Tax Gap: IRS Has Modernized Its Business Nonfiler Program but Could Benefit from More Evaluation and Use of Third-Party Data
Highlights
The Internal Revenue Service (IRS) does not know how many businesses failed to file required returns, nor does it have an estimate of the associated lost tax revenue--the business nonfiling tax gap. Many cases it does investigate are unproductive because the business does not owe the return IRS expects. GAO was asked to assess (1) the data challenges of estimating the business nonfiler tax gap, (2) how recent program changes have affected IRS's capacity to identify and pursue business nonfilers, and (3) additional opportunities for IRS to use third-party data. GAO reviewed IRS's tax gap estimates, nonfiler program processes and procedures, and matched closed nonfiler cases with various other data.
IRS cannot develop a comprehensive estimate of the business nonfiling rate and associated tax gap because it lacks data about the population of all businesses. However, IRS could develop a partial estimate using its business nonfiler inventory. IRS identifies several million potential business nonfilers each year, more than it can thoroughly investigate. IRS could take a random sample of its inventory, thoroughly investigate those cases, and use the results to estimate the proportion of actual nonfilers in its inventory of potential nonfilers. Until recently IRS has not had a way to prioritize cases in its large inventory. IRS modernized its business nonfiler program in 2009 by incorporating income and other data in its records indicating business activity. Active businesses generally have an obligation to file a return. IRS's Business Master File Case Creation Nonfiler Identification Process (BMF CCNIP) now assigns each case a code based on this data. IRS uses the code to select cases to work with the goal of securing tax returns from nonfilers and collecting additional revenue. This is a significant modernization, but IRS lacks a formal plan to evaluate how well the codes are working. IRS has performance information on its individual nonfiler program but less on its business nonfiler program. Key management reports needed to provide program data are under development but no deadline has been set. IRS could also use more information on why many nonfiler cases are unproductive. This could potentially lead IRS to identify actions that could reduce IRS resources used on these cases and associated taxpayer burden. GAO identified several opportunities including the following to enhance IRS's identification and pursuit of business nonfilers. (1) The new BMF CCNIP selection codes provide a quick way to verify taxpayer statements that a business has ceased operations and does not need to file a return. Collections staff have been instructed to use the codes when making case closure decisions. They were previously instructed to use other income data but GAO's analysis indicated this may not have been done in all cases. (2) Non-IRS data on businesses including federal contractors could be used to verify taxpayer statements about whether a tax return should have been filed. GAO's analysis of cases in two states that were closed as not liable to file a return found 7,688 businesses where non-IRS data showed business activity as measured by sales totaling $4.1 billion. GAO also found cases closed as not liable to file a return involving 13,852 businesses on the federal contractor registry. GAO's analyses illustrated the potential value of non-IRS data but GAO did not assess which non-IRS data would be most useful nor examine the capacity of IRS's systems to use such data on a large scale. GAO recommends that the Commissioner of Internal Revenue develop a partial business nonfiler rate estimate; set a deadline for developing performance data; develop a plan for evaluating the selection codes; reinforce the need to use income data and selection codes in verifying taxpayer statements; and study the feasibility and cost-effectiveness of using non-IRS data to verify taxpayer statements. In written comments on a draft of this report IRS agreed that identifying and pursuing active business nonfilers is key to enforcement efforts and acknowledged that our recommendations could assist these efforts. IRS agreed with four of GAO's recommendations and indicated some steps it would take to address the other four.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | To understand the scope of the business nonfiler population, the Commissioner of Internal Revenue should estimate the magnitude of business nonfiling among businesses registered with IRS, using data from its operational files to select cases for further investigation. Based on the results of this work IRS should develop a tax gap estimate for the impact of business nonfiling insofar as doing so is cost-effective. |
As of December 2017, IRS said it did not plan to develop a partial estimate of the business nonfiler rate, as we recommended in August 2010. IRS reported that funding would likely be unavailable for it to do so using operational data. According to IRS, its existing operational data on business nonfilers are sufficient. However, even a partial estimate could give IRS additional information that would be useful in its strategic planning and help it determine what priority it should place on this type of noncompliance. However, given the lack of sufficient data and IRS's budget priorities, GAO has closed this action as not addressed and will no longer track implementation
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| Internal Revenue Service | To monitor the performance of business nonfiler activities, the Commissioner of Internal Revenue should set a deadline for developing data that can be used to measure the performance of the BMF CCNIP and its business nonfiler compliance activities overall. |
IRS has determined that it does not have the necessary data that could be used to measure its business nonfiler efforts across the agency and that it therefore cannot set a deadline for developing such data, as GAO recommended in August 2010. According to IRS, developing such data would be prohibitively costly. Rather, as of December 2017, IRS plans to continue to use the data at the operating division level. Absent cross-agency performance data, IRS is unable to fully understand the outcomes of its business nonfiler efforts. GAO maintains that developing these IRS performance data for all business nonfilers may still produce benefits. However, given the lack of data, costs to produce the data, and IRS' competing priorities, IRS is not able to develop a deadline for developing the data. As a result, GAO has closed this action as not addressed and will no longer track implementation.
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| Internal Revenue Service | To monitor the performance of business nonfiler activities, the Commissioner of Internal Revenue should develop a separate efficiency measure for business nonfilers insofar as doing so is cost-effective. |
In its initial response to our recommendation, IRS said that if cost effective, the new team formed at the Servicewide Nonfiler Executive Advisory Council would develop a separate efficiency measure for business nonfilers. During their September 2010 meeting, the Council commissioned a team to look for data that could be used to develop a business nonfiler efficiency measure. In January 2011, this team reported that data did not exist and changing the IRS financial accounting systems to capture the data would be cost-prohibitive. The Council decided that IRS will continue to calculate a combined individual and business nonfiler efficiency measure rather than develop a separate efficiency measure for business nonfilers.
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| Internal Revenue Service | To monitor the performance of business nonfiler activities, the Commissioner of Internal Revenue should develop an evaluation plan for the BMF CCNIP selection codes, including both an initial evaluation and an ongoing monitoring plan, and conduct an evaluation based on this plan. Results from the study and the ongoing monitoring could be used to refine the selection codes to improve the effectiveness of the program. |
In November 2012, IRS developed an evaluation plan, including a timeline, the data to be used, and an ongoing monitoring plan. IRS completed an evaluation of the selection codes in September 2013 and determined that selection codes were appropriately assigned to cases and determined what selection codes were more likely to generate returns. With the results of this evaluation, IRS has better information to draw from in prioritizing its business nonfiler cases, helping to ensure that the new program is acheiving its goal of selecting more productive cases to work.
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| Internal Revenue Service | To identify additional actions to help achieve the goal of fewer unproductive cases, the Commissioner of Internal Revenue should add closing codes that would better indicate all known causes for "not liable to file" determinations and use this information to analyze causes of unproductive cases and use them as appropriate to identify any actions IRS could take either administratively or through education and outreach that could reduce the number of business nonfiler cases where the filing requirement in IRS's records is not applicable. |
IRS said that Collection, Planning & Analysis conducted a coordinated review of the existing closing codes to determine where capturing additional reasons for not liable determinations would prove valuable for further research efforts. IRS said that this review determined that the existing "not liable to file a return" closing code was sufficient and no linkage between this closing code and unproductive cases could be established. In its initial report, GAO stated that having additional information on closing codes could be useful in a number of ways including program evaluation and outreach activities.
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| Internal Revenue Service | To ensure that IRS does not inappropriately close cases as not liable to file returns, the Commissioner of Internal Revenue should reinforce to collections staff the need to check for business activity using information return data and selection codes. |
IRS said that the training material that was delivered to Campus personnel during FY 2010 program reviews would be provided to all interested offices. The IRM revisions have been developed to include instructions for using selection codes as a research tool for full compliance checks. On 2/15/2011, IRS added a new IRM section 5.19.2.6.5.4.1, which details how to use selection codes in determining liability for returns identified as delinquent. IRS updated IRM 5.1.11 (used by revenue officers) to include an instruction to research information return data and selection codes prior to closing a delinquent return module as not liable.
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| Internal Revenue Service | To ensure that IRS does not inappropriately close cases as not liable to file returns, the Commissioner of Internal Revenue should study the feasibility and cost-effectiveness of using private sector business activity data and federal contract data to make a determination of whether federal contractors and other businesses are liable for filing tax returns. |
IRS completed a study in 2013 on the feasibility and cost-effecitiveness of using two non-IRS, private data sources. This study concluded that using these two data sources would not be cost-effective.
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| Internal Revenue Service | To ensure federal contractors comply with filing requirements, the Commissioner of Internal Revenue should establish a process similar to the Federal Employee/Retiree Delinquency Initiative (FERDI) program for federal workers and retirees that will give a high priority to businesses identified as potential nonfilers that have federal contracts. |
IRS created an indicator of federal contractor business nonfiler cases in the queue of its collection function. By placing an indicator for federal contractor cases, collections staff can identify these cases among non-contractor cases. However, IRS has not provided evidence that federal contractor business nonfiler cases are being prioritized. IRS stated that they plan to update risk rules using the federal contractor indicator, which could effectively prioritize the cases, it has not provided evidence that they have done so. In addition, IRS plans to add a selection code to its business nonfiler case selection program for federal contractors, which could give those cases priority. As of October 2014, IRS had created the federal contractor indicator and code as indicated above to make federal contractor nonfilers a priority, even though it has not shown that it was a "high priority" as suggested in our recommendation.
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