee is a charge assessed to beneficiaries for goods or services  provided by the federal government. In general, a user fee is related to  some voluntary transaction or request for government goods or  services—such as a passport or admission to a national park—above and  beyond what is normally provided to the public. Taxes, on the other hand,  arise from the government’s sovereign power to raise revenue and need  not be related to any specific benefit. Unlike user fees, taxes are  generally imposed to raise revenue to fund benefits for the general public,  such as national defense.
GAO has published a guide on the principles of effective user fee design. In this guide, we focused on criteria that have often been used to assess  user fees and other government collections.
Efficiency is whether the fee ensures that the government is  providing the amount of the service that is economically desirable.  Efficient fees increase awareness of the costs of government  services, creating incentives to reduce costs where possible. In  addition, efficient fees act as a measure of the service’s worth while  meeting demand for the service.
Equity is the extent to which everyone is considered to be paying a  fair share (whether fairness is based on program use or the user’s  ability to pay).
Revenue adequacy is the extent to which the fee covers the intended  share of service costs, and whether the fee revenue is stable enough  to withstand short-term fluctuations in economic activity.
GAO, Federal User Fees: A Design Guide, GAO-08-386SP (Washington, D.C.: May 29,  2008).
Administrative burden is the cost of collecting and enforcing the fee,  as well as any costs users incur to pay the fee.
These criteria interact and are often in conflict with each other; as such,  trade-offs exist when considering among the criteria to design a fee. The  weight that different policymakers may place on different criteria will vary,  depending on how they value different attributes. To that end,  understanding the trade-offs associated with different aspects of a fee’s  design can provide decision makers with better information and support  more robust deliberations about user fee financing.
section_title: Organization of IRS User Fees
paragraphs: IRS charges user fees for various services that assist taxpayers in  complying with their tax liabilities, clarify the application of the tax code to  particular circumstances, and ensure the quality of paid preparers of tax  returns, among others. IRS is organized into four operating divisions  based on types of taxpayers: (1) Wage and Investment (W&I); (2) Large  Business and International (LB&I); (3) Small Business and Self-Employed  (SB/SE); and (4) Tax Exempt and Government Entities (TE/GE). Each  division provides at least one service to taxpayers for which it charges a  fee. In addition to these primary operating divisions, IRS has a number of  offices, including Chief Counsel, Appeals, Professional Responsibility,  and Return Preparer, that also provide services to taxpayers for a fee.  Table 1 shows user fee services organized by business division or  program office responsible for managing the user fee programs.
Descriptions of the services and user fees, including fee rates, are  included in appendix II.
The CFO has oversight responsibilities for the initial assessment,  updates, and collection of user fees. While the CFO does not provide the  services for which user fees are charged, it does have the responsibility  to ensure that user fees are appropriately collected, deposited, and  reported.
section_title: Authority to Collect User Fees
paragraphs: IRS derives its authority to charge user fees from either the Independent  Offices Appropriation Act (IOAA) or various other specific statutes.  Although OMB Circular A-25 states that agencies should recover full  costs to the government to the extent permitted by law for providing the  service or good, the authority for each fee determines how much of the  costs IRS is required to recover. For example, IRS is directed by the  circular to recover full costs for fees authorized by IOAA, unless an  exception applies. Agencies, however, may request waivers from OMB  to charge less than full cost if the fee would be unduly costly to collect or  otherwise justifies an exception. IRS has waivers pending with OMB to  charge less than full cost for installment agreements and offers in  compromise. According to IRS officials, increasing these fees to full cost  could discourage taxpayers from using these services.
In contrast, when IRS is authorized to charge a user fee under a specific  statute, the provisions of that statute govern. For example, IRS can  charge a reasonable fee for income verification express service and U.S.  residency certifications. determination letters, minimum rates are specified in the statute. Table 2  shows IRS user fees by authorizing legislation and illustrates that the  authority to charge a user fee can be separate from the authority to  provide the good or service.
Unlike IOAA-derived user fees that require full cost recovery, IRS is not required to  recover full cost for user fees authorized by specific statutes which permit IRS to charge  what it considers to be reasonable, or fair. Income verification express service provides 2- business-day processing and electronic delivery of tax return transcripts for users, such as  mortgage lenders and other financial market entities, to confirm the income of a borrower  (taxpayer) during the processing of a loan application.
Includes advance art determination letters, pre-filing agreements, foreign insurance excise tax  exemptions, competent authority limitation on benefits determination letters, and Office of the Chief  Counsel and TE/GE division letter rulings and determination letters.
section_title: IRS User Fee Collections, Associated Service Volume, and Carryover Amounts Have Increased with Most of the Revenue Used to Fund Taxpayer Services
subsections: section_title: IRS User Fee Revenue and the Volume of User Fee Services Have Increased in Recent Years
paragraphs: In fiscal year 2010, IRS collected and retained $290 million in user fees  and transferred an additional $62 million of user fee collections to the  U.S. Treasury General Fund (General Fund). Upon collection, user fees  are recorded into various IRS financial systems and are deposited either  into IRS’s Miscellaneous Retained Fees (MRF) Fund for use by the  agency, the General Fund, or both. The allocation of fees between  funds is determined by a formula specified in the Treasury, Postal Service  and General Government Appropriations Act of 1995 (1995 Treasury  Appropriations Act), which was based on the fees and fee amounts in  effect at the time.prior to September 30, 1994, such as enrolled actuary, are divided  between IRS’s MRF Fund and the General Fund. User fees implemented  after September 30, 1994, such as installment agreements, are fully  retained by IRS.
For example, collections from user fees that existed  Table 3 provides IRS’s total retained user fee collections by category for  the past 6 fiscal years. Installment agreements have generated the  majority of IRS’s user fee collections. In fiscal year 2010, they accounted  for approximately 68 percent ($198 million of $290 million) of IRS’s total  retained user fee collections. A rate increase implemented in January  2007 resulted in a 55 percent increase (or from approximately $79 million  to $122 million) in collections from fiscal year 2006 to 2007. According to IRS officials and as shown in table 3, despite the rate increase,  taxpayers continued to initiate, restructure, or reinstate installment  agreements at similar or higher levels. The second largest contributor to  fee collections came from income verification express service, which  accounted for approximately $40 million or 14 percent of fee collections in  fiscal year 2010. Fee collections from income verification express service  increased significantly from fiscal years 2007 to 2009, which IRS officials  attributed to the turmoil in the financial and housing markets.in collection amounts can occur because of fee rate changes or because  of other factors, such as programmatic changes or economic conditions.
By volume of user fee services, income verification express service  topped the list of services provided in fiscal year 2010 with approximately  16 million requests followed by installment agreements with about 3  million requests, as shown in table 4. IRS decreased the income  verification express service fee rate from $4.50 to $2.25 in fiscal year  2010 because of the increased volume, which lowered the unit cost per  income verification express service request. Installment agreement  volume has also increased in recent years, despite the fiscal year 2007  fee rate increases.
IRS has permanent, indefinite authority to obligate and spend user fee  collections. This authority allows the agency independence and flexibility  in the use of these funds. IRS can obligate user fee collections for any  activity for which it has an appropriation with OMB approval, and it can  carry over any unexpended fee collections for use in subsequent years.  We have suggested that carryovers are one way agencies can establish  reserves to sustain operations in the event of a sharp downturn in user  fee collections or other events.reserve of unspent fee collections that can be used for critical needs. The  carryover is what is left over after IRS transfers fee collections to  supplement its appropriations in order to meet agencywide needs. Table  5 provides information on IRS’s MRF carryover balances, which have  grown in recent years as fee activity has increased. At the end of fiscal  year 2010, $288 million in fee collections was carried over for use in  future fiscal years.
section_title: IRS Reviews User Fees Biennially but Does Not Clearly Document Some Processes or Decisions
subsections: section_title: IRS Conducts a Biennial Review of User Fees and Has Taken Steps to Improve Its Cost Estimates
paragraphs: As directed by the CFO Act of 1990 and OMB Circular A-25, IRS  conducts a general review of its user fees on a biennial basis. To initiate  the biennial review, IRS’s CFO issues a memorandum to senior  management in relevant business divisions and program offices  requesting that they validate the cost of providing services for which they  charge a user fee and provide suggestions for new user fees. Based on  the cost estimates developed and other considerations, senior  management will propose whether to increase, decrease, or keep the  current fee rates. These proposals are sent to the CFO and are then  compiled and forwarded in a report to the Commissioner for final review  and approval.
IRS has made efforts to improve its cost estimation process in support of  its user fees, with particular attention given to its largest fee by amount  collected. For example, the Treasury Inspector General for Tax  Administration’s 2006 audit concluded that installment agreement user  fee cost estimates were based on incorrect assumptions and contained  calculation errors and unsupported costs. To address these issues, IRS  hired a contractor to assess the cost estimate for the fiscal year 2007  biennial review and re-hired the contractor to prepare the cost estimate  for the fiscal year 2009 biennial review. For the fiscal year 2011 biennial  review, the contractor was hired to simplify the fiscal year 2009 cost  estimate. According to officials, IRS does not plan to use the contractor  for future biennial reviews.
According to officials, IRS has also taken steps recently to improve the  cost estimate for the offer in compromise user fee. For the biennial review  in 2009, officials conducted interviews and developed a complex series of  spreadsheets to estimate costs of the offer in compromise program. This  process, which IRS described as “less precise and more reliant on  estimates and averages,” estimated the full cost of the average offer in  compromise agreement to be $2,132. Because the 2009 process was  very labor-intensive, IRS assessed other options for gathering the  information needed to prepare the cost estimate. As a result of this  assessment, IRS simplified its cost estimation process while making it  easier to collect information about program costs. The revised fiscal year  2011 review process resulted in an estimated full-cost user fee of $2,718,  an approximate 22 percent increase over that calculated in the 2009  biennial review. According to IRS, the 2009 cost calculations were likely  significantly understated, and its 2011 process for capturing offer in  compromise costs will yield consistently reliable data going forward.
Based on the biennial review, IRS has also revised fee rates to reflect the  updated cost of providing various services, such as income verification  express service and Chief Counsel letter rulings.
section_title: IRS Omitted Some Fees from Biennial Review
paragraphs: IRS has omitted three fees—advance art determination letters,  reproduction of tax returns, and special statistical studies and  compilations—from its biennial review and contrary to the requirements of  the CFO Act. According to an IRS official, the cost estimate used to  support the advance art determination letter user fee has not been  reviewed or updated since fiscal year 1996 because of very low demand  (fewer than 20 per year from fiscal year 2005 to fiscal year 2010).also omitted from the biennial review the user fees for reproduction of tax  returns and special statistical studies and compilations because it  interpreted these fees as not being covered by the biennial review  requirement.
However, the CFO Act requires IRS to review, on a biennial basis, the  fees, royalties, rents, and other charges imposed by IRS for services and  things of value it provides. guidance on conducting a biennial review of user fees regardless of the  authorizing statute to the extent permitted by law. Since there is no  alternative statutory review process for these fees, they fall under the  review requirements of the CFO Act and guidelines of OMB Circular A-25.  Furthermore, as articulated in the accounting standards for the federal  government, Congress and federal executives need cost information to  make decisions about allocating federal resources, modifying programs,  and evaluating program performance.
31 U.S.C. § 902(a)(8). always be cost-effective given the amount collected from these fees, it  may be possible to perform a simplified update during some review  cycles.
section_title: Assumptions Used to Estimate Cost of Some User Fee Programs Were Not Always Correct or Well Documented
paragraphs: According to IRS officials, the CFO’s office works closely with business  divisions and program offices to develop cost estimates, provides  guidance on data to include in the cost estimates, and develops Internal  Revenue Manual guidelines to document IRS’s process for setting and  reviewing user fees. In a recent report, we found that IRS set the user fee  for the preparer tax identification number in accordance with established  guidelines for cost estimation. However, for IRS’s smaller user fee  programs, we found that data or assumptions used in cost estimates were  not always well documented or understood by officials. For example, for  the LB&I fees, the fiscal year and data source for some of the fiscal year  2009 cost estimate components were not documented. In another case,  we noted some confusion early in the fiscal year 2011 review process  from managers in the W&I division about what assumption should be  used to estimate the pay increase in the fiscal year 2011 cost estimate.  They assumed that they should include a 5 percent pay increase in the  fiscal year 2011 cost estimate for the U.S. residency certification fee  when the CFO had determined that such an increase should not be  included.$6.8 million in direct labor costs—in the cost estimate for the offer in  compromise user fee, which the CFO’s office did not detect in its review  of cost estimates.
We also found a calculation error—double counting more than  According to GAO’s cost estimation guide, assumptions used to estimate  costs should be documented to include the rationale behind the  assumptions and any historical data that support the assumption, and federal accounting standards require documentation of all managerial  cost accounting activities, processes, and procedures used to associate  costs with products, services, or activities. IRS’s Internal Revenue  Manual sections on user fees and managerial cost accounting contain  guidelines for developing cost estimates. However, IRS has not  provided a documented set of assumptions and decision rules for  program managers to follow in estimating costs of user fee program  activities for each biennial review. Although it is the responsibility of IRS’s  business units to develop the cost estimates, supplemental guidance or  tools from the CFO’s office that provide a crosswalk between the cost  estimation guidelines and specific cost estimate assumptions could  potentially help staff avoid mistakes that would need to be caught later in  the review process. Finally, because these tools could provide more  specific instructions on assumptions to be used and documenting data  sources, IRS can better ensure consistency of its cost estimates across  user fee programs.
section_title: IRS Does Not Always Document Factors Considered or Decisions Made during Biennial Review of Existing User Fee Rates
paragraphs: In setting user fee rates, IRS officials said they consider taxpayer burden,  administrative costs, and potential effects on taxpayer compliance,  among other factors, when determining whether to recover full cost. For  example, IRS set the U.S. residency certification fee rate at $35 rather  than $110, the estimated fiscal year 2009 cost of providing the service.  Based on anecdotal information, IRS decided that raising the fee rate  could discourage taxpayers from applying for the certification, which could  result in higher withholding of foreign income taxes and potentially lower  income tax revenue to the U.S. Treasury. Similarly, IRS has kept the offer  in compromise fee rate at $150 since the fee’s inception in 2003, even  though IRS recently estimated that it costs more than $2,700 to  implement the program per user. According to IRS officials, the fee rate  has been kept at $150 to encourage taxpayers who owe taxes to work  with IRS and resolve their tax bills.
GAO’s user fee design guide outlines important factors to consider when  setting user fee rates, including evaluating users’ ability to pay and the  extent to which the general public and certain individuals benefit from the  fee-based program. As described above, IRS officials consider factors  other than cost recovery in setting fee rates. However, we found that IRS  has not thoroughly documented these factors, corroborated anecdotal  support with data analysis, or studied the effect of user fees on taxpayer  behavior. A 2007 report by the National Taxpayer Advocate also found  that IRS had not studied the effect of user fees on taxpayer behavior or  demand for IRS services. Further, although officials said that changing  the offer in compromise fee rate would be costly, IRS has not  documented the extent to which changing this fee rate and others would  impose additional costs or administrative burden on the agency.
After reviewing fee rates, IRS publishes some of the revised fees in  revenue procedures and other documentation. However, IRS’s fiscal  year 2009 biennial report did not document whether the proposed fee  rates discussed in the report had been approved by the IRS  Commissioner. For example, in the report, IRS officials proposed a $5 fee  increase from $35 to $40 for providing U.S. residency certification. When  asked about the disposition of the proposed fee rates presented in the  biennial report, officials initially stated that all the proposed fees in the  biennial report had been approved and implemented, as appropriate.  However, we found documentation that the user fee for U.S. residency  certification remained at $35, which officials later confirmed. IRS officials  acknowledged that they used an informal process to decide whether to go  forward with the proposed fee increase, which led to miscommunication in  determining which fee rate had been implemented.
GAO’s standards for internal control in the federal government establish  the need for clear documentation. standards, events should be promptly recorded to maintain their  relevance and value to management in controlling operations and making  decisions. Moreover, thoroughly documenting decisions and the rationale  behind decisions becomes increasingly important as the federal  workforce ages and the retirement of senior managers and staff risks the  loss of valuable institutional knowledge.
GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1  (Washington, D.C.: Nov. 1, 1999), 15.
section_title: IRS Has Implemented New User Fees, but the Extent to Which Guidelines Were Used to Assess Potential Fee Opportunities Is Unclear
paragraphs: IRS has implemented several new user fees in recent years. As part of  IRS’s fiscal year 2005 biennial review, the former IRS Commissioner  tasked all business divisions and program offices with identifying potential  new user fees to offset processing costs. Through this review, IRS  identified several new user fees, including income verification express  service and U.S. residency certification, which were implemented in fiscal  year 2007. As a result of IRS establishing these new fees, Congress  removed the limit on user fee collections that IRS could retain and  reduced IRS’s annual appropriation by the estimated amount of user fees  that would be collected.
Since then, IRS has also identified three new user fees related to return  preparers and implemented the first fee, preparer tax identification  number, in September 2010. IRS plans to implement the remaining two  user fees for competency testing and fingerprinting requirements in fiscal  year 2012. program will be funded exclusively through collections from these three  fees.
According to IRS officials, the return preparer user fee  IRS faces unique challenges in establishing user fees. For example, the  National Taxpayer Advocate has noted that user fees may prevent the  public from accessing IRS’s services because they cannot afford to pay  the fee or may discourage people from seeking services that help IRS  fulfill its core mission. User fees may also be costly for IRS to administer  and divert resources from activities that bring in more tax revenue. On the  other hand, user fees can promote an efficient and fair allocation of  government resources and ensure that those who are receiving special  benefits pay for them.
GAO-11-336 discussed IRS’s plans for implementing user fees for preparer tax  administration number registration, competency testing, and continuing education. Since  then, IRS has decided not to establish a fee for continuing education and has decided to  establish a user fee for fingerprinting preparers as part of a background check. assist staff in identifying potential new user fees. However, IRS may not  be taking full advantage of its process for identifying new user fees. For  example, officials in some divisions or offices said that they had no formal  process for soliciting suggestions from employees on new user fee  proposals. Although the CFO’s biennial review memo refers managers to  the Internal Revenue Manual when reviewing costs of existing user fees,  it does not specifically indicate that these same guidelines or other  established design guidelines should be considered when examining new  user fees opportunities. We were unable to determine the extent to which  IRS staff considered these guidelines, and in our survey of division  commissioners, we identified variation in the criteria considered across  the operating divisions and offices. If managers are unclear about the  process for soliciting user fee proposals or do not receive clear direction  on what guidelines to consider when evaluating their programs for new  user fees, IRS may be less able to fully engage its staff in evaluating new  user fees. As a result, IRS could be missing potential fee opportunities or  misallocating resources toward developing fee proposals that are not  efficient, equitable, cost-effective, or feasible. The cost and effort involved  to clarify its process for soliciting new user fee proposals and to refer staff  to established guidelines for identifying and evaluating potential fee  opportunities would likely be modest to IRS, since, as table 7 shows,  several sources exist for such guidelines.
section_title: Conclusions
paragraphs: Because of the volume of IRS’s user fee transactions with the public,  ensuring that user fee rates are properly set, collected, and reviewed is  important for taxpayers. As a result of its biennial reviews of user fees,  IRS has focused on improving cost estimates related to its most  significant fees in recent years. However, we that found that (1) some  fees were omitted from the biennial review, (2) assumptions used in cost  estimates were not always well documented, and (3) factors considered  in setting fees and decisions made were not always well documented. It is  also unclear the extent to which user fee design guidelines were used to  assess new fee opportunities. Given that most of these issues pertained  to IRS’s smaller fee programs, steps taken to strengthen the review  process should not only improve the efficiency of the review but also be  cost-effective. Accordingly, we have identified some additional steps,  such as clarifying the review guidelines up front, which could potentially  decrease the amount of rework needed downstream and be implemented  at low cost.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Commissioner of Internal Revenue take the  following five actions to:  Include certain fees in the biennial review that were previously  omitted.
Develop supplemental guidance or tools that provide more detailed  information on data and assumptions to include in cost estimates.
Better document the factors considered in setting and reviewing  existing user fees.
Better document the decisions made in setting and reviewing existing  user fees.
Provide clear, specific, and direct guidelines for IRS employees and  managers to follow in identifying potential fee opportunities.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Commissioner of Internal  Revenue for his review and comment. In written comments, reprinted in  appendix III, the Deputy Commissioner for Operations Support agreed  with our recommendations and indicated that IRS plans to implement  them during its fiscal year 2013 biennial review of user fees.
We are sending copies of this report to the Chairmen and Ranking  Members of other Senate and House committees and subcommittees that  have appropriation, authorization, and oversight responsibilities for IRS.  We are also sending copies to the Commissioner of Internal Revenue, the  Secretary of the Treasury, and other interested parties. In addition, the  report is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff members have any questions or wish to discuss the  material in this report further, please contact me at (202) 512-9110 or  whitej@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  Individuals making key contributions to this report are listed in   appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of this report were to (1) describe the types and amounts  of user fees collected and how the Internal Revenue Service (IRS)  collects and uses fees, (2) assess how IRS sets and reviews existing user  fees, and (3) assess how IRS identifies additional areas where new user  fees could be justified.
To meet these objectives, we reviewed user fee legislation and guidance,  agency and budget documents, literature on user fee design and  implementation characteristics, and cost estimates for user fees that were  included in IRS’s biennial review process. We primarily focused on user  fees that were included in IRS’s fiscal year 2009 biennial review. We  also obtained information about IRS’s internal controls for the revenue  and volume data we used and determined that the data were sufficiently  reliable for the purposes of this report. Specifically, we relied on our audit  of the aggregated year-end user fee balances and transaction testing for  the installment agreement user fee revenue amount, which accounts for  the majority of user fee collections and found that the revenue data were  sufficiently reliable for our descriptive purposes. Further, we performed a  separate analysis to assess the reliability of the user fee volume data by  (1) conducting a correlation analysis between the revenue and volume  data and (2) using the revenue amount and fee rate to calculate the  volume. Based on our analyses, we determined that the volume data  were sufficiently reliable for our descriptive purposes.
In addition, we interviewed officials from IRS’s Office of the Chief  Financial Officer, Office of the Chief Counsel, Large Business and  International Division, Office of Professional Responsibility, Return  Preparer Office, Small Business and Self-Employed Division, Tax Exempt  and Government Entities Division, and Wage and Investment Division,  who were responsible for overseeing the user fee programs, and the  Taxpayer Advocate Service. We also obtained written responses from the  deputy commissioner of each of the user fee programs we selected.  Finally, we reviewed prior GAO work on user fees and cost estimation  and other relevant literature.
We conducted this performance audit from February 2011 through  November 2011 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
section_title: Appendix II: IRS User Fee Descriptions and Amounts
paragraphs: Chief Counsel letter rulings and determination letters: IRS’s Chief  Counsel issues letter rulings and determination letters for a variety of  requests, including but not limited to, (1) advanced pricing agreements,  (2) private letter rulings, (3) change in accounting method, and (4) change  in accounting period. User fees range from $150 to $14,000. IRS  publishes updated guidance on obtaining Chief Counsel letter rulings and  determination letters and fee amounts in the first Revenue Procedure  each year.
Competent authority limitation on benefits determination letter: IRS  charges a user fee of $15,000 for taxpayers who request a discretionary  determination under a limitation on benefits provision. Revenue  Procedure 2006-54 provides guidance on requesting a competent  authority limitation on benefits determination letter.
Enrolled actuary: An enrolled actuary is an individual who has met  certain standards and qualifications set forth by the Joint Board for the  Enrollment of Actuaries and has also been approved to perform actuarial  services required under the Employee Retirement Income Security Act of  1974. IRS charges a user fee of $250 for the initial enrollment and for the  renewal, which occurs on a triennial basis. Implementing regulations for  the enrolled actuary fee are at 26 C.F.R. §§ 300.7 and 300.8 and 20  C.F.R. § 901.11.
Enrolled agent/enrolled retirement plan agent: In order to become  enrolled to practice before IRS, an individual must submit an application  and meet certain standards, pay a user fee of $30 for the initial enrollment  and for renewal every 3 years, and pass the special enrollment  examination that is administered by IRS. Similar to attorneys and certified  public accountants, enrolled agents and enrolled retirement plan agents  are unrestricted as to which taxpayers they can represent and types of  tax matters they can handle. Implementing regulations for the enrolled  agents and enrolled retirement plan agents fee are at 26 C.F.R. §§ 300.5  and 300.6.
Foreign insurance excise tax (FET) exemption: FET is imposed on  premiums paid to the foreign insurer. Applicants (which are foreign  insurance companies) may apply for a FET closing agreement with IRS  under Revenue Procedure 2003-78 certifying that they meet the  residency and limitation of benefits articles of the applicable income tax  treaty. Through this agreement, the foreign insurer (or applicant) assumes  the responsibility of paying the tax, if any, that otherwise would be paid by  the domestic insured party. Applicants requesting a FET exemption must  pay a $4,000 fee.
Income verification express service (IVES): This service provides 2- business-day processing and electronic delivery of tax return transcripts  for users, such as mortgage lenders and other financial market entities, to  confirm the income of a borrower (or taxpayer) during the processing of a  loan application. IRS charges a user fee of $2.00 for each IVES transcript  request.
Installment agreement (IA): An IA is a payment option or payment plan  that allows a taxpayer to pay his or her full tax liability with smaller  monthly payments over a period of time for up to 60 months. Interest and  any applicable penalties continue to accrue until the balance is paid in  full. To secure an IA, applicants must submit a completed application and  pay the applicable user fee. There are three levels of fees applicable to  new IAs: (1) $105 for most taxpayers, (2) $52 for taxpayers entering into  direct debit agreements, and (3) $43 for taxpayers who qualify for the low- income rate (i.e., taxpayers whose incomes falls below 250 percent of the  poverty level). Taxpayers who request reinstatement of an IA must pay a  fee of $45. Implementing regulations for the IA fee are at 26 C.F.R.  §§ 300.1 and 300.2.
Offer in compromise (OIC): An OIC is an agreement between IRS and a  taxpayer to settle a tax liability for payment of less than the full amount  owed. When submitting an offer for consideration, taxpayers must make a  partial payment unless a waiver applies.amount in a lump sum, in which 20 percent of the offer amount is due  when submitting the offer, or in installment payments, in which case the  first installment payment is due with the offer (unless the taxpayers qualify  for low-income waiver, in which case the 20 percent or installment  payment is not applicable). If IRS accepts the offer amount, the user fee   Taxpayers may pay the offer  is applied toward the remaining balance due.for the OIC fee are at 26 C.F.R. § 300.3.
Pre-filing agreement (PFA): Taxpayers are subject to the $50,000 user  fee only if they are selected to participate in the PFA program. If  taxpayers are selected, IRS will examine specific issues relating to their  tax returns before they are filed. The objective of the PFA program is to  resolve issues that are likely to be disputed in post-filing audits. Revenue  Procedure 2009-14 provides guidance on the PFA program.
Preparer tax identification number (PTIN): All paid tax return preparers,  including attorneys, certified public accountants, and enrolled agents, are  required to apply for a PTIN before preparing any federal tax returns in  2011 and thereafter. Individuals who apply for a PTIN must pay an annual  fee of $64.25. Of that amount, IRS collects $50 for associated PTIN  activities and the remaining $14.25 is transferred to a third-party vendor  responsible for maintaining the registration system. Implementing  regulations for the PTIN fee are at 26 C.F.R. § 300.9.
Special enrollment examination (SEE): Prior to enrolling as an enrolled  agent or enrolled retirement plan agent, individuals must either pass a  three-part exam or possess years of past IRS service and technical  experience specified in Circular 230 to practice before IRS. IRS charges  $11 per part to oversee the examination. Implementing regulations for the  SEE fee are at 26 C.F.R. § 300.4.
Tax Exempt and Government Entities letter rulings and  determination letters: The Tax Exempt and Government Entities  Division issues letter rulings and determination letters for a variety of  activities, including but not limited to employee plans and exempt  organizations. Depending on the request, fees can range from $200 to  $25,000.
U.S. residency certification: Income tax treaties between the United  States and foreign countries can reduce withholding rates for certain  types of income paid to U.S. residents. In such cases, U.S. treaty  partners may require taxpayers to provide a letter of U.S. residency  certification for purposes of claiming benefits under an income tax treaty  or exemption from a value-added tax imposed by the foreign country.  Applicants requesting such certifications would need to submit a $35 fee  for the first 20 certifications and $5 for each additional request of 20  certifications thereafter to IRS.
section_title: Appendix III: Comments from the Internal Revenue Service
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Jay McTigue (Assistant Director),  Elizabeth Fan, and Susan Sato made key contributions to this report.  Doreen Eng, Edward Nannenhorn, Jacqueline Nowicki, Chelsa Gurkin,  Melanie Papasian, Neil Pinney, and Andrew J. Stephens also provided  valuable assistance.