Section 6012 of the Internal Revenue Code requires individuals, businesses, and other taxable entities with income over a certain threshold amount to file income tax returns. While most individuals and businesses voluntarily comply with this requirement, millions do not. At the beginning of fiscal year 1993, IRS had an inventory of about 10 million known nonfilers—about 7 million individuals and about 3 million businesses that had not filed one or more required returns. IRS estimated that the amount of unpaid individual income taxes on returns due but not filed for 1992 alone was more than $10 billion. IRS identifies potential nonfilers in several ways. One of the more significant ways to identify potential nonfilers of individual income tax returns is through the document matching program. Under that program, IRS matches taxpayers’ returns with information returns (generally Forms W-2 and 1099) showing income, such as wages and interest, paid by third parties, such as employers and banks. When the match shows income but no corresponding tax return, a potential nonfiler is identified. IRS identifies business nonfilers by computer-matching filed returns with the business’ filing requirements. Once it has identified potential nonfilers, and after considering what resources are available, IRS decides what action to take. In 1993, IRS received about 114 million individual income tax returns. Almost all of those returns were for tax year 1992. For that same tax year, IRS identified 59.6 million potential individual nonfilers. Of the 59.6 million, IRS took no enforcement action on 54.1 million (91 percent), primarily because IRS subsequently determined that the individual or business had no legal requirement to file. Collection officials at IRS’ National Office and regional offices evaluated the remaining 5.5 million cases to determine the potential tax due. Cases that IRS judged to have the least potential, 2.5 million, or 46 percent, received a reminder to file. Cases judged to have medium potential, 0.6 million, or 11 percent, received up to 2 notices. Cases judged to have the highest potential, 2.3 million, or 43 percent, received up to 4 notices. Under IRS procedures, nonfiler cases that are not resolved during the notice process are assigned to either the automated Substitute-for-Return (SFR) program, an Automated Collection System (ACS) call site, or a district office. Generally, cases are assigned to the automated SFR program when (1) IRS has enough income information from other sources, such as information documents filed by employers and banks, to prepare a return for the nonfiler; and (2) the potential tax due meets established criteria. Other cases are assigned, using predetermined criteria, to ACS or a district office, where they are scored to establish working priority. Cases assigned to a district office are put in an automated inventory called the “queue” at the district office. Cases with higher estimated net tax yield are assigned to revenue officers in IRS’ Collection function. Revenue officers attempt to contact nonfilers and obtain delinquent returns through telephone calls, letters, or visits. Nonfiler cases with low estimated yield may remain in the queue indefinitely. Our objectives, addressed under our basic legislative authority, were to assess the results of IRS’ Nonfiler Strategy and identify any opportunities for IRS to improve future nonfiler efforts. To accomplish our objectives, we did the following: We interviewed IRS National Office officials responsible for overseeing the Nonfiler Strategy about planning and managing the Strategy and about its results. We interviewed officials and personnel at the Central, Mid-Atlantic, and Southeastern Regional Offices; Atlanta, Baltimore, Cincinnati, and Detroit District Offices; and Atlanta and Cincinnati Service Centers about their roles in the Nonfiler Strategy, their procedures for implementing the Strategy, and the results obtained. We chose the Central Region and Cincinnati District Office because of earlier work done at those locations. We selected the other locations because they had large inventories of nonfilers. The four district offices had 10 percent of IRS’ nonfiler inventory as of August 31, 1993. We interviewed Austin Compliance Center officials about their analysis of IRS’ process for identifying nonfilers and selecting nonfiler cases. We reviewed relevant IRS manuals, instructions, reports, and statistics. We reviewed IRS Internal Audit reports and met with Internal Audit personnel doing work in the nonfiler area. Because IRS’ Examination function redirected a significant number of staff to help with nonfiler cases during the Nonfiler Strategy, we took some specific steps directed at that aspect of the Strategy. To help identify the types of nonfiler cases worked by Examination staff, as well as how they were worked, we randomly selected 35 cases worked by Examination in each of the 4 district offices we visited. In each district, we selected 15 cases from the cases closed by Examination in fiscal year 1993, 15 cases from the cases closed by Examination in fiscal year 1994, and 5 cases that had been closed by Examination in fiscal year 1995 but were still physically located at the district offices when we visited them in November and December 1994. These 140 cases involved a total of 464 nonfiled returns. We also reviewed IRS’ account records as of February and May 1995 to determine whether the taxpayers in our sample cases remained compliant by filing returns in subsequent years. Our sample results are not projectable. Appendix I contains a profile of the nonfilers in our sample and a profile developed by IRS’ Statistics of Income Division from returns filed in fiscal year 1993 that were 360 days or more late. Much of the statistical data in this report on the results of IRS’ Nonfiler Strategy was taken from the Commissioner’s Nonfiler Report, a statistical report prepared by National Office staff responsible for overseeing the Strategy. After we finished our review and had drafted our report, IRS told us that the Commissioner’s Nonfiler Reports on which we had based our analyses were erroneous. IRS provided revised reports, which showed significant differences from the reports we had relied on. Also, the revised reports covered only 11 months of the fiscal year because data that IRS needed to reconstruct the reports for the full fiscal year were not available. We updated our report and, where appropriate, our analyses to reflect the revised data provided by IRS. We did not assess the data’s accuracy or reliability. We did our audit work from December 1993 through May 1995 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Commissioner of Internal Revenue or her designee. On December 4, 1995, we met with several IRS officials, including the National Director, Service Center Compliance; the National Director, Compliance Specialization; the Acting Director of the Office of Return Delinquency; and the Acting Director for Special Compliance Programs. They provided us with oral comments, which the National Director, Service Center Compliance, reiterated and expanded on in memoranda dated December 11, 1995, and February 12, 1996. Their comments are summarized and evaluated on pages 23 and 32 and are incorporated in this report where appropriate. IRS became increasingly concerned about the nonfiler problem in 1991, when its delinquent return inventory—which had been growing by about 12 percent a year—increased by 30 percent. In October 1992, IRS initiated a Nonfiler Strategy with the basic objective of bringing nonfilers into the system and keeping them there. During the planned 2 years of the Strategy, fiscal years 1993 and 1994, IRS took several positive steps to achieve that objective. Those actions included deployment of staff from the Examination function to work on nonfiler cases, an increased emphasis on nonfiler activities by other IRS functions, elimination of aged cases from inventory, cooperative working arrangements with states and the private sector, and implementation of a refund hold program. IRS considers the Nonfiler Strategy a success because, as a result of the actions noted in the preceding paragraph, IRS, among other things, (1) reduced the size of the nonfiler inventory, (2) eliminated unproductive cases that allowed IRS to focus its enforcement resources more effectively, (3) eliminated backlogs in the automated SFR inventory, and (4) increased the number of returns secured from individual nonfilers. While we acknowledge all of those accomplishments, our comparison of the results IRS achieved during the 2 years of the Strategy (1993 and 1994) with the results achieved in the year before the Strategy (1992) was inconclusive. Some of the data showed improved results compared with 1992, but other data showed the opposite. The results of the Strategy were also inconclusive when compared with IRS’ three goals. IRS achieved its goal of reducing the backlog of nonfiler investigations, but there is insufficient information with which to judge IRS’ success in achieving its other two goals. In that regard, it is unclear how much, if at all, voluntary compliance improved as a result of the Strategy. For example, IRS knows the extent to which nonfilers who were brought into compliance during the Strategy became noncompliant again, but it does not know how that rate of recidivism compares to years before the Strategy. Likewise, IRS did not have the comprehensive cost data needed to assess return on investment—a key component of IRS’ third goal. Also affecting an assessment of IRS’ results was the absence of measurable goals for such things as the number of overdue returns IRS expected to secure or the number of nonfilers IRS expected to bring into compliance during the Strategy. In our opinion, these various factors would make it difficult for IRS management to adequately assess its efforts during the Nonfiler Strategy and make informed decisions on the nature and extent of any future efforts. The objective of IRS’ Nonfiler Strategy, as described by the Commissioner of Internal Revenue in October 1993 testimony before the Subcommittee on Oversight of the House Committee on Ways and Means, was to bring nonfilers into the system and keep them there.