TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
Trends
in Compliance Activities Through Fiscal Year 2006
March 27, 2007
Reference Number: 2007-30-056
This
report has cleared the Treasury Inspector General for Tax Administration
disclosure review process and information determined to be restricted from
public release has been redacted from this document.
Phone Number |
202-927-7037
Email Address | Bonnie.Heald@tigta.treas.gov
Web Site |
http://www.tigta.gov
March 27, 2007
MEMORANDUM FOR DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Trends in Compliance Activities Through Fiscal Year 2006 (Audit # 200730016)
This report presents the results of our review of statistical information that reflects activities of the Collection and Examination functions. The overall objective of this review was to provide statistical information requested by the Internal Revenue Service (IRS) Oversight Board and trend analyses of that information.
Impact on the Taxpayer
During this annual review, we analyze information from the IRS’ management information system reports to determine the trends and changes in the major areas of compliance. Overall, many compliance activities increased and results improved during Fiscal Year (FY) 2006. Continued effort to improve compliance is important to maintaining the integrity of the voluntary tax compliance system.
Synopsis
Since FY 2000, the IRS has been reversing many of the downward trends in compliance activities that had occurred in prior years. In FY 2006, many of these activities continued to increase as Collection and Examination function field staffing increased slightly. Both the Collection and Examination functions hired enforcement personnel during FY 2006, but there may be little hiring during FY 2007 due to budget constraints.
In FY 2006, the level of compliance activities and the results obtained in many Collection function areas showed a continued increase. The use of liens[1] and levies (collection enforcement tools) was greater, surpassing the FY 1997 levels. The use of seizures also increased, but it is unlikely that the use of seizures will return to the pre‑1998 levels in the foreseeable future. Enforcement revenue collected continued to increase (to $48.7 billion), but the total dollar amount of uncollected liabilities also increased to $271 billion. However, the gap between new delinquent accounts and account closures narrowed slightly during FY 2006.
The Collection
function collected 5.5 percent more than in FY 2005, but the number
of taxpayers (779,272) and the amount owed ($27.2 billion) on accounts in
the Queue were each a 10‑year high.
One reason for the increase in the Queue this year is a rise in the
number of compliance assessments.[2] While
the Queue is a source of work for Collection Field function employees, a significant
amount may never be worked. In addition,
from FYs 2001 through 2006, the IRS removed almost 6.8 million
accounts with balance-due amounts totaling more than $28 billion from
Collection function inventory; these accounts may never be worked. In September 2006, the IRS started assigning
balance-due cases that otherwise would not have been worked to private
collection agencies. As of January 18,
2007, the IRS had received $12.6 million on cases assigned to the
collection agencies. However, continued
use of private collection agencies is uncertain because some members of
Congress want the IRS to discontinue their use.
During FY 2006, the overall percentage of tax returns examined increased by just over 4 percent, and the number of field Examination function personnel increased by just over 9 percent. However, the overall percentage of tax returns examined is still 27 percent lower than it was in FY 1997.
Overall, the number of individual tax returns examined increased during FY 2006. Correspondence examinations accounted for 87 percent of the examinations of individuals with incomes under $100,000 and 62 percent of those with incomes of $100,000 and over.[3] Correspondence examinations are usually not as comprehensive as face-to-face examinations, and the impact on compliance may be limited. In a report issued last year,[4] we noted that high-income taxpayers did not always respond to correspondence examinations. About 86 percent of the amount assessed on these no-response cases was either reversed or not collected after almost 2 years from the date of the assessment. In addition, the dollar yield per hour decreased for individual income tax return examinations conducted by revenue agents but increased for those conducted by tax compliance officers.
In FY 2006, the number of corporate tax returns examined decreased 1 percent, after increasing 71 percent in FY 2005. However, the number of returns examined has still decreased 59 percent since FY 1997. The total number of corporate tax returns examined decreased from 1 out of 37 returns filed in FY 1997 to 1 out of 80 returns filed in FY 2006. The number of tax returns examined for larger corporations (those with assets of $10 million and over) decreased just over 2 percent. Yield indicators for examinations of corporate tax returns improved again. There were increases in the amount of tax adjustments and in hours spent examining those returns for the year. The net effect was an increase in the dollar yield per hour.
Some of the positive changes noted in this report might be attributed to management emphasis on the Collection and Examination programs. Over the last few years, the Small Business/Self-Employed Division has implemented reengineering and organizational changes that could have had a positive impact on enforcement efforts. In addition, both functions continue to work toward improved workload selection methods.
Despite actions the IRS has taken to improve its enforcement efforts, the Government Accountability Office regarded enforcement of tax laws (collection of unpaid taxes and Earned Income Tax Credit noncompliance) as 1 of the 26 high‑risk areas in the Federal Government in its January 2007 update.[5] However, as our report points out, the IRS has moved toward reversing many of the enforcement declines in both the Collection and Examination functions.
Continued effort to improve compliance is important to maintaining the integrity of the voluntary tax compliance system. According to a tax gap strategy document dated September 2006, the tax gap for Tax Year 2001 is $345 billion.[6] The strategy document provides a broad base on which to build future efforts to address the tax gap but depends on future budgets to provide detailed strategy elements.
Recommendation
We made no recommendations in this report. However, key IRS management officials reviewed the report prior to issuance and agreed with the facts and conclusions.
Copies of this report are also being sent to the IRS managers affected by the report information. Please contact me at (202) 622-6510 if you have questions or Daniel R. Devlin, Assistant Inspector General for Audit (Small Business and Corporate Programs), at (202) 622-5894.
Overall,
Compliance Activities Increased and Results Improved
Collection
Function Compliance Activities Increased and Results Improved
Examination
Function Compliance Activities Increased and Results Improved
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Glossary of Terms
Appendix V
– Detailed Charts of Statistical Information
Appendix VI
– Prior Treasury Inspector General for Tax Administration Compliance Trends
Reports
Abbreviations
|
ACS |
Automated Collection System |
|
CFf |
Collection Field function |
|
FY |
Fiscal Year |
|
IRS |
Internal Revenue Service |
|
TDA |
Taxpayer Delinquent Account |
|
TDI |
Taxpayer Delinquency Investigation |
|
TIGTA |
Treasury Inspector General for Tax
Administration |
We initiated this review of nationwide compliance statistics
for examination and collection activities at the request of the Internal
Revenue Service (IRS) Oversight Board.
Our data analyses were performed in the Treasury Inspector General for
Tax Administration (TIGTA)
Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II. A Glossary of Terms is included in Appendix IV. Detailed charts and tables referred to in the body of this report are included in Appendix V. Most of the calculations throughout the report and Appendix V are affected by rounding. All initial calculations were performed using the actual numbers rather than the rounded numbers that appear in the report.
Much of the data included in this report update prior TIGTA audit reports on compliance trends. See Appendix VI for a list of those reports.
Overall, many compliance activities increased and results improved during Fiscal Year (FY) 2006. Since FY 2000, the IRS has been reversing numerous downward trends in compliance activities that had occurred in prior years in both the Collection and Examination functions. In FY 2006, many of these activities continued to increase, while others fell slightly from the prior year.
Although the IRS has started to reverse many of the downward trends in compliance activities, the Collection and Examination functions enforcement staffing level is not significantly higher than the 10‑year low experienced in FY 2003. The combined Collection and Examination functions enforcement personnel[7] declined from approximately 20,600 at the beginning of FY 1997 to 15,500 at the end of FY 2006, a 25 percent decrease. After decreasing 1 percent during FY 2005, staffing increased 7 percent this year. The budget was a 7 percent increase over the FY 2005 budget for tax law enforcement, and the Collection and Examination functions hired enforcement personnel during the year. However, Congress never passed an actual budget for FY 2007, and spending will be limited to FY 2006 levels with some required increases. Therefore, most enforcement hiring will be curtailed for the fiscal year. The President’s Budget Proposal for FY 2008 includes an increase of almost 6 percent for Collection and Examination function enforcement.
For some time, the total number of tax returns filed and the total dollars the IRS received (gross collections) increased with the growing economy. In the past 10 years, the total number of tax returns filed grew 12 percent, from 158 million in Calendar Year 1996 to 177 million in Calendar Year 2005. From FYs 1997 to 2001, IRS gross collections grew from $1.62 trillion to $2.13 trillion but then fell a total of 8 percent during FYs 2002 and 2003, to $1.95 trillion. These were the first decreases in total revenue since FY 1983. However, since FY 2003, gross collections have increased 29 percent and reached a new record high of $2.52 trillion this year.[8]
After remaining relatively constant for FYs 1999
through 2002, the amount of enforcement revenue collected increased 43 percent
in the last 4 years. During
FY 2006, enforcement revenue collected increased 3 percent to $48.7
billion.[9] This amount (not adjusted for inflation) is
31 percent higher than the FY 1997 level.[10]
As our report points out, the IRS has moved toward reversing many of the enforcement declines in both the Collection and Examination functions. However, despite work the IRS is doing to improve its enforcement efforts, the Government Accountability Office regarded enforcement of tax laws (collection of unpaid taxes and Earned Income Tax Credit noncompliance) as 1 of the 26 high-risk areas in the Federal Government in its January 2007 update.[11] The Government Accountability Office states that improvements in compliance with tax laws will require efforts on the part of the IRS and Congress.
Continued effort to improve compliance is important to maintaining the integrity of the voluntary tax compliance system. According to a tax gap strategy document dated September 2006, the tax gap for Tax Year 2001 is $345 billion, representing a compliance rate of about 84 percent.[12] The purpose of the strategy document was to provide a broad base on which to build future efforts to address the tax gap. Additional detailed strategy elements to address the tax gap are, in part, contingent upon the budget process for FYs 2008 and beyond. One of the seven components included in the strategy is to be better able to prevent, detect, and remedy noncompliance.
In a prior audit report on tax gap projections, we concluded that the IRS does not have sufficient information to completely and accurately measure the overall tax gap.[13] While the IRS is conducting research to obtain a better and updated measure of the tax gap, it still faces large challenges to completely and accurately measure the tax gap. We believe improvements can be made, but sufficient resources need to be provided.
Collection Function Compliance Activities Increased
and Results Improved
The Collection Field function (CFf) revenue officer personnel assigned delinquent cases increased 5 percent in FY 2006; there were 3,876 field revenue officers as of the end of the fiscal year.[14] However, since the start of FY 1997, revenue officer staffing is down 30 percent.
In addition to the increase in staffing during FY 2006, the Small Business/Self‑Employed Division implemented an organizational change during FY 2005 and continues with efforts to improve business processes. Also, workload selection methods continue to be studied with the goal of identifying the best cases to be worked. These efforts could have had some positive impacts in the Collection function activities that continued to show improvement during FY 2006. However, the results of some activities were not positive.
Many Collection function operations showed improvement
The following activities showed positive results for the Collection function during FY 2006.
Figure 1 was removed due to its size.
To see Figure 1, please go to the Adobe PDF version of the report on the
TIGTA Public Web Page.
In last year’s trends report,[18] we noted there should be an increase in the number of liens filed on accounts with large balance‑due amounts based on procedural changes being made by the Collection function.[19]
As also shown in Figure 1, the uses of levies and seizures (additional collection enforcement tools) increased substantially from lows experienced in FY 2000. Levies increased 1,603 percent, and seizures increased 697 percent.[20] The number of levies surpassed the FY 1997 volume in FY 2006. However, the number of seizures made was still substantially lower than the number made before FY 1998. It is unlikely the IRS’ use of seizures will return to the pre-1998 volumes in the foreseeable future.
Some Collection function
operations showed mixed results
Some indicators were not positive for Collection function compliance activity during FY 2006.
An inventory of unassigned collection cases is maintained in the Queue. After decreasing slightly during FY 2005, the number of taxpayers with unpaid accounts in the Queue and the amount owed on these accounts increased to 10-year highs during FY 2006.[24] The number of taxpayer accounts increased just over 28 percent to 779,272. At the same time, the amount owed increased just over 34 percent to $27.2 billion. One reason for the increase in the Queue this year is a rise in the number of compliance assessments.[25] In addition, the number of taxpayers with unfiled tax returns increased just over 15 percent to 824,936, but there was a small (just over 8 percent) decrease in the number of these accounts that were shelved or surveyed (removed from inventory) during the year.[26] Although many of the cases in the Queue may be assigned to be worked, a significant amount may never be worked.
As noted above, the Queue inventory increased during FY 2006. However, those inventory figures do not include the millions of tax periods for unpaid accounts and unfiled return investigations shelved or surveyed (removed) from Collection function inventory during the last few years. From FYs 2001 through 2006, the IRS removed almost 6.8 million TDAs[27] (with balance-due amounts totaling more than $28 billion) and almost 15.2 million TDI tax periods from Collection function inventory. However, the pace for removal of both TDAs and TDIs has slowed each year since FY 2004. These cases were removed from Collection function inventory because they were potentially less productive than other available inventory and may never be worked.
The Collection function is unable to work all of the existing accounts in the Queue with current staffing, and, as stated above, the number of TDA receipts is outpacing closures. If changes do not occur, a significant number of cases will continue to not be worked. This reinforces the need for additional resources to work the cases. As previously noted, the Collection function hired additional staff during FY 2006, but it is unlikely that hiring will take place during FY 2007. In addition, in September 2006, the IRS started assigning balance-due cases that otherwise would not have been worked to private collection agencies. As of January 18, 2007, the IRS had received $12.6 million on cases assigned to the collection agencies. Continued use of private collection agencies is uncertain because some members of Congress want the IRS to discontinue their use.
Examination Function Compliance Activities
Increased and Results Improved
Overall, the number of field Examination function personnel that conduct examinations of tax returns increased just over 9 percent between FYs 2005 and 2006. The number of revenue agents increased to 10,513, while the number of tax compliance officers (formerly referred to as tax auditors) increased to 1,145 as of the end of the fiscal year.[28] However, there has been an almost 22 percent decrease in the number of examiners in field offices[29] since the start of FY 1997.
In addition to the increased staff during FY 2006, over the last few years the Small Business/Self-Employed Division has implemented some reengineering and organizational changes that could have had a positive impact within the Examination function in some of the areas noted below. In addition, the Examination function continues to study methods that will result in the identification of tax returns for examination that contain greater potential for noncompliance.
Compared to FY 2005, the percentage of tax returns examined increased for most types of tax returns during FY 2006. At the same time, examination yield per hour (the amount of tax adjustments on tax returns divided by the number of hours spent examining those returns) also increased for corporate and other types of tax returns, but revenue agent results for individual tax returns decreased.[30]
The number of tax returns examined
increased, but many examinations were conducted via correspondence
When analyzing examination coverage rates, it is important to recognize differences in the types of contacts that are counted in Examination function statistics. Examinations range from an IRS notice asking for clarification of a single tax return item that appears to be incorrect (correspondence examination) to a full face‑to‑face interview and review of the taxpayer’s records. Face‑to‑face examinations are generally more comprehensive and time consuming for the IRS and the taxpayers, and they typically result in higher dollar adjustments to the tax amounts. Thus, caution should be used when combining statistics from the various Examination function programs into overall examination rates. During FY 2006, almost 70 percent of all examinations were conducted via correspondence.[31]
In addition, the IRS uses several computer‑matching and automated error-checking routines in the Computing Centers to check the accuracy of tax returns. The running of these routines often results in adjustments to tax liabilities; however, these adjustments are not included in the traditional “audit rates” and are not generally reported separately as enforcement efforts.
The overall percentage of tax returns examined (including face-to-face and correspondence examinations) increased by just over 4 percent[32] from FY 2005 and has increased 84 percent since FY 2000. However, the rate is still 27 percent lower than it was in FY 1997. The largest increase in the examination rate from FY 2000 was for individual tax returns. Examinations of other types of tax returns did not increase as significantly or decreased.
Examination function staffing increased during FY 2006. However, hiring during FY 2007 was curtailed due to budget considerations. This may reverse again in FY 2008, as the President’s Proposed Budget provides for an increase in Examination function enforcement.
Figure 2 compares the change in field Examination function staffing to the change in examinations for all types of tax returns by field employees from the beginning of FY 1997 through FY 2006. The chart line for the number of field examiners does not start at zero because the number of examiners conducting examinations during FY 1997 decreased by almost 7 percent during the year.
Figure 2 was removed
due to its size. To see Figure 2, please
go to the Adobe PDF version of the report on the TIGTA Public Web Page.
A continued effort to increase examination coverage is important to maintaining the effectiveness of the voluntary tax compliance system. In 2006, the study of taxpayer attitudes about cheating on taxes showed a decline, after showing improvements each year since 2003. In 2006, 12 percent of taxpayers believed it was acceptable to cheat on their tax returns. This is up from 10 percent in 2005.[33] Also, fear of examination is a major factor in influencing taxpayers to report taxes honestly. In 2002, 54 percent of taxpayers surveyed cited fear of examination as a factor that influenced their voluntary compliance. This increased to 62 percent in 2005 then decreased to 61 percent in 2006.
The following paragraphs summarize examination coverage for various types of tax returns.
In a report
issued last year, we noted that correspondence examinations of high‑income
taxpayers may have only a limited impact on compliance.[37] Taxpayers did not
always respond to these examinations.
About 86 percent of the amount assessed on these no-response cases
was either reversed or not collected after an average of 608 calendar days
(almost 2 years) from the date of the assessment.
Earned Income Tax Credit issues accounted for between 55 percent and 83 percent of the examinations of individual income tax returns with income under $25,000 for FYs 2000 through 2006 and accounted for 28 percent of the examinations of individuals overall during FY 2006. Excluding examinations in which the Earned Income Tax Credit was an issue, from FYs 2000 to 2006, the number of examinations of individual tax returns with income under $100,000 increased 166 percent (from 250,248 to 666,400) and the number with income of $100,000 and over increased 158 percent (from 98,983 to 255,002).
The number of corporate tax returns
with assets of under $10 million examined was unchanged in FY 2006. During the same period, the number of
corporate tax returns with assets of $10 million and over examined decreased
just over 2 percent. However, a
much higher percentage of these larger corporations are examined than those
with assets of under $10 million.