TABLE OF CONTENTS
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Appendices
Appendix I - Statistical Reports - Other
Seated, left to right: Gordon Milbourn and Joseph Hungate Standing, left to right: Marty Greiner, Pamela Gardiner, Steven Jones and Mary Anne Curtin
Marking our fifth anniversary as an independent Inspector General affords us the opportunity to reflect on our past and note our accomplishments. On the inside cover of this report is a chronicle of the significant milestones in our corporate history, beginning in 1952, when we were established as the Inspection Service within the Bureau of Internal Revenue. Since TIGTA’s creation in 1999, we have had independent status as a distinct bureau within the Treasury Department.
TIGTA realizes that there are continually new threats to the IRS and methods to improve its operations. We do not rest on our laurels, but continue the challenging work that our agency is required to perform. We also strive to improve our internal agency operations. Our Deputy Inspector General for Investigations, Steven Jones, was recently interviewed by the Federal Times (see page 20 in this report). In the article, titled “How to Measure Success at a Law Enforcement Agency,” Mr. Jones describes the innovative performance measurement tool he and his fellow executives have developed.
Our audits for the past six months assessed such IRS operational and programmatic issues as systems modernization, tax compliance initiatives, IRS security, integrating performance and financial management, providing quality customer service operations, processing returns and implementing tax law changes, and human capital.
TIGTA accomplishments since inception and for the past six months are summarized in the following table and demonstrate our continuing commitment to helping in the important effort to improve tax administration and protect its integrity, thereby benefiting taxpayers. TIGTA is certainly proud of its past with the many significant accomplishments we have had, including having established excellent working relationships with the IRS and Congress. Our hard working employees are focused on the challenges and opportunities that the future holds as we strive to fulfill our agency’s mission and carry out our objectives.
| Increased/ | No. of | No. of | Regulations/ | |||
| Number of Audit | Cost Savings | Protected | Investigations | Investigations | Legislative | |
| Reports Completed | Identified | Revenue | Opened | Closed | Requests Reviewed | |
| Since inception | $16.4 | $27.8 | ||||
| (1999) | 1,077 | billion | billion | 25,525 | 25,289 | 1,678 |
| April 1, 2004 – | $337 | $1.17 | ||||
| Sept. 30, 2004 | 108 | million | billion | 1,691 | 1,911 | 171 |
The Treasury Inspector General for Tax Administration (TIGTA) provides independent oversight of Treasury Department matters involving IRS activities, the IRS Oversight Board, and the IRS Office of Chief Counsel. Although TIGTA is placed organizationally in the Treasury Departmental Offices and reports to the Secretary of the Treasury and the Congress, it functions independently from the Departmental Offices and all other offices and bureaus within the Department.
TIGTA’s work is devoted to all aspects of activity related to the Federal tax system as administered by the IRS. TIGTA protects the public’s confidence in the tax system by overseeing the IRS as it strives to achieve its strategic goals, by identifying and addressing the IRS’ management challenges, and by implementing the President’s Management Agenda and the priorities of the Department of the Treasury. TIGTA’s primary functional offices are the Office of Audit (OA) and the Office of Investigations (OI). TIGTA’s Offices of Chief Counsel, Information Technology, and Management Services support OA and OI efforts. TIGTA conducts audits and investigations designed to:
Protect against external attempts to corrupt or threaten IRS
employees. Provide policy direction and conduct, supervise and coordinate audits and investigations related to IRS programs and operations. Review existing and proposed legislation and regulations related to IRS programs and operations and make recommendations concerning the impact of such legislation or regulations. Promote economy and efficiency in the administration of tax laws. Prevent and detect fraud and abuse in IRS programs and operations. Inform the Secretary of the Treasury and Congress of problems and deficiencies identified and of the progress made in resolving them.
Source: TIGTA Strategic Plan, Fiscal Years 2003-2008
TIGTA has all the authorities granted under the Inspector General Act of 1978, as amended.1 TIGTA also has access to tax information in the performance of its tax administration responsibilities and the obligation to report potential criminal violations directly to the Department of Justice. TIGTA and the Commissioner of Internal Revenue have established policies and procedures delineating responsibilities to investigate potential criminal offenses
1 5 U.S.C.A. app. 3 (West Supp. 2003).
under the internal revenue laws. In addition, the IRS Restructuring and Reform Act of 1998 (RRA 98)2 amended the Inspector General Act of 1978 to give TIGTA statutory authority to carry firearms, execute and serve search and arrest warrants, serve subpoenas and summonses, and make arrests as set forth in Section (§) 7608(b)(2) of the Internal Revenue Code (I.R.C.).
2 Public Law No. 105-206, 112 Stat. 685 (codified as amended in scattered sections of 2 U.S.C., 5
U.S.C. app., 16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.).
TIGTA Semiannual Report to Congress September 30, 2004
TIGTA’s Office of Audit strives to promote the economy, efficiency, and effectiveness of tax administration by adding value to IRS operations. Audit recommendations are provided to improve IRS systems and operations, while ensuring fair and equitable treatment of taxpayers. TIGTA’s comprehensive, independent performance and financial audits of IRS programs and operations focus on mandated reviews and high-risk challenges facing the IRS.
Audit recommendations result in cost savings and increased or protected revenue, reduction of taxpayer burden, and protection of: taxpayer rights and entitlements; taxpayer privacy and security; and IRS resources.
Each year, TIGTA identifies the major management challenges facing the IRS. These challenge areas for Fiscal Year (FY) 2004 follow. Audit emphasis is placed on statutory coverage required by the RRA 98, as well as on areas of concern to the Commissioner of Internal Revenue, the Secretary of the Treasury, and key stakeholders.
The statutory audits generally address aspects of the major management challenges; however, legislation also provides TIGTA the authority to conduct audits and investigations of the IRS Oversight Board.
The following sections highlight significant audits completed during this 6-month reporting period.
The RRA 98 established the IRS Oversight Board to oversee the IRS in its administration of internal revenue laws. The IRS Oversight Board has the authority and responsibility to be directly involved in the management, direction, strategy, and long-term operation of the IRS. The Board was specifically granted review and approval authority for strategic plans, the Commissioner’s plans for any major reorganization of the IRS, and the IRS budget request submitted by the Commissioner. In addition, the Board was given the responsibility to review, but not to approve operational plans and functions of the IRS including modernization of the tax
system, and the Commissioner’s selection, evaluation, and compensation of IRS senior executives who have program management responsibility over significant functions of the IRS.
In our audit of the Oversight Board, many stakeholders told us the Board has improved IRS governance, as intended by the RRA 98. However, some stakeholders were concerned that issues have been brought to the Board’s attention each year with no apparent action taken towards resolution.
For example, one responsibility of the Oversight Board is to review and approve the IRS budget before it is submitted to the Department of the Treasury to ensure it adequately supports IRS’ strategic priorities. However, there is concern that the Board has not had enough influence in the budget process since previous IRS budgets submitted by the President and those passed by the Congress have been significantly less than those submitted by the Board.
Similarly, the Board was tasked to oversee the IRS’ Business Systems Modernization (BSM) efforts which are significantly behind schedule and over budget. Many BSM-related recommendations made by the Board in December 2003 had already been made much earlier by TIGTA and the Government Accountability Office.
TIGTA recommended the Board formalize a process to focus its efforts strategically on the most significant issues facing the IRS, and adopt a process for evaluating and communicating its effectiveness and impact on tax administration. In addition, the Board should define practices for coordinating with IRS executives and other oversight bodies, develop policies and procedures to evaluate the IRS’ efforts and results in achieving savings and efficiencies, and make timely use of independent assessments of the IRS’ modernization and other programs.
Further, TIGTA recommended the Board establish guidance to specify which circumstances will require a formal resolution and a process to vote on formally and publish resolutions, and define a system to educate new Board members on IRS operations and strategic issues. The Oversight Board agreed with the recommendations and is implementing corrective action.
Report Reference No. 2004-10-193
The remaining audit summaries in this report fall into IRS’ Major Management Challenges categories (see page 7).
SYSTEMS MODERNIZATION
The IRS has developed an enterprise architecture to guide the BSM program, and the IRS and the PRIME contractor3 have deployed business systems projects that provide value to taxpayers.
TIGTA reports issued during the past three years have emphasized the need to improve the BSM program. These findings were confirmed by three independent studies and a BSM benchmarking analysis launched by the
3 The PRIME contractor is the Computer Sciences Corporation, which heads an alliance of leading technology companies brought together to assist with the IRS’ efforts to modernize its computer systems and related information technology.
Page 6 TIGTA Semiannual Report to Congress
IRS, as well as an internal probe by the PRIME contractor, which resulted in 21 recommendations, 15 of which were similar to those issued in previous TIGTA reports. TIGTA concluded from these reports that BSM weaknesses continue to exist and the IRS and its contractors need to complete planned corrective actions to address the root causes identified in the studies.
IRS computer room with outdated technology
Over the past two fiscal years, TIGTA has cited four primary challenges the IRS and its contractors must overcome to be successful – challenges TIGTA believes still must be met:
In its response, the IRS agreed with TIGTA’s annual BSM program assessment report and stated a fundamental change was needed. To accomplish this culture change, the IRS will ensure the Customer Account Data Engine (CADE)4 program and the overall health of the BSM program are periodically subjected to a third-party assessment, modernization efforts are scaled back, senior IRS business unit managers are held accountable for the success of modernization efforts related to business requirements, capped or fixed-price contracts for development work are used, and the skills of experienced IRS tax executives are complemented by those of outside seasoned technology executives.
Report Reference No. 2004-20-107
TAX COMPLIANCE INITIATIVES
The IRS’ overall FY 2003 enforcement efforts and results for its Collection, Examination, and Criminal Investigation
(CI) functions were mixed but showed some continuing positive changes. The President’s proposed FY 2005 budget provides for additional staffing in these functions, a crucial step in the IRS’ ability to increase enforcement activities. Significant 2003 highlights include:
4
The CADE is the foundation for managing taxpayer accounts in the IRS’ modernization plan.
Num be r o f R eturns
• Corporate tax return examinations continued to decline. From FY 1997 to FY 2003, the examination rate for corporate tax returns fell from 1 in 52 to 1 in 182. To counteract this, the IRS Commissioner has indicated that some staffing increases from the President’s proposed FY 2005 budget would be allocated to corporate compliance.
Corporate Tax Returns Examined FYs 1997 - 2003
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
Source: TIGTA analysis of the IRS Data Book information
• In FY 2002 the CI function increased the number of subject investigations initiated and referred for prosecution and the percentage of time directly spent on subject investigations, with fewer days being expended to discontinue subject investigations. These indicators continued to show improvement in FY 2003 even with an overall decrease in the number of special agents. However, CI expects to increase special agent staffing substantially in FYs 2004 and 2005. TIGTA is hopeful that IRS productivity will continue to improve and that planned special agent staffing increases will materialize.
Report Reference Nos. 2004-30-083 and 2004-10-115
“International transfer pricing” is a term commonly used to describe pricing arrangements for exchanging goods, services, and other property between related entities or affiliates of a Multinational Enterprise (MNE) group5 with operations in the United States and other countries. As part of a comprehensive transfer pricing strategy, at the beginning of an examination, Large and Mid-Size Business Division employees are to request transfer pricing documentation from MNE taxpayers for evaluation by an international examiner and/or an economist.
TIGTA found that information was requested for only about 35 percent of cases closed between FYs 1997 and 2002. Following the January 2003 Transfer Pricing Compliance Directive’s issuance, that number increased to 55 percent of cases, which still fell short of the Directive’s requirement to request documentation for every case.
TIGTA estimated over half of returns with potential transfer pricing issues were not referred to an international examiner for evaluation because they were surveyed improperly by domestic revenue agents and team managers and were never opened for examination. Likewise, some returns with potential transfer pricing issues that were opened for examination were also not being referred for review by international examiners. By improving controls in this area, Federal Government revenue could increase by approximately $32.3 million annually in additional
5 An MNE group is a group of associated companies with business establishments in two or more countries. These companies may be any form of business entity including corporations and partnerships.
Page 8 TIGTA Semiannual Report to Congress
income taxes or reduction in tax attributes,6 provided the IRS has additional international examiner resources.
TIGTA recommended the IRS reemphasize to all executives, managers, and revenue agents the transfer pricing requirements, and implement an automated control to prevent these returns from being surveyed improperly. In the long term, the IRS should have the current system modified to generate referrals automatically to international examiners when returns are opened for examination. IRS management generally agreed with the recommendations.
Report Reference No. 2004-30-133
The IRS has faced the significant challenge of working on an increasing inventory of non-filed returns with fewer resources. Potential individual non-filer cases increased from
The Return Delinquency Notice Program’s effectiveness has been significantly affected by the resource decline. Individual non-filers that have been identified by the IRS but have not received a return delinquency notice increased from 4.8 million for TY 1994 to
6.7 million for TY 2001, representing a potential net tax value of $1 billion.
6 Tax attributes are carry forwards of net operating losses and tax credits that can be used to reduce future taxes.
Direct Full Time Equivalents (FTE) Return Delinquency Notice Program7 FYs 1997 – 2002
Source: IRS Small Business/Self-Employed (SB/SE) Division.
TIGTA made no recommendations to address the declining resource situation since the IRS’ FY 2004 budget proposal provided for additional FTEs. However, TIGTA identified two opportunities to use the IRS’ limited resources in a more efficient manner. First, return delinquency cases involving Federal Government employees or retirees could be assigned a lower work priority, freeing the IRS to address more fully other categories of non-filer cases that offer greater potential to maximize tax collections.
Second, at the time TIGTA completed its review, the IRS may not have been realizing the full potential of the Refund Hold Program8 to encourage taxpayers to file delinquent returns. However, the IRS
7
The data represents FTEs allocated by both the SB/SE and Wage & Investment Income Divisions.
8
This Program identifies individual taxpayers that have filed a current year tax return claiming a refund but have not filed returns for a previous tax year for which the IRS believes a tax liability may exist. The IRS freezes the current year refund while it attempts to resolve the prior year tax return delinquency.
stated it had made significant changes to the Refund Hold Program since our review was performed. IRS management agreed with some of the recommendations presented in the report.
Report Reference No. 2004-30-127
SECURITY OF THE IRS
The IRS, under the Federal Manager’s Financial Integrity Act of 1982, reported one computer security material weakness covering nine specific infrastructure weaknesses. The plans and processes developed by the IRS in eight of the areas have not been implemented completely and, as a result, weaknesses still exist. For example:
9 Patches are vendor updates that should be installed into existing programs to address security weaknesses or program bugs.
• Audit trail reviews have improved. However, for one major operating system, reviews are not being made due to the lack of software needed to analyze audit trail data and to the lack of capacity on several outdated computers. In addition, audit trails are not being run and reviewed for most IRS applications.
While the IRS agreed with most of our recommendations it did not agree that it should continue to designate eight of the nine issues as material weaknesses. In particular, the IRS did not agree with the recommendations to continue reporting certification and accreditation of computer systems and the review of audit trails as part of the overall computer security material weakness. These disagreements have been forwarded to the Department of the Treasury for resolution.
Report Reference Nos. 2004-20-129, 2004- 20-131, 2004-20-158 (Limited Official Use), and 2004-20-155
The audit trail for detecting improper activities on modernized systems is not functioning. Software performance and functionality problems with the Security Audit and Analysis System (SAAS) have prevented users from accessing collected SAAS data. The IRS was aware the SAAS did not meet IRS requirements when delivered, but formally accepted the System with the caveat that its deficiencies were to be addressed. To date, the problems have not been resolved fully. As a result, the IRS’ and TIGTA’s ability to detect improper activity on its computer systems is diminished.
While the IRS agreed with most of our recommendations, it did not agree to develop alternatives to audit trails for modernized applications in the event SAAS deficiencies cannot be corrected.
Report Reference No. 2004-20-135
INTEGRATING PERFORMANCE AND FINANCIAL MANAGEMENT
Office space costs represent one of the IRS’ largest non-payroll expenditures. In FY 2003, the IRS spent approximately $633 million to occupy approximately
30.6 million square feet of space in 796 facilities.
Although the IRS has begun to address the problem of underused office space, miscalculation in the development of its overall space utilization rate caused the rate to be excessively high. Furthermore, the IRS did not set funds aside to pay the costs of releasing all underused space. TIGTA estimated $64 million as the annual cost for underused IRS office space. Additionally, by releasing office space for telecommuting employees, TIGTA estimated the IRS could save $19.8 million each year.
TIGTA recommended the IRS adjust the target utilization rate by revising calculations and the office space release plan to include specific details on costs, savings, and the benefits of reducing unneeded leased space. TIGTA also recommended the IRS release space after reporting vacancies based on division requirements for telecommuting employees. IRS management generally disagreed with the recommendations. These disagreements were elevated to the Department of the Treasury.
Report Reference No. 2004-10-182 PROVIDING QUALITY CUSTOMER SERVICE OPERATIONS
Providing top quality service to every taxpayer in every transaction is integral to taxpayer compliance. To assist taxpayers in complying with the law, the IRS offers assistance through toll-free telephone numbers, walk-in services, and written and electronic communications, including the IRS’ Web site, IRS.gov. The effectiveness of each of these services influences a taxpayer’s ability and desire to comply voluntarily with tax laws.
.
The Volunteer Income Tax Assistance (VITA) Program plays an important role in the IRS’ goal of improving taxpayer service and facilitating public participation in the tax system. Posing as taxpayers, TIGTA auditors had 35 tax returns prepared at 44 VITA sites nationwide, none of which was prepared correctly. Taxpayer issues included income reporting, filing status, exemptions, and the Earned Income Tax Credit (EITC) and Child Tax Credit. In addition, information such as VITA site location, hours, need for an appointment, and language services available was not always provided accurately or clearly by IRS employees.
TIGTA recommended the IRS review the existing volunteer qualification process and develop a quality review program to make certain volunteers are trained, certified, and are applying the law correctly. In addition, the IRS should ensure VITA site information is current and accurate. IRS management agreed with the recommendations.
Report Reference No. 2004-40-154
Providing taxpayer assistance at walk-in sites called Taxpayer Assistance Centers (TAC) is one strategy the IRS has implemented to meet its goal of improving the quality and efficiency of service delivery. During the 2004 filing season, TIGTA made anonymous visits to the TACs to determine if taxpayers received accurate answers to tax law questions. IRS employees answered correctly only 67 percent of the 250 in-scope10 tax law questions. Although this is an increase from the 2002 filing season’s 51 percent accuracy rate, it is a decrease from the 2003 filing season’s 70 percent.
The IRS has not adequately educated taxpayers on what services are offered at the TACs. This lack of information creates a burden for taxpayers who visit TACs and ask questions that are out of the scope of IRS employees’ training and authorization.
10 IRS employees are authorized to answer tax law questions related to specific tax topics as long as they are within their expertise and training; these are called in-scope questions.
TAC Accuracy Rates for Filing Seasons 2002 - 200411
Percentage Correct
70
60
50
40
30
20
10
0
Source: TIGTA reviews conducted during the period January through April 2002, 2003, and 2004.
TIGTA recommended the IRS identify ways to improve TAC work processes and the quality of the taxpayer experience for those who visit TACs. The IRS Web site and publications should provide a clear explanation of the services offered at TACs. The IRS should also help explain to taxpayers what tax law questions TAC employees can answer by training screeners or providing a list of tax law topics. IRS management generally agreed with the recommendations.
Report Reference No. 2004-40-152
The Kiosk Program plays an integral role in the IRS’ future concept of self-assistance customer service. The program broadens the use of electronic interactions by providing more education and assistance through convenient, easy to use self-assistance channels. However, the IRS cannot determine whether the Kiosk Program provides cost-effective customer service because of insufficient internal controls and management oversight. Though the Kiosk Program has been in
11 The accuracy rates in the graph represent percentages and include “Correct” and “Correct but Incomplete” responses.
place since 1998, the IRS has yet to develop guidelines or processes to monitor the program efficiently and effectively.
TIGTA recommended the IRS develop guidelines and strategies to monitor taxpayer usage and satisfaction; ensure information is current, accurate, and consistent; monitor kiosk functionality; place kiosks optimally; and educate taxpayers on the benefits and locations of kiosks. IRS management agreed with the recommendations.
Report Reference No. 2004-40-151
The Taxpayer Advocate Service (TAS) is responsible for resolving taxpayers’ problems that have not been addressed through normal IRS channels. The time it takes the TAS to resolve taxpayers’ problems has increased significantly over the past five years, from an average of 37 days in FY 1998 to 76 days in FY 2003. However, staffing for the TAS has remained fairly constant, and new case receipts and closures have decreased approximately 40 percent since FY 1998.
Case management inefficiency was responsible for a significant portion of the time increase. Untimely action on cases occurred when case advocates did not document a plan of action on cases, did not establish follow-up dates to manage their inventory effectively, and did not have the technical knowledge to resolve certain issues.
Last year, TIGTA reviewed the TAS’ systemic advocacy function, which is devoted to resolving problems that affect large numbers of taxpayers.12 TIGTA’s prior and current reviews indicate that the TAS may not be using its resources effectively to accomplish its primary mission of helping individual taxpayers and resolving systemic problems.
TIGTA recommended the National Taxpayer Advocate (NTA) alert managers that case advocates are not developing case action plans as required, provide training on developing case action plans and establish estimated case completion dates. TIGTA also recommended the NTA provide specific direction for managers as to when and how often to review cases and revise procedures, and eliminate its 5-day grace period allowed on follow-up actions. While expressing some concerns about the presentation of data and conclusions, the NTA agreed with most of the recommendations and is implementing corrective action.
Report Reference No. 2004-10-166
PROCESSING RETURNS AND IMPLEMENTING TAX LAW CHANGES
Corporate taxpayers file a Corporation Application for Tentative Refund (Form 1139) to obtain refunds of tax by carrying net operating losses, net capital losses, or unused general business credits back to earlier years. The IRS paid corporate taxpayers an estimated $22.8 million in interest on an estimated 3,300 late refunds issued for amounts greater than $10,000 based on Forms 1139 processed in Calendar Year (CY) 2002. Interest was paid because the refunds were not issued
12 The National Taxpayer Advocate Could Enhance the Management of Systemic Advocacy Resources (Reference Number 2003-10-187, dated September 2003).
within 45 days. TIGTA estimated the IRS could have taken action to avoid payment of $12.6 million of this interest. Form 1139 refund timeliness was affected partly by the consolidation of ten form processing sites to two sites. The additional personnel required to process these cases at the two sites are now more experienced, and significant improvements have been made in controlling and recognizing these cases. Despite improving procedures, an estimated $16 million in interest was paid on an estimated 3,000 late Form 1139 refunds in CY 2003.
TIGTA recommended the IRS use interest reports to monitor the payment of interest and to determine causes for the delays so they could be acted upon. This action could reduce the payment of avoidable interest by an estimated $48.3 million over five years. IRS management generally agreed with the recommendation.
Report Reference No. 2004-30-171
The IRS maintains a National Account Profile (NAP) database that contains taxpayer information obtained from the Social Security Administration. During the processing of tax returns, the IRS compares selected NAP information to validate the identity and age of taxpayers and dependents claimed on each tax return. However, the IRS does not use all of the data available in the NAP to help validate that only qualifying children are claimed for EITC purposes or to identify tax returns that may be using the Social Security Numbers (SSNs) of deceased individuals improperly.
A significant number of returns exist on which the EITC was claimed for children who were considerably older than the primary taxpayers, or were actually the taxpayers’ parents. For TY 2002, TIGTA estimates there were over 10,000 tax returns filed with more than $16 million in potentially erroneous EITC claimed because the “child” was significantly older than the primary taxpayer.
The IRS has also been processing tax returns on which either the primary taxpayer or a dependent is deceased. Although in certain circumstances this is appropriate, TIGTA identified instances in which taxpayers were using SSNs of deceased taxpayers to reduce taxes due improperly or to receive larger refunds. TIGTA estimated that $21 million in erroneous tax benefits was obtained after 22,000 tax returns included the SSNs of deceased individuals improperly.
Management generally agreed with our recommendation to use NAP information more effectively while processing returns to help identify taxpayers claiming improper tax benefits.
Report Reference No. 2004-40-098 (Limited Official Use)
The IRS tax regulations and processes for granting extensions to file corporate income tax returns prevent the effective, fair, and efficient administration of the tax laws. TIGTA found that the IRS grants extensions of time to file corporate tax returns by relying on erroneous information provided by filers that show all anticipated taxes have been paid. This prevents effective and fair tax administration, as the IRS is generally prevented from assessing a Delinquency
D elinq u en t T a xe s - 1 9 9 8 to 2 0 0 1 (in billio n s)
$4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0
| $0.2 | $0.3 | $0.7 | $1.6 |
Penalty13 once it has granted an extension. Otherwise, this penalty would apply to any taxes not paid by the normal tax return due date.
Relationship Between Extension Use and the Amount of Delinquent Taxes Owed
$4.1
NONE ONE TWO THREE FOUR
Source: TIGTA analysis of IRS Business Master File data.
Of 960,000 taxable corporations that obtained extensions of time to file in CY 1999, TIGTA found that approximately 168,000 of them had failed to pay a total of $1.8 billion in taxes by the normal tax return due date. Additionally, of the 960,000 corporations, 310,000 had failed to pay taxes on returns with extended due dates at least once between CYs 1998 and 2001, delaying the Federal Government’s receipt
13 The Delinquency Penalty (also commonly referred to as the Failure to File Penalty) is 5 percent per month and generally cannot exceed 25 percent of delinquent taxes. The penalty does not apply to taxpayers who have paid all taxes by the normal tax return due date. The Delinquency Penalty is reduced by the amount of the Failure to Pay (FTP) Penalty if they apply concurrently. The FTP Penalty is assessed on unpaid taxes at a rate of 0.5 percent per month and cannot exceed 25 percent of delinquent taxes.
of approximately $5.8 billion in corporate taxes. Approximately 107,000 of these corporations were delinquent in at least two of the four years. Of all delinquent taxes reported on corporate income tax returns filed after the normal CY 1999 due date, 86 percent are represented by corporations that received an extension.
The IRS extension regulations also enable corporations owing unusually large amounts, such as $100,000 or more, to delay tax payments while avoiding interest charges and FTP penalties that would otherwise accrue to their unpaid taxes. In CY 1999, approximately 2,000 corporations that received filing deadline extensions had more than $100,000 each in unpaid taxes at the normal return due date. These corporations accounted for approximately 60 percent ($1.1 billion) of all delinquent taxes for CY 1999 owed by corporations that were granted filing deadline extensions.
IRS regulations for granting extensions also penalize corporations differently for the same types of payment noncompliance. Corporations that file their returns late without a deadline extension can be subject to vastly different interest and penalty amounts than those that received an extension due to the Delinquent Penalty protection provided by an extension. Additionally, unnecessary taxpayer burden is created by the regulations as corporations that had paid their taxes on time expended an estimated $183 million to prepare and submit extension forms in CY 1999, even though these corporations would not have been subject to interest or penalties. IRS management agreed with some of the recommendations presented in the report.
TIGTA’s Office of Investigations helps protect the ability of the IRS to collect revenue for the Federal Government. To achieve this, TIGTA employs federal criminal investigators (special agents) in various cities across the United States to investigate allegations of criminal violations and serious administrative misconduct by IRS employees, to protect the IRS against external attempts to corrupt tax administration, and to ensure IRS employee and infrastructure security.
“At the IRS, our working equation is service plus enforcement equals compliance. The better we serve the taxpayer, and the better we enforce the law, the more likely the taxpayer will pay the taxes he or she owes.”
Testimony of the Honorable Mark W. Everson, Commissioner, Internal Revenue Service, before the Subcommittee on Oversight of the House Committee on Ways and Means; February 12, 2004.
Through its investigative program, TIGTA, pursuant to its unique statutory charge, has responsibility to protect the integrity of tax administration. TIGTA investigators perform a variety of functions, including:
• Investigating allegations of criminal violations that impact Federal tax