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

Letter

Background

User Fee Definition and Design Principles

A user fee is a charge assessed to beneficiaries for goods or services provided by the federal government. In general, a user fee is related to some voluntary transaction or request for government goods or services—such as a passport or admission to a national park—above and beyond what is normally provided to the public. Taxes, on the other hand, arise from the government’s sovereign power to raise revenue and need not be related to any specific benefit. Unlike user fees, taxes are generally imposed to raise revenue to fund benefits for the general public, such as national defense.

GAO has published a guide on the principles of effective user fee design. In this guide, we focused on criteria that have often been used to assess user fees and other government collections.

Efficiency is whether the fee ensures that the government is providing the amount of the service that is economically desirable. Efficient fees increase awareness of the costs of government services, creating incentives to reduce costs where possible. In addition, efficient fees act as a measure of the service’s worth while meeting demand for the service.

Equity is the extent to which everyone is considered to be paying a fair share (whether fairness is based on program use or the user’s ability to pay).

Revenue adequacy is the extent to which the fee covers the intended share of service costs, and whether the fee revenue is stable enough to withstand short-term fluctuations in economic activity.

GAO, Federal User Fees: A Design Guide, GAO-08-386SP (Washington, D.C.: May 29, 2008).

Administrative burden is the cost of collecting and enforcing the fee, as well as any costs users incur to pay the fee.

These criteria interact and are often in conflict with each other; as such, trade-offs exist when considering among the criteria to design a fee. The weight that different policymakers may place on different criteria will vary, depending on how they value different attributes. To that end, understanding the trade-offs associated with different aspects of a fee’s design can provide decision makers with better information and support more robust deliberations about user fee financing.

Organization of IRS User Fees

IRS charges user fees for various services that assist taxpayers in complying with their tax liabilities, clarify the application of the tax code to particular circumstances, and ensure the quality of paid preparers of tax returns, among others. IRS is organized into four operating divisions based on types of taxpayers: (1) Wage and Investment (W&I); (2) Large Business and International (LB&I); (3) Small Business and Self-Employed (SB/SE); and (4) Tax Exempt and Government Entities (TE/GE). Each division provides at least one service to taxpayers for which it charges a fee. In addition to these primary operating divisions, IRS has a number of offices, including Chief Counsel, Appeals, Professional Responsibility, and Return Preparer, that also provide services to taxpayers for a fee. Table 1 shows user fee services organized by business division or program office responsible for managing the user fee programs.

Descriptions of the services and user fees, including fee rates, are included in appendix II.

The CFO has oversight responsibilities for the initial assessment, updates, and collection of user fees. While the CFO does not provide the services for which user fees are charged, it does have the responsibility to ensure that user fees are appropriately collected, deposited, and reported.

Authority to Collect User Fees

IRS derives its authority to charge user fees from either the Independent Offices Appropriation Act (IOAA) or various other specific statutes. Although OMB Circular A-25 states that agencies should recover full costs to the government to the extent permitted by law for providing the service or good, the authority for each fee determines how much of the costs IRS is required to recover. For example, IRS is directed by the circular to recover full costs for fees authorized by IOAA, unless an exception applies. Agencies, however, may request waivers from OMB to charge less than full cost if the fee would be unduly costly to collect or otherwise justifies an exception. IRS has waivers pending with OMB to charge less than full cost for installment agreements and offers in compromise. According to IRS officials, increasing these fees to full cost could discourage taxpayers from using these services.

In contrast, when IRS is authorized to charge a user fee under a specific statute, the provisions of that statute govern. For example, IRS can charge a reasonable fee for income verification express service and U.S. residency certifications. determination letters, minimum rates are specified in the statute. Table 2 shows IRS user fees by authorizing legislation and illustrates that the authority to charge a user fee can be separate from the authority to provide the good or service.

Unlike IOAA-derived user fees that require full cost recovery, IRS is not required to recover full cost for user fees authorized by specific statutes which permit IRS to charge what it considers to be reasonable, or fair. Income verification express service provides 2- business-day processing and electronic delivery of tax return transcripts for users, such as mortgage lenders and other financial market entities, to confirm the income of a borrower (taxpayer) during the processing of a loan application.

Includes advance art determination letters, pre-filing agreements, foreign insurance excise tax exemptions, competent authority limitation on benefits determination letters, and Office of the Chief Counsel and TE/GE division letter rulings and determination letters.

IRS User Fee Collections, Associated Service Volume, and Carryover Amounts Have Increased with Most of the Revenue Used to Fund Taxpayer Services

IRS User Fee Revenue and the Volume of User Fee Services Have Increased in Recent Years

In fiscal year 2010, IRS collected and retained $290 million in user fees and transferred an additional $62 million of user fee collections to the U.S. Treasury General Fund (General Fund). Upon collection, user fees are recorded into various IRS financial systems and are deposited either into IRS’s Miscellaneous Retained Fees (MRF) Fund for use by the agency, the General Fund, or both. The allocation of fees between funds is determined by a formula specified in the Treasury, Postal Service and General Government Appropriations Act of 1995 (1995 Treasury Appropriations Act), which was based on the fees and fee amounts in effect at the time.prior to September 30, 1994, such as enrolled actuary, are divided between IRS’s MRF Fund and the General Fund. User fees implemented after September 30, 1994, such as installment agreements, are fully retained by IRS.

For example, collections from user fees that existed Table 3 provides IRS’s total retained user fee collections by category for the past 6 fiscal years. Installment agreements have generated the majority of IRS’s user fee collections. In fiscal year 2010, they accounted for approximately 68 percent ($198 million of $290 million) of IRS’s total retained user fee collections. A rate increase implemented in January 2007 resulted in a 55 percent increase (or from approximately $79 million to $122 million) in collections from fiscal year 2006 to 2007. According to IRS officials and as shown in table 3, despite the rate increase, taxpayers continued to initiate, restructure, or reinstate installment agreements at similar or higher levels. The second largest contributor to fee collections came from income verification express service, which accounted for approximately $40 million or 14 percent of fee collections in fiscal year 2010. Fee collections from income verification express service increased significantly from fiscal years 2007 to 2009, which IRS officials attributed to the turmoil in the financial and housing markets.in collection amounts can occur because of fee rate changes or because of other factors, such as programmatic changes or economic conditions.

By volume of user fee services, income verification express service topped the list of services provided in fiscal year 2010 with approximately 16 million requests followed by installment agreements with about 3 million requests, as shown in table 4. IRS decreased the income verification express service fee rate from $4.50 to $2.25 in fiscal year 2010 because of the increased volume, which lowered the unit cost per income verification express service request. Installment agreement volume has also increased in recent years, despite the fiscal year 2007 fee rate increases.

IRS has permanent, indefinite authority to obligate and spend user fee collections. This authority allows the agency independence and flexibility in the use of these funds. IRS can obligate user fee collections for any activity for which it has an appropriation with OMB approval, and it can carry over any unexpended fee collections for use in subsequent years. We have suggested that carryovers are one way agencies can establish reserves to sustain operations in the event of a sharp downturn in user fee collections or other events.reserve of unspent fee collections that can be used for critical needs. The carryover is what is left over after IRS transfers fee collections to supplement its appropriations in order to meet agencywide needs. Table 5 provides information on IRS’s MRF carryover balances, which have grown in recent years as fee activity has increased. At the end of fiscal year 2010, $288 million in fee collections was carried over for use in future fiscal years.

IRS Reviews User Fees Biennially but Does Not Clearly Document Some Processes or Decisions

IRS Conducts a Biennial Review of User Fees and Has Taken Steps to Improve Its Cost Estimates

As directed by the CFO Act of 1990 and OMB Circular A-25, IRS conducts a general review of its user fees on a biennial basis. To initiate the biennial review, IRS’s CFO issues a memorandum to senior management in relevant business divisions and program offices requesting that they validate the cost of providing services for which they charge a user fee and provide suggestions for new user fees. Based on the cost estimates developed and other considerations, senior management will propose whether to increase, decrease, or keep the current fee rates. These proposals are sent to the CFO and are then compiled and forwarded in a report to the Commissioner for final review and approval.

IRS has made efforts to improve its cost estimation process in support of its user fees, with particular attention given to its largest fee by amount collected. For example, the Treasury Inspector General for Tax Administration’s 2006 audit concluded that installment agreement user fee cost estimates were based on incorrect assumptions and contained calculation errors and unsupported costs. To address these issues, IRS hired a contractor to assess the cost estimate for the fiscal year 2007 biennial review and re-hired the contractor to prepare the cost estimate for the fiscal year 2009 biennial review. For the fiscal year 2011 biennial review, the contractor was hired to simplify the fiscal year 2009 cost estimate. According to officials, IRS does not plan to use the contractor for future biennial reviews.

According to officials, IRS has also taken steps recently to improve the cost estimate for the offer in compromise user fee. For the biennial review in 2009, officials conducted interviews and developed a complex series of spreadsheets to estimate costs of the offer in compromise program. This process, which IRS described as “less precise and more reliant on estimates and averages,” estimated the full cost of the average offer in compromise agreement to be $2,132. Because the 2009 process was very labor-intensive, IRS assessed other options for gathering the information needed to prepare the cost estimate. As a result of this assessment, IRS simplified its cost estimation process while making it easier to collect information about program costs. The revised fiscal year 2011 review process resulted in an estimated full-cost user fee of $2,718, an approximate 22 percent increase over that calculated in the 2009 biennial review. According to IRS, the 2009 cost calculations were likely significantly understated, and its 2011 process for capturing offer in compromise costs will yield consistently reliable data going forward.

Based on the biennial review, IRS has also revised fee rates to reflect the updated cost of providing various services, such as income verification express service and Chief Counsel letter rulings.

IRS Omitted Some Fees from Biennial Review

IRS has omitted three fees—advance art determination letters, reproduction of tax returns, and special statistical studies and compilations—from its biennial review and contrary to the requirements of the CFO Act. According to an IRS official, the cost estimate used to support the advance art determination letter user fee has not been reviewed or updated since fiscal year 1996 because of very low demand (fewer than 20 per year from fiscal year 2005 to fiscal year 2010).also omitted from the biennial review the user fees for reproduction of tax returns and special statistical studies and compilations because it interpreted these fees as not being covered by the biennial review requirement.

However, the CFO Act requires IRS to review, on a biennial basis, the fees, royalties, rents, and other charges imposed by IRS for services and things of value it provides. guidance on conducting a biennial review of user fees regardless of the authorizing statute to the extent permitted by law. Since there is no alternative statutory review process for these fees, they fall under the review requirements of the CFO Act and guidelines of OMB Circular A-25. Furthermore, as articulated in the accounting standards for the federal government, Congress and federal executives need cost information to make decisions about allocating federal resources, modifying programs, and evaluating program performance.

31 U.S.C. § 902(a)(8). always be cost-effective given the amount collected from these fees, it may be possible to perform a simplified update during some review cycles.

Assumptions Used to Estimate Cost of Some User Fee Programs Were Not Always Correct or Well Documented

According to IRS officials, the CFO’s office works closely with business divisions and program offices to develop cost estimates, provides guidance on data to include in the cost estimates, and develops Internal Revenue Manual guidelines to document IRS’s process for setting and reviewing user fees. In a recent report, we found that IRS set the user fee for the preparer tax identification number in accordance with established guidelines for cost estimation. However, for IRS’s smaller user fee programs, we found that data or assumptions used in cost estimates were not always well documented or understood by officials. For example, for the LB&I fees, the fiscal year and data source for some of the fiscal year 2009 cost estimate components were not documented. In another case, we noted some confusion early in the fiscal year 2011 review process from managers in the W&I division about what assumption should be used to estimate the pay increase in the fiscal year 2011 cost estimate. They assumed that they should include a 5 percent pay increase in the fiscal year 2011 cost estimate for the U.S. residency certification fee when the CFO had determined that such an increase should not be included.$6.8 million in direct labor costs—in the cost estimate for the offer in compromise user fee, which the CFO’s office did not detect in its review of cost estimates.

We also found a calculation error—double counting more than According to GAO’s cost estimation guide, assumptions used to estimate costs should be documented to include the rationale behind the assumptions and any historical data that support the assumption, and federal accounting standards require documentation of all managerial cost accounting activities, processes, and procedures used to associate costs with products, services, or activities. IRS’s Internal Revenue Manual sections on user fees and managerial cost accounting contain guidelines for developing cost estimates. However, IRS has not provided a documented set of assumptions and decision rules for program managers to follow in estimating costs of user fee program activities for each biennial review. Although it is the responsibility of IRS’s business units to develop the cost estimates, supplemental guidance or tools from the CFO’s office that provide a crosswalk between the cost estimation guidelines and specific cost estimate assumptions could potentially help staff avoid mistakes that would need to be caught later in the review process. Finally, because these tools could provide more specific instructions on assumptions to be used and documenting data sources, IRS can better ensure consistency of its cost estimates across user fee programs.

IRS Does Not Always Document Factors Considered or Decisions Made during Biennial Review of Existing User Fee Rates

In setting user fee rates, IRS officials said they consider taxpayer burden, administrative costs, and potential effects on taxpayer compliance, among other factors, when determining whether to recover full cost. For example, IRS set the U.S. residency certification fee rate at $35 rather than $110, the estimated fiscal year 2009 cost of providing the service. Based on anecdotal information, IRS decided that raising the fee rate could discourage taxpayers from applying for the certification, which could result in higher withholding of foreign income taxes and potentially lower income tax revenue to the U.S. Treasury. Similarly, IRS has kept the offer in compromise fee rate at $150 since the fee’s inception in 2003, even though IRS recently estimated that it costs more than $2,700 to implement the program per user. According to IRS officials, the fee rate has been kept at $150 to encourage taxpayers who owe taxes to work with IRS and resolve their tax bills.

GAO’s user fee design guide outlines important factors to consider when setting user fee rates, including evaluating users’ ability to pay and the extent to which the general public and certain individuals benefit from the fee-based program. As described above, IRS officials consider factors other than cost recovery in setting fee rates. However, we found that IRS has not thoroughly documented these factors, corroborated anecdotal support with data analysis, or studied the effect of user fees on taxpayer behavior. A 2007 report by the National Taxpayer Advocate also found that IRS had not studied the effect of user fees on taxpayer behavior or demand for IRS services. Further, although officials said that changing the offer in compromise fee rate would be costly, IRS has not documented the extent to which changing this fee rate and others would impose additional costs or administrative burden on the agency.

After reviewing fee rates, IRS publishes some of the revised fees in revenue procedures and other documentation. However, IRS’s fiscal year 2009 biennial report did not document whether the proposed fee rates discussed in the report had been approved by the IRS Commissioner. For example, in the report, IRS officials proposed a $5 fee increase from $35 to $40 for providing U.S. residency certification. When asked about the disposition of the proposed fee rates presented in the biennial report, officials initially stated that all the proposed fees in the biennial report had been approved and implemented, as appropriate. However, we found documentation that the user fee for U.S. residency certification remained at $35, which officials later confirmed. IRS officials acknowledged that they used an informal process to decide whether to go forward with the proposed fee increase, which led to miscommunication in determining which fee rate had been implemented.

GAO’s standards for internal control in the federal government establish the need for clear documentation. standards, events should be promptly recorded to maintain their relevance and value to management in controlling operations and making decisions. Moreover, thoroughly documenting decisions and the rationale behind decisions becomes increasingly important as the federal workforce ages and the retirement of senior managers and staff risks the loss of valuable institutional knowledge.

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1, 1999), 15.

IRS Has Implemented New User Fees, but the Extent to Which Guidelines Were Used to Assess Potential Fee Opportunities Is Unclear

IRS has implemented several new user fees in recent years. As part of IRS’s fiscal year 2005 biennial review, the former IRS Commissioner tasked all business divisions and program offices with identifying potential new user fees to offset processing costs. Through this review, IRS identified several new user fees, including income verification express service and U.S. residency certification, which were implemented in fiscal year 2007. As a result of IRS establishing these new fees, Congress removed the limit on user fee collections that IRS could retain and reduced IRS’s annual appropriation by the estimated amount of user fees that would be collected.

Since then, IRS has also identified three new user fees related to return preparers and implemented the first fee, preparer tax identification number, in September 2010. IRS plans to implement the remaining two user fees for competency testing and fingerprinting requirements in fiscal year 2012. program will be funded exclusively through collections from these three fees.

According to IRS officials, the return preparer user fee IRS faces unique challenges in establishing user fees. For example, the National Taxpayer Advocate has noted that user fees may prevent the public from accessing IRS’s services because they cannot afford to pay the fee or may discourage people from seeking services that help IRS fulfill its core mission. User fees may also be costly for IRS to administer and divert resources from activities that bring in more tax revenue. On the other hand, user fees can promote an efficient and fair allocation of government resources and ensure that those who are receiving special benefits pay for them.

GAO-11-336 discussed IRS’s plans for implementing user fees for preparer tax administration number registration, competency testing, and continuing education. Since then, IRS has decided not to establish a fee for continuing education and has decided to establish a user fee for fingerprinting preparers as part of a background check. assist staff in identifying potential new user fees. However, IRS may not be taking full advantage of its process for identifying new user fees. For example, officials in some divisions or offices said that they had no formal process for soliciting suggestions from employees on new user fee proposals. Although the CFO’s biennial review memo refers managers to the Internal Revenue Manual when reviewing costs of existing user fees, it does not specifically indicate that these same guidelines or other established design guidelines should be considered when examining new user fees opportunities. We were unable to determine the extent to which IRS staff considered these guidelines, and in our survey of division commissioners, we identified variation in the criteria considered across the operating divisions and offices. If managers are unclear about the process for soliciting user fee proposals or do not receive clear direction on what guidelines to consider when evaluating their programs for new user fees, IRS may be less able to fully engage its staff in evaluating new user fees. As a result, IRS could be missing potential fee opportunities or misallocating resources toward developing fee proposals that are not efficient, equitable, cost-effective, or feasible. The cost and effort involved to clarify its process for soliciting new user fee proposals and to refer staff to established guidelines for identifying and evaluating potential fee opportunities would likely be modest to IRS, since, as table 7 shows, several sources exist for such guidelines.

Conclusions

Because of the volume of IRS’s user fee transactions with the public, ensuring that user fee rates are properly set, collected, and reviewed is important for taxpayers. As a result of its biennial reviews of user fees, IRS has focused on improving cost estimates related to its most significant fees in recent years. However, we that found that (1) some fees were omitted from the biennial review, (2) assumptions used in cost estimates were not always well documented, and (3) factors considered in setting fees and decisions made were not always well documented. It is also unclear the extent to which user fee design guidelines were used to assess new fee opportunities. Given that most of these issues pertained to IRS’s smaller fee programs, steps taken to strengthen the review process should not only improve the efficiency of the review but also be cost-effective. Accordingly, we have identified some additional steps, such as clarifying the review guidelines up front, which could potentially decrease the amount of rework needed downstream and be implemented at low cost.

Recommendations for Executive Action

We recommend that the Commissioner of Internal Revenue take the following five actions to: Include certain fees in the biennial review that were previously omitted.

Develop supplemental guidance or tools that provide more detailed information on data and assumptions to include in cost estimates.

Better document the factors considered in setting and reviewing existing user fees.

Better document the decisions made in setting and reviewing existing user fees.

Provide clear, specific, and direct guidelines for IRS employees and managers to follow in identifying potential fee opportunities.

Agency Comments

We provided a draft of this report to the Commissioner of Internal Revenue for his review and comment. In written comments, reprinted in appendix III, the Deputy Commissioner for Operations Support agreed with our recommendations and indicated that IRS plans to implement them during its fiscal year 2013 biennial review of user fees.

We are sending copies of this report to the Chairmen and Ranking Members of other Senate and House committees and subcommittees that have appropriation, authorization, and oversight responsibilities for IRS. We are also sending copies to the Commissioner of Internal Revenue, the Secretary of the Treasury, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions or wish to discuss the material in this report further, please contact me at (202) 512-9110 or whitej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals making key contributions to this report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to (1) describe the types and amounts of user fees collected and how the Internal Revenue Service (IRS) collects and uses fees, (2) assess how IRS sets and reviews existing user fees, and (3) assess how IRS identifies additional areas where new user fees could be justified.

To meet these objectives, we reviewed user fee legislation and guidance, agency and budget documents, literature on user fee design and implementation characteristics, and cost estimates for user fees that were included in IRS’s biennial review process. We primarily focused on user fees that were included in IRS’s fiscal year 2009 biennial review. We also obtained information about IRS’s internal controls for the revenue and volume data we used and determined that the data were sufficiently reliable for the purposes of this report. Specifically, we relied on our audit of the aggregated year-end user fee balances and transaction testing for the installment agreement user fee revenue amount, which accounts for the majority of user fee collections and found that the revenue data were sufficiently reliable for our descriptive purposes. Further, we performed a separate analysis to assess the reliability of the user fee volume data by (1) conducting a correlation analysis between the revenue and volume data and (2) using the revenue amount and fee rate to calculate the volume. Based on our analyses, we determined that the volume data were sufficiently reliable for our descriptive purposes.

In addition, we interviewed officials from IRS’s Office of the Chief Financial Officer, Office of the Chief Counsel, Large Business and International Division, Office of Professional Responsibility, Return Preparer Office, Small Business and Self-Employed Division, Tax Exempt and Government Entities Division, and Wage and Investment Division, who were responsible for overseeing the user fee programs, and the Taxpayer Advocate Service. We also obtained written responses from the deputy commissioner of each of the user fee programs we selected. Finally, we reviewed prior GAO work on user fees and cost estimation and other relevant literature.

We conducted this performance audit from February 2011 through November 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: IRS User Fee Descriptions and Amounts

Chief Counsel letter rulings and determination letters: IRS’s Chief Counsel issues letter rulings and determination letters for a variety of requests, including but not limited to, (1) advanced pricing agreements, (2) private letter rulings, (3) change in accounting method, and (4) change in accounting period. User fees range from $150 to $14,000. IRS publishes updated guidance on obtaining Chief Counsel letter rulings and determination letters and fee amounts in the first Revenue Procedure each year.

Competent authority limitation on benefits determination letter: IRS charges a user fee of $15,000 for taxpayers who request a discretionary determination under a limitation on benefits provision. Revenue Procedure 2006-54 provides guidance on requesting a competent authority limitation on benefits determination letter.

Enrolled actuary: An enrolled actuary is an individual who has met certain standards and qualifications set forth by the Joint Board for the Enrollment of Actuaries and has also been approved to perform actuarial services required under the Employee Retirement Income Security Act of 1974. IRS charges a user fee of $250 for the initial enrollment and for the renewal, which occurs on a triennial basis. Implementing regulations for the enrolled actuary fee are at 26 C.F.R. §§ 300.7 and 300.8 and 20 C.F.R. § 901.11.

Enrolled agent/enrolled retirement plan agent: In order to become enrolled to practice before IRS, an individual must submit an application and meet certain standards, pay a user fee of $30 for the initial enrollment and for renewal every 3 years, and pass the special enrollment examination that is administered by IRS. Similar to attorneys and certified public accountants, enrolled agents and enrolled retirement plan agents are unrestricted as to which taxpayers they can represent and types of tax matters they can handle. Implementing regulations for the enrolled agents and enrolled retirement plan agents fee are at 26 C.F.R. §§ 300.5 and 300.6.

Foreign insurance excise tax (FET) exemption: FET is imposed on premiums paid to the foreign insurer. Applicants (which are foreign insurance companies) may apply for a FET closing agreement with IRS under Revenue Procedure 2003-78 certifying that they meet the residency and limitation of benefits articles of the applicable income tax treaty. Through this agreement, the foreign insurer (or applicant) assumes the responsibility of paying the tax, if any, that otherwise would be paid by the domestic insured party. Applicants requesting a FET exemption must pay a $4,000 fee.

Income verification express service (IVES): This service provides 2- business-day processing and electronic delivery of tax return transcripts for users, such as mortgage lenders and other financial market entities, to confirm the income of a borrower (or taxpayer) during the processing of a loan application. IRS charges a user fee of $2.00 for each IVES transcript request.

Installment agreement (IA): An IA is a payment option or payment plan that allows a taxpayer to pay his or her full tax liability with smaller monthly payments over a period of time for up to 60 months. Interest and any applicable penalties continue to accrue until the balance is paid in full. To secure an IA, applicants must submit a completed application and pay the applicable user fee. There are three levels of fees applicable to new IAs: (1) $105 for most taxpayers, (2) $52 for taxpayers entering into direct debit agreements, and (3) $43 for taxpayers who qualify for the low- income rate (i.e., taxpayers whose incomes falls below 250 percent of the poverty level). Taxpayers who request reinstatement of an IA must pay a fee of $45. Implementing regulations for the IA fee are at 26 C.F.R. §§ 300.1 and 300.2.

Offer in compromise (OIC): An OIC is an agreement between IRS and a taxpayer to settle a tax liability for payment of less than the full amount owed. When submitting an offer for consideration, taxpayers must make a partial payment unless a waiver applies.amount in a lump sum, in which 20 percent of the offer amount is due when submitting the offer, or in installment payments, in which case the first installment payment is due with the offer (unless the taxpayers qualify for low-income waiver, in which case the 20 percent or installment payment is not applicable). If IRS accepts the offer amount, the user fee Taxpayers may pay the offer is applied toward the remaining balance due.for the OIC fee are at 26 C.F.R. § 300.3.

Pre-filing agreement (PFA): Taxpayers are subject to the $50,000 user fee only if they are selected to participate in the PFA program. If taxpayers are selected, IRS will examine specific issues relating to their tax returns before they are filed. The objective of the PFA program is to resolve issues that are likely to be disputed in post-filing audits. Revenue Procedure 2009-14 provides guidance on the PFA program.

Preparer tax identification number (PTIN): All paid tax return preparers, including attorneys, certified public accountants, and enrolled agents, are required to apply for a PTIN before preparing any federal tax returns in 2011 and thereafter. Individuals who apply for a PTIN must pay an annual fee of $64.25. Of that amount, IRS collects $50 for associated PTIN activities and the remaining $14.25 is transferred to a third-party vendor responsible for maintaining the registration system. Implementing regulations for the PTIN fee are at 26 C.F.R. § 300.9.

Special enrollment examination (SEE): Prior to enrolling as an enrolled agent or enrolled retirement plan agent, individuals must either pass a three-part exam or possess years of past IRS service and technical experience specified in Circular 230 to practice before IRS. IRS charges $11 per part to oversee the examination. Implementing regulations for the SEE fee are at 26 C.F.R. § 300.4.

Tax Exempt and Government Entities letter rulings and determination letters: The Tax Exempt and Government Entities Division issues letter rulings and determination letters for a variety of activities, including but not limited to employee plans and exempt organizations. Depending on the request, fees can range from $200 to $25,000.

U.S. residency certification: Income tax treaties between the United States and foreign countries can reduce withholding rates for certain types of income paid to U.S. residents. In such cases, U.S. treaty partners may require taxpayers to provide a letter of U.S. residency certification for purposes of claiming benefits under an income tax treaty or exemption from a value-added tax imposed by the foreign country. Applicants requesting such certifications would need to submit a $35 fee for the first 20 certifications and $5 for each additional request of 20 certifications thereafter to IRS.

Appendix III: Comments from the Internal Revenue Service

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Jay McTigue (Assistant Director), Elizabeth Fan, and Susan Sato made key contributions to this report. Doreen Eng, Edward Nannenhorn, Jacqueline Nowicki, Chelsa Gurkin, Melanie Papasian, Neil Pinney, and Andrew J. Stephens also provided valuable assistance.