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. 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. 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 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. 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’ 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.