Tax Policy and Administration: 1993 Annual Report on GAO Tax-Related Work
(Letter Report, 03/31/94, GAO/GGD-94-82).

This report summarizes GAO's work in the tax area during fiscal year
1993. It discusses actions taken on GAO's recommendations as of the end
of 1993, recommendations that GAO made to Congress before and during
fiscal year 1993 that remain open, and assignments for which GAO was
given access to tax information under the law. GAO's key recommendations
for tax policy and administration relate to the need for improving
compliance with the tax laws, increasing accounts receivable
collections, simplifying the tax system, strengthening the Tax Systems
Modernization program, and improving management at the Internal Revenue
Service.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-94-82
     TITLE:  Tax Policy and Administration: 1993 Annual Report on GAO 
             Tax-Related Work
      DATE:  03/31/94
   SUBJECT:  Tax administration
             Tax administration systems
             Tax law
             Delinquent taxes
             Tax nonpayment
             Computerized information systems
             Government collections
             Tax credit
             Federal taxes
             Voluntary compliance
IDENTIFIER:  IRS Tax System Modernization Program
             IRS Taxpayer Compliance Measurement Program
             Puerto Rico
             Medicaid Program
             Earned Income Tax Credit
             Federal Tax Deposit System
             IRS Electronic Filing System
             TSM
             
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Cover
================================================================ COVER


Report to Designated Congressional Committees

March 1994

TAX POLICY AND ADMINISTRATION -
1993 ANNUAL REPORT ON GAO'S
TAX-RELATED WORK

GAO/GGD-94-82

1993 Annual Tax Report


Abbreviations
=============================================================== ABBREV

  ADP - automated data processing
  CFO - chief financial officers
  EIC - earned income credit
  ETEP - Employment Tax Examination Program
  FDIC - Federal Deposit Insurance Corporation
  FICA - Federal Insurance Contribution Act
  FTD - federal tax deposit
  GSA - General Services Administration
  HUD - U.S.  Department of Housing and Urban Development
  IRS - Internal Revenue Service
  NOL - net operating losses
  OBRA - Omnibus Budget Reconciliation Act
  PHA - Public Housing Authorities
  RTC - Resolution Trust Corporation
  SSA - Social Security Administration
  TCE - Tax Counseling for the Elderly
  TCMP - Taxpayer Compliance Measurement Program
  TMAC - Treasury Multiuser Acquisition Contract
  TSM - Tax Systems Modernization
  UBT - uniform business tax
  USDA - U.S.  Department of Agriculture
  VAT - value-added tax

Letter
=============================================================== LETTER


B-242620

March 31, 1994

The Honorable Daniel P.  Moynihan
Chairman, Committee on
 Finance
United States Senate

The Honorable John Glenn
Chairman, Committee on
 Governmental Affairs
United States Senate

The Honorable Dan Rostenkowski
Chairman, Committee on
 Ways and Means
House of Representatives

The Honorable John Conyers, Jr.
Chairman, Committee on
 Government Operations
House of Representatives

This report is submitted in compliance with 31 U.S.C.  719(d) and
summarizes our work on tax policy and administration during fiscal
year 1993.  It contains appendixes that highlight (1) agency actions
taken on our recommendations as of December 31, 1993; (2)
recommendations we made to Congress before and during fiscal year
1993 that have not been acted upon; and (3) assignments for which we
were authorized access to tax information under 26 U.S.C. 
6103(i)(7)(A)(i). 


   KEY RECOMMENDATIONS FOR TAX
   POLICY AND ADMINISTRATION
------------------------------------------------------------ Letter :1

In recommendations to Congress and the administration, we suggested
actions that could be taken to improve compliance with the tax laws,
increase accounts receivable collections, enhance the effectiveness
of tax policies and incentives, simplify the tax system, strengthen
the Tax Systems Modernization program, and improve management of the
Internal Revenue Service (IRS). 


      IMPROVE COMPLIANCE WITH TAX
      LAWS
---------------------------------------------------------- Letter :1.1

To reduce the gap between what taxpayers owe and what they
voluntarily pay--estimated at $127 billion in 1992\1 --IRS must
improve voluntary compliance.  IRS' data showed that voluntary
compliance for small corporations plummeted from 81 percent in 1980
to 61 percent in 1987 (the latest year for which data were
available), while individual compliance stayed at about the
mid-80-percent level.  If IRS is to effectively target its efforts
toward increasing compliance and reducing the tax gap, it needs
reliable data on the nature of noncompliance, and it must clarify
what data it needs from taxpayers to ensure higher levels of
compliance. 

In the past fiscal year, we recommended a number of ways to help
increase the level of voluntary compliance.  In the near future, we
plan to report on issues concerning the effectiveness of IRS' large
corporation examination program. 

  Business Computer Matching.  IRS' most recent compliance data
     showed that small corporations in 1987, and sole proprietors in
     1988, overstated their deductions by $40 billion.  We suggested
     that IRS could better detect such noncompliance by using
     computer matching rather than, as is its current practice,
     relying on audits of business books and records.  We recommended
     that IRS test the feasibility of "reverse matching," comparing
     certain expenses small businesses deduct on their tax returns
     with the same expenses they report on information returns.  IRS
     has agreed to test reverse matching, particularly in connection
     with wages reported on Form W-2 (GAO/GGD-93-133, Aug.  13,
     1993).  (See p.  50.)

  Compliance Measurement.  For about 30 years, the Taxpayer
     Compliance Measurement Program (TCMP) has been IRS' primary
     means of gathering information on taxpayer compliance.  In 1991,
     IRS began making plans to redesign TCMP due to concerns about
     TCMP's cost, burden to taxpayers, and timeliness.  We reported
     that neither cost nor taxpayer burden justified the proposed
     changes to TCMP and recommended that IRS delay any changes until
     a satisfactory substitute could be found that would result in
     consistent measurement nationwide, objective selection of
     returns for audit, and statistical details on noncompliance. 
     IRS agreed with our recommendation and plans to redesign TCMP to
     meet these and other criteria presented in our report
     (GAO/GGD-93-52, Apr.  5, 1993).  (See p.  42.)

  Tax-Exempt Bond Oversight.  The volume of long-term, tax- exempt
     bonds doubled between 1968 and 1990, while the amount of forgone
     federal tax revenues grew proportionately, exceeding $20 billion
     in 1990.  We recommended that IRS improve its oversight of
     compliance with tax-exempt bond requirements by redirecting its
     enforcement program to (1) test current market compliance, (2)
     make better use of information collected from bond issuers, and
     (3) reassess staffing levels and locations.  We also recommended
     that IRS develop and implement a plan for more effective use of
     resources to promote voluntary compliance in the tax-exempt bond
     industry.  In addition, we suggested actions that Congress could
     take to encourage voluntary compliance, such as adoption of
     penalties targeting specific types of noncompliance or
     modification of present disclosure prohibitions.  IRS agreed
     that tax-exempt bond oversight was inadequate and has begun
     making changes in concert with our recommendations
     (GAO/GGD-93-104, May 10, 1993).  (See p.  45.)

  Real Estate Tax Deductions.  IRS audits indicated that individuals
     overstated their real estate tax deductions by an estimated $1.5
     billion in 1988, resulting in a loss of nearly $300 million in
     federal income taxes for that year.  To improve voluntary
     compliance, we recommended that IRS clearly define user fees,
     special assessments, and rebates in Form 1040 instructions and
     that it work with local governments to revise their real estate
     tax bills to designate user fees and special assessments as
     "nondeductible." Further, we suggested that IRS auditors
     routinely check local records and that IRS negotiate agreements
     with local governments to share data on taxpayers' real estate
     payments.  Since we completed our review, IRS has taken steps,
     such as improving the instructions on deducting real estate
     taxes, to implement our recommendations (GAO/GGD-93-43, Jan. 
     19, 1993 and GAO/T-GGD-93-46, Sept.  21, 1993).  (See p.  35.)

  Information Returns on Forgiven Debt.  Until recently, the Federal
     Deposit Insurance Corporation (FDIC) and the Resolution Trust
     Corporation (RTC), unlike most other federal agencies, were not
     required to submit information returns to IRS and taxpayers when
     forgiving debts of taxpayers.  Our study indicated that
     substantially more taxpayers reported forgiven debt as income
     when an information return was filed, and we recommended that
     Congress require FDIC and RTC file information returns on
     forgiven debt exceeding $600.  In response to our
     recommendation, Congress enacted a legislative provision
     requiring such returns.  The Joint Committee on Taxation
     estimated that this requirement would generate $484 million over
     5 years (GAO/GGD-93-42, Feb.  17, 1993).  (See p.  37.)

  Transfer Pricing.\2 In March 1993, we testified that 72 percent of
     foreign-controlled corporations did not pay U.S.  income taxes
     in 1989, compared to 59 percent of U.S.-controlled corporations. 
     The data for 1987, 1988, and 1990 show similar differences. 
     However, these percentages changed when we examined data related
     to the largest corporations.  For corporations with $250 million
     or more in assets, 30 percent of foreign-controlled corporations
     did not pay U.S.  income taxes, compared to 33 percent of
     U.S.-controlled corporations.  By adjusting corporate income
     under the authority of section 482 of the Internal Revenue Code,
     IRS continues to try to prevent corporations from underpaying
     their income taxes through improper use of transfer
     pricing--prices companies charge related parties for goods and
     services transferred on an intercompany basis.  We concluded,
     however, that enforcement of the transfer pricing regulations
     would remain difficult for IRS because of the growing influence
     of international forces on the U.S.  economy and the subjective
     judgments required by the current transfer pricing regulations
     (GAO/T-GGD-93-16, Mar.  25, 1993; GAO/GGD-93-112FS, June 11,
     1993; and GAO/GGD-92-89, June 15, 1992).  (See p.  41.)

  Reporting Net Operating Loss Carryover.  Although no one knows the
     exact amount of net operating loss carryover that corporations
     have accumulated to offset future tax liability, our work
     suggested that it is large and growing.  Using IRS data, we
     estimated this carryover for two-thirds of all corporations and
     found that it grew from $160 billion to $246 billion in 1989--an
     increase of 54 percent.  We recommended that IRS clarify its
     instructions on net operating loss deductions and that it
     require corporations to annually report their carryover amounts,
     thereby enabling IRS to use the reported amounts to track the
     validity of corporate net operating loss deductions.  IRS has
     agreed to take action on these recommendations (GAO/GGD-93-131,
     Sept.  23, 1993).  (See p.  90.)

  Money Laundering.  We reported on actions taken by states to combat
     money laundering.  We noted that the Internal Revenue Code
     requires persons engaged in a trade or business who receive cash
     payments of over $10,000 to file a report with IRS but that
     these reports are not available to state law enforcement
     agencies.  We recommended that Congress amend the IRS disclosure
     laws to allow states access to these reports (GAO/GGD-93-1, Oct. 
     15, 1993).  (See p.  30.)


--------------------
\1 IRS has updated its tax gap estimate for 1992 but has not yet, as
of February 1994, released this figure publicly.  In a December 1993
speech, IRS' Deputy Commissioner indicated that the revised estimate
would be between $135 billion and $150 billion. 

\2 Transfer prices are prices companies charge other related
companies for goods and services transferred on an intercompany
basis. 


      INCREASE ACCOUNTS RECEIVABLE
      COLLECTIONS
---------------------------------------------------------- Letter :1.2

In recent years, IRS has placed increasing emphasis on collecting
delinquent taxes, but the results have not been encouraging. 
Collections of overdue taxes in the past 5 years have not changed
much.  They have declined yearly since 1991.  As discussed in our
report on high risk federal government management areas, several
factors, such as inadequate records, an antiquated and inefficient
collection process, and ineffective staff allocation practices, have
hindered IRS' collection efforts (GAO/HR-93-13, Dec.  1992).  (See p. 
22.)

In fiscal year 1993 reports, we suggested some changes to improve the
collection process.  In October 1993, we reported on ways IRS could
better manage a growing category of delinquent accounts considered
"currently not collectable." We plan to report in the near future on
IRS' expanded use of programs to compromise delinquent tax debts. 

  Modern Collection Techniques.  We studied private sector and state
     collection techniques to determine what changes IRS could make
     to improve its delinquent tax collections.  We recommended that
     IRS restructure its collection program to (1) support earlier
     telephone contact with delinquent taxpayers, (2) develop
     detailed information on delinquent taxpayers for customized
     collection procedures, (3) test the use of private collection
     companies, and (4) identify ways to increase cooperation with
     state governments.  IRS agreed in principle with our
     recommendations and has tests currently pending or underway to
     determine whether it should fully adopt our recommendations. 
     For example, IRS said its emphasis would be on early telephone
     contact and resolving accounts much sooner as new technology and
     new organizational designs are implemented (GAO/GGD-93-67, May
     11, 1993).  (See p.  28.)

  Collection Staff Deployment.  Although IRS' delinquent taxpayer
     workload has continued to grow, productivity of collection staff
     has varied at different field locations.  Currently, IRS' staff
     allocation system does not use marginal productivity
     measurements to adjust staff levels at various field locations. 
     We recommended that IRS develop a plan to better deploy its
     collection staff to maximize the assessment and collection of
     taxes and, as a last resort, reconsider its policy against
     transfer of collection staff among field offices.  IRS
     recognized that the collection staff deployment issue needed to
     be addressed and has begun to use staffing strategies for
     matching staff to workload needs.  IRS is continuing to explore
     possibilities for improving resource allocations such as
     redirecting work to other locations to address uneven staffing
     (GAO/GGD-93-97, May 5, 1993).  (See p.  24.)


      ENHANCE EFFECTIVENESS OF TAX
      POLICIES AND INCENTIVES
---------------------------------------------------------- Letter :1.3

Congress continues to seek equitable ways to reform the current tax
system and, in doing so, possibly increase tax revenues and reduce
the budget deficit.  At the same time, it often adopts tax incentives
and preferences to promote certain social policy goals.  Hundreds of
billions of dollars in revenues are forgone because of incentives and
preferences.  Forgone revenues from these tax expenditures are
expected to increase faster than the economy will grow.  In 1993, we
provided Congress with information on the costs and benefits
associated with various tax policies and incentives.  In 1994, we are
continuing to study how these provisions could be scrutinized and the
revenues forgone controlled. 

  Value-Added Tax.  For several years, a federal value-added tax
     (VAT) has been discussed as an option that the United States
     might use to reduce the budget deficit, reform the current
     federal tax system, or fund new programs.  We analyzed the
     organizational structure and administration that such a tax
     might require in the United States.  We concluded that the costs
     of administering a VAT would vary according to the complexity of
     the proposed system.  Using one set of assumptions, we estimated
     that a single-rate, broad-based tax effective in 1995 would cost
     the government between $1.2 and $1.8 billion annually to
     administer.  These costs could rise significantly if the VAT
     were structured to include multiple rates and exemptions.  We
     also concluded that it would take between 18 and 24 months to
     put a VAT into operation and would cost about $800 million for
     initial taxpayer education, staff training, and computer system
     development (GAO/GGD-93-78, May 3, 1993).  (See p.  80.)

  Industrial Development Bonds.  Tax-exempt industrial development
     bonds are issued by state and local governments to finance
     private manufacturing facilities.  The interest on these bonds
     is tax exempt because the activities financed are thought to
     produce public benefits.  We reported, however, that the issuers
     generally do not have requirements for achieving public benefits
     and that our review of projects in three states showed only
     limited public benefits.  Overall, we questioned whether the
     benefits provided by these bonds were worth the $2 billion in
     tax revenues estimated to be forgone annually.  We suggested
     that Congress might wish to reconsider extending the program or,
     alternatively, specify requirements for greater achievement of
     public benefits (GAO/RCED-93-106, Apr.  26, 1993).  (See p. 
     78.)

  Corporate Consumption Tax.  In an attempt to eliminate the
     perceived inefficiencies and complexities of the current method
     of taxing U.S.  businesses, legislation has been proposed to
     replace the current corporate income tax and the employer's
     share of the Federal Insurance Contributions Act (FICA) payroll
     tax with a consumption tax, the uniform business tax (UBT). 
     Under an income tax, corporations are allowed a deduction for
     depreciation of plant and equipment representing the loss in
     value over time.  In contrast, consumption taxes in general--and
     UBT in particular--would allow the immediate deduction of all
     investment spending.  The corporate income tax also allows a
     deduction for wages and interest, whereas under the UBT the
     deduction would not be allowed.  We reported on the advantages
     and disadvantages of the UBT as to savings and investment,
     distribution of corporate profits, composition of trade, tax
     progressivity, and administrative costs (GAO/GGD-93-55, May 11,
     1993).  (See p.  82.)

  Puerto Rico and the Section 936 Tax Credit.  Section 936 of the
     Internal Revenue Code primarily affects Puerto Rico and
     subsidiaries of U.S.  companies that operate there.  Under this
     provision, income earned by U.S.  firms from operations in U.S. 
     possessions is effectively exempted from federal corporate
     income taxes.  To aid congressional deliberations on proposals
     to modify or replace section 936, we examined its economic
     impact on Puerto Rico and the firms currently taking advantage
     of section 936.  We reported on issues related to Puerto Rico's
     economic development--industry concentration, income and
     employment levels--that might be affected by revision of section
     936.  We also summarized data on distribution of tax benefits,
     employment, and compensation among section 936 manufacturing
     firms (GAO/GGD-93-109, June 8, 1993).  (See p.  84.)

  Long-Term Care Insurance.  Few individuals purchase insurance to
     cover long-term care (medical, social, and support services
     provided over an extended period of time to people in nursing
     homes or in the community who are dependent on others for
     assistance) despite the fact that the population is aging and
     there are increasing strains on the Medicaid system.  Recently,
     many alternatives have been proposed to increase the incentive
     to purchase such insurance.  We reported on the different tax
     treatments presented by these proposals and showed how the
     related tax incentives would affect the price of the insurance
     (GAO/GGD-93-110, June 22, 1993).  (See p.  86.)

  Home Equity Financing.  Home equity financing, estimated to
     represent about 12 percent of all housing debt, or $357 billion
     in 1991, grew at an average annual rate of about 20 percent
     between 1981 and 1991.  In contrast, total nonhousing consumer
     debt had an annual growth rate of about 4 percent.  We
     identified several factors that played a role in the growth of
     housing debt, especially home equity debt, including rising home
     values, changes in banking laws, and lenders' aggressive
     marketing campaigns.  We also found that the elimination of the
     tax deductibility of interest expenses for many forms of
     consumer debt, but excluding mortgage debt, contributed to the
     continuing growth of home equity financing (GAO/GGD-93-63, Mar. 
     25, 1993).  (See p.  73.)


      SIMPLIFY THE TAX SYSTEM
---------------------------------------------------------- Letter :1.4

Simplification remains critical to reducing taxpayer burden and
encouraging greater voluntary compliance.  We identified some changes
to help simplify several aspects of our relatively complex U.S.  tax
system. 

  Tax Forms.  We reviewed certain commonly used IRS forms,
     publications, and notices for conformity with current legal
     requirements and IRS guidance.  Although we did not find any
     discrepancies with these requirements, we identified numerous
     changes that could be made to improve the clarity and usefulness
     of these documents to taxpayers.  IRS agreed with most of our
     suggestions, and it is changing its documents accordingly
     (GAO/GGD-93-72, Apr.  30, 1993).  (See p.  71.)

  Dependent Exemption.  In a review of taxpayer compliance in
     claiming the dependent exemption, we concluded that the rules
     for claiming dependent exemptions are too complex and burdensome
     for many taxpayers to comply with.  We suggested that Congress
     consider simplifying the rules by substituting a residency test
     similar to that used in the Earned Income Tax Credit program. 
     We also recommended that IRS resolve operational problems in its
     computer matching program, enabling IRS to cost-effectively
     implement a 100-percent computer matching program to identify
     erroneous dependent claims (GAO/GGD-93-60, Mar.  19, 1993). 
     (See p.  39.)

  Earned Income Tax Credit.  We reported that the earned income tax
     credit increased the progressivity of the tax system by
     offsetting payroll taxes and reducing the average federal income
     tax rates of the low-income workers who receive the credit. 
     Although recent changes in the law have made it simpler to
     determine eligibility for the credit, IRS introduced a complex
     new schedule in an effort to reduce erroneous credit payments. 
     We concluded that the new schedule is overly complicated and
     that most of the necessary information could be included on the
     tax return itself.  Further, because we found that IRS credit
     processing procedures are inconsistent in the treatment of
     taxpayers who claim the credit but fail to file complete
     information, we recommended that IRS adjust its procedures to
     ensure that all taxpayers receive equitable treatment.  Finally,
     we recommended that IRS expand its efforts to inform low-income
     workers about the tax credit by sending explanatory notices to
     all nonfiling workers who had earned income (GAO/T-GGD-93-20,
     Mar.  30, 1993 and GAO/GGD-93-145, Sept.  24, 1993).  (See p. 
     75.)


      STRENGTHEN THE TAX SYSTEMS
      MODERNIZATION PROGRAM
---------------------------------------------------------- Letter :1.5

Tax Systems Modernization (TSM) is a long-term multibillion dollar
program through which IRS is to replace its antiquated data
processing system with a modern system using state-of-the-art
electronic methods for receiving, processing, storing, and retrieving
tax information.  We have reported that systems modernization is the
most pressing issue facing IRS (GAO/OCG-93-24TR, Dec.  1992).  (See
p.  53.) In 1993, we monitored the progress of TSM and identified
certain issues.  At the request of several congressional committees,
we are continuing to follow IRS' modernization program. 

  Modernization Progress.  We testified that because of the numerous
     complex business and technical changes that IRS is undertaking
     with its modernization program, strong technical leadership
     under a chief systems architect is critical to successful
     implementation.  We noted that although IRS had made progress
     with some interim systems, other new systems were experiencing
     schedule delays that are not expected to be completed until
     newer replacement systems are operational.  We recommended,
     therefore, that these projects be reevaluated in light of the
     schedule delays.  We also reported that IRS has progressed
     slower than expected in completing steps that are basic to
     successful modernization, such as planning for business changes
     that take advantage of new technology, developing detailed
     security and telecommunications requirements, and addressing the
     major human resource implications of the new computer systems
     (GAO/T-GGD-93-4, Feb.  3, 1993; GAO/IMTEC-93-1, Feb.  24, 1993;
     GAO/T-IMTEC-93-3, Mar.  30, 1993; GAO/T-IMTEC-93-6, Apr.  27,
     1993; and GAO/T-GGD-93-24, Apr.  27, 1993).  (See pp.  53, 94
     and 96.)

  Electronic Filing Marketing.  IRS' electronic filing program
     benefits IRS and taxpayers by reducing handling costs while
     allowing faster and more accurate processing of returns and
     refunds.  IRS' marketing of the electronic filing program has
     focused on attracting more tax preparers, but only approximately
     12 percent of all individual returns were filed electronically
     in 1992.  To broaden the use of electronic filing, we
     recommended that IRS devise a marketing plan that directs
     appropriate attention to other segments of the population.  In
     response to our recommendations, IRS developed an electronic
     filing strategy with 21 initiatives to broaden use of electronic
     filing (GAO/GGD-93-40, Jan.  22, 1993).  (See p.  32.)

  Electronic Filing Fraud.  Electronic filing significantly reduces
     the time it takes to issue a refund to a taxpayer--on average,
     from 5 weeks for taxpayers who file paper returns to 2 weeks for
     taxpayers who file electronically.  However, because this speed
     leaves IRS with as little as 2 days to investigate and stop a
     refund, the program is particularly vulnerable to fraud.  We
     assessed IRS' controls to prevent electronic filing fraud and
     recommended additional controls.  Since our report, IRS has
     improved its computer checks to identify questionable electronic
     returns and has established special procedures for handling
     electronic returns submitted by first-time filers
     (GAO/GGD-93-27, Dec.  30, 1992).  (See p.  32.)


      IMPROVE MANAGEMENT OF IRS
---------------------------------------------------------- Letter :1.6

IRS manages systems that affect the lives of millions of taxpayers
every day.  These operations should be run in a manner to ensure fair
and equitable treatment for all taxpayers.  IRS is burdened with
manual processes and inaccessible information.  Technical
modernization should allow IRS to use resources more productively,
speed up tax processing, and reduce costs.  We recommended several
ways to improve management of IRS operations. 

  1992 Financial Statement Audit.  We reported on IRS' financial
     statements, which IRS prepared for the first time on its fiscal
     year 1992 operations.  We were unable to express an opinion on
     the reliability of these statements because critical supporting
     information was not available.  IRS did not design its existing
     systems to provide meaningful and reliable information to use in
     reporting on its operations.  Its internal controls were
     insufficient to safeguard assets, provide a reasonable basis for
     determining compliance with laws and regulations, or ensure that
     there were no material misstatements in the financial statements
     (GAO/AIMD-93-2, June 30, 1993 and GAO/AIMD-93-3, Aug.  4, 1993). 
     (See p.  64.)

  Controls Over Computer Systems and Equipment.  As a part of our
     review of IRS' 1992 financial statements, we examined the
     controls over IRS' computer systems, equipment, and software. 
     IRS' computer systems contain confidential information on all
     U.S.  taxpayers, and we found that IRS did not sufficiently
     monitor the activities of its staff to ensure protection of
     taxpayer data.  Further, we reported that IRS' inventory records
     were unreliable for managing and reporting on its computer
     equipment and hardware (GAO/AIMD-93-34, Sept.  22, 1993 and
     GAO/AIMD-93-24, Aug.  5, 1993).  (See pp.  66 and 97.)

  Tax Deposit Delays.  IRS continues to lose millions of dollars of
     interest payments each year because of delays in depositing
     individual income tax payments.  We believe that IRS needs to
     aggressively seek faster ways to deposit tax payments.  We
     recommended that IRS collect data to help it develop strategies
     for identifying and rapidly depositing large tax payments
     (GAO/GGD-93-64, Mar.  22, 1993).  (See p.  55.)

  Federal Tax Deposit System.  The federal tax deposit (FTD) system
     collects payment and tax data separately.  This creates problems
     because it is difficult to match the accounting information on
     the tax returns to the payment data on the FTD coupons.  The
     Department of the Treasury is automating the FTD process.  We
     recommended that these automation efforts be closely monitored
     to ensure that the new automated system can collect the
     accounting and payment data together (GAO/AFMD-93-40, Apr.  28,
     1993).  (See p.  61.)

  Social Security Tax Accounts.  We reported that the taxpayer
     identity data IRS collects each year to process tax returns
     would help the Social Security Administration (SSA) identify the
     correct accounts to which to credit workers' social security
     taxes.  We recommended that IRS and SSA jointly study the extent
     to which SSA could better match workers' earnings to correct
     social security accounts by using IRS taxpayer data
     (GAO/HRD-93-42, Mar.  29, 1993).  (See p.  99.)


---------------------------------------------------------- Letter :1.7

We do our work on tax policy and administration matters pursuant to
31 U.S.C.  713, which authorizes the Comptroller General to audit IRS
and the Bureau of Alcohol, Tobacco, and Firearms.  GAO Order 0135.1,
as amended, prescribes the procedures and requirements that must be
followed in protecting the confidentiality of tax returns and return
information made available to us when doing tax-related work.  This
order is available upon request. 

Copies of this report are being sent to the Director of the Office of
Management and Budget, the Secretary of the Treasury, and the
Commissioner of Internal Revenue.  Copies will also be sent to
interested congressional committees and to others upon request. 

Major contributors to this report are listed in appendix VIII.  If
you or your colleagues would like to discuss any of the matters in
the report, please call me on (202) 512-5407. 

Jennie S.  Stathis
Director, Tax Policy and
 Administration Issues


SUMMARIES OF TAX-RELATED PRODUCTS
ISSUED IN FISCAL YEAR 1993 BY
SUBJECT MATTER
=========================================================== Appendix I


   ACCOUNTS RECEIVABLE AND
   COLLECTION ACTIVITIES
--------------------------------------------------------- Appendix I:1

Internal Revenue Service Receivables                    22 
Improved Staffing of IRS' Collection Function           24
   Would Increase Productivity 
IRS Significantly Overstated Its Accounts               26
   Receivable Balance 
New Delinquent Tax Collection Methods for IRS           28

   COMPLIANCE
--------------------------------------------------------- Appendix I:2

Money Laundering:  State Efforts to Fight It Are        30
   Increasing But More Federal Help Is Needed 
Opportunities to Increase the Use of Electronic         32
   Filing and Better Control Fraud 
Overstated Real Estate Tax Deductions Need              35
   to Be Reduced 
Information Returns Can Improve Reporting of            37
   Forgiven Debts 
Erroneous Dependent and Filing Status Claims            39 
Updated Information on Transfer Pricing                 41 
IRS' Plans to Measure Tax Compliance Can Be Improved    42 
Recurring Tax Issues Tracked by IRS' Office of Appeals  44 
Improvements for More Effective Tax-Exempt              45
   Bond Oversight 
IRS Activities to Increase Compliance                   48
   of Overseas Taxpayers 
Information Reporting of Interest Payments              49
   Can Improve Voluntary Compliance 
Computer Matching Could Identify Overstated             50
   Business Deductions 

   GENERAL MANAGEMENT
--------------------------------------------------------- Appendix I:3

Implementation of IRS Employee Suggestions              52 
Critical Issues Facing IRS                              53 
Status of Progress in Correcting Selected               54
   High-Risk Areas 
Delayed Tax Deposits Continue to Cause Lost             55
   Interest for the Government 
Collection and Exchange of Data by IRS and              57
   the U.S. Customs Service 
Examples of Waste and Inefficiency in IRS               58 
IRS' Budget Request for Fiscal Year 1994                59 
IRS Can Improve the Federal Tax Deposit System          61 
Management of IRS' Information Systems                  63
   Management Resources 
Examination of IRS' Fiscal Year 1992                    64
   Financial Statements 
IRS Information Systems:  Weaknesses Increase           66
   Risk of Fraud and Impair Reliability of
   Management Information

   TAXPAYER ASSISTANCE
--------------------------------------------------------- Appendix I:4

Information on Tax Counseling for the                   68
   Elderly Program 
IRS' Test of Tax Return Filing by Telephone             69 
Implementation of IRS Actions in Corresponding          70
   to Taxpayers 
Selected IRS Forms, Publications, and Notices           71
   Could Be Improved

   TAX POLICY
--------------------------------------------------------- Appendix I:5

Small Tax-Exempt Insurance Companies                    72 
Many Factors Contributed to the Growth in               73
   Home Equity Financing in the 1980s 
Earned Income Tax Credit:  Design and                   75
   Administration Could Be Improved 
Industrial Development Bonds:  Achievement of           78
   Public Benefits Is Unclear 
Value-Added Tax:  Administrative Costs Vary             80
   With Complexity and Number of Businesses 
Implications of Replacing the Corporate                 82
   Income Tax With a Consumption Tax 
Puerto Rico and the Section 936 Tax Credit              84 
Long-Term Care Insurance:  Tax Preferences              86
   Reduce Costs More for Those in Higher
   Tax Brackets 
Public Housing:  Low-Income Housing                     88
   Tax Credit as an Alternative
   Development Method 
Corporate Taxes:  Many Benefits and Few Costs           90
   to Reporting Net Operating Loss Carryover
 


   TAX SYSTEMS MODERNIZATION
--------------------------------------------------------- Appendix I:6

IRS' Use of Consultants to Do the TMAC                  92
   Price/Technical Trade-Off Analysis 
Program Status and Comments on IRS' Portion             94
   of President's Request for Fiscal Year
   1993 Supplemental Funds and Fiscal Year
   1994 Budget Request 
Achieving Business and Technical Goals in Tax           96
   Systems Modernization 
IRS Lacks Accountability Over Its ADP Resources         97 
Time Tables for Critical Planning Documents             98

   OTHER
--------------------------------------------------------- Appendix I:7

IRS Tax Identity Data Can Help Improve SSA              99
   Earnings Records 
1992 Annual Report on GAO's Tax-Related Work           101 
Trends for Certain IRS Programs                        102 
Net Farm Income:  Primary Explanations for             103
   the Difference Between IRS and USDA Figures 
 


   ACCOUNTS RECEIVABLE
--------------------------------------------------------- Appendix I:8


   INTERNAL REVENUE SERVICE
   RECEIVABLES
--------------------------------------------------------- Appendix I:9

GAO/HR-93-13, 12/92

GAO identified IRS' accounts receivable inventory as an area of high
risk vulnerable to waste, fraud, abuse, and mismanagement.  This was
one of a series of reports, made available to the President-elect,
congressional leadership from both parties, and appropriate
Cabinet-level designees, identifying 17 federal programs selected
because they had weaknesses in internal controls or in financial
management systems. 

GAO reported that IRS had an accounts receivable inventory totaling
about $111 billion at the end of September 1991.  IRS estimated that
nearly 75 percent of that amount cannot be collected because either
the records are inaccurate and taxpayers do not actually owe the
money, IRS cannot locate the taxpayers, or the taxpayers cannot pay. 
That leaves almost $30 billion that IRS has estimated as potentially
collectible. 

IRS based these estimates on its record of success at collecting
delinquent taxes.  If IRS were to improve its ability to collect, it
could recoup more of the unpaid debt.  Yet, IRS collections have
actually declined, dropping by 5 percent in fiscal year 1991. 
Meanwhile, reported delinquent tax debts--the accounts receivable
inventory--continue to grow and age. 

GAO identified several obstacles that have interfered with IRS'
ability to collect unpaid taxes:  (1) IRS' records are inaccurate and
insufficient; (2) IRS' collection process is lengthy, antiquated,
rigid, and inefficient; (3) IRS has had difficulty balancing
collection efforts with the need to protect the taxpayer--an
objective embodied in legal restrictions on IRS' efforts; (4) IRS'
decentralized structure tends to blur lines of responsibility and
accountability; (5) IRS does not have enough information to allocate
staff effectively; and (6) staffing varies dramatically among
districts and is independent of collection needs. 

GAO has made numerous recommendations to IRS over the years to
improve its collection efforts, and IRS has responded to some of
them.  But, in GAO's judgment, more needs to be done.  Many areas
remain to be addressed.  Among other actions, IRS should (1) gather
more and better data and use that data as a basis for decisions, (2)
shorten and improve its debt collection process, and (3) remove
organizational impediments to collections and determine the
appropriate size and mix of collection staff.  Further, GAO said that
Congress could reassess the issue of the appropriate balance between
the need to protect taxpayers and the need to collect delinquent tax
debts. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------- Appendix I:9.1

GAO/T-GGD-90-19, 02/20/90; GAO/GGD-90-80, 04/13/90;
GAO/GGD-90-85, 06/20/90; GAO/GGD-90-111FS, 07/30/90;
GAO/GGD-90-102, 07/31/90; GAO/T-GGD-90-60, 08/01/90;
GAO/T-GGD-91-2, 10/18/90; GAO/GGD-91-4, 12/21/90;
GAO/GGD-91-36, 03/13/91; GAO/T-GGD-91-17, 03/20/91;
GAO/GGD-91-45, 04/16/91; GAO/IMTEC-91-39, 06/18/91;
GAO/T-GGD-91-20, 06/25/91; GAO/T-GGD-91-54, 07/09/91;
GAO/GGD-91-94, 08/28/91; GAO/T-GGD-91-65, 09/12/91;
GAO/GGD-91-89, 09/30/91; GAO/GGD-92-45FS, 01/30/92;
GAO/GGD-92-29, 02/18/92; GAO/T-GGD-92-23, 03/17/92;
GAO/GGD-92-6, 03/26/92; GAO/T-IMTEC-92-13, 04/02/1992; and
GAO/T-GGD-92-26, 04/02/1992


   IMPROVED STAFFING OF IRS'
   COLLECTION FUNCTION WOULD
   INCREASE PRODUCTIVITY
-------------------------------------------------------- Appendix I:10

GAO/GGD-93-97, 05/05/93

At the request of the Chairman, Subcommittee on Oversight, Committee
on Ways and Means, GAO reported on (1) the growth of the delinquent
account and delinquent return workload, (2) how IRS has deployed its
collection staff to meet this workload, and (3) the results of
collection function activities by location. 

GAO noted that IRS has been faced with a continually growing workload
of delinquent taxpayers but has not allocated its collection field
staff to maximize collections by ensuring that each field office has
the appropriate number of staff.  Productivity has varied greatly
over time and among IRS offices.  For example, dollars collected per
staff year ranged from a low of about $136,000 to a high of over
$836,000 during the 5 years ending September 30, 1991.  In addition,
some field offices have had almost no backlog of delinquent cases,
while others individually had over 60,000 delinquent accounts that
were not being processed at the end of fiscal year 1991 because of
insufficient staff. 

Although IRS recognizes that some offices have staffing imbalances,
GAO said that IRS has not identified the full extent of the
imbalances because it has not used staff productivity measures in
determining the most appropriate allocation of staff. 


      RECOMMENDATION(S)
------------------------------------------------------ Appendix I:10.1

The Commissioner of Internal Revenue should direct the Assistant
Commissioner for Collection to develop a plan for (1) ensuring that
the collection staff in field offices is balanced to maximize the
assessment and collection of delinquent taxes; (2) providing a means
for the collection function to assess the impact of planned future
technological, strategic, and organizational changes on collection
staffing needs and, if appropriate, modifying its plan on the basis
of that assessment; and (3) identifying strategies for transferring
collection employees to other functions as a means of eliminating
staffing imbalances. 

GAO also recommended that IRS reconsider its decision not to transfer
collection staff among field offices and consider the benefits to the
federal government of the additional collections that will result
from balancing workload and staffing. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:10.2

IRS is expected to issue a final Collection Resource Allocation Study
Group report by 1994.  IRS is currently consolidating regional office
responses to GAO's recommendations.  IRS' collection function has
already included provisions to implement some of the recommendations
in its fiscal year 1994 Financial and Operating Plan. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:10.3

GAO/GGD-92-6, 03/26/92


   IRS SIGNIFICANTLY OVERSTATED
   ITS ACCOUNTS RECEIVABLE BALANCE
-------------------------------------------------------- Appendix I:11

GAO/AFMD-93-42, 05/06/93

As a part of its audit of IRS' fiscal year 1992 financial statements
pursuant to the Chief Financial Officers Act of 1990 (P.L.  101-576),
GAO reviewed IRS' accounts receivable.  GAO's analysis showed that
(1) the gross accounts receivable balance IRS reported for June 30,
1991, was overstated by as much as $39.4 billion and (2) about two
thirds of what was owed was not likely to be collected.  Because the
composition of IRS' gross receivables changed little during the next
3 months, GAO believed that an overstatement also existed in the
balance IRS reported for September 30, 1991. 

GAO said that IRS overstated it gross receivables primarily because
it included duplicate and insufficiently supported assessments that
it had recorded as a part of its efforts to identify and collect
taxes due.  GAO noted that these and many other erroneous assessments
were not valid receivables. 

GAO also said that IRS estimates regarding the collectibility of its
receivables were unreliable.  IRS' June 1991 estimate did not involve
any substantive analysis of collectibility, and the methodology IRS
used to develop its September 1991 estimate was also flawed even
though it involved a more extensive analysis. 

GAO believes that some taxpayers may perceive that IRS' efforts to
collect taxes are not equitable because of the disparity between IRS
gross receivables and amounts expected to be collected, thereby
affecting voluntary compliance with the tax laws.  GAO noted that
more reliable information on receivables could allow IRS to more
effectively allocate resources, determine staffing levels, and
measure enforcement and collection performance. 


      RECOMMENDATION(S)
------------------------------------------------------ Appendix I:11.1

The Commissioner of Internal Revenue should ensure that IRS'
accounting system development efforts meet its financial reporting
and other financial needs, by requiring, as a minimum, approval of
related system designs by IRS' Chief Financial Officer.  In addition,
IRS should (1) identify which assessments should be in the
receivables balance, including only valid receivables in the balances
reported in IRS' financial statements and (2) modify its methodology
for assessing the collectibility of its accounts receivables. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:11.2

IRS generally agreed with GAO's recommendations and plans to take
appropriate action to implement them.  For example, IRS was (1)
planning to assign full responsibility for the entire revenue
accounting system function to its Chief Financial Officer, (2)
evaluating its assessments and excluding certain ones from the
accounts receivables, and (3) conducting a statistical study of its
accounts receivable to determine their collectibility.  GAO plans to
evaluate these efforts as a part of its fiscal year 1993 audit of
IRS' financial statements. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:11.3

GAO/AFMD-93-40, 04/28/93; GAO/AIMD-93-2, 06/30/93; and
GAO/AIMD-93-24, 08/05/93


   NEW DELINQUENT TAX COLLECTION
   METHODS FOR IRS
-------------------------------------------------------- Appendix I:12

GAO/GGD-93-67, 05/11/93

In response to a request by the Chairman, Subcommittee on Oversight,
House Committee on Ways and Means, GAO reported on the options
available to IRS to enhance its collection of delinquent federal
taxes.  Specifically, GAO examined whether IRS could strengthen its
tax collection programs by adopting private sector or state
collection techniques. 

GAO found that IRS' ability to collect delinquent taxes has been
hampered by self-imposed and external constraints.  For example (1)
because of convention, IRS has generally followed a lengthy and rigid
three-stage collection process that begins with a series of written
notices, or bills, sent to delinquent taxpayers over a period of
about 6 months followed by telephone calls and ends with visits to
delinquent taxpayers; (2) because of legal restrictions, IRS handles
all aspects of delinquent tax collection itself and does not evaluate
or reward its collection staff on the basis of collection
performance; and (3) because of inadequate information systems, IRS
pursues delinquent accounts without knowing whether the amounts
recorded in the accounts are valid receivables and with only limited
knowledge about the characteristics of the delinquent taxpayers. 

GAO noted that (1) although IRS and state tax departments currently
cooperate in many tax administration projects, only about 10 percent
of these projects are directly related to tax collection; (2) IRS may
have opportunities for expanding cooperative projects with states
that are directly related to collecting delinquent federal taxes; and
(3) based on GAO's survey of states, more than half of the states
with an opinion about participating in joint tax collection projects
with IRS would consider engaging in such projects if they were
compensated. 

GAO concluded that since IRS competes with private collection
companies and state governments for payments from debtors, IRS should
adopt collection strategies that are more effective than its current
approaches, including (1) early telephone contact with delinquent
taxpayers, (2) customized handling of delinquency cases, (3) expanded
use of cooperative efforts with state governments, and (4) use of
private collection companies. 

GAO also concluded that, for IRS to enhance its collection of
delinquent federal taxes, certain external and internal changes would
have to occur. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
------------------------------------------------------ Appendix I:12.1

Congress may wish to consider revising current tax law to allow IRS
to use collection performance in determining compensation and rewards
for its collection staff as long as other criteria, such as fair and
courteous treatment of taxpayers, are also considered. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:12.2

The Commissioner of Internal Revenue should (1) restructure IRS'
collection organization to support earlier telephone contact with
delinquent taxpayers and determine how to use current collection
staff in earlier, more productive phases of the collection cycle; (2)
develop detailed information on delinquent taxpayers and use it to
customize collection procedures; (3) identify and implement ways to
increase cooperation with state governments in collecting delinquent
taxes.  GAO also recommended that the Commissioner allow the
Assistant Commissioner (Collection) to use private collection
companies, on a test basis, to support IRS' collection efforts as
permitted by current law. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:12.3

IRS has requested additional resources devoted to increasing the use
of telephone contact with delinquent taxpayers.  As IRS implements
new technology and new organizational designs, its emphasis will be
on contacting taxpayers by telephone earlier than current methods
allow.  IRS plans to extend the hours at its Automated Collection
System call sites, establish call sites in the service centers for
prenotice contact on large dollar cases, and extend telephone
assistance hours for taxpayers requesting installment agreements and
other accounts receivable related work.  No further IRS action was
taken on the other GAO recommendations, nor was any legislative
action taken as of December 31, 1993. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:12.4

GAO/T-GGD-90-19, 02/20/90; GAO/GGD-92-23, 12/10/91; and
GAO/IMTEC-92-63, 09/21/92


   COMPLIANCE
-------------------------------------------------------- Appendix I:13


   MONEY LAUNDERING:  STATE
   EFFORTS TO FIGHT IT ARE
   INCREASING BUT MORE FEDERAL
   HELP IS NEEDED
-------------------------------------------------------- Appendix I:14

GAO/GGD-93-1, 10/15/92

In response to a request from the Chairman of the Permanent
Subcommittee on Investigations, Senate Committee on Governmental
Affairs, GAO identified (1) actions taken by states to combat money
laundering and (2) actions taken by the federal government to assist
the states. 

Federal efforts over the past 20 years to curtail money laundering
operations and identify and locate income derived from criminal
activity have developed into an approach using legislation and
requiring reporting of large currency transactions.  In 1970, the
Bank Secrecy Act was enacted and required individuals, banks, and
other financial institutions to report large foreign and domestic
financial transactions to the Department of the Treasury.  In 1984,
section 6050I was added to the Internal Revenue Code and required
certain persons engaged in a trade or business who receive more than
$10,000 in cash payments in a single transaction or series of related
transactions to file a report on an IRS Form 8300. 

Although a growing number of states have recognized the importance of
attacking money laundering as a means of reducing the profitability
of crime, their efforts vary considerably.  Only a few states use
both legislation and financial transaction reports as federal law
enforcement agencies do.  Most states make only limited use of the
Bank Secrecy Act data available from Treasury. 

Although IRS Form 8300 provides the same basic information as the
Bank Secrecy Act reports, the Internal Revenue Code does not allow
disclosure of the data to entities other than federal agencies for
law enforcement purposes. 


      RECOMMENDATION(S) TO
      CONGRESS
------------------------------------------------------ Appendix I:14.1

Congress should amend the disclosure provisions of the Internal
Revenue Code to give the Secretary of the Treasury permanent
authority to disclose to federal agencies information reported on IRS
Form 8300 and to allow states access to the data on the same basis as
federal law enforcement agencies. 


      RECOMMENDATION(S) TO THE
      DEPARTMENT OF THE TREASURY
------------------------------------------------------ Appendix I:14.2

If IRS Form 8300 information is made available to the states,
Treasury should make it available to states on magnetic media ready
for computer processing, as are Bank Secrecy Act data. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:14.3

The Commissioner of Internal Revenue generally agreed with our
recommendations to Congress and said that if the disclosure
provisions were amended, IRS would work closely with Treasury to
provide access to the states.  In January 1993, H.R.  22 was
introduced in the House of Representatives.  This bill, among other
things, would permit state access to the form 8300 data and also
authorize access by non-Treasury federal agencies, since this
authority expired in November 1992.  As of December 31, 1993, no
further action had been taken. 


   OPPORTUNITIES TO INCREASE THE
   USE OF ELECTRONIC FILING AND
   BETTER CONTROL FRAUD
-------------------------------------------------------- Appendix I:15

GAO/GGD-93-27, 12/30/92 and GAO/GGD-93-40, 01/22/93

Most individual income tax returns are filed on paper.  Electronic
filing is an alternative to that system--returns are sent to IRS over
telephone lines and are processed by computer, thus eliminating
labor-intensive manual processing steps and reducing the number of
errors.  About 11 million taxpayers filed their income tax returns
electronically in 1992. 

The feature of electronic filing that appears to be most appealing to
taxpayers is the ability to get quicker refunds.  These expedited
refunds come at a price, however.  Taxpayers must pay a third party
to prepare and/or electronically transmit the returns and pay an
additional fee if they want to get their money even faster through a
refund anticipation loan provided by a financial institution. 
According to IRS, about 74 percent of the electronic returns filed in
1992 through April 1 involved refund anticipation loans. 

IRS' approach to promoting the electronic filing program has focused
on attracting more preparers and transmitters.  That approach has led
to a steady increase in the number of taxpayers filing
electronically.  Nonetheless, about 90 percent of all individual
income tax returns filed in 1992 were not filed electronically. 

GAO issued a report in January 1993 on opportunities to increase the
use of electronic filing.  Given the benefit of electronic filing to
both IRS and taxpayers, GAO said that IRS needed to develop a
strategy for making electronic filing more appealing and more
available to a broader segment of the population, such as those who
are not expecting a refund or who are unwilling to pay the costs
associated with going through a preparer or transmitter.  GAO also
said that IRS, in developing such a plan, needed to address various
operational issues that, if effectively resolved, could enhance the
appeal of electronic filing and help IRS more fully realize the
benefits available through this technology. 

The most serious operational issue discussed by GAO was the need for
IRS to deal with an ever-increasing incidence of electronic filing
fraud.  In a separate report on that subject, issued in December
1992, GAO said that IRS had improved its controls in 1992 but that
additional controls were needed to further reduce IRS' vulnerability. 


      RECOMMENDATION(S)
------------------------------------------------------ Appendix I:15.1

To broaden the electronic filing of individual income tax returns,
the Commissioner of Internal Revenue should (1) identify market
segments and specify national strategies for attracting those
segments to electronic filing, including strategies to encourage
employers and financial institutions to provide electronic filing
services to their employees and customers, (2) assess the feasibility
of enabling taxpayers to file electronically through their personal
computers and provide broader access to electronic filing at IRS
field offices and other convenient locations, and (3) determine which
forms and schedules might be added to the list of documents that can
be filed electronically to broaden the accessibility of electronic
filing. 

The Commissioner of Internal Revenue should also ensure that various
operational issues discussed in the January 1993 report are resolved. 
With specific reference to electronic filing fraud, GAO made several
recommendations to the Commissioner including the following:  (1)
seek approval to allow Criminal Investigation staff access to
National Crime Information Center data for the purpose of checking
the background of electronic filing applicants; (2) identify
electronic filing preparers/transmitters on IRS computer files so
that past year electronic filing participants who did not pay taxes
or file returns can be included in the annual suitability screening
process; (3) follow through on plans to develop improved computer
checks for identifying questionable electronic returns in time for
the 1993 filing season; (4) classify electronic returns from
first-time filers as questionable returns for further investigation,
and delay processing those returns until the validity of the filer
can be established; (5) require that preparers/transmitters obtain at
least two pieces of identification from electronic filers before
transmitting their returns, and retain the pieces of identification
with taxpayers' records; and (6) until electronic filing paper
documents are no longer required, follow established procedures for
warning and suspending preparers/transmitters who do not submit
timely paper documents, and discontinue issuing refunds until the
associated electronic return can be matched with a corresponding
taxpayer signature document. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:15.2

IRS generally agreed with GAO's recommendations.  IRS did not agree,
however, that it should discontinue issuing refunds until the
electronic return could be matched with a corresponding signature
document.  IRS believed that doing so would defeat the purpose of
electronic filing and adversely affect the program's primary selling
point--being able to get refunds faster. 

In response to GAO's other recommendations, IRS had taken several
steps as of December 1993.  Among other things, IRS (1) developed an
electronic filing strategy that contained 21 initiatives for
broadening the use of electronic filing including initiatives that
would enable individual taxpayers to file directly with IRS, expand
access to free electronic filing at IRS locations, and establish
electronic filing sites in public-access buildings; (2) added more
forms and schedules to the list of those that taxpayers will be able
to file electronically in 1994; (3) instructed each of its district
offices to check with their respective states on the availability of
the National Law Enforcement Telecommunications System for background
checks of electronic filing applicants; (4) improved its computer
checks in 1993 and planned further improvements in 1994; and (5)
established special procedures for handling electronic returns
submitted by first-time filers that gave IRS staff more time to
assess the validity of those returns before issuing the refunds. 


   OVERSTATED REAL ESTATE TAX
   DEDUCTIONS NEED TO BE REDUCED
-------------------------------------------------------- Appendix I:16

GAO/GGD-93-43, 01/19/93 and GAO/T-GGD-93-46, 09/21/93

In a report to the Chairman, Subcommittee on Private Retirement Plans
and Oversight of the IRS, Senate Committee on Finance, and in
subsequent testimony before the Subcommittee on Select Revenue
Measures, House Ways and Means Committee, GAO discussed the issue of
overstated real estate tax deductions among individual taxpayers. 
GAO reviewed IRS' random compliance audits of individuals and
contacted 171 local governments that collected $100 million or more
in real estate taxes. 

GAO found that IRS audits showed individuals overstated their 1988
real estate tax deduction by an estimated $1.5 billion nationwide. 
This level of noncompliance resulted in an estimated $300 million
federal income tax loss for 1988 and about $400 million for 1992. 
However, GAO found that the level of noncompliance and resulting tax
loss were much greater.  IRS audits detected only an estimated $37
million (29 percent) of $127 million in overstated deductions in
three locations. 

The overstated deductions arose from taxpayers deducting Montgomery
County, Maryland, user fees and not reporting New Jersey and
Minnesota real estate tax rebates.  The reasons for such
noncompliance included (1) inadequate IRS instructions on what to
deduct or report and (2) confusing real estate tax bills that did not
clearly distinguish taxes from user fees. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
------------------------------------------------------ Appendix I:16.1

Congress may want to consider legislation that would require states
to annually send IRS and taxpayers an information return on any cash
rebates for real estate tax payments. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:16.2

The Commissioner of Internal Revenue should (1) include rules on the
tax deductibility of user fees and reporting of rebates in tax return
instructions and consider ways, such as an optional worksheet, to
help taxpayers calculate the real estate tax deduction; (2) work
cooperatively with local governments to revise their real estate tax
bills to identify user fees, label these charges as not tax
deductible, and notify taxpayers that the local government may report
the deductible tax to IRS; (3) notify examiners to check local
records on user fees and state records on rebates to verify real
estate tax deductions; and (4) negotiate agreements with local
governments on their sharing of data on real estate tax payments by
individuals, and use the data in IRS' enforcement programs. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:16.3

IRS has improved its instructions on deducting real estate taxes and
drafted changes to the tax return to clarify that taxpayers should
not deduct user fees.  IRS also has notified its examiners to better
check support for the deduction.  Finally, IRS has been working with
local governments on revisions to their bills.  On a separate track,
Congress has been considering legislation to require (1) IRS to
clarify its rules and the tax return, (2) IRS to help local
governments determine what is deductible, and (3) local governments
to clarify their bills, using federal funds. 


   INFORMATION RETURNS CAN IMPROVE
   REPORTING OF FORGIVEN DEBTS
-------------------------------------------------------- Appendix I:17

GAO/GGD-93-42, 02/17/93

In a report to the Chairman, Subcommittee on Private Retirement Plans
and Oversight of the IRS, Senate Committee on Finance, GAO measured
the impact of information returns on individual taxpayers' reporting
of income from having their debts forgiven.  GAO tested a random
sample of debts forgiven by the Federal Deposit Insurance Corporation
(FDIC).  The test covered 1986--when FDIC filed information returns
on its forgiven debts, and 1989--the most recent year for which FDIC
did not file these returns when GAO did its test. 

GAO found 1 percent voluntary compliance in reporting income from
FDIC-forgiven debts when the taxpayers had no information returns
compared to 48 percent when they had information returns.  Moreover,
by computer matching the information returns and pursuing potential
noncompliance, IRS determined that another 20 percent failed to
report their forgiven debt income and owed taxes for 1986, while
another 12 percent did not owe taxes.  The match found another 20
percent who may have underreported forgiven debt income but IRS did
not pursue these potential underreporters largely because of limited
resources.  For those 1986 cases that were pursued, IRS generated an
estimated $37 in recommended taxes for every $1 that IRS spent.  For
those cases in which IRS had complete records, 83 percent of the
taxpayers had paid these recommended taxes. 

When FDIC did not file information returns for 1989, an estimated $78
million in federal income taxes were lost.  FDIC's forgiven debts
totaled $2.2 billion in 1989 and increased to over $8.4 billion by
1991.  This 1991 total would rise to $10.9 billion if the Resolution
Trust Corporation's (RTC), whose forgiven debts approximated FDIC's,
were included. 

If Congress extends information reporting to debts forgiven by FDIC
and RTC, taxpayers with debts forgiven by FDIC or RTC will be subject
to more IRS scrutiny than those whose debts are forgiven by private
lending institutions (e.g., banks and savings and loans).  The amount
of debt forgiven by these institutions has doubled to $40 billion
from 1985 to 1990.  Because loans in the FDIC samples came from banks
and were selected randomly, taxpayers' compliance in reporting this
$40 billion would likely be similar to the 1-percent compliance GAO
found for FDIC's debts that were forgiven but not covered by
information returns. 


      RECOMMENDATION(S) TO
      CONGRESS
------------------------------------------------------ Appendix I:17.1

To improve taxpayer compliance in reporting forgiven debt, Congress
should require FDIC and RTC to issue information returns on forgiven
debts that exceed $600. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
------------------------------------------------------ Appendix I:17.2

If FDIC and RTC information reporting on forgiven debts proves to be
cost effective, Congress also may wish to explore whether extending
similar information reporting to other institutions is warranted. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:17.3

In August 1993, Congress extended information reporting to debts
forgiven by FDIC, RTC, and certain private financial institutions. 
Further, in September 1993, Congress considered a legislative
proposal to extend such reporting to all financial institutions. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:17.4

If Congress extends information reporting, IRS should use the
information returns on forgiven debts in its enforcement programs. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:17.5

As of December 31, 1993, IRS was developing a system for processing
and matching the information returns to be filed, starting in tax
year 1994. 


   ERRONEOUS DEPENDENT AND FILING
   STATUS CLAIMS
-------------------------------------------------------- Appendix I:18

GAO/GGD-93-60, 03/19/93

In a report to the Chairman, Senate Committee on Finance, GAO
reviewed the compliance of individuals in claiming dependent
exemptions and filing status.  GAO analyzed IRS' most recent
compliance audits of individuals for 1988 to determine the extent and
causes of noncompliance and to identify ways to improve compliance. 
According to IRS' audits, taxpayers erroneously claimed exemptions
for an estimated 9 million dependents for 1988, improperly lowering
their taxable income by an estimated $17 billion.  Also, an estimated
3 million taxpayers claimed the wrong filing status. 

According to GAO estimates, the primary source (73 percent) of
erroneous dependent claims for 1988 was the taxpayer's failure to
meet the dependent support test.  Of those not meeting this test,
taxpayers either did not (1) provide the necessary financial support
or (2) have adequate records to show whether they provided the
support.  GAO found that the support test was complex because it
required detailed records and difficult financial analyses.  After
analyzing four options, GAO found only one that eliminated the
complexity of the support test by replacing it with a residency test. 
Under this test, taxpayers can claim dependents who lived with them
for at least 6 months, if they meet other dependency tests. 

If the support test were replaced, complexity would not be reduced
for taxpayers claiming head of household filing status.  These
taxpayers would still have to meet a maintenance test, which is
nearly as complex as the support test.  IRS data showed that the head
of household accounted for an estimated 82 percent of all filing
status errors in 1988. 

Even if Congress simplified these tests, IRS could do more to detect
any remaining erroneous dependent claims.  For 1988, IRS matched
about 3 percent of dependents' Social Security numbers (SSN) to
identify dependents who were claimed on more than one tax return or
did not meet income and age requirements.  If IRS had a 100-percent
matching program for 1988, IRS could have generated an estimated $751
million in tax revenues at a cost that ranges between $45 million to
$60 million.  A 100-percent matching program coupled with the simpler
rules would address an estimated 4.3 million (71 percent) of the 6.1
million erroneous dependent claims. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
------------------------------------------------------ Appendix I:18.1

Congress should consider enacting legislation that would substitute a
residency test for the dependent support test if the dependent lives
with the taxpayer.  If this legislation is enacted, Congress also
should consider eliminating the household maintenance test for filing
as head of household status. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:18.2

The Commissioner of Internal Revenue should correct the operational
problems in IRS' limited matching program and implement a 100-percent
computer matching program to identify erroneous dependent claims. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:18.3

In 1993, Congress considered but did not enact this legislation.  IRS
had not acted on this recommendation as of December 31, 1993. 


   UPDATED INFORMATION ON TRANSFER
   PRICING
-------------------------------------------------------- Appendix I:19

GAO/T-GGD-93-16, 03/25/93 and GAO/GGD-93-112FS, 06/11/93

In testimony before the Senate Committee on Governmental Affairs, GAO
provided information on transfer pricing issues facing IRS.  GAO
found that for each year from 1987 through 1990, about 72 percent of
foreign-controlled corporations did not pay U.S.  income taxes,
compared to about 59 percent of U.S.-controlled corporations.  Also,
the dollar amounts at issue between IRS and taxpayers had remained
large.  For example, on September 30, 1992, at least $14.4 billion of
proposed section 482 adjustments to income had been protested to IRS'
Appeals Division and were awaiting resolution.  IRS' recent
experience in sustaining section 482 cases through Appeals and in
litigating them had been difficult. 

In a report to Senator Byron L.  Dorgan, GAO followed up its
testimony statement that 207 (or 30 percent) of the 693 very large
foreign-controlled corporations did not pay U.S.  income taxes in
1989 as compared to 1,555 (or 33 percent) of the 4,650 very large
U.S.-controlled corporations.  In the group of very large
corporations--those with assets of $250 million or more--GAO found
that 102 foreign-controlled corporations (or 15 percent) and 362
U.S.-controlled corporations (or 8 percent) paid less than $100,000
in income taxes. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:19.1

GAO/GGD-92-89, 06/15/92


   IRS' PLANS TO MEASURE TAX
   COMPLIANCE CAN BE IMPROVED
-------------------------------------------------------- Appendix I:20

GAO/GGD-93-52, 04/05/93

In a report to the Chairmen of the Senate Committee on Finance and
House Committee on Ways and Means, GAO analyzed IRS' plans to revamp
its program for statistically measuring taxpayer compliance--the
Taxpayer Compliance Measurement Program (TCMP).  In addition to this
analysis, GAO interviewed users of TCMP data and analyzed the TCMP
audit cases. 

GAO found that TCMP audit data have benefited many users.  IRS uses
TCMP data to measure compliance and objectively select returns for
audits.  Congress and federal agencies use TCMP data for policy
analysis, revenue estimating, and research.  Even so, GAO found that
IRS had planned changes that would have reduced the value of TCMP
data. 

IRS had planned to (1) audit about 50-percent fewer tax year 1992
returns (25,000 rather than 54,000), which would reduce the precision
of any detailed estimates; (2) no longer require auditors to examine
every line on the return, which would lead to gaps in data on
noncompliance; and (3) change the number and makeup of the taxpayer
groups, which would preclude consistent comparisons with previous
measures. 

GAO concluded that these proposed changes did not appear justified. 
Implementing these proposed TCMP changes would be premature and would
hamper IRS' ability to achieve its strategic objectives for the
1990s.  IRS planned these changes because it believed that TCMP costs
too much, is overly intrusive on compliant taxpayers, and produces
untimely data.  GAO agreed that these were valid but not significant
problems given TCMP's benefits.  As a result, GAO believes that IRS
should defer its proposed changes until IRS develops an adequate
replacement for TCMP. 


      RECOMMENDATION(S)
------------------------------------------------------ Appendix I:20.1

The Commissioner of Internal Revenue should not implement the three
proposed changes and ensure that any proposed changes to TCMP produce
data that (1) consistently measure nationwide compliance, (2) allow
IRS to objectively select returns for audit and allocate audit
resources, (3) provide statistical details on noncompliance in
support of existing enforcement programs, and (4) meet the needs of
various users. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:20.2

IRS agreed to not implement its three changes and to redesign TCMP to
meet GAO's four criteria.  However, to finish the redesign, IRS had
to postpone the next TCMP until tax returns are filed for 1994.  As
of December 31 1993, IRS appeared to be on track to meeting this time
frame. 


   RECURRING TAX ISSUES TRACKED BY
   IRS' OFFICE OF APPEALS
-------------------------------------------------------- Appendix I:21

GAO/GGD-93-101, 05/04/93

In a report to the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, GAO discussed the most prevalent issues
appealed by taxpayers and how often those issues had been appealed in
the past. 

GAO found that, as of September 30, 1992, an IRS database contained
about 12,000 disputed issues with $99 billion in proposed income
adjustments awaiting Office of Appeals resolution.  Fourteen Internal
Revenue Code sections accounted for about 45 percent--or 5,279--of
those issues and 57 percent--or $56 billion--of the proposed
adjustment amount.  Issues related to these 14 code sections
accounted for an average of 44 percent of all issues resolved by
Appeals during fiscal years 1991 and 1992, 52 percent of the proposed
adjustment amounts, and 59 percent of the proposed adjustment amounts
sustained by Appeals. 


   IMPROVEMENTS FOR MORE EFFECTIVE
   TAX-EXEMPT BOND OVERSIGHT
-------------------------------------------------------- Appendix I:22

GAO/GGD-93-104, 05/10/93

In a report to the Chairman of the Subcommittee on Human Resources
and Intergovernmental Relations, House Committee on Government
Operations, GAO assessed IRS' efforts to oversee compliance with
tax-exempt bond requirements. 

GAO found that IRS' principal tax-exempt bond enforcement effort, the
Expanded Bond Audit Program, had concentrated almost exclusively on
possible noncompliance cases that were identified by others and that
were a part of an alleged surge in abusive bonds issued in
anticipation of the stricter requirements in the Tax Reform Act of
1986.  IRS recognized that its tax-exempt bond oversight efforts
needed to be improved and had, therefore, begun some initiatives
during the period studied and will take more initiatives on the basis
of the GAO report.  GAO also concluded that Congress could take
actions to enhance IRS' ability to deter abusive uses of tax-exempt
bonds. 

GAO found that several areas merited particular attention to improve
IRS' tax-exempt bond oversight.  IRS' near-total concentration on
bond abuses predating the 1986 Tax Reform Act hampered its
understanding of current compliance problems and IRS had not used
tax-exempt bond return information to monitor issuers' compliance. 
In addition, IRS' plan for improving its tax-exempt bond oversight,
while a positive step, did not provide a clear direction for
integrating tax-exempt bond efforts throughout IRS. 

GAO also found that the basic sanction for tax-exempt bond
noncompliance available to IRS--collecting taxes on interest earned
by bondholders--is inadequate to deter noncompliant behavior by those
who are most responsible for abusive transactions.  That is, this
sanction applies to the innocent purchasers of the bond but not to
the bond's issuer and the specialists the issuer relies on to provide
legal, financial, and other services.  This aspect of the sanction is
contrary to the commonly accepted theory that to provide the best
deterrence, a penalty should be targeted to those responsible for the
noncompliance.  Legislation would be needed to develop better
targeted penalties. 

IRS' ability to deter abusive use of tax-exempt bonds could be
further enhanced by bringing market forces to bear against abusers. 
To do so, GAO said that Congress may wish to explore options for
modifying the present tax information disclosure prohibitions.  If
IRS could, in some way, disclose limited information about the
results of its tax-exempt bond enforcement activities, market
participants would be in a better position to make judgments about
the potential consequences of doing business with specific parties. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
------------------------------------------------------ Appendix I:22.1

Congress may want to consider options to enhance tax-exempt bond
voluntary compliance:  (1) adoption of other penalties for specific
kinds of noncompliance and (2) whether permitting the disclosure of
some tax-exempt, bond-related tax information, with appropriate
safeguards, would improve overall compliance incentives in the
industry. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:22.2

GAO recommended that the Commissioner of Internal Revenue (1)
partially redirect existing Expanded Bond Audit Program efforts to
include active testing of current market compliance, (2) identify and
make better use of information to detect noncompliance and direct
enforcement efforts, (3) provide final guidance for tax-exempt bond
enforcement, and (4) reassess program staffing levels and locations
and training needs in light of the program's future. 

GAO also recommended that the Commissioner develop and implement a
plan to guide efforts throughout IRS to make more effective use of
resources to promote voluntary compliance in the tax-exempt bond
industry and test the use of the penalty for promoting abusive tax
shelters in tax-exempt bond enforcement. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:22.3

As of December 31, 1993, Congress had not considered alternative
penalties or revised disclosure provisions for tax-exempt bonds. 

IRS generally agreed to implement or consider most of the
recommendations contained in GAO's report.  For example, IRS
transferred responsibility for tax-exempt bonds to the Employee Plans
and Exempt Organizations Division.  In addition, IRS plans to (1)
audit four bond issuances by non-exempt organizations in each of its
seven district offices, (2) increase the number of examiners for
tax-exempt bonds, (3) provide specialized training to examiners, (4)
develop audit guidelines on tax-exempt bonds, (5) achieve significant
levels of audit coverage, (6) increase effective use of tax-exempt
bond information, (7) develop an action plan to implement this
revised tax-exempt bond program, and (8) consider whether legislative
changes are needed to improve the IRS' ability to enforce tax-exempt
bond provisions. 


   IRS ACTIVITIES TO INCREASE
   COMPLIANCE OF OVERSEAS
   TAXPAYERS
-------------------------------------------------------- Appendix I:23

GAO/GGD-93-93, 05/18/93

In a report to the Chairman, Senate Committee on Finance, GAO
discussed actions IRS had taken since 1986 to improve the tax
compliance of American taxpayers living overseas. 

GAO found that IRS had taken several steps to encourage compliance by
these taxpayers, including (1) reducing taxpayer burden, (2)
increasing taxpayer education, and (3) continuing its enforcement
efforts.  In spite of these efforts, IRS still could not measure the
full extent of overseas noncompliance because it had limited
information about Americans living overseas. 

In three overseas enforcement initiatives that GAO studied, IRS did
not collect significant additional federal tax revenues.  Among the
possible reasons for this were that (1) nonfilers had incomes below
the minimum level required for filing a U.S.  tax return, or (2)
their U.S.  tax liability was negligible after the foreign earned
income exclusion and the foreign tax credit were taken into account. 
The revenue costs related to the exclusion of income earned abroad
were estimated to be $7.9 billion for fiscal years 1992 through 1996. 

IRS planned to continue its efforts to educate taxpayers who live
overseas about filing requirements and to consider additional options
for simplifying filing and reducing the burden of filing from
overseas locations.  In addition, IRS had begun several projects to
develop better information about Americans living overseas.  These
projects might ultimately allow IRS to better target its enforcement
activities. 


   INFORMATION REPORTING OF
   INTEREST PAYMENTS CAN IMPROVE
   VOLUNTARY COMPLIANCE
-------------------------------------------------------- Appendix I:24

GAO/GGD-93-55R, 07/22/93

In correspondence to Senator Arlen Specter, GAO discussed the issue
of sending information returns to individual taxpayers. 
Specifically, GAO addressed this issue in the context of interest
income that banks also may report to the taxpayers on a separate,
year-end statement. 

GAO reported that Congress specifically required this separate
mailing of information returns that would only report the income. 
The added visibility of a separate mailing is more likely to increase
taxpayer compliance than bank statements containing other information
unrelated to taxes. 

In addition, GAO's analysis uncovered many examples in which
information reporting increased the taxpayers' compliance.  For
example, in the absence of information reporting, individuals
voluntarily reported between 15 to 75 percent of the income they
received (depending on the type of income).  In contrast, individuals
who received information returns voluntarily reported between 85 to
99 percent of their income (again depending on type of income).  GAO
concluded that the use of a separate mailing was worthwhile. 


   COMPUTER MATCHING COULD
   IDENTIFY OVERSTATED BUSINESS
   DEDUCTIONS
-------------------------------------------------------- Appendix I:25

GAO/GGD-93-133, 08/13/93

In a report to the Chairman, Subcommittee on Commerce, Consumer, and
Monetary Affairs, House Committee on Government Operations, GAO
tested whether IRS could further use information returns that small
businesses (sole proprietorships and small corporations) already had
filed.  IRS does not computer match these returns with business tax
returns (i.e., "reverse match") to detect any overstated deductions
or unfiled information returns.  IRS attempts to detect such
noncompliance through audits. 

To determine the feasibility of a reverse match, GAO analyzed 189 IRS
compliance audits of businesses at two IRS service centers in which
IRS had detected overstated tax deductions for one of four
expenses--wages, rents, pension plan contributions, and services. 
GAO analysis included 73 audits of small businesses that overstated
wage deductions.  GAO also analyzed IRS' databases on all recent
compliance audits to determine the extent that all small businesses
overstated these four deductions and two others--interest and bad
debts--that had potential for a reverse match. 

GAO found that a reverse match was feasible to identify businesses
that overstate wage deductions or do not file all required Forms W-2. 
GAO found that such matching would have identified 52 of the 73 small
businesses in our sample that overstated wage deduction in either tax
years 1987 or 1988.  Also, such matching would have identified all 12
of the 73 businesses that failed to file information returns on wages
they paid. 

Reverse matching for the other five types of deductions GAO reviewed
is less feasible because of various factors.  For example, businesses
are required to issue information returns on various payments to
individuals and sole proprietors but not to corporations.  Thus,
amounts that businesses deducted for services would not necessarily
match amounts they reported on information returns.  GAO believes
these limitations can be reduced, if not overcome, as IRS modernizes
its computer operations.  Addressing other limitations, such as the
reporting gap between tax returns and information returns, would
require legislative or regulatory changes.  Given the $40 billion in
overstated deductions from just small businesses, significant
benefits would likely emerge from expanding reverse matching beyond
wages to include services and other deductions GAO reviewed. 
However, the costs for businesses to file more information returns
would have to be considered. 


      RECOMMENDATION(S)
------------------------------------------------------ Appendix I:25.1

The Commissioner of Internal Revenue should do a limited test of a
reverse matching program for wages, and, if this proves to be cost
effective, the Commissioner should develop a full-scale program. 

If Congress expanded information reporting to cover service payments
to corporations or forgiven debts, the Commissioner should do a
limited test of reverse matching programs for these deductions.  If
they prove cost effective, a full-scale program should also be
developed. 

When implementing Tax Systems Modernization (TSM), IRS should
consider what actions are necessary to overcome the limitations to
reverse matching programs for other deductions, such as pensions,
rents, and interest. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:25.2

IRS agreed to test reverse matching for wages in exploring ways to
use information returns and tax returns as well as other information. 
IRS also agreed to explore ways to overcome the limitations to
reverse matching, particularly as TSM progresses.  As of December 31,
1993, IRS was taking action on all recommendations. 


   GENERAL MANAGEMENT
-------------------------------------------------------- Appendix I:26


   IMPLEMENTATION OF IRS EMPLOYEE
   SUGGESTIONS
-------------------------------------------------------- Appendix I:27

GAO/GGD-93-22, 11/24/92

In response to a request from the Chairman, Subcommittee on
Oversight, House Committee on Ways and Means, GAO reviewed IRS'
employee suggestion awards program.  Specifically, GAO determined
whether IRS was making cash awards to employees for suggestions but
not implementing the approved suggestions, thereby failing to take
advantage of potential savings offered.  The IRS' employee suggestion
program encourages employees to suggest ways to improve operations
and gives cash and other awards if the suggestions are adopted. 

GAO found that IRS does not routinely monitor or document the
implementation of approved suggestions on an IRS-wide basis. 
Therefore, it was not practical to determine the extent that approved
suggestions were being implemented throughout IRS.  However, GAO did
test the process in three IRS offices and found that almost all
approved suggestions were implemented. 

IRS recognizes that the suggestion program has problems and is taking
steps to strengthen the program.  These problems include lack of
management support, poor training for personnel who administer the
program, inadequate publicity, and untimely evaluation of
suggestions. 


   CRITICAL ISSUES FACING IRS
-------------------------------------------------------- Appendix I:28

GAO/OCG-93-24TR, 12/92 and GAO/T-GGD-93-4, 02/03/93

In December 1992, GAO issued a series of transition reports
discussing major policy, management, and program issues facing
Congress and the new administration.  One of those reports dealt with
IRS.  In a similar report issued 4 years before, GAO had discussed
four issues facing IRS--the need to (1) modernize the agency's
outdated and inefficient tax-processing system, (2) strengthen human
resources, (3) collect $30 billion in delinquent taxes, and (4)
reduce the $114 billion tax gap. 

In its 1992 report, GAO noted that those four areas still required
the new Commissioner's priority attention as did five others (1)
ongoing efforts to change the way IRS does business, (2) strategic
business process, (3) financial management, (4) management of
criminal investigation resources, and (5) the need to respond to
calls for a consumption tax.  GAO said that two themes cut across all
these issues--the need to foster and manage change and the need for
effective communication. 

More details on the issues surrounding delinquent taxes were provided
in a related report (See p.  22.)

In testimony before the Subcommittee on Treasury, Postal Service, and
General Government of the House Committee on Appropriations, GAO
discussed three of the five issues--systems modernization, tax
delinquencies, and the tax gap.  GAO said that the three issues were
interrelated.  IRS would be better able to collect delinquent taxes
and reduce the tax gap if its employees had on-line access to
essential information when needed--the basic goal of the
modernization effort.  GAO discussed (1) IRS' slow progress in
completing steps, such as finalizing decisions on how it will
structure its operations and developing system and data standards to
guide software development, that are critical to the modernization
effort; (2) the impact of inadequate records, an antiquated and
inefficient collection process, and ineffective staff allocation
practices on IRS' collection efforts; and (3) the need for IRS to
improve voluntary compliance by, among other things, rethinking its
enforcement approach and ensuring that it has reliable data with
which to effectively target its efforts. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:28.1

GAO/HR-93-13, 12/92


   STATUS OF PROGRESS IN
   CORRECTING SELECTED HIGH-RISK
   AREAS
-------------------------------------------------------- Appendix I:29

GAO/T-AFMD-93-1, 02/03/93

In testimony before the Subcommittee on Oversight, House Committee on
Ways and Means, GAO discussed seven areas within its high-risk
program and several crosscutting issues that affect these and other
problem areas throughout the government.  Specifically, GAO focused
on program weaknesses, agency corrective actions, and recommendations
for future actions by Congress, the administration, and agency
officials in areas involving several government organizations,
including IRS. 

IRS is responsible for routine tax collection and for pursuing
delinquent payments.  Although IRS routinely collects about a
trillion dollars each year, its efforts to collect delinquent taxes
have been inefficient and unbalanced.  As a result, billions of
dollars in taxes remain uncollected, representing a serious loss of
revenue for the government. 

GAO said that several problems have interfered with IRS' ability to
collect unpaid taxes.  Specifically, (1) IRS' records are inaccurate
and insufficient; (2) its collection process is lengthy, antiquated,
rigid, and inefficient; (3) it has had difficulty balancing
collection efforts with the need to protect the taxpayer; (4) its
decentralized structure tends to blur lines of responsibility and
accountability; and (5) it does not have enough information to
allocate staff effectively. 

Although IRS has begun to develop some much needed information on the
accounts receivable inventory, taken a step toward establishing a
unified collection strategy by appointing an accounts receivable
executive officer, and included collection goals in its strategic
planning process, GAO said that many areas have yet to be addressed. 
These include gathering more and better data and removing
organizational impediments to collections.  Further, GAO said that
Congress could revisit the issue of the appropriate balance between
the need to protect taxpayers and the need to collect delinquent tax
debts. 


   DELAYED TAX DEPOSITS CONTINUE
   TO CAUSE LOST INTEREST FOR THE
   GOVERNMENT
-------------------------------------------------------- Appendix I:30

GAO/GGD-93-64, 05/22/93

In a report to the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, GAO provided updated information on a
1990 report about the timeliness of IRS deposits of tax payments. 

IRS data for 2 of its 10 service centers showed that the 2 centers
averaged 6.2 days to deposit the $5.2 billion in tax payments they
received with individual tax returns during the peak period (between
April 15 and May 4, 1992)--the time of year when IRS receives the
heaviest volume of returns with tax payments.  GAO estimated that the
government could have earned $2.4 million in additional interest
income if the $5.2 billion had been deposited within 24 hours of
receipt--the time service centers normally take to make deposits at
other times of the year.  The lost interest was considerably less
than the $8.8 million GAO reported for the same two centers in 1990,
but most of the reduction was due to lower interest rates rather than
faster processing of tax payments. 

GAO recommended in 1990 that IRS assess various options for reducing
the time it takes to deposit large tax payments.  In GAO's opinion,
IRS' National Office did not provide the strong leadership necessary
to effectively respond to that recommendation. 

The Department of the Treasury has a cash management strategy that,
if successfully implemented, could speed up deposits.  Under this
strategy, which IRS did not expect to fully implement before 1996,
tax payments would be sent directly to banks instead of IRS' service
centers.  In the interim, IRS needs to more aggressively seek faster
ways to deposit tax payments.  One opportunity identified by GAO
involved requests for extensions to file.  IRS data for the two
service centers showed that taxpayers who requested extensions sent
payments along with those requests that were, on average, about four
times greater than the payments that accompanied regularly filed
returns. 


      RECOMMENDATION(S)
------------------------------------------------------ Appendix I:30.1

The Commissioner of Internal Revenue should direct the Assistant
Commissioner for Returns Processing to (1) expedite deposits of tax
payments submitted with applications for filing extensions starting
with the 1994 filing season and (2) require that service centers
collect data during the 1993 peak period to identify the type of mail
having the largest tax payments and the number of tax payments
received at various dollar levels.  IRS should then use the data to
develop strategies for identifying and rapidly depositing large tax
payments. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:30.2

In 1993, two of IRS' service centers collected data that showed mail
in oversized envelopes is more likely to contain larger tax payments. 
GAO has been told that all 10 service centers will be required to
prioritize the handling of such mail in 1994.  As for payments
accompanying applications for filing extensions, IRS said it would
test an alternative way to process the payments but has determined
that the earliest the process can be tried would be 1995. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:30.3

GAO/GGD-90-120, 08/31/90


   COLLECTION AND EXCHANGE OF DATA
   BY IRS AND THE U.S.  CUSTOMS
   SERVICE
-------------------------------------------------------- Appendix I:31

GAO/GGD-93-33R, 04/06/93

In a letter to the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, GAO presented information resulting from
general observations of IRS and Customs officials about their
collection and exchange of data.  The information, presented in
matrix form, covered

  the type of data each agency collected,

  the extent of data sharing between the agencies,

  the type of data that officials in one agency would like from the
     other, and

  the barriers to additional data sharing. 

 


   EXAMPLES OF WASTE AND
   INEFFICIENCY IN IRS
-------------------------------------------------------- Appendix I:32

GAO/GGD-93-100FS, 04/27/93

In a fact sheet to the Chairman of the Subcommittee on Oversight of
the House Committee on Ways and Means, GAO documented examples of
waste, inefficiency, and abuse in IRS.  Those examples came from
prior GAO reports and reports prepared by IRS' Internal Audit
Division and the Department of the Treasury's Office of Inspector
General, various studies and other documents prepared by and for IRS,
and congressional hearings. 

GAO noted that (1) many of the examples derived from IRS' antiquated
computer systems, fragmented organizational structure, and
inefficient work processes and (2) IRS was doing things, such as
modernizing its systems and reassessing the roles and
responsibilities of its various organizational components, that
should alleviate many of the problems discussed in the fact sheet. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:32.1

GAO/T-GGD-92-34, 04/30/92


   IRS' BUDGET REQUEST FOR FISCAL
   YEAR 1994
-------------------------------------------------------- Appendix I:33

GAO/T-GGD-93-23, 04/28/93

The administration's fiscal year 1994 budget request for IRS was for
116,060 full-time equivalent staff years and $7.4 billion--about $284
million and 792 staff years more than IRS' fiscal year 1993
authorization.  The budget called for large increases for Tax Systems
Modernization (TSM) and for 11 compliance initiatives involving such
things as collecting delinquent taxes, increasing international tax
compliance, and increasing audit coverage.  The increases were
offset, in part, by decreases due to anticipated productivity savings
from automation. 

In conjunction with hearings on this budget request held by the
Subcommittee on Oversight, House Committee on Ways and Means, GAO
prepared a statement for the record that made the following points: 

  More than half of the TSM increase was for synchronized deployment
     of four automated systems.  GAO questioned the appropriateness
     and timing of this request because much remained to be done
     before IRS would be able to develop and approve a detailed
     deployment plan. 

  GAO believed that the goals of some of the 11 initiatives could be
     achieved without more staff.  IRS could collect more delinquent
     taxes, for example, by changing collection processes and
     reallocating existing resources. 

  IRS might have trouble delivering on some compliance initiatives
     because of its continuing need to redirect resources to offset
     labor cost shortfalls.  If estimated productivity savings proved
     unrealistic, for example, IRS' base operations would be eroded
     in 1994 and at least some of the growth intended through the
     initiatives might go unrealized as resources are diverted to
     stem that erosion. 

  The budget included no allowance for additional staff to implement
     expected tax law changes in 1993.  Such changes could increase
     IRS' taxpayer service workload and, without any increase in
     resources, exacerbate IRS problems in meeting taxpayer demand
     for telephone assistance.  As of March 28, 1993, IRS was only
     answering about 24 percent of the calls it was receiving. 

  Operating efficiencies are available through TSM and changes in the
     way IRS does business.  As a part of that discussion, GAO
     suggested some changes affecting IRS' regional offices and
     discussed some IRS initiatives to streamline its operations. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:33.1

IRS' appropriation, as enacted on October 29, 1993, provided for $51
million less than the administration had requested--$35 million less
for enforcement and $16 million less for information systems. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:33.2

GAO/T-GGD-91-17, 03/20/91; GAO/T-GGD-92-34, 04/30/92; and
GAO/GGD-93-76, 05/11/93


   IRS CAN IMPROVE THE FEDERAL TAX
   DEPOSIT SYSTEM
-------------------------------------------------------- Appendix I:34

GAO/AFMD-93-40, 04/28/93

In a report to the Secretary of the Treasury, GAO presented the
results of its evaluation of IRS' current procedures for collecting
the necessary accounting and payment data for the payments made
through the Federal Tax Deposit (FTD) system.  The FTD system
collects taxes paid by private sector businesses and governmental
entities and accounts for over 80 percent of IRS' tax receipts.  The
report assesses the efforts that IRS and Treasury's Financial
Management Service have underway to modernize this process. 

Because the FTD system is a paper-based system that separates the
payment and related accounting data, opportunities for numerous
errors exist in the process.  Resolving such errors is both time
consuming and costly to the IRS and taxpayers.  Also, the current
process costs Treasury about $145 million annually because of a 1-day
delay in funds availability to the Treasury.  Recognizing that
automating the system can provide substantial savings, the Treasury
in 1986 began to automate the FTD system and speed up collecting tax
revenues by 1 day.  IRS has developed several prototype systems that
(1) automate this process, (2) address several systemic problems, and
(3) allow same-day fund availability to the Treasury. 

Yet, the candidate systems for national application do not address
the business problem of separately reporting accounting and payment
data.  However, because of the potential for about $145 million in
annual savings, GAO said it might be beneficial to proceed with one
or more of these models provided a nationwide system can be
implemented by IRS' current target date of 1994.  But if a full-scale
implementation continues to be delayed, as it has been virtually
since the project began, and the projected cash management savings
would be further delayed, GAO said that the best course of action
would be to incorporate concurrent reporting of tax payment and the
related accounting data with current initiatives.  After discussing
the issue with GAO, Treasury officials said that they had made
significant changes in the project's direction, including a
commitment to test concurrent reporting of accounting and payment
data.  Treasury plans to do the necessary analyses to decide whether
to pursue the cash management savings first or to bring both
components on at the same time to reduce taxpayer confusion. 


      RECOMMENDATION(S) TO THE
      SECRETARY OF THE TREASURY
------------------------------------------------------ Appendix I:34.1

The Secretary of the Treasury should direct the Commissioners of the
Internal Revenue Service and the Financial Management Service to
monitor the revised FTD automation efforts. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:34.2

GAO/GGD-90-102, 07/31/90


   MANAGEMENT OF IRS' INFORMATION
   SYSTEMS MANAGEMENT RESOURCES
-------------------------------------------------------- Appendix I:35

GAO/GGD-93-37R, 05/25/93

At the request of the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, GAO began an assessment of how IRS'
Information Systems Management organization managed its resources. 
That organization had about 4,400 authorized positions and a budget
of $294 million for fiscal year 1993. 

GAO discussed various events that had transpired or were in process
that bore on the issues covered by this request.  Those events
included (1) IRS' development and substantive implementation of an
action plan in response to a subcommittee inquiry about allegations
of abuse in the use of computer resources; (2) an October 1992
reorganization of Information Systems Management's systems
development activities; (3) an ongoing study, begun in September
1992, of IRS' ability to deliver projects that employ advanced
systems development technologies and methods; and (4) an Internal
Audit study, completed in August 1992, that disclosed, among other
things, a need to improve management and control of software
development resources, budgets, and costs. 

Because it would take several months to properly evaluate these
actions, GAO agreed with the Chairman's office to terminate this
assessment. 


   EXAMINATION OF IRS' FISCAL YEAR
   1992 FINANCIAL STATEMENTS
-------------------------------------------------------- Appendix I:36

GAO/AIMD-93-2, 06/30/93 and GAO/T-AIMD-93-3, 08/04/93

In a report to Congress, GAO presented the results of its audit of
Principal Financial Statements IRS prepared pursuant to the Chief
Financial Officers (CFO) Act of 1990 (P.  L.  101-576).  The act also
authorized GAO to do an audit of these statements.  GAO was unable to
express an opinion on the reliability of these statements because
critical supporting information was not available.  And, where
information was available, GAO found that it was generally
unreliable. 

The significant matters that GAO noted in its audit related to
revenue, tax accounts receivable, property and equipment, management
of operating funds, computer controls, seized assets, and reports
required by the Federal Managers' Financial Integrity Act.  GAO found
that IRS' internal controls over each of these areas did not (1)
effectively safeguard assets, (2) provide a reasonable basis for
determining material compliance with relevant laws and regulations,
and (3) ensure that there were not any material misstatements in the
Principal Financial Statements.  In addition, GAO was unable to test
all significant controls because of the limitations on data
availability. 

Further, GAO could not test compliance with many laws that it wanted
to test because of the ineffective internal controls and limitations
on the availability of data. 

In subsequent testimony before the Senate Committee on Governmental
Affairs, the Comptroller General discussed the (1) results of GAO's
financial statement audits at IRS and the Customs Service and (2) the
need to accelerate governmentwide financial management reform through
the full and effective implementation of the CFO Act of 1990. 

The Comptroller General said that GAO's financial audits showed that
(1) serious financial problems exist at the Department of the
Treasury and the Department of Defense, which he discussed before the
same Committee in his July 1, 1993, testimony (GAO/T-AIMD-93-1); and
(2) this demonstrated a need to prepare and audit annual financial
documents.  He noted that through the CFO Act's pilot financial
statement audits, IRS and Customs have improved their financial
reporting and the quality of the underlying financial and program
performance data. 

The Comptroller General further noted that Congress has a better idea
of how these organizations are actually functioning.  Regarding IRS,
for example, he said that Congress now has reliable estimates of IRS'
receivables and the related collectible amount, which are tens of
billions of dollars less than what had been reported by the agency in
the past. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:36.1

GAO/GGD-92-81BR, 04/17/92; GAO/HRD-92-81, 09/01/92;
GAO/T-GGD-93-20, 03/30/93; GAO/AFMD-93-40, 04/28/93;
GAO/AFMD-93-42, 05/06/93; GAO/GGD-93-109, 06/08/93; and
GAO/AIMD-93-24, 08/05/93


   IRS INFORMATION SYSTEMS: 
   WEAKNESSES INCREASE RISK OF
   FRAUD AND IMPAIR RELIABILITY OF
   MANAGEMENT INFORMATION
-------------------------------------------------------- Appendix I:37

GAO/AIMD-93-34, 09/22/93

As a part of its audit of IRS' fiscal year 1992 financial statements,
GAO reviewed computer controls.  In a report to the Commissioner of
Internal Revenue, GAO discussed weaknesses in general controls over
IRS' computerized information systems.  General controls affect the
overall effectiveness and security of computer operations as opposed
to being unique to any specific computer application.  They ensure
(1) that the organizational structure, operating procedures, software
security features, and physical projections are designed to ensure
that only authorized changes are made to computer programs; (2) that
access to data is appropriately restricted; and (3) that backup and
recovery plans are adequate to ensure the continuity of essential
operations.  Such controls are critical to IRS' ability to safeguard
assets, maintain the confidentiality of taxpayer data, and ensure the
reliability of financial management information. 

GAO identified two areas of significant weakness in the general
controls over IRS computer systems that have increased the risk of
fraud and diminished the reliability of IRS' financial management
information: 

  IRS did not adequately restrict access to taxpayer data to only
     those computer support staff who needed it and did not
     adequately monitor the activities of thousands of employees who
     were authorized to read and change taxpayer files.  As a result,
     IRS could not be certain that the confidentiality and accuracy
     of this data were protected and that the data were not
     manipulated for purposes of personal gain.  GAO reported that
     IRS internal reviews have identified instances where IRS
     employees (1) manipulated taxpayer records to generate
     unauthorized refunds, (2) accessed taxpayer records to monitor
     the processing of fraudulent returns, and (3) browsed taxpayer
     accounts that were unrelated to their work, including those of
     friends, relatives, neighbors, and celebrities. 

  Controls did not ensure that IRS used only authorized versions of
     its computer programs.  This is a systemic problem that permits
     programmers to introduce unauthorized software changes either
     inadvertently or deliberately and, thus, increases the risk that
     taxpayer and other data may not be processed as intended by
     management policies. 

GAO also noted that (1) in case of an unexpected interruption in
operations at its primary computer center, IRS' ability to maintain
taxpayer accounts on a current basis may be impeded and (2) IRS has
not yet tested the effectiveness of its recently revised disaster
recovery plan. 


      RECOMMENDATION(S)
------------------------------------------------------ Appendix I:37.1

GAO made several recommendations regarding controls over (1)
employees access to computer programs and taxpayer data files and (2)
centrally and locally developed computer programs. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:37.2

IRS generally agreed with GAO's recommendation and has taken or plans
to take corrective action.  For example, IRS said that (1) it is
revising written guidelines, strengthening management reviews, and
enhancing audit trail systems to better report employees activities
and (2) it has formed a team to identify needed controls, is testing
off-the-shelf computer software that contains program version
controls, and is strengthening documentation and scheduling
requirements for locally developed computer processes.  IRS also
provided some details regarding its efforts to strengthen its
disaster recovery capabilities. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:37.3

GAO/AFMD-93-40, 04/28/93; GAO/AFMD-93-42, 05/06/93;
GAO/AIMD-93-2, 06/30/93; and GAO/AIMD-93-24, 08/05/93


   TAXPAYER ASSISTANCE
-------------------------------------------------------- Appendix I:38


   INFORMATION ON TAX COUNSELING
   FOR THE ELDERLY PROGRAM
-------------------------------------------------------- Appendix I:39

GAO/GGD-93-90BR, 04/08/93

In a report to the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, GAO provided information about IRS'
grants for the Tax Counseling for the Elderly (TCE) program.  Under
this program, nonprofit organizations provide volunteer-assisted free
tax counseling for the elderly.  This report discusses how (1) grant
funds are awarded under the TCE program, (2) funds were spent by the
five largest grantee organizations, and (3) IRS oversees the use of
grant funds. 

To be eligible for a grant, an organization must have nonprofit
status, volunteer coordination experience, and tax expertise.  IRS
awards grant funds to all organizations that apply and meet the
eligibility criteria, although the organizations generally receive
less than they request.  In 1992, IRS granted $3 million to 58
organizations. 

IRS requires that at least 70 percent of grant funds be used as
reimbursement to volunteers for out-of-pocket expenses incurred in
training or providing tax assistance to the elderly.  The remaining
30 percent of grant funds may be used for administrative expenses,
such as advertising the program to the elderly, telephone costs, and
supplies needed by volunteers.  Before fiscal year 1992, the limit on
administrative expenses was 25 percent.  IRS records of grantee
expenditures in fiscal year 1991 indicate that the five largest
grantee organizations spent the funds received in accordance with
these guidelines. 

IRS requires all grantees to submit monthly or quarterly expense
statements and requires independent audits of grantees who receive
more than $25,000 in federal funds.  IRS district offices are
responsible for reviewing the quality of TCE return preparation, and
IRS service centers maintain statistics, including accuracy rates, on
the tax returns prepared under the TCE program.  The TCE program has
an intricate system of reporting on program activities and fund
disbursement that, if properly implemented, provides reasonable level
of certainty that grant funds are used for expenses directly related
to providing assistance to the elderly. 


   IRS' TEST OF TAX RETURN FILING
   BY TELEPHONE
-------------------------------------------------------- Appendix I:40

GAO/GGD-93-91BR, 04/26/93

In 1992 and 1993, IRS tested the filing of the simplest individual
income tax return (Form 1040EZ) by using a push-button telephone. 
The test, known as TeleFile, was limited to taxpayers in Ohio who met
certain eligibility requirements.  At the request of the Chairman of
the Senate Committee on Governmental Affairs, GAO reviewed the
results of this test in 1992 and changes to the test for 1993. 

IRS' evaluation of TeleFile test results in 1992 and GAO's assessment
of those results indicated that filing by telephone can be a viable
alternative to the filing of paper returns for the millions of
taxpayers who would otherwise file a Form 1040EZ.  IRS' test in 1992
showed that telephone filing is technically feasible and that
taxpayers who used it liked it.  Taxpayers are not required to pay to
use TeleFile and can access the system 7 days a week, 24 hours a day
without leaving home.  Also, TeleFile users can get their refunds
faster, and their burden is reduced by having fewer computations to
make.  For IRS, TeleFile results in more accurate returns that are
less costly to process. 

The biggest change in the test for 1993 was that some users, instead
of having to send in a paper document with their signature, had a
voice recording taken, which served as their signature. 

Security poses the biggest potential obstacle to expansion of
TeleFile.  Despite the presence of several controls, GAO said that
TeleFile security was being compromised because of taxpayer
identifying information, such as Social Security numbers and personal
identification numbers, needed to file a return over the telephone,
was printed on the label on the outside of the tax package mailed to
eligible taxpayers, and thus easily accessible to others.  IRS was
aware of this problem and was considering alternatives to correct it. 


   IMPLEMENTATION OF IRS ACTIONS
   IN CORRESPONDING TO TAXPAYERS
-------------------------------------------------------- Appendix I:41

GAO/GGD-93-38R, 04/27/93

Taxpayers write to IRS on a variety of matters, such as to send a
payment, request that a penalty be abated, or provide information in
response to an IRS notice.  IRS sends interim letters to taxpayers to
advise them when the matter in question cannot be resolved within 30
days.  In a letter to the IRS, the Subcommittee expressed concern
that the correspondence was inappropriate for the situation, citing
cases in which the taxpayer had sent payments to IRS, but IRS'
interim response did not acknowledge the payments but instead
contained language thanking the taxpayers for their "inquiry." In its
reply to the Subcommittee, IRS said it agreed with the subcommittee's
concern and was taking immediate action to change the interim letter. 
GAO found that the problem had not been solved, primarily because IRS
directed only one of several service center functions that correspond
with taxpayers to correct its procedures.  Also, GAO found that IRS
staff who prepared the corrected letters did not choose appropriate
language when composing the letters on IRS' computerized letter
writing system.  GAO plans to study this problem in more depth as
part of a broader review of IRS correspondence issues it is doing for
the Subcommittee. 


   SELECTED IRS FORMS,
   PUBLICATIONS, AND NOTICES COULD
   BE IMPROVED
-------------------------------------------------------- Appendix I:42

GAO/GGD-93-72, 04/30/93

In response to a request from the Chairman, Subcommittee on
Oversight, House Committee on Ways and Means, GAO reported on the
accuracy of some commonly used IRS forms, publications, and notices. 
Specifically, GAO examined 17 selected forms and publications to see
if they conformed with current legal requirements as stated in the
Internal Revenue Code and Treasury Regulations and 21 notices for
consistency with the purposes established by IRS guidance.  GAO also
looked for consistency with IRS revenue rulings, revenue procedures,
and other IRS documents, including other forms and publications. 

GAO did not identify any instances in which the forms, publications,
and notices did not conform with legal requirements or IRS guidance. 
However, GAO did identify some changes that could be made to improve
the understandability and usefulness of these printed products to
taxpayers.  Generally, GAO suggested changes that were directed
toward the use of more specific language, consistent terminology, and
inclusion of appropriate references to other forms and publications. 

The report also discusses the usefulness of taxpayer assistance
telephone numbers that IRS provides on these printed products.  The
taxpayer assistance telephone numbers provided on the tax forms and
publications that GAO reviewed were those of IRS taxpayer offices
that should be able to respond to taxpayer' questions and related
matters.  The notices reviewed generally included the telephone
number of an IRS service center, district office, or toll-free
taxpayer call site. 

IRS agreed to address most of GAO's suggestions and said that the
changes either already have been made or will be incorporated in
future versions of the IRS documents. 


   TAX POLICY
-------------------------------------------------------- Appendix I:43


   SMALL TAX-EXEMPT INSURANCE
   COMPANIES
-------------------------------------------------------- Appendix I:44

GAO/GGD-93-11R, 02/08/93

Congress has provided tax relief under Internal Revenue Code section
501(c)15 to small, local insurance companies that provide insurance
to rural and farm communities.  GAO reviewed this provision to
determine if its intent was still being met and in a letter to the
Acting Commissioner of Internal Revenue presented the results of that
study. 

GAO said that the Tax Reform Act of 1986 expanded the provision under
which a property or casualty insurance company could qualify for this
tax-exempt status.  The 1986 provision provided tax-exempt status to
mutual and stock companies that have no more than $350,000 in net or
direct written premium income.  This change made it possible for a
company with sizable investment income to be tax exempt if it has a
small premium income. 

GAO found, for the most part, that the insurance companies qualifying
for the tax exemption since 1986 were generally small companies that
seem to be the types of organizations Congress intended to assist
under section 501(c)15.  In a few isolated instances, companies had
earned large amounts of investment income tax free under the revised
section 501(c)15.  Because GAO found few companies with substantial
investment income, little revenue appeared to have been forgone. 


   MANY FACTORS CONTRIBUTED TO THE
   GROWTH IN HOME EQUITY FINANCING
   IN THE 1980S
-------------------------------------------------------- Appendix I:45

GAO/GGD-93-63, 03/25/93

At the request of Congressman William J.  Coyne, GAO reviewed (1) the
use of home equity financing, including both home equity loans and
home equity lines of credit and (2) the effect of the Tax Reform Act
of 1986 on the use of home equity and other types of consumer
financing. 

GAO said that while total housing debt and nonhousing consumer debt
increased at average annual rates of 6 and 4 percent between 1981 and
1991, the use of home equity financing increased by 20 percent.  GAO
reported that several factors played a role in the growth in housing
debt, particularly home equity debt.  These factors included rising
home values, changes in banking laws, and lenders' aggressive
marketing campaigns for home equity financing.  In addition, the Tax
Reform Act of 1986 contributed to the continuing growth and
popularity of home equity financing with the elimination of the tax
deductibility of interest expenses from many types of consumer debt,
but not mortgage debt. 

Although information on home equity financing usage was available
from surveys of borrowers and lenders, GAO reported that no
conclusions could be reached from the data concerning changes in
consumer behavior due to increased availability of home equity
financing during this period.  This was because the data did not
clearly indicate whether the existence of home equity financing
allowed borrowers to (1) finance something they would not have
otherwise done or (2) finance something they would have done anyway,
freeing resources for other uses. 

GAO also reported that while home equity financing was tax-preferred
due to interest deductibility, there were disadvantages to using it. 
For example, when borrowers use home-based debt, there is the
potential for losing the home if they default.  In addition, unlike
other types of consumer financing, there are costs associated with
obtaining home equity financing, such as application processing fees. 

If there is congressional concern about the amounts or uses of home
equity financing, GAO gave several options that Congress could
consider:  (1) eliminate the tax deductibility of interest paid on
home equity financing and (2) limit the amounts of deductible home
equity financing or further limit the total amount of mortgage debt
eligible for the interest deduction.  While these options could
possibly alleviate congressional concerns, they also raise
enforcement difficulties.  For example, the elimination of interest
deductibility on home equity financing would be difficult for IRS to
monitor.  Under current reporting requirements to IRS, interest on
home equity financing and other mortgage debt are reported as a
single line item on individual tax returns, thus making it very
difficult to differentiate between different types of mortgage debt. 
A more feasible option may be for Congress to introduce a cap on
deductible mortgage interest.  This would allow IRS to use existing
information reporting systems for enforcement purposes. 


   EARNED INCOME TAX CREDIT: 
   DESIGN AND ADMINISTRATION COULD
   BE IMPROVED
-------------------------------------------------------- Appendix I:46

GAO/T-GGD-93-20, 03/30/93 and GAO/GGD-93-145, 09/24/93

In testimony before the Subcommittees on Select Revenue Measures and
Human Resources, House Ways and Means Committee, and in a report to
Senator Bill Bradley, GAO assessed the design of the earned income
credit (EIC), a tax credit available to low-income workers with
qualifying children.  GAO wanted to know if the EIC was achieving its
objectives and whether IRS is continuing to encounter problems in
administering the credit.  Specifically, GAO evaluated (1) how the
benefits of the credit are distributed among taxpayers; (2) the
extent to which the credit offsets the payroll tax incurred by
qualifying taxpayers; and (3) how the credit affects recipients' work
incentives, especially those of single parents.  The administrative
issues that GAO was asked to examine included how IRS was attempting
to ensure that the maximum number of qualifying recipients receive
the credit without unduly increasing the number of illegitimate
claims. 

The tax credit was created in 1975 with the objective of providing
assistance to low-income workers who maintained households and had
dependent children they claimed as exemptions.  In its first year,
6.2 million families claimed the credit.  By 1988, 11.1 million
families were receiving the credit, and almost 14 million received it
for tax year 1991. 

The EIC is a refundable tax credit payable to a qualifying household
if income is below a cap ($22,370 in 1992) and if the household
contains at least one qualifying child.  Any credit amount that
exceeds tax liability is paid to the recipient.  The credit is based
on a percentage of earnings (17.6 percent in 1992) up to $7,500 of
earned income.  When income is between $7,500 and $11,850, the credit
is a constant amount ($1,324 in 1992).  For income above $11,850, the
credit is reduced (at a rate of 12.57 percent in 1992) as income
rises, until it disappears at the cap ($22,370 in 1992). 

GAO concluded the credit increased progressivity of the tax system
for recipients.  In 1988, the credit offset about half of the payroll
taxes for low-income workers who qualified for the credit and almost
offset these taxes for qualified workers in the credit's lowest
income range.  By 1994, the credit is expected to nearly offset
payroll taxes for the average low-income recipient.  Those workers
who received the credit and are below the poverty line have their
overall federal tax burden substantially reduced, while those
qualified workers who are above the poverty line have their taxes
reduced somewhat.  However, because only 18 percent of low-income
filers qualify for the credit, the overall effect on tax
progressivity for low-income households is much less. 

GAO also concluded that overall work incentives built into the design
of the credit negatively affected the average annual hours worked by
credit recipients.  GAO estimates that in 1988 recipients probably
worked about 2.1 percent fewer hours as a result of the credit. 
Wives were more responsive to the credit since their hours worked
fell more than husbands and single female parents.  GAO projections
based on the credit rates for tax year 1994 contained in the Omnibus
Budget Reconciliation Act of 1990 (OBRA) suggest that the size of
these responses may increase as the credit becomes larger by 1994. 

GAO found that some IRS administrative problems have been solved but
that others remain.  Some of these problems can be resolved by
improving IRS' returns processing procedures; others may require
legislative changes to make the credit more administrable. 

GAO said that the act's simplifications reduced the importance of
filing status and dependency tests as problems for the IRS.  However,
additional credits and interactions between these credits and other
provisions in the code were introduced by the act, which along with
IRS' new schedule EIC, have added to the complexity of the credit. 

Even with the act's changes, IRS still faces the dilemma of either
denying the credit to potentially eligible workers or giving the
credit to potentially ineligible workers.  Trying to balance these
forces can lead to inconsistent treatment of filers.  For example,
the returns processing procedures IRS has instituted since the act
may still allow certain filers who provide incomplete information to
receive the credit.  However, other filers who also provide
incomplete information may not receive the credit or may receive it
after much delay, although they appear qualified on the basis of tax
return information.  In addition, while IRS has greatly expanded its
outreach effort for the EIC, it still does not use information it has
on nonfilers that could substantially improve this effort. 


      RECOMMENDATION(S)
------------------------------------------------------ Appendix I:46.1

The Commissioner of Internal Revenue should (1) modify the tax return
to capture all of the requisite qualification information, (2) send
notices that explain credit requirements to nonfilers with low earned
incomes, and (3) modify returns processing procedures to ensure that
all potentially eligible taxpayers who submit similar information are
treated consistently. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:46.2

IRS and Treasury disagreed with GAO's recommendation to modify the
tax return to capture the relevant qualification information. 
Because some of the additional information would be added to the
current space for dependent information, IRS was concerned that the
burden on non-EIC taxpayers would be increased.  IRS also believed
that adding more information to the tax return would make that return
more complex. 

IRS agreed with GAO's recommendation to send notices about the EIC to
nonfilers.  IRS said that a work group is looking at GAO's proposal
and studying other ways to reach all individuals who may be eligible
for the credit and are not receiving it. 

IRS disagrees that taxpayers potentially eligible for the credit are
treated inconsistently.  IRS contends that taxpayers who file a
schedule EIC are treated consistently within that group and that
taxpayers eligible for the credit and do not file a schedule EIC but
show similar qualifying information on their tax returns are treated
consistently within their class of filers. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:46.3

GAO/T-92-26, 02/19/92


   INDUSTRIAL DEVELOPMENT BONDS: 
   ACHIEVEMENT OF PUBLIC BENEFITS
   IS UNCLEAR
-------------------------------------------------------- Appendix I:47

GAO/RCED-93-106, 04/22/93

The federal government forgoes revenue, estimated by the Joint
Committee on Taxation, at over $2 billion in 1991, because of the
tax-exempt status of small issue industrial development bonds.  The
bonds, issued by state and local governmental authorities, are
intended to help finance the creation or expansion of manufacturing
facilities.  Because these bonds are considered to generate public
benefits, the Internal Revenue Code exempts the interest investors
earn on the bonds from federal income taxes.  The authorizing
provision for issuing these bonds expired on June 30, 1992, and at
the time of GAO's review, the President had proposed extending the
provision permanently. 

In a report to the Chairman of the Subcommittee on Intergovernmental
Relations, House Committee on Government Operations, GAO presented
the results of its review of the use and benefits of small issue
industrial development bonds for manufacturing.  Specifically, GAO
determined the extent to which (1) public benefits were achieved
through the use of these bonds; (2) the bonds were subject to
default; and (3) the bonds were paid off early, thus removing the
Internal Revenue Code use restrictions so that the projects could
subsequently be used for purposes other than manufacturing. 

GAO said that these industrial development bonds were being used for
their intended purpose of financing manufacturing facilities. 
However, contrary to claims that these bonds were achieving public
benefits, such as (1) creating jobs, (2) assisting economically
distressed areas, (3) fostering start-up companies, and (4) keeping
manufacturing firms in the country, GAO found that it was unclear
whether the bonds significantly achieved these benefits.  Of the 68
projects financed with industrial development bonds in the 3 states
we reviewed, only 16 of the projects were located in economically
distressed areas, 7 involved start-up companies, and 1 might have
moved to another country had it not received industrial bond
financing. 

Additional concerns that these bonds were subject to high rates of
default or that they were paid off early were not confirmed by GAO's
study.  In the three states GAO reviewed, the bonds seldom defaulted,
which may be attributed to safeguards in the issuance process to
ensure that the developers were creditworthy and that the projects
were financially sound.  Similarly, GAO said that few bonds were paid
off early, and there was no evidence that projects were subsequently
used for nonmanufacturing purposes.  When early payment of the bonds
occurred, GAO found that usually the company refinanced the debt or
had become financially able to pay it off. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
------------------------------------------------------ Appendix I:47.1

Given the questions that surround whether these industrial bonds are
achieving the public benefits attributed to them and because of the
tax revenue forgone, Congress may wish to consider not renewing the
provision authorizing issuance of these industrial bonds.  If,
however, Congress does extend the provision, it may wish to specify
requirements to better direct these bonds toward achieving public
benefits that would not occur from alternative investment of the
money.  For example, GAO suggested that Congress may wish to provide
requirements that would direct small issue industrial development
bonds to economically distressed areas or to start-up companies. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:47.2

On August 10, 1993, Congress enacted the Omnibus Budget
Reconciliation Act of 1993 (P.L.  103-66) which, among other things,
permanently extended the Industrial Development Bond provision.  No
further action had been taken as of December 31, 1993. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:47.3

GAO/RCED-91-50, 03/29/91; and GAO/RCED-92-247R, 07/24/92


   VALUE-ADDED TAX: 
   ADMINISTRATIVE COSTS VARY WITH
   COMPLEXITY AND NUMBER OF
   BUSINESSES
-------------------------------------------------------- Appendix I:48

GAO/GGD-93-78, 05/03/93

For several years a federal value-added tax (VAT) has been discussed
as an option that the United States might use to reduce the budget
deficit, reform the current federal tax system, or fund new programs. 
In its earlier work on the VAT, GAO found a major gap in the
literature pertaining to how a VAT might be administered in the
United States and how much it might cost.  GAO thus initiated this
review to provide Congress with this information.  Specifically,
GAO's objectives were to (1) identify the processes and structure for
administering a VAT, (2) estimate the costs of administering a basic
VAT in the United States, (3) consider how alternative designs affect
administrative costs, and (4) discuss the transition necessary to
implement a VAT. 

A single-rate, broad-based VAT would promote economic neutrality
among goods and services, minimize compliance burdens for the
taxpayer, and minimize administrative costs.  For its basic VAT, GAO
assumed that (1) IRS would administer the tax in cooperation with
Customs and the Federal Reserve System; (2) all goods and services
would be taxed except for difficult to tax sectors, such as financial
intermediaries, whole life insurers, and pre-existing buildings,
including residential housing; (3) nearly all businesses would be
subjected to the tax and would file monthly or annually depending
upon the gross receipts of the business; and (4) businesses with
gross receipts above $25,000 would be required to file and pay
electronically. 

The costs of administering a VAT would vary according to the
complexity of the tax.  Exemptions and multiple rates, such as the
ones foreign countries use to address concerns of the burden on
low-income consumers, would significantly increase the complexity,
resulting in higher costs of administration.  A single-rate,
broad-based VAT in 1995 would cost the government between $1.22
billion and $1.83 billion annually, depending on the number of
taxpayers subjected to the tax.  If the VAT were structured to
include exemptions and multiple rates, the administrative costs could
be as much as $700 million higher.  GAO estimated that reducing the
number of businesses from 24 to 12 million would reduce the
administrative costs from $1.83 billion to $1.41 billion; with only 9
million taxpayers, the estimated costs would be further reduced to
$1.22 billion. 

For transition to a VAT, about $800 million would be needed for
taxpayer education, staff training, and computer system development. 
Optimally, 18 to 24 months would be required to properly prepare for
a VAT. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:48.1

GAO/GGD-90-50, 03/21/90


   IMPLICATIONS OF REPLACING THE
   CORPORATE INCOME TAX WITH A
   CONSUMPTION TAX
-------------------------------------------------------- Appendix I:49

GAO/GGD-93-55, 05/25/93

In a report to Congressman Bill Archer, GAO discussed the advantages
and disadvantages of replacing the corporate income tax with a
broad-based consumption tax.  The report reviewed the impact of such
a change on its effects on (1) economic efficiency and equity, (2)
tax administration costs, and (3) tax compliance costs.  In
particular, the report evaluated the likely effects of replacing the
corporate income tax and the employer's share of the Federal
Insurance Contribution Act payroll tax with the Uniform Business Tax
(UBT). 

GAO found that the UBT closely resembled a consumption-type,
value-added tax (VAT) because it allowed businesses to deduct
investment expenditures but not wages and interest.  Under an income
tax, corporations are allowed a deduction for depreciation of plant
and equipment representing the loss in value over time.  In contrast,
consumption taxes in general--and the UBT in particular--allow the
immediate deduction of all investment spending.  The corporate income
tax also allows a deduction for wages and interest expense, while the
UBT does not.  Thus, replacing the corporate income tax and a portion
of the payroll tax with the UBT would likely increase taxes on wage
income and decrease taxes on capital income. 

Increased taxes on wage income could reduce the labor supply of some
workers, most likely those who work part time or those deciding
whether to enter the labor force.  Reducing taxes on capital income
would increase investment demand.  Whether the increase in investment
demand would actually lead to greater investment would depend on
whether additional domestic or foreign saving would be generated to
finance the investment.  Most, but not all, studies of the effects of
income taxes on domestic saving find the effect to be small.  If
additional domestic saving or foreign saving does generate additional
investment, the average level of worker productivity and real wages
may increase. 

Some advocates of VATs maintain that border tax adjustments--taxing
imports and exempting exports from tax--favor domestic production and
can improve the trade deficit.  Although this may appear to be the
case from the perspective of a particular company or industry, it
does not apply to the economy as a whole.  Substituting the UBT or a
VAT for the corporate income tax affects the trade balance to the
extent that national saving increases by more or less than
investment. 

The current corporate income tax has been criticized as favoring
investments financed with debt over those financed with equity
because interest payments are deductible and dividend payments are
not.  Replacing the corporate tax with the UBT would eliminate the
current bias, but create a bias in favor of financing investment from
undistributed profits.  Under the proposal, undistributed profits
would not bear any income tax until shareholders sold their shares
and realized a capital gain.  In contrast, dividends and interest
would be taxed under the personal income tax when received. 

The replacement of the corporate income tax and the employer's share
of the payroll tax with the UBT would likely make the tax system less
progressive, but how much less is uncertain.  There is considerable
debate about whether the corporate tax results in lower income for
shareholders, lower income for owners of capital in general, lower
wages for workers, or higher prices for consumers.  If the current
corporate tax is effectively paid by workers or consumers, the switch
to the UBT would not affect the distribution of income substantially,
although the lowest income groups could pay somewhat higher taxes. 
However, to the extent that the current corporate tax reduces capital
income, the switch to the UBT would make the tax system less
progressive. 

GAO found that moving from the current income tax to the UBT would
not necessarily lower either administration or compliance costs of
the tax system.  While both types of costs could decrease for
corporations, some noncorporate businesses could pay both the income
tax and the UBT.  Their compliance costs could rise, and their
additional returns would have to be processed and examined, thereby
increasing administrative costs. 


   PUERTO RICO AND THE SECTION 936
   TAX CREDIT
-------------------------------------------------------- Appendix I:50

GAO/GGD-93-109, 06/08/93

In a report to the Chairman, Senate Committee on Finance, GAO
provided information relevant to Congress' consideration of proposals
to revise the Internal Revenue Code section 936 tax credit, which
primarily affects Puerto Rico and subsidiaries of U.S.  companies
that operate there.  GAO's report provided background information,
addressed issues concerning estimating the effects of alternatives to
the section 936 tax credit, and discussed the possible multiplier
effects of section 936 firms on the Puerto Rican economy.  The report
also summarized information relating to changes in the Puerto Rican
economy since 1971 and to the distribution of tax benefits,
employment, and compensation among section 936 manufacturing firms. 

Regarding the effects of alternatives to the section 936 tax credit,
GAO said a key question was the impact on Puerto Rico's economic
development.  The impact of changing section 936 on Puerto Rico's
economic development and growth depended on how the change would
affect the use of Puerto Rico's resources, both resources employed
directly by section 936 firms as well as resources employed
indirectly through Puerto Rican suppliers.  The effect of changing
section 936 on the employment of Puerto Rico's resources depended on
how the tax change affects firms' location decisions and whether the
resources would be otherwise employed. 

GAO also said that although some firms might consider relocating, the
kind of detailed information on firms, including firms that may move
to Puerto Rico, necessary to estimate the effects of the proposed tax
changes on firms' location decisions did not exist. 

Although data were not available to estimate the effects of proposed
tax changes on firm's location decisions, the report provided data on
the distribution of tax benefits, employment, and compensation among
section 936 firms.  Average tax benefits per employee were $24,300
while average wages paid, including estimated fringe benefits, were
$22,800.  For some industries, in particular the chemical industry
and its pharmaceutical component, average tax benefits considerably
exceeded wages paid.  The average tax benefits per chemical industry
employee were $69,800 in 1989, and average compensation was $32,900. 
The section 936 tax benefits were concentrated in capital-intensive
firms.  Given the characteristics of these firms, GAO said that the
effect of these firms on the Puerto Rican economy might not be
proportional to their capital investments in Puerto Rico or to the
tax credits they received. 

On the topic of possible multiplier effects of section 936 firms on
the Puerto Rican economy, GAO said that in an economy with high
persistent unemployment like Puerto Rico's, investment undoubtedly
produced a multiplier effect.  GAO was, however, unable to find
estimates of a multiplier that took into account the possibility of
alternative employment for Puerto Rico's resources and the
adjustments that would occur in response to price changes resulting
from firms' location decisions.  GAO said the magnitude of the
multiplier effect depended on whether the resources would have been
employed otherwise and that it was likely that some portion of those
who would lose employment due to a change in section 936, either from
reduced operations of firms directly benefiting from section 936 or
firms indirectly benefiting, would find alternative employment.  The
relatively high level of education in the Puerto Rican labor force
combined with the below average unemployment rate for the well
educated suggested such a result. 


      SUMMARY OF RELATED ACTION(S)
------------------------------------------------------ Appendix I:50.1

Congress revised the section 936 tax credit in the Omnibus Budget
Reconciliation Act of 1993.  The Joint Committee on Taxation expects
the revisions to reduce forgone federal revenues by $3.75 billion
from 1994 through 1998. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:50.2

GAO/GGD-92-72BR, 05/04/92


   LONG-TERM CARE INSURANCE:  TAX
   PREFERENCES REDUCE COSTS MORE
   FOR THOSE IN HIGHER TAX
   BRACKETS
-------------------------------------------------------- Appendix I:51

GAO/GGD-93-110, 06/22/93

Long-term care insurance policies charge a premium that is, in part,
a payment by policyholders to offset the current risk of requiring
long-term care and, in part, an addition to a reserve that prefunds
future insurance.  Although IRS has ruled on certain issues related
to such insurance, it has not specifically addressed many
policyholder tax issues.  As a result, some uncertainty exists about
the current tax treatment of long-term care insurance.  For example,
the part of long-term care insurance premiums that funds current or
prefunds future medical care benefits may or may not qualify for the
medical and dental expense deduction.  In addition, benefits paid
from such policies could be included in taxable income but--to the
extent they are used to pay medical expenses--may be deductible under
the medical and dental expense deduction. 

In response to a request from the Chairman of the House Committee on
Energy and Commerce, GAO compared how alternative tax treatments
common to several proposals to increase the incentive to buy
long-term insurance would affect the cost of such insurance.  GAO
said that many of the alternatives being proposed would clarify the
tax treatment of payment from long-term care insurance policies and
long-term care riders to life insurance policies.  Other proposals
would liberalize tax treatment either by allowing long-term care
insurance premiums to be deductible or payments from policies to be
tax exempt so that individuals or groups would have more incentive to
buy long-term care insurance. 

GAO noted that although current tax practice regarding long-term care
insurance is ambiguous, it closely resembled the life insurance or
annuity approach.  Because investment income is not taxed, the annual
premium for long-term care insurance costs less than it would if such
earnings were taxed as accrued.  For example, a 40-year-old customer
in the 28-percent tax bracket realizes a 20-percent reduction in the
annual premium resulting from exempting investment income.  Interest
accumulation is more important in calculating annual premiums for
younger customers, so that the gain from exempting interest is much
smaller for a 65-year-old about to retire, who would only realize an
8-percent reduction in the annual premium. 

While not discussing each alternative proposed, GAO did examine
generic types such as pension, life insurance, and health insurance,
and showed how the related tax incentives would affect the price of
long-term care insurance depending upon (1) the age and tax bracket
of the consumer and (2) whether the coverage is employer provided or
individually purchased.  GAO noted the following: 

  One important alternative approach would move the tax treatment of
     long-term care insurance to a pension model by allowing
     individuals to deduct premiums paid for long-term care insurance
     or, if such insurance were provided by employers, exclude
     premiums from taxable income, thus lowering the annual effective
     cost of such insurance. 

  Some proposals by treating long-term care insurance as accident and
     health insurance for tax purposes and thereby significantly
     reducing the overall cost of such insurance, provide the most
     generous income tax treatment because they would allow deducting
     premiums and exempting both investment income and distributions
     from taxable income. 

GAO concluded that because most proposals provided favorable income
tax treatment, they primarily would benefit those in the highest tax
brackets who also tend to earn above-average incomes. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:51.1

GAO/GGD-90-31, 01/29/90; and GAO/HRD-92-14, 12/26/91


   PUBLIC HOUSING:  LOW-INCOME
   HOUSING TAX CREDIT AS AN
   ALTERNATIVE DEVELOPMENT METHOD
-------------------------------------------------------- Appendix I:52

GAO/T-RCED-93-54, 06/17/93 and GAO/RCED-93-31, 07/16/93

In testimony before the Subcommittee on Housing and Community
Development, House Committee on Banking, Finance and Urban Affairs
and in a report to that Subcommittee and the Subcommittee on Housing
and Urban Affairs, Senate Committee on Banking, Housing and Urban
Affairs, GAO provided the results of its work on the low-income
housing tax credit program as an alternative to the public housing
program in developing public housing.  GAO's work was mandated in the
National Affordable Housing Act of 1990 (P.L.  101-625). 

The tax credit and public housing programs involve different methods
of using federal funds for developing low-income housing:  (1) the
public housing program provides direct grants from the Department of
Housing and Urban Development (HUD) to public housing authorities
(PHA) who are the primary developers and managers of publicly
controlled housing for low-income households, and (2) the tax credit
program provides federal tax credits to low-income housing
developers.  The programs also differ in the level of federal
involvement:  while HUD selects and works closely with the PHAs that
receive public housing development grants, there are few federal
requirements for the development of projects with tax credits. 

GAO compared the two programs in terms of (1) tenant and project
characteristics, (2) costs to the federal government, and (3) public
housing authorities' administrative experiences when developing each
type of project.  GAO reviewed nine PHAs nationwide that completed
projects through both programs between 1989 and 1991. 

Regarding characteristics, GAO said that the PHAs used the tax credit
program to serve different types of tenants and to develop different
types of projects other than the public housing development program. 
Most of the public housing units were used for families with children
and were scattered through predominantly middle-income neighborhoods. 
However, the authorities used the greater flexibility offered them
with tax credits to develop more concentrated housing for the elderly
as well as families in a variety of low- and middle-income
neighborhoods.  In addition, GAO said the tax credit projects needed
federal operating funds, such as Section 8 housing subsidies, to
serve tenants with incomes as low as those tenants in public housing
projects. 

Although HUD grants covered virtually all of the costs of developing
the public housing projects, tax credits only generated enough cash
to pay for a little more than half of the costs for developing the
tax credit projects.  GAO estimates at one PHA showed that if tax
credits were used to serve households as poor as those in the PHA's
public housing project the federal government would have to spend
more per unit than it did for the public housing project. 

GAO said that PHAs had to overcome certain administrative obstacles
to use each of the programs:  The four PHAs that GAO visited said
that the greatest obstacle with the public housing program was the
multitude of HUD regulations and procedures; while with the tax
credits, it was finding other funding sources, such as commercial
loans, to cover development costs beyond those covered by the tax
credit.  GAO noted that (1) at least two of the PHAs were able to
develop housing quicker with the tax credit and (2) PHAs said that,
with so few funds available through the public housing program, the
tax credit was a valuable tool for developing additional low-income
housing. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:52.1

GAO/T-RCED-90-73, 04/12/90 and GAO/RCED-90-203, 08/14/90


   CORPORATE TAXES:  MANY BENEFITS
   AND FEW COSTS TO REPORTING NET
   OPERATING LOSS CARRYOVER
-------------------------------------------------------- Appendix I:53

GAO/GGD-93-131, 09/23/93

In a report to the Chairman, Subcommittee on Oversight, House
Committee Ways and Means, GAO estimated the total amount of past net
operating losses (NOL) that corporations had accumulated through
1989.  GAO's estimate relied on a methodology that IRS' Research
Division had developed just for small corporations in 1987.  GAO
applied this methodology to data reported by all corporations for
1989, which allowed estimates for about two thirds of the
corporations. 

No one knows the exact amount of NOL carryover that corporations have
accumulated to offset future tax liability through NOL deductions. 
GAO's work suggested that the NOL carryover amount is not only large
and growing but could be larger than existing data allowed us to
identify.  For over two thirds of all corporations, the estimated
carryover of $160 billion in 1985 increased to $246 billion in
1989--or 54 percent in current dollars.  Over this time, total
receipts (i.e., the amount of gross receipts and other forms of
positive income before deductions) for the corporations covered by
GAO's estimate grew from $0.95 trillion to $1.25 trillion (32
percent). 

GAO found that IRS' instructions on the NOL deduction amounts that
corporations should report were incomplete and confusing.  As a
result, three out of four corporations reported NOL deductions even
when they had no taxable income or reported more NOL deductions than
taxable income.  These corporations mistakenly reported their NOL
carryover amounts as NOL deductions.  Accordingly, GAO used these
misreported amounts to estimate corporate NOL carryover. 

While neither of these reporting mistakes improperly reduced their
1989 taxable income, NOL deductions can have a major impact on taxes. 
For example, corporations reduced their tax liability by claiming $39
billion in NOL deductions for 1989. 

IRS' Research Division recommended that corporate tax returns be
modified to report NOL carryover.  GAO believed that the benefits of
this procedure outweigh the costs.  GAO said that knowing the amount
of the NOL carryover would (1) improve revenue estimates of proposed
tax law changes, (2) improve voluntary compliance in reporting NOL
deductions, and (3) allow IRS to do limited compliance checks.  IRS
estimates that the added costs and burdens from requiring this
reporting and processing the data would be minimal. 


      RECOMMENDATION(S)
------------------------------------------------------ Appendix I:53.1

The Commissioner of Internal Revenue should (1) revise instructions
on reporting NOL deductions to clarify amounts that can be deducted
and to clearly define NOL carryover and (2) require corporations to
annually report their NOL carryovers and use the reported amounts to
track corporate NOL deductions. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:53.2

IRS had begun taking actions on GAO's recommendations.  As of
December 31, 1993, IRS had drafted clearer instructions and added a
new space on the income tax return on which corporations should
report their NOL carryover. 


   TAX SYSTEMS MODERNIZATION
-------------------------------------------------------- Appendix I:54


   IRS' USE OF CONSULTANTS TO DO
   THE TMAC PRICE/TECHNICAL
   TRADE-OFF ANALYSIS
-------------------------------------------------------- Appendix I:55

GAO/IMTEC-93-4BR, 10/23/92

In a briefing report to the Chairman of the Senate Committee on
Governmental Affairs, GAO presented the results of its review of IRS'
use of outside consultants to conduct a second price/technical
trade-off analysis for the Treasury Multiuser Acquisition Contract
(TMAC) procurement.  This analysis was performed between November
1991 and February 1992, after the General Services Administration
Board of Contract Appeals ruled that IRS' earlier analysis was
inadequate. 

TMAC was a 1-year contract awarded in 1991, with annual renewal
options for up to 6 years, to provide up to 3,200 minicomputers,
50,000 workstations, printers, networking hardware and software, an
integrated office automation system, and computer maintenance and
other services to support IRS' Tax Systems Modernization (TSM)
program. 

The Chairman asked GAO to determine (1) the extent to which IRS
identified and evaluated sources of expertise available within the
government to do the analysis before contracting with the outside
consultants and whether these actions were consistent with the
Federal Acquisition Regulation, (2) whether the analysis was done
properly, and (3) the level of oversight and assistance that the
General Services Administration (GSA) has provided IRS on major TSM
procurements after a Delegation of Procurement Authority was issued
by GSA. 

GAO said that IRS' use of outside consultants to perform the
price/technical trade-off analysis was not inconsistent with the
procurement regulation.  While prohibiting agencies from contracting
for services that are readily available within the government, the
regulation does not require agencies to take any specific actions,
such as a comprehensive review, to determine the availability of such
in-house services.  IRS' Assistant Commissioner for Procurement said
that he chose to use consultants because he believed (1) they could
complete the analysis quicker than in-house sources and thereby avoid
additional delay in awarding the contract and (2) the credibility of
the analysis would be enhanced if a new team and new methodology were
used to do it.  While IRS did not do a review to determine the
availability of expertise within the government, IRS officials said
that they could not have done the analysis as quickly as the
consultants.  However, IRS has taken steps to make greater use of
in-house expertise on future procurements that may involve
price/technical trade-offs. 

GAO also said that (1) the price/technical trade-off analysis used a
methodology that appeared reasonable and (2) IRS was furnishing GSA
with information on the status and progress of IRS' acquisition
efforts, and GSA was providing technical assistance upon request. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:55.1

GAO/IMTEC-90-24, 01/12/90; GAO/IMTEC-92-7, 10/28/91;
GAO/IMTEC-92-27, 03/13/92; and GAO/IMTEC-92-14R, 05/28/92


   PROGRAM STATUS AND COMMENTS ON
   IRS' PORTION OF PRESIDENT'S
   REQUEST FOR FISCAL YEAR 1993
   SUPPLEMENTAL FUNDS AND FISCAL
   YEAR 1994 BUDGET REQUEST
-------------------------------------------------------- Appendix I:56

GAO/T-IMTEC-93-1, 02/24/93; IMTEC/T-93-3, 03/30/93; and
GAO/T-IMTEC-93-6, 04/27/93

In several testimonies before the Subcommittee on Treasury, Postal
Service, and General Government, Committee on Appropriations and the
Subcommittee on Oversight, Committee on Ways and Means, GAO discussed
the funding aspects of IRS' Tax Systems Modernization (TSM) program. 
Specifically, GAO (1) commented on IRS' portion of the President's
request for supplemental funds for fiscal year 1993, (2) discussed
IRS' proposed fiscal year 1994 budget request for TSM, and (3)
provided its views on actions the Subcommittee could take to help
ensure TSM's success. 

The fiscal year 1993 supplemental request was for $148.4 million to
buy computer and telecommunications equipment for 12 projects; $41
million of that request was earmarked for IRS' Tax Systems
Modernization (TSM) program.  Of the $41 million, about $15.7 million
was for two short-term TSM projects and $25.3 million was for
telecommunications improvements in preparation for TSM projects.  GAO
said that IRS should reevaluate all of the short-term projects
because they were experiencing schedule delays to the point where
their completion was expected about the same time that the
replacement TSM systems would be starting operations.  The remaining
$107.4 million was primarily to support IRS' current information
processing operations. 

IRS requested $717 million for its fiscal year 1994 budget--a net
increase of $145 million over fiscal year 1993.  GAO had concerns
about the appropriateness and timing of about $83 million of the
increase.  Also, GAO noted that IRS' funding requests were not based
on reliable cost and benefit estimates, and, as a result, GAO had no
confidence in IRS' $23 billion cost estimate for the entire TSM
program. 

GAO also talked about one of the most critical issues facing the
IRS--managing the expensive TSM program.  GAO made the following
observations: 

  While IRS had made progress in implementing several interim TSM
     systems such as electronic filing, other interim systems being
     developed had experienced significant problems and delays,
     calling for a reevaluation of their costs and benefits. 

  TSM's success as expressed in terms of cost, benefits, and timing,
     was at risk unless a number of problems were resolved soon.  For
     example, business studies that could significantly affect TSM
     remained unfinished, the program lacked a firm management and
     technical foundation, and much more had to be done with regard
     to the program's human resource implications. 

GAO suggested that the Subcommittee consider having IRS take certain
actions to address these problems before releasing fiscal year 1994
appropriations and take other actions before considering IRS' budget
request for fiscal year 1995. 


      SUMMARY OF RELATED ACTION(S)
------------------------------------------------------ Appendix I:56.1

In IRS' 1994 Appropriations Act (P.L.  103-123, dated Oct.  28, 1993)
Congress adopted GAO's suggestion by including language prohibiting
the expenditure of 1994 funds on TSM until the Commissioner of
Internal Revenue reported to the House and Senate Committees on
Appropriations concerning the implementation of TSM.  The request for
fiscal year 1993 supplemental funds was not approved by Congress. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:56.2

GAO/IMTEC-90-13, 02/08/90; GAO/OCG-93-24TR, 12/92; and
GAO/T-GGD-93-4, 02/03/93


   ACHIEVING BUSINESS AND
   TECHNICAL GOALS IN TAX SYSTEMS
   MODERNIZATION
-------------------------------------------------------- Appendix I:57

GAO/T-GGD-93-24, 04/27/93

In testimony before the Subcommittee on Treasury, Postal Service, and
General Government of the House Committee on Appropriations, GAO (1)
talked about how Tax Systems Modernization (TSM) is changing the way
IRS does business and (2) highlighted issues related to IRS'
management of TSM. 

As examples of how automation is changing the way IRS does business,
GAO cited automated filing (like electronic filing) and IRS'
Corporate Files On-Line project, through which taxpayers' account
information is quickly made available to IRS employees.  While noting
the benefits from these initiatives, GAO also pointed to some
significant limitations. 

One theme highlighted in GAO's testimony was the need for an
experienced chief systems architect at IRS' executive level to
concentrate on the technical aspects of TSM and provide technical
leadership.  This individual would be responsible for TSM's technical
design and compatibility and help make critical decisions that
balance business needs with technology. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:57.1

GAO/OCG-93-24TR, 12/92; GAO/GGD-93-27, 12/30/92; GAO/GGD-93-40,
01/22/93; and GAO/T-GGD-93-4, 02/03/93


   IRS LACKS ACCOUNTABILITY OVER
   ITS ADP RESOURCES
-------------------------------------------------------- Appendix I:58

GAO/AIMD-93-24, 08/05/93

As a part of its audit of IRS' fiscal year 1992 financial statements,
GAO reviewed IRS' accountability over its automated data processing
(ADP) equipment and software.  In a report to the Commissioner of
Internal Revenue, GAO said that IRS has invested hundreds of millions
of dollars in these resources, which are critical to the agency's
processing and accounting for tax data.  GAO noted that IRS is in the
early stages of a Tax Systems Modernization effort that it projects,
through the year 2008, will result in expenditures of about $23.1
billion, $8.9 billion of which is for ADP hardware and software, thus
making it especially important for IRS to have reliable information
to properly manage and accurately report on these assets. 

GAO reported that despite recent improvement efforts, IRS' ADP
inventory records were unreliable for managing and reporting on these
assets because IRS had not instituted basic controls to ensure that
information maintained by its ADP inventory system was current and
accurate.  Specifically, GAO said that IRS (1) had not developed
procedures to ensure that acquisitions and disposals were accurately
recorded on a timely basis; (2) did not effectively perform physical
inventories; and (3) did not properly value ADP resource, primarily
because, for many items, IRS used unrealistic estimates instead of
actual costs. 


      RECOMMENDATION(S)
------------------------------------------------------ Appendix I:58.1

The Commissioner of Internal Revenue should (1) ensure that data
maintained by IRS' ADP inventory system meets management and
reporting needs; (2) provide that any software purchases,
development, or modifications related to this system are subject to
review and approval; and (3) develop and implement standard operating
procedures that incorporate controls to ensure that inventory records
are accurately maintained. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:58.2

IRS generally agreed with GAO's recommendations and plans to take
corrective actions to develop standards and requirements and
institute appropriate controls to ensure the integrity of financial
management information contained in the ADP inventory system. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:58.3

GAO/AFMD-93-40, 04/28/93; GAO/AFMD-93-42, 05/06/93;
and GAO/AIMD-93-2, 06/30/93


   TIME TABLES FOR CRITICAL
   PLANNING DOCUMENTS
-------------------------------------------------------- Appendix I:59

GAO/AIMD-93-81FS, 09/30/93

In a fact sheet to the Chairman of the Senate Committee on
Governmental Affairs, GAO provided information on the (1) critical
planning and system development products that IRS needs to
successfully implement its Tax Systems Modernization (TSM) program
and (2) estimated or actual completion dates for these products and
the frequency with which they were updated. 

GAO categorized the TSM planning and system development products into
two broad categories--summary documents and technical supporting
products. 

Summary documents set forth IRS' strategic goals and vision for tax
administration in the next century and describe the approach for
achieving these goals.  They are high-level documents and are
generally used to guide and oversee the modernization efforts by
senior IRS management and Congress. 

Technical supporting products supplement the summary documents and
are used to manage the TSM program.  They are the detailed plans and
tools used by IRS to direct and manage the various TSM projects and
activities and include (1) an acquisition plan, (2) a security
architecture, and (3) an integrated project schedule. 


   OTHER
-------------------------------------------------------- Appendix I:60


   IRS TAX IDENTITY DATA CAN HELP
   IMPROVE SSA EARNINGS RECORDS
-------------------------------------------------------- Appendix I:61

GAO/HRD-93-42, 03/29/93

Each year, millions of workers pay Social Security taxes on earnings
that cannot be credited to their Social Security accounts because the
Social Security Administration (SSA) does not have sufficient
information to identify the correct accounts for these earnings.  As
a result, the workers to whom these uncredited earnings belong may
not receive the full Social Security benefits to which they are
entitled.  Despite SSA's efforts to address this problem, the number
of reports and the amount of uncredited earnings continues to grow. 

The Chairman of the House Committee on Ways and Means asked GAO to
determine whether IRS has information that would allow SSA to
identify the owners of uncredited earnings.  Specifically, the
Chairman asked about an IRS process that collects additional taxpayer
identification information as a condition for mailing out income tax
refunds.  In addition, GAO developed information on the possibility
of SSA using IRS data files to help identify spouses who never
reported surname changes to SSA. 

In its report to the Chairman, GAO said that through routine tax
administration activities, IRS obtains taxpayer identity data that
could help SSA resolve uncredited earnings recorded in its suspense
file.  In GAO's opinion, this information, which is required by IRS
as a condition for paying tax refunds, has the potential to greatly
benefit SSA resolution efforts.  IRS reports show that over 776,000
taxpayers responded to its requests about the identity question to
obtain a release of their refunds.  Because IRS did not retain the
taxpayer responses, however, GAO was unable to estimate the potential
suspense file resolution value to SSA. 

GAO noted that spousal names from certain joint tax returns would
also help SSA credit earnings to workers' accounts.  GAO said that
IRS data could be helpful when SSA's crediting problems relate to
unreported changes in surnames.  Using this data, GAO estimated that
SSA could resolve about 79,000 uncredited earnings cases, valued at
$556 million for tax year 1989 alone. 


      RECOMMENDATION(S) TO IRS AND
      SSA
------------------------------------------------------ Appendix I:61.1

The Commissioners of SSA and IRS should do a joint study evaluating
the extent to which additional uncredited earnings reports can be
resolved by using data taxpayers send to IRS to obtain the release of
their tax refunds.  SSA should also use the spousal name information
IRS currently provides to SSA to supplement ongoing efforts to
resolve unidentified earnings cases. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:61.2

SSA and IRS generally agreed with our recommendations.  While SSA
agreed to do a joint study, its primary concern was whether IRS could
electronically transmit to SSA the taxpayer responses about their
identity.  SSA believes that manually handling a workload of this
size could be a substantial effort and impact heavily on
administrative costs.  IRS agreed to assist SSA if such a study were
conducted. 

Regarding disclosing tax data, IRS and SSA noted that there were
legal restrictions that had to be addressed.  While recognizing that
the Internal Revenue Code limits disclosure of tax data, GAO noted
that the code also authorizes IRS to disclose information returns
under certain conditions.  One condition deals with having an
effective returns processing program.  Thus, while the disclosure
issue needs to be fully considered, the type of information discussed
in this report has, historically, been considered disclosable. 

With regard to the GAO's recommendation concerning the exchange and
use of spousal names from tax returns, SSA said it would work with
IRS to obtain spousal name information.  IRS said that SSA can access
this information already from the Individual Master Ferret File it
provides SSA.  Therefore, GAO suggested that SSA use this IRS data
file to supplement its current resolution efforts. 


   1992 ANNUAL REPORT ON GAO'S
   TAX-RELATED WORK
-------------------------------------------------------- Appendix I:62

GAO/GGD-93-68, 03/31/93

This report was prepared in compliance with a legislative requirement
and contains information on GAO's tax policy and
administration-related work during fiscal year 1992.  It includes (1)
summaries of tax-related products issued in fiscal year 1992; (2)
summaries of tax-related products issued before fiscal year 1992 with
open recommendations to Congress; (3) descriptions of legislative
actions taken in fiscal year 1992 in response to GAO recommendations;
(4) a listing of recommendations to Congress that were open as of
December 31, 1992; (5) a listing of recommendations GAO made in
fiscal year 1992 to the Commissioner of Internal Revenue; and (6)
brief descriptions of assignments for which GAO was authorized access
to tax data in fiscal year 1992. 

GAO reported that (1) IRS had taken, or planned to take, action on
most of the tax-related recommendations GAO made during fiscal year
1992 and (2) congressional committees and Members of Congress used
GAO products in overseeing tax administration operations, considering
tax policy issues, and enacting legislation. 


   TRENDS FOR CERTAIN IRS PROGRAMS
-------------------------------------------------------- Appendix I:63

GAO/GGD-93-102FS, 05/26/93

In a fact sheet addressed to the Chairman, Subcommittee on Regulation
and Government Information, Senate Committee on Governmental Affairs,
GAO provided trend data for (1) some mission-related indicators, such
as voluntary compliance and net revenue collections, that IRS has
traditionally used; (2) three of IRS' key enforcement
programs--examination, collection, and information returns; and (3)
IRS' taxpayer service and returns processing activities.  For these
same programs and activities, the fact sheet also includes
information on (1) recent developments within IRS relating to
performance measures and (2) gaps in IRS' management information that
were identified in some of GAO's previous work. 

The trends included in the fact sheet are generally for fiscal years
1986 through 1991.  For several of the more important indicators,
such as staffing, obligations, and overall workload, the trends go
back to fiscal year 1981. 

Most of the indicators included in the fact sheet relate to resources
(such as staffing), workload (such as the number of tax returns
filed), and output (such as the number of audits completed) as
opposed to program results or program impact.  This type of focus
reflects the level of development of performance measurement at IRS
as well as most other government agencies. 

In recognition of the need for results/impact-oriented indicators,
IRS has started to develop performance measures for its three
strategic objectives:  (1) increasing voluntary compliance, (2)
reducing taxpayer burden, and (3) improving quality-driven
productivity and customer satisfaction.  IRS also plans to measure
how its component parts contribute to accomplishing its mission. 
Rather than developing performance measures in each of IRS'
functional areas, such as Examination and Collection, IRS is
developing performance measures for its core business systems.  These
core business systems encompass what IRS believes are its major
business processes and cut across functional lines.  For example, the
core business system called "ensuring compliance" incorporates work
that is currently being done by Examination and Collection as well as
IRS' other compliance functions. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:63.1

GAO/T-GGD-92-26, 04/02/92; and GAO/GGD-92-125, 08/13/92


   NET FARM INCOME:  PRIMARY
   EXPLANATIONS FOR THE DIFFERENCE
   BETWEEN IRS AND USDA FIGURES
-------------------------------------------------------- Appendix I:64

GAO/GGD/RCED-93-113, 06/03/93

In a report to Senator J.  Robert Kerrey, GAO discussed what it
believed to be the primary explanations for the difference between
IRS' and the U.S.  Department of Agriculture's (USDA) net farm income
figures.  In 1989, the most recent year for which comparable data
were available, IRS showed net farm income at $4.2 billion, while
USDA reported it at $49.9 billion--a difference of $45.7 billion. 

GAO identified the following five primary explanations for the
difference in these figures:  (1) IRS and USDA figures were developed
from two different populations, (2) USDA's net farm income figures
included noncash income items that were excluded from IRS' figures,
(3) IRS and USDA reported some sales of livestock in a different
manner, (4) IRS and USDA accounted for depreciation in a different
manner, and (5) IRS' net farm income figures were understated because
some tax filers erroneously reported farm incomes and expenses. 

GAO pointed out that data users must exercise caution when using
either agency's aggregate figures to portray the financial condition
of U.S.  farms.  This is necessary because dependence on any one
figure could present a misleading picture of the financial conditions
of different groups within the farm sector.  For instance, in 1989,
individual tax filers reported an aggregate net farm loss of $214
million on their tax returns.  However, this aggregate figure did not
reflect the fact that the only groups of individual tax filers
reporting overall net farm losses were those with adjusted gross
incomes of less than $10,000, of $15,000 to $20,000, or of $200,000
or more. 


SUMMARIES OF TAX-RELATED PRODUCTS
ISSUED BEFORE FISCAL YEAR 1993
WITH OPEN RECOMMENDATIONS TO
CONGRESS AS OF DECEMBER 31, 1993
========================================================== Appendix II


------------------------------------------------------ Appendix II:0.1

Congress May Wish to Consider (1) Directing the                 106
   Secretary of Transportation to Monitor the
   Effects of Increasing the Tax-free Limit on
   Transit Benefits and Taxing Parking and (2)
   Using This Information to Determine if Additional
   Legislative Changes Are Desirable 
Congress Needs to (1) Clarify the Rules for                     108
   Classifying Workers Along the Lines That GAO
   Recommended in Its 1977 Report, by Amending the
   Law to Exclude From the Common Law Definition of
   "Employee" Certain Classes of Workers and (2)
   Consider Legislation to Improve Independent
   Contractor Compliance Through Withholding and/or
   Improved Information Reporting 
Congress Should Explore the Level of Tax Evasion                111
   With the Responsible Federal Agencies and
   Affected Industries.  If Evasion Is Sufficiently
   High, Congress Should Consider Moving the
   Collection of Excise Taxes to the Point
   at Which Gasoline First Leaves the Refinery
   or Is First Imported 
Congress Should Clarify the Law by Expressly                    113
   Authorizing IRS to Use Administrative Offsets.
   Congress May Also Want to (1) Specify the
   Procedural Protections to Be Afforded Taxpayers
   When IRS Uses the Offset Mechanism and (2)
   Consider Whether Tax Compliance Should Be Made a
   Prerequisite to Awarding Federal Contracts 
Congress Should Clarify the Internal Revenue Code               115
   to (1) Specifically Provide IRS Authority to
   Withdraw a Notice of a Lien When It Is in the
   Best Interests of the Taxpayer and the
   Government and (2) Eliminate the Uncertainty
   Over Whether Taxpayers Should Be Given 21 Days
   to Correct an Erroneous Levy Under Section
   6332(c)

------------------------------------------------------ Appendix II:0.2

Congress May Wish to Extend the Offset Authority                117
   for Expenses IRS Incurred in Undercover
   Operations, Which Expired on December 31, 1991,
   and Revise Current IRS Reporting Requirements 
Congress Should Consider Modifying the Targeted                 119
   Jobs Tax Credit Program to Require Employers
   Using the Program to Take Special Actions
   That Benefit Members of theTargeted Group 
Congress Should Consider Revising the Criteria                  121
   for Tax Exemption if It Wishes to Encourage
   Nonprofit Hospitals to Provide Charity Care
   and Other Community Services 
Congress Should Consider Restricting the Use of                 123
   Low-Income Housing Tax Credits Generally to Areas
   Where Vacancy Rates Are Low for Suitable Units
   Renting at or Below the Area's Fair Market Rents 
Congress May Wish to Periodically Reconsider the                125
   Preferential Tax Treatment Given to Interest
   That Is Earned on Life Insurance and Deferred
   Annuity Contracts, Weighing Social Benefits
   Against Revenue Forgone 
Congress Should Repeal Internal Revenue Code                    127
   Section 809 Dealing With Policyholder
   Dividends Paid by Life Insurance Companies
   and Designate What Portion of These Dividends
   Consists of Distributed Earnings
 

Congress May Wish to Consider (1) Directing the Secretary of
Transportation to Monitor the Effects of Increasing the Tax-free
Limit on Transit Benefits and Taxing Parking and (2) Using This
Information to Determine if Additional Legislative Changes Are
Desirable

GAO/RCED-92-243, 09/08/92

In a report to congressional requesters, GAO examined the role tax
policy plays in commuting decisions.  GAO specifically focused on (1)
contrasting the tax treatment of mass transit and parking benefits,
(2) describing how current tax treatment influenced commuter
behavior, (3) assessing whether proposed tax law modifications might
encourage mass transit use, and (4) identifying alternative efforts
to discourage drive-alone commuting and encourage mass transit use. 

GAO reported that, on the whole, federal tax law favors
employer-provided parking over employer-provided transit benefits,
thus encouraging driving rather than taking mass transit to work. 
Parking benefits were completely tax exempt for the employee, while
transit benefits were taxable income to the employee if the monthly
value exceeded $21.  GAO said that the difference in the tax
treatment of parking and transit benefits reduces the cost of
commuting by auto relative to taking mass transit and thereby
encourages people to drive to work. 

Bills that were pending before Congress would, among other things,
increase the tax-free limit for employer-provided transit benefits up
to $100 per month and/or begin taxing parking benefits.  Employers
that provided the increased benefit would effectively lower the cost
of riding transit for those who received the benefit.  GAO said that
while such proposals could increase transit ridership, the size of
the potential increase is unknown mainly because it is unclear how
many additional employers would offer the benefit or how many
employees would take advantage of it. 

Some proposed changes in the tax law would treat the value of
employer-provided parking that exceeds $145 or $160 per month as a
taxable fringe benefit.  GAO found that while these tax policy
changes could effectively raise the cost of driving for commuters in
some cities and might discourage them from driving alone, relatively
few drivers would be affected because most parking benefits are worth
less than $145 per month. 

GAO reported that other efforts to discourage drive-alone commuting
and encourage mass transit use were under way at the federal, state,
and local levels.  For example, (1) employers in some areas will be
required by the federal Clean Air Act Amendments of 1990 to reduce
drive-alone commuting by employees and (2) some areas have restricted
the number of parking places available. 


      MATTER(S) FOR
      CONGRESSIONAL
      CONSIDERATION
------------------------------------------------------ Appendix II:0.3

It is unclear how effective legislative changes in the tax treatment
of transportation benefits would be in discouraging drive-alone
commuting and encouraging greater reliance on mass transit.  Because
of the lack of this information, Congress may wish to consider
including language in such legislation to direct the Secretary of
Transportation to monitor the effects of increasing the tax-free
limit on transit benefits and taxing parking.  Congress may wish to
use this information to determine if additional legislative changes
are desirable. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix II:0.4

As of December 31, 1993, no congressional action had been taken
directing the Secretary of Transportation to monitor the effects of
increasing the tax-free limit on transit benefits and taxing parking. 


      RELATED GAO ACTION(S)
------------------------------------------------------ Appendix II:0.5

The Energy Policy Act of 1992 (P.L.  102-486, dated Oct.  24, 1992)
includes provisions to increase the tax-free limit on transit
benefits from $21 per month to $60 per month.  It also treats the
value of employer-provided parking that exceeds $155 per month as a
taxable fringe benefit.  These actions could encourage greater use of
mass transit. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix II:0.6

GAO/RCED-93-25, 11/13/92

Congress Needs to (1) Clarify the Rules for Classifying Workers Along
the Lines That GAO Recommended in Its 1977 Report, by Amending the
Law to Exclude From the Common Law Definition of "Employee" Certain
Classes of Workers and (2) Consider Legislation to Improve
Independent Contractor Compliance Through Withholding and/or Improved
Information Reporting

GAO/GGD-92-108, 07/23/92 and GAO/T-GGD-92-63, 07/23/92

At the request of Senators Max Baucus and David Pryor and Congressman
Doug Barnard, Jr., GAO reviewed the tax effects of IRS' Employment
Tax Examination Program (ETEP).  This program focuses on small
business compliance with the common law rules for classifying workers
as either "employees" or "independent contractors" (self-employed
individuals who provide services). 

GAO issued its report and testified at a hearing before the
Subcommittee on Select Revenue Measures, House Committee on Ways and
Means.  In both the report and testimony, GAO said the common law
rules for classifying workers remain unclear and subject to
conflicting interpretations as GAO described in its 1977 report
entitled Tax Treatment of Employees And Self-Employed Persons by the
Internal Revenue Service:  Problems and Solutions.  Since then, no
final action has been taken to clarify the common law rule. 

GAO also reported that independent contractor compliance continued to
be a concern.  As early as 1979, GAO concluded that noncompliance
among self-employed workers, such as independent contractors, was
serious enough to warrant tax withholding on payments to them.  Since
the mid-1970s, IRS studies have documented the lower level of
compliance of independent contractors compared to employees.  IRS
estimated that self-employed individuals (including independent
contractors) would underpay $20.3 billion in 1992 taxes by not
reporting income. 

Because of the continual high tax noncompliance of independent
contractors, IRS began the nationwide ETEP in 1988.  IRS planned to
reduce this noncompliance by requiring businesses to treat
misclassified independent contractors as employees subject to
withholding taxes.  GAO reported that 6,900 ETEP audits through
December 1991 proposed assessments of $468 million and reclassified
338,000 workers as employees.  Since fiscal year 1989, IRS data have
shown that 90 percent of ETEP audits have found misclassified
workers. 

GAO found that while the classification rules still need clarifying,
IRS could use approaches in addition to ETEP to help improve
independent contractor compliance.  For example, IRS could require
businesses to (1) withhold taxes from payments to independent
contractors and (2) improve compliance in filing information returns
on payments to independent contractors.  GAO concluded that either
approach should help collect more of the taxes owed through means
other than retroactive tax assessments under ETEP.  While GAO
acknowledged that both approaches would increase the burden on
independent contractors and businesses that use them, GAO believed
that both approaches have merit. 

GAO reported on the pros and cons of each approach.  For example, GAO
said withholding provides the cornerstone of employees' tax
compliance, as well as a gradual and systematic method to pay taxes. 
GAO also reported that withholding has several administrative
problems that need to be resolved--such as ensuring that the tax
withheld approximates the tax due. 

GAO's second approach--improving information reporting--would shift
emphasis to the clearer laws on information returns.  IRS' data show
that independent contractors reported 97 percent of the income that
appears on information returns.  Without these returns, contractors
reported only 83 percent.  GAO assessed eight options for
strengthening information reporting, itemizing the various pros and
cons of each.  GAO largely identified the options through past and
ongoing work. 


      RECOMMENDATION(S) TO
      CONGRESS
------------------------------------------------------ Appendix II:0.7

Congress needs to clarify the rules for classifying workers along the
lines that GAO recommended in its 1977 report by amending the law to
exclude certain classes of workers from the common law definition of
"employee." Congress also should consider legislation to improve
independent contractor compliance through withholding and/or improved
information reporting. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix II:0.8

As GAO completed its report, H.R.  5011--the Employment Tax
Improvement Act of 1992--was introduced to revise employment tax
procedures and improve information reporting along with the
compliance of independent contractors.  This bill included many of
GAO's eight options as well as others.  No further action had been
taken as of December 31, 1993. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix II:0.9

GAO/GGD-89-107, 09/25/89; GAO/GGD-91-94, 08/28/91; and
GAO/GGD-77-88, 11/21/77

Congress Should Explore the Level of Tax Evasion With the Responsible
Federal Agencies and Affected Industries.  If Evasion Is Sufficiently
High, Congress Should Consider Moving the Collection of Excise Taxes
to the Point at Which Gasoline First Leaves the Refinery or Is First
Imported

GAO/GGD-92-67, 05/12/92

In response to a request from Congressmen Downey and McGrath, GAO
studied federal motor fuel excise tax compliance and administration. 
This report discussed (1) the lack of information to determine motor
fuel excise tax compliance, (2) the effect of recent legislation on
compliance, (3) the effectiveness of IRS programs in promoting
compliance, and (4) state initiatives that could be adapted to
bolster federal motor fuel excise tax collections. 

GAO found that no reliable statistical information was available to
estimate the current level of fuel tax evasion.  IRS had recognized
this problem and was investigating alternative methods for estimating
motor fuel excise tax evasion.  Although government and private
officials involved in the motor fuel distribution and tax system
agreed that the legislative changes that have taken effect over the
last 5 years have reduced some forms of motor fuel excise tax
evasion, disagreements existed about the extent of the reductions. 

Because the level of evasion was unknown, GAO could not assess the
effectiveness of IRS compliance programs.  IRS was working with the
Federal Highway Administration and selected states to determine
whether joint enforcement efforts could improve compliance with motor
fuel excise taxes.  IRS was also developing a database containing
information on all firms authorized to deal in tax-free motor fuel. 
The database was to be used by IRS and states in examining compliance
and by terminal operators to determine whether firms they do business
with are properly registered with IRS and thus eligible to purchase
fuels tax-free. 

GAO found that the applicability of states' compliance initiatives to
federal motor fuel excise tax enforcement was difficult to gauge
because of differences between state and federal taxes and collection
systems.  IRS was considering shifting the motor fuel excise tax
collection point to the refinery level, which would be similar to New
York State's collection point.  GAO concluded that moving the
collection point would reduce the number of liable firms and should
help minimize the potential for evasion.  Industry members, however,
disagreed about the desirability of such a move. 

Regardless of what the actual level of gasoline tax evasion may be,
GAO found strong arguments suggesting that refinery-level taxation
could curb evasion more than the current collection scheme.  For
example: 

  Gasoline would change hands fewer times between production and
     taxation, resulting in larger volume transactions. 

  Refiners are presumed to be financially more sound and to maintain
     better records than other parties in the distribution chain. 

  The tax would be imposed on fewer taxpayers, thereby reducing the
     universe for IRS' examination efforts. 

A key question, however, is whether refinery-level tax collection
imposes competitive disadvantages.  The American Petroleum Institute
argued that the cost disadvantages would make the petroleum
distribution system less efficient or more reliant on foreign
imports.  For example, increasing carrying costs for gasoline before
it was marketed would create a disincentive to store gasoline, which
could result in spot shortages. 

GAO concluded that the differences in competitive costs that could be
created by moving the point of taxation to the refinery would likely
vary on average between 2 cents per barrel (.0005 cents per gallon)
for U.S.  competitors and 4 cents per barrel (.001 cents per gallon)
between U.S.  and foreign competitors.  GAO did not know whether such
cost difference could have a significant effect on competition.  In
contrast, depending on how extensive evasion is in a particular
market, tax-paying firms could face a 14.1 cent per gallon
disadvantage compared to tax-evading firms. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
----------------------------------------------------- Appendix II:0.10

Congress should explore the level of tax evasion with the responsible
federal agencies and affected industries.  If evasion is sufficiently
high, Congress should consider moving the collection of gasoline
excise taxes to the point at which gasoline first leaves the refinery
or is first imported. 


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix II:0.11

As of December 31, 1993, no congressional action had been taken. 

Congress Should Clarify the Law by Expressly Authorizing IRS to Use
Administrative Offsets.  Congress May Also Want to (1) Specify the
Procedural Protections to Be Afforded Taxpayers When IRS Uses the
Offset Mechanism and (2) Consider Whether Tax Compliance Should Be
Made a Prerequisite to Awarding Federal Contracts

GAO/T-GGD-92-23, 03/17/92

In testimony before the Subcommittee on Oversight, House Committee on
Ways and Means, GAO discussed two issues:  (1) a component of the
accounts receivable--tax delinquencies of federal contractors--and
(2) the status of the 1992 tax return filing season. 

GAO said that over one quarter of the 26,000 federal contractors it
reviewed were delinquent on IRS' records for either the payment of
taxes or the filing of tax returns.  IRS' records showed that the
contractors owed $773 million as of July 1991. 

GAO pointed out that the 1986 Tax Reform Act required federal
agencies to report information on federal contracts starting in 1987. 
But Treasury regulations were not finalized until December 1989, and
the first submission of usable information was not made until July
1991.  GAO found that IRS had not developed procedures to fully use
the information received and had no procedure to ensure that all
required information was properly reported. 

GAO found that IRS had not fully used contract payments as a means to
collect delinquent taxes.  In those cases in which IRS used contract
information, IRS either administratively offset contract payments or
levied the payments due the contractor.  IRS preferred the
administrative offset because it remains in effect until the
delinquency is satisfied, whereas a levy applies only to the amount
due the contractor at the time the levy is received.  A levy has to
be reissued to remain in effect.  GAO stated that it was unclear
whether IRS has the authority to administratively offset contractual
payments and suggested that Congress consider clarifying this issue
by expressly authorizing administrative offsets of contractual
payments. 

GAO also pointed out that making tax compliance a prerequisite for
awarding federal contracts had potential for preventing and
collecting delinquencies.  However, current procurement and tax laws
preclude denying a contract solely because the contractor has a tax
delinquency, and tax law precludes IRS providing tax compliance
information to the contracting agency. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
----------------------------------------------------- Appendix II:0.12

Congress should clarify the law by expressly authorizing IRS to use
administrative offsets.  Congress may also want to (1) specify the
procedural protections to be afforded taxpayers when IRS uses the
offset mechanism and (2) consider whether tax compliance should be
made a prerequisite to awarding federal contracts. 


      RECOMMENDATION(S) TO IRS
----------------------------------------------------- Appendix II:0.13

IRS should (1) establish a mechanism to ensure that federal agencies
and the General Services Administration's Federal Procurement Data
Center report all required information on federal contracts; (2) work
with the other federal agencies, including the Department of Defense,
to ensure that all required information is shared; and (3) complete
the project it has under way to provide guidance to its own staff on
how to use federal contract information. 


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix II:0.14

Although there has been no congressional actions on these
recommendations, IRS revised its procedures regarding offset and levy
in May 1992 to require the use of levies.  Under the levy procedures,
taxpayers are afforded the protections not provided for under
administrative offset.  IRS is also investigating the use of an
interactive compliance alert response system that would allow for
compliance checks prior to awarding contracts and disbursing
payments. 

IRS developed a review instrument to learn what problems may exist in
reporting by federal agencies.  IRS intends to use the results of
this review to develop solutions, including outreach efforts with
other federal agencies.  IRS has requested a system change to help
ensure that information is shared with all agencies that need it. 
This change is expected to be completed by January 1994. 

Congress Should Clarify the Internal Revenue Code to (1) Specifically
Provide IRS Authority to Withdraw a Notice of a Lien When It Is in
the Best Interests of the Taxpayer and the Government and (2)
Eliminate the Uncertainty Over Whether Taxpayers Should Be Given 21
Days to Correct an Erroneous Levy Under Section 6332(c)

GAO/GGD-92-23, 12/10/91 and GAO/T-GGD-92-09, 12/10/91

In a report to the Chairman, Subcommittee on Private Retirement Plans
and Oversight of the IRS, Senate Committee on Finance, GAO assessed
IRS' implementation of the 1988 Taxpayer Bill of Rights.  GAO also
testified on its findings at a Subcommittee hearing held December 10,
1991. 

GAO found that IRS had implemented all 21 provisions of the Taxpayer
Bill of Rights.  GAO focused on seven key provisions and concluded
that these provisions had generally been successfully implemented. 
Despite IRS' general success, GAO found that there were certain
shortcomings.  Specifically, GAO said that some taxpayers eligible to
use the Taxpayer Assistance Order Program may be unaware of the
program.  Further, although IRS sends copies of a taxpayer's rights
guide known as Publication 1, it does not emphasize to taxpayers the
importance of reading the publication when contacting them before
conducting an audit interview.  GAO also said that IRS is
inconsistent in notifying taxpayers when it cancels installment
agreements, depending upon whether agreements are monitored by
service centers or district offices.  Finally, GAO pointed out issues
that it believes need to be clarified in the Internal Revenue Code to
facilitate IRS' implementation of the act. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
----------------------------------------------------- Appendix II:0.15

Congress may wish to consider clarifying the Internal Revenue Code to
(1) specifically provide IRS authority to withdraw a notice of a lien
when it is in the best interests of the taxpayer and the government
and (2) eliminate the uncertainty over whether taxpayers should be
given 21 days to correct an erroneous levy under section 6332(c). 


      RECOMMENDATION(S) TO IRS
----------------------------------------------------- Appendix II:0.16

The Commissioner of Internal Revenue should take several actions to
improve implementation of the Taxpayer Bill of Rights.  These actions
include

  developing testing procedures to determine whether IRS employees
     successfully identify and manage taxpayers' hardship situations
     and, when hardships exist, initiate applications for assistance
     on the taxpayer's behalf;

  emphasizing the importance of reading Publication 1 when contacting
     taxpayers by telephone or through correspondence before
     taxpayers have an audit interview; and

  developing standard procedures for district offices to use when
     advising taxpayers that their installment agreements are subject
     to cancellation. 


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix II:0.17

In October 1992, Congress passed the Revenue Act of 1992, which,
among other things, contained a provision giving IRS authority to
withdraw a notice of a lien when it is in the best interest of the
taxpayer and the government.  On November 3, 1992, however, the act
was vetoed by the President and as of December 31, 1993, no further
action had been taken. 

IRS agreed with GAO's recommendations and has taken or plans to take
action to implement them.  For example, IRS is

  developing test questions to evaluate whether IRS employees
     successfully recognize taxpayers eligible for Taxpayer
     Assistance Orders,

  revising its audit notification letter to emphasize that taxpayers
     should read Publication 1 before an audit interview, and

  developing standard procedures for district offices to use when
     advising taxpayers that their installment agreements are subject
     to cancellation. 

Congress May Wish to Extend the Offset Authority for Expenses IRS
Incurred in Undercover Operations, Which Expired on December 31,
1991, and Revise Current IRS Reporting Requirements

GAO/GGD-91-106, 07/03/91

This report responded to section 3301 of the Crime Control Act of
1990.  Section 3301 required that GAO study IRS undercover
investigative operations that were done using the authority provided
in section 7608(c) of the Internal Revenue Code of 1986.  This
authority exempts IRS undercover operations from certain laws and
allows IRS to use the proceeds from the undercover operation to
offset necessary and reasonable expenses incurred in the operation. 
The Crime Control Act required that GAO evaluate (1) IRS' use of the
proceeds in these operations, (2) the operations' results, and (3)
IRS' financial audits of the operations. 

GAO reported that IRS had made limited use of the offset authority,
which was due to expire on December 31, 1991.  From November 1988
through May 1, 1991, IRS had approved the use of the offset authority
in only 19 of its undercover operations--less than 5 percent of the
total undercover operations initiated for the same period. 

The 19 undercover operations using the offset provision had produced
about $545,000 in income.  In regards to the income earned,
approximately $121,000 was used to offset operational expenditures,
$269,000 had not yet been offset against expenditures, and about
$155,000 had been returned to the general fund.  IRS reported that as
of May 1, 1991, undercover operations using the offset provision had
resulted in the seizure of over $207 million in cash and significant
amounts of drugs, including cocaine and heroin, and 75 convictions. 

GAO noted that identifying a direct cause and effect relationship
between the financing mechanism provided by the offset authority and
the results of a given investigation was difficult, if not
impossible, because many variables came into play.  However, GAO
concluded that the additional funds made available through the use of
the offset provision allowed IRS to either undertake more
investigations than it could without those funds or to expand the
range of activities for each investigation. 

GAO raised questions about IRS' control over funds.  None of the
operations involving the offset provision had met the statutory
criteria requiring a detailed financial audit.  In some cases, IRS
Internal Audit might not have sufficient access to all the
information needed to do a thorough audit because it did not have
complete access to information on investigations done under the
control of a grand jury.  Thirteen of the 19 operations using the
offset authority were grand jury cases. 

Further, GAO believed that IRS' use of Internal Audit to audit
undercover operations using the offset provision should not be
limited to those operations meeting a specific dollar threshold. 
IRS' use of Criminal Investigation Division employees to do audits of
offset operations in which activity fell below the prescribed dollar
thresholds raised questions of organizational independence, a general
standard for government auditing.  GAO said that such questions could
be avoided by having Internal Audit do all the audits.  In addition,
the sensitivity of the activities being undertaken and the exemption
of the expenditures from normal controls over appropriated funds
increased the need for the audits to be done by an independent
entity. 

GAO also said that Congress' understanding of the use and results of
undercover operations involving the offset provision could be
enhanced if IRS' reports to Congress contained additional details and
were more timely. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
----------------------------------------------------- Appendix II:0.18

Should Congress decide to extend the offset authority, it might also
wish to revise the current IRS reporting requirements.  GAO said that
(1) expanding the information IRS is required to include in its
annual reports to Congress and (2) requiring IRS to report the
results of its detailed financial audits after the covert phase of
the operation, instead of when the operation is closed, could provide
Congress with more timely and complete information on undercover
operations involving offsetting.  Such reporting should not
jeopardize undercover agents' safety or the success of criminal
proceedings. 


      RECOMMENDATION(S) TO IRS
----------------------------------------------------- Appendix II:0.19

The Commissioner of Internal Revenue should direct the Chief
Inspector to ensure that Internal Audit expands its financial audits
to include all undercover operations involving offsetting, regardless
of the amount of expenditures or proceeds. 


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix II:0.20

The offset authority expired on December 31, 1991, thereby rendering
our recommendations moot.  As of December 31, 1993, this authority
had not been reinstated. 

Congress Should Consider Modifying the Targeted Jobs Tax Credit
Program to Require Employers Using the Program to Take Special
Actions That Benefit Members of the Targeted Group

GAO/HRD-91-33, 02/20/91

In 1977, Congress established the Targeted Jobs Tax Credit Program to
induce employers to favor certain disadvantaged individuals facing
barriers to employment.  Over the past 10 years, employers had
claimed an estimated $4.5 billion in tax credits under the program. 
Yet, little information was available on the employers using the
program or the workers hired under it. 

In a report to two subcommittees of the House Committee on Education
and Labor, GAO provided descriptive information on employers using
the program and the individuals for whom the tax credits were
claimed.  GAO discussed (1) the extent to which employers made
specific efforts to identify, hire, or retain eligible workers; and
(2) differences in participants' earnings before and after their
involvement in the program. 

This tax credit program is intended to increase employment
opportunities for members of the targeted groups by providing a
financial incentive to employers to recruit, hire, and retain target
group members.  GAO found that nearly half of the 60 employers it
interviewed had made some special effort to do so.  The other half
had taken advantage of the tax credit without making special efforts
to hire members of the targeted groups. 

GAO also determined that work experiences had a positive impact on
participants' earnings.  GAO did not find any substantial
differences, however, in earnings changes resulting from
participants' work experience when compared with the experience of
other workers who were eligible for the program but did not
participate. 

GAO's analysis of data from 13 states indicated that (1) retail
stores and restaurants were the primary users of the tax credit
program in 1988 and (2) most of the hirings under the program that
year involved youths who were hired to fill entry-level jobs
requiring minimal skills and paying low wages. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
----------------------------------------------------- Appendix II:0.21

If Congress wishes a higher proportion of employers using the
Targeted Jobs Tax Credit Program to take special actions that benefit
members of the targeted groups, it could modify the program by
imposing new requirements.  For example, program requirements might
involve employer outreach efforts to eligible populations,
prescreening to determine eligibility before the hiring decision, or
providing additional training or supervision to eligible workers to
increase the likelihood of retention. 


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix II:0.22

No legislative action had been taken on this matter as of December
31, 1993. 

Congress Should Consider Revising the Criteria for Tax Exemption if
It Wishes to Encourage Nonprofit Hospitals to Provide Charity Care
and Other Community Services

GAO/HRD-90-84, 05/30/90 and GAO/T-HRD-90-45, 06/28/90

In a report to and testimony before the House Select Committee on
Aging, GAO discussed the role of nonprofit hospitals in providing (1)
acute medical care to indigents and (2) other community services,
such as health education and screening.  Private nonprofit hospitals,
which account for about one half of the nation's hospitals, are
exempt from federal taxation if they meet certain tests established
by IRS.  Until 1969, the test for tax-exempt status included specific
reference to providing services to those unable to pay.  Since then,
IRS has not required such care as long as the hospital provides
benefits to the community in other ways. 

GAO analyzed the distribution of uncompensated care among hospitals
in five states to assess the role of nonprofit hospitals in supplying
such care.  GAO found that

  nonprofit hospitals provided a smaller share of their states'
     uncompensated care than they provided of general hospital
     services;

  uncompensated care expenses were not distributed equally among the
     nonprofit hospitals but were disproportionately concentrated in
     large urban teaching hospitals;

  among the rest of the nonprofit hospitals, the tendency was for
     those hospitals with the greatest ability to finance charity
     care to have the lowest rates of uncompensated care; and

  about 57 percent of the nonprofit hospitals in the five states
     incurred charity care costs that amounted to less than GAO's
     estimate of the value of the hospitals' tax exemptions. 

GAO noted that (1) some hospitals' goals did not focus on the health
needs of the poor or underserved in their community, (2) physician
staffing and charity admissions policies discouraged indigent
admissions except in emergency cases, and (3) nonprofit hospitals
were more likely than investor-owned hospitals to offer community
services but were equally likely to charge patients for those
services and more likely to recover their costs. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
----------------------------------------------------- Appendix II:0.23

Currently, there are no requirements relating hospitals' charitable
activities for the poor to tax-exempt status.  If Congress wishes to
encourage nonprofit hospitals to provide charity care to the poor and
underserved and other community services, it should consider revising
the criteria for tax exemption.  Criteria for exemption could be
directly linked to a certain level of (1) care provided to Medicaid
patients, (2) free care provided to the poor, or (3) efforts to
improve the health status of underserved portions of the community. 


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix II:0.24

Although several bills to establish charity care standards for
tax-exempt hospitals have been introduced, none were enacted as of
December 31, 1993.  IRS, however, revised and strengthened its
examination guidelines for examining large multientity exempt
hospital systems and increased its tax-exempt hospital examination
activities since GAO reported on the issue. 

Congress Should Consider Restricting the Use of Low-Income Housing
Tax Credits Generally to Areas Where Vacancy Rates Are Low for
Suitable Units Renting at or Below the Area's Fair Market Rents

GAO/T-RCED-90-34, 02/27/90 and GAO/RCED-90-168, 06/19/90

In response to a request from the Chairman of the Subcommittee on
HUD/Moderate Rehabilitation Investigation, Senate Committee on
Banking, Housing and Urban Affairs, GAO provided information on the
financial implications of combining subsidies under the Department of
Housing and Urban Development's (HUD) Section 8 Moderate
Rehabilitation Program and the Department of the Treasury's
Low-Income Housing Tax Credit Program.  In February 1990, GAO
testified on one of those projects.  In June 1990, GAO reported on
eight specific housing projects. 

GAO reported that (1) developers for the eight projects realized cash
proceeds that exceeded their costs for acquiring and rehabilitating
the properties by 11 to 34 percent and (2) developers generated the
proceeds by selling their ownership interests in the projects, along
with the related tax credits, and combining them with mortgage loans
secured by moderate rehabilitation rental subsidies. 

GAO said that (1) by combining rehabilitation subsidies and tax
credits, developers received more assistance than needed to ensure
the projects' financial viability or to compensate them for their
limited financial risk, (2) the use of both programs was questionable
because the projects were located in areas with ample vacant units
and with rents generally well below the established rents for the
eight projects, and (3) it would have been more economical to rely on
existing rental housing subsidized by certificates and/or vouchers
under HUD's Certificate and Voucher Programs rather than developing
the eight projects GAO reviewed. 

GAO noted that Congress and HUD had taken steps to better control
subsidies under the Moderate Rehabilitation and Tax Credit Programs. 
Those changes (1) limited the amount of subsidies allowable and the
way they could be used, (2) placed greater responsibility on state
credit-allocation agencies, and (3) prohibited the use of tax credits
in conjunction with the Section 8 program. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
----------------------------------------------------- Appendix II:0.25

Congress may wish to consider restricting the use of tax credits
generally to areas where vacancy rates are low for suitable units
renting at or below the area's fair market rents.  Congress could
further require that any deviation from this policy by a state
credit-allocation agency be documented and subject to review by an
authorized representative of the federal or state government. 


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix II:0.26

The Omnibus Budget Reconciliation Act of 1990 required (1) the
Secretary of the Treasury and HUD's Inspector General to jointly
conduct a study on the combined use of the low-income housing tax
credit and the Section 8 Moderate Rehabilitation Program funds and
(2) states to develop tax credit allocation plans that would include
priorities for targeting the credits.  State allocation plans include
this new targeting requirement, thereby providing a basis for GAO to
assess whether this alternative action responds to the
recommendation.  Low-income housing tax credits were made permanent
on August 10, 1993, with the signing of the Budget Reconciliation Act
of 1993. 


      SUMMARY OF RELATED ACTION(S)
----------------------------------------------------- Appendix II:0.27

HUD revised its program policies and guidelines to require that when
projects are to receive tax credits in conjunction with HUD
subsidies, HUD must consider the value of the tax credit and adjust
accordingly the amount of other subsidies awarded to the project.  In
addition, HUD revised its program policies to target housing
subsidies to geographic areas with low unit vacancies. 

Congress May Wish to Periodically Reconsider the Preferential Tax
Treatment Given to Interest That Is Earned on Life Insurance and
Deferred Annuity Contracts, Weighing Social Benefits Against Revenue
Forgone

GAO/GGD-90-31, 01/29/90

In a report to the Chairmen of the Senate Committee on Finance and
the House Committee on Ways and Means, GAO responded to section 5014
of the Technical and Miscellaneous Revenue Act of 1988.  Section 5014
called for GAO to report on (1) the effectiveness of the revised tax
treatment of life insurance products in preventing the sale of life
insurance primarily for investment purposes and (2) the policy
justification for, and the practical implications of, the current tax
treatment of earnings accruing on the cash surrender value of life
insurance and annuity contracts in light of the Tax Reform Act of
1986. 

Under current law, interest earned on life insurance and deferred
annuity contracts, commonly referred to as "inside buildup," is not
taxed as long as it accumulates within the contract.  By choosing not
to tax the interest as it is earned, the federal government forgoes
an estimated $5 billion in tax revenue each year.  Also, as a result
of this preferential tax treatment, there are incentives to design
life insurance and annuity products that are targeted more toward
generating investment income than toward providing insurance
protection. 

GAO found that recent changes in the definition of life insurance had
reduced the sales of single-premium policies but said it was more
difficult to evaluate the effect on other investment-oriented life
insurance products. 

GAO noted that the most convincing policy justification for the
current tax treatment of accrued interest is that it lowers the cost
of providing insurance and retirement income protection.  Even if
more is spent on life insurance and annuity protection as a result of
this tax preference, it is not clear that the revenue loss is
justified.  In addition, although borrowing against the cash value of
life insurance is not taxed, it reduces the protection afforded
beneficiaries.  As a result, the current tax treatment, which allows
the borrowing of life insurance accrued interest without tax, appears
inconsistent with (1) the goal of fostering increased protection and
(2) the tax treatment of similar products, such as Individual
Retirement Accounts and 401(k) plans. 


      RECOMMENDATION(S) TO
      CONGRESS
----------------------------------------------------- Appendix II:0.28

Because the pattern of policy usage as well as the type of products
offered can change, Congress may wish to periodically reconsider its
policy decision to grant preferential tax treatment to inside
buildup, weighing the social benefits against the revenue forgone. 
If Congress decides not to tax inside buildup, it should eliminate
tax-free borrowing of life insurance proceeds.  Any borrowing of
those proceeds should be considered a distribution of interest
income.  To offset the advantages of accruing interest income without
tax, a penalty provision needs to be added to the regular tax.  Since
repayment of the amount borrowed restores the death benefits, any
amount that is taxed when it is borrowed should be tax deductible if
subsequently repaid. 


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix II:0.29

As of December 31, 1993, no legislative action had been taken. 

Congress Should Repeal Internal Revenue Code Section 809 Dealing With
Policyholder Dividends Paid by Life Insurance Companies and Designate
What Portion of These Dividends Consists of Distributed Earnings

GAO/GGD-90-19, 10/19/89 and GAO/T-GGD-90-03, 10/19/89

In a report to the Chairmen of the Subcommittees on Health and on
Select Revenue Measures, House Committee on Ways and Means, and in
testimony before the Select Revenue Measures Subcommittee, GAO
discussed (1) the effect of section 809 of the Internal Revenue Code
on the income tax split between stock and mutual life insurance
companies and within the mutual segment itself and (2) alternative
methods of taxing mutual life insurance companies.  Congress enacted
section 809 to make the taxation of mutual companies more parallel to
that of stock companies. 

GAO found that section 809 imposed taxes that (1) were higher for the
mutual companies as a whole in years when their earnings were low and
vice versa, (2) were regressive on the basis of company income
because averages for all mutual companies dictated each firm's taxes,
and (3) depended disproportionately on the behavior and performance
of the larger mutual companies.  GAO also found that for 1984 through
1987, the mutual stock split in taxes produced by the section 809
approach was consistent with the mutual stock split in income. 

After examining various alternatives, GAO concluded that the most
equitable approach would be to repeal section 809, allow mutual life
insurance companies to deduct all policyholder dividends in
determining corporate taxable income, and tax policyholders on the
earnings part of certain dividends. 


      RECOMMENDATION(S) TO
      CONGRESS
----------------------------------------------------- Appendix II:0.30

Congress should repeal section 809 and designate what portion of
policyholder dividends paid by life insurance companies consists of
distributed earnings.  For administrative reasons, companies would
pay the tax as a proxy for individual policyholders. 


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix II:0.31

GAO's proposal and a number of others have been part of the ongoing
discussion about the tax treatment of mutual life insurance
companies.  However, as of December 31, 1993, no legislative action
had been taken. 


LEGISLATIVE ACTIONS TAKEN IN 1993
ON GAO RECOMMENDATIONS
========================================================= Appendix III


----------------------------------------------------- Appendix III:0.1

Congress Should Amend the Internal Revenue Code                 129
   to Allow HUD Temporary Access to Federal Tax
   Data to Validate Its Cost-Benefit Analysis of
   Using Tax Data to Identify Subsidized Households'
   Misreporting of Income 
Congress Should Consider Revising the Current Tax               131
   Law to Provide for Amortization of Purchased
   Intangible Assets, Including Goodwill, Over
   Specific Statutory Cost Recovery Periods 
Congress Should Make Several Tax-Related Changes                133
   to the Debt Collection Act to Help Alleviate
   the Government's Credit Management Problems
 

Congress Should Amend the Internal Revenue Code to Allow HUD
Temporary Access to Federal Tax Data to Validate Its Cost-Benefit
Analysis of Using Tax Data to Identify Subsidized Households'
Misreporting of Income

GAO/HRD-92-60, 07/17/92

In response to a request from the Chairman, Subcommittee on Housing
and Urban Affairs, Senate Committee on Banking, Housing and Urban
Affairs, GAO did a study to determine whether the Department of
Housing and Urban Development (HUD) has sufficient internal controls
to ensure that families in federally subsidized public and Section 8
housing accurately reported their income.  GAO found that HUD lacks
sufficient information to ensure that federally subsidized housing
units are occupied by needy, low-income families and that those
living in such units are paying correct rents.  Public housing
agencies and management agents cannot effectively verify the accuracy
of most subsidized households' self-reported wage, interest, and
dividend income. 

GAO's computer match of approximately 175,000 HUD-subsidized
households' records (less that 4 percent of such records) with
federal tax data revealed that in 1989, 21 percent of the matched
households may have understated their incomes to HUD by $138 million. 
This would have resulted in potential excess federal subsidies of $41
million.  In regards to households that may have understated their
incomes, 63 percent reported no wage, interest, or dividend income in
1989. 


      RECOMMENDATION(S) TO HUD
----------------------------------------------------- Appendix III:0.2

To gain access to tax data, HUD should (1) incorporate in its
assisted housing information systems appropriate data safeguards and
(2) conduct a cost-benefit analysis of using tax data to identify
subsidized households' misreporting of income and report the results
to Congress. 


      RECOMMENDATION(S) TO
      CONGRESS
----------------------------------------------------- Appendix III:0.3

When HUD's centralized public housing information system is fully
operational and data safeguards are in place, Congress should amend
the Internal Revenue Code to allow HUD temporary access to federal
tax data to validate its cost-benefit analysis.  If HUD's use of tax
data is indeed cost beneficial, Congress should further amend the
Internal Revenue Code to broaden and make permanent HUD's access to
federal tax data, including its use in the Section 8 program when
that program's centralized management information system becomes
fully operational. 


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix III:0.4

The Omnibus Budget Reconciliation Act of 1993 (P.L.  103-66,
effective Aug.  10, 1993), grants HUD temporary access to federal tax
data for income verification under certain housing assistance
programs in section 13404.  HUD plans to upgrade its automated
systems, including appropriate safeguards for tax data, in late 1994. 

Congress Should Consider Revising the Current Tax Law to Provide for
Amortization of Purchased Intangible Assets, Including Goodwill, Over
Specific Statutory Cost Recovery Periods

GAO/GGD-91-88, 08/09/91

One of the oldest controversies between taxpayers and IRS is the
extent to which taxpayers can deduct the price they pay for
intangible assets, such as customer or subscription lists.  The
general rule is that the cost of an intangible asset can be amortized
over its useful life.  Purchased goodwill and other intangible assets
without determinable useful lives, however, are not amortizable. 
Taxpayers are supposed to determine the specific useful life for each
intangible asset separately.  The taxpayer's determination of useful
life is questioned only when IRS performs an audit.  IRS frequently
contends that many intangible assets are in fact purchased goodwill
and not amortizable.  However, taxpayers assert that the assets are
not goodwill, the determined useful lives are accurate, and the
intangible assets are eligible for amortization. 

The opportunities for disputes between taxpayers and IRS intensified
during the 1980s, when business acquisition activity increased and
led to a growth in the reported value of intangible assets from about
$45 billion in 1980 to $262 billion in 1987.  As a result, billions
of dollars of potential tax deductions and, therefore, tax revenues
were affected by decisions on whether tax deductions for intangible
asset costs were permitted. 

In response to a request from the Joint Committee on Taxation, GAO
provided information on the types of deductible intangible assets,
the asset values and useful lives claimed, and the industries
affected.  GAO also explored various proposals for revising
intangible asset tax rules, which had not significantly changed since
1927. 

GAO analyzed tax data IRS gathered in 1989 on all of its unresolved,
or open, purchased intangible asset cases.  Taxpayers in nine
industry groups had claimed deductions for 175 types of purchased
intangible assets that they identified as different from goodwill and
valued at $23.5 billion.  In 70 percent of the cases in which
taxpayers claimed that intangible assets had a determinable useful
life, IRS claimed that the assets were in fact goodwill and not
amortizable.  In total, IRS proposed adjustments of about $8 billion
on the basis of its evaluation of the value, useful life, or
classification of intangible assets.  The final outcome of these
cases will depend on IRS' or the courts' interpretation of facts
related to each asset. 

GAO concluded that disagreements between taxpayers and IRS over which
intangible assets may be amortized would continue unless changes were
made in the current rules.  GAO said that the current tax treatment
of goodwill and similar intangible assets failed to recognize the
economic benefits that wasting intangible assets contribute over
time.  These assets are consumed over time even if a precise period
cannot be determined.  Denying amortization deductions does not
result in an accurate determination of taxable income since expenses
are not properly matched to income generated.  Recognition of these
economic benefits over time for tax purposes could be accomplished,
according to GAO, by establishing specific statutory cost recovery
periods for purchased intangible assets similar to those used for
tangible assets. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
----------------------------------------------------- Appendix III:0.5

Congress should consider revising the current tax law to provide for
amortization of purchased intangible assets, including goodwill, over
specific statutory cost recovery periods. 


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix III:0.6

The Omnibus Budget Reconciliation Act of 1993 (P.L.  103-66, dated
Aug.  10, 1993) revised the tax law to, among other things, allow
taxpayers to amortize certain purchased intangible assets, including
goodwill, over 15 years. 


      RELATED GAO PRODUCT(S)
----------------------------------------------------- Appendix III:0.7

GAO/NSIAD-88-56BR, 12/28/87 and GAO/T-GGD-92-1, 10/02/91

Congress Should Make Several Tax-Related Changes to the Debt
Collection Act to Help Alleviate the Government's Credit Management
Problems

GAO/AFMD-90-12, 04/16/90

At the request of Congressman John R.  Kasich, GAO reviewed the
efforts of selected federal agencies, including IRS, to implement the
Office of Management and Budget's nine-point credit management
program.  That program's nine points include such things as (1)
screening loan applicants, (2) reporting to consumer reporting
agencies, (3) using collection firms, (4) offsetting federal income
tax refunds, and (5) writing off delinquent debts.  GAO focused on
selected programs at the five primary credit agencies--the Small
Business Administration and the departments of Agriculture, Housing
and Urban Development, Education, and Veterans Affairs. 

GAO noted the progress agencies had made over the past several years
in certain credit management areas.  GAO also cited some problems. 
For example, agencies were not always (1) checking to see if loan
applicants were delinquent in paying taxes or (2) reporting
closed-out debts to IRS as income to the debtor. 


      RECOMMENDATION(S) TO
      CONGRESS
----------------------------------------------------- Appendix III:0.8

Because of the magnitude of the government's credit management
problems, Congress should amend the Debt Collection Act in a number
of ways.  The tax-related changes would involve (1) screening loan
applicants to determine credit worthiness and ability to repay and to
determine if the applicants owe delinquent debts to the federal
government, including IRS; (2) referring all appropriate debts to IRS
for the purpose of offsetting delinquent debtors' tax refunds; and
(3) reporting closed-out debts to IRS as income to the debtor. 

Congress should legislatively direct the Secretaries of Housing and
Urban Development and Veterans Affairs and the Administrators of the
Farmers Home and Small Business Administrations, in coordination with
IRS, to test the use of consent forms for obtaining and using tax
information in the loan-making process.  The affected agencies could
designate selected programs, including those with guaranteed loans,
for participation in the test.  Congress should also require IRS to
disclose address information to agencies pursuing debt collection
activities under authorities in addition to the Federal Claims
Collection Act. 


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix III:0.9

Congress implemented some of GAO's recommendations to improve the
government's credit management.  The Emergency Unemployment
Compensation Act of 1991 (P.L.  102-164, dated Nov.  15, 1991)
provides permanent authority for collecting nontax debts by reducing
debtors' tax refunds; the Cash Management Improvement Act Amendments
of 1992 (P.L.  102-589, dated Nov.  10, 1992) requires the referral
of debts to IRS for the purpose of offsetting delinquent debtors' tax
refunds; and the Omnibus Budget Reconciliation Act of 1993 (P.L. 
103-66, dated Aug.  10, 1993) requires the applicable financial
entities to report discharged debts to IRS as income to the debtor. 


LISTING OF OPEN RECOMMENDATIONS TO
CONGRESS BEFORE AND DURING FISCAL
YEAR 1993
========================================================== Appendix IV


------------------------------------------------------ Appendix IV:0.1

Congress May Wish to Consider Revising Current Tax              29
   Law to Allow IRS to Use Collection Performance
   in Determining Compensation and Rewards for Its
   Collection Staff as Long as Other Criteria, Such
   as Fair and Courteous Treatment of Taxpayers,
   Are Also Considered 
Congress Should Amend the Disclosure Provisions of              30
   the Internal Revenue Code to (1) Give the
   Secretary of the Treasury Permanent Authority to
   Disclose to Federal Agencies Information Reported
   on IRS Form 8300 and (2) Allow States Access to
   the Data on the Same Basis as Federal Law
   Enforcement Agencies 
Congress May Wish to Consider Legislation That                  35
   Would Require States to Annually Send IRS and
   Taxpayers an Information Return on Any Cash
   Rebates for Real Estate Tax Payments 
Congress Should Require FDIC and RTC to Issue                   38
   Information Returns on Forgiven Debts That Exceed
   $600 to Improve Taxpayer Compliance in Reporting
   Such Debts; If This Is Proven to Be Cost
   Effective, Congress Also May Wish to Explore
   Whether Extending Similar Information Reporting
   to Other Institutions Is Warranted 
Congress May Wish to Consider Enacting Legislation              40
   That Would Substitute a Residency Test for the
   Dependent Support Test When the Dependent Lives
   With the Taxpayer; If Enacted, Congress Also
   Should Consider Eliminating the Household
   Maintenance Test for Filing as Head of Household
   Status 
Congress May Wish to Consider Several Options                   46
   to Enhance Tax-Exempt Bond Voluntary Compliance,
   by (1) Adopting Other Penalties for Specific
   Kinds of Noncompliance and (2) Permitting the
   Disclosure of Some Tax-Exempt, Bond-Related Tax
   Information, With Appropriate Safeguards

------------------------------------------------------ Appendix IV:0.2

Congress May Wish to Consider Not Renewing the                  79
   Provision Authorizing Issuance of Industrial
   Bonds, or Congress May Wish to Specify
   Requirements to Better Direct These Bonds Toward
   Achieving Public Benefits That Would Not Occur
   From Alternative Investment of the Money 
Congress May Wish to Consider (1) Directing the                 106
   Secretary of Transportation to Monitor the
   Effects of Increasing the Tax-free Limit on
   Transit Benefits and Taxing Parking and (2)
   Using This Information to Determine if
   Additional Legislative Changes Are Desirable 
Congress Needs to (1) Clarify the Rules for                     108
   Classifying Workers Along the Lines That
   GAO Recommended in its 1977 Report, by
   Amending the Law to Exclude From the
   Common Law Definition of "Employee"
   Certain Classes of Workers and (2) Consider
   Legislation to Improve Independent Contractor
   Compliance Through Withholding and/or
   Improved Information Reporting 
Congress Should Explore the Level of Tax Evasion                111
   With the Responsible Federal Agencies and
   Affected Industries.  If Evasion Is Sufficiently
   High, Congress Should Consider Moving the
   Collection of Excise Taxes to the Point
   at Which Gasoline First Leaves the Refinery
   or Is First Imported 
Congress Should Clarify the Law by Expressly                    113
   Authorizing IRS to Use Administrative Offsets.
   Congress May Also Want to (1) Specify the
   Procedural Protections to Be Afforded Taxpayers
   When IRS Uses the Offset Mechanism and (2)
   Consider Whether Tax Compliance Should Be Made
   a Prerequisite to Awarding Federal Contracts

------------------------------------------------------ Appendix IV:0.3

Congress Should Clarify the Internal Revenue                    115
   Code to (1) Specifically Provide IRS
   Authority to Withdraw a Notice of a Lien
   When It Is in the Best Interests of the
   Taxpayer and the Government and (2) Eliminate
   the Uncertainty Over Whether Taxpayers Should
   Be Given 21 Days to Correct an Erroneous Levy
   Under Section 6332(c) 
Congress May Wish to Extend the Offset                          117
   Authority for Expenses IRS Incurred in
   Undercover Operations, Which Expired on
   December 31, 1991, and Revise Current IRS
   Reporting Requirements 
Congress Should Consider Modifying the                          119
   Targeted Jobs Tax Credit Program to
   Require Employers Using the Program
   to Take Special Actions That Benefit
   Members of the Targeted Group 
Congress Should Consider Revising the Criteria                  121
   for Tax Exemption if It Wishes to Encourage
   Nonprofit Hospitals to Provide Charity Care
   and Other Community Services 
Congress Should Consider Restricting the Use of                 123
   Low-Income Housing Tax Credits Generally to Areas
   Where Vacancy Rates Are Low for Suitable Units
   Renting at or Below the Area's Fair Market Rents 
Congress May Wish to Periodically Reconsider the                125
   Preferential Tax Treatment Given to Interest
   That Is Earned on Life Insurance and Deferred
   Annuity Contracts, Weighing Social Benefits
   Against Revenue Forgone 
Congress Should Repeal Internal Revenue Code                    127
   Section 809 Dealing With Policyholder
   Dividends Paid by Life Insurance Companies
   and Designate What Portion of These Dividends
   Consists of Distributed Earnings

LISTING OF RECOMMENDATIONS MADE IN
FISCAL YEAR 1993 TO THE
COMMISSIONER OF INTERNAL REVENUE
AND TO OTHER AGENCY HEADS
=========================================================== Appendix V


   ACCOUNTS RECEIVABLE AND
   COLLECTION ACTIVITIES
--------------------------------------------------------- Appendix V:1

Develop a Plan to Ensure That the Collection Staff              24
   in Field Offices Are Balanced to Maximize the
   Collection of Delinquent Taxes by Using
   Productivity Indicators and Reconsider the
   Decision Not to Transfer Collection Staff Among
   Field Offices 
Ensure Accounting System Development Efforts Meet               26
   Financial Reporting and Other Financial Needs
   by (1) Requiring Approval of Related System Designs
   and (2) Validating Those Receivables Reported in
   Financial Statements 
Restructure the Collection Organization to Support              29
   Earlier Telephone Contact With Delinquent Taxpayers;
   Develop Detailed Information on Delinquent Taxpayers
   to Customize Collection Procedures; Identify Ways to
   Increase Cooperation  With State Governments in
   Collecting Delinquent Taxes; and Permit the Use of
   Private Collection Companies on a Trial Basis

   COMPLIANCE
--------------------------------------------------------- Appendix V:2

If IRS Form 8300 Information Is Made Available to               31
   the States, Treasury Should Make It Available to
   States on Magnetic Media Ready for Computer
   Processing 
Expand Access to Electronic Filing for Individual               32
   Income Tax Returns and Develop Operational
   Procedures and Analyses to Protect Against
   Electronic Filing Fraud 
Incorporate Rules on the Tax Deductibility of User              35
   Fees and Rebates in Tax Return Instructions;
   Negotiate With Local Governments to Revise Their
   Real Estate Tax Bills to Identify User Fees and
   to Share Their Data on Real Estate Tax Payments
   by Individuals; and Notify Examiners to Check
   State and Local Records to Verify Real Estate
   Tax Deductions

------------------------------------------------------- Appendix V:2.1

If Congress Extends Information Reporting, Use the              38
   Information Returns on Forgiven Debts in
   Enforcement Programs 
Correct the Operational Problems in Limited                     40
   Matching Program and Implement a 100-Percent
   Computer Matching Program to Identify Erroneous
   Dependent Claims 
Stop Implementation of Proposed Changes to TCMP,                42
   and Ensure That Any Future Changes to TCMP
   Produce Data That (1) Consistently Measure Nationwide
   Compliance, (2) Allow Objective Selection of Returns
   for Audit, and (3) Provide Statistical Details on
   Noncompliance 
Test on a Limited Basis, (1) a Reverse Matching Program         51
   for Wages; (2) Service Payments to Corporations or
   Forgiven Debts if Congress Expands Information
   Reporting; and Consider Actions to Overcome the
   Limitations to Reverse Matching Programs for
   Other Deductions, Such as Pensions, Rents, and
   Interest

   GENERAL MANAGEMENT
--------------------------------------------------------- Appendix V:3

Expedite Deposits of Tax Payments Submitted With                55
   Applications for Filing Extensions Starting With
   the 1994 Filing Season and Require That Service
   Centers Collect Data During the 1993  Peak Period
   to Develop Strategies for Identifying and Rapidly
   Depositing Large Tax Payments 
Treasury Should Direct IRS to Jointly Monitor With              62
   the Financial Management Service Revised FTD
   Automation Efforts 
Control Employees' Access to Computer Programs and              67
   Taxpayer Data Files and Access to Centrally and
   Locally Developed Computer Programs

   TAX POLICY
--------------------------------------------------------- Appendix V:4

Modify Tax Return to Capture All of the Requisite               76
   Qualification Information; Send Nonfiler Notices
   That Explain Credit Requirements to Nonfilers
   With Low Earned Incomes; and Modify Returns
   Processing Procedures to Ensure That Taxpayers
   Are Treated Consistently 
Revise Instructions on Reporting Net Operating                  91
   Losses Deductions to (1) Clarify Amounts That Can
   Be Deducted and (2) Clearly Define Net Operating
   Losses Carryover, and Require Corporations to
   Annually Report the Carryovers

   TAX SYSTEMS MODERNIZATION
--------------------------------------------------------- Appendix V:5

Ensure That Data Maintained by the ADP Inventory                97
   System Meets Management and Reporting Needs;
   Provide That Any Software Purchases, Development,
   or Modifications Related to This System Are
   Subject to Review and Approval; and Develop
   Standard Operating Procedures That Incorporate
   Controls to Ensure That Inventory Records Are
   Accurately Maintained

   OTHER
--------------------------------------------------------- Appendix V:6

Do a Joint Study With SSA Evaluating the Extent                 99
   to Which Additional Uncredited Earnings Reports
   Can Be Resolved by (1) Using Data Taxpayers Send
   to IRS to Obtain the Release of Their Tax Refunds
   and (2) Using the Spousal Name information IRS
   Currently Provides SSA to Assist in the
   Resolution of Unidentified Earnings Cases

CHRONOLOGICAL LISTING OF GAO
PRODUCTS ON TAX MATTERS ISSUED IN
FISCAL YEAR 1993
========================================================== Appendix VI

----------------------------------------------------------------------  --------
Tax Systems Modernization: IRS' Use of Consultants to Do the TMAC         10/23/
 Price/Technical Trade-off Analysis (GAO/IMTEC-93-4BR)                        92
Money Laundering: State Efforts to Fight It Are Increasing But More       10/15/
 Federal Help Is Needed (GAO/GGD-93-1)                                        92
Implementation of IRS Employee Suggestions (GAO/GGD-93-22)                11/24/
                                                                              92
IRS Can Improve Controls Over Electronic Filing Fraud (GAO/GGD-93-27)     12/30/
                                                                              92
Internal Revenue Service Receivables (GAO/HR-93-13)                        12/92
Internal Revenue Service Issues (GAO/OCG-93-24TR)                          12/92
Overstated Real Estate Tax Deductions Need to Be Reduced (GAO/GGD-93-     01/19/
 43)                                                                          93
Tax Administration: Opportunities to Increase the Use of Electronic       01/22/
 Filing (GAO/GGD-93-40)                                                       93
Status of Tax Systems Modernization, Tax Delinquencies, and the Tax       02/03/
 Gap                                                                          93
 (GAO/T-GGD-93-04)
Government Management: Status of Progress in Correcting Selected High-    02/03/
 Risk Areas (GAO/T-AFMD-93-1)                                                 93
Review of Tax-Exempt Insurance Companies (GAO/GGD-93-11R)                 02/08/
                                                                              93
Tax Administration: Information Returns Can Improve Reporting of          02/17/
 Forgiven Debts (GAO/GGD-93-42)                                               93
Tax Systems Modernization: Comments on IRS' Portion of President's        02/24/
 Request for Fiscal Year 1993 Supplemental Funds (GAO/T-IMTEC-93-1)           93
Tax Administration: Erroneous Dependent and Filing Status Claims (GAO/    03/19/
 GGD-93-60)                                                                   93
Tax Administration: Delayed Tax Deposits Continue to Cause Lost           03/22/
 Interest for the Government (GAO/GGD-93-64)                                  93
International Taxation: Updated Information on Transfer Pricing           03/25/
 (GAO/T-GGD-93-16)                                                            93
Tax Policy: Many Factors Contributed to the Growth in Home Equity         03/25/
 Financing in the 1980s (GAO/GGD-93-63)                                       93
IRS Tax Identity Data Can Help Improve SSA Earnings Records (GAO/HRD-     03/29/
 93-42)                                                                       93
Earned Income Credit: Effectiveness of Design and Administration          03/30/
 (GAO/T-GGD-93-20)                                                            93
Tax Systems Modernization: Program Status and Comments on IRS' Portion    03/30/
 of President's Request for Fiscal Year 1993 Supplemental Funds (GAO/         93
 T-IMTEC-93-3)
1992 Annual Report on GAO's Tax-Related Work (GAO/GGD-93-68)              03/31/
                                                                              93
IRS' Plans to Measure Tax Compliance Can Be Improved (GAO/GGD-93-52)      04/05/
                                                                              93
Collection and Exchange of Data by the IRS and the U.S. Customs           04/06/
 Service                                                                      93
 (GAO/GGD-93-33R)
Information on Tax Counseling for the Elderly Program (GAO/GGD-93-        04/08/
 90BR)                                                                        93
Industrial Development Bonds: Achievement of Public Benefits Is           04/26/
 Unclear (GAO/RCED-93-106)                                                    93
IRS' Test of Tax Return Filing by Telephone (GAO/GGD-93-91BR)             04/26/
                                                                              93
Examples of Waste and Inefficiency in IRS (GAO/GGD-93-100FS)              04/27/
                                                                              93
Implementation of Actions Involving IRS Correspondence in Responding      04/27/
 to Taxpayers (GAO/GGD-93-38R)                                                93
Tax Administration: Achieving Business and Technical Goals in Tax         04/27/
 Systems Modernization                                                        93
 (GAO/T-GGD-93-24)
Tax Systems Modernization: Comments on IRS' Fiscal Year 1994 Budget       04/27/
 Request (GAO/T-IMTEC-93-6)                                                   93
IRS' Budget Request for Fiscal Year 1994 (GAO/T-GGD-93-23)                04/28/
                                                                              93
IRS Can Improve the Federal Tax Deposit System (GAO/AFMD-93-40)           04/28/
                                                                              93
Selected IRS Forms, Publications, and Notices Could Be Improved (GAO/     04/30/
 GGD-93-72)                                                                   93
Value-Added Tax: Administrative Costs Vary With Complexity and Number     05/03/
 of Businesses (GAO/GGD-93-78)                                                93
Recurring Tax Issues Tracked by IRS' Office of Appeals (GAO/GGD-93-       05/04/
 101)                                                                         93
Improved Staffing of IRS' Collection Function Would Increase              05/05/
 Productivity (GAO/GGD-93-97)                                                 93
IRS Significantly Overstated Its Accounts Receivable Balance (GAO/        05/06/
 AFMD-93-42)                                                                  93
Improvements for More Effective Tax-Exempt Bond Oversight (GAO/GGD-       05/10/
 93-104)                                                                      93
Implications of Replacing the Corporate Income Tax With a Consumption     05/11/
 Tax (GAO/GGD-93-55)                                                          93
New Delinquent Tax Collection Methods for IRS (GAO/GGD-93-67)             05/11/
                                                                              93
IRS Activities to Increase Compliance of Overseas Taxpayers (GAO/GGD-     05/18/
 93-93)                                                                       93
Review of the Internal Revenue Service's Information Systems              05/25/
 Management Organization (GAO/GGD-93-37R)                                     93
Trends for Certain IRS Programs (GAO/GGD-93-102FS)                        05/26/
                                                                              93
Net Farm Income: Primary Explanations for the Difference Between IRS      06/03/
 and USDA Figures (GAO/GGD/RCED-93-113)                                       93
Tax Policy: Puerto Rico and the Section 936 Tax Credit (GAO/GGD-93-       06/08/
 109)                                                                         93
International Taxation: Taxes of Foreign-and U.S.-Controlled              06/11/
 Corporations (GAO/GGD-93-112FS)                                              93
Public Housing: Projects Developed With Low-Income Housing Tax Credit     06/17/
 Differ From Traditional Public Housing Development Projects (GAO/T-          93
 RCED-93-54)
Long-Term Care Insurance: Tax Preferences Reduce Costs More for Those     06/22/
 in Higher Tax Brackets (GAO/GGD-93-110)                                      93
Examination of IRS' Fiscal Year 1992 Financial Statements (GAO/AIMD-      06/30/
 93-2)                                                                        93
Public Housing: Low-Income Housing Tax Credit as an Alternative           07/16/
 Development Method (GAO/RCED-93-31)                                          93
Information Reporting of Interest Payments Using IRS Form 1099-INT        07/22/
 (GAO/GGD-93-55R)                                                             93
Financial Management: First Financial Audits of IRS and Customs           08/04/
 Revealed Serious Problems (GAO/T-AIMD-93-3)                                  93
IRS Lacks Accountability Over Its ADP Resources (GAO/AIMD-93-24)          08/05/
                                                                              93
Tax Administration: Computer Matching Could Identify Overstated           08/13/
 Business Deductions (GAO/GGD-93-133)                                         93
Improving Compliance With Real Estate Tax Deductions (GAO/T-GGD-93-       09/21/
 46)                                                                          93
IRS Information Systems: Weaknesses Increase Risk of Fraud and Impair     09/22/
 Reliability of Management Information (GAO/AIMD-93-34)                       93
Corporate Taxes: Many Benefits and Few Costs to Reporting Net             09/23/
 Operating Loss Carryover (GAO/GGD-93-131)                                    93
Tax Policy: Earned Income Tax Credit: Design and Administration Could     09/24/
 Be Improved (GAO/GGD-93-145)                                                 93
Tax Systems Modernization: Time Tables for Critical Planning Documents    09/30/
 (GAO/AIMD-93-81FS)                                                           93
--------------------------------------------------------------------------------

LISTING OF ASSIGNMENTS FOR WHICH
GAO WAS AUTHORIZED ACCESS TO TAX
DATA IN FISCAL YEAR 1993 UNDER 26
U.S.C.  6103(I)(7)(A)(I)
========================================================= Appendix VII

Subject matter                           Objectives
---------------------------------------  ---------------------------------------
IRS' Actions to Implement the "One Stop  To assess the quality and consistency
Service" Initiative                      of the assistance IRS provides to
                                         individual taxpayers nationwide.

IRS' Consolidated Statement of           To (1) determine extent of financial
Financial Position on September 30,      management and internal control
1993                                     problems needing correction, (2)
                                         identify needed audit procedures to
                                         opine on fiscal year 1993 financial
                                         statements, (3) assist IRS in preparing
                                         appropriate financial statements, and
                                         (4) analyze available data maintained
                                         on IRS operations to attest to the
                                         adequacy of such data.
--------------------------------------------------------------------------------

MAJOR CONTRIBUTORS TO THIS REPORT
======================================================== Appendix VIII

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Robert J.  McArter, Assistant Director, Tax Policy and
 Administration Issues
Joseph T.  Valonis, Senior Evaluator-in-Charge
Nancy M.  Peters, Senior Evaluator
Elwood D.  White, Evaluator

