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MSP #11: WORKLOAD SELECTION

The IRS Does Not Sufficiently Incorporate the Findings of Applied and Behavioral Research into Audit Selection Processes as Part of an Overall Compliance Strategy

TAS Recommendations and IRS Responses

1
1.

TAS RECOMMENDATION #11-1

Adopt “increasing voluntary compliance” as the primary measure for evaluating both enforcement and taxpayer service initiatives.

IRS RESPONSE TO RECOMMENDATION: Increasing voluntary compliance is a fundamental continuous goal for tax administration. The IRS already considers the impact of case selection methods on voluntary compliance for both enforcement and taxpayer service initiatives. To that end, across the IRS, we have been continuously refining our workload strategy so that it is informed, in part, by a variety of quantitative and qualitative research methods, so that it efficiently uses data analytics and considers numeric, return based, geographic, demographic, and behavioral economic factors, as well as the impact of perceptions of fairness on voluntary tax compliance.  While we agree that voluntary compliance is (and should continue to be) a very visible and present goal for IRS, there are challenges with construing it is as a primary measure for evaluating all enforcement and taxpayer service initiatives. It is difficult to relate voluntary compliance in a rigorous and meaningful way to all examination and taxpayer service efforts.  This is because increasing voluntary compliance is not applicable as a measure to all initiatives. For instance, an initiative regarding specific transactions in a specific industry can be addressed through enforcement. An assessment can be made on subsequent years to see if these transactions are now being reported correctly industry-wide. This could be an indication of increased voluntary compliance. For initiatives where it is possible to measure voluntary compliance, we are attempting to capture that measurement (for example, initiatives around EITC and IRDM). It is much more difficult to assess the impact that a generic initiative, such as CAP or CMO, spanning industries and code sections, has on voluntary compliance. There are too many factors involved with compliant/non-compliant behavior to point to any specific item in a generic initiative as being the driving force behind increased voluntary compliance.

CORRECTIVE ACTION: N/A

TAS RESPONSE: We are pleased the IRS recognizes voluntary compliance as a key, if not primary, measure of its enforcement and service initiatives. However, despite its assertion that it considers the impact of case selection methods on voluntary compliance, the IRS has not pointed to any specific measures to that end nor has it identified or shared with us any studies it conducted that demonstrate a particular procedure’s impact on voluntary compliance. Moreover, the IRS maintains it is not able to accurately measure the effect of generic service and compliance initiatives on voluntary compliance, a position the National Taxpayer Advocate rejects. The IRS evidently does not intend to attempt or plan to research to determine how it could measure the effect of its initiatives on voluntary compliance as its response does not contain any action items. As discussed in this Most Serious Problem, TAS has itself conducted research into the factors that drive compliance. We have explored the long-term impact on voluntary compliance of liens, penalties, and most recently, audits. Relevant research studies found in volume two of our annual reports include:

  • Estimating the Impact of Audits on the Subsequent Reporting Compliance of Small Business Taxpayers (National Taxpayer Advocate 2014 Annual Report to Congress);
  • Do Accuracy-Related Penalties Improve Future Reporting Compliance by Schedule C Filers? (National Taxpayer Advocate 2013 Annual Report to Congress);
  • Factors Influencing Voluntary Compliance by Small Businesses: Preliminary Survey Results and Small Business Compliance: Further Analysis of Influential Factors (National Taxpayer Advocate 2012 and 2013 Annual Reports to Congress);
  • Investigating the Impact of Liens on Taxpayer Liabilities and Payment Behavior (National Taxpayer Advocate 2012 Annual Report to Congress); and
  • Marjorie Kornhauser, Normative and Cognitive Aspects of Tax Compliance: Literature Review and Recommendations for the IRS Regarding Individual Taxpayers (National Taxpayer Advocate’s 2007 Annual Report to Congress).

This work can be done with respect to specific issues and the IRS can transfer the knowledge gleaned to other issues and form the basis of pilots.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

2
2.

TAS RECOMMENDATION #11-2

Not only incorporate applied and behavioral research into all of its compliance initiatives, but also fund or activate compliance initiatives only after adopting an integrated strategy that articulates how the IRS will:

  1. Use education, outreach, partners, assistance, non-invasive compliance touches, and enforcement touches to increase compliance;
  2. Test the initiative before full deployment, and use tests or pilots to project the effect on future compliance;
  3. Measure the initiative’s success, including conducting surveys and focus groups both before and after the initiative; and
  4. Adjust its overall compliance plan in the light of continuing research findings and trends.

IRS RESPONSE TO RECOMMENDATION: We agree with the importance of education and outreach. IRS employs a robust communication plan that incorporates outreach and education to a wide variety of groups including tax practitioners, industry groups and other stakeholders. For example, IRS partners with external stakeholder groups, such as the Tax Executives Institute, AICPA and industry-specific groups, in order to promote transparency, cooperation and resolution of issues. We solicit feedback from external stakeholders to improve tax forms and publications as well as information on IRS.gov in an effort to increase compliance through non-invasive means. Through the use of innovative tools such as the Payment Mix Comparison Tool, we leverage our relationship with tax practitioners to increase compliance. We also firmly believe in the benefits of the test and learn approach, which we have found to be a good methodology. When conducting compliance initiative projects (CIP), IRS generally begins with a Part 1 which involves auditing a limited number of taxpayers. When issues are identified that appear to be widespread, we leverage that knowledge to expand to a Part 2 CIP incorporating outreach and education into the strategy.  Likewise, we often pilot programs before full deployment, and then use pilot results and experiences in the decision-making process for full-deployment.  And we make use of surveys and focus groups when rolling out new initiatives. The Compliance Concept of Operations and the Compliance Capabilities Vision strategies are being finalized. Many of the approaches recommended by NTA will be addressed as these strategies are implemented. Adopting the full four-part integrated strategy the NTA recommends in every case seems unnecessary. Sometimes, the need for a compliance initiative is clear and compelling, and some initiatives can (and should) be taken without first conducting the uniform and somewhat exhaustive analysis the NTA proposes.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS agrees the recommended approach of adopting an integrated strategy to compliance is appropriate and it intends to implement some of the recommended elements as part of the forthcoming Compliance Concept of Operations and the Compliance Capabilities Vision initiatives, even though it believes the approach is not necessary for all compliance initiatives. The National Taxpayer Advocate has not observed this promised approach emerging in the forthcoming initiatives, which do not incorporate the findings of applied and behavioral research. Even if the IRS adopts initiatives with varying strategic emphases, it should still consider and articulate the importance of each component of the recommended approach prior to funding or activating compliance initiatives.

In its response, the IRS states that where the need for a compliance initiative is clear and compelling, there is no reason to conduct the “somewhat exhaustive” analysis we propose. On the contrary, where there is a “clear and compelling” need, the IRS should be able to clearly articulate it, and that articulation would include the four components we identify. As the IRS undertakes the research and analysis we recommend, it could rely on a library of research and a basic understanding of taxpayer behaviors and factors driving compliance, which would allow it to avoid reinventing the wheel with each initiative.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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