Employment Taxes: Timely Use of National Research Program Results Would Help IRS Improve Compliance and Tax Gap Estimates
Published: 2017-04-18T00:00:00

Fast Facts:
The IRS uses its National Research Program to study tax compliance issues. The program recently completed a study on employment tax returns filed between 2008 and 2010, but the IRS has not made plans to analyze the results of this study.
We looked at the study results and found that noncompliance in reporting taxable wages most frequently involved how workers were classified (and whether employers had to withhold and pay employment taxes for them), and fringe benefits (such as moving expenses). We recommended that the IRS develop plans to analyze the study's results to address noncompliance issues.

Highlights:
section_title: Why GAO Did This Study
paragraphs: Employers report employment taxes for Social Security, Medicare, unemployment insurance, and income taxes to IRS. In fiscal year 2016, these totaled almost $2.28 trillion. Each year, IRS examines a small percentage of employment tax returns to check employer compliance (known as operational examinations).
GAO was asked to review how practices from NRP examinations could improve operational examinations. This report (1) evaluates how IRS plans to analyze the NRP results, (2) describes GAO's review of available NRP data, and (3) describes NRP practices IRS applied to operational examinations and assesses whether additional improvements could be made to operational examinations. GAO reviewed documentation, interviewed officials, and reviewed the NRP results. GAO also surveyed all IRS examiners who completed both NRP and operational examinations on ideas for improving operational examinations.
section_title: What GAO Found
paragraphs: The Internal Revenue Service (IRS) uses its National Research Program (NRP) to study tax compliance issues. These NRP studies generally rely on detailed examinations of a random sample of tax returns and use different practices (including tools and procedures) than IRS's routine operational examinations. IRS recently completed the examinations for an NRP study on employment tax returns filed from tax years 2008 to 2010. This study was the first IRS had done on employment taxes in over 30 years. Based on IRS guidance, NRP results are intended to factor into IRS decisions about compliance areas and to be used to estimate the tax gap—the difference between taxes owed and those voluntarily paid on time. Although the examinations for the study are done, IRS has not developed formal plans to analyze the results to (1) identify areas of noncompliance, (2) address such noncompliance, or (3) update its employment tax gap estimate. IRS officials said they have not developed such formal plans due to competing research priorities and limited resources, and because the NRP results have not yet been finalized. Without completed analysis of the NRP employment tax results, IRS risks using outdated data to make decisions about compliance and areas of the tax gap to pursue.
GAO reviewed the available NRP study results on noncompliance and found that taxable wages for worker classification and fringe benefits were among the most frequently misreported and led to the highest wage adjustment amounts on average. Worker classification issues arise when employers misclassify employees as independent contractors or other nonemployees. If employees are misclassified, the employer's obligation to withhold and pay employment taxes is not established and goes unpaid. Fringe benefits issues involve property, a service, or cash received that should be treated as taxable wages but are not.
IRS carried over certain NRP practices to operational employment tax examinations, including tools to help plan, document, and report the results of examinations but IRS examiners who responded to GAO's survey identified additional improvements that could be made to operational examinations.
More than 90 percent of examiners said that they would like to have a certain tool—electronic data on the information returns of employers—when operational examinations start instead of on request, which they said would help identify issues to examine sooner and put fewer burdens on taxpayers. Although IRS officials said that providing the tool when all examinations start would not be a good use of IRS resources, they did not have data to evaluate whether and when providing this tool would improve examinations.
Half of IRS examiners who were asked about two specific NRP tools in GAO's survey were not aware of how to request them for use during operational examinations. According to IRS officials, these tools may only be used infrequently during employment tax examinations. However, ensuring IRS examiners are aware of how to access them would be in line with IRS's strategic goal of empowering employees with tools and training. Without examiners being aware of these tools and able to utilize them when needed, they may be limited in their ability to effectively examine employment tax returns.
section_title: What GAO Recommends
paragraphs: GAO recommends that IRS develop plans to analyze the NRP results in 2017 to address areas of noncompliance identified, and update its employment tax gap estimates; determine whether and when to provide certain data upfront before an examination starts; and periodically remind IRS examiners how they can access certain tools. IRS agreed with GAO's recommendations.

section_title: Letter
paragraphs: Every year, the federal government forgoes hundreds of billions of dollars  of tax revenue through the gross tax gap—the difference between taxes  owed and taxes voluntarily paid on time. The Internal Revenue Service  (IRS) estimated that the annual average gross tax gap for tax years 2008  to 2010, the most recent estimate, totaled $458 billion. One portion of the  gross tax gap, estimated to be $16 billion (3.5 percent), is due to  taxpayers underreporting employment taxes that employers are to  withhold and remit to cover liabilities for Social Security, Medicare, and  federal unemployment insurance. In fiscal year 2016, federal revenue  from employment taxes to cover these liabilities totaled more than $1  trillion. Employers also withheld federal income tax totaling almost $1.27  trillion. IRS examines only a small fraction of the employment tax returns  that employers file given its resource limitations. In fiscal year 2016, IRS  examined about 54,600 employment tax returns, which covered 0.2  percent of all employment tax returns filed in calendar year 2015.  Because such a small percentage of employment returns are examined,  IRS must especially ensure that the examinations are as efficient and  effective as possible.
One source for improving examinations is IRS’s National Research  Program (NRP). IRS carries out detailed NRP studies to measure  different types of taxpayer compliance. The NRP study of employment  tax returns from tax years 2008 through 2010 represents its first effort to  measure employment tax reporting compliance in over three decades.  This NRP study involved detailed examinations of a random, representative sample of Form 941, Employers Quarterly Federal Tax  Return, which IRS selected from employers who filed at least one return  for tax years 2008 through 2010. The in-depth NRP examinations  provide crucial data for measuring noncompliance. The NRP  examinations also provide IRS an opportunity to review the practices (i.e.,  tools, data, information systems, procedures, and lessons learned) used  during NRP examinations that can then be applied to improve IRS’s  everyday employment tax examinations—known as operational  examinations.
You asked us to assess IRS’s actions to apply examination practices from  the NRP employment tax study to operational employment tax  examinations. In this report, we (1) evaluate how IRS plans to analyze the  NRP data (2) review the NRP data available on areas of noncompliance,  (3) describe NRP examination practices that IRS applied to operational  employment tax examinations, and (4) assess additional NRP  examination practices that could be applied to operational employment  tax examinations.
To evaluate IRS’s plans to analyze the NRP data and use the NRP  results on noncompliance areas, we interviewed IRS research and  examination officials about their plans to analyze and use the NRP data.  We gathered documentation, such as research and analysis plans, when  available. We compared IRS’s plans to analyze and use the NRP data to  IRS’s strategic plan and the Internal Revenue Manual (IRM).
To review NRP data available, we compared the noncompliance for  issues on employment tax returns in terms of the frequency by which the  issues examined were adjusted and the resulting wage adjustment  amounts. We also reviewed the data by characteristics that help identify  reporting noncompliance, such as the payroll size, number of employees,  and IRS business unit. We discussed our results with relevant IRS  officials.
To describe NRP examination practices that IRS applied to operational  employment tax examinations, we interviewed examination staff from the  Small Business/Self-Employed division (SB/SE) and Tax Exempt and  Government Entities (TE/GE) business units who were responsible for  NRP examinations during the employment tax study. To confirm the  application of those NRP practices to operational employment tax  examinations, we gathered available documentation. We also collected  available documentation on the costs and benefits of carrying over NRP  practices to operational employment tax examinations, and discussed the  costs and benefits with the SB/SE and TE/GE staffs.
To assess additional NRP examination practices that could be applied to  operational employment tax examinations, we conducted four group  discussions with examiners who had completed both types of  examinations. During these discussions, we gathered input on NRP  examination practices that examiners thought could be applied to  operational employment tax examinations. We discussed differences  between NRP and operational employment tax examinations with  program staff in SB/SE and TE/GE. Based on the list of additional NRP  examination practices, we developed and fielded a web-based survey of  all IRS examiners who had completed both NRP and operational  employment tax examinations. The survey obtained their views on having  access to the NRP examination practices during their operational  employment tax examinations, if and why they found them helpful, and if  they were aware of how to access them on operational examinations. The  survey was sent to the complete list of 269 examiners identified by IRS  officials as of July 2016 that were thought to meet the criteria of  examiners with NRP and operational examination experience. Of those  examiners, 23 were determined to not meet this criteria according to their  responses to screening questions (1) on if they had completed both NRP  and non-NRP examinations and (2) if they had completed a non-NRP  examination since completing a non-NRP examination. We received a  response rate of 85 percent, with 209 of the 246 examiners completing  the survey who met our criteria. We discussed summary survey  responses with relevant IRS officials. Where appropriate information was  available, we compared the NRP practices with criteria on whether the  practices would help IRS identify noncompliance, improve examination  efficiency, reduce taxpayer burden, and meet other needs. We also  compared the utility of the NRP practices identified to IRS’s strategic  plan.
We assessed the reliability of the NRP study data by reviewing relevant  documentation, interviewing knowledgeable IRS officials, and electronic  testing of the data to identify obvious errors or outliers. We determined  that the data used in our analysis were sufficiently reliable for our  objectives. For additional details on our scope and methodology, see  appendix I.
We conducted this performance audit from April 2016 to April 2017 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: Employment Taxes
paragraphs: For federal tax purposes, employers generally are required to withhold  and remit two types of taxes from their employees’ salaries:  1.  Federal income tax withholding. Income tax is withheld from the pay  of most employees. Pay includes regular pay, bonuses, commissions,  and vacation allowances as well as reimbursements and other  expense allowances paid. The amount of income tax that employers  withhold depends on the amount earned and the information on the  employee’s Form W-4.  2.  Federal Insurance Contribution Act (FICA) taxes. These taxes include  Old-Age, Survivors and Disability Insurance (Social Security) and  hospital insurance (Medicare) taxes. In 2016, the FICA taxes to be  withheld consisted of 6.2 percent of an employee’s taxable earnings  up to $118,500 for Social Security taxes and an additional 1.45  percent of the taxable earnings for Medicare not subject to a wage  cap. Employers are required to match the amounts withheld from an  employee’s salary for Social Security and Medicare taxes.
Employers must also pay a federal unemployment insurance (FUTA)  payroll tax. This tax is equal to 6 percent of the total wages of (up to  $7,000) each employee. This tax is not withheld and remitted from an  employee’s wages. Taken all together, federal income tax withholding,  FICA, and FUTA comprise employment taxes.
In general, employers who withhold federal income tax and Social  Security and Medicare taxes report to IRS either quarterly on Form 941 (Employer’s Quarterly Federal Tax Return) or annually on Form 944  (Employer’s Annual Federal Tax Return). Form 941 includes the tax  liabilities of the employers (the employer share of FICA) as well as the tax  liabilities of employees (withheld income tax and the employee share of  FICA) that are required to be withheld by the employer and paid to the  government on the employee’s behalf. Employers report their annual  FUTA tax to IRS on Form 940, (Employer’s Annual Federal  Unemployment Tax Return). In fiscal year 2016, almost 30.5 million  employment tax returns were filed.
Taxes withheld by employers are a significant portion of federal revenue.  In fiscal year 2016, of revenue remitted by employers, almost $1.27 trillion  came from income taxes, $1 trillion came from FICA employment taxes,  and $8 billion from FUTA taxes.
section_title: Operational Employment Tax Examinations
paragraphs: IRS’s SB/SE and TE/GE divisions both have responsibility for ensuring  that employers comply with employment taxes. While some differences  exist for how operational employment tax examinations take place in  SB/SE and TE/GE, they generally follow the steps in figure 1.
These represent the key steps in the IRS employment tax examination  process, but differences exist in the process between the TE/GE-Exempt  Organizations (EO), TE/GE-Federal, State, and Local Governments  (FSLG), and SB/SE business units. For example, TE/GE-EO focuses its  examinations on the Form 990 (Return of Organization Exempt From  Income Tax) and does not select returns exclusively for employment tax  examinations. Returns are inspected and a separate employment tax  examination may be necessary if the inspection does not reveal  compliance. By contrast, TE/GE-FSLG examinations of government  entities focus only on employment tax issues and SB/SE has a specialty  group that focuses exclusively on employment tax issues.
Other differences exist between the latter two business units. The key  difference tends to be the extent to which SB/SE and TE/GE-FSLG “build  the case file” for examiners before the examination starts. TE/GE-FSLG  tends to include more information upfront whereas SB/SE offers the  information on request, noting that examiners are able to determine if  they need additional information for specific identified issues.
section_title: National Research Program Studies and Examinations
paragraphs: IRS carries out detailed research studies of different types of taxpayer  compliance through NRP. For example, IRS completes an annual NRP  study of individual income tax returns, which we have previously  evaluated. Data for the NRP studies come from detailed examinations  that strive to verify information reported on filed returns in addition to  taxes that may have been under- or over-reported. According to the IRM,  IRS seeks to use NRP data to increase public confidence in the fairness  of the tax system by helping identify compliance problems and direct  resources to efficiently address them. The IRM also states that IRS is  supposed to use NRP data to better estimate the tax gap, update  methods for selecting returns for examination, and improve strategic  planning, among other benefits.
IRS’s NRP study of employment taxes for tax years 2008, 2009, and  2010 was its first on employment taxes since a study for tax year 1984.  IRS started the NRP study in February 2010 and IRS officials said that  they completed most of the examinations by May 2016. IRS selected a  random sample of about 7,200 taxpayers that filed Form 941 employment  tax returns from tax years 2008 to 2010. The NRP data are therefore a  representative sample of only certain types of employer entities, which  includes exempt organizations, government entities, and businesses  (appendix I lists types of entities not included in the sample). NRP  estimates can be analyzed to learn about the level of taxpayer  compliance on filed returns, such as the difference between the correct  amount of employment taxes and the amount reported on employment  tax returns.
IRS’s Office of Research, Applied Analytics, and Statistics (RAAS) is  responsible for the NRP, which includes designing the studies, collecting  and housing the data, and analyzing the results of the studies. The two  business units that administered the NRP employment tax examinations,  TE/GE and SB/SE, also have internal research functions that could  analyze the NRP results.
RAAS houses various types of compliance data, including the results  from its NRP studies, in the Compliance Data Warehouse (CDW). Data in  CDW are made available to staff across IRS and the Department of the  Treasury for research and analysis purposes. RAAS is responsible for  ensuring that the final NRP dataset provided to CDW is consistent and  accurate, and represents the examination results. According to IRS  officials, ensuring that the data meet these outcomes is an iterative  process, meaning data from an NRP study might be initially posted to  CDW, but could continue to change as staff working with the data identify  inconsistencies and errors. RAAS began this iterative process for the  NRP employment tax study in the spring of 2016.
The NRP employment tax examination process generally follows the  same process as operational employment tax examinations, discussed in  figure 1 above. Given the purpose of NRP and its data-driven nature,  NRP examinations differ from operational examinations by examining a  wider breadth of issues, documenting all adjustments and using the data  differently as shown in table 1.
section_title: IRS Has Not Finished Analyzing the NRP Data or Used the Results to Improve Employment Tax Compliance Efforts
paragraphs: Neither RAAS nor the business units (TE/GE and SB/SE) that completed  the NRP examinations have finished analyzing the results from the study,  according to IRS officials. They also do not have specific documented  plans to analyze the NRP employment tax study data or use the results to  improve employment tax compliance programs. Instead, IRS officials  described high-level concepts of what they would like to do with the NRP  results in 2017 or beyond. For example, RAAS officials said that they  intend to complete and release the next tax gap estimates by 2019, and  conduct other research on employment tax compliance that responds to  recommendations from our prior report.
Similarly, TE/GE and SB/SE officials said they plan to partner to explore  and summarize the NRP data and are developing analysis plans for this  work, but had no timeline for when the plans would be ready. According  to officials, TE/GE has a statistician on detail who will be devoted almost  exclusively to summarizing and analyzing study results. TE/GE officials  said they are updating the programming code developed after year 1 of  the study to analyze all 3 years of the NRP results. SB/SE officials said  that after an NRP study, their normal process has been to identify  emerging compliance issues, update return selection criteria and  processes, explore ways to refine classification, and evaluate the need for  research projects as well as for reallocation of examination resources.  SB/SE officials also said they intend to use the NRP data to enhance  examiner training, edit audit technique guides, and clarify or reinforce  examiner procedures as necessary.
However, for the efforts and plans described above, IRS did not have  documentation outlining the detailed objectives and the specific NRP data  to be analyzed and used. IRS officials described these efforts and plans  to us in meetings and then provided a list of them in writing with little  additional detail. RAAS officials said they have not developed specific  plans to analyze the data due to competing priorities and limited  resources. TE/GE officials cited similar reasons for not developing such  plans, but TE/GE and SB/SE officials added they are waiting for the final  NRP data to be made available before they develop detailed analysis  plans. RAAS officials noted that the data initially were available as of fall  2016, and that as of February 2017 the data were still being evaluated  and corrected for inconsistencies, such as duplicate numbers, missing  information, and other errors, which according to IRS has delayed its  ability to analyze the results. According to RAAS officials, updated study  data are expected to be delivered in 2017. RAAS officials said they likely  will continue to evaluate and correct the data as staff in RAAS, SB/SE,  and TE/GE begin to work with the data.
Analyzing and using the NRP study results is important for various  reasons. The NRP’s primary benefit, according to the IRM, is to improve  workload selection systems, such as how IRS selects returns to examine.  The IRM notes that the NRP program seeks to increase public confidence  in the fairness of our tax system by helping IRS identify where compliance  problems occur so that IRS can efficiently use its resources to address those problems. IRS also uses the NRP data to help update its estimate  of the tax gap. IRS’s most recent employment tax gap for FICA and FUTA  are projections based on compliance data from 1984. In addition,  analyzing the NRP employment tax study results would align with IRS’s  strategic plan, which includes an objective to identify trends, detect high- risk areas of noncompliance and prioritize enforcement approaches by  applying research and advanced analytics.
By not developing detailed plans to analyze and use the results of NRP,  IRS is missing an opportunity to identify compliance problems on  employment tax returns as well as identify solutions to address these  problems. Implementing those detailed plans can guide IRS efforts to  identify and correct data inconsistencies. For example, IRS found a  number of errors within the data as a result of our attempts to analyze the  NRP data. Moreover, by not analyzing these data, IRS will not have  current tax gap estimates, continuing to rely on outdated information.
section_title: Noncompliance Varied across Employment Tax Issues and Employer Size
paragraphs: Given that IRS has not completed its own analysis, we reviewed the NRP  employment tax results for tax years 2008 through 2010 to identify  areas—known as issues—of noncompliance in terms of the examination  proposing adjustments to the amount of taxable wages. We reviewed 1)  issues that were most frequently adjusted, 2) the amounts by which  wages were adjusted for these issues, and 3) employer groups that were  more noncompliant.
subsections: section_title: Worker Classification and Fringe Benefits Were Among the Most Frequent Issues of Noncompliance and Led to Highest Percentage of Wage Adjustments
paragraphs: By reviewing the results from the NRP employment tax examinations for  tax years 2008 through 2010, we identified issues where employers were  noncompliant in reporting taxable wages. We analyzed the frequently  examined issues through NRP, which are described in table 2.
Our review of such issues focused on employer noncompliance in  reporting the correct amount of taxable wages and proposed adjustments  to the reported taxable wage amount for employees. These wage adjustments, in turn, affect the amount of taxes withheld and paid by  employers and employees. Overall, the NRP study examined an  estimated 15.7 million employment tax issues, of which an estimated 6.7  million issues resulted in wage adjustments.
Based on our review of the NRP examination results for tax years 2009  through 2010, figure 2 shows the employment tax issues that were the  most frequently examined and adjusted. For example, fringe benefits,  payment recharacterization, and worker classification issues were the  most frequently examined issues (see table 6), representing 38 percent,  24 percent, and 20 percent of all issues that were examined. These  issues were also among those most frequently requiring adjustments (see  table 8)—representing an estimated 33 percent, 20 percent, and 19  percent of issues that required adjustments, respectively. The issue most  likely to result in an adjustment when examined was backup withholding,  where an estimated 1.4 million (74 percent) of the 1.9 million backup  withholding issues required adjustments (see table 10).
The NRP examination adjustments to taxable wages for employment tax  obligations represent billions of dollars. For our review, we focused on the  wage adjustments because the NRP tax adjustments include various tax  relief provisions available to employers and, therefore, underestimate the  level of employment tax noncompliance. For example, the safe harbor  provision through Section 530 of the Revenue Act of 1978 prevents IRS  from examining protected employers for worker classification issues.
The NRP data only provides compliance information on worker  classification issues when Section 530 safe harbor protection does not  apply. Two other examples of employment tax relief include the worker  classification settlement program (CSP) and income tax withholding  relief.
Our review of wage adjustments by issue is shown in figure 3. The  highest wage adjustment amounts involved worker classification, fringe  benefit, and payment recharacterization issues (see table 11).
The estimated average wage adjustment for all adjusted issues (see table  12) is $32,747. The two issues with the highest average wage  adjustments were worker classification and tip income. Worker  classification issues included reclassifications involving corporate officers,  statutory employees such as drivers who distributed certain food items  and the factors that may be used to determine whether the worker was an  independent contractor or employee based on, among other things,  whether the employer controlled how the worker was to provide the  service, such as through written contracts and training. The tip income  issue included employers in industries that reported tip income, such as  restaurants and gaming activities.
section_title: NRP Study Results for SB/SE Employers Suggest Noncompliance May Be Higher for Smaller Employers than for Larger Employers
paragraphs: Our review of these study results suggests that smaller SB/SE employers  are more noncompliant than larger ones using a couple of different size  measures. We focused on results of NRP examinations involving SB/SE  employers because, as we have previously reported, small businesses  tend to have more compliance problems than other taxpayers. In  addition, tax compliance burdens can be greater for small businesses due  to economies of scale. To the extent that these burdens affect tax  compliance of taxpayers, smaller businesses likely would be more  noncompliant than larger ones.
We estimate using the NRP data that 2.9 million of the 6.4 million  examined issues (46 percent) for SB/SE employers with three or less  employees resulted in adjustments, compared to 3.3 million of the 7.9  million examined issues (42 percent) for employers with four or more employees. We also estimate that SB/SE employers with three or less  employees represent 44 percent of SB/SE wage adjustments, but only  employ 6 percent of SB/SE employees. Conversely, larger SB/SE  employers (four or more employees) account for 56 percent of the SB/SE  wage adjustments and employ 94 percent of SB/SE employees. This  comparison suggests greater noncompliance for smaller SB/SE  employers than for larger employers on a per employee basis.
Similarly, our review indicates that smaller SB/SE employers are more  noncompliant than larger employers on a basis of total compensation. For  example, we estimate using the NRP data that 2.6 million of the 5.6  million examined issues (47 percent) for SB/SE employers paying total  compensation of $78,500 or less resulted in adjustments, compared to  3.6 million of the 8.7 million examined issues (41 percent) for SB/SE  employers that pay more than $78,500 in total compensation. In  addition, SB/SE employers paying total compensation of $78,500 or less  represent about 37 percent of the SB/SE wage adjustments, but only pay  4 percent of SB/SE total compensation. Conversely, larger SB/SE  employers (pay more than $78,500 in total compensation) account for 63  percent of the SB/SE wage adjustments and pay 96 percent of SB/SE  total compensation. The disproportionate level of wage adjustments  suggests greater noncompliance for smaller SB/SE employers than for  larger employers on a basis of total compensation.
section_title: IRS Business Units Applied Aspects of NRP Examination Practices to Operational Employment Tax Examinations
subsections: section_title: NRP Examinations Led to Changes in Planning, Documenting, and Reporting of Operational Employment Tax Examinations
paragraphs: Certain practices that were used for NRP examinations were carried over  and are now used for operational employment tax examinations by the  three business units that participated in the NRP study. These practices  fell into three categories: planning, documentation, and reporting.
Planning: IRS carried over NRP practices that help examiners plan  the issues to examine.
Information Return Analysis System (IRAS): A program that  analyzes electronic versions of information returns, such as Form  W-2s and Form 1099s, to test if income was treated as  nontaxable, and if certain employees were incorrectly treated as  exempt from employment taxes or received both a Form W-2 and  Form 1099, among other tests. The results from these tests can  help IRS examiners identify potential examination issues.  According to IRS officials and examiners, IRAS allows examiners  to analyze a substantial number of information returns quickly.
Notice CP2100: A notice taxpayers receive that provides  information on improperly filed Form 1099s with an invalid  Taxpayer Identification Number (TIN), no TIN, or mismatched TIN.  It indicates if the employer may be subject to backup withholding,  which requires income tax withholding of 28 percent from certain  payments if the employee fails to furnish the correct TIN.  According to IRS examiners, this tool allowed them to identify  these issues early in NRP examinations.
Data Collection Instrument (DCI)-1: A workbook that contains data  about the taxpayer, an issue summary, and issue specific lead  sheets that IRS examiners used in the NRP study. The workbook  is used to plan the examination steps. For operational  examinations, the Employment Tax Lead Sheet (ETLS) is now  used, which is based on the DCI-1.
Related Entity Return Information. According to IRS examiners,  having the related income tax return, the Exempt Organization  return, or specific lines of information from those returns help to  identify issues to examine.
Documentation: The DCI-1 was also used in the NRP examinations  to allow examiners to document their findings on examined issues. In  our group discussions with examiners, a number of them mentioned  that the DCI-1 provided a roadmap for documenting the examination  steps, such as the questions posed to the taxpayer, the information  requested, and the support for the examination findings. For  operational examinations, ETLS is now used, which is based on the  DCI-1.
Reporting: The DCI-2 is a workbook used in the NRP examinations  to complete the employment tax report. The DCI-2 calculates the tax  adjustments as a result of examination findings and presents them in  closing reports to the taxpayer. In addition, IRS officials said that the  DCI-2 helped examiners to automatically make complex calculations  to determine additional taxes and penalties due, instead of making  them by hand. For operational examinations, the workbook is known  as the Employment Tax Examiner’s Report, which is based on the  DCI-2.
Table 3 shows the specific practices that SB/SE, TE/GE-EO, and TE/GE- FSLG each carried over from NRP examinations to operational  employment tax examinations, and whether those practices are provided  upfront as part of the case file or on request.
As seen in table 3, the only NRP practice carried over to all business  units was IRAS. However, only FSLG offers IRAS data upfront in the case  file, as done for NRP examinations. FSLG also offers the CP2100 upfront.  In contrast, the NRP practices carried over by SB/SE and TE/GE-EO  were made available to examiners on request. Other practices, such as  the taxpayer’s examination history, were in place in all three business  units before IRS started the NRP study.
In general, the business units decided which NRP practices to carry over  to operational employment tax examinations based on annual feedback  sessions held with their staff involved in the study as well as informal  discussions among those staff. The annual feedback sessions were  organized by the RAAS division, which designed the NRP employment  tax study. The feedback sessions were mainly held to improve the  operations of the study. However, during the feedback sessions,  examiners identified NRP practices, such as IRAS, that they found  helpful, but they did not have access to or access to in the same manner  on operational examinations.
Beyond this feedback, officials in SB/SE and TE/GE said that they carried  over NRP practices to operational employment tax examinations based  on the resources each unit had available. They also said they considered  those “best practices” that were helpful and made sense on the  operational side. IRS officials said that they did not analyze the benefits of  NRP practices carried over to operational examinations. IRS officials said  that the purpose of the NRP employment tax study was not to improve  the operational examination process, but to improve tax gap estimates  and identify noncompliance areas. They also said they had no baseline  data before the NRP study to compare changes made to operational  examinations after the NRP study. Therefore, IRS was unable to analyze  the effects of making these changes.
TE/GE-FSLG did not carry over some NRP practices because they were  not applicable to its examinations. For example, TE/GE-FSLG  government entities do not have a related return, which is why that  practice was not carried over to operational examinations, according to  officials.
section_title: IRS Examiners See Benefits to NRP Practices for Operational Employment Tax Examinations, but Half Were Unaware They Could Request Access to Certain Practices
subsections: section_title: Examiners Would Like Access to NRP Practices at the Start of Operational Examinations but IRS Officials Raised Concerns
paragraphs: IRS examiners who have worked on both NRP employment tax  examinations and operational employment tax examinations identified  NRP practices that they would like to have access to when operational  employment tax examinations start. Their responses to our survey, which  asked about a number of the NRP practices, indicated that the majority of  them would like to have access to all of the practices used in NRP  examinations as well as electronic case files upfront when the operational  examination starts. See figure 4.
The NRP practice that most IRS examiners said they wanted upfront in  the case file and also found to be most helpful were the data used in  IRAS and IRAS itself. Specifically, 181 of 200 (90.5 percent) respondents  wanted access to IRAS and the IRAS data upfront, and 98 of 105  respondents stated that having IRAS and the IRAS data prior to starting  an examination was very or extremely helpful. See figure 5.
As noted earlier, only TE/GE-FSLG includes the IRAS data in the case  file sent to the examiner at the start of the examination. TE/GE FSLG  officials noted that establishing a case on its systems and requesting the  IRAS data as well as other data such as from the CP2100 and taxpayer’s  examination history can take their one case preparer 60 to 90 minutes,  and that receiving the requested IRAS data takes 1 to 2 weeks depending  on the day of the week the request is made.
As for the other two units, TE/GE-EO does not include the IRAS data in a  case file since the examination focuses on the Form 990, and  employment tax issues are examined only to the extent the examiners  uncover potential noncompliance when checking those issues. SB/SE  provides the IRAS data if requested by the examiner. In our survey, 87 of  100 SB/SE examiners said they were aware that they could request IRAS  data for operational examinations. However, 91 of the 100 SB/SE  examiners in our survey preferred to have IRAS data in the case file when  an examination starts rather than on request. In addition, of the SB/SE  examiners who have used IRAS on operational examinations since the  NRP examinations, 46 of 50 survey respondents found it very or  extremely helpful.
For a May 2013 report on a different NRP study, we developed a set of  criteria for evaluating whether NRP practices should be applied to  operational examinations. These criteria include:
Would the change be likely to help examiners correctly identify more  noncompliance?
Is it likely to make the examination more efficient—(i.e., reduce the  cost of conducting an examination, increase benefits for the same  cost, or increase benefits commensurate with justifiable or no  increase in costs)?
Is it likely to reduce taxpayer burden?
Would the change meet any other IRS need?
For this review, we planned to apply these criteria to determine if the NRP  employment tax practices that IRS examiners wanted the most and found  most helpful would be applicable to operational examinations, such as  providing IRAS and the data used in it upfront. However, SB/SE had  limited data and information that aligned with the criteria. Therefore, we  relied on our survey of examiners and interviews with IRS officials as  discussed below.
In the survey, examiners said that having IRAS data upfront is helpful  because it allows them to better plan the examination and identify issues  sooner. IRAS does so by allowing them to electronically match and  analyze a large number of W-2s and information returns. The  identification of examination issues, in turn, facilitates their initial interview  and contact with the taxpayer. It can also reduce taxpayer burden and  make the examination more efficient, according to IRS examiners. These  benefits align with IRS’s strategic plan to deliver high-quality and timely  service to reduce taxpayer burden and encourage voluntary  compliance.
TE/GE-FSLG officials said that providing IRAS and the IRAS data upfront  has improved efficiency by helping examiners plan the examination and  reduce the need to ask taxpayers to provide information. They added that  they do not have data to document their views. In addition, TE/GE- FSLG’s examinations only focus on employment tax liabilities, which  covered 2,003 returns in fiscal year 2015.
When we shared our survey results with SB/SE officials, they were  concerned about providing IRAS data upfront for all operational  examinations as was done for NRP examinations. Specifically, SB/SE’s  employment tax examination caseload is much higher as SB/SE  examined 41,554 Form 941 returns in fiscal year 2015. Given this  caseload, SB/SE officials raised concerns about providing the data  upfront through case building. One concern they raised is that returns  sent to an IRS campus for case building or assigned for examination from  the campus may not be examined. As a result, having the campus pull  IRAS data for all returns will risk that the data may not be used for some.  Similarly, SB/SE officials added that many of their large examinations  could involve many corporate subsidiaries of which only a handful are  examined. Thus, requiring SB/SE to include the IRAS data for all  subsidiaries would be burdensome. Beyond these large examinations,  these officials noted that many SB/SE examinations involve employers  with 10 or fewer information returns, which are too few to merit using  IRAS. IRS did not have data on examinations by the numbers of  subsidiaries or information returns.
SB/SE officials also said that providing IRAS data in all case files upfront  would move the cost burden from the examiner to an administrative office  at IRS’s Cincinnati campus, which helps prepare the cases. According to  IRS officials, the support staff at the Cincinnati campus is shared between  SB/SE’s specialty groups for employment tax and excise tax. In fiscal  year 2015, less than one full-time equivalent employee was devoted to  building employment tax cases for SB/SE at the campus. The  administrative staff who prepare the cases are generally on the General  Schedule (GS)-7 pay scale, whereas the examiners tend to have more  technical experience and a higher GS grade, and can determine whether  the IRAS information would be helpful. The SB/SE examiners who  participated in our survey were GS-11 or higher. IRS officials added that  many support organizations in IRS are operating with smaller staffs due  to budget constraints, and their desire is to maximize the use of resources  for meeting face-to-face with taxpayers.
While we recognize that resource constraints can be an important  consideration, none of the business units who have offered IRAS on  request or upfront in case files had evaluated whether providing the IRAS  data upfront made sense in line with the criteria we identified in May 2013  for making such decisions. Nor did SB/SE have data on the type of  examinations, such as just those with large numbers of information  returns, in which IRAS would be more or less applicable. Without having  these necessary data, IRS is limited in determining whether and when to  provide IRAS data upfront in line with criteria we have identified in our  prior work on evaluating the applicability of practices used in an NRP  study.
IRS examiners we surveyed also found it helpful to have electronic case  files and related return information upfront. For example, 108 of 133  survey respondents found electronic case files extremely or very helpful  while 84 of 94 found related return information similarly helpful. They cited  a number of benefits for both.
According to IRS examiners, electronic case files enhance efficiency by  making it easier to do tasks, such as recording, updating, organizing, and  transmitting the examination information. However, IRS officials added  that in some instances, such as if a case is appealed by the taxpayer,  paper case files have to be completed in addition to electronic case files.  TE/GE FSLG and TE/GE-EO already have fully electronic case files while  SB/SE uses partially electronic case files. SB/SE officials noted that they  are considering moving to fully electronic case files by the middle of 2017  or later. SB/SE officials noted that it would take that long given the  complexity of aligning various IRS information systems and limited IRS  resources for information technology.
Similarly, for related return information, examiners noted that having the  information upfront helps plan the work and identify issues. SB/SE does  not provide the related return when the examination starts, but SB/SE  examiners are able to access an electronically filed related entity return  shortly after an employment examination starts.
In contrast, for the CP2100 and cash transaction data, a much smaller  number of IRS examiners used them on operational employment tax  examinations since completing the NRP employment tax study. According  to IRS officials, the low use could be due to examinations where the  CP2100 or cash transaction data were not necessary. For example, 28 of  209 survey respondents had used the CP2100 and 11 of 181 survey  respondents had used the cash transaction data on operational  examinations since completing examinations for NRP employment tax  study. This may be because the data on the CP2100 and cash  transactions infrequently apply to related employment tax issues.
When the CP2100 and cash transaction data did apply, survey  respondents who used both types of data on operational employment tax  examinations since completing the NRP study generally found them  helpful. According to IRS examiners, the CP2100 can help narrow the  scope and better plan the examination, and the cash transaction data can  help understand the operations of the business under examination.
section_title: Half of IRS Examiners Were Unaware They Could Request Certain NRP Practices For Operational Employment Tax Examinations
paragraphs: Over half of IRS examiners in our survey asked if they were aware how to  request two NRP practices for operational examinations—the CP2100  and cash transaction data—answered no. See figure 6.
All NRP practices in our survey are available for request (SB/SE and  TE/GE-EO) or provided upfront (TE/GE-FSLG). However, examiners  are not always aware of how to access each NRP practice. This is  inconsistent with IRS’s strategic plan to empower employees with the  tools and training to further develop skill proficiency and improve business  performance.
IRS officials said examiners may be unaware of how to request CP2100  and cash transaction data because the related employment tax issues are  infrequently examined. Our survey results showed that a small portion of  our survey respondents had used either NRP practice on operational  employment tax examinations since completing the NRP examinations.  Even so, examiners found these two types of data to be helpful when they  did apply to the examination.
Instructions to examiners for requesting CP2100 and cash transaction  data are in the IRM, which can be accessed at the examiner’s discretion.  However, IRS does not uniformly remind all examiners how to access  them. For example, TE/GE-FSLG made examiners aware of how to  access the CP2100 in a quarterly newsletter, which may explain why 22  of 26 survey respondents from FSLG were aware of how to access it,  compared to 19 of 79 for TE/GE-EO and 47 of 96 for SB/SE. Prior to the  survey, TE/GE-EO had not provided examiners any reminders about how  to access the CP2100, but did so afterwards through an informal training,  which is also available to examiners through a shared computer drive  along with instructions for using CP2100. SB/SE has training on backup  withholding that instructs examiners how to request a CP2100.
Without examiners being aware of these practices and able to utilize them  when needed, they may be limited in their ability to effectively examine  employment tax returns. While survey respondents said CP2100 and  cash transaction data were not used frequently, these practices can be  helpful when needed. IRS examiners said CP2100 can help an examiner  narrow the scope and better plan the examination. Cash transaction data  can help the examiner understand the operations of the business under  examination.
section_title: Conclusions
paragraphs: IRS’s first NRP study on employment tax returns since 1984 provides a  valuable opportunity to identify what noncompliance areas are  contributing to the $16 billion annual employment tax gap, and better  align IRS resources with the most prevalent areas of noncompliance. As  our analysis shows, the NRP results present a rich overview of  examination issues—like worker classification and fringe benefits—and  their estimated prevalence. The study results also provide the opportunity  to analyze those issues by various descriptive statistics such as employer  size and compensation. However, IRS has no specific plans to study the  results and assess issues of noncompliance, or update the current  estimate of the employment tax gap, and has not completed any analysis  of the results.
In addition, the NRP study provides IRS with an opportunity to improve  the operational examination process. Ensuring that examiners are given  the opportunity to access certain NRP practices—and are aware of how  to do that—once they move from NRP examinations to operational  examinations could reduce the burden placed on taxpayers and help  examiners identify examination issues. As practices such as the CP2100  and cash transaction data are less frequently used, examiners may need  reminders or easily accessible information about how to access them. In  some instances, using certain NRP practices when the operational  examination starts may help examiners to identify examination issues  sooner. If IRS does not pursue these opportunities to maximize its NRP  investment, IRS is missing a chance to improve operational examinations.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that IRS leverages lessons learned from the NRP  examinations and effectively completes operational employment tax  examinations, we recommend that the Commissioner of Internal Revenue  take the following five actions:  1.  Develop and document plans to analyze the results in 2017 of the  NRP employment tax study to identify the major issues of  noncompliance.  2.  Develop and document plans for addressing the noncompliance  identified in IRS’s analysis of the NRP employment tax results.  3.  Develop and document plans for assessing the results of the NRP  employment tax study to estimate the current state of the employment  tax gap.  4.  Determine whether and when to provide IRAS upfront for SB/SE  operational examinations based on criteria such as whether it would  help identify more noncompliance, reduce taxpayer burden, and  improve audit efficiency by reducing overall IRS costs (examiner  versus campus costs).  5.  Regularly remind employment tax examiners how they can access  and request the CP2100 and cash transaction data for operational  employment tax examinations.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Commissioner of Internal  Revenue. In its comments, reproduced in appendix IV, IRS generally  agreed with all five of our recommendations. We also received technical  comments from IRS, which we incorporated where appropriate. IRS also  provided additional documentation during its review of our draft report that  led us to modify the first recommendation to reflect that IRS has begun  preliminary analysis of NRP study results.
We appreciate IRS’s response to our report, which highlighted that  addressing the data issues we identified in the NRP data should make the  analysis of it more accurate and that IRS is considering additional  changes to its examination procedures. We look forward to additional  details on the actions and timelines that IRS plans to take in response to  our recommendations.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Chairmen and  Ranking Members of other Senate and House committees and  subcommittees that have appropriation, authorization, and oversight  responsibilities for IRS. We will also send copies of the report to the  Commissioner of Internal Revenue and other interested parties. In  addition, this report will be available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions about this report please contact  me at (202) 512-9110 or lucasjudyj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to (1) evaluate how the Internal Revenue Service  (IRS) plans to analyze the National Research Program (NRP) data, (2)  review NRP data available on areas of noncompliance, (3) describe NRP  examination practices that IRS applied to operational employment tax  examinations, and (4) assess additional NRP examination practices that  could be applied to operational employment tax examinations.
To evaluate IRS’s plans to analyze the NRP data and use the NRP  results on noncompliance areas, we interviewed IRS research and  examination officials about their research and analysis plans and  gathered documentation where available. These research and  examination officials represented Research, Applied Analytics, and  Statistics (RAAS) and Tax-Exempt/Government Entities (TE/GE) and  Small Business/Self-Employed (SB/SE). We gathered and reviewed  documentation, if available, to confirm any IRS plans to analyze and use  the data. We compared this testimonial and documentary evidence to  IRS’s strategic plan and the Internal Revenue Manual (IRM).
To review NRP data available on noncompliance areas for employment  taxes, we obtained the NRP data set on completed examinations of the  employer’s Form 941 - Employer’s Quarterly Federal Tax Return as of  July 18, 2016. Each return selected and examined in the study consisted  of any of the four quarters filed or required for a tax year. IRS’s final  sample sizes for the study were 2,507, 2,387 and 2,318 for tax years  2008, 2009 and 2010, respectively. The sample stratification included 14  strata across the four participating business units (TE/GE-Exempt  Organization (EO), TE/GE-Federal, State, and Local Governments  (FSLG), SB/SE, and Large Business and International (LB&I)) that served  as the primary stratifying variable; other stratifying variables included the  employer’s total wages and the mean number of employees. RAAS  initially estimated that the NRP employment tax study size should be  approximately 20,000 returns. However, according to IRS, this would not  be possible based on resources available for the study. The limitations of  the sample size were pointed out by the Treasury Inspector General for  Tax Administration, which noted that the examination results for the  sampled taxpayers may not enable IRS to fully estimate compliance  levels for business taxpayers, among other findings.
Unlike other IRS examinations, NRP examinations can be used to  estimate taxpayer reporting compliance, such as for reporting  employment tax liabilities. The NRP employment tax study represents  employers that filed at least one quarterly Form 941 return for the study  year. However, certain types of employers were excluded from the study  sample. For example, any nonfilers and other employment tax reporting  businesses such as agricultural businesses (Form 943), household  employers (Schedule H), or businesses with less than $1,000 in annual  employment taxes due (Form 944) were excluded from the sample.  Additional exclusions from the sample included federal governments,  large corporations with assets of $250 million or more, foreign  subsidiaries, Indian Tribal Governments, and maritime employers.  Furthermore, the TE/GE-EO division excluded all church cases from the  2008 study year due to an unresolved legal issue; churches were  included in the study for tax years 2009 and 2010. Since the study  excluded some government entities and large businesses, the NRP  results may not reflect the full and accurate level of compliance for  government and large business employers.
We analyzed and estimated the issues examined as well as the wage  adjustments made as a result of the examination, if any. We were not  able to estimate the tax adjustments associated with certain issues being  examined because the workpapers used for the NRP examinations  spread across two data collection instruments (DCIs). The DCI-1 included  the issues (lead sheets) examiners had to examine as part of the NRP  employment tax study as well as the wage adjustments to be documented  from examining those issues. All wage adjustments were required to be  recorded for the study. The DCI-2 included the employment tax reports  that were shared with taxpayers as a result of the examination. The DCI-2  calculated the tax adjustments to a taxpayer’s tax liability (based on the  wage adjustments in the DCI-1), but did not break out the tax adjustment  by issues, similar to the DCI-1. We also analyzed and estimated the  SB/SE employers’ wage adjustments by the number of employees and  the total compensation.
Our analysis also combined similar issues into higher level groups. For  example, we combined examination results on fringe benefits for  executives and nonexecutives, meaning that the same employer could be  examined for both of these fringe benefit issues. See table 4 for how the  employment tax examination issues were combined. IRS reviewed our  combining of issues and provided suggestions, which we incorporated.
IRS officials described the quality review and data reliability process they  used for data collected from the NRP examinations. In terms of data  validations, IRS officials said that they used various consistency and  validation checks when the examination was complete to determine if  certain fields were blank or not blank, to ensure certain questions were  answered based on the response to a prior element, and to check all  entries in the DCI-1 against rules they created. This process took place at  the end of examination before data were transmitted to the database.
During our analysis of the NRP data, we conducted several reliability  tests to ensure the data excerpts were sufficiently complete. For example,  we electronically tested the data for obvious errors. Additionally, we  shared our results with IRS officials to ensure that the data excerpts we  used were complete and accurate for our purposes. We identified a  number of inconsistencies that needed to be corrected before we could  do our analysis. These included the identification of a number of  questionable results for both the total number of employees and the  amount of compensation. The inconsistencies included the numbers of  employees showing “999999” for some cases, or very large numbers that  were the same as the total compensation. Other inconsistencies might  show similar numbers of employees for three of the quarters and a  substantially different number of employees for the other quarter. In  certain instances a fourth quarter value for number of employees or total  compensation would be missing. IRS officials said the potential missing  fourth quarter data represent the difference in time when the return was  filed and when it was selected for the study. In these instances, we  replaced the missing values for the number of employees and total  compensation with the average value for the three quarters that were not  missing.
We shared these inconsistencies and our corrections with IRS officials,  who agreed with our changes and said they were working on correcting  these inconsistencies as of February 2017. IRS officials said that the NRP  employment tax study presented unique challenges in ensuring data  reliability, which took significantly longer than previous NRP studies  because they were dealing with three business units (SB/SE, TE/GE, and  LB&I) that use different systems to track examinations issues.
We reviewed documentation on the NRP data, interviewed IRS officials  about the data, and conducted several reliability tests discussed above.  We report average annual estimates for 2008 through 2010 where data  were available. For example, the variables we used to indicate whether  issues were examined during each NRP audit are missing for 2008.  However, other examination information, including wage adjustment  information, is available by examination issue for all three years of the  study. Therefore, we report NRP estimates using data for only 2009–2010  when addressing which issues were examined, while NRP estimates  using data for 2008–2010 are used to report wage adjustments amounts  by issue and information used to reflect the compliance of SB/SE  employers of different sizes. Generally, the precision of estimates  increases with more observations. Because a probability procedure  based on random selections was used, the sample was only one of a  large number of samples that might have been drawn. Since each sample  could have provided different estimates, we express our confidence in the  precision of our particular sample’s results as a 95 percent confidence  interval (e.g., +/- 7 percentage points). This is the interval that would  contain the actual population value for 95 percent of the samples that  could have been drawn. See appendix II for the specific estimates of this  analysis and information about their sampling errors. Based on the steps  we undertook, we concluded that the data were sufficiently reliable for the  purposes of this report.
To describe NRP examination practices that IRS has applied to  operational employment tax examinations, we interviewed RAAS staff  who administered the NRP employment tax study on the key differences  between NRP and operational examinations. We also interviewed  examination staff from the SB/SE division and the TEGE division—who  were responsible for NRP examinations during the employment tax study.  Within TE/GE, these included examination staff from EO and FSLG  groups. Based on those discussions, we gathered documentation, to the  extent it was available, to confirm the NRP examination practices carried  over to operational employment tax examinations. We also discussed and  gathered documentation, if available, on the costs and benefits of carrying  over NRP practices to operational employment tax examinations, and  discussed the benefits with the SB/SE and TE/GE staffs.
To assess the extent that additional improvements could be made to  operational employment tax examinations based on IRS’s NRP  experience, we used a three-step process. First, we interviewed IRS  officials and examiners who completed NRP and operational  examinations to identify potential improvements to operational  examinations from using NRP practices. Second, we sent a survey to all  IRS examiners who worked on NRP and operational examinations to get  their views on additional potential improvements. Third, we discussed the  practices that IRS examiners favored with IRS examination staff. We  compared those ideas against a set of criteria to the extent data were  available to determine whether the ideas warranted further action. We  discuss these three steps in more detail below.
We held discussions with RAAS staff as well as SB/SE and TE/GE  examination staff who participated in the NRP study to get their views on  additional NRP practices that could improve operational employment tax  examinations. To get similar views, we held four group discussions (one  with FSLG, one with EO, and two with SB/SE) with IRS examiners who  had worked both operational examinations and NRP examinations. These  examiners were identified by IRS. The practices identified included (1)  NRP practices that examiners would like to have, but were not carried  over to the operational examinations; or (2) NRP practices that examiners  were not aware they had access to on operational examinations, but  would like to have that access.
Based on these discussions, we identified a set of NRP practices that (1)  could be applied to operational examinations, but have not yet been  applied across IRS business units involved in the study; or (2) IRS  examiners were not aware they could access. We developed a set of  specific, close-ended, and open-ended questions that addressed those  topics and had multiple pretests to ensure that the questions were  understandable and answerable. We then administered the web-based  survey to all IRS examiners in SB/SE and TE/GE who had experience  completing operational and NRP employment tax examinations. The  survey asked the same set of questions for six NRP practices we  identified as well as demographic information about the examiners. These  questions included if they would like to have access to these NRP  practices on operational examinations, if and why they found them  helpful, and if they are aware they had access to those NRP practices on  operational employment tax examinations. The survey was sent to the  complete list of 269 examiners identified by IRS officials as of July 2016  that were thought to meet the criteria of examiners with NRP and  operational examination experience. Of those examiners, 23 were  determined to not meet this criteria according to their responses to two  screening questions to ensure IRS examiners had applicable experience  to fill out the survey. These included:  1.  According to IRS records, you have completed both NRP employment  tax examinations and non-NRP employment tax examinations. Is this  correct? (yes/no)  2.  Have you completed a non-NRP employment tax examination since  completing an NRP employment tax examination? (yes/no).
If the survey respondents answered no to either question, they were sent  to the conclusion section of the survey, and did not provide responses to  the remaining demographics questions and questions about the six NRP  practices. We received a response rate of 85 percent, with 209 of the 246  examiners who met our criteria completing the survey. We also reviewed  the raw data of the survey and made changes to ensure the skip patterns  in the survey were adhered to by the respondents. We analyzed the  survey data by the IRS business unit, current position, and key case year  of NRP returns on which the respondent worked.
For each of the six NRP practices, we also asked an open-ended  question about why they thought the NRP practice was helpful. We also  asked an open-ended question on whether the respondents had any  other views to share at the end of the survey. To analyze the responses  to these questions, one of our analysts reviewed the responses and  coded them to identify themes for the seven opened-ended responses  with a second analyst reviewing those themes and the coded responses;  we reconciled any disagreements through discussion.
After analyzing the closed-ended and open-ended data from the survey,  we discussed the IRS examiners’ summary responses with IRS  examination staff in SB/SE and TE/GE. Specifically, we discussed  applying the six NRP examination practices to operational employment  tax examinations. To help lead those discussions with IRS examination  staff, we used the following criteria, which were used for our prior work  evaluating the NRP individual study.
Would the change be likely to help examiners correctly identify more  noncompliance?
Is it likely to make the examination more efficient—(i.e., reduce the  cost of conducting an examination, increase benefits for the same  cost, or increase benefits commensurate with justifiable or no  increase in costs)?
Is it likely to reduce taxpayer burden?
Would the change meet any other IRS need?
Where available, we asked for documentation on the criteria above to  assess whether to apply those NRP practices to operational  examinations. These criteria generally are based on our 2005 report,  Understanding the Tax Reform Debate (GAO-05-1009SP), Office of  Management and Budget Circular A-94, and the Internal Revenue  Manual. IRS officials agreed that these criteria were valid. As noted in  our 2005 report, the criteria may conflict with each other, and as a result,  trade-offs are to be considered among the criteria when evaluating a  particular proposal. In those cases, we used our professional judgment in  weighing the relative importance of these criteria in making our  recommendations. We discussed these criteria with IRS to get its  feedback. To the extent data were available on additional NRP practices  that could be used in operational employment tax examinations, we used  that data and information to evaluate those NRP practices using the  criteria above as well as relevant sections from the IRS strategic plan.
We conducted this performance audit from April 2016 to April 2017 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: Data on Results of National Research Program Employment Tax Examinations
subsections: section_title: Small Business/Self-Employed (SB/SE) Observations Only
section_title: Other Issues (Increases Only) Other Issues (Decreases Only)
section_title: Appendix III: Results from GAO Survey of Internal Revenue Service Examiners
section_title: Appendix IV: Comments from the Internal Revenue Service
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Tom Short (Assistant Director),  Jehan Chase, Karen O’Conor, Steven Flint, Robert Gebhart, Donna  Miller, Robert MacKay, Cynthia Saunders, Albert Sim, Sonya Vartivarian,  and Jason Vassilicos made significant contributions to this report.