process), the coordination of section 482 issues with Customs and the Commerce Department, and the need for further reforms.

On April 9, 1992, the Subcommittee on Oversight held a hearing to receive and review a report by the Department of the Treasury on issues related to the compliance with U.S. tax laws by foreign firms operating in the United States. The Subcommittee also examined the most recent Internal Revenue Service statistics on foreigncontrolled companies and the most recent Federal corporate income tax returns of the 36 companies investigated by the Subcommittee in 1990.

At the hearing, the IRS testified that in 1989, 28 percent of foreign-controlled corporations reported U.S. taxable income as compared to 41 percent of corporations controlled by U.S. persons. The IRS concluded that "there is a compliance problem under section 482, but we cannot quantify it."

The Subcommittee on Oversight continues to review transfer pricing issues.

b. Compliance with Unrelated Business Income Tax Issues

Since the Subcommittee on Oversight's hearings in 1987 and 1988, IRS has been involved in an expanded effort to improve compliance with the unrelated business income tax (UBIT). One of the most significant steps in this effort was to redesign the Form 990. Since 1989, organizations filing the Form 990 must analyze their income to see whether it is from an activity that gives rise to UBIT. This was complemented by a similar change made to Form 990-T in 1990.

During this period IRS has developed cases and established some significant precedents in the courts. There precedents include: American Postal Workers Union, A.F. of L.-C.Ì.O. v. U.S., 925 F. 2d 480 (DC Cir. 1991) (income from sale of health benefit plans to government workers other than postal workers); Portland Golf Club v. Commissioner, 110 S. Ct. 2780 (1990) (income from food and beverage sales to nonmembers); and Disabled American Veterans v. Commissioner, 68 A.F.T.R. 2d 91-5109 (6th Cir. 1991) (income from sale of mailing lists to noncharities).

In addition to publicizing these court wins, IRS has begun to address UBIT issues in its Compliance 2000 initiative. This is an effort to expand upon traditional examination techniques to improve voluntary compliance levels in specific sectors of the tax-exempt community. For example, the publication of examination guidelines on the treatment of corporate sponsorship income in 1992 was, in part, an effort by IRS to include the public in the process of formulating guidance in this area. Corporations have been particularly active in sponsoring activities such as sporting events in recent years and the line between legitimate recognition of corporate donations and the sale of advertising has become blurred.

IRS data on UBIT collection is shown in section 2 of Part IV. In 1986, UBIT collection were $54.9 million. In the year following the Subcommittee's hearings, collections had jumped to $136.0 million in 1988. However, in 1989 and 1990, collections dropped. It is reasonable to assume that the Subcommittee's attention to this issue contributed an increase in the amount of taxes voluntarily paid on liabilities incurred in 1987.

UBIT collections fluctuate due to factors other than compliance, such as operational restructuring, economic circumstances of individual organizations, and bunched collections as a result of judicial decisions and administrative actions. According to IRS, collections began to turn up again in the past 2 years, partly because of an increased audit focus on UBIT issues.

The IRS estimates voluntary compliance rates for the various tax-exempt organizations, based on sampling data from the Taxpayer Compliance Measurement Program (TCMP) survey. The raw data show that the compliance rate for private foundations is quite high-94 percent. Most other organizations exhibit voluntary compliance rates of about 50-60 percent. When these data are statistically adjusted to account for underrepresentation of large exempt organizations, these rates rise to 96 percent for private foundations and 55-75 percent for other organizations.

c. Compliance by Small Corporations

Small corporations with assets below $10 million voluntarily pay about 60 percent of the taxes they owe. The audit coverage of this taxpayer group has dropped dramatically from the 1980 rate of 6.1 percent to 1.6 percent in 1989. According to IRS, the voluntary compliance level for all corporations overall was 61 percent under the last TCMP survey. IRS interprets this to mean that corporations were largely compliant. The measurement of compliance rates is highly sensitive to a small portion of the corporate returns (see table 4). One percent of the population caused a 14 point drop in the overall voluntary compliance rate; while 5 percent of the population caused a 23.3 point drop in the overall rate. In other words, 95 percent of the corporate population has a compliance rate of 84.3 percent. IRS is currently instituting a new selection system to identify and examine this issue.

TABLE 4. PERCENT OF THE CORPORATE POPULATION AND THEIR VOLUNTARY

According to IRS, while the audit coverage of small corporations has decreased from 6.1 percent in 1980, the trend in the last few years has been to increase coverage in these corporate classes. As shown in the following table, coverage and examined returns have increased from fiscal year 1989 through fiscal year 1993.

TABLE 5. AUDIT COVERAGE IN CORPORATIONS WITH ASSETS UNDER $10

The IRS has several methods for selecting Federal tax returns for examination to determine the correct liability of taxpayers. Most returns are selected through a computer program using a mathematical technique to identify those returns with the greatest probability for error. Another computer method selects returns through a random sample under the Taxpayer Compliance Measurement Program to determine taxpayer compliance with the tax law. Also, IRS may select returns to address specific noncompliance areas such as tax shelters and tax protesters.

Further, IRS's document matching program, the Information Returns Program (IRP), is used to identify nonfilers or taxpayers filing a tax return showing information different from the information reported to IRS by third party payers on such items as wages, interest, dividends. The IRS receives more than one billion information returns each year and, in fiscal year 1993, it is estimated that 3.7 million taxpayers will be contacted for discrepancies involving income and deductions and more than 2 million will be contacted for not filing tax returns.

With regard to corporations, IRS's Coordinated Examination Program (CEP) targets large corporations for frequent review using different audit techniques. As of May 31, 1992, there were 1,643 taxpayers in the CEP program, and 1,279 of these corporation had at least one in-process examination and 210 had multicycle examinations.

Total Federal revenues for fiscal year 1992 were $1,092 billion, up 3.5 percent from one year earlier. The IRS is responsible for collecting the vast majority of that total. In fiscal year 1993, IRS estimates that it will spend $.50 for every $100 it collects.

The Subcommittee on Oversight continues to review IRS's management and handling of IRS's accounts receivable inventory (delinquent assessed taxes, penalties, and interest) which has increased by more than $1 billion each month in recent years. The Subcommittee receives quarterly reports from IRS on the accounts receivable inventory. The statute of limitations for IRS collection of tax, following an assessment of the amount due, is 10 years.

IRS has undertaken various activities to address the growing accounts receivable inventory including efforts to address the onequarter of the inventory comprised of erroneous assessments due to IRS or taxpayer errors. Further, IRS is working toward improving the effectiveness of collection efforts and has given all contact employees the authority to grant installment agreements under a streamlined procedure and has liberalized the offer in compromise procedure. Finally, IRS recently began a public awareness and assistance campaign aimed at bringing an estimated 10 million corporate and individual nonfilers back into the tax system voluntarily. At the start of fiscal year 1993, IRS redirected 2,000 examiners to address nonfiler cases.

BUREAU OF ALCOHOL, TOBACCO AND FIREARMS OPERATIONS

The Bureau of Alcohol, Tobacco and Firearms (BATF) was established in 1972 by Department of the Treasury Order 221. The order transferred from IRS to BATF responsibility for regulating the production of alcoholic beverages, administering alcohol and tobacco taxes, and licensing and regulating firearms and explosives. BATF is headquartered in Washington, D.C. and headed by a Director appointed by the Secretary of the Treasury. BATF has two main programs, Compliance Operations (CO) and Law Enforcement (LE). In fiscal year 1993, BATF will employ more than 4,000 employees with an appropriation of over $350 million. BATF will collect over $14 billion in revenue during fiscal year 1993.

BATF's revenue-related responsibilities include: collection of firearms and ammunition excise taxes (assumed in fiscal year 1991); the collection of special occupational taxes (assumed in fiscal year 1987); and depositing, accounting for and taking enforcement action related to alcohol and tobacco excise taxpayers (assumed in fiscal year 1990). BATF reported in 1992 that the special occupational tax compliance rate is 76 percent, up from 60 percent in 1987, and the alcohol and tobacco excises tax compliance rate is approaching 100 percent.