Tax Policy and Administration: 1994 Annual Report on GAO's Tax-Related
Work (Letter Report, 02/16/95, GAO/GGD-95-66).

This report summarizes GAO's work in the tax area during fiscal year
1994.  It discusses actions taken on GAO's recommendations as of the end
of 1994, recommendations that GAO made to Congress before and during
fiscal year 1994 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 related to the need
for improving compliance with the tax laws, increasing accounts
receivable collections, modernizing the Internal Revenue Service,
enhancing the effectiveness of tax incentives, helping taxpayers, and
improving financial management.

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

 REPORTNUM:  GGD-95-66
     TITLE:  Tax Policy and Administration: 1994 Annual Report on GAO's 
             Tax-Related Work
      DATE:  02/16/95
   SUBJECT:  Tax administration systems
             Tax administration
             Delinquent taxes
             Tax nonpayment
             Computerized information systems
             Government collections
             Tax credit
             Federal taxes
             Tax law
             Voluntary compliance
IDENTIFIER:  IRS Tax System Modernization Program
             TSM
             IRS Offer in Compromise Program
             IRS Taxpayer Compliance Measurement Program
             TCMP
             
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Cover
================================================================ COVER


Report to Designated Congressional
Committees

February 1995

TAX POLICY AND ADMINISTRATION -
1994 ANNUAL REPORT ON GAO'S
TAX-RELATED WORK

GAO/GGD-95-66

1994 Annual Tax Report

(268669)


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

  AUR - Automated Underreporter
  BSA - Bank Secrecy Act
  CEP - Coordinated Examination Program
  CFO - Chief Financial Officer
  CNC - currently not collectible
  CTR - Currency Transaction Report
  ERISA - Employment Retirement Income Security Act
  ETEP - Employment Tax Examination Program
  FBI - Federal Bureau of Investigation
  FDIC - Federal Deposit Insurance Corporation
  FinCEN - Financial Crimes Enforcement Network
  FMFIA - Federal Managers' Financial Integrity Act
  FmHA - Farmers Home Administration
  GATT - General Agreement on Tariffs and Trade
  GSE - government sponsored enterprise
  HUD - Housing and Urban Development
  IRS - Internal Revenue Service
  OMB - Office of Management and Budget
  RAL - Refund Anticipation Loan
  RTC - Resolution Trust Corporation
  SSA - Social Security Administration
  TCMP - Taxpayer Compliance Measurement Program
  TSM - Tax Systems Modernization
  PWBA - Pension and Welfare Benefits Administration

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


B-259954

February 16, 1995

The Honorable Bob Packwood
Chairman, Committee on
 Finance
United States Senate

The Honorable William V.  Roth, Jr.
Chairman, Committee on
 Governmental Affairs
United States Senate

The Honorable Bill Archer
Chairman, Committee on
 Ways and Means
House of Representatives

The Honorable William F.  Clinger, Jr.
Chairman, Committee on
  Government Reform and Oversight
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 1994.  It contains appendixes that highlight (1) agency actions
taken on our recommendations as of December 31, 1994; (2)
recommendations we made to Congress before and during fiscal year
1994 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). 


   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, modernize the Internal
Revenue Service (IRS), enhance the effectiveness of tax incentives,
assist taxpayers, and improve financial management. 


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

To reduce the gap between what individual and business taxpayers owe
and what they voluntarily pay--estimated by IRS at over $127 billion
in 1992--IRS must improve voluntary compliance.  In the past fiscal
year, we recommended a number of ways to help IRS achieve that end. 

  -- Sole Proprietorships.  Sole proprietorships, which accounted for
     about 13 percent of individual taxpayers, were responsible for
     about $39 billion, or 40 percent, of the taxable income earned
     by individuals but not reported for tax purposes according to
     the 1988 Tax Compliance Measurement Program--IRS' most recent. 
     Yet, IRS' enforcement strategy does not provide a detailed
     operating plan for dealing with such noncompliance.  Moreover,
     IRS does not expect to develop the information systems needed to
     identify causes of the noncompliance and better target resources
     until the turn of the century.  In the interim, we have
     recommended ways for IRS to better use existing data to improve
     sole proprietor compliance (GAO/GGD-94-175, Aug.  2, 1994). 
     (See p.  40.)

  -- Large Corporations.  Annually, about two-thirds of all
     additional tax assessments recommended as a result of IRS audits
     are attributable to the nation's 1,700 largest corporations. 
     Although audits of these large corporations consume about 20
     percent of IRS' examination resources, IRS neither measures
     actual collections from these audits nor the compliance rates of
     these corporations.  We found that IRS revenue agents and
     appeals officers face conflicting incentives, which contribute
     to the large gap between taxes recommended and taxes collected
     after appeals.  We also noted opportunities for improvement
     through changes in the way IRS allocates resources, trains
     revenue agents, and controls the coordination among IRS
     functions to prevent recurring tax disputes.  We recommended a
     number of steps to help IRS meet its mission of collecting the
     proper amount of tax at the least cost.  IRS should (1)
     centralize control over resources devoted to large corporate
     audits; (2) increase revenue agents' knowledge of the specific
     industries they audit; (3) begin measuring and tracking
     collection rates as a common measure across the agency; (4)
     analyze recurring tax disputes and propose legislative changes
     for minimizing such recurrence; and (5) test ways to measure
     compliance (GAO/GGD-94-70, Sept.  1, 1994).  (See p.  44.)

  -- Independent contractors.  Independent contractors are commonly
     viewed as self-employed workers who provide services, such as
     legal or accounting advice.  They are responsible for their own
     taxes, benefits, and income and job security.  IRS has found
     that self-employed workers such as independent contractors have
     consistently underreported income.  Information reporting, tax
     withholding, and worker classification rules need reform. 
     Because of IRS' and other groups' concerns about independent
     contractor compliance, many of their reform proposals have
     included two provisions that we have generally supported in the
     past.  First, the $50 penalty for not filing an information
     return reporting payments to independent contractors would
     increase significantly.  Second, the $50 penalty would apply
     (instead of this new larger penalty) if the payer (employer)
     reported at least 97 percent, as required, of all aggregated
     payments to independent contractors for that year.  We still
     favor these provisions and encourage Congress to consider other
     options we have suggested for improving information reporting
     (GAO/T-GGD-94-194, Aug.  4, 1994).  (See p.  42.)

  -- Tax Gap.  We analyzed the composition of the gross income tax
     gap as well as what has been done, is being done, and could be
     done to reduce the tax gap.  We also updated information related
     to our past recommendations for reducing the tax gap.  IRS
     estimates showed that of the $127 billion gross income tax gap
     in 1992, $94 billion was attributable to individuals and $33
     billion to corporations.  The largest part arose from unreported
     individual income--$63 billion.  Overall, IRS estimated that
     taxpayers voluntarily paid 82 percent of their income tax
     liabilities.  IRS' goal is to reach 90 percent by 2000.  One way
     Congress could help is to give IRS more compliance tools. 
     Simplifying the definition of independent contractor and
     requiring withholding on payments made to independent
     contractors could help IRS improve compliance.  Congress also
     could require information reporting on payments made to
     corporations, especially those operating as independent
     contractors.  Congress could allow IRS to reinvest productivity
     gains from Tax Systems Modernization (TSM) projects but may want
     assurance before doing so that IRS will use the funds for
     compliance (GAO/GGD-94-123, May 11, 1994).  (See p.  37.)


      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.  The
dollar amount of currently not collectible (CNC) accounts increased
faster than the collection of delinquent taxes between 1987 and 1992. 
Several factors, such as inadequate records, an antiquated and
ineffective collection process, and ineffective staff allocation
processes, have hindered IRS' collection efforts. 

  -- Collection of Overdue Taxes.  IRS is undermining its ability to
     collect hundreds of millions of dollars in overdue taxes because
     of shortcomings in its processes for determining which accounts
     are collectible and which are not.  We recommended that IRS (1)
     establish guidelines for determining taxpayers' ability to pay
     to include, for example, requiring minimum payments for
     taxpayers with income exceeding specified levels; (2) strengthen
     oversight of the ability-to-pay determination process; and (3)
     modify criteria for reactivating cases previously classified as
     not collectible (GAO/GGD-94-2, Oct.  8, 1993).  (See p.  20.)

  -- Settlement of Tax Debts.  The Offer In Compromise Program
     affords some taxpayers the opportunity to settle tax debts for
     less than the amount owed.  While IRS was pleased with the
     results of the program, we found that IRS had not demonstrated
     that the program's objectives of increased collections and
     improved compliance had been met.  We recommended that IRS
     develop the indicators necessary to evaluate the Offer In
     Compromise Program as a collection and compliance tool
     (GAO/GGD-94-47, Dec.  23, 1993).  (See p.  23.)


      MODERNIZE IRS
---------------------------------------------------------- Letter :1.3

IRS is burdened with manual processes and inaccessible information. 
Modernization should allow IRS to use resources more productively,
speed up tax processing, and reduce costs.  We recommended several
ways to modernize IRS' operations. 

  -- Tax Systems Modernization.  In 1993, the Subcommittee on
     Treasury, Postal Service, and General Government, House
     Committee on Appropriations, concluded that TSM was at risk and
     that its successful completion required immediate action to make
     key decisions and establish an essential technical management
     infrastructure.  Thus, IRS' fiscal year 1994 appropriation
     included a requirement that IRS report on three key issues--a
     business plan, a program management approach, and a systems
     architect's office.  IRS supplied the required reports in
     September 1993.  We concluded that IRS did not establish the
     essential infrastructure the Subcommittee sought.  We
     recommended that IRS complete action on two fronts by (1)
     defining its business requirements in detail and (2) filling
     gaps in its technical and management standards
     (GAO/T-AIMD/GGD-94-104, Mar.  2, 1994).  (See p.  53.)

  -- Human Resource Implications of Change.  IRS is planning major
     organizational and operational changes to take advantage of new
     technology to be provided through TSM.  Because those changes
     will have a major effect on IRS' workforce, we recommended that
     IRS (1) assess existing workforce knowledge, skills, and
     abilities; (2) identify specific staffing requirements for
     modernization projects that will have a significant effect on
     human resources; and (3) develop detailed retraining and
     redeployment plans to deal with gaps between staffing
     requirements and existing workforce knowledge, skills, and
     abilities (GAO/GGD-94-159, July 8, 1994).  (See p.  54.)

  -- Electronic Filing Fraud.  Electronic filing fraud is a problem
     whose true dimensions are unknown.  Although the number of
     fraudulent electronic returns is relatively small, the rate of
     growth is high, and it is uncertain how much fraud might be
     going undetected.  We made recommendations to improve IRS'
     controls over electronic filing fraud in several reports over
     the years.  These recommendations included (1) changes to the
     electronic filing system that would help keep fraudulent returns
     from being filed, (2) better detection of fraudulent returns
     that have been filed, and (3) improved screening and monitoring
     of persons and firms authorized to transmit returns
     electronically to IRS (GAO/T-GGD-94-89, Feb.  10, 1994, and
     GAO/T-AIMD-GGD-94-183, July 19, 1994).  (See p.  52.)


      ENHANCE EFFECTIVENESS OF TAX
      INCENTIVES
---------------------------------------------------------- Letter :1.4

Congress continues to seek equitable ways to reform the current tax
system.  At the same time, it often adopts tax incentives and
preferences to promote certain social policy goals.  Hundreds of
billions of dollars in revenue are forgone because of incentives and
preferences.  Forgone revenues from these tax expenditures are
expected to increase faster than the economy will grow. 

  -- Tax Expenditures.  Tax expenditures, or revenues forgone through
     preferential provisions in the tax code--for example,
     deductions, exemptions, and credits--can be a useful part of
     federal policy, but these expenditures should be scrutinized
     more closely and more often to ensure that, when used, they are
     the most effective means to an end.  We assessed the growth of
     federal revenues forgone through income tax expenditures and
     presented three options for reviewing and controlling their
     growth:  (1) strengthening and extending tax expenditure
     controls used by congressional tax-writing committees, (2)
     integrating tax expenditures further into the budget process,
     and (3) reviewing tax expenditures jointly with related federal
     outlay programs (GAO/GGD/AIMD-94-122, June 3, 1994).  (See p. 
     66.)

  -- Research Tax Credit.  In 1981, Congress enacted the research and
     experimentation tax credit to encourage businesses to do
     research.  Congress believed that increased research was
     necessary to enhance the competitiveness of the U.S.  economy. 
     We did three reports on the tax credit that were used in
     congressional deliberations about modifying the original act. 
     In our 1994 report we estimated that the pharmaceutical industry
     earned $1.24 billion of research and experimentation tax credits
     between 1981 and 1990.  The industry's credits, as a share of
     the credits earned by all industries, increased from 4 percent
     in 1981 to 12 percent in 1990.  The pharmaceutical industry
     credits were earned primarily by large companies.  The
     biotechnology sector of the industry, consisting primarily of
     smaller companies, benefited very little from the credit.  The
     research and experimentation tax credit was difficult for IRS to
     administer.  IRS examiners reported that they had difficulty
     distinguishing research for product innovation, which qualified
     for the credit, from research for product development, which did
     not qualify.  Examiners who audited four large pharmaceutical
     companies said that the technical nature of the issues made the
     audits difficult.  (GAO/GGD-94-139, May 13, 1994).  (See p. 
     68.)


      ASSIST TAXPAYERS
---------------------------------------------------------- Letter :1.5

IRS handles about 75 million inquiries from taxpayers on matters
ranging from routine queries on tax account balances to complex
requests about corporate tax issues.  Telephone calls account for
about 63 percent of all inquiries; correspondence, about 28 percent;
and personal visits, about 9 percent.  To ease taxpayer frustration
and increase the likelihood of voluntary compliance with the tax
laws, IRS must be able to provide timely and accurate assistance to
taxpayers. 

  -- IRS Correspondence.  Over the past few years, we, IRS, and
     others have cited delayed, inaccurate, incomplete, and confusing
     responses to taxpayer letters as chronic IRS problems.  Although
     IRS has made progress in correcting its correspondence problems
     by adopting quality and timeliness standards and by expanding
     quality reviews of outgoing mail, some problems persist.  We
     recommended that IRS take several actions, including (1)
     clarifying notices, letters, and publications to better inform
     taxpayers of those situations that can be handled by a telephone
     call; (2) clarifying procedures for responding to taxpayer
     requests to ensure that taxpayers' questions do not go
     unanswered; (3) using correspondence mail-out dates instead of
     the date a response was initiated as a timeliness indicator and
     adopting goals for providing taxpayers with final responses; and
     (4) reassessing the purpose of interim letters and then
     providing the service centers with clear guidelines for
     accomplishing those purposes (GAO/GGD-94-118, June 1, 1994). 
     (See p.  61.)

  -- One-Stop Service.  We reviewed IRS' efforts to implement
     one-stop service to respond to taxpayer questions and
     complaints.  IRS defines one-stop service as the resolution of
     issues during the taxpayer's initial contact with IRS or as a
     result of that contact.  Both taxpayers and IRS will benefit if
     IRS is able to reach its one-stop service goals.  We found that
     IRS has problems measuring the instances counted as one-stop
     service.  To improve this measurement problem, we recommended
     that IRS develop better measures of one-stop service that do not
     include instances where taxpayers will likely need to contact
     IRS again about the same matter.  The measures developed should
     be designed in such a way that they enable IRS to (1) gauge its
     progress toward providing one-stop service by 1998, (2) identify
     and correct problems that might impede IRS' progress, and (3)
     compare delivery of one-stop service among various IRS taxpayer
     services--such as forms distribution, walk-in sites, and
     telephone inquiries (GAO/GGD-94-131, Aug.  29, 1994).  (See p. 
     63.)


      IMPROVE FINANCIAL MANAGEMENT
---------------------------------------------------------- Letter :1.6

Not only must IRS administer the tax code and collect taxes in a fair
and equitable manner, it must also efficiently and effectively manage
its own finances.  Although IRS has implemented many improvements
since our 1993 audit of its 1992 financial statements, it continues
to face major challenges in developing meaningful and reliable
financial management information and adequate internal controls. 

  -- 1994 Financial Audit.  We examined IRS' financial statements for
     fiscal year 1993.  Our audit revealed that the agency is
     hampered by serious, pervasive financial management problems,
     including the inability of antiquated systems to generate
     reliable financial information needed to manage IRS operations. 
     We found, for example, over $90 billion of unrecorded taxpayer
     transactions that had not been posted to taxpayer accounts and
     at least $149 million written off because of unexplained
     differences between IRS' and the Treasury's records for IRS'
     cash accounts.  We were unable to express an opinion on the
     reliability of IRS's fiscal year 1993 Principal Financial
     Statements.  We made recommendations to help IRS continue its
     efforts to resolve these long-standing and difficult problems
     and strengthen its financial management (GAO/AIMD-94-120, June
     15, 1994).  (See p.  30.)

  -- 1995 Budget Request.  We analyzed IRS' fiscal year 1995 budget
     request and raised several concerns based on our past and
     current work at IRS.  We posed several questions for
     consideration in congressional deliberations on the IRS budget
     request.  Our concerns related to such things as (1) the
     possibility that a funding shortfall might adversely affect IRS'
     ability to deliver proposed compliance initiatives, (2) the
     appropriateness of proposed user fees, (3) the impact of
     incomplete business requirements and technical standards on TSM
     projects in the budget request, and (4) the appropriateness of
     the funding and staffing levels being requested for returns
     processing and taxpayer service activities (GAO/GGD-94-129, Apr. 
     20, 1994).  (See p.  29.)


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

We did 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 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 1994 BY
SUBJECT MATTER
=========================================================== Appendix I


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

IRS Can Do More to Collect Taxes Labeled "Currently 20
 Not Collectible"

Collecting Delinquent Taxes and Communicating With 22
 Taxpayers

Changes Needed to Cope With Growth in Offer In 23
 Compromise Program

State Tax Administrators' Views on Delinquent Tax 25
 Collection Methods

BUDGET AND FINANCE

IRS' Self-Assessment of Its Internal Controls and 26
 Accounting Systems is Inadequate

Important IRS Revenue Information is Unavailable or 27
 Unreliable

IRS Does Not Adequately Manage Its Operating Funds 28

Analysis of IRS' Budget Request for Fiscal Year 1995 29

Examination of IRS' Fiscal Year 1993 Financial 30
 Statements

CFO Implementation at IRS and Customs 31

Some Reforms to Budget Process Offer Promise 32

Budgetary Implications of Selected GAO Work 33

COMPLIANCE

Tax Impacts of Forgiven Debts at The Farmers Home 35
 Administration (FmHA)

IRS' Administration of Tax-Customs Valuation Rules in 36
 Tax Code Section 1059A

Many Actions Taken on Tax Gap, but a Cohesive Compliance 37
 Strategy Needed

Feasibility of Using a Meter to Capture Unreported 39
 Business Income

Information on IRS' International Tax Compliance 39
 Activities

IRS Can Better Pursue Noncompliant Sole Proprietors 40

Improving Independent Contractor Compliance With 42
 Tax Laws

Dependent Exemption for Noncustodial Parents 43

Compliance Measures and Audits of Large Corporations 44
 Need Improvement

Information on Transfer Pricing 47

Data on the Tax Compliance of Sweatshops 47

IRS' Handling of Undelivered Income Tax Refund Checks 48

IRS Use of Customs Data 49

IRS MODERNIZATION

IRS' New Business Vision 51

Electronic Filing Fraud 52

Status of Tax Systems Modernization Planning and 53
 Technical Foundation

Automated Underreporter Project Shows Need for Human 54
 Resource Planning

Controlling Improper Access to Taxpayer Data 55

Changes Needed in the Role of IRS' Regional Offices 56

TAXPAYER ASSISTANCE

Increased Fraud and Poor Taxpayer Access to IRS Cloud 59
 1993 Filing Season

More Improvements Needed in IRS Correspondence 61

Better Measures Needed to Assess Progress of IRS' 63
 One-Stop Service

TAX POLICY

Effects on Environmental Infrastructure of Limits on 65
 Certain Tax-Exempt Bonds

Health Insurance Tax Credit Participation Rate Was Low 66

Tax Expenditures Deserve More Scrutiny 66

Pharmaceutical Industry's Use of the Research Tax 68
 Credit

Implications of Removing State and Local Tax Exemption 69
 for Government Sponsored Enterprises

OTHER

Paperwork Reduction:  Reported Burden Hour Increases 71
 Reflect New Estimates, Not Actual Changes

Actions Needed to Sustain and Enhance Management Reforms 72

Opportunity to Strengthen Government's Management of 73
 Information and Technology

Information on IRS Executive Relocations and Travel 74
 Matters

Progress Report on Treasury's Financial Crimes 75
 Enforcement Network

Characteristics of Currency Transaction Reports Filed 76
 in Calendar Year 1992

Money Laundering:  Project Gateway 76

The Volume of Currency Transaction Reports Filed Can and 77
 Should Be Reduced

1993 Annual Report on GAO's Tax-Related Work 78

White House Travel Office Operations 78

Stronger Labor ERISA Enforcement Should Better Protect 79
 Plan Participants

Social Security Trust Funds Can Be More Accurately Funded 80


ACCOUNTS RECEIVABLE AND COLLECTION
ACTIVITIES


   IRS CAN DO MORE TO COLLECT
   TAXES LABELED "CURRENTLY NOT
   COLLECTIBLE"
--------------------------------------------------------- Appendix I:2

GAO/GGD-94-2, 10/08/93

In a report to the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, we presented the results of our
evaluation of IRS' procedures for classifying certain accounts as
currently not collectible (CNC) and IRS' efforts to monitor these
accounts for future collection potential.  IRS can classify an
account as CNC if the taxpayer cannot be located or contacted,
payment would cause significant financial hardship on the taxpayer,
the taxpayer is bankrupt, a business taxpayer no longer exists, or an
individual taxpayer is deceased. 

We reported that IRS was undermining its ability to collect hundreds
of millions of dollars because of inadequate and questionable CNC
determinations, CNC monitoring limitations, and inefficient
collection practices.  We also noted that IRS did not provide its
employees with specific guidance to make CNC determinations.  And,
IRS' supervisory reviews and post reviews were not identifying and
correcting problems with CNC determinations.  Some of these
determinations allowed taxpayers who reported incomes of more than
$70,000 to pay nothing towards their tax debts when installment
payments may have been more appropriate. 

We found accounts that may not have been collectible at the time they
were classified as CNC but, at the time of our review, had collection
potential that was not being realized because collection action
remained suspended.  Some accounts had not been reactivated because
of IRS' policy of not reevaluating collection potential during the
first 65 weeks after an account is classified as CNC--referred to as
the reactivation hold period. 

Other accounts had not been reactivated because IRS tracks only one
taxpayer when monitoring a joint CNC account and had therefore not
been aware of the potential of collecting from the other taxpayer. 
In addition, some of these accounts were ignored because IRS'
reactivation criteria did not consider all indicators of collection
potential.  We noted that even when CNC accounts were reactivated,
IRS still did not realize potential collections because of its
inefficient collection practices for reactivated accounts. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------- Appendix I:2.1

The Commissioner of Internal Revenue should establish specific
guidelines for determining taxpayers' ability to pay delinquent tax
debts, including selecting income levels at which CNC accounts will
be reactivated.  IRS needs criteria for allowable expenses in total
or by category that would require, except in extraordinary
situations, at least minimum payments from delinquent taxpayers with
incomes above a specific level. 

We also recommended that the Commissioner ensure that oversight
mechanisms--supervisory and post reviews--are thorough enough to
identify inappropriate CNC determinations and that reporting
standards are developed to provide meaningful information that can be
used to identify problems needing IRS-wide corrective action. 

We further recommended that IRS eliminate the 65-week reactivation
hold period, track both taxpayers when they file separately but have
joint CNC delinquencies, use all available indicators of collection
potential as reactivation criteria, and expedite the collection
process for reactivated accounts. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------- Appendix I:2.2

IRS agreed that the CNC area could be improved and concurred at least
in principle with most of our recommendations.  For example, IRS has
(1) written draft procedures to address the issue of allowable
expenses, (2) issued guidance to field collection staff on the income
level to which CNC cases are to be reactivated, and (3) plans to
revise the Internal Revenue Manual to include guidance on minimum
payment requirements from delinquent taxpayers with incomes above a
specified level. 

IRS is planning to implement the remaining recommendations with the
exception of eliminating the 65-week reactivation hold.  The
Commissioner did not agree with eliminating the 65-week reactivation
hold because it ensured that cases were not reactivated unnecessarily
when the taxpayers' income was already considered during the
investigation.  However, as we pointed out, the hold also precluded
the timely reactivation of the accounts. 


   COLLECTING DELINQUENT TAXES AND
   COMMUNICATING WITH TAXPAYERS
--------------------------------------------------------- Appendix I:3

GAO/T-GGD-94-50, 11/09/93

In testimony before the Subcommittee on Oversight, House Committee on
Ways and Means, we presented information on how IRS collects tax
debts, processes tax returns, and communicates with taxpayers.  The
information was taken from recently completed reviews for the
Subcommittee.  We identified opportunities to increase revenues,
treat taxpayers more evenly, reduce taxpayer frustration, and cut
down the need for repetitive contacts to resolve tax questions.  If
IRS implements our recommendations, major improvements should result
in the collection of back taxes and in taxpayer relations. 

We reported that for the third consecutive year, IRS' collection of
delinquent taxes declined in 1993.  We believe that increased
collections may be achieved from delinquent tax accounts that IRS has
deemed "currently not collectible." Questionable work and faulty
monitoring systems have resulted in some taxpayers, who earned more
than $70,000, paying nothing toward their tax debts.  IRS' uneven
staffing and antiquated collection process also have a negative
impact.  With staffing imbalances, the extent of collection action
may vary depending on where a taxpayer lives.  Thus, the amount of
revenues collected per staff year varies considerably among IRS
districts.  More fundamental changes are needed in the collection
process, with more emphasis on earlier telephone contact, tailoring
actions to the taxpayer's situation, and evaluating collection staff
performance. 

We found that the 1993 tax filing season, while generally successful,
was clouded by a few problems.  About 2 million fewer returns were
filed in 1993 than 1992.  The main reason fewer returns were filed
appeared to be because of revised 1992 withholding tables, which
resulted in more taxpayers owing taxes at the end of the year.  Also,
electronic filing fraud grew in 1993.  In the first 8 months of 1993,
IRS identified 100 percent more fraudulent electronically-filed tax
returns than in 1992.  One reason may be IRS' improved detection;
however, no one knows how much fraud is going undetected.  Also,
taxpayers continued to have problems telephoning IRS.  In 1993,
taxpayers had a one in four chance of getting through to an IRS
assistor--even worse than the one in three chance the year before. 

IRS' written communication in the form of inaccurate, incomplete,
confusing, and late responses to taxpayers continues to be a problem. 
Forms, notices, and publications are also of concern and we suggested
59 changes to 19 of those commonly used.  IRS has made many of the
suggested changes in forms and publications but will not be able to
clarify the notices before 1995 because of computer constraints. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------- Appendix I:3.1

GAO/GGD-93-7R, 11/18/92; GAO/GGD-93-22, 11/24/92; GAO/T-AFMD-93-1,
02/03/93; GAO/GGD-93-64, 03/22/93; GAO/GGD-93-33R, 04/06/93;
GAO/GGD-93-90BR, 04/08/93; GAO/GGD-93-100FS, 04/27/93;
GAO/GGD-93-38R, 04/27/93; GAO/T-GGD-93-23, 04/28/93; GAO/GGD-93-72,
04/30/93; GAO/GGD-93-101, 05/04/93; GAO/GGD-93-97, 05/05/93;
GAO/GGD-93-67, 05/11/93; GAO/GGD-93-37R, 05/25/93; GAO/GGD-93-131,
09/23/93; and GAO/GGD-94-2, 10/08/93


   CHANGES NEEDED TO COPE WITH
   GROWTH IN OFFER IN COMPROMISE
   PROGRAM
--------------------------------------------------------- Appendix I:4

GAO/GGD-94-47, 12/23/93

At the request of the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, we reviewed IRS' Offer in Compromise
Program to determine the effect that IRS' new emphasis on the program
has had in collecting delinquent taxes and encouraging future
compliance. 

We reported that IRS was pleased with the initial results of the
revised program, but it has yet to demonstrate that the use of offers
in compromise will meet the program's overall objectives of increased
collections and improved compliance.  Although our review of case
studies showed that IRS staff followed prescribed procedures in
processing taxpayers offers, we identified several things IRS needs
to consider as part of its improvement process. 

First, IRS needs reliable data on the offer program.  IRS uses paper
records to track the number of offers received and the amount of tax
debt compromised--a process we found subject to error.  Once IRS has
reliable data, it needs better indicators of the program's
effectiveness. 

Second, IRS needs to continue to improve the efficiency of the offer
program.  For example, its recent decision to streamline the
processing of offers involving tax debts of less than $10,000 should
help reduce administrative costs.  At the same time, however, IRS
needs to be cautious about over reliance on in-house information
sources to substantiate taxpayers' asset claims.  In addition, IRS is
required by law to obtain a legal opinion on all offers with tax
liabilities of $500 or more--a process that increases administrative
costs.  IRS has proposed raising the review threshold to $50,000. 
Because the legal complexity of offers is not always directly related
to the amount of the tax liability, we believe a better option would
be to give IRS discretionary authority to decide when offers need
legal review.  IRS also relies on time-consuming, manual methods to
monitor accepted offers to ensure that taxpayers comply with the
conditions of the offer.  Automating the monitoring process could
improve its efficiency. 

Although we had no data to indicate that IRS' increased compromising
of tax debts might adversely affect voluntary compliance, we believe
IRS needs to be mindful of the effect that settling for less than the
full tax liability might have on taxpayers who pay their taxes in
full.  Congress recognized the potential fairness and equity issues
linked to offers in compromise and, as part of the program, required
that the names of taxpayers whose debts are compromised, the amount
of the debt compromised, and the amount accepted by the government be
made public information.  IRS might defuse this potential issue if it
can demonstrate the overall benefits of the offer program. 

Last, IRS needs to determine the causes for variability in offer
acceptance rates among district offices.  The wide variability in
district offices' acceptance rates could raise the question of
whether taxpayers are being treated consistently. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
------------------------------------------------------- Appendix I:4.1

Congress should consider amending section 7122 of the Internal
Revenue Code to remove the requirement that the Treasury General
Counsel or his delegate review all offers of $500 or more and widen
IRS' discretionary authority to decide which offers require review. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------- Appendix I:4.2

The Commissioner of Internal Revenue should develop the indicators
necessary to evaluate the Offer in Compromise Program as a collection
and compliance tool.  The indicators should be based on accurate data
and include (1) the yield of the program in terms of costs expended
and amounts collected, (2) the amount of revenues collected that
would not have been collected through other collection means, (3) a
measure of noncompliant taxpayers who returned to the tax system, and
(4) a measure of participating taxpayers who remained compliant in
future years. 

We also recommended that the Commissioner determine the causes of
variability in district office acceptance rates and, where
appropriate, take steps to mitigate any inconsistent treatment of
taxpayers. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------- Appendix I:4.3

As of December 31, 1994, Congress had taken no decisive action on the
requirement that the Treasury General Counsel review all offers of
$500 or more. 

IRS generally agreed to implement or consider the recommendations
contained in our report.  For example, IRS has begun to make changes
necessary to gather data to determine program costs and revenue
yield.  IRS does not agree that data on revenue that would not have
been collected or on noncompliant taxpayers who returned to the tax
system can be gathered or that it would be meaningful.  IRS also
plans to use a quality measurement system to collect data on offer
acceptance rates to determine if there is inconsistent treatment of
taxpayers among district offices. 


   STATE TAX ADMINISTRATORS' VIEWS
   ON DELINQUENT TAX COLLECTION
   METHODS
--------------------------------------------------------- Appendix I:5

GAO/GGD-94-59FS, 02/02/94

In a fact sheet to the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, we summarized the views of state tax
administrators on collecting delinquent state taxes.  We surveyed
state tax administrators as part of a study for the Subcommittee on
options available to IRS to enhance its collection of delinquent
federal taxes. 

We found that states were changing their delinquent tax collection
strategies to increase collections and make their collection programs
more efficient.  Those enhancements included (1) new or improved
accounts receivable management information systems, (2) updated
written billing procedures, (3) the use of telephone collection
techniques, and (4) the use of enforcement programs that restrict
taxpayer access to certain state licenses and permits if delinquent
taxes remain unpaid. 

We also found that many states have collection tools not currently
available to IRS.  Thirty-two states used private collection
companies to collect delinquent tax accounts from taxpayers residing
in and out of state.  Eleven states accepted credit card tax
payments; however, most restricted their use to delinquent taxes. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------- Appendix I:5.1

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


   BUDGET AND FINANCE
--------------------------------------------------------- Appendix I:6


   IRS' SELF-ASSESSMENT OF ITS
   INTERNAL CONTROLS AND
   ACCOUNTING SYSTEMS IS
   INADEQUATE
--------------------------------------------------------- Appendix I:7

GAO/AIMD-94-2, 10/13/93

In a report to the Commissioner of Internal Revenue, we concluded
that because of widespread material weaknesses in IRS' operations, we
do not believe that IRS can be reasonably sure that the objectives of
the Federal Managers' Financial Integrity Act (FMFIA) of 1982 have
been achieved.  The act requires agencies to disclose the condition
of their internal control and accounting systems.  Except for the
accounting systems reviews conducted at the service centers, IRS did
not provide adequate guidance or training to staff during FMFIA
reviews. 

IRS' process for identifying, disclosing, and correcting material
weaknesses must be substantially improved if the agency is to produce
reliable information that top management can use to control costs and
improve operations.  Top management involvement is an essential first
step in bolstering IRS operations and accurately reporting IRS
internal control and accounting system weaknesses to the Secretary of
the Treasury. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------- Appendix I:7.1

The Commissioner of Internal Revenue should direct the Senior
Management Council to coordinate and oversee activities to (1)
establish and implement proper written procedures that provide for
the identification, documentation, and correction of material
weaknesses; (2) provide classroom training and guidance materials to
all FMFIA review staff; (3) develop effective corrective action plans
that address the fundamental causes of the weaknesses; and (4) verify
the effectiveness of corrective actions before removing reported
weaknesses from IRS' records. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------- Appendix I:7.2

As of December 1994, as part of IRS' annual self-assessment process,
the Senior Management Council had instituted the practice of meeting
with IRS executives to review the effectiveness of their corrective
action plans.  IRS is developing written policies requiring testing
of corrective actions to determine if the corrective actions are
effective in resolving the weaknesses. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------- Appendix I:7.3

GAO/HRD-92-81, 09/01/92; GAO/AFMD-93-42, 05/06/93; GAO/AIMD-93-2,
06/30/93; GAO/AIMD-93-24, 08/05/93; and GAO/AIMD-94-120, 06/15/94


   IMPORTANT IRS REVENUE
   INFORMATION IS UNAVAILABLE OR
   UNRELIABLE
--------------------------------------------------------- Appendix I:8

GAO/AIMD-94-22, 12/21/93

As the nation's primary tax collector, IRS reported about $1.1
trillion in tax revenues for fiscal year 1992.  Pursuant to a
legislative requirement, we reviewed IRS' financial management
systems and internal controls over federal tax revenues.  This report
discussed deficiencies and internal control weaknesses in the systems
that accounted for this money. 

We found that (1) although IRS accounts for specific types of taxes
assessed, it does not obtain and adequately account for payment
information to determine specific taxes collected; (2) IRS cannot
precisely determine the amount of subsidies provided to the Social
Security trust fund because it does not separately account for the
specific amount of Social Security taxes collected; (3) trust fund
recipients receive little or no information relating to tax revenues;
(4) IRS revenue information is unreliable because IRS systems are not
designed to generate needed revenue information; (5) IRS does not
adequately analyze its transactions to determine how they should be
reported and classified; (6) IRS has omitted or misclassified over
$150 billion in transactions and has overstated tax distributions by
$113 billion by not reducing collections for refunds; (7) IRS does
not calculate interest on certain types of accounts receivable; and
(8) IRS does not consistently review certain manual accounting
entries to prevent erroneous or unauthorized entries. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------- Appendix I:8.1

IRS should (1) develop a way to capture information on the specific
taxes collected for trust funds so that the difference between
amounts assessed and amounts collected is readily determinable and
tax receipts can be distributed as required by law, (2) determine the
trust fund revenue information needs of other agencies and provide
such information, and (3) identify the information needed for revenue
reporting and related sources and develop written policies and
procedures for compiling this information. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------- Appendix I:8.2

IRS is planning to improve its system to account for and report on
tax revenues and intends to provide its Chief Financial Officer a
larger role in overseeing revenue-related operations and reporting
policies.  However, many of its efforts have not yet been defined or
are not expected to be completed until well past the year 2000. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------- Appendix I:8.3

GAO/GGD-92-81BR, 04/17/92; GAO/HRD-92-81, 09/01/92; GAO/T-GGD-93-4,
02/03/93; GAO/HRD-93-42, 03/29/93; GAO/T-GGD-93-20, 03/30/93;
GAO/GGD-93-100FS, 04/27/93; GAO/AFMD-93-40, 04/28/93; GAO/GGD-93-109,
06/08/93; and GAO/AIMD-94-120, 06/15/94


   IRS DOES NOT ADEQUATELY MANAGE
   ITS OPERATING FUNDS
--------------------------------------------------------- Appendix I:9

GAO/AIMD-94-33, 02/09/94

In a report to the Commissioner of Internal Revenue, we discussed
significant weaknesses in the systems that IRS uses to manage, spend,
account for, and report on its operating funds.  We were unable to
audit about $4.3 billion of the $6.7 billion in operating funds that
IRS reported spending in fiscal year 1992 because IRS could not
account for all the money.  Significant control weaknesses included
the following:  (1) managers lacked current, reliable information on
available budget authority; (2) some types of expenditures were
recorded only after lengthy delays; and (3) reports used to monitor
compliance with laws governing the use of budget authority contained
unauthorized adjustments.  In addition, (1) IRS reports included
misclassified expenditures; (2) IRS did not periodically review and
adjust its records to reflect changes in obligations and remove
canceled appropriations or resolve billions of dollars in
discrepancies between its records and those of the Treasury; and (3)
IRS could not ensure that outlays for goods and services were proper
because of fundamental control weaknesses in its payment processes,
including a lack of proper review and approval of payments. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------- Appendix I:9.1

The Commissioner of Internal Revenue should direct the Chief
Financial Officer to improve controls over operating funds to ensure
that budget authority for operations is not exceeded, improve
processes and controls to ensure that payments for goods and services
are proper and timely, and improve systems and processes to ensure
that reports on operating funds are reliable. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------- Appendix I:9.2

IRS agreed with the concerns noted in our report and has been working
to implement the appropriate corrective actions as detailed in its
corrective action plan. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------- Appendix I:9.3

GAO/AIMD-94-120, 06/15/94


   ANALYSIS OF IRS' BUDGET REQUEST
   FOR FISCAL YEAR 1995
-------------------------------------------------------- Appendix I:10

GAO/GGD-94-129, 04/20/94 and GAO/GGD-94-141R, 06/16/94

IRS' fiscal year 1995 budget request totaled $7.61 billion, a 3.7
percent increase over IRS' fiscal year 1994 appropriation that was
primarily attributable to a growth in Tax Systems Modernization
(TSM).  At the same time, the budget would reduce IRS' staffing level
to 109,656 full-time equivalents--a decrease of 5.2 percent that fell
most heavily on IRS' enforcement programs.  Separate from IRS' budget
request, however, the President proposed giving IRS another $405
million for compliance initiatives that would increase IRS staffing
by about 5,000 full-time equivalents and reverse the decline in
enforcement staff. 

Our analysis of the budget request and the proposed initiatives, done
at the request of the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, raised several questions: 

  -- Will funding shortfalls again prevent IRS from fully
     implementing the proposed compliance initiatives? 

  -- Should one of the proposed initiatives be refocused to emphasize
     more use of the telephone in collecting delinquent tax accounts? 

  -- How will the proposed compliance initiatives and related revenue
     estimates be revised in light of the lower funding level in the
     Senate budget resolution? 

  -- Is a fee for installment agreements appropriate and, if so, is
     there a more equitable alternative to the flat fee being
     proposed? 

  -- Would it be better to do away with the direct deposit indicator
     on electronically filed returns rather than charge for providing
     the service? 

  -- To what extent do incomplete business requirements and technical
     standards and guidelines increase the risks for TSM projects in
     the budget request? 

  -- Are the budget requests for returns processing and taxpayer
     service appropriate considering filing season data on the number
     of returns filed and toll-free telephone accessibility? 

At the request of the Chairman, Senate Committee on the Budget, we
provided an opinion on how the additional budget authority being
requested for IRS compliance initiatives might affect budget deficits
over the next 5 years. 

We opined that the additional budget authority will not increase the
budget deficit over the 5-years in question provided (1) the funds
are used as intended to increase IRS' enforcement staffing levels and
thus generate more revenues through enhanced compliance efforts; (2)
funds are provided in the fiscal years after 1995 to maintain the
increased staffing levels; and (3) IRS is able to successfully hire,
train, and retain the additional staff provided by the budget
authority.  A deficit increase in the first year is possible because
of the lag between the time new staff are hired and the time they
become productive.  In our opinion, however, on the basis of past
reviews of IRS' enforcement programs, an increase in enforcement
staffing will help generate significant revenues over the long term,
provided the increased staffing levels are maintained. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:10.1

GAO/T-GGD-92-34, 04/30/92; GAO/T-GGD-93-23, 04/28/93; GAO/GGD-93-67,
05/11/93; GAO/T-AIMD-GGD-94-104, 03/02/94; and GAO/GGD-94-123,
05/11/94


   EXAMINATION OF IRS' FISCAL YEAR
   1993 FINANCIAL STATEMENTS
-------------------------------------------------------- Appendix I:11

GAO/AIMD-94-120, 06/15/94

Pursuant to a legislative requirement, we examined IRS' financial
statements for fiscal year 1993.  Our audit revealed that IRS is
hampered by serious, pervasive financial management problems,
including the inability of antiquated systems to generate the
reliable financial information needed to manage IRS operations.  We
were unable to express an opinion on the reliability of IRS's fiscal
year 1993 Principal Financial Statements.  The report discussed the
scope and severity of IRS' financial management and control problems,
the adverse impact of these problems on IRS' ability to effectively
carry out its mission, and IRS' actions to remedy the problems. 

We found that (1) critical supporting information for IRS financial
statements was not available; (2) the available information was
generally unreliable due to ineffective internal controls; (3) IRS
internal controls did not effectively safeguard assets, provide a
reasonable basis for determining material compliance with laws and
regulations, or ensure that there were no material misstatements in
the financial statements; and (4) although there were no instances of
material noncompliance with laws and regulations during fiscal year
1993, there were instances of noncompliance with certain Internal
Revenue Code provisions. 


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

We made recommendations to help IRS continue its efforts to resolve
these long-standing and difficult problems and to strengthen its
financial management. 


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

IRS is taking steps to resolve problems cited in our report.  Phases
of its corrective action plan are being implemented; however, some of
its milestones have slipped.  Other milestones will take longer to
activate.  In fiscal year 1995, IRS plans to finish cleaning up cash
reconciliations and accounts payable.  Its budget process was
approved by the Congress and will be activated in fiscal year 1995,
also.  We will continue to work with IRS officials as they strengthen
financial management. 


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

GAO/GGD-92-26, 02/19/92; GAO/GGD-93-100FS, 04/27/93; GAO/AIMD-93-40,
04/28/93; GAO/AFMD-93-42, 05/06/93; GAO/AIMD-93-24, 08/05/93;
GAO/GGD-93-133, 08/13/93; GAO/AIMD-93-34, 09/22/93; GAO/GGD-93-145,
09/24/93; GAO/AIMD-94-2, 10/13/93; GAO/AIMD-94-22, 12/21/93;
GAO/AIMD-94-33, 02/09/94; GAO/GGD-94-123, 05/11/94;
GAO/T-AIMD-94-157, 07/13/94; GAO/T-AIMD-94-183, 07/19/94; and
GAO/T-AIMD-94-164, 07/28/94


   CFO IMPLEMENTATION AT IRS AND
   CUSTOMS
-------------------------------------------------------- Appendix I:12

GAO/T-AIMD-94-164, 07/28/94

In testimony before the Senate Committee on Governmental Affairs, we
discussed IRS' and Customs' progress in complying with financial
reporting and other requirements of the Chief Financial Officers
(CFO) Act of 1990.  We discussed the results of our attempt to audit
IRS' and Customs' fiscal year 1993 financial statements, the
short-term actions needed by IRS and Customs to continue their
progress in resolving serious financial management problems, and IRS'
and Customs' efforts to establish the financial management
organizations and systems required by the act. 

We noted that (1) although we were unable to provide an opinion on
IRS' and Customs' fiscal year 1993 financial statements because of
continuing financial management problems, IRS and Customs have made
significant improvements to their financial management operations;
(2) CFO audits have helped IRS and Customs develop effective
financial management systems and internal controls; (3) improvements
to IRS' and Customs' financial management systems and internal
controls should enhance these agencies' ability to fulfill their
mission requirements more effectively and efficiently; (4) IRS and
Customs have developed and implemented methodologies that more
accurately report their collectible accounts receivable, reviewed
their physical inventory and internal controls over seized assets,
conducted physical inventories of their fixed assets, and implemented
integrated accounting and budgeting systems; and (5) IRS and Customs
need to improve their guidance and oversight, develop additional
reconciliation and approval procedures, and improve financial
management information reporting so that they can effectively carry
out their missions and reliably report on their operations. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:12.1

GAO/AIMD-93-34, 09/22/93; GAO/T-AIMD/GGD-94-97, 02/23/94;
GAO/AIMD-94-120, 06/15/94; GAO/AIMD-94-119, 06/15/94;
GAO/T-AIMD-94-149, 06/21/94; and GAO/T-AIMD/GGD-94-183, 07/19/94


   SOME REFORMS TO BUDGET PROCESS
   OFFER PROMISE
-------------------------------------------------------- Appendix I:13

GAO/T-AIMD-94-86, 03/02/94

In testimony before the Subcommittee on the Legislative Process,
House Committee on Rules, we discussed proposed changes to the budget
process focusing on (1) biennial budgeting, (2) increasing controls
over tax expenditures and direct spending, and (3) requiring gross
national product budget analysis and fiscal policy reports in the
President's budget proposals. 

We noted that (1) the House members of the Joint Committee on the
Organization of Congress have proposed to (a) shift the budget cycle
from annual to biennial, (b) broaden congressional control over
fiscal policy by including information on tax expenditures in the
budget resolution and by a new process to better control direct
spending, and (c) broaden the context in which budgets are presented
and debated; (2) although shifting appropriations to a biennial cycle
could save time for agencies, it could also result in a shift in
congressional control and oversight; (3) multiyear fiscal policy
agreements and multiyear authorizations make sense and do not require
changing the appropriations process from annual to biennial; (4)
incorporating tax expenditures into the budget resolution is the
first step toward putting tax expenditures on a more equal footing
with budget outlays; (5) periodic assessments of actual direct
spending against anticipated levels and decisions on whether to take
action based on such assessments would be valuable; and (6) requiring
the President to submit a gross domestic product analysis and a
separate fiscal and budget policy report would allow for longer range
economic planning and further link fiscal policy with the broader
goals for the U.S.  economy. 

Regarding tax expenditures, we pointed out that exemptions and
exclusions from taxation, deductions, credits, deferrals, and
preferential tax rates result in forgone revenues of about $400
billion a year.  Because tax expenditures, unlike appropriated
programs, are not considered as part of the annual budget process,
they are largely beyond the reach of budgetary controls.  We proposed
that Congress begin to increase scrutiny over tax expenditures by
incorporating information on tax expenditures in budget resolutions. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:13.1

GAO/AIMD-94-41, 04/27/94 and GAO/T-AIMD-94-112, 04/28/94


   BUDGETARY IMPLICATIONS OF
   SELECTED GAO WORK
-------------------------------------------------------- Appendix I:14

GAO/OCG-94-3, 03/11/94

In a report to the Congress, the Comptroller General stated that we
have consistently stressed the urgent and ultimately unavoidable need
to reduce the deficit.  Further, he stated that the persistently high
deficit levels of the 1980s and 1990s and the mounting debt
burden--now more than $4 trillion--are hobbling the government's
ability to meet pressing national needs and are absorbing savings
that could otherwise be used to finance investment.  The report
presented options for spending reductions and revenue increases that
stemmed from key findings and issues developed in our audits and
evaluations. 

Our deficit reduction framework consists of three broad strategies: 
(1) considering whether to end or revise government services, (2)
redefining for whom these services are or should be provided, and (3)
exploring how the services can be delivered more efficiently.  The 57
options in this report covered a host of federal policies and
programs ranging from the dairy price support system, to burden
sharing in Korea, to the collection of gasoline excise taxes. 

We discussed each spending option with the Congressional Budget
Office and each revenue option with the Joint Committee on Taxation
to determine budgetary effects.  Where possible, 5-year estimates of
savings were provided for each option by these offices.  Specific tax
options dealt with the deductibility of home equity loan interest,
the tax treatment of interest earned on life insurance policies and
deferred annuities, the targeted jobs tax credit, and the tax
treatment of health insurance premiums. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:14.1

GAO/OCG-92-2, 06/05/92; GAO/OCG-93-1TR, 12/92; and GAO/AIMD-94-155,
07/18/94


   COMPLIANCE
-------------------------------------------------------- Appendix I:15


   TAX IMPACTS OF FORGIVEN DEBTS
   AT THE FARMERS HOME
   ADMINISTRATION (FMHA)
-------------------------------------------------------- Appendix I:16

GAO/GGD-94-25R, 11/10/93

In a letter to Representative Robert L.  Livingston, we provided
information on the tax impacts of debt being forgiven by FmHA.  This
work followed our February 1993 report on information reporting on
forgiven debt (GAO/GGD-93-42, Feb.  17, 1993). 

We reported that taxpayers should report forgiven debt as income
except when the debtor (1) is bankrupt, (2) is insolvent to an extent
that exceeds the amount of the forgiven debt, (3) has been forgiven a
qualified farm debt held by an unrelated lender, or (4) has been
forgiven a debt for a qualified real property business.  Otherwise,
taxpayers should reduce tax attributes such as net operating loss
deductions by the amount of the forgiven debt. 

Data did not exist to allow us to identify how much FmHA forgiven
debt met any of the four exceptions.  We did report that FmHA had
forgiven $3.1 billion in direct loan obligations from fiscal year
1989 through the first three-quarters of 1992 and had written off
another $4.5 billion to settle direct loans with borrowers who had
ceased farming. 

We also provided information about the high noncompliance in
reporting forgiven debt as income and the importance of information
reporting in boosting compliance.  Using the February 1993 report, we
found that taxpayers had reported income from just 1 percent of the
debts forgiven by the Federal Deposit Insurance Corporation (FDIC)
when the taxpayers had not received information returns, compared to
48 percent when they had received them.  When the FDIC did not file
information returns for 1989, an estimated $78 million in federal
income taxes was lost.  Furthermore, we found that taxpayers who did
not report forgiven debts as taxable income appeared financially able
to pay additional taxes. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:16.1

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


   IRS' ADMINISTRATION OF
   TAX-CUSTOMS VALUATION RULES IN
   TAX CODE SECTION 1059A
-------------------------------------------------------- Appendix I:17

GAO/GGD-94-61, 02/04/94

In a report to the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, we provided information on IRS'
enforcement of section 1059A of the Internal Revenue Code.  We also
presented proposals to reconcile the different IRS and U.S.  Customs
Service valuation rules that affected the use of section 1059A. 

Congress enacted section 1059A in 1986 to improve IRS' enforcement of
transfer pricing regulations.\1 Section 1059A was designed to prevent
the federal government from being whipsawed by an importer, on
property acquired from a related party, who claimed a low valuation
for customs purposes and a higher valuation for tax purposes. 

Two general options were available to reconcile the differences in
the valuation definitions that affected the use of section
1059A--multilateral renegotiation of the Customs Valuation Code of
the General Agreement on Tariffs and Trade (GATT), and unilateral
congressional amendment either of section 1059A or of section 402 of
the customs legislation (19 U.S.C.  section 1401a). 

Commenting on the legislative option, IRS said that the issue
addressed in the technical advice memorandum was not a tax problem. 
Rather, the problem was with Customs valuation, resulting from a
loophole in Customs legislation.  Thus, IRS concluded the issue
should be resolved by amending Customs law. 

Customs concluded that the legislative option would violate GATT. 
According to Customs, the amendatory language would place the U.S. 
valuation legislation in conflict with the Customs Valuation Code,
which was negotiated between the United States and its major trading
partners. 

The agencies have not agreed on a common approach to resolving the
problem of the differences in valuation definitions. 


--------------------
\1 Transfer prices are prices companies charge related companies for
goods and services transferred on an intercompany basis. 


   MANY ACTIONS TAKEN ON TAX GAP,
   BUT A COHESIVE COMPLIANCE
   STRATEGY NEEDED
-------------------------------------------------------- Appendix I:18

GAO/GGD-94-123, 05/11/94

In a report to Representative John W.  Olver, we analyzed the
composition of the gross income tax gap as well as what had been
done, was being done, and could be done to reduce the gap.  We
developed this report by tracking actions on past recommendations for
reducing the tax gap.  We also updated information related to those
recommendations. 

The U.S.  income tax system relies on taxpayers to voluntarily
comply.  However, many do not, creating the tax gap and shifting the
burden of funding government services to compliant taxpayers.  IRS
estimates showed that the gross income tax gap is large and
growing--$76 billion in 1981 to $127 billion in 1992.  IRS estimated
that $94 billion of the gap was caused by individuals and $33 billion
by corporations.  The largest part arose from unreported individual
income--$63 billion.  Overall, IRS estimated that taxpayers
voluntarily paid 82 percent of their income tax liabilities.  IRS'
goal is to reach 90 percent by 2000. 

Since the early 1980s, Congress has given IRS tools to help reduce
the tax gap.  Tax laws have subjected more income and deductions to
information reporting and increased penalties for noncompliance. 
Congress also closed the door on various ways to shelter income from
taxation and on some individual tax deductions, which reduced the
opportunity for noncompliance.  Congress has also given IRS
additional funds for specific compliance initiatives.  However, time
lags in hiring, training, and assigning new staff prevented IRS from
achieving projected revenue gains.  Also, because of budget
shortfalls, IRS redirected compliance initiative funds to
nonenforcement areas. 

Despite these tools and additional funds, IRS has not been able to
increase its enforcement.  Audits of corporations have decreased from
over 5 percent in fiscal year 1981 to less than 3 percent in fiscal
year 1992.  During the same period, audits of individuals decreased
from 1.8 percent to less than 1 percent.  Computer matching has been
reduced to absorb budget shortfalls.  As a result, a matching program
for finding unreported income generated about the same amount of tax
assessments in fiscal year 1992 as in fiscal year 1986--$1.8 billion. 

Ongoing changes at IRS offer new ways to reduce the gap.  These
changes include a new compliance strategy called Compliance 2000,
modernization of computer systems, and organizational restructuring. 
In Compliance 2000, IRS wants to maintain existing compliance while
also helping noncompliant taxpayers become compliant and pursue those
who do not intend to comply.  The transition to this new strategy has
been uneven.  IRS has not fully developed a system that can determine
whether the strategy is on track or needs correction.  If these
changes do not work, IRS' goal to increase voluntary compliance to 90
percent by 2000 will be difficult to meet. 

In developing its compliance strategy, IRS needs data to objectively
identify noncompliance and the reasons for it.  IRS is developing
these data, which will not be available for several years.  In the
interim, IRS could use existing statistical compliance data from its
Taxpayer Compliance Measurement Program (TCMP) to focus more of its
enforcement resources on such highly noncompliant taxpayers as small
corporations and sole proprietors (which make up 29 percent of the
tax gap).  We also stated that IRS should not further reduce its
enforcement and that IRS could attack more noncompliance through
computer matching.  For any computer match to be effective, IRS needs
to receive all required information returns in a timely fashion. 

One way Congress could help is to give IRS even more compliance
tools.  Simplifying the definition of independent contractor and
requiring withholding on payments made to them could help improve
compliance.  Congress also could require information reporting on
payments made to independent contractors operating as corporations. 
Congress could allow IRS to reinvest productivity gains from
modernization projects.  Before doing so, Congress may want assurance
that IRS will use the funds for compliance. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:18.1

GAO/GGD-91-12, 01/07/91; GAO/GGD-91-11, 03/13/91; GAO/GGD-91-36,
03/13/91; GAO/GGD-91-49, 03/13/91; GAO/GGD-91-38, 03/29/91;
GAO/T-GGD-91-17, 03/20/91; GAO/GGD-91-45, 04/16/91; GAO/T-GGD-91-21,
04/17/91; GAO/GGD-91-64, 05/14/91; GAO/IMTEC-91-39, 06/18/91;
GAO/T-GGD-91-20, 06/25/91; GAO/GGD-91-91, 07/03/91; GAO/GGD-91-94,
08/26/91; GAO/GGD-91-118, 09/27/91; GAO/GGD-91-89, 09/30/91;
GAO/GGD-92-26, 02/19/92; GAO/T-GGD-92-23, 03/17/92; GAO/T-GGD-92-48,
06/03/92; GAO/T-GGD-92-56, 06/23/92; GAO/GGD-92-108, 07/23/92;
GAO/T-GGD-92-63, 07/23/92; GAO/GGD-92-130, 09/22/92; GAO/GGD-93-27,
12/30/92; GAO/GGD-93-40, 01/22/93; GAO/GGD-93-42, 02/17/93;
GAO/GGD-93-60, 03/19/93; GAO/GGD-93-52, 04/05/93; GAO/GGD-93-97,
05/05/93; GAO/GGD-93-104, 05/10/93; GAO/GGD-93-67, 05/11/93;
GAO/GGD-93-93, 05/18/93; GAO/GGD-93-102FS, 05/26/93; GAO/GGD-93-131,
09/23/93; and GAO/GGD-93-145, 09/24/93


   FEASIBILITY OF USING A METER TO
   CAPTURE UNREPORTED BUSINESS
   INCOME
-------------------------------------------------------- Appendix I:19

GAO/GGD-94-158R, 06/07/94

At the request of Senators Paul Simon and David L.  Boren, we
analyzed the potential revenue, costs, and feasibility of a tax
compliance proposal submitted by a concerned citizen.  The proposal
was intended to help prevent businesses from underreporting sales
income and thus underpaying taxes.  IRS estimated that unreported
business income created a $38 billion income tax shortfall for 1992. 

The proposal would require businesses to enter sales figures into
portable meters at each point of sale.  Businesses would be allowed a
federal tax credit to reduce the cost of the meter.  When businesses
prepare their tax returns, they would attach a small slip of paper
from the meter showing cumulative sales.  Meters also would issue
special receipts that customers could redeem for free tickets to
enter a nationwide lottery.  To receive the tickets, customers would
redeem their receipts at self-service lottery terminals.  Centrally
located computers would help to manage the lottery system and
validate receipts before issuing any lottery ticket. 

We reported that the feasibility of this proposal rested on the
premise that tax revenues will far exceed costs.  This premise could
not be confirmed due to a number of relatively optimistic, untested
assumptions.  We also found that the proposal could cost billions of
dollars to implement and manage.  For example, (1) the federal cost
for a tax credit to buy meters could be substantial, (2) technical
safeguards to protect the computerized lottery network would be
costly, (3) a new government entity would be needed to manage and
administer the lottery, and (4) government resources for meter
enforcement and administration could be large. 


   INFORMATION ON IRS'
   INTERNATIONAL TAX COMPLIANCE
   ACTIVITIES
-------------------------------------------------------- Appendix I:20

GAO/GGD-94-96FS, 06/27/94

In a fact sheet to the Chairman, Senate Committee on Finance, we
provided information on (1) how IRS had used additional resources
allocated to international compliance activities and (2) how it
measured the effectiveness of its international tax compliance
activities. 

From fiscal year 1990 to 1993, IRS devoted more resources to
international tax compliance activities--12 percent more in
authorized positions and 25 percent more in time actually spent by
international examiners and economists.  IRS used these resources
mainly to increase examinations of foreign-controlled corporations by
353 percent and to initiate and expand its Advance Pricing Agreement
Program, which sought to obtain agreement up front on transfer
pricing issues to avoid later disputes during the examination
process.  In the same period, IRS' international examinations of the
tax returns of taxpayers that were not foreign-controlled
corporations decreased 31 percent. 

IRS used several indicators to measure the effectiveness of its
international tax compliance activities.  For example, in
examinations, IRS compared the additional tax recommended by
international examiners with the number of staff hours used to do the
examination.  And in the appeals process, IRS used as indicators the
amounts sustained by IRS' Appeals function compared to the proposed
unagreed adjustments from examination. 


   IRS CAN BETTER PURSUE
   NONCOMPLIANT SOLE PROPRIETORS
-------------------------------------------------------- Appendix I:21

GAO/GGD-94-175, 08/02/94

In a report to the Joint Committee on Taxation, we analyzed the tax
compliance of sole proprietors (i.e., self-employed individuals) and
IRS' efforts to improve their compliance. 

Although they accounted for an estimated 13 percent of individual
taxpayers, sole proprietors accounted for an estimated 40 percent of
underreported total income by individuals in IRS' most recent TCMP. 
They also accounted for an estimated 36 percent of the $94 billion
individual tax gap for 1992.  Further, TCMP data showed that sole
proprietors reported only 75 percent of their net business income
while individuals reported almost 98 percent of nonbusiness total
income.  Since 1979, sole proprietor compliance has fluctuated with
little evidence that IRS' current compliance efforts will prompt
significant improvements.  Even with such noncompliance, we did not
find a comprehensive linkage between IRS' compliance strategy and
compliance efforts for sole proprietors. 

Each of IRS' compliance efforts has limitations.  Requiring many
resources, audits reached relatively few sole proprietors.  In 1992,
IRS audited only 2.3 percent of the 6.6 million individuals whose
primary income was from the sole proprietorship.  Computer matching
was limited because information returns were not required for sole
proprietor income earned from selling goods or from providing
services to individuals.  IRS' compliance projects were often
judgmentally selected on the basis of local officials' experience
rather than objective data, such as from TCMP.  As a result, IRS has
little assurance that these projects addressed the most significant
compliance problems.  Even if projects succeeded locally, IRS' system
to communicate the results was limited. 

IRS was developing new information systems to better identify the
causes of noncompliance and target enforcement resources, but the
systems were not expected to be fully implemented for years.  Whether
they will produce data needed to systematically improve sole
proprietor compliance was unknown.  IRS also was improving TCMP to
identify local compliance problems and causes.  However, such data
will not be available until at least 1998. 

Meanwhile, IRS could better use existing TCMP data to identify the
root causes of some sole proprietor noncompliance.  Such data
indicated that truckers were among the less compliant sole
proprietors.  The primary reason, as found in TCMP workpapers, was
inadequate books and records.  IRS could work with the trucking
industry to fix this problem.  TCMP workpapers also indicated that
unincorporated automobile body shops did not report all income from
work done for businesses such as insurance companies.  Although
businesses are required to send information returns, the shops seldom
received them.  This suggests that IRS may need to work with
businesses on sending information returns. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:21.1

IRS should

  -- develop a system for managing and monitoring all sole proprietor
     compliance projects, linking them to IRS-wide plans, and
     disseminating their results throughout IRS;

  -- use existing TCMP information, including workpapers, to help
     identify projects that would address the most noncompliant sole
     proprietor market segments on a nationwide basis and analyze the
     underlying causes of noncompliance;

  -- work with trucking industry groups to improve record keeping and
     with other sectors where TCMP indicates that record keeping may
     be a problem; and

  -- clarify information return filing instructions for insurance
     companies and work with these companies to improve compliance
     with information reporting requirements. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:21.2

As of December 1994, IRS was taking actions that address our
recommendation on developing a system for managing and monitoring
sole proprietor compliance projects.  IRS cited various activities
already underway, such as its strategic planning process.  On using
existing TCMP data and workpapers to identify projects that address
the most noncompliant sole proprietors, IRS pointed to plans to use
TCMP data and other data to profile market segments that represent
cash and privately owned businesses and to develop strategies to
improve their compliance. 

IRS pointed out that it uses nonenforcement approaches to improve
compliance within specific industries, such as the trucking industry,
on problems with books and records.  IRS developed guidance for
trucking companies containing information on accounting requirements
and record keeping.  IRS is also clarifying information reporting
requirements for insurance companies making payments to automobile
body shops, as we recommended. 


   IMPROVING INDEPENDENT
   CONTRACTOR COMPLIANCE WITH TAX
   LAWS
-------------------------------------------------------- Appendix I:22

GAO/T-GGD-94-194, 08/04/94

In testimony before the House Committee on Small Business, we
presented our views on the tax compliance issues arising from
proposed health care reform provisions that would have affected the
use of independent contractors. 

Independent contractors are commonly viewed as self-employed workers
who provide services.  Employees also may provide services but
usually for one employer over a longer time.  In classifying a worker
as an independent contractor or employee, an employer should follow
the 20 common-law rules.  These rules focus on the degree of control
an employer has over the worker.  Workers who must follow
instructions on when, where, and how to do the work are more likely
to be viewed as employees. 

An employer may switch classification from employee to independent
contractor to reduce labor and some other business costs.  Being
reclassified allows the independent contractor to deduct business
expenses and reduce taxable income.  Such classification rules have
been controversial for some time and still need clarifying. 

Some reform provisions touched on rules for classifying workers as
employees or independent contractors and reporting payments made to
independent contractors on information returns.  Tax law does not
require information returns from independent contractors who (1) are
incorporated, (2) provide services to households, or (3) earn less
than $600 annually. 

Some employers could have been mandated to pay most health insurance
premiums for their employees.  Within this context, our major points
were

  -- independent contractors tend to have lower tax compliance than
     employees;

  -- an employer mandate could induce employers to use more
     independent contractors, some of which will be misclassified
     because of unclear classification rules; and

  -- to the extent that health reform can address these issues
     through improved information reporting and other actions, tax
     administration would benefit. 

Because of concerns about independent contractor compliance, many
reform proposals included two provisions that we have supported. 
First, the $50 penalty for not filing an information return would
increase significantly.  Second, the $50 penalty would apply (instead
of this new larger penalty) if the employer reported at least 97
percent of all aggregated payments to independent contractors for
that year.  We still favor these provisions and encourage Congress to
consider these and other options we have provided for improving
information reporting. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:22.1

GAO/GGD-91-49, 03/13/91; GAO/GGD-92-108, 07/23/92; GAO/T-GGD-92-63,
07/23/92; GAO/GGD-92-130, 09/22/92; GAO/GGD-94-123, 05/11/94; and
GAO/GGD-94-175, 08/02/94


   DEPENDENT EXEMPTION FOR
   NONCUSTODIAL PARENTS
-------------------------------------------------------- Appendix I:23

GAO/GGD-94-200R, 08/31/94

When parents are divorced or separated, only one can claim the
dependent exemption.  Representative William J.  Coyne asked us for
suggestions on how the law could be changed to allow all noncustodial
parents who provide over half of their children's support to claim
the exemption. 

We reported that Congress specifically amended the law in 1984 to
allow the custodial parent to receive the exemption unless he or she
transfers the right to the exemption to the noncustodial parent.  The
law was changed to relieve IRS' administrative burden in settling
disputes when both parents claimed the exemption and to provide more
certainty as to who could claim the exemption.  We concluded that
changing the law would reintroduce the uncertainty that existed prior
to the law change and make it difficult to administer. 


   COMPLIANCE MEASURES AND AUDITS
   OF LARGE CORPORATIONS NEED
   IMPROVEMENT
-------------------------------------------------------- Appendix I:24

GAO/GGD-94-70, 09/01/94

In a report to the Chairman, Permanent Subcommittee on
Investigations, Senate Governmental Affairs Committee, we analyzed
the taxes paid by the largest, most complex corporations and IRS'
audits of them under its Coordinated Examination Program (CEP). 
Excluding refunds, these corporations pay income taxes of about $155
billion each year.  IRS considers CEP to be its most important audit
program. 

Specifically, we computed the collection rate--the portion of
additional taxes recommended by CEP auditors that IRS eventually
collected after CEP corporation appeals and litigation.  The
collection rate does not measure corporate compliance or the tax gap;
these estimates are done by IRS.  We also identified factors that
reduced the amounts collected as well as the status of IRS' changes
to the program to address those factors. 

Tax law complexity makes measuring tax compliance and the collection
rate very difficult.  Complex laws provide opportunities for
different interpretations, which may lead to different calculations
of corporate liability.  IRS auditors annually recommend that CEP
corporations pay billions in additional tax--about two-thirds of that
recommended from all IRS audits.  Yet the 1,700 audit staff years
devoted to CEP are modest compared to the task of auditing the 1,700
CEP corporations.  Recognizing this challenge, IRS does CEP audits,
unlike other audits, under a team approach using specialists such as
engineers, economists, and international specialists. 

We computer-matched IRS databases to calculate the percentage of
taxes recommended by CEP teams between fiscal years 1983 and 1991
that was eventually collected after any appeals or litigation through
fiscal year 1992.  Our computer match showed a 22-percent collection
rate.  Had IRS' databases accounted for factors such as claims for
net operating losses, the collection rate computation could be even
more accurate.  We expressed the belief that collecting 22 cents per
dollar left room for improvement in the audit process, appeals
process, or both. 

CEP teams and corporations may disagree on the information needed for
an audit.  Some IRS requests for information were overly broad or
hard to satisfy.  However, CEP teams need certain information to
determine whether income and deductions are properly reported. 
Without the necessary support, CEP recommendations for additional
taxes are unlikely to survive an appeal.  We found that two methods
for obtaining information--information document requests and
summonses--did not work well. 

Conflicting incentives within IRS contributed to the low collection
rate.  IRS encouraged CEP teams to recommend more taxes in the
shortest time possible, making full audits hard to do.  Appeals
focused on settling cases, which encouraged concessions of taxes that
CEP teams recommended to avoid losing all such taxes in court.  With
this knowledge, corporations could negotiate from a stronger position
in Appeals, particularly when IRS litigated very few CEP cases. 
Rather than providing CEP teams with needed data during the audit,
about half of the corporations we surveyed said they introduced new
data in Appeals. 

We also noted opportunities for improvement in how IRS manages CEP
resources and trains CEP auditors.  The authority to control budget
resources resided with IRS' district offices.  We found that this
lack of central authority allowed districts to redirect resources
from CEP, leaving CEP teams ill-equipped to comprehensively audit
enormous corporations.  Funds for travel, training, and private
sector experts were insufficient. 

IRS did not encourage CEP auditors to specialize in auditing certain
industries.  Instead, IRS rotated them to different corporations that
often involved different industries, accounting standards, and
issues.  We said that rotating auditors to corporations in different
industries hindered their ability to recommend taxes that could be
sustained in Appeals. 

Appeals' controls to ensure coordination with other IRS functions did
not always work or exist.  Insufficient coordination gave an edge to
CEP corporations and led to inconsistent settlements.  Specifically,
corporations had an advantage during negotiations whenever Appeals
(1) used new evidence submitted by corporations after audit without
letting CEP officials evaluate it and (2) settled issues contrary to
IRS legal positions without obtaining the views of the Office of
Chief Counsel. 

IRS has been concerned about the effectiveness of CEP since the
1970s.  IRS announced 10 changes to CEP in 1990 that were intended to
relieve taxpayer burden through tax simplification and better systems
and procedures, resolve many factual issues at the audit level,
provide appropriate training and resources, improve the effectiveness
and efficiency of audits, and improve the currency of audits.  We
concurred that these changes were needed in addition to those we
recommended. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:24.1

We recommended that IRS

  -- use the 22 percent collection rate to estimate the taxes that
     CEP audits will yield, until more reliable information becomes
     available;

  -- correct its databases to allow for a more accurate computation
     of the collection rate;

  -- test ways to measure CEP corporate tax compliance and the
     related tax gap;

  -- provide the CEP Director with authority over CEP resources in
     the districts;

  -- include a common measure, such as the collection rate, in CEP
     and Appeals;

  -- increase revenue agents' knowledge of specific industries in
     which they do CEP audits;

  -- improve IRS' tools for collecting information from CEP
     corporations during the audit;

  -- allow CEP auditors to rotate among corporations in the same
     industries;

  -- improve controls to ensure that Appeals seeks CEP teams'
     evaluation of new information from corporations and coordinates
     with Counsel officials before conceding taxes in opposition to
     IRS legal positions; and

  -- propose legislative changes that will permanently resolve
     recurring tax disputes. 


      ACTIONS TAKEN(S) AND/OR
      PENDING
------------------------------------------------------ Appendix I:24.2

IRS disagreed with most of our recommendations about the collection
rate.  IRS did not agree to use the collection rate in any capacity
or to correct its databases to allow for a more accurate computation
of the rate.  Nor did IRS agree to test ways to measure corporate
compliance.  However, as of December 1994, IRS was taking actions
related to these areas.  It was creating a database, accounting for
some of the errors in its existing databases, that could be used
eventually to compute the collection rate.  IRS also has been
attempting to develop a baseline measure of voluntary compliance and
to study whether CEP audits could identify more noncompliance. 

IRS is taking actions to increase revenue agents' knowledge of
industries in which they do audits, thereby improving IRS' tools to
collect data from corporations and allowing agents to rotate to
corporations within the same industry--to the extent possible.  IRS
did not agree to give the CEP Director more authority over CEP
resources.  IRS agreed to improve its various controls over Appeals'
settlements of CEP audit disputes.  IRS also agreed to propose
legislative changes more strongly. 


   INFORMATION ON TRANSFER PRICING
-------------------------------------------------------- Appendix I:25

GAO/GGD-94-206R, 09/15/94

In a letter to Senator Byron L.  Dorgan, we provided updated
statistical information on IRS' administration of section 482 of the
Internal Revenue Code, which deals with transfer pricing issues. 
Following up a 1993 GAO testimony, the information summarized IRS'
recent experience with section 482 in examinations, appeals, and
litigation.  It was developed from IRS international examination and
appeals data covering the late 1980s through 1993 and from 1993 and
1994 U.S.  Tax Court rulings. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:25.1

GAO/T-GGD-93-16, 03/25/93


   DATA ON THE TAX COMPLIANCE OF
   SWEATSHOPS
-------------------------------------------------------- Appendix I:26

GAO/GGD-94-210FS, 09/23/94

In a report to the Chairman, Subcommittee on Commerce, Consumer, and
Monetary Affairs, House Committee on Government Operations, we
provided data on the federal and state tax compliance of sweatshops
in the garment and restaurant industries.  Federal law and
regulations did not define a sweatshop.  Building on past research,
we defined a sweatshop as a business that violated more than one
federal or state law governing wages and hours, child labor, health
or safety, workers' compensation, or industry registration.  We did
our work at IRS and the Department of Labor and two
states--California and New York--where sweatshops were common. 

Although no data existed on their overall tax compliance, many
sweatshops that we reviewed failed to comply with one or more
elements of federal or state tax laws.  For example, of the 94
garment and restaurant sweatshops we studied, 84 (89 percent) were
assessed at least one penalty for filing returns or paying taxes late
in 1 or more years between 1990 and 1993.  As of mid-1994, 30
sweatshops still owed tax liabilities of $492,000--$16,400 on
average.  Lacking comparable tax data for other types of businesses,
we could not determine whether the 94 sweatshops complied better or
worse in filing tax returns and paying taxes. 

IRS identified most of these tax liabilities through audits--the most
comprehensive way to identify noncompliance.  IRS audited 15 of the
94 sweatshops at least once during the 4 years.  Of the overall
$848,800 in additional taxes assessed against the 94 sweatshops
during those 4 years, the 15 audits accounted for about 70 percent
($589,000). 

Lacking tax data on sweatshops, IRS and the two states could not
focus on pursuing unpaid income taxes of sweatshops.  Tax officials
at IRS and these states said they applied their limited resources to
industries with more unpaid taxes.  IRS officials said these
industries are an enforcement priority and may include sweatshops. 
For example, IRS and the two states directed enforcement efforts at
the garment and restaurant industries but not the tax compliance of
sweatshops.  The state efforts tended to focus on violations of labor
laws.  IRS' efforts included a nationwide audit program for the
garment industry.  For this industry, IRS had a group in Los Angeles
to address compliance and was planning similar groups in other
states. 

Officials at the Department of Labor and the two states generally
favored working with IRS on joint compliance projects, such as for
garment sweatshops.  Such joint efforts could improve compliance with
all laws, including tax laws.  The federal tax code, however,
restricts IRS' ability to share tax data in joint efforts. 


   IRS' HANDLING OF UNDELIVERED
   INCOME TAX REFUND CHECKS
-------------------------------------------------------- Appendix I:27

GAO/T-GGD-94-186, 09/26/94

In a statement for the record submitted for hearings by the
Subcommittee on Commerce, Consumer, and Monetary Affairs, House
Committee on Government Operations, we provided the results of our
work on how IRS handles undelivered income tax refund checks.  For
the 1992 filing season, IRS sent over 89.3 million refunds, totaling
about $113 billion, to taxpayers.  In light of this large volume of
refunds and the mobility of Americans, it is not surprising that some
of these refunds were not delivered to taxpayers but were returned to
IRS.  About 279,000 of the 89.3 million refunds, or about one-third
of 1 percent, were initially returned by the U.S.  Postal Service as
undeliverable. 

According to IRS, undeliverable refunds are caused by (1) taxpayers
moving and leaving no forwarding address with the Postal Service or
IRS, (2) the Postal Service not delivering or forwarding refund
checks, and (3) IRS incorrectly recording taxpayers' addresses. 

IRS follows certain procedures for handling undeliverable tax
refunds.  These procedures include attempts to locate better
addresses for the taxpayers and publicity efforts to notify taxpayers
of undelivered refunds. 

As a result of these procedures, IRS was able to resolve over 251,000
of the 279,000 undeliverable 1992 refunds.  Thus, only about 28,000
undelivered refunds, totaling $12.4 million and representing less
than 1/35th of 1 percent of the total number of refunds issued during
the 1992 filing season were not resolved. 

Although about 28,000 refunds could not be delivered, IRS credits
taxpayers' accounts for the refund amount.  This ensures that the
refunds are available to the taxpayers in the future.  We believe
that IRS is acting responsively in its handling of undelivered income
tax refunds and that the burden of further responsibility for
obtaining refunds due should shift to the taxpayers. 


   IRS USE OF CUSTOMS DATA
-------------------------------------------------------- Appendix I:28

GAO/GGD-94-217R, 09/30/94

Trade data have been provided by the U.S.  Customs Service to IRS
under a working arrangement signed in 1992 that sought to enhance
both agencies' enforcement efforts.  The arrangement was signed
following hearings by the Subcommittee on Oversight, House Committee
on Ways and Means, in which the two agencies were encouraged to share
such information.  In a letter to the Chairman of the Subcommittee,
we provided information on the use of the data in developing tax
audits of transfer prices.  As of September 30, 1994, IRS had made 17
requests for Customs data.  Of these requests, 14 were specifically
requested for use in transfer pricing audits under section 482.  We
discussed these 14 cases with the IRS field staff who requested the
Customs data.  We analyzed the reasonableness of the information we
received by discussing it with IRS National Office representatives
responsible for coordinating the use of the data. 

Our discussions indicated that a substantial tax adjustment was
obtained in one case and savings in audit time were obtained in six
cases, as a result of the use of Customs data.  IRS field staff also
said they would like to receive data in a more timely and more
accessible form.  Since IRS has begun to step up its efforts to raise
field agents' awareness of the Customs data, it will be increasingly
important for the data to be accessible as the number of requests
will probably increase. 


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

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


   IRS MODERNIZATION
-------------------------------------------------------- Appendix I:29


   IRS' NEW BUSINESS VISION
-------------------------------------------------------- Appendix I:30

GAO/T-GGD-94-58, 11/17/93

IRS has been encouraged on several occasions to use the opportunity
afforded by Tax Systems Modernization to identify alternative
business practices that would provide better service to taxpayers. 
In 1992, IRS began to do just that.  IRS has now developed its new
business vision, at least conceptually.  That vision was the subject
of this testimony before the Subcommittee on Commerce, Consumer and
Monetary Affairs, House Committee on Government Operations. 

IRS' new vision calls for (1) shifting from a paper-based to an
electronic tax-processing system, (2) consolidating fragmented
telephone assistance into fewer centrally managed locations that can
handle almost all taxpayer calls, and (3) developing a database that
will contain all pertinent account information readily available to
employees who need it.  We support these business concepts.  They
hold promise for improved taxpayer service and more efficient and
effective government. 

IRS got a late start in developing its new vision and faces many
challenges before the vision becomes a reality.  One challenge is to
increase significantly the number of tax returns that are filed
electronically.  IRS' goal is to increase the number to 80 million by
2001.  To reach this goal, IRS said it needs legislation that would
enable it to require electronic filing under certain conditions. 
Considering the time needed to pass legislation and issue
regulations, we believe that the legal issues associated with
electronic filing need to be resolved and legislative proposals
submitted to Congress soon if IRS is to meet its goal. 

Besides legislation, IRS needs to make electronic filing more
accessible to a broader range of taxpayers.  We have recommended that
IRS (1) encourage employers and financial institutions to offer
electronic filing to employees and customers and (2) consider letting
taxpayers file through their personal computers.  IRS has developed a
strategy that includes these initiatives and many others. 

IRS' new business vision also poses a significant human resource
challenge because it will dramatically change the work done by many
IRS employees.  IRS has pledged that all career and
career-conditional employees in jobs affected by new technology will
be given the opportunity for retraining and continued employment at
the same grade level.  IRS will use several strategies in trying to
meet the human resource challenge, including retraining and
redirecting some affected employees into tax compliance and customer
service positions. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:30.1

GAO/T-GGD-91-54, 07/09/91; GAO/GGD-93-40, 01/22/93; and
GAO/GGD-94-159, 07/08/94


   ELECTRONIC FILING FRAUD
-------------------------------------------------------- Appendix I:31

GAO/T-GGD-94-89, 02/10/94 and GAO/T-AIMD/GGD-94-183, 07/19/94

As we noted in separate testimonies before the Subcommittee on
Oversight, House Committee on Ways and Means, and the Senate
Committee on Governmental Affairs, electronic filing fraud is a
problem whose true dimensions are unknown.  In 1993, IRS received
about 115 million individual income tax returns.  Of those returns,
about 12 million were filed electronically--13 percent more than in
1992.  By comparison, IRS identified 25,633 fraudulent electronic
returns during the first 10 months of 1993 compared to 12,488 for the
same period in 1992--a 105 percent increase.  Although the number of
identified fraudulent electronic returns is relatively small, the
rate of growth is high, and it is uncertain how much fraud might be
going undetected. 

In the past, IRS has appeared more interested in expanding electronic
filing than in ensuring that it fully understood and adequately
addressed the associated risks.  As a result, IRS has been in a
reactive posture--adding controls every year in the hope of
effectively dealing with a problem that it did not fully understand. 
With IRS planning to expand to 80 million electronic returns by 2001,
IRS must thoroughly assess its controls and determine what is needed
to adequately protect the government's revenues. 

We reiterated several recommendations made in earlier reports
directed at improving IRS' controls over electronic filing fraud. 
The recommendations involved (1) changes to the electronic filing
system that would help prevent fraudulent returns from being filed,
(2) better detection of fraudulent returns that have been filed, and
(3) improved screening and monitoring of persons and firms authorized
to transmit returns electronically to IRS.  Some of those
recommendations have not yet been implemented. 

In the longer term, IRS must ensure that fraud control needs, like
various up-front matching capabilities, are fully identified and
considered in planning its systems modernization program.  It is also
important that IRS learn from its electronic filing experience by
building adequate controls into the design of future systems, like
TeleFile (the system that allows certain taxpayers to file their
returns over the telephone), and ensuring that those controls are
adequate before nationwide implementation. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:31.1

GAO/GGD-93-37, 12/30/92 and GAO/GGD-94-65, 12/22/93


   STATUS OF TAX SYSTEMS
   MODERNIZATION PLANNING AND
   TECHNICAL FOUNDATION
-------------------------------------------------------- Appendix I:32

GAO/T-AIMD-GGD-94-104, 03/02/94

In 1993, the Subcommittee on Treasury, Postal Service, and General
Government, House Committee on Appropriations, concluded that the Tax
Systems Modernization (TSM) effort was at risk and that its
successful completion required immediate action to make key decisions
and establish an essential technical management infrastructure. 
Thus, IRS' fiscal year 1994 appropriation included a requirement that
IRS report on three key issues--a business plan, a program management
approach, and a systems architect's office.  IRS supplied the
required reports in September 1993. 

In testimony before the Subcommittee, we concluded that although IRS'
reports contained as much information as IRS was able to provide,
they did not establish the essential infrastructure the Subcommittee
sought.  To establish this infrastructure, IRS must complete action
on two fronts. 

IRS must first define its business requirements in detail.  Without
approved business requirements, which precisely define the
operational capabilities needed from TSM, IRS is not in a position to
develop the technical specifications that shape specific information
systems development projects.  The absence of complete and detailed
TSM requirements puts ongoing systems development projects at risk
because the resulting systems may not fit properly into the whole. 

Second, IRS must fill gaps in its technical and management standards. 
Technical standards form a foundation that guides the system
development and allows the many systems and subsystems of TSM to
connect and work cooperatively.  Without a common data format for
storing and transmitting information, for example, TSM systems will
not be able to readily exchange information--a primary TSM goal. 
Management standards form a foundation for the overall management of
TSM and the complex physical deployment of TSM systems for use by IRS
employees nationwide.  Short-term and long-term investments are at
risk because the technical and management standards are not in place. 
To reduce its risks, IRS should set aggressive schedules and clear
accountability for completing these efforts. 


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

GAO/T-GGD-93-24, 04/27/93; GAO/T-IMTEC-93-6, 04/27/93; and
GAO/GGD-94-129, 04/20/94


   AUTOMATED UNDERREPORTER PROJECT
   SHOWS NEED FOR HUMAN RESOURCE
   PLANNING
-------------------------------------------------------- Appendix I:33

GAO/GGD-94-159, 07/08/94

Over the next several years, IRS plans to implement its $23 billion
TSM program.  Among other things, TSM will replace outdated computer
and telecommunications equipment with new systems designed to provide
instant access to information and move IRS toward a paperless
electronic environment.  In conjunction with the modernization, IRS
is overhauling its organization and operations to take better
advantage of the new technology and is reshaping its workforce to
meet the job requirements of the new work environment. 

This report, addressed to the Chairman, Subcommittee on Commerce,
Consumer and Monetary Affairs, House Committee on Government
Operations, discusses IRS' (1) human resource planning for TSM, (2)
strategy for meeting the human resource needs of the new environment,
and (3) experience in implementing the Automated Underreporter (AUR)
project--the first TSM project with a significant human resource
impact. 

With modernization, IRS estimated that over 24,000 workers will no
longer be needed for the jobs they are now doing, but it has pledged
that no career or career-conditional employees will lose their jobs
because of TSM.  At the time of our review, IRS had not yet (1)
determined workforce requirements for the new work environment; (2)
assessed the knowledge, skills, and abilities of its current
workforce in relation to the new requirements; and (3) developed
detailed retraining and redeployment plans. 

IRS' experience in implementing the AUR project reveals some of the
problems that can occur without comprehensive human resource
planning.  IRS was not adequately prepared to redeploy the almost
1,900 employees displaced at four service centers that lost the
underreporter function.  Despite a large number of vacant positions
that had accumulated during a 2-year freeze on hiring permanent
employees, the centers did not have enough vacant positions to
reassign all of the displaced employees.  As of November 1993--about
18 months after the redeployment began--about 16 percent of the
employees were still awaiting reassignment.  Additionally, IRS began
reassigning staff before it had negotiated redeployment guidelines
with the National Treasury Employees Union, which represents many of
the affected employees. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:33.1

The Commissioner of Internal Revenue should take the following steps
before fielding other modernization projects that have a significant
human resource impact: 

  -- assess existing workforce knowledge, skills, and abilities and
     update this assessment periodically for later comparison with
     project requirements;

  -- identify specific staffing requirements (numbers, skills,
     grades, and training) for all TSM projects that will have a
     significant effect on human resources; and

  -- compare project staffing requirements with the inventories of
     existing workforce knowledge, skills, and abilities and develop
     detailed retraining and redeployment plans to meet the
     requirements for TSM projects that will have a significant
     effect on human resources. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:33.2

IRS has efforts underway that are intended to help it manage the
human resource implications of its modernization effort.  These
efforts lay an organizational framework within which IRS could plan
for, and its employees could cope with, the human resource impacts of
TSM.  However, IRS has not specifically addressed our
recommendations.  We are continuing to monitor those efforts. 


   CONTROLLING IMPROPER ACCESS TO
   TAXPAYER DATA
-------------------------------------------------------- Appendix I:34

GAO/T-AIMD/GGD-94-183, 07/19/94

In testimony before the Senate Committee on Governmental Affairs, we
discussed IRS' efforts to (1) safeguard taxpayer automated files from
unauthorized access and manipulation by IRS employees and (2) remove
unnecessary risk from its computer systems environment.  A portion of
this testimony also dealt with electronic filing fraud.  Because that
part of our statement generally mirrored information in other
testimony that is summarized on page 52, it is not included in this
summary. 

We identified the following primary weaknesses with IRS' computer
systems security:  (1) inadequate control over access to computer
systems, which leaves taxpayer data at risk of illegal disclosure or
alteration; (2) limited monitoring of changes to taxpayer accounts;
(3) poor contingency preparation for recovery after a disaster, which
could leave IRS unable to provide basic tax processing and support
services; and (4) improper management of software changes, which
could leave IRS open to sabotage. 

IRS has taken some steps and plans to take others to reduce these
risks.  Adequately reducing the risk in these areas will depend on
the prompt and effective implementation of significant computer
systems security improvements. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:34.1

GAO/T-AIMD-93-3, 08/04/93


   CHANGES NEEDED IN THE ROLE OF
   IRS' REGIONAL OFFICES
-------------------------------------------------------- Appendix I:35

GAO/GGD-94-160, 07/26/94

In a time of expanding telecommunications and persistent budget
pressures, some large federal organizations are reducing their field
structures.  IRS has a three-tiered organizational structure that
includes a National Office, 7 regional offices, and 73 field offices
(63 district offices and 10 service centers).  Questions have been
raised about the value of the seven regional offices and whether they
could operate more efficiently.  This report, prepared in response to
a request from the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, addresses those questions. 

Past studies of IRS' organization have concluded that IRS needs
regional offices.  In our study, we reached the same conclusion after
surveying the internal customers of regional offices--executives in
IRS' National Office and field offices--and after reviewing regional
office involvement in IRS' initiative aimed at bringing nonfilers
back into the tax system. 

At the time of our review, IRS had about 96,000 field office
employees spread over about 700 work locations.  Evidence indicates
that regional offices are needed for effective management of such a
large and widespread organization.  The need for regional offices
could change, however, if IRS were to significantly reduce the number
of district offices or if future changes to IRS' business processes
and the technology supporting those processes enabled IRS to broaden
its span of control (ratio of supervisors to employees). 

Even though regional offices are needed, it was clear from our
analysis and from executives' responses to our survey that those
offices were not operating in a way that provided the most value to
internal customers.  Many customers, while acknowledging the need for
regional offices, often responded negatively to questions about how
helpful regional offices have been. 

With these concerns in mind and in conjunction with upcoming changes
that will reduce the number and size of regional offices, IRS needs
to rethink the role of those offices.  For example, regional staff
should not spend valuable time funneling information between National
and field offices or doing unproductive reviews of field office
activities.  It is also unproductive, in our opinion, for regional
offices to be involved in managing activities, such as returns
processing, where the number of sites involved is small enough for
the National Office to manage directly. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:35.1

The Commissioner of Internal Revenue should ensure that regional
office roles and responsibilities are defined in a way that clearly
support field office needs and contribute to accomplishing IRS'
mission.  In defining those roles and responsibilities, IRS should
(1) allow field offices to exchange information directly with the
National Office, when appropriate, rather than having to funnel
everything through a regional office; (2) ensure that reviews done by
regional offices do not duplicate those done by other offices and
that the reviews focus on helping to solve problems; and (3) remove
regional offices from the chain of command in those situations where
span of control is not an issue. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:35.2

The Commissioner of Internal Revenue said that (1) as IRS continues
to redesign its processes, consolidate and realign operational
components, and implement new technology, it expects that more
exchanges of information will be handled directly from the National
Office to field offices; (2) as the number of regional offices is
reduced, the roles of the regions will shift to more proactive
analysis and improvement of compliance operations in the districts;
and (3) chain of command is considered when operations are
consolidated as part of IRS' reinvention effort and that field
operations are being realigned under the National Office, when
appropriate.  With respect to the third point, IRS has decided to
have service centers report directly to the Chief of Taxpayer
Services. 


   TAXPAYER ASSISTANCE
-------------------------------------------------------- Appendix I:36


   INCREASED FRAUD AND POOR
   TAXPAYER ACCESS TO IRS CLOUD
   1993 FILING SEASON
-------------------------------------------------------- Appendix I:37

GAO/GGD-94-65, 12/22/93

At the request of the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, we assessed various aspects of IRS'
performance during the 1993 tax filing season.  Specifically, we
looked into tax return processing--including the growth in fraudulent
electronic returns--the accuracy and accessibility of toll-free
telephone assistance, and the availability of tax materials to
taxpayers. 

As of April 30, 1993, about 2 million fewer individual income tax
returns had been filed than during the comparable period in 1992. 
IRS believed that a major reason for the decrease was the change in
withholding tables for tax year 1992, which caused fewer taxpayers to
receive refunds and more to owe taxes--many of those owing taxes
apparently choosing not to file early returns. 

Although the number of income tax returns filed decreased, IRS, as of
August 31, 1993, had identified about 54,000 returns involving
fraudulent refund claims, about twice as many as were identified in
1992.  The fraudulent refund claims involved returns filed on paper
as well as those filed electronically. 

Electronic filing fraud is a particular problem for IRS because the
speed with which refunds on electronic returns are processed leaves
little time for IRS to stop fraudulent refunds before they are
issued.  IRS identified more fraudulent electronic refunds in 1993
than in 1992, continuing the trend of annual increases in fraudulent
refund claims since electronic filing became available nationwide in
1990.  IRS took several steps in an attempt to better combat
electronic fraud in 1993.  For example, IRS implemented an up-front
computer check to verify that taxpayer names and Social Security
numbers on returns matched information in IRS' records.  For 1994,
IRS plans to offer tax return preparers who provide electronic filing
with an indicator on whether IRS will honor a taxpayer's request for
direct deposit of a refund.  That indicator will be needed to receive
Refund Anticipation Loans (RAL) from banks while tax refunds are
being processed.  However, first-time electronic filers will not
receive RALs because of the number of fraudulent returns filed thus
far. 

We believe that IRS can do other things to improve its ability to
identify and stop fraudulent electronic refunds.  Toward that end, we
made several recommendations in December 1992 and made two additional
recommendations in this report.  See GAO/GGD-93-27, Dec.  30, 1992. 

Except for the continuing problem with fraud, IRS indicators show
that it did a good job processing returns during the 1993 filing
season.  According to IRS data, for example, most refunds were issued
quickly and accurately.  IRS also implemented procedures that (1)
allowed it to make more accurate eligibility determinations on
returns where taxpayers claimed the Earned Income Credit and (2) made
it easier for taxpayers to obtain installment agreements.  If IRS
decides to continue the latter effort, it should make the procedure
more available to taxpayers by allowing them to file the installment
agreement request form electronically. 

IRS' data showed that assistors handling toll-free telephone calls
did a good job answering tax law questions, and distribution centers
did a good job responding to taxpayers' requests for forms,
instructions, and publications.  However, taxpayers continued having
difficulty getting through to telephone assistors.  Using IRS data,
we determined that IRS answered only about one out of four calls. 
IRS is taking steps to compile better data on the extent of this
accessibility problem. 


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

To improve its ability to identify and stop fraudulent electronic
refunds, IRS should (1) analyze the fraud cases identified from
information provided by banks that give RALs to see if those cases
involve unique features that should be included in the criteria used
by IRS computers to screen electronic returns for potential fraud and
(2) determine which RAL banks were used for fraudulent refunds to see
if special attention should be given to banks that do not use the
Fraud Service Bureau--an entity established by the four main RAL
banks to review RAL applications and identify those involving
potential fraud. 

To make the new installment agreement procedures more available to
taxpayers, IRS should allow taxpayers to file the installment
agreement request form electronically. 


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

According to IRS, it analyzes information received from the RAL banks
to determine whether there are unique characteristics that should be
included in IRS' scoring criteria.  IRS said that only some of its 10
service centers maintain the kind of data needed to determine whether
the bank involved did or did not use the Fraud Service Bureau.  IRS
planned to ask those centers to review their information to see if
use or nonuse of the Fraud Service Bureau is a characteristic that
should be considered in assessing a return's fraud potential.  IRS
prepared a request for programming changes that would allow the
electronic filing of installment agreement request forms beginning in
January 1995. 


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

GAO/GGD-91-23, 12/27/90; GAO/GGD-91-98, 06/28/91; GAO/GGD-92-132,
09/15/92; and GAO/GGD-93-27, 12/30/92


   MORE IMPROVEMENTS NEEDED IN IRS
   CORRESPONDENCE
-------------------------------------------------------- Appendix I:38

GAO/GGD-94-118, 06/01/94

In a report to the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, we discussed IRS' efforts to improve its
correspondence with taxpayers and recommended additional
improvements.  During the past 6 years, GAO, IRS, and others have
cited delayed, inaccurate, incomplete, and confusing responses to
taxpayer letters as chronic IRS problems.  Although IRS has made
progress in correcting its correspondence problems by adopting
quality and timeliness standards and by expanding quality reviews of
outgoing mail, some problems persist. 

Our review of nearly 1,900 closed correspondence cases in IRS'
Atlanta and Cincinnati Service Centers found that 15 percent of the
cases were incorrect, unclear, incomplete, or nonresponsive.  Also,
11 percent of the cases resulted from taxpayers repeatedly trying to
contact IRS to resolve a matter.  Problems such as these increase
IRS' costs, frustrate taxpayers, and ultimately discourage taxpayer
compliance with the tax laws.  We outlined several opportunities for
IRS to improve its responsiveness to taxpayers, including resolving
more taxpayer issues by telephone, clarifying the situations that
warrant an IRS response to taxpayer correspondence, making timeliness
indicators more useful, and improving interim letters.  Interim
letters are sent to taxpayers when the issue in question cannot be
resolved within 30 days; however, IRS' measures of timeliness do not
focus solely on providing a final response to taxpayers, which may
underestimate the time required.  We also found interim letters in
our sample to be unclear and potentially confusing to taxpayers. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:38.1

The Commissioner of Internal Revenue should direct IRS' staff to take
the following actions: 

  -- clarify the wording in IRS' notices, letters, and publications
     to better inform taxpayers of those situations that can be
     handled by a telephone call.  Before implementing this
     recommendation, however, IRS first needs to ensure that its
     telephone system can meet the additional demand;

  -- clarify IRS' existing procedures for responding to taxpayer
     requests to ensure that taxpayers' questions do not go
     unanswered;

  -- use correspondence mail-out dates instead of the date a response
     was initiated as a timeliness indicator and adopt goals for
     providing taxpayers with final responses;

  -- reassess the purposes of interim letters and then provide the
     service centers with clear guidelines for accomplishing those
     purposes;

  -- review samples of interim letters to ensure that improvement in
     quality results from the revised guidelines; and

  -- implement Correspondence Task Force recommendations to (1)
     incorporate correspondence improvements at district offices, (2)
     meet user requirements for a letter writing system and an
     automated inventory control system, and (3) measure taxpayer
     satisfaction. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:38.2

IRS agreed with five of the six recommendations.  IRS provided an
alternative solution to GAO's recommendation that it use
correspondence mail-out dates as a timeliness indicator and adopt
goals for providing taxpayers with final responses.  IRS' alternative
solution was to mandate the use of spot-checks of interim letters in
all functional areas.  We agreed that IRS' alternative was reasonable
but recommended that the results of the spot-checks be incorporated
into timeliness measures.  In May 1994, IRS issued a memorandum
entitled "Action 61 Interim Letter Guidelines." A training package on
interim letters was also provided to all employees who correspond
with taxpayers.  IRS' May 1994 guidelines on interim letters directed
the service centers to conduct reviews of the interim letter process
and set improvement objectives.  IRS' National Office is to examine
the results of these procedures during annual program reviews. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:38.3

GAO/GGD-91-66, 03/20/91; and GAO/GGD-93-38R, 04/27/93


   BETTER MEASURES NEEDED TO
   ASSESS PROGRESS OF IRS'
   ONE-STOP SERVICE
-------------------------------------------------------- Appendix I:39

GAO/GGD-94-131, 08/29/94

In a report to the Chairman, Subcommittee on Commerce, Consumer, and
Monetary Affairs, House Committee on Government Operations, we
reported on IRS' efforts to implement one-stop service to respond to
taxpayers' questions and complaints.  IRS defined one-stop service as
the resolution of issues during the taxpayer's initial contact with
IRS or as a result of that contact.  Taxpayers and IRS will benefit
if IRS is able to reach its one-stop service goals.  Taxpayers will
have the opportunity to resolve issues in one contact with IRS, thus
avoiding the time-consuming frustration of dealing with multiple IRS
contacts.  Reducing multiple contacts will save money for IRS, and
lowering taxpayer frustration should benefit IRS through increasing
taxpayer compliance. 

Between 1992 and 1993, IRS improved its ability to deliver one-stop
service to taxpayers who telephoned with account inquiries.  Although
progress has been made, several barriers limit IRS' ability to
deliver one-stop service over the telephone.  IRS hopes to remove
some of the barriers through its consolidation of various telephone
and correspondence handling services into 23 Customer Service
Centers.  IRS expects these centers to be operational by 2001.  In
the meantime, current measures overstate delivery of one-stop
service.  In many instances counted as one-stop service, a taxpayer
will likely need to contact IRS again about the same matter. 
Moreover, measures of one-stop service in service center
correspondence activities and at forms distribution and walk-in sites
are limited or nonexistent. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:39.1

The Commissioner of Internal Revenue should develop better measures
of one-stop service that do not include instances where taxpayers
will likely need to contact IRS again about the same matter.  The
measures developed should apply to all taxpayer telephone
inquiries--including account-related, tax law, and procedural
inquiries as well as calls to automated collection sites and forms
distribution sites--service center correspondence activities, and
walk-in sites.  Moreover, the measures should be designed in such a
way that they enable IRS to (1) gauge its progress toward meeting its
1998 one-stop service goal, (2) identify and correct problems that
might impede IRS' progress toward that goal, and (3) compare delivery
of one-stop service among various taxpayer services available at IRS. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:39.2

IRS has begun to revise its one-stop measurement system for telephone
account calls.  Also, in the longer term, automated case files are
planned that would enable IRS to determine if a taxpayer made
multiple contacts on a given problem. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:39.3

GAO/T-GGD-92-33, 04/28/92


   TAX POLICY
-------------------------------------------------------- Appendix I:40


   EFFECTS ON ENVIRONMENTAL
   INFRASTRUCTURE OF LIMITS ON
   CERTAIN TAX-EXEMPT BONDS
-------------------------------------------------------- Appendix I:41

GAO/RCED-94-2, 10/28/93

Although state and local governments rely heavily on tax-exempt bonds
to finance environmental infrastructure, such as solid waste,
wastewater treatment, and drinking water facilities and to comply
with federal environmental mandates, Congress capped the volume of
tax-exempt bonds that can be issued each year for this purpose.  At
the request of Representatives Nita M.  Lowey and Christopher Shays,
we reviewed the impact of the volume cap on state and local
investment in environmental infrastructure, focusing on (1) national
investment in drinking water, wastewater treatment, and solid waste
facilities and (2) the cap's effect on private companies' investments
in those facilities. 

We found that capital spending and the volume of tax-exempt bonds
issued for environmental projects have changed little since the law
was revised, suggesting that the volume cap has not curbed overall
investment nationwide.  Nevertheless, further examination of spending
trends show that capital spending on the environment as a percentage
of the gross domestic product has fallen.  Moreover, it has not kept
pace with the rising tide of federal environmental mandates, which
will require considerably higher levels in the future. 

Private companies claim that the volume cap and other provisions of
the act have discouraged private investment.  They noted that the
volume cap has discouraged some companies from investing because
states' allocation processes give low priority to environmental
projects.  Also, several states allocate private activity bond
authority on a first-come, first-served basis, increasing the risk
that investors will be unable to secure all the necessary financing. 
Private companies said that other provisions of the 1986 Tax Reform
Act, which eliminated the investment tax credit and lengthened
depreciation schedules, have influenced investment decisions to an
even greater degree than the volume cap. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:41.1

GAO/HRD-90-34, 03/22/90; GAO/HRD-92-87FS, 03/31/92; and
GAO/RCED-92-35, 01/27/92


   HEALTH INSURANCE TAX CREDIT
   PARTICIPATION RATE WAS LOW
-------------------------------------------------------- Appendix I:42

GAO/GGD-94-99, 05/02/94

In response to a request from the Ranking Minority Member of the
Subcommittee on Health, House Committee on Ways and Means, we
described the administration of the health insurance tax credit and
studied the effect of the credit on the purchase of health insurance. 
We discussed the estimated participation rate, in part to determine
whether the potentially eligible population was aware of the health
insurance credit, and the health insurance tax credit's influence on
low-wage workers' purchase of health insurance. 

We estimated that about one-quarter of those who potentially were
eligible actually claimed the health insurance credit in 1991.  A
lack of awareness may have prevented more eligible taxpayers from
taking the credit. 

We found that the credit may not have been sufficient to encourage
eligible taxpayers to purchase insurance coverage.  The health
insurance credit reimbursed only a small percentage of taxpayers'
reported costs of health coverage.  The maximum health insurance
credit available in 1991 was $428.  The analysis of tax year 1991 tax
returns showed that the health insurance credit paid, on average,
$233, or 23 percent of the average reported health insurance premium
of $1,029 for credit recipients.  This $1,029 average annual premium
for recipients represented only a fraction of the total cost of
employer-provided health insurance, because employers generally pay a
significant part of the cost. 

We made no recommendations because during our work on this request
the health insurance tax credit was repealed by the Omnibus Budget
Reconciliation Act of 1993.  The requester's staff asked us to
complete the work because much of the information would be helpful in
discussions on health care reform. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:42.1

GAO/GGD-91-110FS, 09/12/91


   TAX EXPENDITURES DESERVE MORE
   SCRUTINY
-------------------------------------------------------- Appendix I:43

GAO/GGD/AIMD-94-122, 06/03/94

At a time when the federal government faces hard choices to reduce
the deficit and use available resources wisely, all federal
expenditures and subsidies should be carefully reviewed.  Tax
expenditures, or revenues forgone through preferential provisions in
the tax code--for example, deductions, exemptions, and credits--can
be a useful part of federal policy, but they should be scrutinized. 
Congressional and executive branch processes do not subject existing
tax expenditures to the same controls that apply to programs
receiving appropriated funds.  This report assessed the growth of
federal revenues forgone through income tax expenditures and
presented three options for reviewing and controlling their growth: 
(1) strengthening and extending expenditure control methods now used
by congressional tax-writing committees, (2) integrating tax
expenditures further into the budget process, and (3) reviewing tax
expenditures jointly with related federal outlay programs. 

At the request of Representative William J.  Coyne, we reviewed tax
expenditure growth, focusing on (1) the size of increases in tax
expenditures, (2) whether tax expenditures need increased scrutiny,
and (3) options that could be used to control the growth of tax
expenditures and the advantages and disadvantages of each
alternative. 

We found that (1) substantial revenues are forgone through tax
expenditures, but they do not overtly compete in the annual budget
process and most are not subject to reauthorization, (2) policymakers
have few opportunities to make explicit comparisons or trade-offs
between tax expenditures and federal spending programs, (3) the
revenues forgone through tax expenditures reduce the resources
available to fund other programs or reduce the deficit and force tax
rates to be higher to obtain a given amount of revenue, (4) greater
scrutiny of tax expenditures could be achieved by strengthening
techniques currently used to control tax expenditures, (5) Congress
could further integrate tax expenditures into the budget process by
deciding whether savings in tax expenditures are desirable and
setting specific savings targets in annual budget resolutions, and
(6) reviews of tax expenditures could be integrated with functionally
related outlay programs, which could make the government's overall
funding effort more efficient. 


      RECOMMENDATION(S) TO
      CONGRESS
------------------------------------------------------ Appendix I:43.1

The tax-writing committees should explore, within the existing
framework, opportunities to exercise more scrutiny over indirect
"spending" through tax expenditures. 

If Congress wishes to consider tax expenditure efforts in a broader
context of the allocation of federal resources, it could consider
further integrating tax expenditures into current budget processes. 
Providing for congressional consideration of a savings target as part
of the annual budget process could ensure that Congress addresses tax
expenditures periodically. 

Alternatively, options that integrate consideration of related outlay
and tax expenditure efforts could promote a more thorough review by
the legislative and executive branches of possible trade-offs. 


      RECOMMENDATION(S) TO THE
      OFFICE OF MANAGEMENT AND
      BUDGET
------------------------------------------------------ Appendix I:43.2

Once tax expenditure performance data are developed, the Office of
Management and Budget (OMB) should consult with the Treasury in
considering how to portray tax expenditure performance information in
the budget.  The tax expenditure performance information should be
combined with related outlay information to demonstrate the relative
efficiency, effectiveness, and equity of federal outlay and tax
expenditure efforts within a functional area.  Such a presentation
could be used to show the relative effectiveness of federal spending
programs funded through outlays and tax expenditures. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:43.3

As a result of our work, examinations of tax expenditures were made
part of agency performance plans.  Such plans are required by the
Government Performance and Results Act.  Furthermore, tax
expenditures were made part of the congressional budget process when
they were incorporated into the 1995 Congressional Budget Resolution
as a nonbinding agreement. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:43.4

GAO/HRD-91-33, 02/20/91; GAO/GGD-91-85, 07/10/91; GAO/GGD-93-63,
03/25/93; and GAO/RCED-93-31, 07/16/93


   PHARMACEUTICAL INDUSTRY'S USE
   OF THE RESEARCH TAX CREDIT
-------------------------------------------------------- Appendix I:44

GAO/GGD-94-139, 05/13/94

In 1981, Congress enacted the research and experimentation tax credit
to encourage businesses to do research.  Congress believed that
increased research was necessary to enhance the competitiveness of
the U.S.  economy.  In our report to the Chairman, Senate Special
Committee on Aging, we estimated the amount of research and
experimentation tax credit claimed by the pharmaceutical industry. 
We found that the pharmaceutical industry earned $1.24 billion of
research and experimentation tax credits between 1981 and 1990.  The
industry's credits, as a share of the credits earned by all
industries, increased from 4 percent in 1981 to 12 percent in 1990. 

The pharmaceutical industry credits were earned primarily by large
companies.  Between 1981 and 1990, companies with assets of $250
million or more earned, on average, about 90 percent of the
industry's credits.  The biotechnology sector of the industry, which
consisted largely of smaller companies, benefitted very little from
the credit.  Although their research spending had been increasing,
the biotechnology companies typically could not claim the credit
because they had low or no tax liabilities. 

The research and experimentation tax credit was difficult for IRS to
administer.  IRS examiners reported that they had difficulty
distinguishing research for product innovation, which qualified for
the credit, from research for product development, which did not
qualify.  Examiners who audited four large pharmaceutical companies
said that the technical nature of the issues made the audits
difficult. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:44.1

GAO/GGD-89-114, 09/05/89; GAO/GGD-92-72BR, 05/04/92; and
GAO/GGD-93-109, 06/08/93


   IMPLICATIONS OF REMOVING STATE
   AND LOCAL TAX EXEMPTION FOR
   GOVERNMENT SPONSORED
   ENTERPRISES
-------------------------------------------------------- Appendix I:45

GAO/T-GGD-94-182, 07/14/94

In testimony before the House Committee on the District of Columbia,
we discussed the (1) basis for exempting government-sponsored
enterprises (GSE) from state and local taxation and (2) the
implications of removing the exemption. 

Except for real property taxes, GSEs are exempt from state and local
taxes.  This is one of a set of advantages that GSEs receive in
exchange for performing certain services.  These services are meant
to compensate for perceived market failure.  For example, mortgages
and student loans were (1) small, (2) not standardized, (3) difficult
to evaluate, and (4) illiquid.  GSEs, by providing primary and
secondary markets for these loans, increased liquidity, efficiency,
and reduced risk in the national market.  In addition to the tax
exemption, these GSEs have lines of credit to the federal Treasury
that reduce their perceived riskiness to potential investors.  As a
result, GSEs pay interest rates only slightly higher than the federal
government. 

If the exemption is removed for D.C.  alone, the main effect would be
on the Federal National Mortgage Associate (Fannie Mae).  Because of
its competition with the Federal Home Loan Mortgage Corporation,
Fannie Mae will have an incentive to reduce its tax bill by shifting
activity out of D.C.  The tax bill it pays will come from two primary
sources:  customers and shareholders.  To the extent that it can,
Fannie Mae will try to pass the tax on to financial institutions and
the final borrowers.  If Fannie Mae cannot pass on these higher costs
to borrowers, it may be forced to cut dividends to shareholders and
Fannie Mae stock prices may fall. 


   OTHER
-------------------------------------------------------- Appendix I:46


   PAPERWORK REDUCTION:  REPORTED
   BURDEN HOUR INCREASES REFLECT
   NEW ESTIMATES, NOT ACTUAL
   CHANGES
-------------------------------------------------------- Appendix I:47

GAO/PEMD-94-3, 12/06/93

The U.S.  government is the world's largest creator, collector,
distributor, and user of information.  From filing income tax returns
to applying for food stamps, the American citizen is faced with a
government form.  Thousands of businesses, nonprofit groups, and
state and local governments also fill out applications to receive
federal benefits or to remain eligible as government contractors. 

Each year OMB completes an information collection budget that
measures federal information collection requirements imposed on
everyone outside the federal government.  To determine the burden
associated with a particular information collection effort, agencies
usually develop an estimate of the time required to comply with a
particular collection, the number of respondents complying, and the
number of times respondents comply.  Then the total burden, measured
in hours, is calculated by multiplying the average response time per
respondent by the expected number of respondents. 

At the request of Representative William F.  Clinger, Jr., we
examined apparent increases in the paperwork reduction burden.  We
found an increase in reported burden hours of 261 percent (from over
1.8 billion hours to nearly 6.6 billion) between 1987 and 1992.  Most
of this change (3.4 billion of the 4.8 billion hour increase) is
accounted for by Department of the Treasury reestimates of the time
spent processing paperwork, especially tax-related reporting and
filing requirements at IRS rather than by the imposition of actual
new burdens.  A net increase of about 1.5 billion hours can be
accounted for by changes in ongoing collections, primarily stemming
from changes in population size and revisions to collection
instruments.  In addition to the Treasury reestimates, some increases
in paperwork burden were due to new statutory requirements for other
agencies.  There were also some decreases.  For example, in 1991,
revisions in forms related to estimated income taxes and business
partnerships led to a decrease of 38.6 million hours reported by the
Treasury. 

The major reason for collecting information continues to be the
existence of what the OMB calls "regulatory or compliance
requirements." Although these requirements appear to have increased,
this change may be more attributable to the Treasury's reestimates of
time needed to deal with the compliance burden. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:47.1

GAO/PEMD-89-19FS, 06/14/89; GAO/PEMD-93-5, 02/03/93; and
GAO/T-AIMD/NSIAD-94-126, 05/19/94


   ACTIONS NEEDED TO SUSTAIN AND
   ENHANCE MANAGEMENT REFORMS
-------------------------------------------------------- Appendix I:48

GAO/T-OCG-94-1, 01/27/94

Over the years, we have testified repeatedly on the breadth and the
seriousness of the problems undermining the effectiveness and
efficiency of federal programs.  In testimony before the Senate
Committee on Governmental Affairs, the Comptroller General urged
Congress to (1) expand the requirement for auditing financial
statements to more federal programs and agencies, (2) strengthen the
framework for managing information technology to ensure that agencies
come up with systems that effectively support federal programs, (3)
focus on high-risk programs especially vulnerable to waste and
mismanagement, (4) implement the new performance results measurement
legislation, and (5) develop strategies for implementing National
Performance Review recommendations. 

With respect to IRS, one of several agencies that were cited as
examples, the Comptroller General said that

  -- IRS's books showed that the government was owed $110 billion in
     delinquent taxes and that it would collect about $30 billion of
     this amount.  Our audit showed that only about $65 billion was
     owed and, of that amount, IRS could expect to collect only about
     $19 billion;

  -- because of its accounting weaknesses, IRS is considered one of
     several high-risk agencies, meaning that it is especially
     vulnerable to waste and mismanagement.  IRS cannot determine the
     amount of tax revenues that should be accrued to the excise tax
     trust funds.  Consequently, general fund tax dollars subsidize
     these funds and give decisionmakers the impression that excise
     taxes are generating more revenue than they actually do; and

  -- IRS' $23 billion TSM program is intended to deliver systems that
     support the agency's business vision of fast, accurate,
     virtually paperless, and less-costly tax processing.  The
     program needs continuing attention to ensure that sufficient
     technical leadership, skills, and experience are available to
     manage and implement this highly complex systems integration
     effort. 


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

GAO/T-AIMD-94-98, 03/24/94; GAO/T-AIMD/NSIAD-94-126, 05/10/94;
GAO/GGD-94-203R, 09/02/94; and GAO/AIMD-94-141, 08/12/94


   OPPORTUNITY TO STRENGTHEN
   GOVERNMENT'S MANAGEMENT OF
   INFORMATION AND TECHNOLOGY
-------------------------------------------------------- Appendix I:49

GAO/T-AIMD/GGD-94-126, 05/19/94

The Paperwork Reduction Act is a vital part of a legislative
framework, including the Chief Financial Officers Act and the
Government Performance and Results Act, designed to resolve basic
management problems undermining the effectiveness of many government
programs.  The legislation is intended to reduce the information
collection burden imposed on citizens by the federal government and
to increase the efficiency and effectiveness of federal programs
through information technology.  This testimony before the Senate
Committee on Governmental Affairs (1) focused on implementation of
the act, particularly as it affects information resources management
and (2) the proposed reauthorization compromise. 

IRS was cited as an agency having difficulty harnessing information
technology.  IRS' $23 billion TSM program, designed to support
faster, more accurate, and less-costly tax administration, is being
undertaken without adequately defined business requirements and
technical or management standards, thereby greatly increasing the
risk of failure. 

We noted that (1) federal agencies, including IRS, have difficulties
in managing and using information technology; (2) the federal
government can learn from successful private organizations and state
governments how to manage information technology as an integral part
of its business strategy; (3) fundamental practices critical to a
modern information management system include directing resources
toward high-value uses and supporting improvements with the right
skills, roles, and responsibilities; (4) reauthorization of the act
should clarify the responsibilities of line managers for effectively
managing information, require agencies to ensure that information
technology investments effectively support agency missions, and
encourage agencies to redesign their business practices and
supporting systems before upgrading or replacing existing systems;
(5) the act should also require agencies to establish performance
measures, integrate information management and technology into
organizationwide decisionmaking, and establish a chief information
officer; and (6) we have made numerous recommendations to improve
agencies' compliance with legislative, data collection, regulatory
review, and reporting requirements. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:49.1

GAO/IMTEC-91-7, 12/12/90; GAO/PEMD-92-33, 07/02/92; GAO/OCG-93-5TR,
12/92; GAO/PEMD-93-5, 02/03/93; GAO/PEMD-94-3, 12/06/93;
GAO/GGD-94-28, 12/13/93; GAO/T-OCG-94-1, 01/27/94;
GAO/T-AIMD/GGD-94-104, 03/02/94; GAO/AIMD/NSIAD-94-101, 04/12/94; and
GAO/GGD-94-105, 04/27/94


   INFORMATION ON IRS EXECUTIVE
   RELOCATIONS AND TRAVEL MATTERS
-------------------------------------------------------- Appendix I:50

GAO/GGD-94-140, 06/01/94

In response to a request from the Chairman, Subcommittee on Federal
Services, Post Office and Civil Service, Senate Committee on
Governmental Affairs, we developed information on executive
relocations and other aspects of IRS' travel and transportation
activities. 

In the 3 years ending September 1992, there were 122 IRS executive
relocations at a cost estimated by the IRS Chief Financial Officer of
about $60,000 each.  IRS executive assignments, including
relocations, are made by the Commissioner upon advice by IRS'
Executive Resources Board.  Relocations are made to meet immediate
management needs and to develop a qualified corps of executives to
meet future needs. 

IRS procedures require consideration of lower cost alternatives for
long-term travel associated with temporary duty assignments exceeding
2 months.  IRS does not centrally maintain long-term travel data
because authority to approve such assignments is dispersed among many
IRS units throughout the organization.  We reviewed long-term travel
assignments made at four IRS offices during fiscal year 1992.  In
these cases, officials who authorized the travel said that
less-costly alternatives were considered. 

Our review of a judgmental sample of 67 meetings and conferences held
at nongovernmental facilities during fiscal year 1992 showed that the
site selections, for the most part, generally met federal
requirements that were in effect at that time.  In 1993, IRS revised
its procedures for selecting meeting and conference sites to restrict
the use of nongovernmental facilities.  The revisions responded, in
part, to recommendations from the Department of the Treasury's
Inspector General that were based on a conclusion that IRS was not
adequately managing the selection of nongovernmental facilities for
such activities. 

IRS has encouraged the use of modern technology to reduce travel
costs and estimated that it saved nearly $3 million in travel
expenses from January through July 1993 by using videoconferencing. 
IRS officials said that IRS continues to assess its strategies to
take advantage of emerging telecommunications technology. 


   PROGRESS REPORT ON TREASURY'S
   FINANCIAL CRIMES ENFORCEMENT
   NETWORK
-------------------------------------------------------- Appendix I:51

GAO/GGD-94-30, 11/08/93

In a report to the President of the Senate and the Speaker of the
House of Representatives, we reported on the Financial Crimes
Enforcement Network (FinCEN), as required by Public Law 102-550. 
FinCEN, part of the Department of the Treasury, distributes a variety
of financial data to help federal, state, and local law enforcement
agencies combat money laundering.  The primary source of most of the
financial intelligence information accessed and disseminated by
FinCEN are reports required by the Bank Secrecy Act (BSA).  The act
requires individuals as well as banks and other institutions, such as
check cashing businesses, currency exchanges, and money transmitters,
to report large foreign and domestic financial transactions to the
Treasury.  Over 95 percent of the more than 52 million BSA reports
filed as of September 1993 were Currency Transaction Reports (CTR). 
Financial institutions and certain types of businesses must file a
CTR with IRS for each deposit, withdrawal, exchange, or other payment
or transfer, by, through, or to such financial institutions or
businesses that involve more than $10,000 in currency.  BSA databases
are stored on computers at IRS' Detroit Computing Center and the
Treasury Enforcement Communications System in Newington, VA. 

Since its inception less than 4 years ago, FinCEN has been receiving
a steadily increasing volume of requests for intelligence data. 
Similarly, the number of individual agencies requesting these data
has continued to rise each year.  The network also provides strategic
intelligence analyses that identify emerging trends, patterns, and
issues relating to money laundering.  Law enforcement groups use
these reports for everything from instructional seminars to threat
assessments of specific geographic areas. 


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

GAO/GGD-91-53, 03/18/91


   CHARACTERISTICS OF CURRENCY
   TRANSACTION REPORTS FILED IN
   CALENDAR YEAR 1992
-------------------------------------------------------- Appendix I:52

GAO/GGD-94-45FS, 11/10/93

In a fact sheet prepared for the Chairman, House Committee on
Banking, Finance and Urban Affairs, we provided information on CTRs
filed pursuant to the BSA with IRS' Computing Center in Detroit. 

We provided statistical data on the 100 businesses for which the most
CTRs were filed in 1992, and information on the procedures that can
be used to exempt certain businesses from CTR reporting requirements. 
We found that banks accounted for virtually all of the nine million
CTRs filed in 1992.  The reports described about $418 billion in cash
transactions by companies and individuals. 

Businesses accounted for about 92 percent of all CTRs filed and for
about 99 percent of the total dollar amount of the transactions
reported.  Most of the transactions were deposits, and over half of
the CTRs were for transactions of $20,000 or less. 

Treasury regulations allow banks to exempt certain types of
businesses from reporting transactions.  Data on the number of
businesses exempted are not collected.  But, 1.2 million of the 9.2
million records from 1992 resulted from transactions that exceeded
the dollar limit on exemptions.  In addition, IRS officials estimated
that between 30 and 40 percent of all reports filed could qualify for
exemptions. 


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

GAO/T-GGD-93-31, 05/26/93


   MONEY LAUNDERING:  PROJECT
   GATEWAY
-------------------------------------------------------- Appendix I:53

GAO/GGD-94-91R, 02/15/94

In a letter to the Chairman of the House Committee on Banking,
Finance and Urban Affairs, we provided information on a Department of
the Treasury initiative to facilitate access by the states to BSA
data.  In July 1993, Treasury officials announced a test program
known as "Project Gateway," that allows Texas law enforcement
authorities direct access to BSA data maintained on computer at IRS'
Detroit Computing Center. 

Project Gateway, which began operating September 1, 1993, allows
authorized state personnel in Texas direct access to the IRS database
through a computer located in Austin.  Analysts may only search for
information about a specific individual or business.  Consequently,
analysts are precluded from performing any analyses of the reports
based on, for example, types of institutions filing the reports,
reports filed within certain geographical areas, or reports filed by
type of business.  Federal agencies have found these types of
analyses useful for identifying emerging trends and geographic
patterns in money laundering. 

Six states currently have agreements with the Treasury that allow
them to maintain their own computerized databases of currency
transaction reports.  The Treasury periodically supplies each state
with report data on tape copied from the IRS database.  Because the
states can construct and maintain their own databases, there are no
limits on what reports can be accessed and what type of intelligence
analyses can be produced.  However, the states are limited in that
they receive only the reports from those institutions located within
their geographic boundaries. 

In November 1993, FinCEN proposed a new initiative for sharing BSA
data with the states.  This proposal would permit those states
presently authorized to receive BSA data on tape direct access to the
IRS database in Detroit without any limitation as to what records
would be accessed.  The proposal is currently being evaluated by
Department of the Treasury officials. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:53.1

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


   THE VOLUME OF CURRENCY
   TRANSACTION REPORTS FILED CAN
   AND SHOULD BE REDUCED
-------------------------------------------------------- Appendix I:54

GAO/T-GGD-94-113, 03/15/94

In testimony before the Senate Committee on Banking, Housing and
Urban Affairs, we discussed proposed legislation to reduce the volume
of CTRs filed that have no law enforcement value.  Under the BSA,
banks and other financial institutions are required to file a
currency transaction report for each transaction involving more than
$10,000 in cash.  The number of reports filed has been steadily
increasing--as of April 1993 nearly 50 million reports had been filed
and this figure could double in the next 3 years.  Although these
reports are extremely useful in detecting and prosecuting money
laundering, we concluded that the volume of filings could be
substantially reduced without jeopardizing law enforcement.  In fact,
the large volume of reports has made analysis difficult, expensive,
and time consuming.  Many of the reports being filed are of routine
business transactions that could have been exempted from being
reported.  We supported the legislative provisions that would have
encouraged greater use of exemptions for routine transactions that do
not have law enforcement value. 


   1993 ANNUAL REPORT ON GAO'S
   TAX-RELATED WORK
-------------------------------------------------------- Appendix I:55

GAO/GGD-94-82, 03/31/94

This summary, prepared in compliance with a legislative requirement,
contains information on GAO's tax policy and administration-related
work during fiscal year 1993.  It includes (1) summaries of
tax-related products issued in fiscal year 1993; (2) summaries of
tax-related products issued before fiscal year 1993 with open
recommendations to Congress; (3) descriptions of legislative actions
taken in fiscal year 1993 in response to GAO recommendations; (4) a
listing of recommendations to Congress that were open as of December
31, 1993; (5) a listing of recommendations we made in fiscal year
1993 to the Commissioner of Internal Revenue; and (6) brief
descriptions of assignments for which we were authorized access to
tax data in fiscal year 1993 under 26 U.S.C.  6103(i)(7)(A). 


   WHITE HOUSE TRAVEL OFFICE
   OPERATIONS
-------------------------------------------------------- Appendix I:56

GAO/GGD-94-132, 05/02/94

In a report prepared in response to Public Law 103-50, we provided
information on the White House Travel Office.  Specifically, we
reviewed (1) past operations and oversight of the Travel Office, (2)
the current operations of the Travel Office and the extent to which
past problems have been corrected, (3) the actions taken in 1993 that
led to a White House official's decision to investigate the
operations of the Travel Office and remove employees, (4) the actions
of other federal agencies during this period including IRS and the
Federal Bureau of Investigation (FBI), and (5) certain other matters
related to events that occurred in the Travel Office. 

We concluded that although the White House had the authority to fire
several employees in its press travel office in 1993, the White House
should have tried to insulate its management decisions from influence
of persons with personal interest in travel office operations.  We
questioned the practice of granting nongovernment employees
uncontrolled access to White House officials without having policies
to govern their activities because the appearance of influence and
authority that access conveys could lead to inappropriate actions or
abuses. 

Media reports that IRS agents issued a taxpayer a summons to obtain
records in response to the Travel Office controversy and that a White
House official suggested to FBI officials that IRS might be called,
raised concerns that the White House may have attempted to influence
IRS action, either directly or through the FBI.  On the basis of our
review of investigations by IRS' Inspection Service, the Department
of the Treasury's Office of Inspector General, and in our own review,
we concluded that IRS officials acted within the scope of their
procedures and regulations.  We found no evidence that White House
officials contacted IRS about the Travel Office matter or that the
FBI made any inappropriate contacts with IRS. 

The White House Counsel issued guidelines to White House staff in
February 1993 that contain the White House procedures for obtaining
and providing information to IRS.  Expanded in July 1993, these
guidelines require all information concerning potential tax
violations to be sent to the White House Counsel, who in turn refers
the information to either the Attorney General or the Deputy
Secretary of the Treasury. 

We made several recommendations as a result of our review, none of
which related to IRS or to tax-related matters. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:56.1

GAO/GGD-93-143, 09/30/93 and GAO/GGD-93-148, 09/09/93


   STRONGER LABOR ERISA
   ENFORCEMENT SHOULD BETTER
   PROTECT PLAN PARTICIPANTS
-------------------------------------------------------- Appendix I:57

GAO/HEHS-94-157, 08/08/94

The Department of Labor's Pension and Welfare Benefits Administration
(PWBA) is responsible for enforcing provisions of the Employee
Retirement Income Security Act of 1974 (ERISA)--the federal program
to protect an estimated 200 million participants and beneficiaries of
private pension and welfare plans--as well as the $2.5 trillion in
assets held by those plans.  We reviewed the Department of Labor's
enforcement of ERISA, focusing on Labor's (1) enforcement strategy,
(2) methodology for targeting pension and welfare plans for
investigation, and (3) use of penalties to increase compliance. 

A review of Labor's enforcement program showed improvements since
1986 but also showed the need to strengthen enforcement by taking
steps to ensure maximum use of investigative resources.  PWBA has
never evaluated its current enforcement strategy.  Such an evaluation
is needed to determine whether PWBA is focusing on the right issues
and whether the strategy produces the greatest results.  In addition,
PWBA has done little to assess the effectiveness of
computer-targeting programs developed to systematically select
pension and welfare plans for investigation of potential fiduciary
violations.  The enforcement program also can be strengthened by
increasing the use of penalties authorized by ERISA to deter plans
from violating the law. 

In this report to the Secretary of Labor, we reported that PWBA lacks
the staff and resources necessary and does not routinely follow up on
IRS referrals so that it can take appropriate legal action and impose
penalties against those firms that do not comply with ERISA fiduciary
requirements.  Further, PWBA needs to determine whether additional
administrative guidance and legal changes are needed to enhance PWBA
penalty enforcement. 


      RECOMMENDATION(S) TO LABOR
------------------------------------------------------ Appendix I:57.1

We recommended that the Secretary of Labor direct the Assistant
Secretary for Pension and Welfare Benefits Administration to increase
the use of penalties authorized by ERISA.  This can be done by
establishing procedures to routinely review referrals of potential
reporting violators from IRS service centers and by using
decentralized legal staff to help assess prohibited transaction
penalties when warranted.  PWBA should also determine whether
additional administrative guidance, changes to the law, or both are
needed to remedy confusion associated with the penalty and enhance
PWBA penalty enforcement. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:57.2

Labor agreed that its ERISA enforcement program should maximize the
use of resources but generally disagreed with many of the
recommendations.  Labor said that its current strategy and
computer-targeting leverage enforcement resources are extremely
limited in view of the large universe of participants and plans
covered by ERISA.  Labor also said that recent and anticipated
initiatives should improve the program.  We commend Labor for its
enforcement efforts, but we continue to believe that our
recommendations, if implemented, would strengthen the program. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:57.3

GAO/HRD-93-34R, 09/30/93


   SOCIAL SECURITY TRUST FUNDS CAN
   BE MORE ACCURATELY FUNDED
-------------------------------------------------------- Appendix I:58

GAO/HEHS-94-48, 09/02/94

Each year, the social security trust funds are credited with revenues
derived from income taxes paid on social security benefits.  But are
these funds credited with the right amount?  At the request of the
Subcommittee on Oversight, House Committee on Ways and Means, we
reviewed the effect of unreported tax-exempt income on the taxation
of social security benefits, focusing on (1) additional compliance
measures that would improve IRS' ability to assess and collect social
security benefit taxes and (2) how the Department of the Treasury and
IRS determine the amount of revenue owed to social security trust
funds. 

We reported that the social security trust funds' revenues could be
increased by recognizing additional taxes identified through IRS'
efforts to locate underreported taxable income and through better
detection of underreported tax-exempt interest.  Recognizing
additional taxes identified by IRS, could have boosted the trust
funds by more than $200 million in tax revenue and investment income
for tax years 1984 to 1989.  Further, data from the Federal Reserve
and the Investment Company Institute indicated that taxpayers may
have underreported an estimated $7.2 billion in tax-exempt income on
their 1989 tax returns. 


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

We recommended that the Secretary of the Treasury direct IRS to
identify the amount of additional taxes that have been assessed on
social security benefits through its underreporter program.  Given
the uncertainty of the tax revenue losses from underreporting of
tax-exempt income and the financial industry's potential processing
burden, we recommended that IRS conduct a detailed study of tax
returns to better identify the benefits of having taxpayers report
tax-exempt income.  In addition, IRS should obtain data on the costs
of reporting and processing such information.  The study could
involve IRS' TCMP or a pilot study that solicits the cooperation of
several payers so that the benefits and costs of reporting tax-exempt
income can be estimated.  If a favorable cost-benefit ratio is
identified, IRS should take appropriate steps to make it possible to
routinely acquire this information. 


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

The Commissioner of Internal Revenue stated that the TCMP survey of
tax year 1994 returns filed in 1995 would examine 153,000 returns of
which 92,000 will be Form 1040 based--33,000 nonbusiness and 59,000
business.  All income, deduction, and exemption items on the returns
are to be examined, which should enable IRS to analyze the levels of
compliance related to underreporting of tax-exempt interest. 


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

GAO/HRD-92-81, 09/01/92 and GAO/HRD-93-42, 03/29/93


SUMMARIES OF TAX-RELATED PRODUCTS
ISSUED BEFORE FISCAL YEAR 1994
WITH OPEN RECOMMENDATIONS TO
CONGRESS AS OF DECEMBER 31, 1994
========================================================== Appendix II

OPEN RECOMMENDATIONS

Congress may wish to consider revising current tax law 84
 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 may wish to consider several options to enhance 85
 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

Congress should consider enacting legislation 87
  that would substitute a residency test for the
  dependent support test if 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 want to consider legislation that 89
 would require states to send IRS and
 taxpayers an annual information return on any cash
 rebates for real estate tax payments

Congress should amend the disclosure provisions of 90
 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 needs to (1) clarify the rules for 92
 classifying workers along the lines that we
 recommended in our 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 amend the Internal Revenue Code to 94
 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 may wish to consider clarifying the Internal 95
 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)

Congress should consider modifying the Targeted 96
 Jobs Tax Credit Program by imposing new eligibility
  requirements if it wishes to encourage employers
  using the program to take special actions that
  benefit members of the targeted group

OPEN RECOMMENDATION

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


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

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

We found that IRS' ability to collect delinquent taxes has been
hampered by self-imposed and external constraints.  For example, IRS
has generally followed a lengthy and rigid three-stage collection
process that (1) because of convention, 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. 

We 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) concluding from our 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. 

We 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. 

We 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 II:0.2

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 II:0.3

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.  We 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 II:0.4

In 1995, IRS plans to change its collection procedures by (1)
reducing the number of notices it sends taxpayers and (2) initiating
earlier telephone contact.  IRS has future plans, such as analyzing
information from various databases to identify the characteristics of
tax debtors, which should help in customizing collections. 
Cooperative agreements between IRS and individual states have
increased and efforts are continuing to expand the level of
cooperation that currently exists.  No further IRS action was taken
on our other recommendations, nor was any legislative action taken as
of December 1994. 


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

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

OPEN RECOMMENDATION

Congress may wish to consider several options 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 (GAO/GGD-93-104, 05/10/93)


      SUMMARY
------------------------------------------------------ Appendix II:0.6

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

We 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 our report.  We also concluded that Congress could take actions to
enhance IRS' ability to deter abusive uses of tax-exempt bonds. 

We 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. 

We 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 who 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, we suggested 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 II:0.7

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 II:0.8

We 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. 

We 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 II:0.9

As of December 1994, Congress had not considered alternative
penalties or revised disclosure provisions for tax-exempt bonds. 

IRS generally agreed to implement most of the recommendations
contained in our report.  For example, IRS (1) transferred
responsibility for tax-exempt bond enforcement activities to the
Employee Plans and Exempt Organizations Division, (2) is identifying
targeted areas of potential noncompliance by using information
available on Forms 8038 and 8038G, (3) developed an action plan to
promote voluntary compliance and guide tax exempt bond oversight
efforts, (4) developed specialized training for examiners, and (5) is
emphasizing public education and information dissemination. 

OPEN RECOMMENDATION

Congress should consider enacting legislation that would substitute a
residency test for the dependent support test if the dependent lives
with the taxpayer.  If enacted, Congress also should consider
eliminating the household maintenance test for filing as head of
household status (GAO/GGD-93-60, 03/19/93)


      SUMMARY
----------------------------------------------------- Appendix II:0.10

In a report to the Chairman, Senate Committee on Finance, we reported
on individual compliance in claiming dependent exemptions and filing
status.  We 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 our 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.  We found that the support test was complex because it
required detailed records and difficult financial analyses.  After
analyzing four options, we 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 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 II:0.11

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 II:0.12

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 II:0.13

Congress considered this legislation in 1993 but not in 1994.  The
recommendation to IRS had not been implemented as of December 1994,
but IRS is planning to implement it as more computer capability
becomes available. 

OPEN RECOMMENDATION

Congress may want to consider legislation that would require states
to send IRS and taxpayers an annual information return on any cash
rebates for real estate tax payments (GAO/GGD-93-43, 01/19/93 and
GAO/T-GGD-93-46, 09/21/93)


      SUMMARY
----------------------------------------------------- Appendix II:0.14

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, we discussed the issue of
overstated real estate tax deductions among individual taxpayers.  We
reviewed IRS' random compliance audits of individuals and contacted
171 local governments that collected $100 million or more in real
estate taxes. 

We 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, we 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 II:0.15

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


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

The Commissioner of Internal Revenue should (1) include rules on the
tax deductibility of user fees and 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 sharing data on
real estate tax payments made by individuals and use the data in IRS'
enforcement programs. 


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

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 and has been working with local
governments on revisions to their bills.  Congress is awaiting the
outcome of IRS' work with the local governments before considering
the need for any legislation. 

OPEN RECOMMENDATION

Congress should amend the disclosure provisions of 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 (GAO/GGD-93-1, 10/15/92)


      SUMMARY
----------------------------------------------------- Appendix II:0.18

In response to a request from the Chairman of the Permanent
Subcommittee on Investigations, Senate Committee on Governmental
Affairs, we 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 (BSA) was enacted which required individuals, banks,
and other financial institutions to report large foreign and domestic
financial transactions to the Department of the Treasury.  In 1984,
section 60501 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 certain transactions to file a report on
an IRS Form 8300 with IRS. 

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
BSA data available from the Treasury. 

Although IRS Form 8300 provides the same basic information as BSA
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 II:0.19

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 II:0.20

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


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix II:0.21

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 the Treasury to
provide access to the states.  Although several bills have been
introduced, none had been enacted as of December 1994. 

OPEN RECOMMENDATION

Congress needs to (1) clarify the rules for classifying workers along
the lines that we recommended in our 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)


      SUMMARY
----------------------------------------------------- Appendix II:0.22

At the request of Senators Max S.  Baucus and David H.  Pryor and
Congressman Doug Barnard, Jr., we 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). 

We issued a report and testified at a hearing before the Subcommittee
on Select Revenue Measures, House Committee on Ways and Means.  We
said the common-law rules for classifying workers remain unclear and
subject to conflicting interpretations as we had described in our
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. 

We also reported that independent contractor compliance continued to
be a concern.  In 1979, we 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 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. 
We 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. 

We 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.  We concluded that either
approach should help collect more of the taxes owed through means
other than retroactive tax assessments under ETEP.  While we
acknowledged that both approaches would increase the burden on
independent contractors and businesses that use them, we believed
that both approaches had merit. 

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

Our 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.  We assessed eight options for
strengthening information reporting and itemizing the various pros
and cons of each, which we had identified in past and ongoing work. 


      RECOMMENDATION(S) TO
      CONGRESS
----------------------------------------------------- Appendix II:0.23

Congress needs to clarify the rules for classifying workers along the
lines that we recommended in our 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:0.24

As of December 1994, Congress had considered but had not enacted
either of our recommendations. 


      RELATED GAO PRODUCT(S)
----------------------------------------------------- Appendix II:0.25

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

OPEN RECOMMENDATION

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)


      SUMMARY
----------------------------------------------------- Appendix II:0.26

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

Our computer match of approximately 175,000 HUD-subsidized
households' records (less than 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.  Regarding households that may have understated their
incomes, 63 percent reported no wage, interest, or dividend income in
1989. 


      RECOMMENDATION(S) TO HUD
----------------------------------------------------- Appendix II:0.27

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 II:0.28

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 II:0.29

The Omnibus Budget Reconciliation Act of 1993 (P.L.  103-66) grants
HUD temporary access to federal tax data for income verification
under certain housing assistance programs in section 13404 until
September 1998.  Proposed rules outlining a matching program with IRS
and the Social Security Administration (SSA) are awaiting HUD
clearance, and revised consent forms to permit IRS and SSA matching
were issued in June and September 1994.  A pilot income verification
program with appropriate data safeguards is expected in 1995.  The
Congressional Budget Office estimated that over $1 billion would be
saved between 1994 and 1998 because of this recommendation. 

OPEN RECOMMENDATION

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


      SUMMARY
----------------------------------------------------- Appendix II:0.30

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

We found that IRS had implemented all 21 provisions of the Taxpayer
Bill of Rights.  We focused on seven key provisions and concluded
that these provisions had generally been successfully implemented. 
Despite IRS' general success, we found that there were certain
shortcomings.  Specifically, 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.  We 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, we pointed out issues that need to be clarified in
the Internal Revenue Code to facilitate IRS' implementation of the
act. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
----------------------------------------------------- Appendix II:0.31

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:0.32

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:0.33

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 interests of the
taxpayer and the government.  On November 3, 1992, however, the act
was vetoed by the President.  As of December 1994, no further action
had been taken. 

OPEN RECOMMENDATION

Congress should consider modifying the Targeted Jobs Tax Credit
Program by imposing new eligibility requirements if it wishes to
encourage employers using the program to take special actions that
benefit members of the targeted group (GAO/HRD-91-33, 02/20/91)


      SUMMARY
----------------------------------------------------- Appendix II:0.34

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, we provided descriptive information on employers using the
program and the individuals for whom the tax credits were claimed. 
We 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.  We found that nearly half of the 60 employers we
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. 

We also determined that work experiences had a positive impact on
participants' earnings.  We 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. 

Our 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:0.35

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:0.36

No legislative action had been taken on this matter as of December
31, 1994, when this program expired.  When this happened in the past,
the program was reauthorized, sometimes retroactively. 


LEGISLATIVE ACTIONS TAKEN IN 1994
ON GAO RECOMMENDATIONS
========================================================= Appendix III

CLOSED RECOMMENDATIONS

Congress should require the Federal Deposit Insurance 99
 Corporation and the Resolution Trust Corporation to
 issue information returns on forgiven debts that exceed
 $600.  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 should explore the level of motor fuel excise 100
 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

RECOMMENDATION

Congress should require the Federal Deposit Insurance Corporation and
the Resolution Trust Corporation to issue information returns on
forgiven debts that exceed $600.  If this is proven to be cost
effective, Congress also may wish to explore whether extending
similar information reporting to other institutions is warranted
(GAO/GGD-93-42, 02/17/93)


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

In a report to the Chairman, Subcommittee on Private Retirement Plans
and Oversight of the IRS, Senate Committee on Finance, we measured
the impact of information returns on individual taxpayers who
reported income from forgiven debts.  We 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 we did our test. 

We 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 20 percent failed to report their
forgiven debt income and owed taxes for 1986, while 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 was 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 we
found for FDIC's debts that were forgiven but not covered by
information returns. 


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

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 III:0.3

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. 


      RECOMMENDATION(S) TO IRS
----------------------------------------------------- Appendix III:0.4

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 III:0.5

In August 1993, Congress enacted legislation that extended
information reporting to debts forgiven by FDIC, RTC, and certain
private financial institutions.  The Joint Committee on Taxation
estimated that this provision would generate $484 million in revenue
over 5 years.  In September 1993, Congress considered a legislative
proposal to extend such reporting to all financial institutions.  No
action was taken. 

As of December 1994, IRS had issued proposed regulations for filing
the information returns and convened a public hearing.  On the basis
of comments made at the hearing, IRS plans to issue revised
regulations that clarify various reporting issues.  IRS also
developed a system for processing and matching the information
returns.  This information return filing requirement is slated to
start for tax year 1994. 

RECOMMENDATION

Congress should explore the level of motor fuel excise 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)


      SUMMARY
----------------------------------------------------- Appendix III:0.6

In response to a request from Congressmen Thomas J.  Downey and
Raymond J.  McGrath, we 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. 

We 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 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, we 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. 

We 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 the
New York state collection point.  We 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,
we 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; and

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

A key question, however, was whether refinery-level tax collection
imposed 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. 

We 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.  We could not determine
whether such a 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 III:0.7

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 III:0.8

The Omnibus Budget Reconciliation Act of 1993 (P.L.  103-66) moved
the motor fuel tax collection point up in the distribution system and
incorporated a fuel dying requirement.  As a result, collections
should increase by $1 billion from 1994 through 1998. 


LISTING OF OPEN RECOMMENDATIONS TO
CONGRESS BEFORE AND DURING FISCAL
YEAR 1994
========================================================== Appendix IV

Congress should consider amending section 7122 of 18
 the Internal Revenue Code to remove the requirement
 that Treasury General Counsel or his delegate
 review all offers in compromise of $500 or more and widen
 IRS' discretionary authority to decide which offers
 require review

The tax-writing committees should explore, within 60
 the existing framework, opportunities to exercise
 more scrutiny over "indirect" spending through tax
 expenditures as a part of the annual budget process

Congress may wish to consider revising current tax law 84
 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 may wish to consider several options to enhance 85
 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

Congress should consider enacting legislation that 87
 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 want to consider legislation that would 89
 require states to send IRS and taxpayers an annual
 information return on any cash rebates for real
 estate tax payments

Congress should amend the disclosure provisions of the 90
 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 needs to (1) clarify the rules for classifying 92
 workers along the lines that we recommended in our
 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 amend the Internal Revenue Code to 94
 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 may wish to consider clarifying the Internal 95
 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)

Congress should consider modifying the Targeted Jobs 96
 Tax Credit Program by imposing new eligibility
 requirements if it wishes to encourage employers
 using the program to take special actions that
 benefit members of the targeted group


LISTING OF RECOMMENDATIONS MADE IN
FISCAL YEAR 1994 TO THE
COMMISSIONER OF INTERNAL REVENUE
AND TO OTHER AGENCY HEADS
=========================================================== Appendix V


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

Establish guidelines for determining taxpayers' ability 21
 to pay delinquent tax debts; select income levels at
 which Currently Not Collectible (CNC) accounts will be
 reactivated; develop criteria to require minimum payments
 from delinquent taxpayers with incomes above a specified
 level; ensure oversight mechanisms adequate to identify
 inappropriate CNC determinations; develop reporting
 standards that allow identification of problems needing
 IRS-wide corrective action; expedite collection process
 for reactivated accounts; and eliminate 65-week reactivation
 hold period

Develop the indicators necessary to evaluate the Offer 24
 in Compromise Program as a compliance and collection
 tool and determine causes of variability in district
 office acceptance rates


   BUDGET/FINANCE
--------------------------------------------------------- Appendix V:2

Coordinate and oversee internal control and accounting 26
 activities to (1) establish and implement proper written
 procedures that provide for the identification,
 documentation, and correction of all material weaknesses;
 (2) provide classroom training and guidance materials to
 all FMFIA review staff; (3) develop effective corrective action
 plans that address the fundamental causes of the weaknesses;
and (4) verify the effectiveness of corrective actions
 before removing reported weaknesses from IRS' records

Develop a way to capture information on the specific taxes 27
 collected for trust funds; determine the trust fund revenue
 information needs of other agencies and provide such
 information, as appropriate; and identify the information
 needed for revenue reporting and related sources and
 develop written policies and procedures for compiling
 this information

Improve controls over operating funds to ensure that budget 28
 authority for operations is not exceeded, improve processes
 and controls to ensure payments for goods and services are
 proper and timely, and improve systems and processes to
 ensure reliable reports on operating funds

Implement recommendations from our examination of IRS' 31
 fiscal year 1993 financial statements


   COMPLIANCE
--------------------------------------------------------- Appendix V:3

Develop system for managing and monitoring all sole 41
 proprietor compliance projects; identify projects that
 would address the most noncompliant sole proprietor
 market segments and analyze underlying causes of
 noncompliance; work with trucking groups and other market
 sectors to improve record keeping; and clarify information
 return filing instructions for insurance companies and
 work with them to improve compliance

Improve the Coordinated Examination Program (CEP) by 46
 providing the CEP director with authority over CEP resources in
 the districts; improving IRS' tools for collecting information
 from CEP corporations during the audit; expanding measures in
 CEP and appeals to a common measure; increasing revenue agents'
 knowledge of specific industries in which they do CEP audits
 and use staff rotation to help; ensuringappropriate
 evaluation and coordination before conceding taxes in
 opposition to IRS legal positions; proposing legislative
 changes that will permanently resolve recurring tax disputes;
correcting IRS databases to allow for a more accurate
 computation of the collection rate but meanwhile use the 22
 percent collection rate; and testing ways to measure CEP
 corporate compliance and the related tax gap


   IRS MODERNIZATION
--------------------------------------------------------- Appendix V:4

Assess knowledge, skills, and abilities of existing 55
 workforce; identify specific staffing requirements
  for all TSM projects; and compare staffing requirements
  to workforce's current skill inventory and develop retraining
  and redeployment plans to meet TSM project requirements

Define regional office roles and responsibilities to 57
 clearly support field office needs and contribute to
 accomplishing IRS' mission.  In doing so, allow field
 offices to exchange information directly with the
 National Office without going through the region; ensure that
 regional office reviews are not duplicative and focus
 on solving problems; and remove regional offices from
 chain of command where span of control is not an issue


   TAXPAYER ASSISTANCE
--------------------------------------------------------- Appendix V:5

Analyze the fraud cases identified from information 60
 provided by RAL banks; determine which RAL banks were
 used for fraudulent refunds to help decide whether
 certain banks warrant special attention; and allow
 taxpayers to submit the installment agreement request
  form electronically

Better inform taxpayers of situations that can be handled by 62
 telephone; clarify procedures for responding to taxpayer
 requests; improve timeliness indicators and adopt timeliness
 goals; provide service centers with clear guidelines;
 determine if revised guidelines improve quality of responses;
 and implement Correspondence Task Force recommendations

Develop better measures of one-stop service that allow 63
 IRS to gauge progress in meeting its one-stop service
 goal; identify and correct problems that might impede
 progress; and compare delivery of one-stop service among
 various taxpayer services available at IRS


   TAX POLICY
--------------------------------------------------------- Appendix V:6

OMB in consultation with the Treasury should decide how to 68
 portray tax expenditure information in the budget so that
 tax expenditures and related outlay information can show
 the relative effectiveness of federal spending within
 functional areas


   OTHER
--------------------------------------------------------- Appendix V:7

The Department of Labor should increase the use of penalties 80
 authorized by ERISA by establishing procedures to routinely
 review IRS referrals of potential violators and using
 decentralized legal staff to help assess prohibited
 transaction penalties; and determine if additional
 administrative guidance and/or legislative changes are
 needed to remedy confusion and enhance penalty enforcement

Identify the amount of additional taxes that have been 81
 assessed on social security benefits through IRS'
 underreporter program; conduct a detailed study of tax
 returns to better identify the benefits of having taxpayers
 report tax-exempt income; and obtain data on the costs of
 reporting and processing such information


CHRONOLOGICAL LISTING OF GAO
PRODUCTS ON TAX MATTERS ISSUED IN
FISCAL YEAR 1994
========================================================== Appendix VI

----------------------------------------------------------------------  --------
Tax Administration: IRS Can Do More to Collect Taxes Labeled              10/08/
 "Currently Not Collectible" (GAO/GGD-94-2)                                   93
Financial Management: IRS' Self-Assessment of Its Internal Control and    10/13/
 Accounting Systems Is Inadequate (GAO/AIMD-94-2)                             93
Environmental Infrastructure: Effects of Limits on Certain Tax-Exempt     10/28/
 Bonds (GAO/RCED-94-2)                                                        93
Money Laundering: Progress Report on Treasury's Financial Crimes          11/08/
 Enforcement Network (GAO/GGD-94-30)                                          93
Tax Administration: Collecting Delinquent Taxes and Communicating with    11/09/
 Taxpayers (GAO/T-GGD-94-50)                                                  93
Farmers Home Administration (FmHA) Forgiven Debts (GAO/GGD-94-25R)        11/10/
                                                                              93
Money Laundering: Characteristics of Currency Transaction Reports         11/10/
 Filed in Calendar Year 1992 (GAO/GGD-94-45FS)                                93
Tax Administration: IRS' New Business Vision (GAO/T-GGD-94-58)            11/17/
                                                                              93
Paperwork Reduction: Reported Burden Hour Increases Reflect New           12/06/
 Estimates, Not Actual Changes (GAO/PEMD-94-3)                                93
Financial Management: Important IRS Revenue Information Is Unavailable    12/21/
 or Unreliable (GAO/AIMD-94-22)                                               93
Tax Administration: Increased Fraud and Poor Taxpayer Access to IRS       12/22/
 Cloud 1993 Filing Season (GAO/GGD-94-65)                                     93
Tax Administration: Changes Needed to Cope with Growth in Offer in        12/23/
 Compromise Program (GAO/GGD-94-47)                                           93
Improving Government: Actions Needed to Sustain and Enhance Management    01/27/
 Reforms (GAO/T-OCG-94-1)                                                     94
Tax Administration: State Tax Administrators' Views on Delinquent Tax     02/02/
 Collection Methods (GAO/GGD-94-59FS)                                         94
International Taxation: IRS' Administration of Tax-Customs Valuation      02/04/
 Rules in Tax Code Section 1059A (GAO/GGD-94-61)                              94
Financial Management: IRS Does not Adequately Manage Its Operating        02/09/
 Funds (GAO/AIMD-94-33)                                                       94
Tax Administration: Electronic Filing Fraud (GAO/T-GGD-94-89)             02/10/
                                                                              94
Money Laundering: Project Gateway (GAO/GGD-94-91R)                        02/15/
                                                                              94
Tax Systems Modernization: Status of Planning and Technical Foundation    03/02/
 (GAO/T-AIMD-GGD-94-104)                                                      94
Budget Process: Some Reforms Offer Promise (GAO/T-AIMD-94-86)             03/02/
                                                                              94
Addressing the Deficit: Budgetary Implications of Selected GAO Work       03/11/
 (GAO/OCG-94-3)                                                               94
Money Laundering: The Volume of Currency Transaction Reports Filed Can    03/15/
 and Should Be Reduced (GAO/T-GGD-94-113)                                     94
Tax Policy and Administration: 1993 Annual Report on GAO's Tax-           03/31/
 Related Work (GAO/GGD-94-82)                                                 94
Tax Administration: Analysis of IRS' Budget Request for Fiscal Year       04/20/
 1995 (GAO/GGD-94-129)                                                        94
Tax Policy: Health Insurance Tax Credit Participation Rate Was Low        05/02/
 (GAO/GGD-94-99)                                                              94
White House: Travel Office Operations (GAO/GGD-94-132)                    05/02/
                                                                              94
Tax Gap: Many Actions Taken but A Cohesive Compliance Strategy Needed     05/11/
 (GAO/GGD-94-123)                                                             94
Tax Policy: Pharmaceutical Industry's Use of the Research Tax Credit      05/13/
 (GAO/GGD-94-139)                                                             94
Paperwork Reduction Act: Opportunity to Strengthen Government's           05/19/
 Management of Information and Technology (GAO/T-AIMD/GGD-94-126)             94
Tax Administration: Information on IRS Executive Relocations and          06/01/
 Travel Matters (GAO/GGD-94-140)                                              94
Tax Administration: More Improvement Needed in IRS Correspondence         06/01/
 (GAO/GGD-94-118)                                                             94
Tax Policy: Tax Expenditures Deserve More Scrutiny (GAO/GGD/AIMD-94-      06/03/
 122)                                                                         94
Feasibility of a Meter to Capture Business Income (GAO/GGD-94-158R)       06/07/
                                                                              94
Financial Audit: Examination of IRS' Fiscal Year 1993 Financial           06/15/
 Statements (GAO/AIMD-94-120)                                                 94
Effect of Proposed IRS Compliance Initiatives on Budget Deficits (GAO/    06/16/
 GGD-94-141R)                                                                 94
Tax Administration: Information on IRS' International Tax Compliance      06/27/
 Activities (GAO/GGD-94-96FS)                                                 94
Tax Systems Modernization: Automated Underreporter Project Shows Need     07/08/
 for Human Resource Planning (GAO/GGD-94-159)                                 94
GSEs: Implications of Removing State and Local Tax Exemption (GAO/T-      07/14/
 GGD-94-182)                                                                  94
IRS Automation: Controlling Electronic Filing Fraud and Improper          07/19/
 Access to Taxpayer Data (GAO/T-AIMD/GGD-94-183)                              94
Internal Revenue Service: Changes Needed in the Role of Regional          07/26/
 Offices (GAO/GGD-94-160)                                                     94
Financial Audits: CFO Implementation at IRS and Customs (GAO/T-AIMD-      07/28/
 94-164)                                                                      94
Tax Administration: IRS Can Better Pursue Noncompliant Sole               08/02/
 Proprietors (GAO/GGD-94-175)                                                 94
Tax Administration: Improving Independent Contractor Compliance With      08/04/
 Tax Laws (GAO/T-GGD-94-194)                                                  94
Pension Plans: Stronger Labor ERISA Enforcement Should Better Protect     08/08/
 Plan Participants (GAO/HEHS-94-157)                                          94
Tax Administration: Better Measures Needed to Assess Progress of IRS'     08/29/
 One-Stop Service (GAO/GGD-94-131)                                            94
Correspondence on the Dependent Exemption for Noncustodial Parents        08/31/
 (GAO/GGD-94-200R)                                                            94
Tax Administration: Compliance Measures and Audits of Large               09/01/
 Corporations Need Improvement (GAO/GGD-94-70)                                94
Social Security: Trust Funds Can Be More Accurately Funded (GAO/HEHS-     09/02/
 94-48)                                                                       94
Information on Transfer Pricing (GAO/GGD-94-206R)                         09/15/
                                                                              94
Tax Administration: Data on the Tax Compliance of Sweatshops (GAO/        09/23/
 GGD-94-210FS)                                                                94
Undelivered Tax Refunds: IRS' Handling of Undelivered Income Tax          09/26/
 Refund Checks (GAO/T-GGD-94-186)                                             94
IRS Use of Customs Data (GAO/GGD-94-217R)                                 09/30/
                                                                              94
--------------------------------------------------------------------------------

Appendix VII LISTING OF
ASSIGNMENTS FOR WHICH GAO WAS
AUTHORIZED ACCESS TO TAX DATA IN
FISCAL YEAR 1994 UNDER 26 U.S.C. 
6103(I)(7)(A)
========================================================== Appendix VI

Subject matter             Objectives
-------------------------  -----------------------------------------------------
Administration of          To determine (1) how IRS uses information reported by
original issue discount    issuers of publicly issued original issue bonds to
instruments                assure compliance, (2) whether Original Issue
                           Discount information reporting can be expanded or
                           modified to increase taxpayer compliance, and (3)
                           whether lessons from IRS' regulatory experience with
                           the Original Issue Discount provisions can be applied
                           to the taxation of other new financial products.

Business taxpayer          To (1) understand the process by which business
compliance burden          taxpayers identify and comply with their tax
                           requirements and the ways in which the compliance
                           process is considered burdensome and (2) determine
                           the feasibility of obtaining reliable information
                           from businesses on their tax compliance costs.

Audits of large            To (1) compute the rate at which taxes recommended in
corporations               these audits are assessed over time, (2) analyze
                           factors that affect this rate, and (3) identify the
                           status of ongoing and planned changes to improve
                           these audits.

Tax compliance of          To identify (1) the extent of tax compliance by
sweatshops                 sweatshops and (2) IRS' and states' efforts to
                           improve that compliance.

Form 5500                  To determine whether (1) Form 5500 information can be
                           provided in a more timely and cost effective manner;
                           (2) the accuracy, processing, enforcement, targeting,
                           and management of this information can be improved;
                           and (3) the information presently requested on the
                           form is adequate to meet agency needs. Form 5500,
                           with its attendant schedules, is the principal
                           financial reporting mechanism used by the Department
                           of Labor, IRS, and the Pension Benefit Guaranty
                           Corporation to oversee compliance with the Employee
                           Retirement Income Security Act of 1974 and obtain
                           relevant statistical and research data.

IRS' consolidated          To (1) determine the extent of financial management
statement of financial     and internal control problems needing correction, (2)
position on September 30,  identify needed audit procedures to opine on fiscal
1994                       year 1994 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.

IRS' Taxpayer Compliance   To (1) monitor IRS' TCMP design efforts, (2) identify
Measurement Program        issues that IRS may be excluding from TCMP, and (3)
(TCMP)                     review IRS audits to assess the quality of the TCMP
                           work.

Long-term effects of       To determine (1) the earnings and employment outcomes
training under the Job     of persons who have participated in training programs
Training Partnership Act   sponsored under the Job Training Partnership Act, and
                           (2) how these outcomes compare to those that might
                           have occurred in the absence of training.

Invalid segment of the     To determine (1) why the number of accounts on the
Individual Master File     invalid segment of the IMF are increasing, (2) how
(IMF)                      the invalid segment of the IMF affects taxpayers and
                           IRS' processing and enforcement operations, and (3)
                           what can be done to reduce or minimize the growth of
                           accounts on the invalid segment.
--------------------------------------------------------------------------------

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

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

David J.  Attianese, Assistant Director, Tax Policy and
Administration
 Issues
Rodney F.  Hobbs, Evaluator-in-Charge
Bryon S.  Gordon, Evaluator
Gillian M.  Martin, Evaluator
Judy A.  Lanham, Secretary


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