The Internal Revenue Service can improve its handling of tax examinations and audits, allowing it to recoup more of the estimated $450 billion annually in unpaid taxes, investigators said.
Although not directly tied to the embattled tax-exempt office that has come under fire from lawmakers this week, the report by the Government Accountability Office shows there’s still room for improvement with how the IRS conducts reviews of tax records.
“Improving examination procedures helps IRS to better detect noncompliance, promote voluntary compliance, and minimize the cost of examinations for IRS and taxpayers,” the GAO said.
In fact, the GAO interviewed many IRS examiners who said they would welcome many changes to give them more information to help them do their jobs better and ensure taxpayers are complying with the law.
GAO, Congress’ watchdog agency, evaluated the effectiveness of the IRS National Research Program, or NRP, a scientific, data-based approach to evaluating tax returns and monitoring compliance. The program has been so effective, investigators said, that parts of it should be implemented across the entire agency.
“IRS annually makes a considerable investment in NRP, but opportunities exist for IRS to improve operational examinations by applying NRP practices,” investigators said. “IRS is missing a chance to improve operational examinations by better classifying returns, identifying more noncompliance, and reducing taxpayer burdens.”
The main goal is to better track individuals who don’t file their tax returns, or file them incorrectly. The “tax gap” is the difference in how much the government is owed in taxes, and how much of that is actually voluntarily paid on time by taxpayers. According to IRS data, the federal government missed out on $450 billion in unpaid taxes in 2006 – the most recent year for which data is available.
But examinations of taxpayer records helped the agency recoup about $65 billion. Wider implementation of the NRP could help raise that figure, the GAO said.
In response to the report, IRS said it is always working to improve its review process.
“We are always looking for ways to improve our processes and procedures in screening, selecting and examining tax returns,” said a May 9 letter from Steven Miller, the then-acting IRS commissioner who resigned last week after the IRS controversy erupted.
“We endeavor to leverage our usage of data whenever possible and we appreciate its value in giving our tax return screeners and examiners more complete information,” Miller continued, adding that the IRS would take the GAO recommendations into consideration.
The NRP was started to help IRS officials to better understand who was paying taxes, who wasn’t, and what amount of money might still be outstanding at the end of each year.
The NRP investigations often go into more depth than typical tax reviews, GAO said, noting that sometimes even small changes can make big differences. NRP examinations have been putting data into Microsoft Excel spreadsheets, making it easier to analyze than other examinations that put data into Microsoft Word documents.
NRP reviews also transcribe much more data from paper-filed returns than normal reviews, the GAO said, giving tax officials much more information to work with. Investigators said better transcriptions of paper documents should be implemented agencywide.
The IRS estimates it would cost an extra $8 million annually to implement the kind of transcription the GAO wants. But the watchdog said the cost would be more than made up for by getting increased revenue from the estimated 55 percent of taxpayers who don’t comply with federal laws. The amount for a single item on the tax form, “other expenses,” was estimated to be $103 billion in 2010, giving lots of opportunity for the increased scrutiny and better transcriptions “to justify the cost,” the GAO said.
The GAO quoted one IRS examiner who espoused the merits of proper transcription.
“When you don’t get everything transcribed [for classification], you could end up wasting taxpayers’ time and increasing their burden by asking them for more information, particularly for more information that had likely already been provided in the original return but not transcribed,” the examiner said.