Tax Policy and Administration:

IRS' Efforts to Evaluate the Section 1203 Process for Employee Misconduct and Measure Its Impacts on Tax Administration

GAO-04-1039R: Published: Sep 27, 2004. Publicly Released: Sep 27, 2004.

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Congress has long stressed the importance of proper treatment of taxpayers by the Internal Revenue Service (IRS). This emphasis was a major impetus for the IRS Restructuring and Reform Act of 1998, which included numerous additional protections for taxpayers. Among these was Section 1203, which defines 10 acts or omissions for which an IRS employee is to be fired. Most, but not all, of the acts or omissions involve mistreatment of taxpayers, such as by falsifying information or by harassing them. At the same time, Congress has been concerned about IRS's ability to administer the tax laws, including whether the Section 1203 provisions could hamper IRS's enforcement efforts by having a "chilling effect" on IRS employees' willingness to take appropriate enforcement actions against noncompliant taxpayers. Related concerns are whether the IRS and the Treasury Inspector General for Tax Administration (TIGTA) process for reviewing allegations made against employees is too time consuming and inconsistent, and whether all the Section 1203 provisions should be retained. In February 2003, we recommended that IRS evaluate the effectiveness of changes it made to speed up and otherwise improve the review of Section 1203 allegations. Congress is now considering legislation that would amend Section 1203 by, for example, deleting the requirement that IRS employees be fired for failing to file a tax return on time when they are owed a refund. This report responds to a Congressional request for information on IRS's Section 1203 process. Specifically, Congress asked for the (1) statistics on Section 1203 allegations and related actions taken; (2) status of any changes to the Section 1203 process and actions taken on our previous recommendation to evaluate the process; and (3) actions taken and data collected to measure the effects of Section 1203 on tax administration, particularly IRS's enforcement programs.

Since Section 1203 took effect in July 1998, the number of allegations filed annually peaked at about 1,700 in 2000. However, the number of allegations regarding taxpayer and employee rights versus those regarding IRS employee compliance with federal tax filing and reporting laws differed over the years. From 1998 to 2000, the number of Section 1203 allegations regarding taxpayer and employee rights increased, particularly from 1999 to 2000. Since 2000, most types of taxpayer and employee rights allegations have decreased each year. For example, Section 1203 allegations related to retaliation or harassment declined from 1,000 in 2000 to 143 in 2003. In contrast, Section 1203 allegations related to employee noncompliance with tax filing and reporting laws steadily increased almost each year since 1998. Partial year data for 2004 through April suggest that this trend might continue. IRS and TIGTA managers stated that the basic Section 1203 process has not changed since 2002. However, IRS managers added that an IRS task force is studying the part of the process that deals with the Employee Tax Compliance (ETC) process and plans to recommend changes during November 2004. This task force is to identify ways to (1) more quickly process ETC issues including Section 1203 allegations and (2) more effectively educate employees about their responsibilities to comply with federal tax law. IRS is also taking some actions to implement our previous recommendation on evaluating the Section 1203 process, but has not yet developed a full set of goals and measures for evaluating the process. IRS has not yet measured the effects of Section 1203 on enforcement programs. In light of IRS officials stating that they still believe that Section 1203 can have a chilling effect on enforcement, measuring these effects is important. IRS plans to measure employees' willingness to take enforcement actions under Section 1203, using a revised version of the survey we used for our 2003 report to identify the extent of their willingness. According to an IRS official, IRS plans to administer the survey by the end of calendar year 2004. For now, the survey is to be administered to IRS enforcement employees who contact small business and self-employed taxpayers about their tax compliance. IRS officials said they are concerned about the time and effort of continually doing the survey, particularly when so few allegations in recent years have involved contacts with taxpayers. They also said that they are considering other means for getting input on the impacts of Section 1203 on enforcement, such as through focus groups. IRS officials said that after the survey is completed in 2004, they will decide whether and how often to administer the survey and whether other IRS employees should be included.

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