Tax Research: IRS Has Made Progress but Major Challenges Remain
Released: 1996-06-05T00:00:00

Letter

Background

Our federal tax system relies on voluntary compliance with tax laws. It presumes that taxpayers understand the laws and are willing and able to follow them. If not, IRS must determine the reason and then act to restore compliance and maintain the flow of tax revenue. IRS traditionally has responded to noncompliance by using enforcement efforts such as auditing tax returns and computer matching data from third parties (e.g., banks and employers).

Over time, IRS concluded that enforcement was essential to pursue intentional noncompliance but not to correct unintentional noncompliance. Because of this enforcement limitation and concerns about the level of noncompliance, IRS formulated a different compliance philosophy. Known as Compliance 2000, the philosophy envisioned using nonenforcement efforts to correct unintentional noncompliance and reserving enforcement efforts for intentional noncompliance. IRS first espoused this philosophy in 1988 and by the early 1990s had initiated many research projects across IRS’ 63 district offices to identify noncompliant market segments, root causes for the noncompliance, and innovative ways to improve compliance.

Even so, noncompliance continued to result in major losses in tax revenue. IRS’ most recent estimate put the gross income tax gap—the difference between income taxes owed and voluntarily paid—at $127 billion for 1992 alone. IRS estimated total tax compliance to be about 87 percent—83 percent in taxes paid voluntarily and 4 percent in taxes paid after IRS enforcement. IRS data have shown such total compliance to be stagnant since the early 1970s.

Concerns about these trends prompted IRS to create the Compliance Research and Planning approach in 1993. This new approach attempts to merge the Compliance 2000 philosophy with a rigorous compliance research system. By combining IRS’ National Office knowledge about research with its district knowledge about compliance and enforcement, IRS hoped to identify nonenforcement and enforcement efforts to help improve total compliance to 90 percent by 2001. This approach has required the establishment of new research methods, organizations, and tools.

The research methods include a compliance research cycle that starts with identifying a noncompliant market segment and ends with using research results in ongoing compliance programs. The organizations include the National Office of Research and Analysis (NORA) in the Research Division and 31 District Offices of Research and Analysis (DORA). NORA has responsibility for developing and implementing the new approach. DORAs are responsible for researching national and district compliance levels and finding cost-effective wholesale solutions to noncompliance, with the support of three IRS functions—Examination, Collection, and Taxpayer Service. Appendix II discusses the research cycle and organizations. As planned, the major research tool will be the Compliance Research Information System (CRIS). CRIS is to be an integrated network of databases containing a sample of IRS data over multiple years for use in compliance research. Appendix III discusses CRIS.

Objectives, Scope, and Methodology

Our objectives were to (1) review the many lessons that IRS learned from past compliance efforts, including Compliance 2000, to identify the factors most critical to the success of the new compliance research approach and (2) analyze the current status of the new approach and its ability to incorporate these factors as well as help IRS achieve the goal of 90-percent total compliance by 2001. To accomplish each objective, we visited IRS’ National Office and all 31 DORAs, interviewing responsible officials and collecting relevant data.

Our National Office work focused on NORA. We interviewed NORA officials and collected data on the plans for and status of the new research approach. We discussed the officials’ views on lessons learned from past research and factors critical to the success of the new approach.

Our fieldwork focused on visits to all 31 DORAs to monitor implementation of IRS’ new approach. To ensure consistent data collection, we did 293 structured interviews. The interviewees included 31 District Directors; 31 DORA Chiefs; 92 Chiefs of Examination, Collection, or Taxpayer Service; and 139 DORA staff (about 80 percent of the staff at the time of our visits). Our interviews solicited information on the lessons learned and critical success factors as well as on the status of the new approach. We obtained information on all DORA staff, such as positions and education (see app. V), and on Compliance 2000 research projects (see app. I).

After we finished our DORA visits in September 1995, events occurred that could affect the new research approach. We conducted structured follow-up interviews with NORA officials and the 31 DORA Chiefs to determine the real and potential effects of these events, including IRS budget cuts and postponement of TCMP.

We did our work in Washington, D.C., and the 31 DORAs from April 1995 to January 1996 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from you or your designee. On April 22, 1996, we obtained comments from responsible officials in IRS’ Compliance Research Division. Their comments are discussed on pages 18 and 19.

Compliance 2000 Generated Few Compliance Gains but Many Lessons Were Learned for Future Research

IRS viewed its Compliance 2000 strategy as a way to advance voluntary compliance. The strategy differed from the traditional enforcement approach by recognizing that nonenforcement approaches, such as education and assistance, can boost compliance. To determine when it was best to use each approach, IRS sought to uncover root causes for noncompliance and distinguish between compliant and noncompliant taxpayers across market segments.

Compliance 2000 did not work for various reasons. In 1992 testimony, we reported that IRS lacked the necessary compliance data and infrastructure to do research by market segments. We found that IRS had not tracked whether its districts started research projects on the basis of objective compliance data or researched the most noncompliant market segments. We concluded that Compliance 2000 was a worthy idea that needed careful implementation. We stated that IRS needed to use objective data to select research projects and develop an infrastructure for planning, managing, and monitoring the projects.

An IRS Internal Audit report in December 1993 had similar findings. The report disclosed that 38 of 50 Compliance 2000 projects were traditional enforcement projects that the districts had renamed as Compliance 2000 projects. And IRS had no database to capture results or provide an inventory of the compliance issues covered. The report concluded that the projects did not represent rigorous research, the managerial controls were weak, and a management structure was needed to provide effective oversight.

NORA officials acknowledged such problems and indicated that very few Compliance 2000 projects could be viewed as viable research. Even in the few projects that NORA officials viewed as viable, IRS had not created a database to show whether compliance increased and, if so, what actions prompted those increases.

We sought to further confirm these problems by collecting data on Compliance 2000 projects as we visited the 31 DORAs. We confirmed that IRS did not track the methods and results of the projects. As shown in appendix I, we found that many projects were duplicated. Available records were insufficient for us to compare costs and benefits across the projects.

We found that IRS learned many lessons about research from Compliance 2000. According to NORA officials, the major lesson was that IRS needed a totally new organization and approach because the decentralized approach under Compliance 2000 did not produce viable research. Our interviews at NORA and the 31 DORAs indicated that such lessons governed the design of the new approach, particularly those that IRS officials pointed to as factors critical to the success of this approach. These factors include the need for (1) support for the research across IRS, (2) objective compliance data that are readily accessible, (3) skilled staff, (4) a sound infrastructure to organize and manage the research, and (5) measures to evaluate how well the new approach is working. The next section discusses the potential of IRS’ new approach in the context of these five factors.

IRS’ New Approach Offers Potential for Improving Compliance Research

IRS holds high hopes for its new compliance research approach in integrating the Compliance 2000 philosophy with efforts to boost compliance. To act on this potential, IRS has taken steps built on lessons learned from past efforts.

Support for Compliance Research Can Be Built but Not Mandated

While directives are important to set the vision, building support relies on collaboration. In this vein, NORA has developed a cooperative strategy to communicate the research vision, needs, and results as well as generate feedback on the needs of IRS districts and functions. Given such feedback, NORA plans to create a special unit to meet the needs for research on ways to better select and handle workload. NORA is also encouraging DORAs to provide short-term research assistance to districts and functions (e.g., electronic filing and earned income credit). Ultimately, NORA knows that the new approach will have to prove its worth to build the necessary staff support.

IRS Is Developing a Compliance Database

IRS’ new approach depends heavily on CRIS. As envisioned, CRIS is to be IRS’ network of databases for identifying the nationwide and district compliance of market segments. IRS is implementing CRIS in the following three stages.

Working File CRIS was used in fiscal years 1994 and 1995 for training DORA staff. It had 75 data elements limited to one market segment.

Interim CRIS was delivered to all DORAs by fall 1995. It expanded to 800 data elements and samples of individual and business filers for all market segments.

Final CRIS is slated to implement its first database, having over 2,500 data elements on a sample of 7 to 10 million individual filers, in fiscal year 1997. It is to interface with other systems being created to aid in storing data and assigning workload. It is expected to contain 3 years of data.

On completion, CRIS is to have 10 databases, each with thousands of data elements. CRIS has been funded for $7 million to develop and maintain these databases over the next 5 fiscal years. If CRIS works, IRS would have an integrated network of recent compliance data. And, IRS research staff could quickly profile compliance by market segment. IRS expects CRIS to provide data on taxpayer compliance in (1) filing required tax returns in a timely manner, (2) accurately reporting information on tax returns, and (3) fully and timely paying taxes owed.

Also, realizing that IRS data contain taxpayer and IRS errors, NORA has developed data validation standards. NORA officials believed that these standards will better ensure that the research stems from adequate data.

DORA Positions and Training Focus on Research Skills

Past research efforts highlighted the need for staff who had research skills. Toward that end, NORA devised a staffing plan that requires certain positions at each DORA, such as a chief, program analysts, and other generalists. NORA also created specialist positions that require skills in statistics, operations research, economics, and computers.

Recognizing limitations in having such staff in the field and restrictions on external hiring given the redeployment agreement, NORA encouraged DORA chiefs to fill positions with the most qualified staff available. NORA expected the number of staff to initially total about six to eight per DORA and grow as workload dictated.

NORA also devised a plan to train all DORA staff in research methods. Phase I training, which began in early 1995, described NORA, DORA, CRIS, profiling, statistics, and research methods. Phase II training includes advanced methods in statistics, research, and market segmentation. NORA is also offering customized training to meet the needs of DORA staff.

The Infrastructure Has Been Framed

IRS has laid the framework for the infrastructure it believes is needed to manage the new research approach. This framework includes NORA, DORAs, a research plan, and research methods. IRS has plans for other mechanisms to manage the research.

NORA and DORA officials said research in the field has often suffered because research knowledge resided in the National Office, but knowledge about compliance and enforcement resided with district staff who usually lacked research skills. These officials said districts lacked commitment to do the research and use its results. NORA officials viewed the NORA/DORA framework as a way to correct these problems.

Furthermore, IRS districts are forming Compliance Planning Councils (CPC) at the DORA level to build district support for compliance research, oversee district compliance programs, and provide a conduit to the three district functions. In summary, CPCs are to provide a multifunctional perspective in reviewing district compliance workload. At a minimum, each CPC is to consist of the DORA Chief and chiefs of the three functions. IRS is also forming nine Cooperative Strategy Working Groups (CSWG) to help with oversight, coordination, and implementation of the new approach. CSWGs are to make many of the decisions about compliance research, with the concurrence of the national director for compliance research.

NORA is developing an annual research plan and a compliance research cycle. If implemented properly, both elements should create a common understanding of the research vision and enhance the quality of the research. The research plan prioritizes compliance issues and research efforts. The plan allocates resources across DORAs to meet expectations, within set time frames, on (1) establishing the new research approach, (2) helping IRS districts and functions to meet their compliance and enforcement needs, and (3) reducing the tax gap and improving compliance. The research cycle outlines the steps for all projects, as shown in figure 1.

As shown above, the latter steps of the cycle produce research results that form the basis for establishing compliance workloads, as set in the compliance plan. Appendix II provides details on the research cycle and compliance plan.

IRS Hopes to Have Specific Measures of Success

For fiscal year 1995, IRS measured the success of the new approach against expectations set forth in IRS’ Business Master Plan; those expectations focused on establishing all DORAs. For fiscal year 1996, success is to be measured against expectations set forth in the research plan. NORA officials acknowledged the need for more specific measures of success.

Combining all five factors, IRS’ new compliance research approach offers potential for improving compliance. If implemented successfully, it also may enhance the effectiveness of the tax system. Rigorous research could help ensure that tax laws, regulations, and guidance are clear; taxpayers receive necessary assistance; paid preparers encourage compliance; and enforcement is cost effective. Integrating the research with ongoing programs could help meet these basic requirements, to the extent the research helps increase compliance and reduce taxpayer burden. In doing so, the research would co-exist rather than compete with these programs.

IRS Is Addressing Obstacles to Its New Research Approach but Major Challenges Remain

Some obstacles have slowed implementation of IRS’ new compliance research approach. IRS has taken actions to overcome the obstacles but faces critical challenges in incorporating the success factors.

Tensions Undercut Organizational Support for the New Approach

NORA and DORA officials raised concerns about support for compliance research because of three types of tensions. Our interviews with 293 District Directors, CPC members representing the three functions, and DORA staff illustrated these concerns as well as mixed support for the new approach.

For example, about 63 percent of those we interviewed believed that this approach will reduce the tax gap, and nearly 70 percent, who had knowledge of previous attempts, believed that it will be more cost effective. However, only 38 percent of those we interviewed believed that the approach will significantly contribute to meeting IRS’ 90-percent compliance goal by 2001. When asked why, most of these officials viewed this goal as too challenging and the time period as too short.

Proponents of the new approach favored its systemic and objective nature. They viewed national research on market segments, by reaching more noncompliant taxpayers, as the way to significantly improve compliance. Opponents, believing that major compliance problems are well known, favored shifting the research resources into efforts involving tax simplification and legislative changes, such as tax withholdings and income reporting. NORA officials noted that compliance research offers the best way to identify and justify such efforts.

The first tension dealt with changing the IRS culture. IRS has focused on maximizing revenue yield through enforcement instead of voluntary compliance through enforcement and nonenforcement efforts. Our DORA work showed that the three functions largely expected the research to aim at this traditional focus. Given concerns that it will not, only 34 percent of the Chiefs of Examination, Collection, and Taxpayer Service we interviewed at the 31 DORAs considered DORA to be a good investment of resources. NORA officials believed that these responses did not reflect the broad, multifunctional view needed to increase compliance. These differing views reflect, at a minimum, the tension over the new approach.

A second tension involved pressures to quickly produce high-profile results. We heard this concern during interviews at all 31 DORAs. Interviewees doubted whether IRS would give the approach time to prove itself. They said IRS often expects results right away, but compliance research is unlikely to produce immediate benefits.

The third tension dealt with directing 85 percent of the DORA work to national compliance issues, leaving the remainder to the discretion of the district. District officials, who believed that many compliance issues have a local flavor, generally wanted more control. NORA officials, as well as DORA Chiefs, saw a national focus as the way to help improve compliance and reduce the tax gap.

NORA officials recognize the seriousness of these and other tensions that undercut support for the new approach. NORA officials have planned various efforts to educate and inform IRS management and staff at all levels on the new approach as well as to advance its cooperative strategy.

Major Gaps Exist in the Compliance Data

IRS decided to open DORAs a few years before CRIS was finished to allow DORAs to become fully staffed and equipped, as well as to participate in the development of CRIS and learn about IRS data. While IRS has made progress, questions remain on whether CRIS will be completed soon enough to contribute to research on improving compliance by 2001.

At the time of our DORA visits, only 19 percent of the DORA staff viewed the available data, which were from Working File CRIS, as sufficient to do their jobs. DORA staff complained that the data were outdated, inaccurate, and lacked compliance measures.

After our visits, DORA staff began using data from Interim CRIS. The DORA Chiefs we interviewed during our follow-up work viewed the Interim CRIS as a far better system. However, only 39 percent of them thought the data were sufficient to do the work required at DORA. Among other things, they noted that Interim CRIS lacked historical data, compliance indicators, and enforcement actions against filed tax returns as well as on nonfilers.

NORA officials acknowledged these problems but had viewed these earlier phases as training for DORA staff. They believed that the staff had sufficient data for such training and the assigned work. The officials said that Final CRIS and the data validation standards will address these problems and add discipline so that the staff only does the work made possible by the data.

Even so, Final CRIS is developing more slowly than expected. NORA officials remain optimistic that its first database, involving individual filers, will be operational by fiscal year 1997. As for the other nine databases, such as for partnerships and corporations, IRS was not sure when they would be fully operational and how many can produce research results by 2001 on improving compliance.

Furthermore, the postponement of TCMP heightens the need for finding other ways to measure reporting accuracy on filed returns. NORA officials told us that they viewed TCMP as a crucial part of CRIS because TCMP had been a proven way to measure reporting accuracy. Over three-fourths of the $94 billion tax gap for individuals in 1992 arose from noncompliance in reporting rather than in filing or in paying.

IRS officials said that, without the randomness and comprehensiveness of TCMP, they doubted whether IRS will have a precise way to measure reporting compliance nationally or at the DORA level, or whether IRS will have a basis for identifying emerging noncompliance among market segments or tax issues. CRIS is using TCMP results for 1988, but these results will lose more of their usefulness with each passing year. NORA officials said they are not sure how they will measure reporting compliance.

Staffing Problems Increase the Need for Training

At the time of our visits, the 31 DORAs had 217 staff, varying from 4 to 12 staff at each DORA. Of those we interviewed, 85 percent of the District Directors and DORA Chiefs were satisfied with the number of staff, but 94 percent of the chiefs and 74 percent of the directors thought staffing should increase in the future; the rest were uncertain. Given IRS’ budget cut, DORA Chiefs expressed concern that staffing would not increase in fiscal year 1996 as anticipated. Figure 2 shows the number and types of positions for all 31 DORAs, excluding the 31 DORA Chiefs.

The category of “other” includes Assistant DORA Chief, Diversity Coordinator, Fed-State Coordinator, Magnetic Media Specialist, Public Affairs Specialist, and Acting Team Leader.

We analyzed the distribution of positions across the 31 DORAs. Our analysis showed that 21 DORAs lacked 1 or more of the required specialist positions involving economic, statistics, computer, and operations research skills. For example, Seattle had two program analysts, one operations research analyst, and one economist, while Los Angeles had five program analysts, two operations research analysts, and one Fed-State coordinator. Neither site had a statistician or a computer research analyst.

Although over half of the DORA positions involved specialist skills, DORAs had difficulty finding such staff. Only 58 percent of the DORA Chiefs said their staff had the requisite background and skills; they pointed to gaps in skills such as statistics, economics, and operations research. Our analysis showed that 37 percent of the staff we interviewed had some research experience, and 5 percent had spent most of their career in a research capacity. Of DORA staff holding college or graduate degrees, about half of these degrees were in business or liberal arts; less than 30 percent related to specialist positions.

Both NORA and DORA officials we interviewed pointed to the IRS redeployment agreement and limits on hiring staff from outside of IRS as barriers to getting the most qualified staff for doing research. Over 50 percent of the DORA staff were hired as redeployment eligible. Sixty-five percent of the District Directors and DORA Chiefs said the redeployment agreement limited their ability to staff DORAs with the most qualified employees.

Because many DORA staff do not have the research skills needed, NORA is working on ways to share specialized skills across the research projects and DORAs. Plans call for identifying the necessary specialist skills before starting a project and finding specialists from NORA or the DORAs who can work on the project when needed. NORA officials said a project will not start if needed specialists cannot be found.

NORA officials agreed that DORA staff could benefit from more specialized skills, but they were pleased with the staff overall and their ability to learn. Given these views, NORA has executed what it views as an aggressive training plan. As for phase I of the training, 94 percent of the DORA Chiefs viewed it as at least generally adequate; 83 percent of DORA staff agreed. Staff who thought the training could be improved wanted more training in statistics, data analysis, economics, research design and methodology, and computers. A NORA training survey of DORA staff also identified similar training needs. NORA officials said training in these areas is being developed.

NORA has developed a plan for phase II training and a budget of $3.5 million. NORA has planned internal computer courses and external courses on topics such as research methods and use of research. NORA officials said that the training budget had been fully allocated as of March 1996, but that funding had not been obligated. If the funding is not received soon, projects may be delayed.

Research Infrastructure Needs Further Development

IRS has not completed the infrastructure for planning and managing the research, although progress has been made. For example, until November 1995, NORA had not started to develop linkages with programs in the functions that used market segments due to other priorities. Until the linkages are developed, unnecessary duplication may occur and opportunities to improve these programs may be missed. NORA officials said linkages will be made when functions ask for profiles and research by market segment as well as through the compliance plan.

Objective criteria for selecting research projects had not been fully established. Without such criteria, NORA cannot ensure that staff research the major areas of noncompliance. Our interviews and review of the research plan showed that many projects arose from districts’ or functions’ beliefs about the major areas of noncompliance. Other projects were selected with more objective data from TCMP, the tax gap, or other studies; however, such data reflected compliance in the 1980s. NORA officials acknowledged a desire for more objective and recent data in selecting projects but believed that enough of the initial projects dealt with known compliance problems to avoid wasted efforts. The officials said CSWGs are responsible for establishing criteria for selecting and ranking projects and are working with five DORAs on such criteria.

CPCs also were not fully developed. As of December 1995, districts had established 28 of the 31 CPCs; most CPCs had only met a few times, largely to get organized. Although 55 percent of the CPC members we interviewed said CPCs were at least generally effective, 21 percent said they were not, and 24 percent thought it was too soon to tell. CPCs included members who managed the three district functions. If developed, CPCs could help link compliance research to the needs of the district functions.

Starting in March 1996, NORA implemented a system to start tracking the status and results of research projects. NORA relies on DORA staff to input a lot of data about the projects and research into the system. However, controls over accurate and complete data entry have not yet been fully developed.

New Approach Lacks Success Measures

IRS has not developed specific measures for evaluating the success of the new research approach. Of the 62 District Directors and DORA Chiefs we interviewed, 73 percent cited a need for better measures. Most of these interviewees suggested measuring impacts of the research on compliance, particularly by market segment or district. NORA and DORA officials believed that success will be based, in part, on the support and demand for research from the three functions.

Two CSWGs were working on ways to measure success, including (1) a peer review system and (2) a quality review of the research process and its results. NORA expects them to be finished during the spring of 1996. Without good measures, IRS will not be able to objectively evaluate its new approach. IRS faces the challenge of developing valid measures that will be meaningful to customers inside and outside of IRS.

Conclusions

IRS’ goal to increase total compliance with the tax laws to 90 percent by 2001 is a worthy one. IRS estimates have shown that decades of attempting to improve compliance through enforcement failed to raise total compliance above about 87 percent. IRS’ new approach of supplementing its enforcement efforts with rigorous research into the causes of noncompliance strikes us as being intuitively logical.

On the basis of lessons learned from the past, IRS officials believe, and we agree, that among the factors needed to better ensure success of the new approach, at least five stand out in terms of relative importance: (1) support for the research throughout IRS, (2) objective compliance data that are readily accessible for research, (3) skilled staff capable of doing rigorous research, (4) an infrastructure for organizing and managing the research, and (5) measures to evaluate whether the new approach works.

We identified several issues that IRS needs to address in terms of these five critical success factors. The mixed support we found for the new research approach has caused tensions within IRS that could have an adverse impact on potential success. The fact that IRS might not have objective data available when needed for the research effort may make it difficult to produce useful research results in a timely manner. Furthermore, unless specialized staff are available when and where needed, the research effort could also be hampered. Finally, IRS has not yet fully developed the infrastructure needed to plan and manage the research, nor does it have measures to use in evaluating the success of the new approach.

IRS has taken or planned some actions to address these issues. It has developed mechanisms designed to build support for the new approach. Working with existing resources in the face of budget constraints, IRS has developed training and staff-sharing programs to help address specialized staffing needs. IRS is also working to (1) enhance the infrastructure by tracking projects and linking research and compliance programs and (2) develop measures for evaluating the success of the new approach.

Effectively addressing each of these issues should enhance IRS’ potential for success. Thus, it is important that IRS monitor its progress in addressing these issues and position itself to take corrective action if and when needed.

Recommendations

We recommend that the IRS Commissioner develop an approach for monitoring the effectiveness of mechanisms established to build support for the new approach as well as for the staff-sharing and training efforts that are under way and, if necessary, make modifications; devise a method to better ensure that reliable compliance data will be available when needed for the research effort, given the indefinite postponement of TCMP; set a schedule for completing CRIS, monitor its progress, and take the necessary actions to resolve identified problems; and establish milestones and monitoring mechanisms for (1) completing the infrastructure needed to organize and manage the research effort and (2) developing the measures needed for evaluating success.

Agency Comments and Our Evaluation

We obtained oral comments on a draft of this report from senior IRS officials in a meeting on April 22, 1996. IRS officials included the National Director for Compliance Research, the Chief of National Office Research and Analysis, and a representative from IRS’ Office of Legislative Affairs. In general, these officials agreed that the report accurately reflects the key issues in IRS’ new compliance research and analysis approach. They further agreed with our conclusions and recommendations and noted the following actions were being planned or taken on each of our four recommendations.

First, in developing an approach for monitoring mechanisms for building support and efforts in staff sharing and training, the IRS officials said they will be monitoring all such mechanisms and efforts, particularly use of the cooperative strategy and other outreach efforts about the new approach. Second, in devising a method to provide reliable compliance data, these officials acknowledged the problems with losing the comprehensive, top-down measures of TCMP but said IRS has sufficient compliance data in the short term for the research work to continue.

Third, these officials said action is already being taken to set a schedule for completing CRIS, monitoring its progress, and resolving related problems. Recently, IRS has required all computer systems under development, including CRIS, to have established milestones and a completion schedule that will be monitored internally. Fourth, in establishing milestones and monitoring the completion of the infrastructure as well as of the measures, the IRS officials said the fiscal year 1997 research plan will provide the means for doing these activities. They said IRS’ new system for tracking the status and results of research projects is expected to be operational by June 1996, and measures for evaluating the success of the new research approach are being developed.

This report contains recommendations to you. The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on the recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight not later than 60 days after the date of this letter. A written statement also must be sent to the House and Senate Committees on Appropriations with the agency’s first request for appropriations made more than 60 days after the date of this letter.

Copies of this report are being sent to interested congressional committees, the Director of the Office of Management and Budget, the Secretary of the Treasury, and other interested parties. It will also be made available to others upon request.

Major contributors to this report are listed in appendix VI. Please contact me on (202) 512-9044 if you or your staff have any questions about this report.

Summary of Compliance 2000 Projects Data Collection Instrument

This appendix contains a summary of the results from our data collection on Compliance 2000 Projects. We provided a data collection instrument to responsible officials at 31 District Offices of Research and Analysis (DORA) for completion during the summer of 1995. (DORAs are not an outgrowth of Compliance 2000. Compliance 2000 was a district (old 63-district configuration) configuration. However, we chose to collect data from the DORAs because many of the DORAs had received data from Compliance 2000 offices after they were closed.) Of the 31 DORAs, 28 reported information on 133 Compliance 2000 projects.

We found that important information was unavailable for most of the projects. For example, none of the projects reported whether compliance improved or not. Of 133 reported projects, 70 reported no information on either the results or the resources spent. Of the 63 for which such information was available, 35 provided information on the resources, 37 provided information on enforcement results (e.g., dollars assessed and returns obtained), and 24 provided information on nonenforcement activities (e.g., number of seminars held and publications issued). Table I.1 provides this information by DORA.

Furthermore, we noticed that many projects dealt with the same general topic, such as compliance in filing information returns on miscellaneous income, nonfilers, and tax-exempt organizations. Table I.2 shows that of the 133 projects, 72 duplicated at least one project.

Summary of IRS’ New Compliance Research and Analysis Approach

This appendix contains information on various aspects of the new compliance research approach. It provides details on the research infrastructure needed to sustain the new approach.

Compliance Research and Planning Cycle

As envisioned, the National Office of Research and Analysis (NORA) and the District Offices of Research and Analysis (DORA) will collaborate to conduct new activities that form a disciplined research cycle—Compliance Research and Planning Cycle. This cycle encompasses 10 steps in addressing a compliance problem. Table II.1 describes each of these steps.

Measure levels of compliance across market segments in (1) filing timeliness, (2) reporting accuracy, and (3) paying taxes owed in full and on time.

Identify and rank market segments with significant compliance problems.

Profile market segments to identify patterns of noncompliance, validate their selection, and enrich the understanding of the common characteristics that distinguish a given segment from other segments.

Identify potential treatments to improve compliance after determining and understanding the causes/reasons for noncompliance.

Test treatments to determine if they have produced significant, measurable improvements in a market segment’s compliance level over an original baseline.

Remeasure compliance levels and evaluate whether the applied treatments were effective in improving the compliance of market segment.

Generate the compliance plan to drive all compliance-related workload for IRS.

Allocate compliance resources to match needs with staff and other resources at national and district levels.

Plan compliance workload to match staff (grade and skill levels) to the scheduled work.

Select compliance workload by identifying cases, accounts, or groups of taxpayers to work in a way that will meet plan objectives within the district work plan schedules and resources.

National Office of Research and Analysis

NORA is responsible for supporting, guiding, and coordinating work at DORAs. The first priority of NORA was to establish DORAs and ensure that they were staffed, equipped, and operational. NORA also is responsible for evaluating the overall research approach and its components.

Specifically, NORA is to (1) work with all levels and functions in a consulting role to support market research activities, (2) assist National Office and field executives in institutionalizing Compliance 2000, (3) provide compliance data necessary to develop a multiyear strategic compliance plan, (4) develop new case selection criteria that are based on market research, (5) supply data to the national portion of the compliance plan, (6) propose national initiatives to improve compliance in selected market segments, (7) advise and issue progress reports to the Director of Research and Chief Compliance Officer, (8) review DORAs’ work to ensure that national program objectives are met, (9) ensure that DORAs provide quality service, (10) develop methods for measuring the compliance of various market segments, (11) ensure consistent and frequent communication and feedback with internal and external stakeholders, (12) ensure that DORA training needs are identified and met, and (13) provide guidance and control to DORAs in handling external data.

District Offices of Research and Analysis

The primary function of each DORA site is delivery of a local-level compliance research capability using local knowledge and resources. DORA staff are to be primarily responsible for providing information, guidance, and counsel to the district offices on methodologies and strategies that address areas of noncompliance, given resource allocation constraints, and compliance plan objectives.

As DORA staff learn to do compliance research, they are expected, in the short term, to (1) learn proper research procedures and processes, such as techniques, methodologies and data analysis, data sources, security, and privacy issues; (2) research and evaluate local external data sources; (3) begin assessing the potential for additional market segments and estimating the nonfiler population; (4) learn elements and practice proper usage of internal and external data; and (5) provide data and measurements for past Compliance 2000 projects.

Cooperative Strategy Working Groups

The Cooperative Strategy Working Groups (CSWG) were established to design, plan, and implement decisions that help maintain the vitality of the new research approach. NORA and DORAs provide the members. Each group is to have a statement that describes its responsibilities, composition, and schedule. The groups are expected to develop guidelines to ensure the effectiveness of their work. However, interim guidelines to help get CSWGs started were developed by NORA.

CSWGs are to be implemented in three stages: (1) “First-Wave,” by the beginning of fiscal year 1995; (2) “Second-Wave,” by the end of fiscal year 1995; and (3) “Longer Term.” Each stage represents a series of working groups. The First-Wave stage consisted of the Policy and Governance, Data Development and Planning, Education and Training, Profiling, and Communications cooperative strategy working groups. The Second-Wave stage consisted of the Compliance Studies and Tests, NORA/DORA Research Planning, and Systems Development cooperative strategy working groups. The Longer Term stage consists of the Resources Cooperative Strategy Working Group. The following describes each of these groups.

Policy and Governance Cooperative Strategy Working Group: (1) identifies compliance research issues; (2) determines procedural requirements for NORA and DORAs; and (3) formulates and recommends policies and procedures to address those issues and requirements.

Data Development and Planning Cooperative Strategy Working Group: (1) exercises oversight and operational roles in the design, development, acquisition, use, maintenance, and evaluation of internal and external data and (2) measures the support of compliance research operations.

Education and Training Cooperative Strategy Working Group: carries out the oversight, development, and operation for internal and external training provided to NORA and DORA staff.

Profiling Cooperative Strategy Working Group: (1) oversees market segmentation and profiling operations and (2) formulates and recommends profiling standard procedures and the design and testing of compliance measures.

Communications Cooperative Strategy Working Group: oversees, develops, and maintains mechanisms and the media for communications on compliance research.

Compliance Studies and Tests Cooperative Strategy Working Group: (1) oversees compliance studies and tests and (2) recommends compliance research standards for conducting, analyzing, and reporting compliance studies and treatment tests.

NORA/DORA Research Planning Cooperative Strategy Working Group: (1) develops and provides input into the compliance plan and (2) reviews other IRS plans.

Systems Development Cooperative Strategy Working Group: (1) oversees the design, development, implementation, and evaluation of the technology used in compliance research and (2) addresses issues regarding the hardware, software, and telecommunications surrounding compliance research.

Resources Cooperative Strategy Working Group: (1) determines staffing and financial resources requirements for all compliance research and (2) ensures that resources are allocated according to the compliance plan.

Compliance Planning Council

The Compliance Planning Council (CPC) is to be responsible for multifunctional integration, planning, and coordination of compliance activities within the District. Compliance activities are expected to focus on research, identification of market segments, and development of strategies to deal with noncompliant behavior. Specific activities of CPCs may include advising the District Director and assisting in the identification and prioritization of the DORA workload, approving and allocating resources to compliance treatment plans and other multifunctional compliance initiatives, monitoring ongoing progress of projects and initiatives, and ensuring consistent and frequent communication and feedback with internal and external stakeholders.

CPC membership may consist of the (1) Chief of Examination, (2) Chief of Collection, (3) Chief of Taxpayer Service, (4) Chief of Criminal Investigation, (5) Chief of DORA, (6) Chief of Information Systems Division, (7) Disclosure Officer, (8) President of the National Treasury Employees Union, (9) Problem Resolution Officer, (10) District Counsel, (11) Appeals, and (12) Employee Plans/Equal Employment Opportunity.

Research Plan

The research plan is to apply NORA and DORA staff resources to national workload during fiscal year 1996 and beyond. Resources are to be used efficiently to avoid unnecessary duplication of effort. The plan is to link NORA/DORA work to IRS’ fiscal year 1996 Business Master Plan and to the major components of the tax gap.

The research plan is to lay out research projects that can have a national impact on compliance and assigns the projects to one or more DORAs. It is to cover fiscal years 1996 through 1998, and be flexible enough to accommodate new opportunities and new research findings to redirect national efforts.

Compliance Plan

The compliance plan is to set forth all compliance-related workload for IRS. The scope and duration of the activities it mandates are likely to occupy several years. The compliance plan is expected to comprise both enforcement and nonenforcement activities. For this reason, it is expected to mandate actions both for functions within the Chief Compliance Officer organization as well as for functions with Customer Service organizations. When the national component of the compliance plan includes activities that transcend Chief Officer organizational boundaries, it is to be issued jointly by the Chief Officers concerned. Once officially issued, the compliance plan is to become the basis for final resource allocations, functional workplans, and workload selections.

Summary of IRS’ Compliance Research Information System

This appendix contains additional information on the final Compliance Research Information System (CRIS) database. It provides more details on the CRIS infrastructure and types and sources of data required.

As envisioned, CRIS will be the primary integrated research tool used for compliance research and analysis. Plans call for CRIS to be an integrated network of 10 databases containing a sample of internal, external, and multiyear data, which is to be accessible to national and district office personnel to support analyses of voluntary compliance rates and levels. CRIS is expected to enable IRS to develop working hypotheses on the means to increase voluntary compliance, test the hypotheses, evaluate the results, and make decisions on how to implement the new strategies. IRS also envisions that CRIS will improve both the quantity and quality of data as well as sophisticated analysis.

The vast majority of CRIS data is expected to come from statistically reliable samples drawn from the following IRS data sources: (1) the individual master file and returns transaction file, (2) the business master file and returns transaction file, (3) various other internal master files, (4) results data from the Taxpayer Compliance Measurement Program, and (5) various other taxpayer surveys and studies.

The only external data planned for CRIS are census data. However, external data may be used for follow-on research after noncompliant market segments are identified by the objective application of CRIS measures to internal IRS sample data. External data sources will not be appended on a taxpayer-by-taxpayer basis to internal CRIS data. CRIS is designed to be a sample with no taxpayer identifiers.

All internal CRIS data are to be transmitted electronically or via magnetic tape. External data are to be provided to the CRIS system via magnetic tape. Validity and consistency checks will be performed on internal data before their input to CRIS. IRS also plans to validate data from external sources.

As planned, most of the information in the CRIS system is to be updated once a year, although some data may need to be updated as often as every 3 months. Data from external sources are to be updated on an as-needed or as-available basis. Samples are to represent taxpayers from the current year and 2 previous years. To provide the data needed for specialized market segmentation, the CRIS system is to comprise 10 databases. IRS has come up with the following 10 database models. (1) Form 1040 Individual/Family Filers (income tax filers using forms 1040, 1040A, and 1040EZ) (2) Corporations (3) Sub-Chapter S Corporations (corporations that file under the chapter S provision distribute corporate income and losses to their shareholders) (4) Partnerships (5) 94X Employers (Employers filing Forms 940, 941, 943, etc.) (6) Fiduciary (7) Individual Non-filer Case Leads (operational data) (8) Industries (9) Collection Research File (operational data) (10) Audit Information Management System (operational data)

The only database that is currently being developed is the Form 1040 Individual/Family Filers Database. It consists of a stratified random sample of the universe of individual taxpayer accounts for a specific tax period. The database includes general entity information and account information on the current and 2 prior years’ returns, as well as tax return line items for the current and 2 prior years. Related data include information return documents and, for Schedule C and F filers, data extracted from the business master and returns transaction files, the payer master file, the employee plans master file, and various other internal sources.

Consolidated Results of Structured Interviews

This appendix combines the results of five data collection instruments used to conduct structured interviews with District Directors; Chiefs of DORA, Examination, Collection, and Taxpayer Service; and DORA staff. In total, we interviewed 293 officials from April to December 1995. Some percentages may not equal 100 due to rounding.

Summary of DORA Staffing Data Collection Instrument

This appendix contains the results from our District Offices of Research and Analysis (DORA) staffing data collection instrument that was provided to all 31 DORA Chiefs for completion during the summer of 1995. The Chiefs reported 217 staff onboard during our field visits. The average and median number of staff per site was 7, and staffing ranged from 4 to 12 people per site. The following tables provide more details about the DORA staff. Some percentages may not equal 100 due to rounding.

Computer Research Analyst and related computer positions Not applicable.

Table V.3: Analysis of Number of Years Staff Employed at IRS

Major Contributors to This Report

General Government Division, Washington, D.C.

Atlanta Field Office

Chicago/Detroit Field Office

Cincinnati Field Office

Boston/New York Field Office

San Francisco Field Office

Susan Malone, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.

U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.