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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, January 6, 2013

GAO: IRS Could Significantly Increase Revenues by Better Targeting Enforcement Resources

GAO LogoThe Government Accountability Office has released IRS Could Significantly Increase Revenues by Better Targeting Enforcement Resources:(GAO-13-151):

The IRS spends most of its enforcement resources on examinations. Correspondence exams of individual tax returns, which target fewer and simpler compliance issues, are significantly less costly on average than the broader and more complex field exams. GAO estimated that the average cost (including overhead) of correspondence exams opened in 2007 and 2008 was $274, compared to an average of $2,278 for field exams. IRS spent almost 20 percent of the $1.6 billion per year that it devoted to exams on returns from taxpayers with positive income of at least $200,000, even though such returns accounted for only 3 percent of the 136 million individual returns filed per year. (Positive income, a measure that IRS uses to classify returns for exam planning purposes, disregards losses that may offset this income).

GAO estimated that, for the 2 years of cases reviewed, correspondence exams were significantly more productive in terms of direct revenue produced per dollar of cost than field exams. Both types of exams of taxpayers with positive incomes of at least $200,000 were significantly more productive than exams of lower-income taxpayers.

GAO demonstrated how these estimates could be used to inform resource allocation decisions. For example, a hypothetical shift of a small share of resources (about $124 million) from exams of tax returns in less productive groups shown in the figure to exams in the more productive groups could have increased direct revenue by $1 billion over the $5.5 billion per year IRS actually collected (as long as the average ratio of direct revenue to cost for each category of returns did not change). These gains would recur annually, relative to the revenue that IRS would collect if it did not change its resource allocation. This particular resource shift would not reduce exam coverage rates significantly and, therefore, should have little, if any, negative effect on voluntary compliance.

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Of course, what GAO does not point out is that assembly-line, quota-driven audits by low-paid staff thousands of miles away can wear down the most cooperative taxpayer and the most tenacious professional.

All things considered, dealing with Bashar al-Assad is probably easier than dealing with the infamous CP-2000 computer-matching notice from IRS. He's more intelligent, and more flexible.

Posted by: Bob | Jan 7, 2013 7:05:08 AM

Correspondence audit with backup data are both a pain and exasperating, in reaching the auditor by telephone and explaining the deductions to a "novice." To say nothing about copying "ton" of pages of back up data and/or a diary.

Would help if this were limited to Medical Expenses, Real Estate Taxes, and Charity which entail a nominally limited number of checks and letters from the charitable institutions. Perhaps a bank statement showing RE taxes paid.

Posted by: Ted L | Jan 7, 2013 10:25:16 AM

what it doesn't take into consideration is that the correspondence exams are selected for audit by computer analysis of the returns. The computer analysis has found a high potential of an error on the returns and selected them for a limited correspondence audit. The field exams are for more complex returns that require more work and more experienced examiners. Doing the field cases by correspondence will result in less errors found and less taxes collected.

Posted by: Rick | Jan 7, 2013 11:26:31 AM

All I want to say is " I am a business owner who believe the arm of the IRS is used to attack competitors of other businesses.". But I Have no proof. Here is my story. I have spent three years of attending meetings, copying documents, having documents lost by the IRS, filing briefs AND A HOST OF OTHER activities to numerous to mention. Because I withdrew funds from my IRA, claimed the income and deposited it in the business account of my S Corporation to save the company in 2007 and 2008. Then I claimed the contribution as a donation instead of a capital investment in the S Corp. Here is a mistake that could have been corrected in five minutes that has tide up numerous people and some cash for three years.

Posted by: Lolita | Jan 11, 2013 5:29:57 AM