IRS Correspondence Audits: Better Management Could Improve Tax Compliance and Reduce Taxpayer Burden
Highlights
What GAO Found
The notices the Internal Revenue Service (IRS) sends during correspondence audits have misled taxpayers by providing unrealistic time frames on when IRS would respond to their correspondence. For example, notices stated that IRS would respond within 30 to 45 days when it has consistently taken several months to do so. Further, as of early 2014, IRS data show that it had not responded timely to more than 50 percent of the correspondence taxpayers sent. In many cases, refunds are held up until the audit is finished. According to IRS tax examiners, notices caused taxpayer frustration and generated unnecessary taxpayer calls to IRS. Furthermore, examiners who answer such calls said they do not know when IRS will respond. IRS recently revised the notices, but the revisions were not based on analysis of historical data nor did IRS have a plan to analyze data to ensure it is responding timely per revised notices.
The taxpayers cannot understand why IRS would send a letter out with such unrealistic time frames and there is no acceptable way we can explain it to them. That is why they are so frustrated. It puts us in a very awkward and embarrassing situation…. I try to gain control of the situation and tell the taxpayer I understand the frustration so that he will calm down so we can make the phone call productive, but this takes time and wastes time for both the taxpayer and me.
Source: tax examiner focus group interview.
IRS does not have information to determine how the correspondence audit program affects its compliance, taxpayer burden, and cost strategic goals. IRS has not documented objectives for the program. While IRS has many program measures such as how many audits are closed annually, they are not linked to the compliance, burden, and cost goals. Thus, it is not possible to tell whether the program is performing better or worse from one year to the next. Beyond the measures, IRS did not have guidance on how IRS managers were to use program data to make decisions. In some cases, the program data being used are incomplete. For example, IRS did not track data on the number of times a taxpayer called IRS or sent documents. Using incomplete information limits insights on the additional revenues identified from IRS's audit investments and on how much burden the audits impose on the taxpayers.
In 2012 IRS began its Correspondence Examination Assessment Project (CEAP) to reduce taxpayer burden. With a contractor, IRS identified five problem areas involving communications with taxpayers, the audit process, expedited audit resolution, resource alignment, and program metrics. CEAP has 19 improvement efforts finished or underway. However, IRS has not defined the intended benefits and tracked the actual benefits. As a result, it will be difficult to determine whether the efforts successfully addressed the problems. The CEAP contractor recommended that IRS develop a tool for better balancing resource allocation between, for example, telephone calls and reviewing correspondence. IRS officials said they would consider the recommendations but did not have a specific plan or timeframe. Thus, it will be difficult to hold IRS managers accountable for ensuring that the recommendations are completed in a timely manner.
Why GAO Did This Study
IRS uses correspondence audits (done by mail and the majority of IRS audits) to resolve disputes over tax return reporting of relatively simple issues. Tax observers and IRS itself have concerns that these audits impose unnecessary burden on taxpayers or costs on IRS.
GAO was asked to assess the audit program. In this report, GAO assessed the extent to which (1) IRS correspondence audit notices create unnecessary burden or costs; (2) IRS can determine if the audits are meeting its compliance, burden, and cost goals; and (3) IRS's improvement efforts are likely to deliver the expected benefits.
GAO visited two IRS audit sites, analyzed IRS audit program objectives, measures, and decisions, and documented improvement efforts, and interviewed program officials and IRS tax examiners. GAO compared IRS's practices to internal control guidance and criteria for results-oriented management.
Recommendations
GAO recommends that IRS (1) collect and analyze data on whether IRS is responding timely in revised audit notices, (2) establish program objectives as well as measures that reflect the objectives and strategic goals, (3) document guidance for making decisions with program data, (4) track previously unused program data to provide more performance insights, (5) document the intended and actual benefits of audit improvement efforts, and (6) develop a plan and timeline for implementing the contractor's recommendations. In commenting, IRS described planned actions on all the recommendations.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | To reduce the need for taxpayer calls, ensure that IRS is providing taxpayers with more realistic time frames on when IRS will respond, and more efficiently use IRS resources, the Commissioner of the Internal Revenue Service should collect data to analyze whether IRS is responding within the time frames cited in the revised audit notices. |
IRS officials collected and analyzed data on how long it took IRS to respond to taxpayers being audited through the end of fiscal year 2014. IRS found that delays in terms of IRS's responses exceeding the timeframe cited in the audit notices were continuing and more improvements were needed, including further revisions to the timeframes cited in audit notices and a revised automated recorded telephone message that taxpayers heard when calling about the status of the audit.
|
| Internal Revenue Service | If IRS delays are continuing, the Commissioner of the Internal Revenue Service should further revise the notices to provide more realistic response times based on the data and take other appropriate actions to ensure efficient use of IRS tax examiner resources. For example, IRS could choose to provide taxpayers who call IRS with a recorded message notifying them of delays in IRS responding and when to expected an IRS response. |
As of September 2017, IRS had revised the notice and guidance so that when high inventory levels prevent IRS from meeting the usual time frame for responding, IRS will enter dates for an expected response into notices. The dates will be based on data showing how long IRS is taking to work taxpayer correspondence received. IRS also revised the automated telephone message that taxpayers hear when they call. The new message provides taxpayers information on the correspondence audit workload and time frames and asks that they allow a certain number of days before calling to check on the status of their audit.
|
| Internal Revenue Service |
Priority Rec.
To clarify the desired results of the correspondence audit program and its linkages to IRS-wide activities, the Commissioner of the Internal Revenue Service should establish formal program objectives. |
IRS agreed with GAO's June 2014 recommendation and correspondence audit program officials planned a working group to develop formal program objectives. After several attempts to draft program objectives in specific and measurable terms to enable assessments of program performance toward achieving objectives, in April 2021, IRS officially adopted finalized objectives, measures, and linkages to strategic goals. This will enable IRS to track whether these objectives are being achieved through, among other things, effective and efficient use of agency resources.
|
| Internal Revenue Service |
Priority Rec.
To clarify the desired results of the correspondence audit program and its linkages to IRS-wide activities, the Commissioner of the Internal Revenue Service should ensure that the program measures reflect those objectives. |
IRS agreed with GAO's June 2014 recommendation and officials said that, among other actions, they plan to review and update program documentation and guidance as warranted to ensure a clear link between correspondence audit program objectives and related measures. After several attempts to link measures with objectives, in April 2021, IRS officially adopted finalized objectives, measures, and linkages to strategic goals. This action included a report to regularly track the program performance measures over time. IRS actions to formally adopt and regularly track measurements that reflect program objectives will help provide IRS with assurance that this program is achieving its objectives.
|
| Internal Revenue Service |
Priority Rec.
To clarify the desired results of the correspondence audit program and its linkages to IRS-wide activities, the Commissioner of the Internal Revenue Service should clearly link those measures with strategic IRS-wide goals on ensuring compliance in a cost-effective way while minimizing taxpayer burden. |
IRS agreed with GAO's June 2014 recommendation and officials said that, among other actions, they plan to review and update program documentation and guidance as warranted to ensure that program measures clearly link to IRS strategic goals. After several attempts, in April 2021, IRS officially adopted finalized objectives, measures, and linkages to strategic goals. Adopting and regularly tracking these linked measures will help IRS assure that its program measures reflect progress toward both the program objectives and agency-wide strategic goals.
|
| Internal Revenue Service | To better inform decisions being made about the correspondence audit program, the Commissioner of the Internal Revenue Service should document how the decisions are to be made using the performance information (including criteria and tolerances used). |
IRS officials agreed with the recommendation and took steps to document the program plan development process. In July 2017 and May 2018, officials provided documents describing correspondence audit planning processes with details on the role of performance information, including how IRS decides the number of audits to conduct on various compliance issues by considering data on audit coverage tolerances and criteria on potential collection results compared to audit costs. With documentation on the tolerances and criteria for using performance information to guide operational decisions such as allocation of resources, IRS has reasonable assurance that it is making these decisions cost-effectively and achieving better results.
|
| Internal Revenue Service |
Priority Rec.
To better inform decisions being made about the correspondence audit program, the Commissioner of the Internal Revenue Service should track and use other program data that have not been used to provide more complete performance information. Examples of data that could be tracked and used include how much of the recommended tax amounts is collected over time; taxpayer burden and experience such as how often audits are resolved in one contact, how often taxpayers correspond or call, and how long taxpayers wait for IRS to respond to their documents and for the audit to close; and costs beyond the direct audit time, such as the costs to answer taxpayer calls per audit, assess the recommended tax, and collect those tax assessments. |
IRS took steps to track and use other program data that have not been used. In July 2017, IRS officials provided documentation showing they had implemented a new planning method considering collection results data and taxpayer burden indicators for fiscal year 2017. In May 2018, IRS officials said they would use more complete data on the costs of audits in planning audits for fiscal year 2019. By using data that provide a more complete picture of audit compliance results and costs--such as data on costs to answer taxpayer calls and collect additional taxes assessed from audits--IRS will have more complete performance information to make decisions that justify the use of resources to audit certain types of tax issues and returns.
|
| Internal Revenue Service | To better ensure an effective investment of resources in the CEAP efforts, the Commissioner of the Internal Revenue Service should clearly document the intended benefits of ongoing efforts to address identified problems, and the process for measuring and tracking actual benefits. |
IRS documented information for ongoing CEAP efforts in May 2016, including their intended benefits, expected outcomes, and measures. For example, for a CEAP effort to promote quick resolution of cases, IRS gave tax examiners professional decision making tools and encouraged them to contact taxpayers by telephone when additional documentation is required. IRS identified the effort's intended benefits, which included increased customer satisfaction and decreased cycle time spent on cases. IRS also measured and tracked actual benefit data showing increased tax examiner telephone contact attempts and a high percentage--83 percent--of cases where examiners properly used professional decision-making, as applicable.
|
| Internal Revenue Service | To better ensure an effective investment of resources in the CEAP efforts, the Commissioner of the Internal Revenue Service should develop a plan and timeline for implementing the CEAP contractor's recommendations on possible ways to improve the (a) selection of correspondence audit workload and (b) allocation of resources between providing telephone assistance and reviewing taxpayer correspondence to resolve audits or develop justifications for not implementing the recommendations. |
IRS officials pursued efforts with research functions to improve workload selection and better allocate examiner resources, consistent with contractor recommendations. In July 2017, IRS officials provided documentation showing that for fiscal year 2017 they had implemented a new audit planning method that considered collection results data. Although IRS was unable to determine the optimum resource allocation, IRS research functions also assessed taxpayer burden and performance measures to determine whether examiner resources should be shifted between handling taxpayer telephone calls and doing audit casework.
|