Executive Summary

Recidivists

Recommendations

information they had promised to mail were not received. Because it did not appear that the person making the phone calls needed any special auditing skills, it would seem that IRS could achieve the same result by using paraprofessionals or other lower graded staff, leaving higher graded staff more time to audit. (See pp. 27 to 30.)

In July 1995, the Deputy Commissioner of Internal Revenue approved a strategy for dealing with recidivists-nonfilers who are brought into compliance and then fail to file again in later years. The strategy calls for such things as expediting cases by eliminating some notices. However, the strategy says nothing about revising the language in the notices that will be sent. If IRS plans to send recidivists fewer notices than it sends other nonfilers and to revise other procedures relating to the handling of recidivist cases, the language of the remaining notices may no longer be appropriate for those cases. An IRS official responsible for the nonfiler program acknowledged that if IRS decides to send fewer notices to recidivists, it may need to revise the wording of those notices. It is important that IRS make that determination in a timely manner because of the long process involved in approving and making the computer programming changes needed to revise a notice. (see pp. 30 to 31.)

To better assess the results of future nonfiler efforts, if any, and provide a better foundation for deciding about subsequent efforts, GAO recommends that the Commissioner of Internal Revenue (1) establish measurable goals and (2) develop comprehensive data on program costs.

To enhance any future IRS efforts directed at nonfiling, GAO recommends that the Commissioner of Internal Revenue do the following:

• Revise procedures to provide for more timely telephone contact with nonfilers in line with the reengineering team's recommendations. In that regard, IRS should consider whether the Early Intervention Project, which includes, among other things, earlier telephone contact with taxpayers whose taxes are delinquent, should be extended to nonfilers.

• Consider the feasibility and appropriateness of assigning more nonfiler work to lower graded professional staff, paraprofessionals, and administrative staff. In considering its options, IRS might want to solicit input from district managers and staff who worked on the Nonfiler Strategy.

• Determine, if IRS decides to send fewer notices to recidivists, whether the language of the remaining notices should be revised.

Executive Summary

Agency Comments

GAO obtained comments on a draft of this report at a meeting with IRS officials on December 4, 1995. Those comments were expanded on in memoranda dated December 11, 1995, and February 12, 1996. (See pp. 23 and 32.)

IRS officials took strong exception to the "extremely negative tone" of GAO'S
draft report. They said that the draft focused almost exclusively on
criticisms of the Strategy without fully acknowledging its
accomplishments and that an uninformed reader would likely judge the
Strategy a failure when, in IRS' view, it was generally a success. In response
to those comments, GAO revised this summary and chapter 2 of the report
to give more prominence to the Strategy's positive aspects and to
recognize IRS' position on the Strategy's success. However, although IRS is
confident that the Strategy was a success, GAO could not reach the same
conclusion given the statistical data available and the absence of
measurable goals and comprehensive cost data.

IRS agreed with GAO's recommendation on revising the notices sent to recidivists but took issue with the other recommendations in GAO's draft. In response to IRS' comments and to clarify its intent in some cases, GAO revised the wording of the recommendations.

IRS took most exception to GAO's recommendation about the staffing of future nonfiler efforts. IRS said that the decision to assign nonfiler cases to higher graded Examination employees was a management decision based on the view that maintaining the viability of the nonfiler program outweighed possible short-term productivity losses in other areas.

It was not GAO's intent to second-guess IRS' staffing decisions for the Nonfiler Strategy but rather to suggest that IRS consider other options in staffing any future nonfiler initiatives. GAO revised its recommendation to give IRS more flexibility in deciding how to staff future nonfiler efforts. After seeing the revision, IRS said that it would, in the future, “consider using appropriately graded employees, if available."

Chapter 1

Introduction

Section 6012 of the Internal Revenue Code requires individuals,
businesses, and other taxable entities with income over a certain threshold
amount to file income tax returns. While most individuals and businesses
voluntarily comply with this requirement, millions do not. At the beginning
of fiscal year 1993, IRS had an inventory of about 10 million known
nonfilers-about 7 million individuals and about 3 million businesses that
had not filed one or more required returns.1 IRS estimated that the amount
of unpaid individual income taxes on returns due but not filed for 1992
alone was more than $10 billion.

IRS identifies potential nonfilers in several ways. One of the more significant ways to identify potential nonfilers of individual income tax returns is through the document matching program. Under that program, IRS matches taxpayers' returns with information returns (generally Forms W-2 and 1099) showing income, such as wages and interest, paid by third parties, such as employers and banks. When the match shows income but no corresponding tax return, a potential nonfiler is identified. IRS identifies business nonfilers by computer-matching filed returns with the business' filing requirements. Once it has identified potential nonfilers, and after considering what resources are available, IRS decides what action to take.

In 1993, IRS received about 114 million individual income tax returns.
Almost all of those returns were for tax year 1992. For that same tax year,
IRS identified 59.6 million potential individual nonfilers. Of the 59.6 million,
IRS took no enforcement action on 54.1 million (91 percent), primarily
because IRS subsequently determined that the individual or business had
no legal requirement to file. Collection officials at IRS' National Office and
regional offices evaluated the remaining 5.5 million cases to determine the
potential tax due. Cases that IRS judged to have the least potential,
2.5 million, or 46 percent, received a reminder to file. Cases judged to have
medium potential, 0.6 million, or 11 percent, received up to 2 notices.
Cases judged to have the highest potential, 2.3 million, or 43 percent,
received up to 4 notices.

Under IRS procedures, nonfiler cases that are not resolved during the notice process are assigned to either the automated Substitute-for-Return

'For purposes of the Nonfiler Strategy, IRS defined a nonfiler as an individual or business with an annual tax return more than 360 days past due or a business with a quarterly return more than 90 days past due.

Chapter 1
Introduction

Objectives, Scope,

and Methodology

(SFR) program, an Automated Collection System (ACS) call site,3 or a district office. Generally, cases are assigned to the automated SFR program when (1) IRS has enough income information from other sources, such as information documents filed by employers and banks, to prepare a return for the nonfiler, and (2) the potential tax due meets established criteria. Other cases are assigned, using predetermined criteria, to ACS or a district office, where they are scored to establish working priority.

Cases assigned to a district office are put in an automated inventory called the "queue" at the district office. Cases with higher estimated net tax yield are assigned to revenue officers in IRS' Collection function. Revenue officers attempt to contact nonfilers and obtain delinquent returns through telephone calls, letters, or visits. Nonfiler cases with low estimated yield may remain in the queue indefinitely.

Our objectives, addressed under our basic legislative authority, were to assess the results of IRS' Nonfiler Strategy and identify any opportunities for IRS to improve future nonfiler efforts.

To accomplish our objectives, we did the following:

We interviewed IRS National Office officials responsible for overseeing the Nonfiler Strategy about planning and managing the Strategy and about its results.

• We interviewed officials and personnel at the Central, Mid-Atlantic, and Southeastern Regional Offices; Atlanta, Baltimore, Cincinnati, and Detroit District Offices; and Atlanta and Cincinnati Service Centers about their roles in the Nonfiler Strategy, their procedures for implementing the Strategy, and the results obtained. We chose the Central Region and Cincinnati District Office because of earlier work done at those locations. We selected the other locations because they had large inventories of

2Section 6020 of the Internal Revenue Code authorizes the Secretary of the Treasury or his designee to make "substitute for return" (SFR) assessments for persons who fail to file their tax returns. In an SFR assessment, IRS determines the taxpayer's liability using a filing status of "single," the standard deduction, and income information available from third parties and notifies the taxpayer that it will assess this amount unless the taxpayer responds by filing a correct return for a different amount. If the taxpayer fails to respond or disagrees with IRS' calculation but does not file a return, IRS pursues the assessment using standard deficiency procedures.

'ACS call sites are Collection offices that attempt to resolve nonfiler cases through phone calls. Before doing so, IRS scores the cases to determine investigative priorities. For those nonfiler cases that have a high score compared to other collection cases, an ACS tax examiner attempts to identify the nonfiler's telephone number and, if successful, attempts to contact the nonfiler to secure all past due returns. Cases that ACS is unable to resolve, and that meet certain criteria, are transferred to a district office. Nonfiler cases with lower scores may remain inactive in the ACS inventory indefinitely.