Recommendations to the Commissioner of Internal Revenue

Agency Comments and Our Evaluation

Keeping nonfilers compliant once they have been brought into compliance is critical if IRS is to increase voluntary compliance and maintain control over its nonfiler workload. IRS' recently approved strategy for dealing with recidivism, if implemented, would be a big step in the right direction. Part of that strategy calls for reducing the number of notices sent to recidivists. There is no mention, however, of any intent to review the language of the remaining notices to ensure that it is still appropriate.

To enhance any future IRS efforts directed at nonfiling, we recommend 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.

• If IRS decides to send fewer notices to recidivists, it should determine whether the language of the remaining notices should be revised.

We requested comments on a draft of this report from the Commissioner of Internal Revenue or her designee. On December 4, 1995, we met with several IRS officials, including the National Director, Service Center Compliance; the National Director, Compliance Specialization; the Acting Director of the Office of Return Delinquency; and the Acting Director for Special Compliance Programs. They provided us with oral comments, which the National Director, Service Center Compliance, reiterated and expanded on in memoranda dated December 11, 1995, and February 12, 1996.

In commenting on our draft, IRS said that it agreed with only one of our three recommendations the one dealing with the language of notices sent to recidivists.

IRS said that our proposed recommendation on timely contact with nonfilers was unnecessary because IRS has been working to accelerate the

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Opportunities to Improve Future IRS
Noafler Efforts

processing of information returns for several years with the intent of making earlier contacts with nonfilers and filers who have underreported their income. We have revised the body of our report to more clearly acknowledge those efforts. However, our recommendation was intended to go beyond the initial identification of and contact with nonfilers. Our intent was to encourage IRS to make more timely telephone contact with nonfilers. Although the accelerated processing of information returns should speed up the entire process and lead to quicker telephone contact, we believe that there are other steps IRS could take, similar to its Early Intervention project for delinquent taxes, to help achieve that end. In that regard, we think our recommendation is necessary, and we have reworded it to clarify the focus on earlier telephone contact.

In response to our revised recommendation, IRS said that it (1) has established the framework for expanding the Early Intervention Project to business nonfilers, if sufficient resources become available; and (2) does not anticipate having sufficient staffing to expand the Project to individual nonfilers. IRS said that if circumstances change in the future, it may find it feasible to consider including individual nonfilers in the Project. Although we acknowledge the resource limitations, we wonder whether it might be feasible for IRS to revise the Early Intervention Project to include a mix of delinquent tax and nonfiler cases, even if that means having to exclude some delinquent tax cases, rather than limiting the Project to only delinquent tax cases. That might enable IRS to assess the relative benefits of early intervention on both types of cases.

IRS took most exception to our proposed recommendation on assigning
nonfiler case work. IRS said that the recommendation was unnecessary and
reflected a basic misunderstanding of the purpose of the Nonfiler Strategy.
IRS said that the decision to assign nonfiler cases to Examination
employees, even those capable of working higher graded, more productive
cases, was (1) a management decision based on the view that maintaining
the viability of the nonfiler program outweighed possible short-term
productivity losses in other areas and (2) a short-term response to stem
the growth of the nonfiler inventory that was never intended as an ongoing
work assignment practice. IRS also said that a review of the special nonfiler
auditing standards makes it clear that techniques needed under the
nonfiler initiative required more technical expertise than could be
provided by paraprofessionals.

As noted earlier, it was not our intent to second-guess IRS' staffing decisions for the Nonfiler Strategy but rather to suggest that IRS consider

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Opportunities to Improve Future IRS
Nonfiler Efforts

other options in staffing any future nonfiler initiatives. Our work at four district offices indicated that other options might be more efficient, depending on the availability of staff. In that regard, our review of case files in four district offices indicated that the audit work on nonfiler cases in those districts was often less involved than suggested by the auditing standards referred to by IRS and thus often did not require the expertise of GS-11 revenue agents. That perception was supported by many of the district office Examination staff and managers we interviewed who said that nonfiler work could be done by lower graded staff. Those lower graded staff could be revenue agents below GS-11 or tax auditors or, for some tasks, paraprofessionals or administrative staff. We revised the report and reworded the recommendation to avoid the impression that we are advocating that all nonfiler work be done by paraprofessionals.

IRS also questioned how we could draw conclusions about staffing when our review was limited to four districts and our results are not projectable. We believe the scope of our work was sufficient to raise questions about the level of staffing needed to do the kind of nonfiler case work that was done during the Nonfiler Strategy. We agree, however, that it was not sufficient to support a specific recommendation that IRS adopt different staffing patterns for any future nonfiler effort (which is how we had worded the recommendation in our draft report). Thus, we revised our recommendation to (1) give IRS more flexibility in deciding how, if at all, the staffing of future nonfiler efforts should differ; and (2) suggest that IRS, in considering its options, solicit input from managers and staff in district offices that we did not visit.

After we revised our recommendation, IRS advised us that it will, in the future, "consider using appropriately graded employees, if available."

Appendix I

Profiles of Individual Nonfilers

IRS' Statistics of Income Division developed a profile of individual nonfilers
from returns filed in fiscal year 1993 that were 360 days or more late. That
profile showed that 1.7 million taxpayers filed 2.6 million returns that were
360 days or more late in fiscal year 1993. Of the 1.7 million taxpayers,
71 percent filed 1 return, 18 percent filed 2 returns, and 11 percent filed 3
or more returns.

Of the 2.6 million returns:

Forty-three percent were at least 1 year but less than 2 years past due,
41 percent were either 2 or 3 years late, and 16 percent were more than 3
years overdue.

Forty percent were from wage earners with no self-employment income;
23 percent were filed by those claiming self-employment income or some
combination of wages and self-employment income; and 5 percent were
filed by persons claiming income only from other sources, such as interest
and dividends, alimony, and capital gains. No data were available for the
other 32 percent.

• Fifty-five percent involved a balance due, 38 percent involved a refund, and 7 percent had a zero balance.