TIGTA: IRS Fails to Assess Penalties When Taxpayers Erroneously Claim Tax Credits or Tax Refunds

The Treasury Inspector General for Tax Administration today released The Law Which Penalizes Erroneous Refund and Credit Claims Was Not Properly Implemented (2013-40-123):

Congress enacted the erroneous claim for refund or credit penalty (referred to as the erroneous refund penalty) to enhance the IRS’s ability to address the growing number of erroneous tax credit and refund claims filed. Taxpayers who claim excessive tax credits or refunds may be penalized up to 20 percent of the erroneous tax credit or refund claim. Refund or credit claims that have no reasonable basis in law create unnecessary burden on both taxpayers and the IRS by straining resources and impeding effective tax administration.  

The Small Business and Work Opportunity Tax Act of 2007 amended the Internal Revenue Code to allow for a monetary penalty for erroneous tax refund or tax credit claims. This audit was initiated to determine whether the IRS is properly assessing the erroneous claim for refund or credit penalty on individual tax accounts.

The IRS incorrectly interpreted the erroneous refund penalty law, which significantly limited the types of erroneous tax refund or credit claims to which the penalty would apply. The IRS assessed only 84 erroneous refund penalties totaling $1.9 million between May 2007 and May 2012.

In response to concerns raised from various IRS functions, the IRS Office of Chief Counsel subsequently revised its interpretation of the law as to when the erroneous refund penalty could be assessed, and issued an updated memorandum in May 2012.

Although the IRS revised its interpretation of the law, it has not developed processes and procedures to enable those functions (Campus Operations) that disallow the majority of individual tax credits to assess the penalty. For example, in the year after the IRS revised its interpretation of the law (June 3, 2012 through May 25, 2013), there were 709,123 individual tax credits disallowed by these functional areas for which the IRS could have potentially assessed erroneous refund penalties totaling more than $1.5 billion.

IRS management raised concerns about the costs and benefits of establishing processes and procedures for the Campus Operations to assess erroneous refund penalties. However, the IRS has not provided any documentation and/or analysis to support the validity of these concerns. In view of the significant problem of erroneous claims for credits and refunds and the related costs to the Government, TIGTA believes that the IRS should reexamine its decision and put appropriate procedures and processes in place to comply with this section of law.

Update:  The Weekly Standard, IRS Not Following Law in Penalizing Excessive Refunds and Tax Credits

GAO: Evaluation of Corporate Tax Expenditures

The Government Accountability Office has released Corporate Tax Expenditures: Evaluations of Tax Deferrals and Graduated Tax Rates (GAO-13-789):

Congress and the administration are reexamining tax expenditures used by corporations as part of corporate tax reform. These tax expenditures—special exemptions and exclusions, credits, deductions, deferrals, and preferential tax rates—support federal policy goals, but result in revenue forgone by the federal government.

GAO was asked to examine issues related to certain tax expenditures. This report uses GAO’s tax expenditures evaluation guide to determine what is known about: (1) the deferral of income for controlled foreign corporations; (2) deferred taxes for certain financial firms on income earned overseas; and (3) the graduated corporate income tax rate. GAO combined the two deferral provisions for evaluation purposes.

GAO’s guide suggests using five questions to evaluate a tax expenditure: (1) what is its purpose and is the purpose being achieved; (2) does it meet the criteria for good tax policy; (3) how is it related to other federal programs; (4) what are its consequences for the federal budget; and (5) how is its evaluation being managed? To address these questions, GAO reviewed the legislative history and relevant academic and government studies, analyzed 2010 Internal Revenue Service (IRS) data, and interviewed agency officials and tax experts.

(Hat Tip: Bruce Bartlett.)

TIGTA: Tax Returns Prepared Through IRS Volunteer Programs Had 49% Error Rate

The Treasury Inspector General for Tax Administration today released Inconsistent Adherence to Quality Requirements Continues to Affect the Accuracy of Some Tax Returns Prepared at Volunteer Sites (2013-40-110):

The Volunteer Program provides no-cost Federal tax return preparation and electronic filing to underserved segments of the population of individual taxpayers, including low- to moderate-income, elderly, disabled, and limited-English-proficient taxpayers. However, ensuring that tax returns are accurately prepared remains a challenge for the Volunteer Program. Problems with the accuracy of some of the tax returns affect the taxes owed and refunds received by these taxpayers. ...

Of the 39 tax returns prepared for auditors during the 2013 Filing Season, 20 (51 percent) were prepared correctly and 19 (49 percent) were prepared incorrectly. This is a two-percentage-point increase over the 49 percent accuracy rate for the same number of returns in the 2012 Filing Season. The 19 incorrect tax returns resulted from incorrect application of the tax law, insufficient requests for information during the intake/ interview process, or lack of adherence to quality review requirements.

TIGTA: 51% Error Rate in Correspondence Audits of Taxpayers

The Treasury Inspector General for Tax Administration today released Actions Are Needed to Strengthen the National Quality Review System for Correspondence Audits (2013-30-099):

This audit was initiated to determine the accuracy of the results from the National Quality Review System (NQRS) and how management uses the feedback to enhance the quality of correspondence audits. ... TIGTA evaluated a statistical sample of 127 of 2,913 correspondence audits that had been reviewed by the NQRS during an 18‑month period and found errors with penalty determinations in 65 of the audits (51 percent) that had not been detected and reported by NQRS quality reviewers.

IRS executives and stakeholders should be provided with a more comprehensive snapshot of audit quality so that needed corrective actions can be timely recognized and taken. Only one overall measure of audit quality is currently reported quarterly by the NQRS to IRS executives and other key stakeholders even though as many as 71 items are reviewed. Finally, the random selection of audits for NQRS review could not be verified. As such, TIGTA was not able to confirm the statistical validity of the NQRS results.

TIGTA: IRS Violated Taxpayer's Rights in 16% of FOIA Requests

The Treasury Inspector General for Tax Administration today released Fiscal Year 2013 Statutory Review of Compliance With the Freedom of Information Act (2013-30-109):

The IRS must ensure that the provisions of the Freedom of Information Act (FOIA), the Privacy Act of 1974 (Privacy Act), and Internal Revenue Code (I.R.C.) Section 6103 are followed. Errors can violate taxpayer rights and result in improper disclosures of tax information.

TIGTA is required to conduct periodic audits to determine if the IRS properly denied written requests for tax account information. ...  The overall objective of this review was to determine whether the IRS improperly withheld information requested in writing based on FOIA exemption (b)(3), in conjunction with I.R.C. § 6103, and/or FOIA exemption (b)(7) or by replying that responsive records were not available or did not exist.

TIGTA reviewed a statistically valid sample of 55 FOIA/Privacy Act information requests from a population of 3,415 FOIA/Privacy Act requests and found nine (16.4 percent) in which taxpayer rights may have been violated because the IRS improperly withheld or failed to adequately search for and provide information to requestors.

In addition, the IRS may have violated taxpayer rights by failing to adequately search for and provide information in three (5.6 percent) of 54 sampled I.R.C. § 6103 information requests. When the sample results are projected to their respective populations, approximately 559 FOIA/Privacy Act and 13 I.R.C. § 6103 information requests may have had information erroneously withheld. ... Additionally, sensitive taxpayer information was inadvertently disclosed in response to nine (16.4 percent) of the FOIA/Privacy Act and four (7.4 percent) of the I.R.C. § 6103 information requests reviewed.

TIGTA: Chief Counsel's Office Is at Risk of Outside Influence on Letter Rulings

The Treasury Inspector General for Tax Administration yesterday released Chief Counsel Should Take Steps to Minimize the Risk of Outside Influence on Its Letter Rulings (2013-10-081):

The IRS issues letter rulings that interpret and apply tax laws to a specific set of facts provided by corporations, individuals, and international entities. Because each letter ruling can impact millions of dollars of tax collections, the IRS must protect the integrity and independence of the letter ruling process. The appearance that practitioners could possibly manipulate the letter ruling process may result in the risk that inappropriate favorable rulings could cost the Government substantial tax revenue. ...

Chief Counsel does not have written policies or an effective management information system to prevent practitioners or taxpayers from having letter ruling requests assigned to a preferred attorney. Specifically, five of the six associate offices that provide rulings had no written policies and insufficient management information to assess the potential risk of outside influence on the assignment of their letter rulings. ...

TIGTA recommended that the Chief Counsel ... develop written policies for all Associate Chief Counsel offices to oversee, manage, and, as appropriate, limit the number of letter ruling assignments from the same practitioner.

TIGTA: Trends in IRS Compliance Activities Through Fiscal Year 2012

The Treasury Inspector General for Tax Administration today released Trends in Compliance Activities Through Fiscal Year 2012 (2013-30-078):

This report is a compilation of statistical information reported by the IRS. The data presented in this report provide taxpayers and stakeholders with information about how the IRS focuses its compliance resources and the impact of those resources on revenue and compliance over time.

During Fiscal Years 2011 and 2012, the IRS encountered challenges that included administering recent legislative changes within an environment of decreasing resources. For example, approximately 50 of the 500 Affordable Care Act provisions add to or amend the Internal Revenue Code. At the same time, the IRS operated under a continuing resolution for Fiscal Year 2012 that funded it at a little more than $11.8 billion, which is a 2.7 percent reduction since Fiscal Year 2010.

Since Fiscal Year 2010, approximately 8,000 full-time IRS positions have been lost—about 5,000 from front-line enforcement personnel. In addition to offering early retirements and buyouts, IRS records indicate that more than one-third of executives and nearly 20 percent of nonexecutive managers are currently eligible for retirement.

Enforcement revenue collected declined by 9 percent in Fiscal Year 2012, from $55.2 billion to $50.2 billion. This has decreased in two straight years and is 13 percent less than the $57.6 billion collected in Fiscal Year 2010. The 13 percent eduction in enforcement revenue correlates to the 14 percent reduction in the number of enforcement personnel.

• Accounting Web, TIGTA Report: IRS Tax Gap Estimate Needs Improvement
• Bloomberg Businessweek, IRS With Smaller Budget Capturing Less Money Through Enforcement

TIGTA: IRS Must Improve Comprehensiveness, Accuracy, Reliability & Timeliness of Tax Gap Estimate

The Treasury Inspector General for Tax Administration today released The Internal Revenue Service Needs to Improve the Comprehensiveness, Accuracy, Reliability, and Timeliness of the Tax Gap Estimate (2013-IE-R008):

Synopsis
The Tax Gap is defined as the difference between the true tax liability in any year and the amount of tax that is paid voluntarily and on time. The IRS's most recent Tax Gap estimate was $450 billion for Tax Year 2006. The Tax Gap estimate is a widely used measure in tax policy and administration. Some officials state that the absolute number is unimportant since the estimate is a significant amount. However, an important consideration for concern about accuracy is the relationship between the different forms of noncompliance and the types of tax. Furthermore, as Congress considers tax reform, it is important that the Tax Gap estimate reflects as accurately as possible the many forms and areas of noncompliance so that tax policy options can be considered.

Several issues affect the comprehensiveness, accuracy, reliability, and timeliness of the Tax Gap estimate.

First, the voluntary compliance rate computation derived from the Tax Gap estimate is now used by the IRS and the Department of the Treasury as the measure for achieving the Agency Priority Goal of increasing voluntary compliance. This may require more frequent or interim updates to the estimates. Furthermore, in order to have a credible goal, the data should be verifiable and valid. However, the IRS develops the Tax Gap estimates in accordance with its own policies and procedures. While Federal agencies are generally required to follow Office of Management and Budget Standards and Guidelines for Statistical Surveys, the IRS stated that these standards are not technically applicable to the conduct of the National Research Program. The IRS does adhere to several aspects of the OMB standards through its own policies and procedures, including elements in the planning and design phases, but does not adhere completely to other aspects associated with developing cost estimates, the production of estimates and projections, and conducting a formal peer review process.

Second, the individual income tax underreporting gap estimate could be more comprehensive if it included estimates for the informal economy and offshore tax evasion. While the estimation method does include a process to impute undetected income, separate quantified estimates would provide better information on the size of these compliance issues. These areas present significant challenges to tax administration, and the absence of a related estimate could hinder or delay possible solutions.

Third, the current method to estimate the corporate Tax Gap needs to be improved. There are two concerns about the accuracy and reliability of the Tax Year 2006 corporate income tax underreporting gap estimate. Both concerns relate to using recommended tax from operational examinations as the basis for projecting the Tax Gap.

• The difficulty in deriving the actual tax liability of large corporations. Unlike recommended tax assessments for individual and small corporate taxes, large corporations often contest recommended taxes. The result is often an assessed amount that is substantially less than the recommended tax. Therefore, using recommended tax as a basis for projections of noncompliance may not provide reliable information.
• A significant portion of small corporations are substantially no more than incorporated sole proprietorships. In fact, in Tax Year 2003, there were about 758,000 corporations with gross receipts of less than $100,000 reported. Consequently, it is extremely likely that a large portion of small corporations exhibit the same pathologies as those found in sole proprietorships. That is, a small percentage of these returns also account for a significant portion of the underreporting.

Recommendations
We recommended that the Director, Office of Research, Analysis, and Statistics, take the following actions: (1) conduct a study to determine the feasibility of providing interim updates of the Tax Gap estimate; (2) develop a process and procedures to ensure compliance with the applicable OMB standards; (3) issue a published report to explain the methods, assumptions, and premises used to develop the estimates; (4) develop the capability to estimate the Tax Gap for the informal economy; (5) perform a study to determine the feasibility of creating an estimate of the Tax Gap due to offshore tax evasion; (6) consider modifying the estimation model for large corporations from using recommended tax from operational examinations to tax assessments from operational examinations; and (7) consider conducting a National Research Program review on small corporations filing Form 1120, U.S. Corporate Income Tax Return, with total assets of less than $10 million.

Response
The IRS agreed with our first three recommendations. The IRS substantially agreed with recommendation four by agreeing to perform a feasibility study to estimate the Tax Gap for the informal economy. The IRS agreed with recommendation five and substantially agreed to recommendation six by studying the merits of alternative approaches to estimating noncompliance by large corporations. Finally, the IRS is conducting a National Research Program review of small corporations with less than $250,000 in assets; however, it is a very small sample and therefore the IRS will consider the feasibility of conducting more studies of small corporations.

• Accounting Today, Inspector General Questions Accuracy of IRS’s Tax Gap Estimate
• Forbes, How Much Tax Cheating Is Really Going On?
• The Hill, IRS Tax Gap Projections Could Be More on the Mark
• Reuters, IRS 'Tax Gap' Could be More Accurate -- TIGTA Report

CRS: The Potential Federal Tax Implications of United States v. Windsor

Congressional Research Service, The Potential Federal Tax Implications of United States v. Windsor (Striking Section 3 of the Defense of Marriage Act (DOMA)): Selected Issues (R43157) (Sept. 9, 2013):

This report will provide an overview of the potential federal tax implications for same-sex married couples of the U.S. Supreme Court ruling in United States v. Windsor, with a focus on the federal income tax. Estate tax issues are also discussed. Importantly, this report focuses on changes in the interpretation and administration of federal tax law resulting from the Court’s decision. The decision itself did not amend federal tax law. This report is not intended to address all tax-related issues that may arise as a result of the Windsor decision. Such discussion is beyond the scope of this report.

(Hat Tip: Bruce Bartlett.)

GAO: Big Companies Paid 12.6% Effective Tax Rate in 2010

The Government Accountability Office yesterday released Corporate Income Tax: Effective Tax Rates Can Differ Significantly from the Statutory Rate (GAO-13-520):

Effective tax rates (ETR) differ from statutory tax rates in that they attempt to measure taxes paid as a proportion of economic income, while statutory rates indicate the amount of tax liability (before any credits) relative to taxable income, which is defined by tax law and reflects tax benefits and subsidies built into the law. Lacking access to detailed data from tax returns, most researchers have estimated ETRs based on data from financial statements. A common measure of tax liability used in past estimates has been the current tax expense--either federal only or worldwide (which comprises federal, foreign, and U.S. state and local income taxes). The most common measure of income for these estimates has been some variant of pretax net book income. GAO was able to compare book tax expenses to tax liabilities actually reported on corporate income tax returns.

For tax year 2010 (the most recent information available), profitable U.S. corporations that filed a Schedule M-3 paid U.S. federal income taxes amounting to about 13 percent of the pretax worldwide income that they reported in their financial statements (for those entities included in their tax returns). When foreign and state and local income taxes are included, the ETR for profitable filers increases to around 17 percent. The inclusion of unprofitable firms, which pay little if any tax, also raises the ETRs because the losses of unprofitable corporations greatly reduce the denominator of the measures. Even with the inclusion of unprofitable filers, which increased the average worldwide ETR to 22.7 percent, all of the ETRs were well below the top statutory tax rate of 35 percent. GAO could only estimate average ETRs with the data available and could not determine the variation in rates across corporations. The limited available data from Schedules M-3, along with prior GAO work relating to corporate taxpayers, suggest that ETRs are likely to vary considerably across corporations.

• Bloomberg, Profitable U.S. Companies Paid 12.6% Taxes in 2010: GAO
• CBS News, Feds: Big Companies Pay Low Tax Rate
• CNN, GAO: U.S. Corporations Pay Average Effective Tax Rate of 12.6%
• Forbes, GAO: Big Companies Paid a 12.6% Effective Federal Income Tax Rate
• The Hill, GAO: Corporations Pay One-Third of Statutory Rate
• Huffington Post, U.S. Companies Pay Just One-Third of the Legal Tax Rate: GAO Study
• New York Times, Big Companies Paid a Fraction of Corporate Tax Rate
• Reuters, For U.S. Corporate Giants, Taxes Are Far Below Top Rate: Study
• Tax Foundation, GAO Compares Apples to Oranges to Find Low Corporate Effective Tax Rate
• Wall Street Journal, Firms Paid 12.6% Tax Rate in 2010
• Wall Street Journal, Five Numbers Show How Much Corporations Really Pay in Taxes

GAO: IRS's Tax Expenditure Data Are Limited

The Government Accountability Office has released Tax Expenditures: IRS Data Available for Evaluations Are Limited (GAO-13-479):

By one measure, tax expenditures resulted in an estimated $1 trillion of revenue forgone by the federal government in fiscal year 2011. GAO has recommended greater scrutiny of tax expenditures, as periodic reviews could help determine how well specific tax expenditures achieve their goals and how their benefits and costs compare to those of other programs with similar goals. To assist with this, GAO recently issued a guide (GAO-13-167SP) for evaluating the performance of tax expenditures. GAO was asked to identify data needed for evaluating tax expenditures and its availability. This report: (1) determines the information available from IRS for evaluating tax expenditures; and (2) compares, for a few case studies, the information identified by federal agencies for evaluating outlay programs with similar purposes to tax expenditures. To address these objectives, GAO analyzed 173 tax expenditures, and information from IRS tax forms, federal agency performance reports, and prior GAO reports.

GAO: Corporate Tax Expenditures Equal Corporate Tax Revenues

The Government Accountability Office yesterday released Information on Estimated Revenue Losses and Related Federal Spending Programs (GAO-13-339):

Estimated tax revenue that the federal government forgoes resulting from corporate tax expenditures increased over the past few decades as did the total number of corporate tax expenditures. ... Estimated corporate revenue losses in 2011, which totaled $181.4 billion, were approximately the same size as the amount of corporate income tax revenue the federal government collected that year.

• Accounting Today, Congressman Introduces Bill to Stop Corporate Tax Haven Abuse
• Bloomberg, Corporate Tax Breaks Equal to Revenue in 2011, GAO Says
• Business Roundtable, Corporate Tax Reform: The time Is Now
• The Hill, GAO: Corporate Tax Breaks Equaled Revenue in 2011
• Reuters, U.S. Loses $180 Billion to Corporate Tax Breaks: Report

(Hat Tip: Bruce Bartlett.)

CRS: 250 Tax Expenditures

Congressional Research Service, Tax Expenditures: Compendium of Background Material on Individual Provisions, S. Rep. No. 45, 112th Cong., 2d Sess. (1065 pages):

This compendium gathers basic information concerning approximately 250 federal tax provisions currently treated as tax expenditures. They include those listed in Tax Expenditure Budgets prepared for fiscal years 2011-2015 by the Joint Committee on Taxation, although certain separate items that are closely related and are within a major budget function may be combined. The Joint Committee on Taxation also lists about 30 additional tax expenditures with de minimis revenue losses (i.e., less that $50 million over 5 years).

With respect to each tax expenditure, this compendium provides:

• The estimated federal revenue loss associated with the provision for individual and corporate taxpayers, for fiscal years 2011-2015. as estimated by the Joint Committee on Taxation;
• The legal authorization for the provision (e.g., Internal Revenue Code section, Treasury Department regulation, or Treasury ruling);
• A description of the tax expenditure, including an example of its operation where this is useful;
• A brief analysis of the impact of the provision, including information on the distribution of benefits where data are available:
• A brief statement of the rationale for the adoption of the tax expenditure where it is known. including relevant legislative history:
• An assessment, which addresses the arguments for and against the provision; and
• Selected bibliography.

The information presented for each tax expenditure is not intended to be exhaustive or definitive. Rather, it is intended to provide an introductory understanding of the nature, effect, and background of each provision. Useful starting points for further research are listed in the selected bibliography following each provision.

ObamaCare Tax Increases Are Double Original Estimate

Following up on Tuesday's post, House Holds Hearing Today on The Tax-Related Provisions in the President’s Health Care Law: Tax Foundation, Obamacare Tax Increases Will Impact Us All:

The Joint Committee on Taxation recently released a 96 page report on the tax provisions associated with Affordable Care Act. The report describes the 21 tax increases included in Obamacare, totaling $1.058 trillion – a steep increase from initial assessment. The summer 2012 estimate is nearly twice the $569 billion estimate produced at the time of the passage of the law in March 2010. ...

Provision	2010 Estimate, 2010-2019, $billion	2012 Estimate, 2013-2022, $billion
0.9% payroll tax on wages and self-employment income and 3.8% t tax on dividends, capital gains, and other investment income for taxpayers earning over $200,000 (singles) / $250,000 (married)	210.2	317.7
“Cadillac tax” on high-cost plans *	32	111
Employer mandate *	52	106
Annual tax on health insurance providers *	60.1	101.7
Individual mandate *	17	55
Annual tax on drug manufacturers/importers *	27	34.2
2.3% excise tax on medical device manufacturers/importers*	20	29.1
Limit FSAs in cafeteria plans *	13	24
Raise 7.5% AGI floor on medical expense deduction to 10% *	15.2	18.7
Deny eligibility of “black liquor” for cellulosic biofuel producer credit	23.6	15.5
Codify economic substance doctrine	4.5	5.3
Increase penalty for nonqualified HSA distributions *	1.4	4.5
Impose limitations on the use of HSAs, FSAs, HRAs, and Archer MSAs to purchase over-the-counter medicines *	5.0	4
Impose fee on insured and self-insured health plans; patient-centered outcomes research trust fund *	2.6	3.8
Eliminate deduction for expenses allocable to Medicare Part D subsidy	4.5	3.1
Impose 10% tax on tanning services *	2.7	1.5
Limit deduction for compensation to officers, employees, directors, and service providers of certain health insurance providers	0.6	0.8
Modify section 833 treatment of certain health organizations	0.4	0.4
Other Revenue Effects	60.3	222**
Additional requirements for section 501(c)(3) hospitals	Negligible	Negligible
Employer W-2 reporting of value of health benefits	Negligible	Negligible
Total Gross Tax Increase:	569.2	1,058.3
* Provision targets households earning less than $250,000. ** Includes CBO’s $216.0 billion estimate for “Associated Effects of Coverage Provisions on Tax Revenues” and $6.0 billion within CBO’s “Other Revenue Provisions” category that is not otherwise accounted for in the CBO or JCT estimates.
Source: Joint Committee on Taxation Estimates, prepared by Ways and Means Committee Staff

TIGTA to Investigate Whether IRS Improperly Steered $500 Million in Contracts to Computer Company

The Treasury Inspector General for Tax Administration has agreed to investigate whether an IRS employee improperly steered more than $500 million in government contracts to Signet Computers, after receiving this letter from House Committee on Oversight and Government Reform Chair Darrell Issa.

Washington Post, House Committee Investigating $500 Million in Contracts Between IRS, Computer Company:

“At best, this is a conflict of interest that runs afoul of ... Federal Acquisition Regulation,” Issa writes. “At worst, the IRS may have a situation in which a contracting official is awarding sole source contracts based on false justifications, or receiving kickbacks in exchange for government contracts.” ... The IRS’ contracts with Signet Computers also may have been tailored so that Signet was the only company that could win them in open bidding, Issa writes.

TIGTA: IRS Wastes Millions in Internet Access Fees for Employee Laptops and Blackberrys

The Treasury Inspector General for Tax Administration today released Inadequate Aircard and BlackBerry Assignment and Monitoring Processes Result in Millions of Dollars in Unnecessary Access Fees (2013-10-010):

In Fiscal Year 2011, the IRS had approximately 35,000 active aircards and more than 4,400 BlackBerrys assigned to employees, providing them with mobile Internet and e-mail access.  TIGTA found that cost savings can be achieved if the IRS ensures that only those employees with a valid business need are assigned an aircard and/or BlackBerry and provides more effective oversight and monitoring of these devices.  Improved policies and procedures can result in savings of $5.9 million over five years. ...

Processes for assigning and monitoring the use of aircards and BlackBerrys are not adequate to ensure that employees have a business need for the devices.  Assignment of these devices is generally based on job series classifications without adequately ensuring a business need exists.

In addition, the IRS paid approximately $1.1 million during Fiscal Year 2011 for 13,878 aircards and 754 BlackBerrys that were not used for periods of three months to one year.  For example, TIGTA identified 45 aircards and 68 BlackBerrys that were not used at all for the entire 12 months of the fiscal year. 

Finally, 2,560 employees may have been assigned an aircard or BlackBerry without required management approval.  These devices cost the IRS more than $950,000 in Fiscal Year 2011, or about $4.8 million over five years. 

CBO Rejects GOP Charge That It Slanted Report on Taxing U.S. Multinational Corporations

The Congressional Budget Office yesterday doubled down on its report, Options for Taxing U.S. Multinational Corporations, in response to a January 24, 2013 letter from House Ways & Means Chair Dave Camp charging that the report was "heavily slanted and biased":

This letter responds to concerns you raised about the CBO's report, Options for Taxing U.S. Multinational Corporations, which was released on January 8, 2013. We continue to believe that it presents the key issues fairly and objectively and that its findings are well grounded in economic theory and are consistent with empirical studies in this area. Nevertheless, because of the complexity of the subject and the diverse views of experts in the field, we agree that it would have been desirable to seek comments from more outside reviewers. It is always our goal to seek outside reviewers for CBO studies who represent a broad range of views and perspectives. Following is a discussion of the various issues you raised regarding the report.

• The Hill, CBO Defends Tax Report From GOP Criticism
• Reuters, Lawmaker, Budget Agency Spar Over Taxing Corporate Profits

This dispute is similar to last year's charge by Senate Republicans that the Congressional Research Service had released a biased report on the impact of tax rates on economic growth:

• CRS: An Economic Analysis of the Top Tax Rates Since 1945 (Sept. 17, 2012)
• Dems, GOP Trade Barbs After CRS Pulls Report on Tax Rates and Economic Growth (Nov. 2, 2012)
• Republican Staff Study: CRS Report on Tax Rates Is Flawed (Nov. 14, 2012)
• CRS Re-issues Report: Tax Rates on Rich Have 'Negligible' Effect on Economic Growth (Dec. 14, 2012)

GAO Removes IRS Modernization, Keeps Tax Gap, as High-Risk Area

The Government Accountability Office yesterday released High-Risk Series An Update (GAO-13-283), in which the GAO removed one tax area from its list of 30 high-risk areas:

IRS Business Systems Modernization. The IRS made progress in addressing significant weaknesses in information technology and financial management capabilities. IRS delivered the initial phase of its cornerstone tax processing project and began the daily processing and posting of individual taxpayer accounts in January 2012. This enhanced tax administration and improved service by enabling faster refunds for more taxpayers, allowing more timely account updates, and faster issuance of taxpayer notices. In addition, IRS has put in place close to 80% of the practices needed for an effective investment management process, including all of the processes needed for effective project oversight. 

But Enforcement of Tax Laws remains a high-risk area:

The IRS recently estimated that the gross tax gap—the difference between taxes owed and taxes paid on time—was $450 billion for tax year 2006. For a portion of the gap, IRS is able to identify the responsible taxpayers. IRS estimated that it would collect $65 billion from these taxpayers through enforcement actions and late payments, leaving a net tax gap of $385 billion. The tax gap has been a persistent problem in spite of a myriad of congressional and IRS efforts to reduce it, as the rate at which taxpayers voluntarily comply with U.S. tax laws has changed little over the past three decades. Given that the tax gap has been persistent and dispersed across different types of taxes and taxpayers, coupled with tax code complexity and a globalizing economy, reducing the tax gap will require applying multiple strategies over a sustained period of time.

IRS enforcement of the tax laws is vital for financing the U.S. government. Through enforcement, IRS collects revenue from noncompliant taxpayers and, perhaps more importantly, promotes voluntary compliance by giving taxpayers confidence that others are paying their fair share. GAO designated the enforcement of tax laws as a high-risk area in 1990.

Joint Tax Committee Releases Tax Expenditure Estimates for 2012-17

The Joint Committee on Taxation has released Estimate of Federal Tax Expenditures for Fiscal Years 2012-2017 (JCS-1-13):

Tax expenditure analysis can help both policymakers and the public to understand the actual size of government, the uses to which government resources are put, and the tax and economic policy consequences that follow from the implicit or explicit choices made in fashioning legislation. This report on tax expenditures for fiscal years 2012-2017 is prepared by the staff of the Joint Committee on Taxation. ... As in the case of earlier reports, the estimates of tax expenditures in this report were prepared in consultation with the staff of the Office of Tax Analysis in the Department of the Treasury.

The Joint Committee staff has made its estimates (as shown in Table 1) based on the provisions in Federal tax law as enacted through January 2, 2013. Expired or repealed provisions are not listed unless they have continuing revenue effects that are associated with ongoing taxpayer activity. Proposed extensions or modifications of expiring provisions are not included until they have been enacted into law. The tax expenditure calculations in this report are based on the January 2012 Congressional Budget Office revenue baseline and Joint Committee staff projections of the gross income, deductions, and expenditures of individuals and corporations for calendar years 2011-2017.

Part I of this report contains a discussion of the concept of tax expenditures. Part II is a discussion of the measurement of tax expenditures. Estimates of tax expenditures for fiscal years 2012-2017 are presented in Table 1 in Part III. Table 2 shows the distribution of tax returns by income class, and Table 3 presents distributions of selected individual tax expenditures by income class.

CBO: Refundable Tax Credits

Congressional Budget Office, Refundable Tax Credits:

The number and total costs of the refundable credits in the income tax system have grown considerably since 1975. The number of credits peaked at 11 in 2010 before dropping to 6 in 2013 (see Figure 1). Their total costs (that is, the reduction in revenues and the increase in outlays) reached a high of $238 billion in 2008. (That amount and other annual costs discussed in this report are expressed in 2013 dollars.) Those costs will drop to $149 billion in 2013, the CBO estimates, mostly for the earned income tax credit (EITC) and the child tax credit. By 2018, three more credits will have expired, and the EITC and the child tax credit will have been scaled back.

Those cutbacks in refundable tax credits will be more than offset, however, by new health-related subsidies provided through the tax system. Starting in 2014, a new refundable tax credit will be available to some people for the purchase of health insurance through newly created exchanges. The cost of that credit will be about. $110 billion by 2021, CBO and the staff of the Joint Committee on Taxation (JCT) project, bringing the total cost of refundable tax credits in that year to $213 billion— roughly the same as the costs in 2009 and 2010, even though the number of refundable tax credits will have fallen by more than half between 2010 and 2021.

GAO: IRS Faces Challenges Providing Service to Taxpayers

The Government Accountability Office has released IRS Faces Challenges Providing Service to Taxpayers and Could Collect Balances Due More Effectively (GAO-13-156):

While there have been efficiency gains and efforts to improve service, the IRS faced challenges providing telephone service and responding to correspondence, continuing trends experienced in recent years. In 2012, 82 percent of individual taxpayers filed their returns electronically (e-filed), reducing IRS's processing costs. IRS also increased calls answered using automated service and added a variety of self service tools, which helped gain efficiencies. However, IRS's level of telephone service (the percentage of callers seeking live assistance who receive it) declined to 68 percent. In addition, of the 21 million pieces of paper correspondence IRS received, about 40 percent were considered overage (meaning that IRS did not respond within 45 days of receipt), an increase compared to last year. While IRS plans to continue to pursue efficiency gains, its strategy for future years does not specifically address how it plans to reverse these negative trends. Reversing the declines in telephone and correspondence services may require IRS to consider difficult tradeoffs, such as reassessing which phone calls IRS should answer with a live assistor and which it should not because automated services are available.

TIGTA: IRS Has 60% Error Rate in Policing Noncash Charitable Contribution Deduction

The Treasury Inspector General for Tax Administration yesterday released Many Taxpayers Are Still Not Complying With Noncash Charitable Contribution Reporting Requirement (2013-40-009):

TIGTA estimates more than 273,000 taxpayers claimed approximately $3.8 billion in potentially erroneous noncash charitable contributions in Tax Year 2010, which resulted in an estimated $1.1 billion reduction in tax. ... IRS controls are not sufficient to ensure taxpayers are complying with noncash charitable contribution reporting requirements. Statistical samples of Tax Year 2010 tax returns that claimed more than $5,000 in noncash charitable contributions showed that approximately 60 percent of the taxpayers did not comply with the noncash charitable contribution reporting requirements. These taxpayers claimed noncash contributions totaling approximately $201.6 million. Taxpayers who donate motor vehicles must attach a Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, to their tax returns. However, the IRS is still not effectively identifying taxpayers who are not complying with reporting requirements for donations of motor vehicles.

• Accounting Web, TIGTA to IRS: Get Tough on Noncash Charitable Contributions
• Bloomberg, Donors Claim $1.1 Billion Skirting Tax Laws, Audit Says
• Washington Examiner, Bad Santa? Taxpayers Overestimate Charitable Giving, Get Undeserved Tax Refunds
• Washington Post, IRS Failing to Enforce Reporting Requirements for Charitable Contributions

Tax Foundation Gives F Grade to CRS Report on Tax Rates and Economic Growth

Tax Foundation:  CRS Study on Tax Rates and Growth Still Flunks the Test, by Stephen J. Entin:

Studies issued by the Congressional Research Service are intended to inform the Congress as it develops public policy and enacts legislation. A recent CRS publication on the effect of the top statutory tax rates on economic activity [Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945] may have influenced the debate over taxing the rich during the election and may have influenced the tax changes just enacted in the fiscal cliff legislation.

It is critical that such studies reflect the best guidance that the economics and tax professions can provide. The CRS study on the top tax rates did not meet that high standard. Its original release in the fall was met with widespread and justified disbelief, and it was withdrawn for review and examination of its methodology. It has now been reissued in an updated form. However, the re-issued CRS study does not contain any changes of note that would redeem the original report. 

The paper purports to determine the link (or lack thereof) between changes in the top marginal tax rates on income and capital gains and the growth rate of the economy. Unfortunately, the method used to determine the relationship depends mainly on timing, looking to see if a change in the growth rate of the economy coincides with or follows soon after a rise or fall in the tax rates. The study makes no effort to determine the channels through which the tax changes ought to work to affect the economy, looks at the wrong measure of progress over the wrong time frame, and takes inadequate account of what other tax or economic events are occurring at the same time that might mask the results. ...

The CRS study omits important variables and poisons its results by not holding other factors constant. The variables it does examine are indirectly related to the relationship one should be studying, but the study does not follow them for long enough to get the whole picture. The study is as weak now as it was when it was first issued. Grade: F.

Prior TaxProf Blog posts:

• CRS: An Economic Analysis of the Top Tax Rates Since 1945 (Sept. 17, 2012)
• Dems, GOP Trade Barbs After CRS Pulls Report on Tax Rates and Economic Growth (Nov. 2, 2012)
• Republican Staff Study: CRS Report on Tax Rates Is Flawed (Nov. 14, 2012)
• CRS Re-issues Report: Tax Rates on Rich Have 'Negligible' Effect on Economic Growth (Dec. 14, 2012)

GAO: Evaluating Tax Expenditures

The Government Accountability Office has released Tax Expenditures: Background and Evaluation Criteria and Questions (GAO-13-167SP):

Tax expenditures are reductions in a taxpayer's tax liability that are the result of special exemptions and exclusions from taxation, deductions, credits, deferrals of tax liability, or preferential tax rates. Similar to spending programs, tax expenditures represent a substantial federal commitment to a wide range of mission areas. If the Department of the Treasury (Treasury) estimates are summed, an estimated $1 trillion in revenue was forgone from the 173 tax expenditures reported for fiscal year 2011. Tax expenditures are often aimed at policy goals similar to those of federal spending programs. Existing tax expenditures, for example, are intended to encourage economic development in disadvantaged areas, finance postsecondary education, and stimulate research and development. For some tax expenditures, forgone revenue can be of the same magnitude or larger than related federal spending for some mission areas. The revenue the federal government forgoes from a tax expenditure reduces revenue available to fund other federal activities, requires higher tax rates to raise any given amount of revenue, increases the budget deficit, or reduces any budget surplus.

Given the interest in tax expenditures' effectiveness, Congress asked GAO to develop a framework that could be used to evaluate their performance. In response, this guide describes criteria for assessing tax expenditures and develops questions Congress can ask about a tax expenditure's performance.

CBO: Options for Taxing U.S. Multinational Corporations

Congressional Budget Office, Options for Taxing U.S. Multinational Corporations:

In 2008, 12% of all federal revenues came from corporate income taxes; about half was paid by multinational corporations reporting income from foreign countries. How the federal government taxes U.S. multinational corporations has consequences for the U.S. economy overall as well as for the federal budget.

Tax polices influence businesses’ choices about how and where to invest, particularly the profitability of locating in the United States or abroad. The tax laws also can create opportunities for tax avoidance by allowing multinational corporations to use accounting or other legal strategies to report income and expenses for their U.S. and foreign operations in ways that reduce their overall tax liability. U.S tax revenues decline when firms move investments abroad or when they strategically allocate income and expenses to avoid paying taxes here.

This study examines options for changing the way the United States taxes multinational corporations or addressing particular concerns with the current system of taxation. All of those options would affect multinational corporations’ investment strategies and reporting of income, as well as U.S. revenues from corporate income taxes.

(Hat Tip: Ed Kleinbard.)

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

The 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.

CBO: Taxing Businesses Through the Individual Income Tax

Congressional Budget Office, Taxing Businesses Through the Individual Income Tax:

Since the individual income tax was instituted in 1913, the profits of most businesses have been allocated, or “passed through,” to their owners and subjected to that tax—rather than to the corporate income tax. However, most business activity (specifically, the total revenue that businesses receive as receipts from sales of goods and services) has occurred at firms subject to the corporate income tax (C corporations) because those firms tend to be larger than pass-through entities.

Over the past few decades, the proportion of firms organized as pass-through entities and their share of business receipts have increased substantially: In 1980, 83% of firms were organized as pass-through entities, and they accounted for 14% of business receipts; by 2007, those shares had increased to 94% and 38%, respectively.

This report examines those shifts in organizational structure, the effect they have had on federal revenues, and the potential effects on revenues and investment of various alternative approaches to taxing businesses’ profits.

TIGTA: IRS to Issue $21 Billion in Fraudulent Tax Refunds From Identity Theft Over Next Five Years

The Treasury Inspector General for Tax Administration today released There Are Billions of Dollars in Undetected Tax Refund Fraud Resulting From Identity Theft (2012-42-080):

Undetected tax refund fraud results in significant unintended Federal outlays and erodes taxpayer confidence in our Nation’s tax system. Our analysis of tax returns using characteristics of identity theft confirmed by the IRS identified approximately 1.5 million undetected tax returns with potentially fraudulent tax refunds totaling in excess of $5.2 billion. TIGTA estimates the IRS could issue $21 billion in potentially fraudulent tax refunds resulting from identity theft over the next five years.

• Accounting Today
• Bloomberg
• USA Today
• Wall Street Journal

TIGTA: IRS Did Not Follow Law in 22% of Seizures of Taxpayers' Property

The Treasury Inspector General for Tax Administration today released Fiscal Year 2012 Review of Compliance With Legal Guidelines When Conducting Seizures of Taxpayers’ Property (2012-30-072):

TIGTA reviewed a random sample of 50 of the 747 seizures conducted from July 1, 2010, through June 30, 2011, to determine whether the IRS is complying with legal and internal guidelines when conducting each seizure. In the majority of seizures, the IRS followed all guidelines, and TIGTA did not identify any instances in which the taxpayers were adversely affected. However, in 11 seizures, TIGTA identified 14 instances in which the IRS did not comply with a particular I.R.C. requirement. Specifically, TIGTA found:

• The sale of the seized property was not properly advertised. (I.R.C. § 6335(b))
• The amount of the liability for which the seizure was made was not correct on the notice of seizure provided to the taxpayer. (I.R.C. § 6335(a))
• Proceeds resulting from the seizure were not properly applied to the taxpayer’s account. (I.R.C. § 6342(a))
• Information relating to the sale of the seized property was either incorrect or not provided to the taxpayer. (I.R.C. § 6340(c))

When legal and internal guidelines are not followed, it could result in the abuse of taxpayers’ rights.

GAO: The Role of Appraisals in the Estate, Gift & Income Taxes

The Government Accountability Office yesterday released Appraised Values on Tax Returns: Burdens on Taxpayers Could Be Reduced and Selected Practices Improved (GAO-12-608):

Misstated appraisals used to support tax returns have long caused concern. In 2006, Congress adopted the Pension Protection Act, which changed the criterion for when appraisals are considered to be substantially misstated and created a penalty for improper appraiser practices and qualifications for appraisers with respect to noncash charitable deductions. The Tax Technical Corrections Act of 2007.

Among its objectives, GAO was asked to (1) describe the extent to which individual, estate, and gift tax returns are likely to involve an appraiser and the extent to which IRS audits them; (2) describe how IRS selects returns likely to involve appraisals for compliance examinations, and assess whether the current appraisal threshold is useful; and (3) assess IRS procedures for ensuring that its appraisal experts are qualified.

Appraisers’ most prominent role relative to the three types of tax returns GAO studied is in the valuation of estates. In the most recent years for which GAO had data, appraisers were likely involved in the valuation of property worth from $75 billion to $167 billion reported on estate tax returns in 2009. In contrast, less than $17 billion worth of gifts in 2009 and less than $10 billion in noncash contributions in 2008 likely involved an appraiser. Gift tax returns that likely used appraisers had higher audit rates than gift returns that were unlikely to have appraisers. The use of appraisers was not associated with higher audit rates for estate tax returns and individual returns with noncash contributions.

The IRS’s procedures for selecting returns to audit do not specifically target noncash contributions or gift or estate tax returns supported by appraisals. Nevertheless, returns with appraisals do get included in the population of audited returns because certain types of returns on which IRS does focus, such as higher-income ones, are also the most likely ones to have noncash charitable contributions that require appraisals.

GAO: Tax Deadbeats Got $1.4 Billion in Stimulus Loans

The Government Accountability Office today released Tax Debtors Have Received FHA Mortgage Insurance and First-Time Homebuyer Credits (GAO-12-592):

The Federal Housing Administration insured over $1.44 billion in mortgages for 6,327 borrowers with $77.6 million in federal tax debt who benefited from the 2009 American Recovery and Reinvestment Act. Of these borrowers, 3,815 individuals claimed and received $27.4 million in Recovery Act First-Time Homebuyer Credits.

• Accounting Today
• Wall Street Journal
• Washington Examiner

GAO: IRS Continues to Put Taxpayer Information at Risk; 89 of 105 Internal Control Weaknesses Remain

The Government Accountability Office yesterday released IRS Needs to Further Enhance Internal Control Over Financial Reporting and Taxpayer Data (GAO-12-393):

IRS implemented numerous controls and procedures intended to protect key financial and tax-processing systems; nevertheless, control weaknesses in these systems continue to jeopardize the confidentiality, integrity, and availability of the financial and sensitive taxpayer information processed by IRS’s systems. Specifically, the agency continues to face challenges in controlling access to its information resources. For example, it had not always (1) implemented controls for identifying and authenticating users, such as requiring users to set new passwords after a prescribed period of time; (2) appropriately restricted access to certain servers; (3) ensured that sensitive data were encrypted when transmitted; (4) audited and monitored systems to ensure that unauthorized activities would be detected; or (5) ensured management validation of access to restricted areas. In addition, unpatched and outdated software exposed IRS to known vulnerabilities, and the agency had not enforced backup procedures for a key system.

An underlying reason for these weaknesses is that IRS has not fully implemented a comprehensive information security program. IRS has established a comprehensive framework for such a program, and has made strides to address control deficiencies—such as establishing working groups to identify and remediate specific at-risk control areas; however, it has not fully implemented all key components of its program. For example, IRS’s security testing and monitoring continued to not detect many of the vulnerabilities GAO identified during this audit. IRS also did not promptly correct known vulnerabilities. For example, the agency indicated that 76 of the 105 previously reported weaknesses open at the end of GAO’s prior year audit had not yet been corrected. In addition, IRS did not always validate that its actions to resolve known weaknesses were effectively implemented. Although IRS had a process in place for verifying whether each weakness had been corrected, this process was not always working as intended. Of the 29 weaknesses IRS indicated were corrected, GAO determined that 13 (about 45 percent) had not yet been fully addressed.

Considered collectively, these deficiencies, both new and unresolved from previous GAO audits, along with a lack of fully effective compensating and mitigating controls, impair IRS's ability to ensure that its financial and taxpayer information is secure from internal threats. This reduces IRS's assurance that its financial statements and other financial information are fairly presented or reliable and that sensitive IRS and taxpayer information is being sufficiently safeguarded from unauthorized disclosure or modification. These deficiencies are the basis of GAO’s determination that IRS had a material weakness in internal control over financial reporting related to information security in fiscal year 2011.

Update:

• Accounting Today, IRS Needs to Fix Security Controls
• Politico, IRS Data Protections Found Lacking

CBO: Choices for Federal Spending and Taxes

Douglas W. Elmendorf (Director, Congressional Budget Office), Choices for Federal Spending and Taxes (Presentation at Harvard University) (Feb. 24, 2012):

By the end of the coming decade, unless we cut federal spending apart from Social Security and the major health care programs below the unusually low share of GDP it is already projected to reach, stabilizing federal debt relative to GDP will require us to cut spending on Social Security and federal health care programs by about one-quarter, raise taxes by about one-sixth, or do some combination of those approaches. That’s the fundamental choice we face.

GAO Seeks to Hire Director of Tax Policy and Administration

The Government Accountability Office seeks to hire a new Director of Tax Policy and Administration:

This individual will be responsible for leading GAO reviews of tax policy and tax administration, specifically analyzing whether specific provisions of the tax code are achieving their purpose and whether those involved in tax administration are efficiently meeting their responsibilities. To qualify, you must have:

• A broad knowledge of federal tax policy and tax administration, including tax legislation and IRS processes/operations
• The ability to leverage knowledge of tax policy and administration to produce reports and testimonies that assist Congress in its decision-making
• M.S. Taxation and/or Ph.D. in Economics/Public Finance is preferred

Compensation: To $174,000 + bonus eligibility (Senior Executive Service)

Deadline: To be considered, application packages (resume/CV and responses to the PTQs and ECQs) must be received by midnight, March 15, 2012.

CBO: Tax Revenues to 'Shoot Up' 30% by 2014

Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2012 to 2022:

[U]nder current law, revenues will rise considerably as a share of GDP—from 16.3% in 2012 to 20.0% in 2014 and 21.0% in 2022. In particular, between 2012 and 2014, revenues in CBO’s baseline shoot up by more than 30%, mostly because of the recent or scheduled expirations of tax provisions, such as those that lower income tax rates and limit the reach of the AMT, and the imposition of new taxes, fees, and penalties that are scheduled to go into effect. Revenues continue to rise relative to GDP after 2014 largely because increases in taxpayers’ real (inflation-adjusted) income are projected to push more of them into higher tax brackets and because more taxpayers become subject to the AMT.

GAO: IRS Needs to Enhance Taxpayer Self-Service Tools

The Government Accountability Office yesterday released Processing Gains, but Taxpayer Assistance Could Be Enhanced by More Self-Service Tools (GAO-12-176):

GAO recommends that IRS develop a new refund timeliness performance measure to better reflect current capabilities, create an automated telephone line for taxpayers seeking information about amended returns unless IRS has a convincing costbenefit analysis suggesting the costs exceed the benefits, assess the costs and benefits of automating a TAC/VITA locator line, and finalize a strategy for determining which self-service tools to provide on its website.

Joint Tax Committee Releases Tax Expenditure Estimates for 2011-15

The Joint Committee on Taxation today released Estimates of Federal Tax Expenditures for Fiscal Years 2011-2015 (JCS-1-12):

Tax expenditure analysis can help both policymakers and the public to understand the actual size of government, the uses to which government resources are put, and the tax and economic policy consequences that follow from the implicit or explicit choices made in fashioning legislation. This report on tax expenditures for fiscal years 2011-2015 is prepared by the staff of the Joint Committee on Taxation. ...As in the case of earlier reports, the estimates of tax expenditures in this report were prepared in consultation with the staff of the Office of Tax Analysis in the Department of the Treasury.

The Joint Committee staff has made its estimates (as shown in Table 1) based on the provisions in Federal tax law as enacted through January 10, 2011. Expired or repealed provisions are not listed unless they have continuing revenue effects that are associated with ongoing taxpayer activity. Proposed extensions or modifications of expiring provisions are not included until they have been enacted into law. The tax expenditure calculations in this report are based on the January 2011 Congressional Budget Office revenue baseline and Joint Committee staff projections of the gross income, deductions, and expenditures of individuals and corporations for calendar years 2010-2015.

Part I of this report contains a discussion of the concept of tax expenditures. Part II is a discussion of the measurement of tax expenditures. Estimates of tax expenditures for fiscal years 20112015 are presented in Table 1 in Part III. Table 2 shows the distribution of tax returns by income class, and Table 3 presents distributions of selected individual tax expenditures by income class.

GAO: Guide to Disclosure of Confidential Taxpayer Information

The Government Accountability Office today released A Guide for Screening and Assessing Proposals to Disclose Confidential Tax Information to Specific Parties for Specific Purposes (GAO-12-231SP):

The IRS receives a great deal of personal information about individuals and businesses. While taxpayers are required to provide this information to IRS under penalty of fine or imprisonment, confidentiality of information reported to IRS is widely held to be a critical element of taxpayers’ willingness to provide information to IRS and comply with the tax laws. As a general rule, anything reported to IRS is held in strict confidence—Internal Revenue Code Section 6103 provides that federal tax information is confidential and to be used to administer federal tax laws except as otherwise specifically authorized by law.

Although tax information is confidential, nondisclosure of such information is not absolute. Section 6103 contains some statutory exceptions, including instances where Congress determined that the value of using tax information for nontax purposes outweighs the general policy of confidentiality. Since making amendments to Section 6103 in 1976, Congress has expanded the statutory exceptions under which specified taxpayer information can be disclosed to specific parties for specific purposes. Today, Section 6103 exceptions enable law enforcement agencies to use relevant tax information to investigate and prosecute tax and nontax crimes and allow federal and state agencies to use it to verify eligibility for need-based programs and collect child support, among other uses.

Periodically, new exceptions to the general confidentiality rule are proposed, and some in the tax community have expressed concern that allowing more disclosures would significantly erode privacy and could compromise taxpayer compliance. In evaluating such proposals, it is important that Congress consider both the benefits expected from a disclosure of federal tax information and the expected costs, including reduced taxpayer privacy, risk of inappropriate disclosure, and negative effects on tax compliance and tax-system administration. This guide is intended to facilitate consistent assessment of proposals to grant or modify Section 6103 exceptions. This guide consists of key questions that can help in (1) screening a proposal for basic facts and (2) identifying policy factors to consider.

CBO: Trends in the Distribution of Household Income, 1979-2007

Congressional Budget Office, Trends in the Distribution of Household Income Between 1979 and 2007 (Oct. 2011):

After-tax income for the highest-income households grew more than it did for any other group. (After-tax income is income after federal taxes have been deducted and government transfers—which are payments to people through such programs as Social Security and Unemployment Insurance—have been added.) CBO finds that, between 1979 and 2007, income grew by:

• 275% for the top 1% of households
• 65% for the next 19%
• 40% for the next 60%
• 18% for the bottom 20%

GAO Report on Taxation of Financial Derivatives

The Government Accountability Office yesterday released Financial Derivatives: Disparate Tax Treatment and Information Gaps Create Uncertainty and Potential Abuse (GAO-11-750):

Recently, concerns have arisen about the use of certain financial derivatives to avoid or evade tax obligations. As requested, this report (1) identifies and evaluates how financial derivatives can be used to avoid or evade tax liability or achieve differing tax results in economically similar situations, (2) evaluates IRS actions to address the tax effects of investments in financial derivatives through guidance, and (3) evaluates IRS actions to identify financial derivative products and trends through information from other agencies. GAO reviewed research and IRS documents and interviewed IRS and Treasury officials and other experts. GAO analyzed the completion of financial derivative projects on the agencies’ Priority Guidance Plans (PGP) from 1996 to 2010.

GAO recommends that (1) Treasury determine whether alternatives to the current approach to taxing financial derivatives would promote consistent treatment of economically similar positions and be beneficial, that (2) Treasury and IRS provide more public information on the status of PGP projects, including those related to financial derivatives, and that (3) IRS strengthen information-sharing partnerships with relevant agencies.

National Taxpayer Advocate Releases Report to Congress

National Taxpayer Advocate Nina E. Olson today released (IR-2011-71) her mid-year report to Congress, Fiscal Year 2012 Objectives:

The report expresses particular concern about the impact of IRS budget cuts on taxpayer service and tax compliance and about IRS lien filing practices. ...

Impact of Possible Budget Cuts on Taxpayer Service and Compliance.  ...  “In recent years, the IRS has been given more and more tasks, but it is not receiving the resources it needs to fulfill these tasks without cutting corners,” the report says.  “And when the IRS cuts corners, taxpayers can be harmed and revenue collection may suffer.” The National Taxpayer Advocate has previously suggested that the IRS generally be exempt from budget caps or reductions.  She has noted that the “tax gap” (i.e., the amount of tax due but not paid voluntarily and timely) is estimated to be about $345 billion a year.  ... On a budget of about $12.1 billion, the IRS collected $2.35 trillion in FY 2010, or about $194 in federal revenue for each dollar it spent. ...

IRS Collection Practices.  The National Taxpayer Advocate has expressed concern about IRS collection practices in prior reports and has, in particular, made recommendations to reduce the harm that unproductive liens can inflict on taxpayers.  This report praises several recent changes the IRS has announced, including making lien withdrawals available to taxpayers in a wider range of cases.  However, the report expresses continuing concern about the IRS’s practice of automatically filing tax liens based on a dollar threshold instead of basing lien-filing decisions on an analysis of the taxpayer’s financial situation.  The National Taxpayer Advocate believes that such an analysis “should balance the need to protect the government’s interests in the taxpayer’s assets with a corresponding concern for the financial harm the lien will create for that taxpayer.”

In cases where the IRS has determined a taxpayer is suffering an economic hardship or possesses no significant assets, the filing of a lien is unlikely to further tax collection but will further damage a taxpayer’s credit rating, thus harming the taxpayer, increasing the taxpayer’s cost of living, and reducing the chance the taxpayer will be able to obtain a job and pay off the tax debt. ...

Other Areas of Focus.  Additional areas on which the National Taxpayer Advocate intends to focus in the coming year include the following:

• Taxpayer Impact of Possible Government Shutdown
• Tax Reform and Tax Complexity
• Earned Income Tax Credit (EITC) Improvements
• Tax-Related Identity Theft
• Innocent Spouse Relief

Media and blogosphere coverage:

• Accounting Today
• Bloomberg
• Reuters
• Wall Street Journal

GAO Identifies 29 Deficiencies in IRS's Internal Controls

The Government Accountability Office yesterday released Management Report: Improvements Are Needed to Enhance the Internal Revenue Service's Internal Controls and Operating Effectiveness (GAO-11-494R):

During our audit of IRS's fiscal year 2010 financial statements, we identified [15] internal control issues for which we do not already have recommendations outstanding. ...These issues increase the risk that IRS may not prevent or promptly detect and correct (1) unauthorized or improper refunds, purchases, or promotions; (2) errors in the hours credited or amounts paid to staff; (3) loss or theft of cash receipts or taxpayer information; (4) security and control deficiencies at its SCCs and processing facilities; (5) data errors in its property records; and (6) improper disclosure of taxpayer and other sensitive data.. ... This report provides 29 recommendations to address the internal control issues we identified. These recommendations are intended to bring IRS into conformance with its own policies, the Standards for Internal Control in the Federal Government, or both.

TIGTA: IRS Is Not Doing Enough to Ensure its Employees Are Paying Their Taxes

The Treasury Inspector General for Tax Administration today released Employees Are Provided Sufficient Information on Their Tax Responsibilities, but Additional Actions Are Needed to Detect All Noncompliant Employees (2011-10-047):

The IRS redesigned and centralized the Employee Tax Compliance (ETC) Program in Calendar Year 1995 to ensure that employees are held to a high standard of compliance with the tax laws. The IRS has developed processes to educate employees on their tax responsibilities and detect employees who may not have timely filed or timely paid their taxes; however, not all potential employee misconduct concerning noncompliance with tax laws is being assessed, and additional analyses are needed to periodically reevaluate the direction of the Program.  ...

TIGTA independently reviewed IRS computer files over a 2-year period and identified 133 employees who were potentially noncompliant with their taxes and were not detected by the ETC computer application. ... TIGTA determined the IRS significantly reduced the focus of the ETC Program from its original mission and goals partially based on a study it conducted showing that IRS employees were more compliant compared to the general taxpaying public. While TIGTA understands the IRS’s decision to use resources as efficiently as possible, the IRS should document this change and conduct three additional analyses to periodically reevaluate the Program’s direction to ensure proper oversight of employees’ compliance with their tax obligations.

• Forbes, IRS Employees In Tax Trouble
• Fox News, IRS Watchdog: Tax Agency Failed to Detect 133 Employees Behind on Tax Filings
• Going Concern, Some IRS Employees Living by the Motto ‘Do as I Say, Not as I Do’
• Market Watch, Some Tax Cheats Work at the IRS
• Wall Street Journal, IRS Must Beef Up Oversight of Its Own Workers, Report Finds

TIGTA: IRS Did Not Follow Law in 38% of Seizures of Taxpayer Property

The Treasury Inspector General for Tax Administration yesterday released Fiscal Year 2011 Review of Compliance With Legal Guidelines When Conducting Seizures of Taxpayers’ Property (2011-30-049):

In conducting its statutory review, TIGTA reviewed a random sample of 50 of the 578 seizures conducted from July 1, 2009 through June 30, 2010, to determine whether the IRS is complying with all requirements and guidelines when conducting each seizure. In the majority of seizures, the IRS followed all guidelines, and TIGTA did not identify any instances in which the taxpayers were adversely affected. However, ... TIGTA identified 25 instances in which the IRS did not comply with a particular I.R.C. requirement, involving 19 of the 50 seizures reviewed.

Joint Tax Committee: Description of Tax Portions of Obama's 2012 Budget

The Joint Committee on Taxation yesterday released Description of Revenue Provisions Contained in the President’s Fiscal Year 2012 Budget Proposal (JCS-3-11) (647 pages):

This document ... provides a description and analysis of the revenue provisions modifying the Internal Revenue Code of 1986 that are included in the President's fiscal year 2012 budget proposal, as submitted to the Congress on February 14, 2011. The document generally follows the order of the proposals as included in the Department of the Treasury’s explanation of the President’s budget proposals. For each provision, there is a description of present law and the proposal (including effective date), an analysis of policy issues related to the proposal, and a reference to relevant prior budget proposals or recent legislative action.

IRS Allows Millions in Erroneous Car Deductions to Prisoners, Dead People, Kids

The Treasury Inspector General for Tax Administration yesterday released Millions of Dollars in Questionable Qualified Motor Vehicle Deductions Are Being Allowed (2011-41-037):

The American Recovery and Reinvestment Act of 2009 (Recovery Act) provides individuals with a Qualified Motor Vehicle (QMV) deduction, which is an additional deduction for State sales tax and excise tax on the purchase of certain motor vehicles. The amount of the QMV deduction reduces an individual’s taxable income and taxes owed.  The QMV deduction is phased out for individuals with a modified AGI between $125,000 and $135,000 for single individuals and between $250,000 and $260,000 for married individuals filing a joint tax return.  Individuals with modified adjusted gross income equal to or above the phase-out amounts are not eligible for the QMV deduction.  Figure 1 shows the number of individuals claiming the QMV deduction by schedule type and the amounts allowed through November 12, 2010.

Figure 1: QMV Deductions for Tax Year 2009

Schedule	Tax Returns	Total QMV Deductions
Schedule A	2,268,421	$3,846,317,037
Schedule L	2,104,677	$3,383,703,052
Totals	4,373,098	$7,230,020,089

The IRS cannot verify whether individuals claiming a QMV deduction are entitled to the deduction at the time their tax returns are processed.  The reason is that individuals do not have to provide any third-party documentation to support that they actually purchased a qualified motor vehicle and, if a qualified vehicle was purchased, the amount paid in sales and excise taxes. Based on our review of a statistically valid sample of 150 individuals allowed a QMV deduction of less than the amount the IRS considers excessive, it appears that some individuals may have erroneously been allowed QMV deductions for vehicles that were not purchased.

In addition, the process to identify potentially erroneous QMV deductions is not effective.  The IRS failed to identify 4,257 individuals claiming what the IRS defines as an excessive QMV deduction during tax return processing so it could hold and prevent the possible issuance of erroneous tax refunds.  These individuals claimed a total of more than $151.1 million in QMV deductions.  TIGTA also identified 473 cases for which information that the IRS maintains identifies the individuals as ineligible to claim about $1.02 million in QMV deductions they were allowed.  These individuals were in prison, deceased, or underage.

• Accounting Today
• Associated Press
• The Hill
• Reuters
• USA Today
• Wall Street Journal

Open CRS Releases Tax Reports

Open CRS has posted these tax reports:

• Energy Tax Policy: Issues in the 112th Congress (R41769)
• International Corporate Tax Rate Comparisons and Policy Implications (R41743)
• Reducing the Budget Deficit: Tax Policy Options (R41641)
• Should the United States Levy a Value-Added Tax for Deficit Reduction? (R41602)

Taxpayer ID Theft Has Increased 400% in 2 Years; IRS Apologizes to 3 Victims

The House Committee on Oversight & Government Reform yesterday held a hearing on IRS E-File and Identity Theft. Jim White (Director of Strategic Issues, Government Accountability Office) testified at the hearing, Status of IRS Initiatives to Help Victimized Taxpayers (GAO-11-721T):

My testimony today will cover (1) when IRS detects identity theft-based refund and employment fraud, (2) the steps IRS has taken to resolve, detect, and prevent innocent taxpayers’ identity theft-related problems, (3) constraints that hinder IRS’s ability to address these issues, and (4) the potential for more rigorous screening to prevent refund or employment fraud now and in the future. ...

The number of tax-related identity theft incidents (primarily refund or employment fraud attempts) identified by IRS has grown:

• 51,702 incidents in 2008
• 169,087 incidents in 2009
• 248,357 incidents in 2010.

After three victims of identity theft at the hands of the IRS testified (Lori Petraco, Lavonda Thompson, and Sharon Hawa), IRS Commissioner Douglas Shulman apologized in his testimony.

• Fox News, IRS Chief Apologizes for Employees' Rudeness
• The Hill, GAO: Taxpayer Identity Theft on the Rise
• Network World, Does the IRS Need More Options to Fight Identity Theft?
• New York Times, From the IRS, a Rare Return: an Apology
• Wall Street Journal, IRS Chief Warns Lawmakers on Identity Theft
• Wall Street Journal, IRS Experienced 'Significant Increase' In Identity Theft Issues

House Holds Hearing Today on Business Tax Reform and Job Creation

The House Ways & Means Committee held a hearing this morning on How Business Tax Reform Can Encourage Job Creation:

The hearing will inquire about the potential benefits to companies and workers of lowering marginal tax rates on business income, and the trade-offs that such companies might be willing to make given current fiscal constraints. The hearing also will examine major elements of business and corporate taxation in anticipation of future efforts to evaluate policy options that might encourage job creation in the United States.

Here is the list of witnesses with links to their testimony:

• Ashby T. Corum (Partner, KPMG)
• Walter J. Galvin (Vice Chairman, Emerson Electric Co.)
• Judy L. Brown (Executive Vice President & CFO, Perrigo Company)
• James H. Zrust (Vice President, Tax, The Boeing Company)
• James Misplon (Vice President, Tax, Sears Holdings Management Corp.)
• Mark Stutman (National Managing Partner of Tax Services, Grant Thornton)

In coinnection with the hearing, the Joint Committee on Taxation released Present Law and Background Relating to Selected Business Income Tax Provisions (JCX-34-11):

This document ... describes present Federal income tax rules applicable to businesses with respect to capital expenditures, capital cost recovery, other types of cost recovery, tax accounting methods, general business credits, the corporate alternative minimum tax, and differences between tax accounting and financial accounting for selected items of expense of businesses.

• Bloomberg, Boeing, Emerson Executives Press Congress to Lower Tax Rates
• Wall Street Journal, Companies Willing To Give Up Tax Breaks For Lower Top Rate

TIGTA Submits Semiannual Report to Congress

The Treasury Inspector General for Tax Administration today submitted its Semiannual Report to Congress:

It gives me great pleasure to submit this Semiannual Report to Congress summarizing the accomplishments of the TIGTA for the reporting period of October 1, 2010 through March 31, 2011. This report highlights the most notable audits, investigations, and inspections and evaluations performed by TIGTA as we have continued to work diligently to provide oversight of the IRS and protect the integrity of the Federal system of tax administration.

During this reporting period, TIGTA’s combined audit and investigative efforts has recovered, protected, and identified monetary benefits totaling $2.08 billion. Our Office of Audit has completed 33 audits and the Office of Investigations has closed 1,823 investigations over the past six months. In this time of continuing economic challenge, all Americans are being asked to do more with less. American citizens and their Government must work smarter, harder, and better, with fewer resources and greater purpose. Against this backdrop, TIGTA must redouble its efforts to promote economy, efficiency, and integrity in the administration of the Internal Revenue laws. We have never felt the need for greater commitment to our oversight of the IRS, nor has it ever been more important to improve compliance and reduce the Tax Gap – the $345 billion difference between what taxpayers owe and what they pay timely. Underreporting of taxes constitutes over 70% of the Tax Gap.