IRS estimated, for tax year 2001, that $11 billion of the tax gap could be attributed to individual taxpayers who misreport income from capital assets, such as securities and other assets owned for investment or personal purposes. Specific to securities transactions, we estimated based on IRS data and examination of case files, that for the same year, 38 percent of individual taxpayers misreported their capital gains or losses. To help prevent some taxpayer misreporting, brokers must, under the new requirements, report the adjusted cost basis for certain securities on a revised Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions.” For certain securities, brokers must begin collecting these data on January 1, 2011, and report them to IRS in 2012. Brokers must begin collecting information on additional securities, beginning on January 1, 2012. Generally, a taxpayer’s gain or loss from a securities sale is the difference between the gross proceeds from the sale and the original purchase price, or cost basis, net of any fees or commissions. However, to determine any gains or losses from securities sales, the taxpayer must determine if and how the original cost basis of the securities must be adjusted to reflect certain events, such as stock splits. For years, brokers have been required to report information on Form 1099-B such as descriptions of securities sold, sales date, and gross proceeds. However, the law changed what information is reported and who reports it. Prior to the law’s effective date, the taxpayer was responsible for calculating cost basis and reporting it to IRS on their tax return. Now, brokers will be responsible for reporting cost basis information to taxpayers and IRS on the Form 1099-B. The Form 1099-B is due to taxpayers on February 15, and to IRS on February 28 for paper returns and March 31 for electronic returns, for the prior calendar year’s security sales. Additional changes resulting from the law are described in table 4, appendix II. Transaction settlement reporting is expected to help IRS identify and prevent the underreporting of businesses income. Under the new requirements, all merchant transactions completed beginning on January 1, 2011, in which either a payment card or a third-party payment network is used as the form of payment, must be reported by payment settlement entities (PSE) on the new Form 1099-K, “Merchant Card and Third Party Network Payments.” Information reporting on merchants—businesses that accept payment cards or payment from a third-party settlement organization for goods and services—is new for the transaction settlement industry. A payment card is a card-based payment, such as a credit card, debit card, or prepaid telephone card, which is accepted by a group of unrelated merchants. For example, a gift card for a shopping mall is a payment card because it is accepted as payment at a network of unrelated stores; however, a gift card for a specific store is not a payment card because it is only accepted by the store that issued it. A third-party payment network accepts various forms of payment from a customer to settle transactions with merchants who are unrelated to the network. Examples of third-party payment networks include PayPal, certain toll road automated payment systems, and certain shared service organizations (such as certain accounts payable services). A PSE—a bank or other organization that processes transactions and makes payments to the merchant accepting the payment card or the third- party settlement organization that makes payment to the merchant—is responsible for reporting payment card and third-party network transactions annually to IRS and to the merchant, on the Form 1099-K. The new requirements direct PSEs to report the gross amount of reportable payment transactions, which is the total dollar amount of aggregate transactions for each merchant, for each calendar year, without regard to adjustments for credits, cash equivalents, discounts, fees, refunds, or other deductions. In some cases, more than one PSE may be involved in a single transaction, in which case the PSE that actually makes payment to the merchant is responsible for filing the Form 1099-K. When a customer (cardholder) purchases goods or services from a merchant using a payment card, the merchant submits the transaction to the PSE for approval. The PSE submits a request through the card network, such as Visa or Mastercard, to the bank or other entity that issued the card (issuer). The issuer checks the customer’s account to determine if the customer is able to cover the cost of the transaction. If so, the issuer bills or debits the customer’s account for the amount of the transaction. Figure 1 shows this process for a typical credit or debit card transaction, two commonly used types of payment cards. Third-party payment network transactions are similar to credit and debit card transactions in that the third-party network facilitates transactions between unrelated merchants and customers. Third-party payment networks have widely varying business models, and can encompass many different types of payment situations that are not easily generalized, according to IRS officials and industry representatives. Typically, a customer pays the third-party settlement organization for a transaction with an agreed upon form of payment, which may include a payment card, and the third-party settlement organization settles the transaction with the merchant. One example of a third-party network is certain toll collection networks. Some states that operate toll roads contract with a third-party settlement organization to bill customers for road usage. The third-party settlement organization provides a system that allows the toll facility to record the passage of a vehicle with a transmitter inside. The third-party settlement organization periodically bills customers’ accounts and makes payments to the state to settle the toll transactions. IRS initiated the IRDM program in 2009 in part to implement the two new information reporting requirements, but more generally to increase voluntary compliance by expanding and maximizing its ability to use existing and future information returns and establishing a new business information matching program. Formerly, IRS had only matched information returns to individuals’ and sole proprietors’ tax returns. Under IRDM, IRS plans to build several new information technology (IT) systems and enhance some existing systems as well as implement numerous organizational and process changes. Specifically, IRS plans for IRDM to house a new process to use information returns to identify individual and business tax returns that are likely sources of revenue and that are overlooked by the current individual tax return matching system. IRDM implementation involves many IRS groups and offices, and is led by the Small Business/Self Employed (SB/SE) division and Modernization and Information Technology Services (MITS). The Research Analysis and Statistics (RAS) division, the Office of Chief Counsel, and the Tax Forms and Publications group also have important roles in IRDM implementation. For example, RAS is working with IRDM on a research plan to assess the effectiveness of the program. IRDM capabilities will be implemented in stages, beginning in 2012. IRS developed a series of plans to implement the IRDM program, which will be used to implement the new cost basis and transaction settlement reporting requirements. IRDM plans cover program scope, management structures, information technology system development, communications with stakeholders, and other aspects of IRDM implementation. We found that IRDM implementation plans generally are consistent with criteria for effective program planning and implementation listed in our prior reports and IRS guidance. For example, these criteria call for a leadership structure, an internal communication strategy, staffing and training provisions, a review process, risk management, and alignment with the agency strategic plan. IRDM has a leadership structure, headed by an executive steering committee at the highest level, with authority over the IRDM Governance Board whose functions include program management and coordination. It has a stakeholder management and outreach plan that specifies communication strategies, as well as a detailed staffing and organizational development plan to implement document matching for business taxpayers. IRS’s plans include provisions to review and assess the program for continuous improvement, such as a requirement to document lessons learned at the end of each significant project phase. Furthermore, IRDM has a plan that assesses and provides for the management of program risks and a plan that provides for analysis of related technology system interdependencies. IRS has begun implementing several of these plans, to various degrees. It is too early in the implementation process to comprehensively assess whether IRDM has followed all of its plans or achieved outcomes and whether these efforts will be effective. Regarding the schedule of IRDM implementation, we found that IRS has met most time lines established in the program implementation plans, with two notable exceptions: the release of final regulations for cost basis and transaction settlement reporting, to be discussed later in this report, and certain software development milestones. Specifically, MITS did not meet milestone dates for the development and testing of the software expected to enhance IRS’s ability to select potential individual taxpayer cases due to a procurement delay for the associated hardware, which delayed testing by 1 month. This software is also expected to aid in the development of a new IT system to select business taxpayer cases for review. In response to the delays, IRS officials said they have re- prioritized work and, as of May 2011, officials said they do not expect the delays to affect the program’s progress. The IRDM Strategic Roadmap is the foundational plan for IRDM that describes the program’s scope, desired outcome, implementation phases, and time line. IRS guidance and our prior work state that comprehensive plans for implementing a new program should link with the agency’s strategic plan and align with its core processes and agencywide objectives. The Strategic Roadmap is aligned with IRS’s Strategic Plan, which guides and sets goals for IRS’s work at a high level. For example, the Strategic Plan establishes a goal of enforcing the law to ensure that everyone meets their obligation to pay taxes which, according to the Strategic Roadmap, IRDM intends to support by using third-party information reporting to increase voluntary compliance and treat noncompliance.