Not All Available Information Was Considered When
Self-Employment Income Was Examined During the Fiscal Year 2000 Earned Income
Tax Credit Initiative
June 2003
Reference Number:
2003-40-135
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
June
13, 2003
MEMORANDUM FOR
COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
COMMISSIONER, WAGE AND
INVESTMENT DIVISION
FROM: Gordon C. Milbourn III /s/ Gordon C.
Milbourn III
Acting Deputy Inspector
General for Audit
SUBJECT: Final Audit Report - Not All Available
Information Was Considered When Self-Employment Income Was Examined During the
Fiscal Year 2000 Earned Income Tax Credit Initiative (Audit # 200340036)
This
report presents the results of our review to determine whether Internal Revenue
Service (IRS) employees appropriately closed correspondence examinations and
considered available systemic information, specifically where it related to the
self-employment income reported by taxpayers and the Earned Income Tax Credit
(EITC) available to them.
This
review is a continuation of our work that began with an allegation made by IRS
employees that the Correspondence Examination function at the IRS’ Austin
Campus inappropriately closed correspondence examination cases during the
Fiscal Year (FY) 2000 EITC Initiative.
In December 2002, we completed our initial review and issued a report on
the Austin Campus’ activities. We
reported that IRS employees inappropriately closed tax returns examined as part
of this initiative without considering available systemic information to verify
taxpayers’ self-employment income. IRS
management agreed with our findings and stated that they would request guidance
from the IRS’ Office of Chief Counsel to determine the effect of the
disallowance of the self-employment income on Social Security quarter credits
and taxpayers’ rights.
In
summary, tax returns examined as part of the FY 2000 EITC Initiative at all 10
IRS campuses were closed inappropriately without considering available systemic
information to verify taxpayers’ self-employment income. This resulted in approximately 3,547 taxpayers
losing Social Security quarter credits and the Federal Government losing
approximately $8.3 million in unassessed taxes. This happened because the national guidelines for working
correspondence examination cases during this initiative were confusing and in
conflict with general IRS Examination guidelines. IRS employees were instructed to make adjustments to taxpayers’
income tax returns without first researching an IRS computer system to verify
income reported by third parties.
Adjustments included disallowing reported self‑employment income
and related expenses, decreasing or eliminating the self‑employment tax,
and disallowing the EITC claimed.
Additionally, whether an adjustment was made depended on when the
correspondence examination case was processed or if the campus Examination
Quality Assurance (QA) group reviewed the case and considered non‑verification
of third‑party information as an error.
This resulted in unequal treatment of taxpayers.
Further, the Correspondence Examination function examined tax returns that should not have been selected for the EITC Schedule C Preparer Tax Year (TY) 1999 and EITC Schedule C TY 1999 projects, or should have been referred to the Field Examination function. This occurred because most of the campuses did not properly research or classify the tax returns as required by the project guidelines and IRS Examination procedures. Consequently, the campuses incurred extra examination time that could have been put to better use.
We
recommended that the Commissioners, Small Business/Self-Employed (SB/SE) and
Wage and Investment (W&I) Divisions, consult with the IRS’ Office of Chief
Counsel to determine the effect on taxpayers’
rights and entitlements when valid self-employment income was disallowed for
some of the taxpayers examined under the FY 2000 EITC Initiative. In addition, they should ensure that IRS campuses properly
research and classify tax returns for all future EITC initiatives, especially
for those tax returns that cannot be electronically screened.
Copies of this
report are also being sent to the IRS managers who are affected by the report
recommendations. Please contact me at
(202) 622-6510 if you have questions or Michael R. Phillips, Assistant
Inspector General for Audit (Wage and Investment Income Programs), at (202)
927-0597.
Taxpayer Accounts Were Adjusted Without Consideration of All Available Systemic Information
Campuses Could Have Expended Correspondence Examination Resources More Effectively
Appendix I – Detailed Objectives, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Outcome Measures
Appendix V – Management’s Response to the Draft Report
This review is a continuation of our work that began with an allegation made by Internal Revenue Service (IRS) employees that the Correspondence Examination function at the IRS’ Austin Campus inappropriately closed correspondence examination cases during the Fiscal Year (FY) 2000 Earned Income Tax Credit (EITC) Initiative. Specifically, the allegation was that IRS employees were directed by management to close correspondence examinations for assessment without researching the Integrated Data Retrieval System (IDRS) to verify self‑employment income reported by taxpayers who also claimed the EITC on their tax returns.
In December 2002, we completed our initial review and issued a report on the Austin Campus’ activities. We found that some tax returns examined as part of the IRS’ FY 2000 EITC Initiative at the Austin Campus were closed inappropriately without considering systemic information to verify taxpayers’ self-employment income. This happened because national guidelines for working these correspondence examination cases during this initiative were confusing and in conflict with general IRS Examination guidelines. IRS management agreed with our findings and stated that they would request guidance from the IRS’ Office of Chief Counsel to determine the effect of the disallowance of the self-employment income on Social Security quarter credits and taxpayers’ rights.
These cases were included in two projects worked as part of the IRS’ FY 2000 EITC Initiative. These projects were developed through IRS research on taxpayers who intentionally filed tax returns with erroneous information in order to maximize their tax refunds. Criteria were developed to identify tax returns with pre‑determined characteristics that were considered at high risk for refund fraud. These criteria were then loaded into the IRS’ Electronic Fraud Detection System (EFDS) as filters. If the tax returns met filter criteria, the system selected them for examination.
Although the EFDS filters had other criteria, the distinguishing selection criterion for these tax returns was that the taxpayers reported self-employment income and claimed the EITC. The majority of the tax returns included in the FY 2000 EITC Initiative were for TY 1999, but late-filed TYs 1997 and 1998 tax returns, and some TYs 2000 and 2001 tax returns, were also included.
The National Headquarters Examination function froze the tax refunds and sent initial contact letters to the taxpayers examined under the two FY 2000 EITC Initiative projects. These letters informed taxpayers that the IRS had frozen their tax refunds and would be examining their tax returns. The returns were then assigned to individual IRS campuses to be classified and examined. However, due to confusing national project guidelines, delays caused by problems with the Report Generation System (RGS), inadequate resources, and other priorities, the majority of the tax returns selected for these two projects were not classified.
After the tax returns were examined, letters were sent to the taxpayers requesting information to support their self‑employment income and EITC claims. If the taxpayers responded to these letters with support for their self‑employment income and the EITC, the returns were accepted as filed. If the taxpayers responded but could not provide sufficient support, if the taxpayers did not respond, or if the letters were returned to the IRS as undeliverable, the IRS issued Statutory Notices of Deficiency and the taxpayers’ accounts were adjusted by either one or all of the following:
· Disallowing the reported self‑employment income and related expenses.
· Disallowing exemptions for the qualifying children and EITC claimed.
· Decreasing the income tax.
· Decreasing or eliminating the self‑employment tax.
Throughout the examination process, the IRS offers taxpayers who disagree with proposed adjustments the opportunity to appeal the proposed adjustments. Taxpayers can appeal proposed adjustments to a local Appeals Office, which is separate from and independent of the local IRS office or campus. After the Statutory Notice of Deficiency is issued, taxpayers have the right to file a petition with the Tax Court.
We conducted testing in the Small Business/Self-Employed (SB/SE) Division Headquarters in Lanham, Maryland; the Wage and Investment (W&I) Division Headquarters in Atlanta, Georgia; the Andover, Atlanta, Austin, Brookhaven, Cincinnati, Fresno, Kansas City, Memphis, Ogden, and Philadelphia Campuses; and the Taxpayer Advocate Service offices in New York, New York and Washington, D.C., between November 2002 and March 2003.
The audit was conducted in accordance with Government Auditing Standards. Detailed information on our audit objectives, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Tax returns examined under the EITC Schedule C Preparer TY 1999 and EITC Schedule C TY 1999 projects as part of the IRS’ FY 2000 EITC Initiative were closed inappropriately without IRS employees considering systemic information to verify taxpayers’ self‑employment income. This happened because the national guidelines for working correspondence examination cases under these projects were confusing and in conflict with general IRS Examination guidelines.
A review of 319 cases sampled from a total population of 32,251 correspondence examination cases worked at the 10 IRS campuses during this initiative showed that the IRS adjusted the self‑employment net earnings reported on 43 tax returns (13.5 percent) even though it had valid third‑party information supporting the taxpayers’ claims of self‑employment income. The IRS also disallowed the exemptions for the dependents claimed by the taxpayers. Eliminating the dependent exemption and adjusting the self‑employment net earnings resulted in the disallowance of the EITC. As a result, taxpayers lost rights and entitlements because the IRS reported incorrect information to the Social Security Administration (SSA), and the Federal Government lost revenue through lost self‑employment and income taxes. For a more detailed description of the results, see Appendix IV.
Specifically, of the 43 taxpayers that had valid self‑employment net earnings adjusted:
· Thirty-five taxpayers lost 129 Social Security quarter credits to which they are entitled. Applying our sample results to the overall population, approximately 3,547 taxpayers lost 13,074 Social Security quarter credits. The remaining eight taxpayers did not lose Social Security quarter credits even though the IRS disallowed the self‑employment net earnings and reduced the self‑employment taxes. This occurred because in one instance the IRS, when closing the correspondence examination case, did not properly code it to advise the SSA to remove the taxpayer’s quarter credits. In addition, seven other taxpayers had enough wages to earn the maximum Social Security quarter credits for the year.
The IRS reports adjustments to self‑employment net
earnings to the SSA. The SSA uses the
IRS’ information to adjust the taxpayers’ Social Security quarter credits. When, and if, these taxpayers realize they
did not receive the credits for these quarters, they will have to prove they
earned this income to the SSA before they will be eligible to receive the
correct amount of Social Security benefits.
· Forty-three taxpayers had $60,625 in unassessed self‑employment taxes. Applying our sample results to the overall population, the IRS did not assess approximately $6.1 million in self‑employment taxes. In addition, the revenue from the interest and penalties that should have been assessed for these unpaid taxes was lost.
· Thirty-five taxpayers had $21,849 in unassessed income taxes. Applying our sample results to the overall population, the IRS did not assess approximately $2.2 million in income taxes. In addition, the revenue from the interest and penalties that should have been assessed for these unpaid taxes was lost. The remaining eight taxpayers did not have any income taxes due after considering the standard deduction and personal exemptions from their earnings. In addition, these taxpayers would not have received any refunds because either they did not have any withholding or the self‑employment taxes still owed would have been more than the refunds.
Research was not performed
before classification and was not always considered when examining the cases
The Internal Revenue Manual (IRM) requires that research be performed before returns are assigned for examination, including researching the IRS’ computers to determine:
· The taxpayer’s complete filing history.
· Detailed information on individual tax years.
· Taxpayer sources of income and payor information.
The IRM also lists standards that should be met for quality examinations. Two of these standards measure whether:
· Consideration is given to large, unusual, or questionable items during the course of the examination.
· The examined issues are completed to the extent necessary to provide the examiner sufficient information to determine the substantially correct tax based on the correct application of tax law.
Management at six IRS campuses stated that they did not classify the FY 2000 EITC Initiative tax returns or research the IDRS for historical information to determine if the taxpayers had a history of self‑employment income or current self‑employment income before assigning the cases.
Campus management decided not to classify the tax returns because (1) they believed the National Headquarters Examination function pre‑selected the tax returns, (2) the classifiers did not have access to the IDRS, (3) resources were limited, and (4) TY 1999 third‑party information was not available when the processing for these tax returns began.
The guidelines for the EITC Schedule C Preparer TY 1999 and EITC Schedule C TY 1999 projects relied heavily on advice that the IRS’ Office of Chief Counsel provided in Calendar Year 1998. This advice was in response to a question from the Chief, Examination Branch, at the Brookhaven Campus about the appropriateness of disregarding net earnings from self‑employment income when taxpayers claimed the EITC. This advice stated that when taxpayers do not comply with requests for substantiation of the income or if record keeping requirements have not been met, the net earnings from self‑employment income may be disregarded, thereby eliminating the taxpayers’ EITC. However, the advice did not address whether the IRS should research its own computer systems and consider income information reported by third parties prior to disallowing the taxpayers’ claims.
The local Correspondence Examination procedures at 9 of the
10 IRS campuses required employees to research third‑party information
that might support taxpayers’ claims if the taxpayers responded to the IRS’
request for information. However, no
research was to be done on cases once a Statutory Notice of Deficiency was
issued.
Research was not performed
when third-party information became available
By the time third-party information for TY 1999 became
available on the IDRS, the IRS had already issued Statutory Notices of
Deficiency to many of the taxpayers examined under these projects. IRS procedures do not require additional
research on cases where the taxpayers have been issued this notice. This policy normally applies when deductions
or credits are being denied and there is no additional information available on
the IDRS.
The FY 2000 EITC Initiative
continued for more than a year after the initial processing started, and
initial research for third‑party information had not been performed on
these cases. Although we believe the
IRS’ policy of not performing additional research after issuance of a Statutory
Notice of Deficiency is reasonable under normal circumstances, we believe that
additional research should have been performed on these cases before the final
assessments were made to taxpayers’ accounts to ensure taxpayers were not
adversely affected.
Employees at two IRS campuses
believed that the IRS’ actions of disallowing self‑employment net
earnings supported by third‑party information would negatively affect the
taxpayers’ Social Security benefits.
Yet, the Correspondence Examination function’s policy at these two campuses
was to consider current third‑party information only when taxpayers
responded to the IRS’ information requests.
A lack of response from
taxpayers in EITC examinations does not necessarily mean the taxpayers’
reported information is incorrect. The
Taxpayer Advocate Service stated in its FY 2002 report to the Congress that:
“A variety of reasons have been
put forth as to why taxpayers do not respond in EITC examinations, including
language and literacy barriers, non‑receipt of notices, lack of time or
resources to gather documentation, lack of telephone access, lack of
representation, feeling of intimidation, and fear of government intrusion….”
Some Examination Quality
Assurance (QA) groups took exception to cases where their research showed third‑party
income reported to the IRS
The Examination QA groups at all of the campuses reviewed a small sample of the FY 2000 EITC Initiative correspondence examinations. At six campuses, when the QA groups determined that the tax examiners did not consider all available third‑party information, they returned the cases to the tax examiners to complete the research and counted these cases as having errors. Three of these six QA groups did so only for cases where taxpayers responded to the information requests, while the remaining three did not distinguish between cases where taxpayers responded and those where taxpayers did not respond. At the remaining four campuses, the QA groups did not regard non‑consideration of all available current third‑party information as an error because they believed the cases were pre‑selected or the verification of IDRS research was outside their scope of review.
The actions taken by the IRS during its FY 2000 EITC Initiative resulted in unequal treatment of taxpayers. Even though nine campuses continued these practices for the FY 2001 EITC Initiative, Austin Campus Correspondence Examination function management issued new procedures requiring its tax examiners to research the IDRS for historical third‑party information before disallowing self‑employment net earnings.
In FY 2002, the IRS implemented automated screening filters
nationwide to consider historical self-employment income data prior to
assigning the case to a tax examiner.
The filter system automatically checks prior tax year third‑party
reported income data if a Schedule C tax return meets certain income,
self-employment expense, number of qualifying children, and filing status
criteria. Those Schedule C tax returns
that fall outside the automated filter criteria would have to be manually
classified before assignment in accordance with the IRM.
1. The Commissioners, SB/SE and W&I Divisions, should consult with the IRS’ Office of Chief Counsel to determine the effect on taxpayers’ rights and entitlements when valid self‑employment income was disallowed for some of the taxpayers examined under the FY 2000 EITC Initiative.
Management’s Response: IRS management stated that they agreed that the guidelines for examining tax returns in connection with this initiative were unclear. In February 2003, IRS management asked the IRS’ Office of Chief Counsel to determine if any taxpayers’ rights or entitlements were violated as a result of disallowing the Schedule C income and related EITC, and if so, how to rectify these violations.
IRS campuses selected and examined tax returns that should not have been worked by the Correspondence Examination function under the EITC Schedule C Preparer TY 1999 and EITC Schedule C TY 1999 projects. This occurred because most of the IRS campuses did not properly research or classify the FY 2000 EITC Initiative tax returns before assigning these cases for examination.
The guidelines for these projects state that Schedule C tax returns must be classified. Only those cases with little or no Schedule C expenses and little or no wages should be worked under the FY 2000 EITC Initiative.
Our review of 319 sampled cases showed that the IRS campuses examined 142 tax returns (44.5 percent) that either should have been sent to the Field Examination function or should not have been worked under these projects. As a result, the IRS could have realized cost savings in funds put to better use.
Specifically, we estimate that the IRS campuses spent approximately 2 hours more per case examining tax returns that should not have been worked by the Correspondence Examination function under these project codes. Tax examiners in the Correspondence Examination function are not trained to examine the more complex issues associated with business income and expenses. This caused the campuses’ examination rates for these tax returns to average 2 hours more than the typical EITC Schedule C Preparer TY 1999 or EITC Schedule C TY 1999 project correspondence examination rate. Applying our sample results to the overall population, the IRS would have realized approximately $460,000 in cost savings had it selected and reviewed the proper cases for these projects.
2. The
Commissioners, SB/SE and W&I Divisions, should ensure that IRS campuses
properly research and classify tax returns for all future EITC initiatives,
especially for those tax returns that cannot be electronically screened.
Management’s
Response: IRS management stated
that in January 2002, filters were developed in the SB/SE Division to “look back” to prior years for Schedule C
activity. Tax returns that did not meet
the parameters of the Schedule C EITC filters were assigned a specific project
code. Due to the complexity of the
Schedule C issues, the IRS manually classified these tax returns. In January 2003, the IRS refined its
filters. While the filters continue to
“look back” to identify any historical Schedule C activity, tax returns that do
not meet filter parameters are now classified through an automated
process. IRS management also stated
that
the vast majority of tax returns selected for review in the W&I Division
would not contain any additional issues that would require manual screening.
Appendix I
Detailed Objectives, Scope,
and Methodology
The overall objective of this review was to determine whether Internal Revenue Service (IRS) employees appropriately closed correspondence examinations and considered available systemic information, specifically where it related to the self-employment income reported by taxpayers and the Earned Income Tax Credit (EITC) available to them. In addition, we verified whether controls were in place to ensure available systemic information is considered during current correspondence examinations. We conducted the following tests to accomplish these objectives:
I.
Interviewed
Reporting Compliance management from the Small Business/Self-Employed and Wage
and Investment Divisions and managers from the Correspondence Examination
function and the Examination Quality Assurance (QA) groups at each of the 10
campuses on the guidance provided to tax examiners for the EITC Schedule C
Preparer Tax Year (TY) 1999 and EITC Schedule C TY 1999 projects. Additionally, we gathered information on
Correspondence Examination function practices used during the Fiscal Year
(FY) 2000 EITC Initiative.
II.
Reviewed a
statistical sample of 319 tax returns out of a total population of 32,251 EITC
Schedule C Preparer TY 1999 and EITC Schedule C TY 1999 project cases closed by
the IRS campuses.
A.
Determined
the following:
1.
Which tax
returns should have been worked by the Correspondence Examination function.
2.
Whether IRS
campuses spent extra time on correspondence examinations of non‑EITC
Schedule C Preparer TY 1999 and EITC Schedule C TY 1999 project tax returns or
Field Examination function tax returns.
3.
Whether the IRS inappropriately
disallowed valid self‑employment income that was supported by third‑party
reported information.
4.
The amount
of income and self-employment taxes that the IRS should have assessed.
5.
The Social
Security impact on the affected taxpayers.
B.
Reviewed
Correspondence Examination function case files to verify whether the self‑employment
net earnings were disallowed. We
derived the sample size by using the following: population of 32,251 cases; confidence level of 95 percent;
precision level of +4 percent; and expected error rate of 16 percent.
III.
Interviewed
the managers from the Correspondence Examination function and the QA groups at
each of the 10 campuses to identify corrective actions the IRS took to rectify
the disallowance of valid self-employment income on cases where third-party
reported information supported the taxpayers’ claims. Additionally, we judgmentally selected and reviewed the
correspondence examination cases of 20 TY 2001 Schedule C tax returns claiming
the EITC, which had been closed by the Brookhaven and Philadelphia campuses
during FY 2002, to determine whether current case selection filters would
research systemic information during the classification process.
Appendix II
Major Contributors to This Report
Michael R. Phillips, Assistant Inspector General for Audit
(Wage and Investment Income Programs)
Augusta R. Cook, Director
Bryce Kisler, Audit Manager
Julia Tai, Senior Auditor
Sylvia Sloan-Copeland, Auditor
Appendix III
Commissioner N:C
Deputy
Commissioner, Services and Enforcement
N:DC
Acting Deputy
Commissioner, Small Business/Self-Employed Division S
Deputy
Commissioner, Wage and Investment Division
W
Director, Compliance S:C
Director, Compliance W:CP
Director, Strategy
and Finance W:S
Chief Counsel CC
National Taxpayer Advocate TA
Director, Legislative Affairs CL:LA
Director, Office of
Program Evaluation and Risk Analysis
N:ADC:R:O
Office of Management
Controls N:CFO:AR:M
Audit Liaisons:
Chief, Customer Liaison, Small
Business/Self-Employed Division S:COM
Program/Process Assistant Coordinator,
Wage and Investment Division W:HR
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to the Congress.
Type and Value of Outcome Measure:
· Taxpayer Rights and Entitlements – Potential; 3,547 taxpayers affected when the Internal Revenue Service (IRS) disallowed the taxpayers’ valid self‑employment income for a total loss of 13,074 Social Security quarter credits (see page 4).
Methodology Used to Measure the Reported Benefit:
We reviewed a statistical sample of 319 Earned Income Tax
Credit (EITC) Schedule C Preparer Tax Year (TY) 1999 and EITC Schedule C TY
1999 project tax returns closed by the IRS campuses. We researched the
Integrated Data Retrieval System (IDRS) and contacted the Social Security
Administration to calculate the number of Social Security quarter credits these
taxpayers lost. Using our sample
results of 35 taxpayers that lost 129 Social Security quarter credits, we
calculated the percentage of taxpayers that lost Social Security quarter
credits.
·
35/319 = .110
or 11.0 percent
We then calculated
the average number of Social Security quarter credits lost per case.
·
129/35 = 3.6857
Applying these
calculations to the overall population of 32,247 cases (32,251 – 4), we
estimate that 3,547 taxpayers (32,247 x .110) lost approximately 13,074 Social
Security quarter credits (32,247 x .110 x 3.6857).
Type and Value of Outcome Measure:
· Increased Revenue – Potential; the IRS did not assess approximately $6.1 million in self‑employment taxes (see page 4).
Methodology Used to Measure the Reported Benefit:
For our sample of 319 EITC Schedule C Preparer TY 1999 and
EITC Schedule C TY 1999 project tax returns, we researched the IDRS to calculate the amount of self-employment taxes
that should have been assessed by the IRS.
Using our sample results of 43 taxpayers with $60,625 in unassessed self‑employment
taxes, we calculated the percentage of unassessed self-employment tax cases.
·
43/319 = .135
or 13.5 percent
We then calculated
the average amount of unassessed self-employment taxes per case.
·
$60,625/43 =
$1,409.88
Applying these
calculations to the overall population of 32,247 cases, we estimate that the
IRS did not properly assess approximately $6,137,694 in self‑employment
taxes (32,247 x .135 x $1,409.88).
Type and Value of Outcome Measure:
· Increased Revenue – Potential; the IRS did not assess approximately $2.2 million in income taxes (see page 4).
Methodology Used to Measure the Reported Benefit:
For our sample of 319 EITC Schedule C Preparer TY 1999 and
EITC Schedule C TY 1999 project tax returns, we researched the IDRS to
calculate the amount of income tax that should have been assessed by the
IRS. Using our sample results of 35 taxpayers with $21,849 in unassessed income taxes,
we calculated the percentage of unassessed income tax cases.
·
35/319 = .110
or 11.0 percent
We then calculated
the average amount of unassessed income taxes per case.
·
$21,849/35 =
$624.26
Applying these
calculations to the overall population of 32,247 cases, we estimate that the
IRS did not properly assess approximately $2,214,356 in income taxes (32,247 x
.110 x $624.26).
Type and Value of Outcome Measure:
· Inefficient Use of Resources – Potential; approximately $460,000 spent examining tax returns in the Correspondence Examination function that should not have been selected for the EITC Schedule C Preparer TY 1999 and EITC Schedule C TY 1999 projects, or should have been referred to the Field Examination function (see page 10).
Methodology Used to Measure the Reported Benefit:
Based on case selection criteria that were to be used during the FY 2000 EITC Initiative, we classified the 319 tax returns in our sample (with the assistance of a Wage and Investment Division Program Analyst) to identify the type of examinations required. We obtained the examination hours incurred from the Audit Information Management System (AIMS) and computed the average examination hours by the type/location of examination as determined by the Wage and Investment Division Program Analyst. For our 319 sampled tax returns, the IRS spent on average an extra 1.94 hours examining tax returns that should not have been worked by the Correspondence Examination function under the EITC Schedule C Preparer TY 1999 and EITC Schedule C TY 1999 projects. For FYs 2000-2001, the IRS estimated the cost of tax examiners at $16.50 per direct hour. The campuses incurred an extra $4,545 in expenses from reviewing 142 tax returns that should not have been selected for examination under the 2 projects. Using our sample results, we calculated the percentage of cases that should not have been worked by the Correspondence Examination function under the EITC Schedule C Preparer TY 1999 and the EITC Schedule C TY 1999 projects.
· 142/319 = .445 or 44.5 percent
We then calculated
the additional average cost per case as a result of the Correspondence
Examination function working these cases under the EITC Schedule C Preparer TY
1999 and the EITC Schedule C TY 1999 projects.
·
$4,545/142 =
$32.01
Applying these calculations to the overall population of 32,247 cases, we estimate that the IRS could have realized approximately $459,341 in cost savings (32,247 x .445 x $32.01) had it selected the proper cases to work under the EITC Schedule C Preparer TY 1999 and the EITC Schedule C TY 1999 projects.
Appendix V
Management’s Response to
the Draft Report
The response
was removed due to its size. To see the
complete response, please go to the Adobe PDF version of the report on the
TIGTA Public Web Page.