Tax Policy and Administration: 1995 Annual Report on GAO's Tax-Related
Work (Letter Report, 03/08/96, GAO/GGD-96-61).

Pursuant to a legislative requirement, GAO summarized its work on tax
policy and administration during fiscal year (FY) 1995, including: (1)
actions federal agencies took in response to its recommendations as of
December 31, 1995; (2) recommendations made to Congress before and
during FY 1995 that remain open; and (3) assignments for which it
received authorized access to tax information.

GAO noted that its recommendations addressed specific actions that
Congress and the administration could take to: (1) improve compliance
with tax laws; (2) assist taxpayers; (3) enhance the effectiveness of
tax incentives; (4) improve Internal Revenue Service management; and (5)
improve the processing of returns and receipts.

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

 REPORTNUM:  GGD-96-61
     TITLE:  Tax Policy and Administration: 1995 Annual Report on GAO's 
             Tax-Related Work
      DATE:  03/08/96
   SUBJECT:  Federal taxes
             Government collections
             Tax administration
             Voluntary compliance
             Tax law
             Tax credit
             Compliance
             Tax nonpayment
             Computerized information systems
             Tax administration systems
IDENTIFIER:  IRS Taxpayer Compliance Measurement Program
             California
             Earned Income Tax Credit
             Research Tax Credit
             TSM
             IRS Tax System Modernization Program
             IRS Individual Master File
             Taxpayers Bill of Rights Act
             
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Cover
================================================================ COVER


Report to Designated
Congressional Committees

March 1996

TAX POLICY AND ADMINISTRATION -
1995 ANNUAL REPORT ON GAO'S
TAX-RELATED WORK

GAO/GGD-96-61

1995 Annual Tax Report

(268714)


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

  AFDC - Aid to Families With Dependent Children
  AMT - Alternative Minimum Tax
  BMF - Business Master File
  CMM - Capability Maturity Model
  CREF - Cross-Reference Entity File
  EIC - Earned Income Credit
  EIN - Employer Identification Number
  ELF - Electronic Filing
  ETEP - Employment Tax Examination Program
  FICA - Federal Insurance Contribution Act
  FMFIA - Federal Managers' Financial Integrity Act
  FCC - Foreign-controlled corporation
  IMF - Individual Master File
  IRS - Internal Revenue Service
  LIHTC - Low Income Housing Tax Credit
  NTEU - National Treasury Employees Union
  OMB - Office of Management and Budget
  SSA - Social Security Administration
  SSN - Social Security Number
  TCMP - Taxpayer Compliance Measurement Program
  TSM - Tax Systems Modernization
  TSP - Thrift Savings Plan
  USCC - U.S.-controlled corporation

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


B-270549

March 8, 1996

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

The Honorable Ted Stevens
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 in fiscal year
1995.  It contains appendixes that highlight (1) agency actions taken
on our recommendations, as of December 31, 1995; (2) recommendations
we made to Congress before and during fiscal year 1995 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 our reports and testimonies, we suggested actions that if taken
could improve compliance with the tax laws, assist taxpayers, enhance
the effectiveness of tax incentives, improve Internal Revenue Service
(IRS) management, and improve the processing of returns and receipts. 
The associated reports and testimonies are summarized in the
appendixes.  The following pages highlight notable reports and
testimonies from fiscal year 1995. 


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

One of IRS' goals is to increase voluntary compliance.  We issued
several reports and testimonies in fiscal year 1995 dealing with IRS'
primary compliance measurement program and IRS' efforts to reduce
noncompliance. 

Status of Tax Year 1994 Compliance Measurement Program.  IRS'
Taxpayer Compliance Measurement Program (TCMP) plays an important
role in national tax policy and administration decisions.  IRS
collects TCMP data by doing extensive audits on a random sample of
tax returns.  IRS uses the sample data to measure compliance levels,
estimate the tax gap, develop formulas for selecting returns to
audit, identify compliance issues, and allocate its resources. 
Because of TCMP's importance, we monitored IRS' plans to develop and
implement the tax year 1994 TCMP for which audits were slated to
begin in October 1995.  We concluded that (1) IRS' 1994 TCMP would be
the most comprehensive TCMP effort ever undertaken, (2) its larger
sample compared with past TCMP efforts would allow for more
sophisticated and powerful analyses, (3) new audit techniques and
more information should help IRS auditors do higher quality audits,
and (4) the many changes and added complexity would increase the
importance of adequate training of the auditors and supervisory
review of their work.  We continue to believe that TCMP is a good
investment because it is IRS' tool for objectively measuring
compliance with tax laws.  The 1994 TCMP was delayed indefinitely,
however, because of congressional concerns about both the cost and
taxpayer burden associated with the TCMP and budget cuts.  IRS is
considering several alternatives, but as of December 31, 1995, no
alternative had been selected (GAO/GGD-95-39, Dec.  30, 1994;
GAO/T-GGD-95-207, July 18, 1995).  (See p.  20.)

Reducing the Income Tax Gap.  One of the greatest challenges facing
IRS is finding ways to reduce the gross income tax gap--the
difference between income taxes owed and those voluntarily paid.  IRS
estimates that more than $100 billion in income from legal sources is
at stake annually.  IRS attributes about three-fourths of the tax gap
to individuals and about one-fourth to corporations.  To explore
innovative and practical ways to reduce the tax gap, we sponsored a
symposium on January 12, 1995, that brought together well-known tax
authorities with congressional, IRS, and our staff.  In general, the
panelists identified several objectives that, if met, could help
improve compliance:  (1) reduce tax law ambiguity and complexity; (2)
extend the reach of tax requirements, such as income tax withholding,
that tend to promote taxpayer compliance; (3) expand compliance
techniques such as information sharing with states and enhanced
penalties; (4) more aggressively focus on unreported income; (5)
improve IRS' compliance data; and (6) improve IRS' ability to resolve
compliance problems quickly.  The panelists also cautioned against
excessive intrusions into taxpayers' affairs, which could defeat IRS'
objectives.  In June 1995, we testified that (1) compliance varies
across groups of taxpayers and is lowest where there is neither
withholding nor information reporting and (2) some of the tax gap may
not be collectible at an acceptable cost, making it important that
IRS measure compliance and use that information to effectively focus
its resources.  In a December 1994 report, we discussed the tax gap
for one group of taxpayers--
self-employed persons who provide services (GAO/GGD-95-59, Dec.  28,
1994; GAO/GGD-95-157, June 2, 1995; GAO/T-GGD-95-176, June 6, 1995). 
(See pp.  19, 26, and 27.)

Tax Compliance Burden Facing Business Taxpayers.  As business
taxpayers strive to comply with federal, state, and local tax
requirements, they expend time, incur costs, and experience
frustrations.  We define this effort as "taxpayer compliance burden."
Using available studies on federal compliance burden, supplemented
with interviews of business taxpayers, we found that the complexity
of the Internal Revenue Code, compounded by the frequent changes made
to the code, is the source of most business taxpayer burden. 
Determining a reliable estimate of the cost of such burden would be
costly and in itself burdensome on businesses.  In testimony, we
provided examples of code provisions and of IRS' administration of
the code that are most problematic to business.  We also provided
some of the businesses' suggestions for simplification
(GAO/T-GGD-95-42, Dec.  9, 1994).  (See p.  18.)

Pricing of Intercompany Transactions (Transfer Pricing).  Transfer
pricing affects the distribution of profits and therefore taxable
income among related companies and sometimes across tax
jurisdictions.  Abusive transfer pricing occurs when income and
expenses are improperly allocated among related companies to reduce
certain companies' taxable income.  Section 482 of the Internal
Revenue Code allows IRS to reallocate income among related parties if
it finds violations.  In an April 1995 report, we (1) provided
information on IRS' recent experiences in dealing with transfer
pricing issues and its use of available regulatory and procedural
tools and (2) updated earlier analyses showing how many
U.S.-controlled corporations and foreign-controlled corporations paid
no U.S.  income tax.  In 1993 and 1994, IRS examiners found, as they
had in previous years, many section 482 violations.  Also, as in past
years, IRS sustained less than 30 percent of the proposed
adjustments.  According to IRS officials, certain procedural tools,
such as measures to obtain information and stronger penalties, had
served mostly as deterrents.  It was too soon to assess the success
of transfer pricing regulations issued in July 1994 (GAO/GGD-95-101,
Apr.  13, 1995).  (See p.  22.)

California's Experiences in Taxing Multinational Corporations.  A
worldwide formulary apportionment system has been proposed by some
state tax officials and other tax experts as an alternative to the
existing tax system.  In a July 1995 report, we discussed the issues
to be considered before a federal formulary apportionment could be
adopted.  Also, we discussed California's experience with its own
version of the advocated federal system in which multinational
enterprises apportion a share of their worldwide income to
California.  The California formulary approach can be applied to
income from a single corporation or from a group of affiliated
corporations (GAO/GGD-95-171, July 11, 1995).  (See p.  30.)


      ASSIST TAXPAYERS
---------------------------------------------------------- Letter :1.2

To ease taxpayer frustration and increase the likelihood of voluntary
compliance with the tax laws, IRS must (1) treat taxpayers fairly,
(2) provide timely and accurate assistance, and (3) communicate
clearly.  Several of our fiscal year 1995 products dealt with those
issues. 

Treating Taxpayers Fairly.  Several initiatives have been undertaken
in recent years to better protect taxpayers, including enactment of
the Taxpayer Bill of Rights in 1988 and internal IRS efforts to treat
taxpayers as customers and to improve its operations.  IRS has a wide
range of controls, processes, and oversight offices to govern the
behavior of its employees in dealing with taxpayers.  Despite the
many controls intended to protect taxpayers, we found examples that
fell within our definition of taxpayer abuse.  We concluded that IRS
needs to specifically define taxpayer abuse and develop management
information about it to identify and rectify future instances of
abuse.  We recommended that IRS strengthen its controls in several
areas and provide additional information to taxpayers that will
increase their ability to protect their rights.  Such steps would
enable IRS and Congress to better evaluate IRS' performance in
protecting taxpayers' rights (GAO/GGD-95-14, Oct.  26, 1994).  (See
p.  34.)

Telephone Assistance.  Many taxpayers who seek help through IRS'
telephone assistance program are not getting it.  Even with increased
productivity, IRS has not kept pace with the significant growth in
the number of calls received.  IRS employees answered about one out
of two calls in fiscal year 1989 but only one out of four calls in
fiscal year 1994.  Even with new technology, IRS has been unable to
provide the level of telephone service provided by the Social
Security Administration (SSA) and four private sector companies we
contacted.  We recommended that IRS improve its technology to include
real-time call traffic monitoring and management, using the routing
capability of its telecommunications vendor and fully implementing
the features of call routing technology already available
(GAO/GGD-95-86, Apr.  12, 1995).  (See p.  41.)

Improving IRS Notices.  Each year IRS sends millions of notices to
taxpayers concerning the status of their tax accounts.  We reviewed
47 of the most commonly used notices and identified clarity concerns
with 31 of them.  We also found that IRS' ability to improve its
notices is adversely affected by limited computer programming
resources and higher priority programming requests.  Further, the
lack of a system to track the progress of proposed notice language
changes limits IRS' ability to oversee notice clarity improvements. 
We recommended changes to its current notice generation process and a
new system to monitor proposed notice text revisions (GAO/GGD-95-6,
Dec.  7, 1994).  (See p.  37.)

Improving Forms and Publications.  Providing taxpayers with
easy-to-read tax forms and publications is a difficult task for
several reasons.  The tax code is frequently revised, consequently
many publications must also be revised annually under short time
constraints.  In addition, taxpayers' comprehension levels vary. 
Generally, we found IRS' process for developing and revising tax
forms and publications reasonable.  IRS maintains a dialogue with tax
professionals and attempts to generate as much feedback as possible
from taxpayers.  We recommended that IRS take additional steps to
identify the specific concerns of individual taxpayers. 
Specifically, gathering information on the nature of taxpayer
questions through its toll-free telephone system and making greater
use of IRS field personnel who have more contact with taxpayers
should generate additional useful feedback to IRS (GAO/GGD-95-34,
Dec.  7, 1994).  (See p.  39.)


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

Congress continues to seek equitable ways to reform the current tax
system.  At the same time, it adopts tax incentives and preferences
to promote certain social policy goals.  The result is often foregone
revenues to the federal treasury.  In response to congressional
requests, we provided information on two such incentives, the Earned
Income Credit (EIC) and the research tax credit. 

Earned Income Credit.  The EIC is a major federal effort to assist
the working poor.  Established in 1975, Congress intended that the
EIC (1) offset the impact of Social Security taxes on low-income
workers and (2) encourage low-income individuals to seek employment
rather than welfare.  Congress and IRS have long been concerned about
EIC noncompliance.  In 1988, according to IRS, about 42 percent of
the EIC recipients received too large a credit and about 34 percent
of total EIC paid out may have been awarded erroneously.  Limited
studies since then by IRS suggest that noncompliance is still a
problem.  Further, some EIC recipients are illegal aliens who may
receive the EIC if they meet the credit's eligibility rules. 
Awarding the EIC to illegal aliens, however, works at cross-purposes
with federal policies that prohibit illegal aliens from legally
working in the United States.  An IRS analysis of some tax returns
filed in 1993 provided enough information to convince IRS officials
that about 160,000 EIC recipients probably were illegal aliens at
that time.  To better target the EIC to the working poor, IRS needs
to change some of the definitions used to determine eligibility and
develop better measures of EIC filers' resources to determine their
eligibility (GAO/GGD-95-27, Oct.  25, 1994; GAO/GGD-95-122BR, Mar. 
31, 1995; GAO/T-GGD-95-136, Apr.  4, 1995; GAO/T-GGD-95-179, June 8,
1995).  (See p.  45.)

Benefits from the Research Tax Credit.  In 1981, Congress created the
research tax credit to enhance the competitive position of the United
States in the world economy by encouraging the business community to
do more research.  The credit has been extended six times and
modified four times since its inception.  It expired in June 1995. 
Legislation to extend the credit was introduced but had not been
enacted as of December 31, 1995.  We took no position on whether the
research credit should be made a permanent part of the tax code or
allowed to expire given the lack of empirical data for evaluating the
credit's net benefit to society.  We said that the credit's net
benefit to society would ideally be evaluated in terms of the
ultimate benefits derived from the additional research that it
stimulated and not just on the basis of how much research spending it
stimulates for a given revenue cost.  We suggested that Congress
review the base of the credit periodically and adjust it as needed
because the credit can become too generous or too restrictive over
time.  We presented evidence from corporate tax returns indicating
that the accuracy of the credit's base had eroded significantly since
1989 (GAO/T-GGD-95-140, Apr.  3, 1995; GAO/T-GGD-95-161, May 10,
1995).  (See p.  46.)


      IMPROVE IRS MANAGEMENT
---------------------------------------------------------- Letter :1.4

Although IRS has implemented many changes we recommended, pervasive
management problems remain.  These management problems are further
complicated by aging information systems in a period of declining
federal budgets. 

Management of Tax Systems Modernization (TSM) Program.  In testimony
and a companion report to the Commissioner of Internal Revenue, we
discussed IRS' progress in implementing its $8 billion modernization
program and described serious management and technical weaknesses
that must be corrected if TSM is to succeed.  We made numerous
recommendations for improving IRS' business management and
information systems management and development capabilities so that
TSM is better focused to meet IRS' mission needs.  IRS has several
efforts under way to deal with our concerns and has developed an
action plan for implementing our recommendations (GAO/T-AIMD-95-86,
Feb.  16, 1995; GAO/AIMD-95-156, July 26, 1995).  (See p.  51.)

IRS' Fiscal Year 1994 Financial Statements.  In accordance with the
Chief Financial Officer Act of 1990, we reported the results of our
efforts to audit IRS' Principal Financial Statements for the fiscal
year ending September 30, 1994.  The report included an assessment of
IRS' internal controls and its compliance with laws and regulations. 
As in prior years, we were unable to express an opinion on the
reliability of the financial statements.  Our report discussed the
scope and severity of financial management and control problems and
IRS' actions to remedy them and updated the status of recommendations
from our audits of fiscal years 1992 and 1993.  Overcoming these
problems will be difficult because of the long-standing nature and
depth of IRS' financial management problems and the antiquated state
of its information systems (GAO/AIMD-95-141, Aug.  4, 1995).  (See p. 
54.)

IRS Receivables--A High-Risk Area.  We issued a series of reports on
federal program areas considered to be high risk because they are
especially vulnerable to waste, fraud, abuse, and mismanagement. 
This report discussed one such area, IRS' management of its accounts
receivable.  IRS' failure to resolve nearly $156 billion in
outstanding tax delinquencies has not only lessened the revenues
immediately available to support government operations but could also
jeopardize future taxpayer compliance by giving the impression that
IRS is neither fair nor serious about collecting overdue taxes.  In
spite of several initiatives to solve this problem, IRS has been
unable to significantly improve the accuracy of its delinquent
accounts inventory, slow the growth in accounts receivable, or
accelerate and increase the collection of overdue taxes.  IRS still
lacks needed information to guide collection efforts, its collection
process is outdated and inefficient, and its decentralized
organizational structure makes dealing with problems that cut across
the agency difficult (GAO/HR-95-6, Feb.  1995).  (See p.  49.)


      IMPROVE THE PROCESSING OF
      RETURNS AND RECEIPTS
---------------------------------------------------------- Letter :1.5

IRS' most basic function is to receive and process tax returns and
tax payments.  We issued several reports relating to those activities
in fiscal year 1995, including the two discussed below. 

Improving IRS' Installment Agreement Program.  Since 1991, taxpayer
use of installment agreements has grown considerably, and such
agreements have accounted for a growing portion of IRS' collection
activity.  Much of the growth occurred after April 1992 when IRS
streamlined the installment agreement approval process.  IRS internal
auditors reported that some taxpayers were using installment
agreements when they were able to fully pay taxes.  This practice
conflicts with IRS' intent to encourage installment agreements for
taxpayers who cannot otherwise pay their taxes in full when they are
due.  In addition, the auditors were concerned about the ease with
which taxpayers could accumulate additional tax debt by adding new
income tax liabilities to existing installment agreements.  We raised
concerns about certain administrative aspects of the program and
recommended changes whereby IRS would (1) provide taxpayers more
information about the terms, conditions, and costs of installment
agreements and (2) experiment with several methods for reducing
installment agreement servicing costs (GAO/GGD-95-137, May 2, 1995). 
(See p.  60.)

Verifying Taxpayer Identities.  This report discussed IRS' procedures
for processing and posting tax returns in which the primary filer
does not provide a Social Security Number (SSN) or provides a name
and SSN that do not match SSA records.  Returns that can be corrected
along with those that match SSA records are posted to the "valid
segment" of the Individual Master File (IMF) while those that cannot
be corrected are posted to the "invalid segment" of the IMF.  From
1986 through 1994, the average annual growth rate of accounts on the
invalid segment of the IMF was more than twice the growth rate for
accounts on the valid segment.  IRS paid $1.4 billion in refunds on
returns that were posted to the invalid segment of the IMF for tax
year 1993.  No one knows how much, if any, of this amount was
erroneously paid; however, the risk of error was higher because IRS
was less certain of these filers' identities.  We recommended ways
IRS could improve the processing of returns with missing or incorrect
SSNs and clean up IMF accounts which could adversely affect IRS' tax
modernization plans (GAO/GGD-95-148, Aug.  30, 1995).  (See p.  56.)


---------------------------------------------------------- Letter :1.6

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 VII.  If you
or your colleagues would like to discuss any of the matters in this
report, please call me on (202) 512-9110. 

Lynda D.  Willis
Director, Tax Policy and
 Administration Issues


SUMMARIES OF TAX-RELATED PRODUCTS
ISSUED IN FISCAL YEAR 1995 BY
SUBJECT MATTER
=========================================================== Appendix I


   IMPROVE COMPLIANCE WITH TAX
   LAWS
--------------------------------------------------------- Appendix I:1

18

Tax Compliance Burden Faced by Business Taxpayers 18

Estimates of the Tax Gap for Service Providers 19

Status of the Tax Year 1994 Compliance Measurement Program 20

Tax Compliance Initiatives and Delinquent Taxes 22

Transfer Pricing and Information on Nonpayment of Tax 22

Options Reporting to IRS 24

Money Laundering:  Improvements Needed in Reporting Suspicious
 Transactions 25

Reducing the Tax Gap:  Results of a GAO-Sponsored Symposium 26

Reducing the Income Tax Gap 27

IRS' Partnership Compliance Activities Could Be Improved 28

California Taxes on Multinational Corporations and Related Federal
 Issues 30

Other Income Reporting 31

Issues Involving Worker Classification 32

Recurring Issues in Tax Disputes Over Business Expense Deductions 33


   ASSIST TAXPAYERS
--------------------------------------------------------- Appendix I:2

34

IRS Can Strengthen Its Efforts to See That Taxpayers Are Treated
 Properly 34

IRS Notices Can Be Improved 37

IRS Efforts to Improve Forms and Publications 39

Information on Tax Liens Imposed by IRS 40

Adopting Practices Used by Others Would Help IRS Serve More
 Taxpayers 42


   ENHANCE EFFECTIVENESS OF TAX
   INCENTIVES
--------------------------------------------------------- Appendix I:3

44

Tax-Exempt Organizations 44

Earned Income Credit:  Targeting to the Working Poor 45

Information on the Research Tax Credit 47

Recovering Hundreds of Millions in Welfare Benefits Overpayments 48


   IMPROVE IRS MANAGEMENT
--------------------------------------------------------- Appendix I:4

49

Internal Revenue Service Receivables 49

Tax Systems Modernization:  Management and Technical
 Weaknesses Must Be Corrected If Modernization Is to Succeed 51

Analysis of IRS' Fiscal Year 1996 Budget Request and Interim
 Results of 1995 Filing Season 53

Financial Audit:  Examination of IRS' Fiscal Year 1994 Financial
 Statements 54


   IMPROVE THE PROCESSING OF
   RETURNS AND RECEIPTS
--------------------------------------------------------- Appendix I:5

56

Continuing Problems Affect Otherwise Successful 1994 Filing Season 56

Changes Needed to Reduce Volume and Improve Processing of
 Undeliverable Mail 57

Process Used to Revise Federal Employment Tax Deposit Regulations 58

Administrative Improvements Possible in IRS' Installment Agreement
 Program 61

IRS Could Do More to Verify Taxpayer Identities 63

Sole Proprietor Identification Numbers Can Be Improved 65


   OTHER
--------------------------------------------------------- Appendix I:6

67

College Savings:  Using EE Savings Bonds and Loans From Thrift
 Savings Plan to Pay for College 67

IRS User Fees 68

U.S.  Insular Areas' Fiscal Relations With the Federal Government 68

1994 Annual Report on GAO's Tax-Related Work 69

Addressing the Budget Deficit 69

Experience With the Corporate Alternative Minimum Tax 70

Paid Tax Preparers and Tax Software 72

College Savings:  Information on State Tuition Prepayment Prorams 73


   IMPROVE COMPLIANCE WITH TAX
   LAWS
--------------------------------------------------------- Appendix I:7


   TAX COMPLIANCE BURDEN FACED BY
   BUSINESS TAXPAYERS
--------------------------------------------------------- Appendix I:8

GAO/T-GGD-95-42, 12/09/94

In testimony before the Subcommittee on Oversight, House Committee on
Ways and Means, we observed that as business taxpayers strive to
comply with federal, state, and local tax requirements they expend
time, incur costs, and experience frustrations.  We refer to this
time, cost, and frustration collectively as "taxpayer compliance
burden." We were asked by the Ranking Minority Member to identify the
sources of the burden and determine the reliability of taxpayer
burden cost estimates appearing in compliance cost and tax
simplification literature. 

We collected information on compliance burden from the management and
tax staffs of selected businesses, tax accountants, tax lawyers,
representatives of tax associations, and IRS officials. 
Additionally, we reviewed academic research and other studies on
compliance burden and tax simplification.  The focus of our efforts
was the federal tax system. 

We testified that (1) according to those business officials
interviewed, the complexity of the Internal Revenue Code was the
driving force behind federal tax compliance burden; (2) a reliable
estimate of the overall costs of tax compliance was not available and
would be costly and burdensome on businesses to obtain; (3) reducing
compliance burden would be a difficult undertaking because of the
various policy trade-offs, such as revenue and taxpayer equity, that
must be made; and (4) while business officials and tax experts
acknowledged the legitimate purposes of the federal tax system, they
believed that several code provisions are problematic and need
simplification. 

While we were unable to identify reliable tax burden cost estimates,
there was consensus among the business respondents, tax experts, and
the literature that tax compliance burden is significant and that it
can be reduced.  Although some gains can be made by reducing
administrative burden imposed by IRS, the greatest potential for
reducing taxpayer compliance burden is by dealing with the complexity
of the tax code.  One approach to reducing burden would be to tackle
particularly burdensome provisions individually.  Provisions
identified as especially burdensome include Alternative Minimum Tax
(AMT), uniform capitalization, pension and payroll provisions, and
the foreign tax credit.  We believe that simplification of any of
these provisions has the potential for reducing the tax burden of
many businesses. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------- Appendix I:8.1

GAO/GGD-95-6, 12/07/94; GAO/GGD-95-34, 12/07/94;
GAO/T-AIMD/GGD-95-80, 02/07/95; and GAO/GGD-95-88, 04/03/95


   ESTIMATES OF THE TAX GAP FOR
   SERVICE PROVIDERS
--------------------------------------------------------- Appendix I:9

GAO/GGD-95-59, 12/28/94

In a report to the Chairman of the Joint Committee on Taxation, we
provided information about the tax gap for sole proprietors, i.e.,
self-employed individuals.  We presented estimates of the tax year
1992 gross income tax gap for nonfarm sole proprietors who provided
services and estimates of the tax gap attributable to service
providers who may have been employees rather than self-employed.  The
gross income tax gap is the difference between the amount of income
taxes owed and the amount voluntarily paid.  Tax-gap estimates are
important because they can be used to measure IRS' progress in
confronting noncompliance and to help IRS allocate its compliance
resources. 

We estimated that between 9.2 million and 11.5 million of the 13
million nonfarm sole proprietors might be considered service
providers.  IRS estimated that the 1992 tax gap among these service
providers ranged from $21 billion to $30.3 billion--that is, from 56
to 81 percent of IRS' estimated tax gap of $37.2 billion for all
nonfarm sole proprietors who filed a return. 

We estimated that between 0.2 million and 1.6 million of the 11.5
million service providers may be misclassified as service providers
by their employers.  IRS estimated that between $2 billion and $3.5
billion of the $30.3 billion tax gap was associated with these
potentially misclassified workers.  This tax gap estimate included
only service providers who received all their self-employment income
from one business.  The $2 billion estimate included only those
receiving $20,000 or more in income from one business.  The $3.5
billion estimate included all such service providers regardless of
the amount.  We believe that if these workers had been classified
correctly as employees, a significant amount of the taxes owed would
likely have been withheld by their employer. 


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

GAO/GGD-92-108, 07/23/92; GAO/GGD-94-123, 05/11/94; GAO/GGD-94-175,
08/02/94; GAO/GGD-95-157, 06/02/95; GAO/T-GGD-95-176, 06/06/95; and
GAO/T-GGD-95-224, 08/02/95


   STATUS OF THE TAX YEAR 1994
   COMPLIANCE MEASUREMENT PROGRAM
-------------------------------------------------------- Appendix I:10

GAO/GGD-95-39, 12/30/94 and GAO/T-GGD-95-207, 07/18/95

In a report to the Joint Committee on Taxation and in subsequent
testimony before the Subcommittee on Oversight, House Committee on
Way and Means, we commented on the status of IRS' planning efforts
for the 1994 Taxpayer Compliance Measurement Program (TCMP).  We
analyzed IRS' available plans and commented on potential strengths
and weaknesses of the program. 

We said that the 1994 TCMP survey may have been the most
comprehensive TCMP effort ever undertaken.  Planned to include over
150,000 tax returns, it was designed to obtain compliance information
for individuals, small corporations, partnerships, and S
corporations--further disaggregated into 24 types of businesses and 3
types of individual taxpayers.  IRS planned for most sample results
to be usable at the national level as well as at smaller geographic
areas across the country. 

IRS planned to implement several changes from past TCMP surveys.  IRS
planned to have auditors use computers to capture audit adjustments. 
For each adjustment, IRS planned to (1) instruct auditors to
determine the tax issue involved and the reason for the taxpayer
error; (2) provide auditors with tax return data for 1994 and the
prior 2 years as well as other tax information on each taxpayer; and
(3) help uncover erroneous tax-return information using an "economic
reality" audit technique, which surveys the taxpayer's lifestyle
relative to the information reported on the tax return.  We supported
these planned changes and said that they offered promise for
improving the value of TCMP results. 

We also expressed some concerns about the 1994 TCMP.  We were
concerned that IRS might not meet scheduled milestones so that TCMP
audits could begin as planned in October 1995 and that IRS' plans had
some missing pieces.  We reported that IRS was working to address
these concerns: 

  No research plan that specifically defined the research questions
     to be answered and how the data to be collected would be used to
     answer the questions. 

  No plans to collect information on all income and deduction items
     for partnership and S corporation returns or plans to determine
     the tax impact of changes to these returns. 

  No plans to collect information on potentially misclassified
     workers. 

  No plans to collect information on other known compliance issues
     such as those dealing with the earned income credit and wage
     reporting. 

  No plans for developing a mechanism that would electronically
     retrieve TCMP audit workpapers for IRS and other researchers. 

We raised these concerns so that IRS could consider them and make
necessary changes in an informed manner rather than waiting until the
last minute.  We favored this approach so that IRS, as well as
others, had more confidence that the TCMP audits would not only start
in October 1995 but also produce more useful data. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:10.1

IRS took appropriate action on the concerns we raised in this report
and testimony that dealt with meeting milestones for starting TCMP
audits and collecting and analyzing data.  However, the 1995 TCMP has
been delayed indefinitely because of congressional concerns about the
cost of TCMP, its burden on taxpayers, and budget cuts.  IRS is
considering several alternatives, but as of December 31, 1995, no
firm alternative had been selected. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:10.2

GAO/GGD-93-60, 03/19/93; GAO/GGD-93-52, 04/05/93; GAO/GGD-94-123,
05/11/94; GAO/GGD-95-157, 06/02/95; GAO/GGD-95-151, 06/16/95;
GAO/T-GGD-95-207, 07/18/95; GAO/GGD-95-199R, 07/19/95; and
GAO/GGD-96-21, 10/06/95


   TAX COMPLIANCE INITIATIVES AND
   DELINQUENT TAXES
-------------------------------------------------------- Appendix I:11

GAO/T-GGD-95-74, 02/01/95

In testimony before the Subcommittee on Treasury, Postal Service, and
General Government, House Committee on Appropriations, we noted that
IRS faces some formidable enforcement challenges, such as closing a
tax gap that was last estimated at $127 billion in tax year 1992 and
collecting tens of billions of dollars in tax debt.  Past Congresses
recognized the need to expand IRS' enforcement presence by funding
compliance initiatives that would add staff with the intent of
increasing compliance and producing more revenue.  IRS had not fully
implemented past compliance initiatives partly because of
circumstances, such as underfunded pay raises, beyond its control. 
As a result, although the intent of the various initiatives was to
increase IRS' enforcement presence, staffing levels in three of IRS'
major enforcement programs actually declined between 1989 and 1994. 

We testified that some of the additional compliance staffing for 1995
was to be used to collect delinquent tax debts.  However, increased
staffing is not the only answer to IRS' accounts receivable problem. 
IRS' problems in this area are more fundamental.  First, IRS must
improve the accuracy of its delinquent accounts inventory.  Second,
it needs to slow the growth of the inventory of tax debt.  Finally,
it needs to accelerate and increase the collection of overdue taxes. 
Since 1990, IRS has undertaken many efforts toward these objectives;
however, it has not made much headway. 

We identified five underlying causes that tend to perpetuate IRS'
accounts receivable problems:  (1) a lack of accurate and reliable
information, (2) an outdated and inefficient collection process, (3)
difficulty in balancing collection efforts with taxpayer protections,
(4) a decentralized organizational structure, and (5) uneven
staffing.  IRS needs to demonstrate that its efforts will effectively
deal with these causes--causes that cut across the agency and across
lines of managerial authority and responsibility.  IRS also needs to
reengineer its outdated collection process and take greater advantage
of private sector practices. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:11.1

GAO/GGD-92-45FS, 01/30/92; GAO/GGD-92-118, 07/31/92; GAO/T-GGD-93-23,
04/28/93; GAO/GGD-94-129, 04/20/94; and GAO/HR-95-6, 02/95


   TRANSFER PRICING AND
   INFORMATION ON NONPAYMENT OF
   TAX
-------------------------------------------------------- Appendix I:12

GAO/GGD-95-101, 04/13/95

In a report to Senator Byron L.  Dorgan and Congressman Paul E. 
Kanjorski, we updated our 1993 work and provided recent data on
transfer pricing issues and on tax compliance of foreign-controlled
corporations (FCC) and U.S.-controlled corporations (USCC).  Transfer
pricing is governed by section 482 of the Internal Revenue Code. 

IRS' recent experiences with examinations, appeals, and litigation
relating to section 482 issues were mixed.  For instance, in 1993 and
1994, IRS examiners found, as they had in previous years, large
section 482 violations.  The outcomes of the appeals and legal
processes in 1993 and 1994 were similar to those in 1987 and 1988,
with IRS sustaining less than 30 percent of the proposed section 482
adjustment amounts.  In 1993 and the first part of 1994, IRS had
somewhat better success litigating large transfer pricing cases than
in 1990 through 1992. 

According to IRS officials, certain enforcement tools available to
IRS in transfer pricing situations, such as measures to obtain
information and stronger penalties, served mostly as deterrents that
altered taxpayer behavior.  Alternatives to traditional examinations,
appeals, and litigation, such as simultaneous examinations,
arbitration, and advance pricing agreements, were used infrequently
or were expected to grow in number in the future. 

How successful the new transfer pricing regulatory regime will be
remains to be seen.  The flexibility that new regulations allow
taxpayers in applying the arm's length standard must be weighed
against the flexibility given IRS and the increased documentation
required of taxpayers under threat of penalty. 

A majority of all FCCs and USCCs paid no U.S.  income tax in each
year from 1987 through 1991, and the percentages of each--nearly
three-quarters of FCCs and about 60 percent of USCCs--remained
largely unchanged over the 5-year period.  Although taxpaying
corporations were a minority of all FCCs and USCCs, they owned the
majority of corporate assets and generated most of the receipts. 
Furthermore, the largest nontaxpaying corporations--those with assets
of $100 million or more--were relatively few in number but accounted
for relatively large proportions of all FCCs' and all USCCs' total
assets and receipts. 


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

GAO/GGD-92-89, 06/15/92; GAO/T-GGD-93-16, 03/25/93; GAO/GGD-93-112FS,
06/11/93; and GAO/GGD-95-171, 07/11/95


   OPTIONS REPORTING TO IRS
-------------------------------------------------------- Appendix I:13

GAO/GGD-95-145R, 05/05/95

In a letter to Representative Bob Franks, we provided information
about reporting options transactions to IRS.  (An option is a
contract that gives the purchaser the right, in exchange for a
premium, to buy or sell a specific amount of a property at an agreed
upon price by a specified date.) The member wanted to know why
information returns are not filed on options and how information
reporting could work. 

The Secretary of the Treasury, under section 6045 of the Internal
Revenue Code, has broad authority to subject investment payments to
information reporting.  Using this authority, the Secretary has
required information reporting on transactions such as securities and
commodities; however, this information reporting excludes options. 
IRS officials said the exclusion arose from both the complexity of
options transactions and from the high administrative burden
associated with reporting and using such information. 

In 1990, IRS Chief Counsel started a project to establish regulations
for information reporting on options, but reporting barriers and lack
of compliance data slowed the project.  The project is now inactive. 
Industry representatives told us of similar complexities in reporting
options transactions.  Most brokers, however, are required by federal
regulators and industry associations to annually report options
transactions to clients. 

IRS attempts to identify unreported income from options trading.  It
computer matches data received from existing information returns with
tax returns to identify discrepancies.  IRS officials have not
determined the cost-effectiveness of a more elaborate system for
reporting and computer-matching options data.  Another issue involves
the exemption in section 6045 of the Internal Revenue Code granted
corporate, financial, and other institutions.  An industry official
estimated that over half of its options transactions involved
institutions instead of individuals. 

Before requiring information reporting for options, IRS officials
believe IRS needs to determine (1) whether a compliance problem
exists and (2) how the obstacles discussed above can be resolved. 


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

GAO/GGD-91-118, 09/27/91


   MONEY LAUNDERING:  IMPROVEMENTS
   NEEDED IN REPORTING SUSPICIOUS
   TRANSACTIONS
-------------------------------------------------------- Appendix I:14

GAO/GGD-95-156, 05/30/95

Money laundering involves disguising or concealing illicit income to
make it appear legitimate.  Banks, savings and loans, and credit
unions are in a unique position to help identify money launderers by
reporting suspicious transactions to law enforcement officials. 
Financial institutions report tens of thousands of suspicious
transactions each year, which have led to many investigations of
criminal activities.  Because there is no overall control or
coordination of these reports, there is no way to ensure that the
information is used to its full potential. 

Financial institutions report suspicious transactions on various
forms that provide different types of information and that are filed
with different law enforcement and regulatory agencies.  While the
form that is filed most frequently with the IRS is contained in a
centralized database, it does not contain any additional information
describing the suspicious activity that would be useful as an
intelligence source for initiating an investigation.  Other forms
used to report suspicious transactions, which describe the activity
so that the information can be evaluated, are not contained in a
centralized database but are filed with six different federal
financial regulatory agencies, with copies forwarded to the local IRS
district office.  The use of these forms has varied among IRS' 35
districts.  At the time of our audit, there were no IRS procedures or
policies as to how information contained in these suspicious
transaction reports should be managed as an intelligence resource. 
Thus, IRS did not know how many reports had been received nationwide,
and IRS could not assess the management of the reports from an
agencywide perspective. 

The Department of the Treasury, the financial regulatory agencies,
and IRS have agreed to substantial changes in how suspicious
transactions are to be reported and how the information is to be
used.  Because of the steps they have taken, we did not make
recommendations. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:14.1

IRS is developing new national guidelines that are to mandate
consistent evaluation and processing of all reports of suspicious
currency transactions.  Changes are being made to a management
information system to better ensure the proper use of these reports
and to track accomplishments. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:14.2

GAO/GGD-93-1, 10/15/92 and GAO/T-GGD-93-31, 05/26/93


   REDUCING THE TAX GAP:  RESULTS
   OF A GAO-SPONSORED SYMPOSIUM
-------------------------------------------------------- Appendix I:15

GAO/GGD-95-157, 06/02/95

Available IRS data indicate that taxpayers do not pay (either
voluntarily or after IRS compliance efforts) about 13 percent of the
federal income taxes due on their income from legal sources.  Such an
estimated shortfall in tax revenue has been a long-standing and
seemingly intractable problem. 

To explore innovative and practical means for increasing taxpayer
compliance, we sought the views of experts in the field.  On January
12, 1995, we sponsored a symposium that brought together well-known
tax authorities with congressional, IRS, and our staff.  The starting
point for discussions was our May 1994 overview report, which
highlighted the changes that IRS and Congress needed to consider,
given the body of work we had already completed.\1

The panelists concluded that major modifications in the current tax
system would be required to substantially improve taxpayer compliance
with the nation's tax laws.  They identified a number of objectives
that, if met, could help to bring about such change:  (1) reduce tax
law complexity and make results more certain; (2) extend the reach of
tax requirements, such as income tax withholding, that promote
taxpayer compliance; (3) expand the compliance techniques available
to IRS; (4) adjust the focus of IRS' compliance efforts to address
more aggressively the largest aspect of noncompliance, i.e.,
unreported income; (5) improve the utility of IRS' compliance data;
and (6) improve IRS' ability to resolve taxpayer compliance problems
quickly, before the problems become serious. 

But, as the panelists recognized, any change that extends the reach
of the tax system also increases the extent to which the tax system
intrudes into taxpayers' affairs and needs to be carefully
considered.  Thus, the bottom-line decision on whether to extend the
reach of the tax system to recover additional revenues due the
government under current law involves determining the right mix
between (1) the acceptable level of compliance for each type of
taxpayer and (2) the acceptable level of tax system intrusiveness to
promote compliance within each category of taxpayer. 


--------------------
\1 See Tax Gap:  Many Actions Taken, But a Cohesive Compliance
Strategy Needed (GAO/GGD-94-123, May 11, 1994). 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:15.1

GAO/GGD-94-123, 05/11/94; GAO/GGD-95-59, 12/28/94; and
GAO/T-GGD-95-176, 06/06/95


   REDUCING THE INCOME TAX GAP
-------------------------------------------------------- Appendix I:16

GAO/T-GGD-95-176, 06/06/95

One of the biggest challenges facing IRS is finding ways to reduce
the gross income tax gap--the difference between income taxes owed
and those voluntarily paid.  IRS has estimated that taxpayers do not
voluntarily pay more than $100 billion annually in taxes due on
income from legal sources.  While such a tax-gap estimate is
necessarily imprecise, it does indicate the size of the challenge
confronting tax administration. 

In testimony before the House Committee on Ways and Means, we made
the following points on meeting this challenge: 

  IRS information suggests that U.S.  taxpayers voluntarily pay 83
     percent of the income taxes they owe.  Although this compliance
     level may be relatively high by world standards, it translates
     into large sums of tax-gap dollars because of the size of our
     economy. 

  Compliance is not uniform across groups of taxpayers.  IRS
     estimates that wage earners report 97 percent of their wages;
     the self-employed report 36 percent of their income; and
     "informal suppliers"--self-employed individuals who operate on a
     cash basis--report just 11 percent of theirs. 

  The IRS data show that compliance is highest where there is tax
     withholding, a little lower where there is information reporting
     to IRS, and much lower where there is neither.  In addition to
     the relative visibility of the income to tax administrators, the
     complexity of tax rules, together with a number of other
     factors, also influence the level of tax compliance. 

  Some of the tax gap may not be collectible at an acceptable cost. 
     Collection, in some instances, could require either more
     recordkeeping or reporting than the public may be willing to
     accept or too costly an effort for IRS. 

Thus, it is important that IRS invest agency resources to measure
noncompliance and use that information to balance efforts among the
competing goals of (1) maximizing tax revenues, (2) promoting uniform
compliance, and (3) minimizing taxpayer burden. 


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

GAO/GGD-94-123, 05/11/94; GAO/GGD-95-59, 12/28/94; and
GAO/GGD-95-157, 06/02/95


   IRS' PARTNERSHIP COMPLIANCE
   ACTIVITIES COULD BE IMPROVED
-------------------------------------------------------- Appendix I:17

GAO/GGD-95-151, 06/16/95

In a report to the Joint Committee on Taxation, we reviewed IRS'
strategy for addressing partnership compliance.  IRS' most current
partnership compliance data were collected under its tax year 1982
partnership TCMP.  These data showed that partnerships underreported
their net income by $13 billion in 1982, which we estimated resulted
in an underpayment of taxes by partners approaching $3.6 billion. 
Even when partnerships reported all their income, partners sometimes
failed to include it in their own tax returns.  Thus, IRS estimated
that individual partners owed an additional $2.4 billion in taxes in
1982.  Significant tax law changes in the intervening years make
these data unreliable indicators of the present situation. 

IRS' strategy for addressing partnership compliance relied almost
exclusively on audits to detect noncompliance.  The strategy did not
include either a nonfiler or computer document-matching component. 
IRS, however, had a limited document-matching program to identify
partners who do not report partnership income on their individual
income tax returns. 

We made several observations concerning IRS' partnership audit
program: 

  In recent years, relatively few partnership returns were audited
     because IRS focused its business audit resources on taxable
     entities such as corporations. 

  Partnership audits were not as productive as other types of
     business returns when measured by the percent of returns audited
     that resulted in audit adjustments.  This may be because the
     formula used to select partnership returns for audit was
     developed from 1982 TCMP data, while the formula used to select
     corporations for audit was developed from 1987 TCMP data. 

  IRS' primary measure of audit productivity--the amount of net taxes
     assessed per hour of audit time--could not be used for
     partnership audits because IRS did not have data on the
     additional taxes partners were assessed or refunded as a result
     of partnership audit adjustments. 

  IRS could analyze current partnership audit results for leads to
     the types of partnership returns that are more likely to be
     adjusted during audits. 

  IRS did not have an active program to detect partnerships that
     stopped filing required returns, having discontinued this
     program in 1989 to concentrate its nonfiler efforts on taxable
     business returns and employment tax returns. 

  In its 1991 individual document-matching program, IRS processed
     about 12 percent of the Schedules K-1 it received and matched
     them against partners' income tax returns.  The match resulted
     in additional tax assessments of $6.3 million.  We estimated
     that at an additional cost of $18.6 million to IRS, about $219.5
     million in additional taxes may have been assessed if IRS had
     matched all the schedules. 


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

We recommended that as IRS moves forward with its modernization
efforts, the Commissioner of Internal Revenue

  develop plans to modify audit management information systems to
     more fully reflect the results of partnership audits by
     including information on the (1) tax assessments on partners'
     income tax returns and (2) changes in allocations of profits and
     losses among partners,

  analyze computer partnership files to develop audit leads and
     select returns for audit,

  reinstitute the delinquency check program for partnerships to
     identify partnerships that do not file required tax returns,

  develop plans for a document-matching program using information
     returns to verify partnership income, and

  devise ways to enter all Schedules K-1 onto the computer so they
     can be used in the individual computer document-matching program
     and for other compliance purposes. 


      ACTION(S) TAKEN AND/ OR
      PENDING
------------------------------------------------------ Appendix I:17.2

IRS officials generally agreed with our recommendations and are
taking actions that we believe will be responsive to them. 
Specifically, IRS

  is to address the need for expanded data on partnerships and
     partners in its plans to modernize information systems,

  has begun using partnership computer files to develop leads and
     select returns for audit through its newly created District
     Office Research and Analysis sites,

  is to reinstate the partnership delinquency check program for tax
     year 1994 in calendar year 1996,

  is to test the feasibility of a document-matching program for
     certain partnerships, and

  is to attempt to more fully utilize available Schedules K-1 data. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:17.3

GAO/GGD-95-39, 12/30/94


   CALIFORNIA TAXES ON
   MULTINATIONAL CORPORATIONS AND
   RELATED FEDERAL ISSUES
-------------------------------------------------------- Appendix I:18

GAO/GGD-95-171, 07/11/95

In a report to Senator Byron L.  Dorgan, we provided information on
(1) California's experience in doing formulary apportionment audits
of multinational corporations and (2) issues that would have to be
considered before adopting a formulary system at the federal level. 

For tax purposes, states generally can use a formula to apportion the
income of corporations among the states in which they do business. 
Through much of the 1980s, California applied its formula for
apportioning income on a worldwide basis.  This required
multinational enterprises to apportion a share of their worldwide
income to California, including the income of foreign parent and
subsidiary corporations if their operations were closely integrated
or unitary with California business activity. 

Under worldwide formulary apportionment, a key issue that California
auditors had to determine was whether California corporations that
were part of a multinational enterprise were engaged in a unitary
business with affiliated U.S.  and foreign corporations.  This
determination was based on a complex analysis of the enterprise's
ownership and business operations.  Auditors then used the parent
corporation's audited financial statements, federal tax returns, and
other records to ensure that state tax was based on the income and
the apportionment factors for all corporations comprising the unitary
business. 

In the audits of FCCs that we reviewed, state auditors adjusted
income and other apportionment data to account for differences
between U.S.  and foreign accounting standards and recordkeeping. 
The auditors focused on differences that they considered to have a
material impact.  They made six adjustments in the five audits that
we studied in depth.  State auditors reviewed annual audited
financial statements of the foreign parent corporation and requested,
but did not always obtain, additional data from taxpayers that were
needed to determine the effects of different accounting standards and
recordkeeping.  As a result, auditors sometimes made determinations
on the basis of available data and used estimates and assumptions in
making adjustments. 

Although we did not discuss whether formulary apportionment should be
adopted at the federal level, we did describe matters needing
attention before the practice could be adopted.  These matters
include the design and administration of a federal unitary system. 
For example, unitary business and apportionment factors would have to
be defined and the international feasibility of formulary
apportionment, a system opposed by other countries, would have to be
considered.  We further explained that tax experts disagree on
whether the problems associated with such issues could be resolved in
a federal system. 


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

GAO/GGD-92-89, 06/15/92; GAO/T-GGD-93-16, 03/25/93; and
GAO/GGD-95-101, 04/13/95


   OTHER INCOME REPORTING
-------------------------------------------------------- Appendix I:19

GAO/GGD-95-199R, 7/19/95

In correspondence to the Commissioner of Internal Revenue, we
discussed concerns identified during our analysis of the "Other
Income" line of the Individual Income Tax Return as it related to
IRS' planned 1994 TCMP.  Specifically, we raised concerns about
adjustments to the Other Income line and the difficulty associated
with using the causal codes planned for the 1994 TCMP. 

We reported that auditors sometimes used the Other Income line
inappropriately.  In some cases, auditors made adjustments to the
Other Income line, which should have been shown on another line of
the Form 1040.  In other cases, taxpayers incorrectly entered income
amounts on tax return lines that should have been reported on the
Other Income line and IRS auditors reclassified this income, even
though TCMP instructions clearly stated that income was not supposed
to be reclassified.  As a result of these errors, TCMP showed
misleading data on compliance for the Other Income line. 

We also reported that even though IRS planned to identify causes of
noncompliance during the 1994 TCMP, the coding used to identify these
causes would be difficult to use.  We reported that the codes lacked
specificity and that IRS had not developed guidance or criteria on
how each type of causal code should be applied.  As a result, the
usefulness of causal codes may be limited. 

Although we made no recommendations, IRS staff agreed to work on
improving the areas discussed. 


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

GAO/GGD-95-39, 12/30/94 and GAO/T-GGD-95-207, 07/18/95


   ISSUES INVOLVING WORKER
   CLASSIFICATION
-------------------------------------------------------- Appendix I:20

GAO/T-GGD-95-224, 08/02/95

Businesses, to determine their tax liability (e.g., employer portion
of Social Security and unemployment taxes on employee wages) and meet
the requirements of other laws, need to classify their workers as
either "employees" or "independent contractors." But, as described in
our testimony before the Subcommittee on Taxation and Finance,
Committee on Small Business, the common-law rules for classifying
workers remain as unclear and subject to conflicting interpretations
as we found them in 1977.  Thus, businesses continue to be at risk of
large retroactive tax assessments for improperly treating workers as
independent contractors. 

Accordingly, we still believe that the classification rules need to
be clarified.  But, changes to the classification rules need to be
cognizant of the body of laws that create a safety net for American
workers.  Many laws apply only to employees but do not protect
workers classified as independent contractors.  Because a by-product
of classification rule clarification is the potential for changing
the number of workers treated as independent contractors, we believe
the current deliberations should also focus on potential impacts on
the social safety net established for American workers. 

We also believe that there are two approaches that could help improve
independent contractor compliance--(1) require businesses to withhold
taxes from payments to independent contractors and (2) improve
business compliance with the requirements to file information returns
on payments to independent contractors.  IRS data suggest that
although independent contractors have represented only a small
proportion of taxpayers, they have accounted for as much as $21
billion to $30 billion of income taxes owed the federal government by
individuals but not paid for tax year 1992. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:20.1

GAO/GGD-77-88, 11/21/77; GAO/GGD-89-107, 09/25/89; GAO/GGD-92-108,
07/23/92; GAO/GGD-94-123, 05/11/94; GAO/T-GGD-94-194, 08/04/94; and
GAO/GGD-95-59, 12/28/94


   RECURRING ISSUES IN TAX
   DISPUTES OVER BUSINESS EXPENSE
   DEDUCTIONS
-------------------------------------------------------- Appendix I:21

GAO/GGD-95-232, 09/26/95

In a report to the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, we identified the issues that caused the
most frequent disputes between IRS and taxpayers in connection with
section 162 of the tax code.  Section 162 allows taxpayers to deduct
from income "ordinary and necessary" expenses related to trade or
business.  We had previously reported that section 162 was the tax
code section most commonly cited in large tax cases at IRS' Office of
Appeals.\2

To do the work, we reviewed 185 tax court petitions filed in 1993,
mostly by sole proprietors and small- and medium-sized corporations
as well as partnerships, individual shareholders, and individuals
claiming employee business expenses.  We also reviewed 117 Office of
Appeals cases filed by large corporations included in IRS'
Coordinated Examination Program. 

In the 185 tax court petitions, we found that sole proprietors,
small- and medium-sized corporations, and individuals claiming
employee business expenses disagreed with IRS most frequently over
the adequacy of documentation for a given expense deduction.  About
47 percent of all the issues in the petitions we reviewed involved
questions of proper documentation.  These disputes were especially
frequent in cases where the documentation requirements were the most
rigorous--entertainment, travel, meals, and automobile expenses. 
While documentation was the issue sole proprietors disputed most
frequently, small- and medium-sized corporations contested IRS'
decisions on the reasonableness of executive salaries as frequently
as they did documentation. 

Overall, the frequency of disputes over unreasonable executive
compensation was far less than disputes involving documentation of
business expenses--14 percent versus 47 percent.  However, executive
compensation accounted for about 50 percent of the total proposed tax
adjustments--$24.5 million of $48.8 million--in the petitions we
reviewed.  Adequacy of documentation was the second largest category,
at $9.3 million. 

In the 117 Office of Appeals cases, we reported that large corporate
taxpayers disagreed with IRS most frequently over the issue of
capital expenditures, which accounted for about 42 percent of the
issues they contested.  It was also the issue with the most dollars
at stake in the 117 cases, accounting for $1.1 billion of the total
$1.9 billion in proposed tax adjustments.  In these cases, the
corporations argued for immediate deduction of large expenses related
to events such as corporate mergers, reorganizations, or
environmental cleanups.  IRS contended that such expenditures had
future benefits and should therefore be treated as capital
expenditures, not immediately deductible in the current year. 

All of the other issues the large corporations disputed were
contested far less frequently than the issue of capital expenditures. 
For example, documentation questions accounted for only 8 percent of
the issues contested, while unreasonable executive compensation
accounted for 3 percent. 


--------------------
\2 Tax Administration:  Recurring Tax Issues Tracked by IRS' Office
of Appeals (GAO/GGD-93-101, May 4, 1993). 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:21.1

GAO/T-GGD-92-23, 03/17/92 and GAO/GGD-93-101, 05/04/93


   ASSIST TAXPAYERS
-------------------------------------------------------- Appendix I:22


   IRS CAN STRENGTHEN ITS EFFORTS
   TO SEE THAT TAXPAYERS ARE
   TREATED PROPERLY
-------------------------------------------------------- Appendix I:23

GAO/GGD-95-14, 10/26/94

At the request of the Chairman and Ranking Minority Member,
Subcommittee on Treasury, Postal Service and General Government,
House Committee on Appropriations, we reported on how IRS can
strengthen its controls in several specific areas and provide
taxpayers with additional information that will protect taxpayers
from abuse. 

IRS has a wide range of controls, processes, and oversight offices
designed to govern how its employees interact with taxpayers.  While
this system of controls has many elements designed to protect
taxpayers from abuse, it lacks the key element of timely and accurate
information about when, where, how often, and under what
circumstances taxpayer abuse occurs.  This information would greatly
enhance IRS' ability to pull together its various efforts to deal
with abuse into a more effective system for minimizing it.  The
information would also be valuable to Congress in assessing IRS'
progress in treating taxpayers as customers--an often cited IRS
goal--and to taxpayers to increase their ability to protect their
rights. 

We also discussed the need for legislation to provide IRS with
authorization to disclose information to all responsible officers
involved in IRS efforts to collect a trust fund recovery penalty.  A
trust fund recovery penalty is assessed against the responsible
officers and employees of businesses when they fail to collect or pay
withheld income, employment, or excise taxes.  Relatively large trust
fund recovery penalties have caused financial hardships for the
individuals involved, particularly for those who were unaware of the
legal and financial ramifications of the penalty. 


      RECOMMENDATION(S) TO
      CONGRESS
------------------------------------------------------ Appendix I:23.1

To better enable taxpayers and IRS to resolve trust fund liabilities,
we recommended that Congress amend the Internal Revenue Code to allow
IRS to provide information to all responsible officers regarding its
efforts to collect the trust fund recovery penalty from other
responsible officers. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:23.2

To improve IRS' ability to manage its interactions with taxpayers, we
recommended that the Commissioner of Internal Revenue establish a
service-wide definition of taxpayer abuse or mistreatment and
identify and gather the management information needed to
systematically track its nature and extent. 

To strengthen controls for preventing taxpayer abuse within certain
areas of IRS operations, we recommended that the Commissioner of
Internal Revenue

  ensure that IRS' systems modernization effort provides the
     capability to minimize unauthorized employee access to taxpayer
     information in the computer system that eventually replaces the
     Integrated Data Retrieval System;

  revise the guidelines for Information Gathering Projects to require
     that specific criteria be established for selecting taxpayers'
     returns to be examined during each project and to require a
     separation of duties between staff who identify returns with
     potential for tax changes and staff who select the returns to be
     examined;

  reconcile outstanding cash receipts more often than once a year,
     and stress in forms, notices, and publications that taxpayers
     should use checks or money orders whenever possible to pay their
     tax bills, rather than cash;

  better inform taxpayers about their responsibility and potential
     liability for the trust fund recovery penalty by providing
     taxpayers with special information packets;

  seek ways to alleviate taxpayers' frustration in the short term by
     analyzing the most prevalent kinds of information-handling
     problems and ensuring that requirements now being developed for
     new information systems provide for long-term solutions to those
     problems; and

  provide specific guidance for IRS employees on how they should
     handle White House contacts other than those that involve
     checking taxes of potential appointees or routine administrative
     matters. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:23.3

IRS supported our recommendation to Congress.  Legislation has been
introduced in the 104th Congress (H.R.  661 and S.  258) that, if
enacted, would require IRS to disclose to a responsible person who
requested in writing, the results of its efforts to collect the trust
fund recovery penalty from other responsible persons. 

IRS disagreed with our recommendation that it establish a definition
of taxpayer abuse and identify and gather the information needed to
systematically track the nature and extent of such incidents.  IRS
said that the problem of taxpayer abuse, to the extent that it
exists, is best defined, monitored, and corrected within the context
of its definitions and current management information systems. 
Consequently, IRS planned no action on our recommendation. 

IRS identified several safeguards that are to be incorporated into
systems being developed as part of its systems-modernization effort
as well as some recent safeguards that have been incorporated into
its existing computer systems.  These safeguards include issuing
transcripts for account adjustments considered "high risk/high
dollar," development of supplemental audit trails, and the generation
of locally developed diagnostic transcripts.  The Commissioner
suggested imposing criminal sanctions on IRS employees who violate
privacy policies and Senator
John Glenn introduced a bill (S.  670) that would impose up to a
$1,000 fine and up to 1 year in jail for unauthorized employee access
to taxpayers' accounts. 

In February 1995, IRS issued an updated memorandum to the field,
stressing the sensitive nature of information-gathering projects and
the need for management to closely monitor how these projects are
carried out. 

IRS plans to amend the Collection Group Managers Handbook to include
random unannounced cash reconciliations throughout the year.  IRS
also has added a statement to Publication 594, "Understanding the
Collection Process," encouraging taxpayers to pay by check or money
order. 

IRS is to include Notice 784, "Could you be personally liable for
certain unpaid Federal taxes?," with the first balance due notice for
business taxes.  IRS currently sends taxpayer education material,
including trust fund recovery penalty information, when taxpayers who
file an application for an employer identification number indicate
they will be liable for trust fund taxes. 

IRS stated that through its Quality Review Program and the Problem
Resolution Program, it is alleviating information-handling problems
that frustrated taxpayers. 

Finally, IRS said that its current procedures regarding third-party
contacts who provide information that could lead to an audit or
investigation are adequate to cover any contacts from the White
House.  Those procedures essentially call for IRS field office
personnel to evaluate the information provided and decide if an audit
or investigation is warranted. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:23.4

GAO/T-GGD-91-58, 07/24/91; GAO/GGD-91-112FS, 07/24/91;
GAO/T-GGD-92-09, 12/10/91; GAO/GGD-92-23, 12/10/91; GAO/GGD-92-16,
12/31/91; GAO/T-GGD-92-62, 07/22/92; GAO/GGD-92-117, 08/17/92;
GAO/IMTEC-92-63, 09/21/92; GAO/T-GGD-92-65, 09/24/92; GAO/GGD-93-67,
05/11/93; and GAO/AIMD-93-34, 09/22/93


   IRS NOTICES CAN BE IMPROVED
-------------------------------------------------------- Appendix I:24

GAO/GGD-95-06, 12/07/94

Each year, IRS sends millions of notices to taxpayers on the status
of their tax accounts.  In 1993, IRS sent more than 60 million such
notices affecting about $190 billion of taxpayer transactions.  As
requested by the Subcommittee on Oversight, House Committee on Way
and Means, we reviewed 47 commonly used notices for clarity, and we
examined IRS' processes for ensuring that the notices it issues
convey essential information to taxpayers as clearly as possible. 

We identified clarity concerns with 31 of the notices.  In reviewing
these notices for clarity, understandability, and usefulness, we
considered if more specific language, clearer references, and
consistent use of terminology would enhance these documents.  We
assessed whether the material was logically presented, whether
sufficient information was provided so taxpayers could evaluate their
situations, and whether the taxpayer could resolve the matter without
additional guidance.  Further, we considered the notice's format, the
suitability of the notice's title, the directions or guidance
provided in enclosures or remittance forms, and whether IRS provided
the taxpayers with all pertinent information in a single notice or
whether additional notices were needed.  It appears that taxpayers
with multiple or interrelated tax problems would be better served by
receiving a single, comprehensive notice summarizing the status of
their accounts, rather than the stream of multiple notices that IRS
now sends them. 

Despite IRS' process and commitment of resources to improve notice
clarity, in some cases, taxpayers continue to receive notices that
IRS' Notice Clarity Unit said were problematic.  Many of the notice
revisions recommended by that unit were delayed or never made because
of IRS' limited computer-programming resources and higher priority
programming demands, such as those implementing tax law changes and
essential preparation for processing tax returns during the next tax
season.  Consequently, even revisions with strong organizational
support may be significantly delayed. 

We found that improvements could be gained from the transfer of
notices to Correspondex, a more modern computer system that produces
other IRS correspondence.  IRS is testing a group of collection
notices on this system. 


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

We recommended that the Commissioner of Internal Revenue test the
feasibility of using its Correspondex computer system to produce
Individual Master File (IMF) and Business Master File (BMF) notices
and, if possible, transfer as many IMF and BMF notices as practical
to the Correspondex system.  To help the transition to Correspondex,
we recommended that notices be transferred in stages and that a
mechanism be established or an existing body, such as the National
Automation Advisory Group, establish the order in which notices would
be transferred.  The ease of the transition, the costs of the
transfer, and the benefits of making these transfers should all be
considered in establishing the order. 

We also recommended that the Commissioner establish a system to
monitor proposed notice text revisions to oversee progress or
problems encountered in improving notice clarity.  Employing this
system should enable IRS to identify when a revision was proposed and
the revision status at all times until it is implemented.  The
Commissioner should include in the monitoring system a threshold
beyond which delays must be appropriately followed up and resolved. 


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

IRS was considering the use of a computerized bulletin board to track
proposed notice revisions but tabled that approach because of budget
constraints.  As of December 31, 1995, IRS officials were exploring
other alternatives. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:24.3

GAO/GGD-93-72, 04/30/93; GAO/GGD-95-34, 12/07/94; and
GAO/T-GGD-95-42, 12/09/94


   IRS EFFORTS TO IMPROVE FORMS
   AND PUBLICATIONS
-------------------------------------------------------- Appendix I:25

GAO/GGD-95-34, 12/07/94

At the request of the Subcommittee on Oversight, House Committee on
Ways and Means, we examined IRS' efforts to improve its forms and
publications to ensure accuracy and clarity.  Providing taxpayers
with easy-to-read tax forms and publications is one way of promoting
voluntary compliance; however, it is a difficult task.  IRS must
strike a balance between the need for tax documents that accurately
reflect a highly complex tax code and the need to make these
documents understandable and easy to read.  Finding this balance is
an ongoing process, as the tax code is frequently
revised--necessitating corresponding changes in forms and
publications.  Other factors, such as the wide range of taxpayers'
reading abilities, further complicate IRS' task.  IRS' process for
developing and revising its forms and publications appears reasonable
in that it provides for clear lines of responsibility and
accountability, specific time frames, adequate management oversight,
sufficient opportunities to evaluate suggestions from internal and
external sources, and appropriate strategies for coping with sudden
tax law changes. 

Despite IRS' process for developing forms and publications and its
stated commitment to improvement, IRS recognizes that it has no
systematic way to determine what individual taxpayers specifically
find confusing about forms and publications.  IRS has established a
dialogue with professional organizations to obtain their concerns but
not with individual taxpayers.  IRS may already have data that could
help it identify areas that are difficult for individual taxpayers. 
These potential sources of data include information from its
toll-free telephone assistance program and field personnel, such as
auditors and customer-service representatives, who have contact with
individual taxpayers. 


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

We recommended that the Commissioner direct agency staff to make
additional efforts to identify the specific concerns of individual
taxpayers.  Identifying these concerns may be accomplished in a
variety of ways, including (1) soliciting information from IRS field
personnel (e.g., auditors, examiners, and customer-service
representatives) for the purpose of identifying common errors made by
taxpayers, which may be related to confusing passages in forms and
publications and (2) gathering information concerning the nature of
taxpayer questions received through its toll-free telephone system. 


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

During 1995, IRS personnel attended town meetings in several cities
and provided the Tax Forms and Publications Division information on
taxpayers' problems with forms and publications.  Division
representatives planned to meet with IRS assistors who answer
taxpayers' calls for assistance to obtain suggestions for improving
the forms and publications, on the basis of the assistors' experience
in dealings with taxpayers. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:25.3

GAO/GGD-93-72, 04/30/93; GAO/GGD-95-06, 12/07/94; and
GAO/T-GGD-95-42, 12/09/94


   INFORMATION ON TAX LIENS
   IMPOSED BY IRS
-------------------------------------------------------- Appendix I:26

GAO/GGD-95-87R, 03/03/95

At the request of Senator Jesse Helms, we researched several issues
raised by a constituent.  We provided in some detail information
about tax liens imposed by IRS and how such liens might be removed. 

A general tax lien arises when a tax assessment has been made and the
taxpayer has been given notice and demand for payment but has failed
to pay.  A notice of tax lien provides public notice that a taxpayer
owes the government money.  Once a lien is imposed, however, it
cannot be removed except under one of the circumstances discussed
below. 

As a result of the Taxpayer Bill of Rights, for example, any person
whose property is encumbered by a tax lien is permitted to
administratively appeal the filing of the lien on the ground that it
was filed erroneously.  Using this procedure, the taxpayer can apply
for a special certificate of release of lien that indicates that the
filing of the lien was a mistake.  This certificate is intended to
ensure that the public record shows that the filing of the notice of
lien was not the result of the taxpayer's actions and to help repair
the taxpayer's credit record.  In addition, there are four other
possible avenues of relief from a tax lien.  They are (1) a
certificate of nonattachment, (2) a certificate of release of lien,
(3) a certificate of discharge, and (4) a certificate of
subordination. 

IRS believes, and we agree, that the Internal Revenue Code seems to
prohibit IRS from withdrawing the notice of lien in instances where
the notice of lien is on the public record, which might deprive the
taxpayer of an opportunity to obtain the funds needed to pay taxes. 
Therefore, we suggested in a report\3 that Congress amend the code to
provide IRS with specific authority to withdraw a notice of lien in
situations where such action would be advantageous to IRS and the
taxpayer. 

In 1992, Congress twice approved taxpayer rights measures that
included provisions that would have given IRS increased flexibility
in providing relief from lien filings, including withdrawing notices
of lien in situations where withdrawal of the notice would be in the
best interest of the taxpayer and the government.  However, for
reasons having nothing to do with the lien provisions, both measures
were vetoed by then President Bush. 

More recently, on January 23, 1995, proposed legislation was again
introduced in Congress--S.  258 in the Senate and H.R.  661 in the
House of Representatives--that includes a lien provision similar to
the provisions in the 1992 legislation discussed above.  As of
December 31, 1995, no action had been taken on those proposals. 


--------------------
\3 IRS' Implementation of the 1988 Taxpayer Bill of Rights
(GAO/GGD-92-23, Dec.  10, 1991). 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:26.1

GAO/GGD-92-23, 12/10/91


   ADOPTING PRACTICES USED BY
   OTHERS WOULD HELP IRS SERVE
   MORE TAXPAYERS
-------------------------------------------------------- Appendix I:27

GAO/GGD-95-86, 04/12/95

Many taxpayers who seek help through IRS' telephone assistance
program are not getting it.  Even with increased productivity, IRS
has not kept pace with the significant growth in the number of calls
received over fiscal years 1989 to 1994.  IRS' assistors answered
about the same number of calls each year (about 36 million) even
though the staff available to answer calls declined.  IRS answered
about one out of two calls in fiscal year 1989 but only one out of
four calls in fiscal year 1994. 

In a report to the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, we examined IRS' telephone assistance
program to (1) determine the extent and nature of the accessibility
problem, (2) compare IRS' practices with those of other organizations
that provide telephone assistance to identify ways IRS might improve
access with existing staff resources, and (3) identify the reasons
IRS has been unable to answer more calls. 

IRS has improved its telephone assistance program, particularly its
capability to route calls among call sites and provide assistors with
taxpayers' account information.  However, IRS' telephone management
practices, including the ability to apply modern information
technology, have not kept up with those commonly used to enhance call
answering by the Social Security Administration (SSA) and four
private sector companies we contacted. 

It is unlikely that IRS could answer all taxpayers' calls with
current staff and technology resources.  However, we believe that IRS
could apply additional management practices used by other
organizations to answer more calls with existing resources. 

IRS does not use several of the practices commonly used by the other
organizations we contacted, and some of those IRS uses are not as
rigorous or advanced as the practices these organizations employed. 
For example, in fiscal year 1995, for the first time, IRS provided
all taxpayers access to telephone assistors for a total of 10 hours a
day.  In contrast, SSA offered access to assistors 12 hours a day,
and all of the companies we contacted routinely provided access to a
customer-service representative 24 hours a day. 

IRS has fallen behind the other telephone assistance programs in some
areas primarily because IRS' senior management has not aggressively
and consistently pursued the implementation of commonly used
practices.  In part, these attempts failed because IRS did not have a
strategy for working with the National Treasury Employees Union
(NTEU), which represents most IRS telephone assistance employees, to
implement systemwide operating practices and standards.  IRS and NTEU
have recently reached an agreement to work together to implement IRS'
future Customer Service Vision.  We believe that IRS could use this
framework now to put in place telephone assistance program practices
used by others to optimize the number of taxpayers' calls it can
answer. 

IRS has a model for the type of aggressive management attention we
believe is necessary.  IRS created the model in its successful effort
to improve the accuracy of the answers it provides to taxpayers' tax
law questions.  IRS could use this model as the basis for identifying
and applying appropriate telephone management practices to increase
the number of taxpayers' calls IRS answers. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:27.1

We recommended that the Commissioner of Internal Revenue direct the
Chief of Taxpayer Services, in coordination with other appropriate
IRS officials, to lead an aggressive effort to (1) identify and
define the appropriate telephone assistance program operating
practices for IRS that would allow it to optimize the number of calls
it can answer within current budget constraints and (2) work with the
leadership of NTEU to reach agreement on implementing those practices
on a nationwide basis.  Those practices should include, although not
be limited to,

  challenging program goals for increasing the number of calls
     answered that are based, at least in part, on taxpayers' needs;

  standards for the amount of time assistors should be available to
     answer taxpayers' calls;

  hours of operation that offer taxpayers greater opportunity to
     reach IRS assistors; and

  uniform reporting definitions for the number of calls answered and
     other performance measures. 

We also recommended that the Commissioner of Internal Revenue direct
the Chief of Taxpayer Services to quickly take the steps necessary to
effectively route taxpayers' calls nationwide using real-time
information.  These steps may include a combination of (1) acquiring
technology for real-time traffic monitoring and management, (2)
utilizing the routing capability of IRS' telecommunications vendor,
and (3) fully implementing the features of IRS' existing call routing
technology. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:27.2

IRS agreed that more progress can be made in implementing industry
best practices.  IRS plans to provide, before the 1996 filing season,
servicewide standards pertaining to the amount of time assistors
should be available to answer taxpayers' calls.  IRS is also pilot
testing three interactive telephone applications at one call site
that require no IRS employee involvement and will therefore free
telephone assistors to answer other inquiries.  IRS plans to offer
Saturday service on six peak Saturdays and on President's Day during
the 1996 filing season.  This is an increase from three Saturdays in
1995.  In addition, IRS plans to continue offering service 10 hours
daily to callers.  IRS reported that during the 1995 filing season,
it took a more aggressive approach to routing traffic to equalize
access that resulted in over 500 traffic shifts.  Additionally, it
sought assistance from its telecommunications vendor to delineate the
full range of call routing technologies that it plans to implement
for the 1996 filing season. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:27.3

GAO/GGD-91-83, 06/12/91; GAO/GGD-91-98, 06/28/91; GAO/T-GGD-92-33,
04/28/92; GAO/GGD-92-132, 09/15/92; GAO/GGD-92-139FS, 09/22/92;
GAO/GGD-94-65, 12/22/93; GAO/GGD-94-131, 08/29/94; GAO/GGD-95-5,
10/07/94; and GAO/T-GGD-95-97 02/27/95


   ENHANCE EFFECTIVENESS OF TAX
   INCENTIVES
-------------------------------------------------------- Appendix I:28


   TAX-EXEMPT ORGANIZATIONS
-------------------------------------------------------- Appendix I:29

GAO/GGD-95-84BR, 02/28/95; GAO/T-GGD-95-183, 06/13/95; and
GAO/T-GGD-95-198, 06/29/95

Internal Revenue Code section 501(c) establishes 25 categories of
tax-exempt organizations that enjoy many benefits that for-profit
companies do not.  In particular, tax-exempt organizations are
required to pay federal income taxes only on unrelated business
income.  They are also exempt from many state and local taxes.  In
addition, contributions to tax-exempt charities are deductible from
donors' federal income taxes.  IRS is responsible for monitoring the
activities of tax-exempt organizations through examinations of their
annual returns.  IRS' interest is in determining whether the
organizations are operating in accordance with the basis for their
exemptions and whether they are liable for income taxes from
unrelated trades or various excise taxes.  We received three
requests\4 to provide information for congressional deliberations on
the growth of these organizations, their activities, and IRS
oversight. 

We found that, overall, tax-exempt organizations have grown in number
and size since the mid-1970s, from 806,375 to over 1 million in 1990
(about 27 percent).  Between 1975 and 1990, their assets have grown
in real terms over 150 percent to more than $1 trillion, and their
revenues have grown over 225 percent to about $560 billion. 
Charities represented about 48 percent of the total tax-exempt
organizations; social welfare organizations, about 14 percent; labor
and agricultural organizations, about 7 percent; and business
leagues, about 6 percent.  The other 25 percent were scattered among
the remaining 21 categories.  We also discussed complex tax code
provisions, which can cause compliance and administrative
difficulties resulting in numerous IRS rulings and court cases and
sometimes the revocation of an organization's tax-exempt status. 


--------------------
\4 Senators Byron L.  Dorgan and Harry Reid; Chairman, Subcommittee
on National Economic Growth, National Resources, and Regulatory
Affairs, House Committee on Governmental Reform and Oversight; and
Chairman, Subcommittee on Social Security and Family Policy, Senate
Committee on Finance. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:29.1

GAO/GGD-85-64, 07/08/85 and GAO/GGD-87-40BR, 02/27/87


   EARNED INCOME CREDIT: 
   TARGETING TO THE WORKING POOR
-------------------------------------------------------- Appendix I:30

GAO/GGD-95-27, 10/25/94; GAO/GGD-95-122BR, 03/31/95;
GAO/T-GGD-95-136, 04/04/95; and GAO/T-GGD-95-179, 06/08/95

The Earned Income Credit (EIC) is a major federal effort to assist
the working poor.  Congress established the EIC in 1975 to (1) offset
the impact of Social Security taxes on low-income workers and (2)
encourage low-income individuals to seek employment rather than
welfare.  IRS reported that, as of May 26, 1995, about 17.3 million
returns claimed nearly $20 billion in EIC for tax year 1994. 
However, there have long been concerns in Congress and IRS about
noncompliance with EIC requirements and whether those eligible for
the EIC are receiving it. 

At the request of Senator William V.  Roth, Jr., we presented
information about EIC noncompliance and IRS' steps to control it.  We
also reviewed the impact on the amount of EIC paid and administrative
issues that might result from potential changes to the EIC
eligibility criteria that would reflect taxpayer wealth and
additional sources of income.  Further, we provided information about
illegal aliens receiving the EIC. 

We reported that a reliable overall measurement of noncompliance with
EIC provisions has not been made since 1988.  IRS did a 2-week study
in January 1994 and found that 39 percent of persons who filed
returns electronically claimed an EIC that they were not entitled to
receive, and 26 percent of the refund amounts sought were overclaims. 
Noncompliance on EIC paper returns is also a concern.  IRS took
several steps during the 1995 filing season to combat fraudulent or
erroneous returns, especially EIC returns.  IRS also undertook a
study to determine the overall level of EIC compliance--on paper and
electronically filed returns throughout the 1995 filing season. 

We reported that EIC eligibility criteria had not considered all of
the resources recipients may have to support themselves and their
families.  We provided analyses related to using both an EIC wealth
test and an expanded definition of taxpayers' adjusted gross incomes
when making EIC awards.  The Joint Committee on Taxation estimated
that denying the EIC to taxpayers who have some wealth, as indirectly
measured by their asset-derived income, could yield $318 to $971
million in revenue savings in fiscal year 1997, depending on the
wealth test design.  These revenue savings represent potential
reductions in EIC program costs resulting from changing EIC
eligibility criteria.  We cautioned that these changes would make the
EIC more complex and add to the burden on taxpayers and IRS. 

We also reported that no one knows how many illegal aliens receive
the EIC.  If the EIC criteria were revised to require that all EIC
recipients have valid SSNs for work purposes, which illegal aliens
are not eligible to receive, then illegal aliens would no longer
qualify for the EIC. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:30.1

The Self-Employed Health Insurance Act of 1995 included a proxy
measure of taxpayers' wealth to be used in determining EIC awards. 
Effective in 1996, EIC claimants who have income that exceeds $2,350
from certain types of assets will be ineligible for the EIC. 
Congressional proposals are being considered that would add certain
income items to taxpayers' adjusted gross income when determining
their EIC awards. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:30.2

GAO/GGD-93-145, 09/24/93 and GAO/GGD-94-99, 05/02/94


   INFORMATION ON THE RESEARCH TAX
   CREDIT
-------------------------------------------------------- Appendix I:31

GAO/T-GGD-95-140, 04/03/95 and GAO/T-GGD-95-161, 05/10/95

In testimony before the Subcommittee on Taxation and Internal Revenue
Service Oversight of the Senate Committee on Finance and in testimony
before the Subcommittee on Oversight of the House Committee on Ways
and Means, we provided information on the research tax credit. 
Congress created the research tax credit in 1981 to encourage the
business community to do more research.  The credit applies to
qualified research spending that exceeds a base amount.  The credit's
availability expired in June 1995. 

In tax year 1992, corporations earned more than $1.5 billion worth of
research credits, most of which was earned by large corporations in
the manufacturing sector, particularly those producing chemicals
(including drugs), electronic machinery, motor vehicles, and
nonelectronic machinery.  The research credit has been difficult for
IRS to administer, primarily because the definition of spending that
qualifies for the credit was unclear.  In 1994, the Department of the
Treasury issued final regulations that may resolve this uncertainty. 

We noted in our testimony that the credit's net benefit to society
would ideally be evaluated in terms of the ultimate benefits derived
from the additional research that it stimulates and not just on the
basis of how much research spending it stimulates for a given revenue
cost.  However, no one has been able to estimate the credit's net
benefit to society.  Given the absence of empirical data, we have not
taken a position on whether the credit should be made a permanent
part of the tax code. 

Congress made revisions to the credit in 1989 that should have
increased the amount of spending stimulated per dollar of revenue
cost.  But, over time, the fixed base of the revised credit has the
potential to become too generous for some taxpayers, resulting in
undue revenue losses and too restrictive for others, resulting in
less overall research stimulated by the credit.  We presented
evidence from corporate tax returns indicating that the accuracy of
the credit's base has eroded significantly since 1989. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
------------------------------------------------------ Appendix I:31.1

Given that the base of the credit may become too generous or too
restrictive over time, we suggested that Congress may want to provide
for reviewing this base periodically and adjusting it as needed. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:31.2

In the Budget Reconciliation Bill (H.R.  2491), Congress proposed to
extend the credit for the period July 1, 1995, through December 31,
1997.  This bill also provided taxpayers the option to elect an
alternative calculation of the credit that provides lower base
amounts and lower rates of credit.  This alternative calculation may
have eased the restrictiveness of the credit for some taxpayers. 
However, the President vetoed this legislation. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:31.3

GAO/GGD-89-114, 09/05/89 and GAO/GGD-94-139, 05/13/94


   RECOVERING HUNDREDS OF MILLIONS
   IN WELFARE BENEFITS
   OVERPAYMENTS
-------------------------------------------------------- Appendix I:32

GAO/HEHS-95-111, 06/20/95

In 1992, people who were not entitled to welfare benefits, or not
entitled to the level of benefits provided, received an estimated
$4.7 billion in benefit payments by three of the nation's largest
welfare programs--Aid to Families With Dependent Children (AFDC),
Food Stamps, and Medicaid.  These overpayments represent about 4
percent of the total benefits paid in these programs.  Nationwide
state recovery of the overpayments, about $333 million, was
relatively low.  We were asked by the Ranking Minority Member,
Subcommittee on Oversight of Government Management, Senate Committee
on Governmental Affairs, to determine what the states were doing to
recover benefit overpayments and what the federal government could do
to help states recover more overpayments. 

We found that states with the highest recovery rates were
establishing claims for a greater portion of their overpayments and
used certain practices, and more of them, than did states with lower
recovery rates.  These practices included more timely efforts to
verify potential overpayments and establishing claims for
overpayments on more difficult cases. 

We also reported that, while temporarily reducing benefits to recover
overpayments is an effective collection method in the AFDC program,
by law, it cannot be used in the Food Stamp Program to collect
overpayments caused by agency error unless the client consents.  In
1985, a legislative proposal to require recoupment of Food Stamp
benefits, without client consent, for agency error overpayments was
introduced but not enacted.  Subsequently, in 1993, the U.S. 
Department of Agriculture proposed legislation that recommended
recoupment of agency error claims, but the Congress did not act on
the recommendation. 

In addition, we reported that extending the use of federal income tax
refund intercept--an effective overpayment collection tool in the
Food Stamp Program--to AFDC and Medicaid could potentially increase
recoveries.  Legislation to extend federal income tax refund
intercept to the AFDC program had been introduced in 1994 but did not
pass.  The legislation, part of a welfare reform proposal introduced
in the 103rd Congress, would have authorized an intercept program for
AFDC overpayments.  Commenting on this proposal, officials from
Treasury's Financial Management Service cited the need to revise the
proposal's language so that the Health and Human Services'
Administration for Children and Families would be the focal point for
working with the IRS.  This would lessen the administrative burden on
IRS because it could deal with one entity rather than the 50 states
and the District of Columbia.  This approach would more closely
resemble the Food Stamp intercept program, which uses Agriculture's
Food and Consumer Service as its focal point. 


      MATTER(S) FOR CONGRESSIONAL
      CONSIDERATION
------------------------------------------------------ Appendix I:32.1

We suggested that Congress consider amending federal legislation to
(1) authorize states to offset current recipients' benefits without
client consent to recover Food Stamp overpayments caused by agency
error and (2) extend the authority for states to intercept federal
income tax refunds to include the recovery of AFDC and Medicaid
overpayments. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:32.2

IRS comments were not received in time to be incorporated into our
report.  Legislative provisions in the Personal Responsibility and
Work Opportunity Act of 1995 (H.R.  4), approved by both houses of
the 104th Congress, address both of our matters for congressional
consideration.  As of December 31, 1995, this bill had not been
signed. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:32.3

GAO/RCED-86-17, 03/14/86


   IMPROVE IRS MANAGEMENT
-------------------------------------------------------- Appendix I:33


   INTERNAL REVENUE SERVICE
   RECEIVABLES
-------------------------------------------------------- Appendix I:34

GAO/HR-95-6, 02/95

We identified IRS' management of accounts receivable as an area of
high risk vulnerable to waste, fraud, abuse, and mismanagement.  This
report was 1 of a series of 18 reports identifying weaknesses in
agencies' internal controls or financial management systems.  The
1995 series of high-risk reports was an update to the original series
issued in December 1992. 

IRS' management of accounts receivable also has been recognized by
the Office of Management and Budget (OMB) and IRS management as a
high-risk area.  IRS' poor performance in resolving tens of billions
of dollars in outstanding tax delinquencies has not only lessened the
revenues immediately available to support government operations but
could also jeopardize future taxpayer compliance by leaving the
impression that IRS is neither fair nor serious about collecting
overdue taxes. 

We reported that despite many IRS initiatives to "fix" the accounts
receivable problem, negligible progress has been made.  For example,
IRS has not yet developed an accounting system that identifies valid
and collectible receivables and those that are not, thereby
complicating the job of collection personnel trying to resolve
individual accounts.  Also, from 1990 through 1994, the gross
inventory of tax debt, which includes accounts receivable, grew about
80 percent--from $87 billion to $156 billion.  During the same
period, annual collections of delinquent taxes declined from $25.5
billion to $23.5 billion--a decline of about 8 percent. 

We noted that these disappointing results are indicative of the (1)
pervasiveness of problems throughout IRS' processes that cumulate in
the inventory and (2) difficulty in coming to grips with the
interrelationship of several underlying causes.  These include the
lack of accurate and reliable management information for determining
the validity and makeup of the inventory of tax debt and evaluating
the effectiveness of individual collection activities; IRS' lengthy,
antiquated, rigid, and inefficient collection process; difficulty in
balancing collection efforts with the need to protect taxpayer
rights; and a decentralized organization that blurs responsibility
and accountability. 

In our view, IRS' primary task is twofold:  collect more delinquent
taxes and stem the growth in outstanding debts.  The first part of
the task requires greater efficiency and productivity in the
collection process.  The second requires changes in other IRS
components to prevent delinquencies and minimize cluttering up the
collection process with invalid and uncollectible accounts. 

The lack of accurate and reliable information continues to be IRS'
foremost problem and hinders most of its efforts to effectively deal
with tax debts.  Priority must be given to this area because so many
of IRS' modernization efforts rely heavily on accurate and reliable
information.  IRS also needs to clearly demonstrate the institutional
focus necessary to effectively deal with the underlying causes of the
problem--causes that cut across the agency and across lines of
managerial authority and responsibility.  Equally important is that
the strategy address ways to best reengineer IRS' outmoded tax
collection processes, which were designed decades ago and have not
kept pace with advances in technology or communications. 


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

GAO/AFMD-93-42, 05/06/93; GAO/GGD-93-67, 05/11/93; GAO/HR-95-1,
01/95; GAO/HR-95-2, 01/95; GAO/AIMD/GGD-95-220R, 08/03/95; and
GAO/AIMD-95-141, 08/04/95


   TAX SYSTEMS MODERNIZATION: 
   MANAGEMENT AND TECHNICAL
   WEAKNESSES MUST BE CORRECTED IF
   MODERNIZATION IS TO SUCCEED
-------------------------------------------------------- Appendix I:35

GAO/T-AIMD-95-86, 02/16/95 and GAO/AIMD-95-156, 07/26/95

Since 1986, IRS has invested $2.5 billion in Tax Systems
Modernization (TSM).  In addition, it requested another $1.1 billion
for fiscal year 1996 for this effort and, through 2001, expected to
spend over $8 billion on TSM.  TSM is the centerpiece of IRS' vision
of virtually paperless tax processing to optimize operations and
serve taxpayers better.  This report and testimony critique the
effectiveness of IRS' efforts to modernize tax processing.  We
discuss IRS' progress to implement its modernization and describe
serious remaining management and technical weaknesses that must be
corrected if tax systems modernization is to succeed. 

We found that IRS recognizes the criticality to future efficient and
effective operations of attaining its vision of modernized tax
processing and has worked for almost a decade, with substantial
investment, to reach this goal.  However, its efforts to modernize
tax processing are at serious risk because of remaining pervasive
management and technical weaknesses that impede modernization
efforts.  Specifically, we found the following: 

  IRS does not have a comprehensive business strategy to
     cost-effectively reduce paper submissions.  IRS' business
     strategy primarily targets taxpayers who use a third party to
     prepare and/or transmit simple returns, are willing to pay a fee
     to file their returns electronically, and are expecting refunds. 
     Focusing on this limited taxpaying population overlooks most
     taxpayers, including those who prepare their own tax returns
     using personal computers. 

  Strategic information management practices are not fully in place
     to guide systems modernization. 

  Software development capability is immature and weak.  Using the
     Capability Maturity Model (CMM) developed by the Software
     Engineering Institute at Carnegie Mellon University, IRS rated
     itself at the lowest level (i.e., CMM level 1). 

  Systems architectures (including its security architecture and data
     architecture), integration planning, and system testing and test
     planning were incomplete. 

  An effective organizational structure to consistently manage and
     control systems modernization organizationwide was not
     established. 


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

To overcome the management and technical weaknesses impeding
successful modernization efforts, we recommended that IRS' electronic
filing business strategy focus on a wider population of taxpayers,
including taxpayers who can benefit from filing electronically.  In
addition, we recommended the following improvements to IRS' strategic
information management, software development capability, and
technical activities. 

  Take immediate action to improve IRS' strategic information
     management by implementing a process for selecting,
     prioritizing, controlling, and evaluating the progress and
     performance of all major information systems investments, both
     new and ongoing, including explicit decision criteria.  Using
     the best available information, IRS needs to develop
     quantifiable decision criteria that consider such factors as
     cost, mission benefits, and technical risk. 

  Immediately require IRS' future software development contractors to
     have CMM level 2 maturity and by December 31, 1995, take
     measures that will improve IRS' software development capability. 
     The specific measures recommended are intended to move IRS to
     CMM level 2 and include implementing consistent procedures for
     software requirements management, quality assurance,
     configuration management, and project planning and tracking. 

  Take several actions by December 31, 1995, to improve key system
     development technical activities.  These specific actions
     include (1) completing an integrated systems architecture and
     security and data architectures, (2) institutionalizing formal
     configuration management for all new systems development
     projects and upgrades and developing a plan to bring ongoing
     projects under formal configuration management, and (3)
     developing security concept of operations, disaster recovery,
     and contingency plans. 

  Assign the Associate Commissioner responsibility for managing and
     controlling all systems development activities, including the
     research and development division's systems development efforts. 


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

IRS officials agreed with our recommendations for improving TSM in
areas such as electronic filing, strategic information management,
software development, technical infrastructure, and accountability
and responsibility.  IRS officials are currently drafting a
legislatively mandated report, which is required to include a
schedule for successfully mitigating the deficiencies we reported. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:35.3

GAO/T-AIMD/GGD-94-104, 03/02/94; GAO/AIMD-94-120, 06/15/94;
GAO/T-GGD-95-74, 02/01/95; and GAO/HR-95-1, 02/95


   ANALYSIS OF IRS' FISCAL YEAR
   1996 BUDGET REQUEST AND INTERIM
   RESULTS OF 1995 FILING SEASON
-------------------------------------------------------- Appendix I:36

GAO/T-GGD-95-97, 02/27/95

At the request of the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, we testified on the administration's
fiscal year 1996 budget request for IRS and on the interim results of
our assessment of the 1995 tax filing season. 

IRS' fiscal year 1996 budget request was for about $8.2 billion and
114,885 staff, an increase of about $739 million and 922 staff over
IRS' expected fiscal year 1995 operating level.  Most of the increase
was for TSM.  Other increases were to help IRS deal with two
important filing season issues--the need to better control refund
fraud and the difficulties taxpayers experience in trying to reach
IRS by telephone.  We made the following points in our testimony: 

  To focus the TSM effort, IRS should direct its attention to a small
     number of projects that address critical gaps in mission
     performance and are part of the TSM vision.  In light of the
     need to refocus TSM, IRS might not be in a position, in fiscal
     year 1996, to effectively use all of the funding for TSM that it
     had requested. 

  IRS took several steps in 1995 in an attempt to better control
     refund fraud.  As one result of these changes, IRS was delaying
     the refunds of many taxpayers whose eligibility for the EIC was
     problematic or who were not using valid SSNs.  We expressed the
     belief that these actions, if effectively implemented, should
     help reduce refund fraud. 

  Refundable credits, like the EIC, pose a challenge for tax
     administrators.  In addition to the concerns about fraud, there
     are equally important concerns that not all taxpayers who are
     eligible are receiving the credit.  We made several
     recommendations in past reports that could help make the EIC
     less of a problem. 

  Taxpayers were continuing to have problems reaching IRS by
     telephone.  Of the 1,166 calls we made to IRS' toll-free
     assistance number between January 30 and February 10, 1995, we
     reached an IRS assistor 13 percent of the time. 

  IRS' budget included a request for additional staff to answer the
     telephones.  Although the requested increase would help, it
     would not make an appreciable difference in the large gap
     between the number of calls coming into IRS and the number it
     answers.  Most taxpayers might be able to get through to IRS if
     IRS adopted some of the practices used by other large
     organizations that provide similar telephone assistance. 


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

GAO/GGD-92-26, 02/19/92; GAO/GGD-93-27, 12/30/92; GAO/GGD-93-60,
03/19/93; GAO/GGD-93-145, 09/24/93; GAO/GGD-94-65, 12/22/93;
GAO/T-GGD-94-89, 02/10/94; GAO/GGD-94-129, 04/20/94; GAO/GGD-95-5,
10/07/94; GAO/GGD-95-86, 04/12/95; and GAO/AIMD-95-156, 07/26/95


   FINANCIAL AUDIT:  EXAMINATION
   OF IRS' FISCAL YEAR 1994
   FINANCIAL STATEMENTS
-------------------------------------------------------- Appendix I:37

GAO/AIMD-95-141, 08/04/95

This report presented the results of our attempt to audit IRS'
financial statements for fiscal year 1994.  It also assessed IRS'
internal controls and compliance with laws and regulations.  The
report further discussed the scope and severity of IRS' financial
management and control problems and the effect these problems have
had on IRS' ability to carry out its mission and remedy these
problems. 

IRS continues to face major challenges in developing meaningful and
reliable financial management information and in providing adequate
internal controls that are essential to effectively manage and report
on its operations.  Overcoming these challenges is difficult because
of the long-standing nature and depth of IRS' financial management
problems and the antiquated state of its information systems.  We
were unable to express an opinion on the reliability of IRS'
financial statements for fiscal year 1994, as in other years. 

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; and (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.  IRS, however, has made progress in
responding to our previously identified problems and in improving
accounting for federal revenues. 


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

We recommended that the Commissioner of Internal Revenue direct the
Chief Financial Officer to

  implement the software, hardware, and procedural changes needed to
     create reliable subsidiary accounts receivable and revenue
     records that are fully integrated with the general ledger;

  change the current federal tax deposit coupon reporting
     requirements to include detailed reporting for all excise taxes,
     Federal Insurance Contribution Act (FICA) taxes, and employee
     withheld income taxes; and

  implement software changes that will allow the detailed taxes
     reported to be separately maintained in the master file, other
     related revenue accounting feeder systems, and the general
     ledger. 


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

IRS is working with us to implement these recommendations as well as
those from our prior financial audits.  Some progress has been made
in responding to problems we identified in previous reports.  IRS
officials reaffirmed their commitment to the goals of the Chief
Financial Officer Act to improve financial management and to provide
stakeholders and managers with accurate and timely financial
information. 


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

GAO/IMTEC-88-41, 06/17/88; GAO/GGD-89-1, 10/14/88; GAO/AIMD-94-120,
06/15/94; GAO/T-AIMD-94-164, 07/28/94; GAO/HR-95-1, 02/95; and
GAO/HR-95-6, 02/95


   IMPROVE THE PROCESSING OF
   RETURNS AND RECEIPTS
-------------------------------------------------------- Appendix I:38


   CONTINUING PROBLEMS AFFECT
   OTHERWISE SUCCESSFUL 1994
   FILING SEASON
-------------------------------------------------------- Appendix I:39

GAO/GGD-95-5, 10/07/94

At the request of the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, we assessed various aspects of IRS'
performance during the 1994 tax filing season.  Specifically, we
looked into the processing of individual income tax returns and
related refunds and the ability of taxpayers to reach IRS by
telephone. 

The 1994 filing season was successful in many respects.  The number
of returns filed increased after an unexpected decline in 1993, and
more taxpayers used alternatives to the traditional paper filing
method.  According to IRS data and our review at one of IRS' 10
service centers, tax refunds were generally processed accurately and
issued in a timely manner, and IRS improved the accuracy of its
returns processing, thus reducing the amount of rework.  IRS'
computers generally worked well with minimal downtime.  On the basis
of tests done by us and IRS, taxpayers looking for tax forms and
publications at IRS walk-in sites could reasonably expect to find
them, and taxpayers calling IRS' toll-free telephone assistance with
tax law questions could generally expect to get accurate answers. 
However, there were some significant problems. 

  The number of IRS-detected fraudulent refund claims continued the
     steady increase that has plagued IRS for the past several years. 
     Through the first 6 months of 1994, IRS identified twice as many
     fraudulent claims as it had during the same period in 1993. 
     What remained unclear was (1) how much of that growth was due to
     increased fraudulent activity versus improved IRS monitoring and
     (2) how much additional fraud might be going undetected. 

  The ability of taxpayers to reach IRS by telephone has been a
     problem for several years and degraded even further in 1994. 
     Using IRS data, we determined that (1) only about 20 percent of
     the calls to IRS' toll-free telephone assistance and 50 percent
     of the calls to IRS' forms distribution centers were being
     answered and (2) only 13 percent of the calls to IRS' TeleFile
     system were getting through during the peak period.  Under
     TeleFile, certain taxpayers who are eligible to file a Form
     1040EZ are allowed to file using a toll-free number on
     touch-tone telephones. 

  The EIC was the source of many errors by taxpayers and tax
     practitioners in preparing returns.  Those errors, along with
     errors by IRS staff in following IRS procedures for handling EIC
     claims, increased IRS' error resolution workload and delayed
     taxpayers' receipt of benefits. 

We did not make any recommendations to address these significant
problems because (1) there were several efforts already under way and
planned that we expected would have a positive effect on these
issues, such as a review of refund fraud being done by Treasury's
Fraud Task Force and IRS' plans to increase the number of telephone
lines for TeleFile and (2) we had other work under way, which was
specifically targeted at those issues and might help us better
identify root causes. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:39.1

GAO/GGD-91-23, 12/27/90; GAO/GGD-91-98, 06/28/91; GAO/GGD-92-132,
09/15/92; GAO/GGD-93-27, 12/30/92; GAO/GGD-94-65, 12/22/93;
GAO/GGD-95-27, 10/25/94; GAO/GGD-95-86, 04/12/95; and
GAO/T-GGD-95-179, 06/08/95


   CHANGES NEEDED TO REDUCE VOLUME
   AND IMPROVE PROCESSING OF
   UNDELIVERABLE MAIL
-------------------------------------------------------- Appendix I:40

GAO/GGD-95-44, 12/07/94

In a report to the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, we presented the results of our review
of IRS' processes for handling undeliverable mail.  Our work focused
on notices IRS sent to taxpayers involving the assessment and
collection of taxes. 

We reported that IRS sends out millions of pieces of mail each year
to taxpayers and that during fiscal year 1992, about 15 million
pieces were undeliverable.  According to IRS, mail is undeliverable
because (1) taxpayers move and leave no forwarding addresses with the
U.S.  Postal Service or IRS, (2) the Postal Service may not deliver
or forward mail, and (3) IRS may incorrectly record taxpayers'
addresses in its files. 

While the exact costs are not determinable, IRS estimated that it
loses millions of dollars annually in revenues and incurs increased
operations costs from undelivered mail.  One projection indicated
that a minimum of $100 million in lost revenue per year may be
attributable to undeliverable mail addressed to business taxpayers
alone.  IRS estimates also showed that the volume of undeliverable
mail rose from 6.5 million pieces in 1986 to about 15 million pieces
in 1992. 

We noted that it is unlikely that IRS can totally eliminate
undeliverable mail because two of its three principal causes are
external to IRS.  However, IRS needs to give this type of mail more
attention because it adversely affects taxpayers and IRS.  When IRS
sends mail that is undelivered and subsequent attempts to contact the
taxpayers are unsuccessful, the consequences for taxpayers can be
quite severe.  For example, the amount of taxes owed can grow, as
interest and penalties mount, and liquid assets such as bank accounts
may eventually be levied to satisfy the debt. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:40.1

We recommended that the Commissioner of Internal Revenue encourage
taxpayers to make address changes by (1) accepting changes of address
over the telephone; (2) making Form 8822, Change of Address, more
conveniently available; and (3) emphasizing to taxpayers the
importance of keeping their addresses current with IRS. 

We also recommended that IRS proceed with plans to establish a
centralized unit within each of its service centers to process all
service center undeliverable mail. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:40.2

IRS agreed with our recommendations and is working with its Chief
Counsel to revise a procedure to allow accepting general address
changes over the telephone.  IRS is also conducting several tests to
make address changing easier.  For example, IRS is including change
of address forms in Postal Service change of address kits.  Efforts
are also under way to update taxpayer education materials regarding
IRS' need for current addresses and the procedures for changing
addresses. 

IRS is examining various alternatives for standardizing undeliverable
mail procedures, including the establishment of centralized units. 
In addition, IRS is planning to establish locator service procedures
and locator service units at all service centers. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:40.3

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


   PROCESS USED TO REVISE FEDERAL
   EMPLOYMENT TAX DEPOSIT
   REGULATIONS
-------------------------------------------------------- Appendix I:41

GAO/GGD-95-08, 12/29/94

In July 1990\5 , we reported that the rules for depositing employment
taxes were complex and resulted in nearly one-third of all employers
being penalized in 1988 for failing to make timely deposits.  We
recommended that IRS simplify the employment tax deposit rules by
making the deposit date more certain and by exempting significant
numbers of small employers from frequent deposit requirements.  At
the request of Senator Herbert Kohl, we reviewed the development of
the revised federal employment tax deposit regulations issued by the
Department of the Treasury and IRS. 

We reported that the final regulations, issued in September 1992,
launched a new payroll tax deposit process that was widely considered
to be significantly simpler and easier for stakeholders to understand
and comply with.  The regulations provided all but the largest
employers with a fixed-deposit rule that they can follow for an
entire calendar year.  IRS obtained stakeholders' input, either oral
or written, throughout the process.  Although stakeholders were
generally satisfied with the outcome, they differed in their
satisfaction with the process used in developing them.  Some
concerned stakeholders did not believe that an adequate dialogue had
been established with Treasury or IRS officials and that Treasury and
IRS officials did not follow statutory or executive branch guidance
that either appeared to be applicable or that the stakeholders
thought would have been appropriate to follow, i.e., the Regulatory
Flexibility Act or Executive Order 12291. 

We concluded that given such things as the diversity of interests
among the stakeholders who may be affected by tax regulations, the
time constraints under which Treasury and IRS officials often must
operate, and the sometimes conflicting goals that must be reconciled
when tax regulations are written, complete stakeholder satisfaction
is unlikely.  Nevertheless, the employment tax deposit regulation
experience suggests that Treasury and IRS officials could modify
their practices to improve communications with stakeholders and
provide greater assurance that stakeholders' views will be obtained
and considered. 


--------------------
\5 Federal Tax Deposit Requirements Should Be Simplified
(GAO/GGD-90-102, July 31, 1990). 


      RECOMMENDATION(S) TO THE
      SECRETARY OF THE TREASURY
------------------------------------------------------ Appendix I:41.1

To help forestall stakeholder confusion and frustration regarding the
applicability of statutory and executive guidance to tax-related
regulations, we recommended that the Secretary of the Treasury direct
that--when such guidance is not applicable--the text accompanying the
publication of proposed and final regulations should contain a
complete explanation of why this is so.  We also recommended that the
Secretary require that regulation drafters document internally, when
time constraints permit, their consideration of the factors provided
in such statutory and executive guidance to better ensure that tax
regulations reflect stakeholders' needs.  To maximize the value of
informal communications with stakeholders, we recommended that the
Secretary encourage regulation drafters to meet with selected
stakeholders to work through implementation issues associated with
draft-tax regulations before publishing the regulations for notice
and comment. 

To better ensure that a well-informed basis exists for Treasury and
IRS officials to make judgments concerning whether simple, yet
effective, regulations have been designed, we recommended that the
Secretary of the Treasury require regulation drafters to develop key
measures of simplicity for tax regulations.  Officials should use
these measures to help judge whether existing regulations are too
complex and whether regulations under development are sufficiently
simple. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:41.2

In response to our recommendations, IRS reported in March 1995 that
it was (1) considering revising the statements contained in the
preamble of IRS regulations to more explicitly state its assessment
of the applicability of statutory and executive guidance, (2)
considering revising procedures for internal documentation to better
ensure that tax regulations reflect both the policy choices of
Congress and IRS stakeholders' needs, and (3) reviewing its attempts
to measure simplicity in conjunction with other significant policy
concerns in the promulgation of regulations.  IRS also identified
three potential opportunities for further improvement:  (1) where
time and circumstances permit, it will provide a 90-day period for
the submission of public comments, and it will consider comments
received even after that date, when time permits; (2) it intends to
implement a policy of issuing a "plain language" summary of the
regulation together with the formal notice of proposed rulemaking and
make the summary available through a broader range of media; and (3)
it is considering the feasibility of holding public hearings on
certain regulations outside Washington, D.C.  As of December 31,
1995, IRS had taken no further action on these recommendations,
according to an IRS official. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:41.3

GAO/GGD-90-102, 07/31/90 and GAO/GGD-94-105, 04/27/94


   ADMINISTRATIVE IMPROVEMENTS
   POSSIBLE IN IRS' INSTALLMENT
   AGREEMENT PROGRAM
-------------------------------------------------------- Appendix I:42

GAO/GGD-95-137, 05/02/95

At the request of the Chairman, Subcommittee on Oversight, House
Committee on Ways and Means, we reviewed IRS' use of installment
agreements as a means for individual taxpayers to pay their tax
debts.  IRS changed the guidelines for installment agreements in
April 1992 to streamline the process for taxpayers to request
installment agreements and for IRS to approve them. 

We reported that participation in IRS' installment agreement program
grew rapidly after the guidelines were revised--from 1.1 million new
agreements for individual taxpayers in fiscal year 1991 to 2.6
million new agreements in fiscal year 1994, an increase of 136
percent.  Also, during fiscal years 1991 through 1994, the amount of
taxes being paid in new installment agreements increased 135
percent--from $4.0 billion to $9.4 billion.  And, installment
agreements accounted for 33 percent ($4.5 billion) of IRS' delinquent
tax collections from individual taxpayers in fiscal year 1994
compared with 14 percent ($1.9 billion) in fiscal year 1991. 

The changes IRS made to its installment agreement procedures affected
its collection activities in several ways.  First, IRS service center
collection and district office taxpayer service staff approved more
agreements than in the past.  Staff at IRS' Automated Collection
System call sites, who previously approved the majority of
installment agreements, are now assigned higher-dollar cases. 
Second, more past due taxes are being paid off in installments
without going through IRS' routine collection process.  This is due
in part because, under IRS' revised procedures, taxpayers can request
an installment agreement when they file a balance due tax return. 

IRS' internal auditors raised concerns in September 1994 about the
ease with which taxpayers can enter into installment agreements.  The
auditors reported that IRS' new installment agreement procedures may
be allowing taxpayers to (1) choose installment agreements to pay
their taxes when they could have fully paid their taxes on time and
(2) accumulate tax debt because it is easy to add subsequent income
taxes to an existing installment agreement.  An IRS task group,
established in response to the auditors' concerns, made
recommendations aimed at reducing the use of installment agreements
to accumulate debt that could be paid through other methods.  IRS
also agreed to test an internal audit recommendation to obtain
selected information from program participants on the circumstances
causing their tax debt situation. 

We reported that IRS informs taxpayers that applicable penalties and
interest charges will be added to their installment agreements;
however, taxpayers are not given dollar estimates for these penalties
and interest.  This contrasts with installment agreements made in the
private sector, such as those for automobile loans, which typically
disclose information regarding terms, conditions, and costs. 

Further, mailing costs could be reduced if IRS used regular mail
instead of certified mail for routine defaulted installment
agreements, which are not subject to levy action.  Such agreements
are usually placed in deferred status where future collection action
is generally limited to periodic notices and offsets against future
refunds. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:42.1

To improve the information provided to taxpayers and the
administration of the installment agreement program, we recommended
that the Commissioner of Internal Revenue (1) notify taxpayers about
projected total costs and payoff periods when setting up agreements
with taxpayers and when mailing monthly reminder notices, (2)
experiment with Form 9465, Installment Agreement Request, to test
whether having space for taxpayers to authorize direct debit
installment payments increases the frequency with which this option
is used, and (3) send agreement default notices to taxpayers by
regular mail instead of certified mail unless an account is being
referred for levy action. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:42.2

IRS agreed to study the feasibility of notifying taxpayers about
total costs and payoff periods of installment agreements.  If the
notification is not feasible under existing computer systems, IRS
said it would pursue changes as part of its TSM program.  As an
interim step, IRS is planning to break out penalty and interest costs
on monthly reminder notices to taxpayers beginning in 1996. 

IRS also agreed to make the necessary changes to Form 9465 and to
determine the requirements for OMB approval of the new form.  Once
approved, IRS will test the revised form for increased direct debit
usage. 

IRS agreed with the recommendation concerning the use of regular mail
for default notices and will identify the program changes necessary
for implementation. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:42.3

GAO/GGD-95-58R, 12/15/94


   IRS COULD DO MORE TO VERIFY
   TAXPAYER IDENTITIES
-------------------------------------------------------- Appendix I:43

GAO/GGD-95-148, 08/30/95

This report, prepared under our basic legislative authority,
discusses IRS' procedures for processing and posting tax returns in
which the primary filer did not provide an SSN or provided a name and
SSN that did not match Social Security Administration (SSA) records. 
This report discusses (1) the growth in accounts with missing or
incorrect SSNs on IRS' IMF, (2) IRS' procedures for verifying the
identities of tax return filers, and (3) the potential effects of the
procedures on IRS' plans to modernize the tax system and on IRS'
income-matching program. 

IRS relies on data from SSA to determine the accuracy of SSNs and
names recorded on tax documents submitted by individual taxpayers. 
IRS uses this information to establish the identity of each taxpayer
and to ensure that each transaction is posted to the correct account
on the IMF.  When processing paper tax returns with missing or
incorrect SSNs, IRS service centers first try to make corrections by
researching IRS files or other documents (for example, Form W-2 wage
and tax statements) that accompany a tax return.  Returns that can be
corrected, along with those that match SSA records, are posted to the
"valid" segment of the IMF.  Returns that cannot be corrected are
posted to the "invalid" segment of the IMF, using either the
incorrect SSN on the tax return or a temporary number assigned by
IRS.  As of January 1, 1995, 4.3 million accounts were posted on the
invalid segment of the IMF, and 153.3 million accounts were posted on
the valid segment. 

As part of its efforts to combat potential refund fraud, IRS revised
its procedures in 1995 to require that taxpayers who file returns
with (1) missing or incorrect SSNs or (2) temporary numbers provide
documentation to verify their identities.  The notice IRS was sending
to filers in 1995 (known as the CP54B notice), however, did not
clearly convey that they were required to provide documentation to
verify their identities. 

At the time of our review, IRS was not planning to apply the revised
documentation requirements to filers with prior accounts on the IMF
invalid segment who file again using the same name and SSN
combination.  The accounts of these filers, whose identities IRS
verified using pre-1995 procedures, were coded to automatically issue
a refund when one is requested on a return.  As of January 1, 1995,
at least 3.2 million accounts on the IMF invalid segment were so
coded.  We analyzed 58 returns that were posted to the IMF invalid
segment in the first 6 months of 1994 and that had accounts coded for
automatic refund issuance.  Our results suggested that IRS should
subject these filers to the revised documentation requirements; 27 of
the returns were filed by persons who either used SSNs not issued by
SSA or used another individual's SSN, including the SSNs of children
or deceased persons. 

Developing complete and accurate account information on every
taxpayer and being able to respond accurately to taxpayer account
inquiries are goals IRS hopes to achieve in its tax system
modernization efforts.  Achieving these goals is jeopardized by the
current master file structure, which allows two or more taxpayers to
have accounts under the same number or one taxpayer to have several
accounts under different numbers. 

IRS' income-matching program is also hampered by posting returns to
the IMF invalid segment.  IRS matches the income claimed by taxpayers
with the income reported by third parties on information returns. 
Discrepancies are used by IRS to detect underreported income or
nonfiling of tax returns. 


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

To improve the processing of returns with missing or incorrect SSNs
and help clean up accounts currently posted on the IMF invalid
segment, we recommended that the Commissioner of Internal Revenue

  finalize the CP54B notice in time for use during the 1996 tax
     filing season and

  apply the revised documentation requirements to taxpayers who filed
     tax returns that were posted to the IMF invalid segment before
     1995 and whose accounts had a permanent refund release code. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:43.2

IRS officials agreed that a revised CP54B notice was needed and
assured us that revised notices would be available for use during the
1996 filing season.  With respect to our second recommendation, IRS
officials said that a task force was determining the best way to
verify accounts placed on the IMF invalid segment before 1995.  The
task force was also working to reverse the permanent refund release
code on the IMF invalid segment accounts that were established before
1995.  Further, IRS officials plan to remove IMF invalid segment
accounts that have been inactive for a certain period, similar to the
treatment of accounts on the valid segment. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:43.3

GAO/GGD-95-6, 12/07/94


   SOLE PROPRIETOR IDENTIFICATION
   NUMBERS CAN BE IMPROVED
-------------------------------------------------------- Appendix I:44

GAO/GGD-95-160, 09/18/95

Taxpayers are required to have identification numbers so that IRS can
establish accounts for them and record transactions such as the
payment of taxes.  Most taxpayers are required to have only one
identification number.  However, individuals who are self-employed
(i.e, sole proprietors) are sometimes required to have two
identification numbers, an SSN for their individual income tax
returns and an Employer Identification Number (EIN) for their
business returns.  This report, to the Joint Committee on Taxation,
discussed whether IRS (1) accurately cross-referenced the two
identification numbers that self-employed individuals report and (2)
needed to take any actions to improve the accuracy of its
cross-reference files. 

IRS records a sole proprietor's identification numbers on three
computer files.  It uses the SSN to establish an account on the IMF
and includes the EIN in the account for cross-referencing purposes. 
It uses the EIN to establish an account on the BMF and adds the SSN
as a cross-reference.  It uses cross-referenced SSNs and EINs from
the two master files to build the Cross-Reference Entity File (CREF),
which is a file IRS created expressly to consolidate income
information on sole proprietors for use in its underreporter program. 

We concluded that IRS had not screened out all erroneous
identification numbers, which meant that numbers posted to sole
proprietors' records as cross-references may identify someone other
than the intended taxpayer.  From work at the Fresno Service Center,
we made the following estimates: 

  About 20 percent of the EINs posted to tax year 1991 records on the
     IMF from Schedule C returns filed at the Fresno Service Center
     were erroneous. 

  About 3 percent of the BMF records of sole proprietors who filed
     1991 Schedule C returns with the Fresno Service Center contained
     inappropriate SSNs as cross-references. 

  About 10 percent of the accounts on the CREF that related to 1991
     returns filed with Fresno contained erroneous cross-referenced
     taxpayer identification numbers. 

We believe that before posting, IRS did not screen EINs to detect
those incorrectly reported on Schedule C.  No data were available to
discern the total effects of such misposting; however, several false
underreporter cases were created at the Fresno Service Center because
of erroneous cross-references.  More screening is also needed if IRS
is to properly integrate a taxpayer's various records under its TSM
program. 

We found that IRS' difficulties in cross-referencing a sole
proprietor's two identification numbers would be eliminated if sole
proprietors used a single identification number for all tax
information.  In addition to aiding IRS, the use of a single
identification number would lessen the compliance burden that sole
proprietors shoulder, which would be in keeping with IRS authority to
require taxpayer identification numbers. 


      RECOMMENDATION(S) TO IRS
------------------------------------------------------ Appendix I:44.1

We recommended that the Commissioner of Internal Revenue (1)
establish returns-processing and compliance-screening procedures to
help remove erroneous cross-referenced taxpayer identification
numbers from sole proprietors' tax records and (2) evaluate the
feasibility of eliminating the requirement that sole proprietors use
EINs for filing business returns. 


      ACTION(S) TAKEN AND/OR
      PENDING
------------------------------------------------------ Appendix I:44.2

IRS officials generally agreed that data on the CREF should be
perfected and said that IRS would begin evaluating how to do this. 
They also said that a single taxpayer identification number such as
the SSN would facilitate reporting compliance by sole proprietors. 
IRS officials, however, said that IRS would not pursue such a change
because of major implementation obstacles, such as (1) the necessity
of extensive reprogramming of IRS, SSA, and private record systems;
(2) imposing the added burden on the majority of sole proprietors who
now report correctly of changing their reporting responsibilities;
(3) requiring sole proprietors to disclose their SSNs on Forms W-2,
which raises privacy concerns; and (4) allocating significant IRS
resources to educate taxpayers in the new requirement. 

We believe that eliminating the EIN requirement for sole proprietors
is worthy of further evaluation before a decision is made on its
feasibility and cost-effectiveness, especially since in the past IRS
allowed sole proprietors to use their SSNs as EINs.  A similar policy
for those cases where IRS had not assigned an EIN with the same
digits as the sole proprietor's SSN should not involve major BMF
reprogramming and reconfiguration.  IRS is proposing to do a study on
the extent of the problems with the CREF and ways to address them. 
This study could also include an evaluation of the feasibility of
sole proprietors using their SSN rather than an EIN. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:44.3

GAO/T-GGD-87-4, 03/17/87; GAO/GGD-94-175, 08/02/94; and
GAO/GGD-95-59, 12/28/94


   OTHER
-------------------------------------------------------- Appendix I:45


   COLLEGE SAVINGS:  USING EE
   SAVINGS BONDS AND LOANS FROM
   THRIFT SAVINGS PLAN TO PAY FOR
   COLLEGE
-------------------------------------------------------- Appendix I:46

GAO/HEHS-95-16R, 11/04/94

Pursuant to a request from Senators Thad Cochran, James M.  Jeffords,
and Nancy Landon Kassebaum, we reported on ways the federal
government can encourage families to save money for their children's
college educations.  Specifically, we examined (1) whether series EE
savings bonds encourage net savings for college and (2) the
nonrepayment rate for federal employees who have borrowed from the
Thrift Savings Plan (TSP) for education expenses. 

With the Technical and Miscellaneous Revenue Act of 1988, Congress
created a new federal income tax advantage for using EE savings bonds
to pay for certain higher education expenses.  For savings bonds
purchased in 1990 or later, taxpayers may deduct from their gross
income the interest earned on bonds used to pay for tuition and
required fees, net of scholarships, at accredited colleges and
universities.  Few people have used the education expenses provision
of series EE savings bonds to pay for college costs.  The limited
response may be attributable to (1) the fact that investors hold
savings bonds generally for an average of 10 years before redeeming
them and (2) a 1992 national market survey done for the Department of
the Treasury found 77 percent of the respondents had never heard of
these special education savings bonds. 

Since 1988, federal employees have been able to borrow from their TSP
accounts to pay for certain educational expenses.  If active federal
employees fail to repay their loans on time, a taxable distribution
is declared, that is, the amount of unpaid principal and interest is
reported to IRS as taxable income received by the borrower.  Very few
TSP education loans issued from 1988 to 1993 have resulted in taxable
distributions--less than 1 percent for active federal employees.  For
federal employees terminating employment early, regardless of the
reason, less than 8 percent had taxable distributions for the period
1988 and 1989.  Overall, for this period, over 90 percent of the
education loans were repaid in full. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:46.1

GAO/HEHS-95-131, 08/03/95


   IRS USER FEES
-------------------------------------------------------- Appendix I:47

GAO/GGD-95-58R, 12/15/94

Pursuant to a legislative directive, we reviewed the fee structure
and methodology used by IRS in developing user fees to ensure that
the proposed fees reflected no more than actual costs.  At the time
of our review, IRS had increased an existing fee--for copying
taxpayers' tax records--and proposed three new ones--one related to
the electronic tax filing program and two related to the installment
agreement program. 

We reported that IRS does not presently have a cost-accounting
system, and IRS officials told us that the proposed user fees were
based on their best estimates of full costs as required by the
prevailing OMB guidance.  Further, given the limited cost data
available to IRS, we could not validate that the proposed fees
reflected no more than actual costs. 

We noted that IRS is developing an activity-based costing system,
which should give it the capability to develop more comprehensive
cost information for all activities.  The lack of specific data
available to IRS in developing the proposed user fees underscores the
need for the timely completion of IRS' cost system. 


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

GAO/GGD-95-137, 05/02/95


   U.S.  INSULAR AREAS' FISCAL
   RELATIONS WITH THE FEDERAL
   GOVERNMENT
-------------------------------------------------------- Appendix I:48

GAO/T-GGD-95-71, 01/31/95

In anticipation of possible new tax and welfare initiatives, the
Subcommittee on Native American and Insular Affairs, House Committee
on Resources, asked us to provide information on the various fiscal
arrangements between the United States and five insular areas: 
American Samoa, Guam, the Commonwealth of the Northern Mariana
Islands, Puerto Rico, and the U.S.  Virgin Islands.  We provided
information on (1) income and other tax rules and revenues that apply
to these areas, (2) current federal expenditures, and (3) the extent
to which they receive major federal social programs. 

We testified that individuals who are residents of a territory and
who earn income only from sources within the territory owe no federal
tax on this income.  U.S.-source income is treated differently for
federal tax purposes, depending on the territory in which the
individual resides.  Corporations organized in the territories are
generally treated as foreign corporations for U.S.  tax purposes and
are taxed on their U.S.  earnings but not their territorial income. 
U.S.  corporations with subsidiaries in the territories can receive
significant tax benefits through the possession's tax credit if
certain qualifications are met.  The Department of the Treasury
estimated these benefits to be about $3 billion annually.  Other
federal taxes include payroll taxes to fund Social Security and
Medicare and excise taxes. 

In fiscal year 1993, federal expenditures in the five territories
totaled $10.3 billion.  The largest expenditure category was "direct
payments to individuals." These expenditures were made mostly through
Social Security benefits, Medicare benefits, unemployment
compensation, and student education grants.  Major federal social
programs, such as Food Stamps and AFDC, also have been extended in
varying degrees to the territories.  About 86 percent of the $10.3
billion went to Puerto Rico, which is, by far, the largest
possession. 


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

GAO/GGD-90-21, 12/08/89; GAO/HRD-91-18, 06/20/91; GAO/NSIAD-92-64,
04/07/92; GAO/GGD-92-72BR, 05/04/92; GAO/RCED-92-114, 07/21/92;
GAO/GGD-93-109, 06/08/93; and GAO/NSIAD-94-62, 02/07/94


   1994 ANNUAL REPORT ON GAO'S
   TAX-RELATED WORK
-------------------------------------------------------- Appendix I:49

GAO/GGD-95-66, 02/16/95

This summary, prepared in compliance with a legislative requirement,
26 U.S.C.  6103(i)(7)(A), contained information on our tax policy and
administration-related work during fiscal year 1994.  It included (1)
summaries of tax-related products issued in fiscal year 1994; (2)
summaries of tax-related products issued before fiscal year 1994 with
open recommendations to Congress; (3) descriptions of legislative
actions taken in fiscal year 1994 in response to our recommendations;
(4) a listing of recommendations to Congress that were open as of
December 31, 1994; (5) a listing of recommendations we made in fiscal
year 1994 to the Commissioner of Internal Revenue; and (6) brief
descriptions of assignments for which we were authorized access to
tax data in fiscal year 1994 under the above citation. 


   ADDRESSING THE BUDGET DEFICIT
-------------------------------------------------------- Appendix I:50

GAO/OCG-95-2, 03/15/95

In a report to Congress, we stressed the urgent need for deficit
reduction.  This report identified the budgetary implications of
selected policy changes and program reforms discussed in our work but
were not yet implemented or enacted.  The report presented 120
options of which 14 fell under "receipts" and were thus tax related. 
The options were presented in narrative descriptions.  They presented
ways to address, in a budgetary context, some of the significant
problems identified in our evaluations of federal policies and
programs.  We also presented an analytical framework to provide a
structure for congressional consideration of individual options.  In
some discussions, we provided recommendations.  The 14 tax-related
options were

  tax treatment of health insurance premiums,

  information reporting on forgiven debts,

  administration of the tax deduction for real estate taxes,

  corporate tax document matching,

  tax treatment of interest earned on life insurance policies and
     deferred annuities,

  federal agency reporting to the IRS,

  independent contractor tax compliance,

  deductibility of home equity loan interest,

  IRS staff utilization,

  collecting gasoline excise taxes,

  computing excise tax bases,

  small-issue industrial development bonds and qualified mortgage
     bonds,

  improving compliance of sole proprietors, and

  increasing highway user fees on heavy trucks. 


      RELATED GAO PRODUCT(S)
------------------------------------------------------ Appendix I:50.1

GAO/RCED-88-111, 03/28/88; GAO/RCED-88-190BR, 06/27/88;
GAO/GGD-89-52, 05/09/89; GAO/GGD-90-31, 01/29/90; GAO/RCED-90-117,
09/26/90; GAO/GGD-90-123, 09/27/90; GAO/GGD-91-94, 08/28/91;
GAO/GGD-91-118, 09/27/91; GAO/GGD-92-6, 03/26/92; GAO/GGD-92-43,
04/07/92; GAO/GGD-92-67, 05/12/92; GAO/GGD-92-108, 07/23/92;
GAO/GGD-93-130, 09/22/92; GAO/HR-93-13, 12/92; GAO/GGD-93-43,
01/19/93; GAO/GGD-93-42, 02/17/93; GAO/GGD-93-63, 03/25/93;
GAO/RCED-93-106, 04/22/93; GAO/GGD-93-97, 05/05/93; GAO/GGD-93-67,
05/11/93; GAO/RCED-94-181, 06/07/94; and GAO/GGD-94-175, 08/02/94


   EXPERIENCE WITH THE CORPORATE
   ALTERNATIVE MINIMUM TAX
-------------------------------------------------------- Appendix I:51

GAO/GGD-95-88, 04/03/95

In a report to Congressman William J.  Coyne, we discussed the
number, size, and industry class of corporations that paid the
corporate AMT over the period 1987 through 1992; why they were liable
for it; whether AMT achieved its purpose; and how AMT might affect
corporate investment.  AMT was substantially revised by Congress in
1986 to ensure that corporations with substantial economic income
could not avoid significant tax liability by using exclusions,
deductions, and credits.  In addition, Congress made changes so that
corporations that reported significant income on their financial
statements would pay some tax in that year. 

Many of the tax preferences that AMT is designed to limit defer tax
liability rather than permanently reduce tax.  For this reason, AMT
is designed to result in the prepayment of tax rather than cause a
permanent increase in tax liability.  To achieve this, corporations
that pay AMT in a particular year may be able to recoup this amount
in later years through AMT credit.  AMT accelerated tax payments of
$27.4 billion over the 1987 through 1992 tax years.  Over the same
period, corporations used AMT credits totaling $5.8 billion. 

Most AMT revenues came from relatively few corporations, but many
more corporations bear some burden in complying with AMT provisions. 
For example, of the universe of 2.1 million corporations subject to
AMT, just 2,000 large corporations (or 0.1 percent) paid 85 percent
of AMT payments in 1992, and only 28,000 (or 1.3 percent) paid any
AMT at all.  However, 400,000 corporations filed AMT forms. 

AMT most affected corporations and industries that use the
exclusions, deductions, and credits that AMT was designed to offset. 
Of the many rules that make up the AMT, two provisions clearly led to
the largest increase in corporations' taxable incomes.  These were
the provision related to the amount corporations could deduct for the
depreciation of assets and the provision that reflects the difference
between the amount of income corporations report for tax purposes and
the amount they report to shareholders on financial statements. 

AMT partially achieved its objective of making corporations with
positive economic income pay tax.  AMT achieved its second objective
by causing corporations that reported positive amounts of book income
in a particular year to pay some tax in that year.  In every year in
the 1987 through 1992 period, at least 6,000 corporations with
positive book income that paid no regular tax paid some AMT. 

The effects of AMT on corporate investment are not clear.  The
economic literature that we reviewed indicates that under some
circumstances AMT can reduce the incentive for corporations to
invest, but under other circumstances, the incentive to invest may be
greater under the AMT.  Furthermore, there is not a consensus on the
extent that changes in the incentive to invest lead to changes in
actual investment.  To date, no study has directly tested the extent
to which AMT actually affected investments. 


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

GAO/T-GGD-95-42, 12/09/94


   PAID TAX PREPARERS AND TAX
   SOFTWARE
-------------------------------------------------------- Appendix I:52

GAO/GGD-95-125R, 04/14/95

In a letter to the Commissioner of Internal Revenue, we shared the
results from a limited study of IRS' oversight of both paid preparers
of tax returns and software for preparing returns.  We found that
although paid preparers and tax software may affect tax compliance,
IRS lacks data on their compliance impacts. 

Paid preparers did about half of the 1992 individual income tax
returns.  However, IRS does not know the extent to which paid
preparers as a whole or by component group caused noncompliance or
improved compliance on the returns.  IRS' most recent compliance data
indicated that in 1988 individual returns done by paid preparers had
more noncompliance than all other returns.  IRS found noncompliance
on about 55 percent of the returns done by paid preparers, compared
with about 40 percent on other returns.  Knowing the impacts of paid
preparers on compliance, particularly by type of paid preparer, can
be important given the difference in IRS' oversight.  Specifically,
IRS imposes more requirements and can impose more sanctions against
preparers such as attorneys and certified public accountants who
maintain certain professional standards and are qualified to
represent clients before IRS, than against unenrolled preparers such
as commercial preparers who are not subject to the same professional
standards and are not qualified to practice before IRS. 

IRS also has limited information on the extent to which taxpayers and
preparers use software packages for substitute returns or to which
these packages generate accurate returns.  The use of tax software in
preparing returns is growing.  Members of the preparer community have
estimated that 80 percent or more of the paid preparers also used tax
software.  Three basic software options are available:  (1) 1040PC
software, generating a machine readable return; (2) electronic filing
(ELF) software; and (3) other tax software, generating a substitute
Form 1040.  About 18 million of 116 million returns filed in 1994
used ELF and 1040PC software. 

IRS checked all three software options for conformity to
specifications and did additional testing on the ELF and 1040PC
software.  However, IRS did not test whether the software
consistently calculated the correct tax liability.  Knowing the
accuracy of returns prepared using any computer software could be
important as IRS strives for 90-percent tax compliance by 2001. 


   COLLEGE SAVINGS:  INFORMATION
   ON STATE TUITION PREPAYMENT
   PROGRAMS
-------------------------------------------------------- Appendix I:53

GAO/HEHS-95-131, 08/03/95

Pursuant to a request from Senators Thad Cochran, James M.  Jeffords,
and Nancy Landon Kassebaum, we provided information on state tuition
prepayment programs, focusing on (1) how these programs operate and
the participation rates they have achieved, (2) participants' income
levels and options for increasing the participation of lower-income
families, and (3) the key issues surrounding these programs. 

Several states, following Michigan's lead, have authorized tuition
prepayment programs, that allow parents to pay in advance for tuition
at participating colleges on behalf of a designated child and
guaranteeing to cover the child's future tuition bill at one of these
colleges, no matter how much costs rise.  By allowing purchasers to
"lock in" today's prices, these programs are intended to ease
families' concerns about whether they will have enough money in the
future to pay for their children's college expenses. 

We reported that (1) while none of the seven implemented state
programs has achieved an average annual participation rate that seems
very high, the programs vary widely among the states; (2) program
officials identified several factors as important for maximizing
participation--advertising and marketing, a positive public
perception of the program, program simplicity and flexibility, and
affordably priced benefits; (3) most participants in state tuition
prepayment programs come from middle- and upper-income families; (4)
program officials considered sliding-scale fees and tax credits poor
options for increasing lower-income participation; and (5) some of
the major issues concerning the state tuition prepayment programs are
the potential effects they may have on students' educational choices,
their appeal to middle- and upper-income families, their value as an
investment for purchasers, and the degree of risk they pose for
states. 

The most significant issue facing states in establishing and
operating a tuition prepayment program, however, is the possible
applicability of federal tax provisions to purchasers, beneficiaries,
and the programs themselves.  This is important because certain tax
consequences could make it more difficult for programs to survive. 
Concerns about taxation have led some states to defer implementation
of their programs. 

Officials are most concerned about two potential consequences. 
First, officials hope these programs are exempt from federal taxes on
their investment earnings because paying such taxes makes it more
difficult to meet future liabilities.  What it takes to qualify as
exempt, however, is somewhat unclear, in part because IRS and a
federal appeals court have disagreed on the tax status of Michigan's
program and also because other existing programs have not received
IRS guidance. 

Second, program officials are concerned that IRS may decide that
purchasers or beneficiaries are liable for federal income taxes
annually on the imputed interest earned from their investments in
prepaid tuition benefits.  Officials have been following guidance IRS
issued for Michigan's program, which said that beneficiaries are
liable for taxes on the increased value of their prepaid benefits at
the time of redemption.  Officials are concerned that changing from a
deferred to an annual tax would create an administrative burden for
their programs and perhaps a disincentive for potential purchasers. 


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

GAO/HEHS-95-16R, 11/04/95


SUMMARIES OF TAX-RELATED PRODUCTS
ISSUED BEFORE FISCAL YEAR 1995
WITH OPEN RECOMMENDATIONS TO
CONGRESS AS OF DECEMBER 31, 1995
========================================================== Appendix II

Congressional tax-writing committees should explore, within
the existing framework, opportunities to exercise more scrutiny over
indirect spending through tax expenditures.  Congress could also
consider integrating tax expenditures into current budget processes
so that congressional consideration of a savings target is part of
the
annual budget process and to ensure that Congress addresses tax
expenditures periodically.  76

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 in compromise of $500
or more and widen IRS' discretionary authority to decide which
offers require review.  78

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.  80

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.  82

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.  83

Congress needs to (1) clarify the rules for classifying workers 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.  85

OPEN RECOMMENDATION

The tax-writing committees should explore, within the existing
framework, opportunities to exercise more scrutiny over indirect
spending through tax expenditures.  Congress could also consider
integrating tax expenditures into current budget processes so that
congressional consideration of a savings target is part of the annual
budget process and to ensure that Congress addresses tax expenditures
periodically (GAO/GGD/AIMD-94-122, 06/03/94). 


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

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 II:0.2

We recommended that the tax-writing committees 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 II:0.3

Once tax expenditure performance data are developed, we recommended
that OMB 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 II:0.4

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. 

Congress has given considerable attention to tax expenditures during
the past year.  Presidential line-item veto power over selected tax
expenditures is included in budget legislation pending as of December
31, 1995.  This legislation would permit the President to veto
certain targeted tax benefits, including any revenue-losing provision
that provides a federal income tax deduction, credit, exclusion, or
preference to 100 or fewer tax payers, or certain transition rules
that provide a tax benefit to five or fewer taxpayers.  The same
pending legislation would also create some new tax preferences and
expand others, while scaling back, phasing out, or sunsetting others. 

OPEN RECOMMENDATION

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 in compromise of $500 or
more and widen IRS' discretionary authority to decide which offers
require review (GAO/GGD-94-47, 12/23/93). 


      SUMMARY
------------------------------------------------------ Appendix II:0.5

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 overreliance 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 (1) the names of taxpayers whose debts are compromised, (2) the
amount of the debt compromised, and (3) 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 through use of the indicators previously discussed. 

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 II:0.6

We suggested that Congress 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 II:0.7

We recommended that the Commissioner of Internal Revenue 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 II:0.8

As of December 31, 1995, Congress had taken no action to remove the
requirement that the Treasury General Counsel review all offers of
$500 or more and to widen IRS' discretionary authority to decide
which offers require review. 

IRS has begun making changes necessary to gather data to determine
program costs.  Measuring such costs and yields requires two separate
computer programming efforts--one has been completed and the other is
part of a broader ongoing effort.  IRS has also established a group
that will visit selected district offices to conduct interviews and
collect data to assist in identifying inconsistencies in the
treatment of taxpayers receiving offers in compromise. 

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:0.9

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 some self-imposed constraints.  For example, IRS has
generally followed a lengthy and rigid three-stage collection process
that, 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.  Further, 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, 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. 

External constraints have also affected IRS' ability to collect
delinquent taxes.  For example, we found that 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.  IRS may have opportunities for expanding
cooperative projects with states that are directly related to
collecting delinquent federal taxes.  Our survey of states found that
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:0.10

We continue to believe that 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:0.11

We recommended that the Commissioner of Internal Revenue (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; and (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:0.12

In January 1995, IRS implemented a nationwide early intervention
collection program to send delinquent taxpayers fewer notices and
make telephone contact sooner.  The program, involving several
hundred employees at multiple locations, aims at sending delinquent
individual taxpayers three notices rather than the normal five
notices and attempting telephone contact after 2 to 3 months instead
of after 6 months.  While specific performance data are not yet
available, IRS officials contend that the program has been
successful.  IRS plans other enhancements to its collection process,
including using characteristics of the delinquency case to determine
the most appropriate collection enforcement action to be pursued to
resolve the case.  Also, a provision in IRS' fiscal year 1996
appropriations bill directs IRS to devote $13 million to test the use
of private collection agencies to locate and contact delinquent
taxpayers. 

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:0.13

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' SSNs 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 computer-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 computer-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:0.14

We continue to believe that 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:0.15

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


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix II:0.16

Congress considered such legislation in 1993, but not recently.  IRS,
in response to our recommendation, is doing a 100-percent computer
match for the 1995 filing season.  IRS will code and transcribe SSNs
for up to four dependents per return.  Dependent SSNs not matching
the SSA file will "fall out" in the Error Resolution System for
further action. 

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:0.17

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:0.18

We continue to believe that 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:0.19

We recommended that the Commissioner of Internal Revenue (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:0.20

Regarding the first recommendation to IRS, IRS published an
explanation in the 1994 filing year Form 1040 instructions that
deductions cannot be taken for itemized charges for services, charges
for improvements that increase property value, and refunds or rebates
of real estate taxes.  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 needs to (1) clarify the rules for classifying workers 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:0.21

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
report entitled Tax Treatment of Employees and Self-Employed Persons
by the Internal Revenue Service:  Problems and Solutions (GGD-77-88,
Nov.  21, 1977).  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 with employees.  IRS estimated
that self-employed individuals (including independent contractors)
would underpay $20.3 billion in 1992 taxes by not reporting income. 

Because of the continual high tax noncompliance of independent
contractors, IRS began the nationwide ETEP in 1988.  IRS planned to
reduce this noncompliance by requiring businesses to treat
misclassified independent contractors as employees subject to
withholding taxes.  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:0.22

We recommended that Congress 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." We also recommended that
Congress consider legislation to improve independent contractor
compliance through withholding and/or improved information reporting. 


      ACTION(S) TAKEN AND/OR
      PENDING
----------------------------------------------------- Appendix II:0.23

As of December 31, 1995, Congress had considered but had not enacted
either of our recommendations.  Tax-writing committees are expected
to resume debate on this issue in 1996. 


LISTING OF OPEN RECOMMENDATIONS TO
CONGRESS BEFORE AND DURING FISCAL
YEAR 1995
========================================================= Appendix III

Congress should amend the Internal Revenue Code to allow IRS to
provide information to all responsible officers regarding its efforts
to
collect the trust fund recovery penalty from other responsible
officers.  35

Congress may want to provide for reviewing the fixed base of the
revised research tax credit periodically and adjusting it as needed
to
prevent it from becoming too generous or too restrictive
over time.  47

Congress may want to consider amending federal legislation to (1)
authorize states to offset current recipients' benefits without
client consent to recover Food Stamp overpayments caused by agency
error
and (2) extend the authority for states to intercept federal income
tax
refunds to include the recovery of AFDC and Medicaid
overpayments.  49

Congressional tax-writing committees should explore, within the
existing framework, opportunities to exercise more scrutiny over
indirect spending through tax expenditures.  Congress could also
consider integrating tax expenditures into current budget processes
so that congressional consideration of a savings target is
part of the annual budget process and to ensure that Congress
addresses tax expenditures periodically.  76

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 in compromise of
$500 or more and widen IRS' discretionary authority to decide which
offers require review.  78

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.  80

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.  82

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.  83

Congress needs to (1) clarify the rules for classifying workers 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.  85


LISTING OF RECOMMENDATIONS MADE IN
FISCAL YEAR 1995 TO THE
COMMISSIONER OF INTERNAL REVENUE
AND TO OTHER AGENCY HEADS\1
========================================================== Appendix IV


--------------------
\1 Except where stated otherwise, these recommendations were made to
the Commissioner of Internal Revenue. 


   IMPROVE COMPLIANCE WITH TAX
   LAWS
-------------------------------------------------------- Appendix IV:1

(1) Develop plans to modify audit management information systems to
more fully reflect the results of partnership audits by including
information on tax assessments on partners' income tax returns and
changes in allocations of profits/losses among partners; (2) analyze
computer partnership files to develop audit leads and select returns
for audit; (3) reinstate the delinquency check program for
partnerships to identify other partnerships that do not file required
tax returns; (4) develop plans for a document-matching program using
information returns to verify partnership income; and (5) devise ways
to enter all Schedules K-1 onto the computer, so they can be used in
the individual computer document-matching program and for other
compliance purposes.  29



   ASSIST TAXPAYERS
-------------------------------------------------------- Appendix IV:2

Establish a service-wide definition of taxpayer abuse or mistreatment
and identify and gather the management information needed to
systematically track its nature and extent.  35

Ensure that IRS' systems modernization effort provides the capability
to minimize unauthorized employee access to taxpayer information
in the computer system that will replace the Integrated Data
Retrieval
System.  35

Revise the guidelines for Information Gathering Projects to require
that specific criteria be established for selecting taxpayers'
returns
to be examined during each project and to require a separation
of duties between those staff members who identify returns with
potential for tax changes and those who select the returns
to be examined.  35

Reconcile outstanding cash receipts more often than once a year, and
stress in forms, notices, and publications that taxpayers should use
checks or money orders rather than cash to pay their tax bills.  36

Better inform taxpayers about their responsibility and potential
liability for the trust fund recovery penalty by providing them with
special information packets.  36

Seek ways to alleviate taxpayers' frustration in the short term by
analyzing the most prevalent kinds of information-handling problems
and ensuring that requirements now being developed for new
information systems provide for long-term solutions to
those problems.  36

Provide specific guidance for IRS employees on how they should
handle White House contacts other than those that involve checking
taxes of potential appointees or routine administrative matters.  36

Test the feasibility of using IRS' Correspondex computer system to
produce Individual Master File (IMF) and Business Master File (BMF)
notices and, if possible, transfer as many IMF and BMF notices as
practical to the Correspondex system.  The notices should be
transferred in stages, and the ease of the transition, its costs,
and the benefits of making these transfers should all be
considered in establishing the order of the transfers.  38

Establish a system to monitor proposed notice text revisions to
oversee progress or problems encountered in improving notice clarity.
This system should be able to identify when a revision was proposed
and its status at all times, and it should contain a threshold beyond
which delays must be appropriately followed up and resolved.  39

Help improve forms and publications by making additional efforts to
identify the specific concerns of individual taxpayers.  Some ways
available include (1) soliciting information from IRS field personnel
(including auditors, examiners, and customer-service
representatives) to identify common errors made by taxpayers
that may be related to confusing passages in forms and
publications, and (2) gathering information concerning the nature of
taxpayer questions received through IRS' toll-free telephone
system.  40

Undertake an aggressive effort to (1) identify and define the
appropriate telephone assistance program operating practices for IRS
that would allow it to optimize the number of calls it can answer
within current budget constraints and (2) work with leadership of the
employees' union to reach agreement on implementing those
practices on a nationwide basis.  43

Take steps to effectively route taxpayers' calls nationwide, using
real-time information.  These steps could include a combination of
acquiring technology for real-time traffic monitoring and management,
utilizing the routing capability of IRS' telecommunications vendor,
and fully implementing the features of IRS' existing call routing
technology.  43


   IMPROVE IRS MANAGEMENT
-------------------------------------------------------- Appendix IV:3

Focus the electronic filing business strategy on a wider population
of taxpayers, including taxpayers who can benefit from filing
electronically.  52

Implement a process for selecting, prioritizing, controlling, and
evaluating the progress and performance of all major information
systems investments, including explicit decision criteria.  52

Require that future contractors who develop software for IRS have a
software development capability rating of at least Capability
Maturity Model-level 2.  52

Address technical infrastructure weaknesses by (1) completing an
integrated systems architecture; (2) institutionalizing formal
configuration management for all new systems development projects
and upgrades and developing a plan to bring ongoing projects under
formal configuration management; and (3) developing security
concepts of operations, disaster recovery, and contingency
plans.  52

Give the Associate Commissioner management and control
responsibility for all systems development activities, including
those
of the IRS research and development division.  53

Implement the software, hardware, and procedural changes needed
to create reliable subsidiary accounts receivable and revenue records
that are fully integrated with the general ledger.  55

Change the current federal tax-deposit coupon reporting requirements
to include detailed reporting for all excise taxes, FICA taxes, and
employee withheld income taxes.  54

Implement software changes that will allow detailed taxes reported
to be separately maintained in the master file, other related revenue
accounting feeder systems, and the general ledger.  55



   IMPROVE THE PROCESSING OF
   RETURNS AND RECEIPTS
-------------------------------------------------------- Appendix IV:4

Encourage taxpayers to make address changes by (1) accepting
changes of address over the telephone; (2) making Form 8822, Change
of Address, more conveniently available; and (3) emphasizing to
taxpayers the importance of keeping their addresses current
with IRS.  58

Establish a centralized unit within each of IRS' service centers to
process all service center undeliverable mail.  58

The Secretary of the Treasury should forestall stakeholder confusion
and frustration regarding the applicability of statutory and
executive
guidance to tax-related regulations by directing that, when such
guidance is not applicable, the text accompanying the publication of
proposed and final regulations contain a complete explanation of why
this is so.  59

The Secretary of the Treasury should require that regulation drafters
document internally, when time permits, their consideration of the
factors provided in statutory and executive guidance to better ensure
that tax regulations reflect stakeholders' needs.  60

The Secretary of the Treasury should encourage regulation drafters to
meet with selected stakeholders to work through implementation
issues associated with draft-tax regulations before publishing the
regulations for notice and comment.  60

The Secretary of the Treasury should require regulation drafters to
develop key measures of simplicity for tax regulations that can be
used to help judge whether existing or proposed regulations are too
complex.  60

Improve the information provided to taxpayers and the administration
of the installment agreement program by (1) notifying taxpayers
about projected total costs and payoff periods when setting up
agreements with taxpayers and when mailing monthly reminder
notices; (2) experimenting with Form 9465, Installment Agreement
Request, to test whether providing space for taxpayer authorization
of direct debit installment payments increases the use of this
option;
and (3) sending agreement default notices to taxpayers by regular
mail instead of certified mail unless an account is being referred
for levy action.  62

Improve the processing of returns with missing or incorrect SSNs and
help clean up accounts currently posted on the IMF invalid segment
by (1) finalizing the CP54B notice for use in the 1996 tax filing
season
and (2) applying the revised documentation requirements to taxpayers
who filed tax returns that were posted to the IMF invalid segment
before
1995 and whose accounts had a permanent refund release code.  64

Establish returns-processing and compliance-screening procedures to
help remove erroneous cross-referenced taxpayer identification
numbers from sole proprietors' tax records.  65

Evaluate the feasibility of eliminating the requirement that sole
proprietors use EINs for filing business returns.  65


CHRONOLOGICAL LISTING OF GAO
PRODUCTS ON TAX MATTERS ISSUED IN
FISCAL YEAR 1995
=========================================================== Appendix V

------------------------------------------------------------------------  ------
Tax Administration: Continuing Problems Affect Otherwise Successful 1994     10/
 Filing Season (GAO/GGD-95-5)                                              07/94
Tax Administration: Earned Income Credit-Data on Noncompliance and           10/
 Illegal Alien Recipients (GAO/GGD-95-27)                                  25/94
Tax Administration: IRS Can Strengthen Its Efforts to See That Taxpayers     10/
 Are Treated Properly (GAO/GGD-95-14)                                      26/94
College Savings: Using EE Savings Bonds and Loans From Thrift Savings        11/
 Plan to Pay for College                                                   04/94
 (GAO/HEHS-95-16R)
Tax Administration: IRS Efforts to Improve Forms and Publications (GAO/      12/
 GGD-95-34)                                                                07/94
Tax Administration: Changes Needed to Reduce Volume and Improve              12/
 Processing of Undeliverable Mail                                          07/94
 (GAO/GGD-95-44)
Tax Administration: IRS Notices Can Be Improved (GAO/GGD-95-6)               12/
                                                                           07/94
Tax System Burden: Tax Compliance Burden Faced by Business Taxpayers         12/
 (GAO/T-GGD-95-42)                                                         09/94
IRS User Fees (GAO/GGD-95-58R)                                               12/
                                                                           15/94
Tax Administration: Estimates of the Tax Gap for Service Providers (GAO/     12/
 GGD-95-59)                                                                28/94
Tax Administration: Process Used to Revise the Federal Employment Tax        12/
 Deposit Regulations (GAO/GGD-95-8)                                        29/94
Tax Compliance: Status of the Tax Year 1994 Compliance Measurement           12/
 Program (GAO/GGD-95-39)                                                   30/94
U.S. Insular Areas: Information on Fiscal Relations With the Federal         01/
 Government (GAO/T-GGD-95-71)                                              31/95
Tax Administration: Tax Compliance Initiatives and Delinquent Taxes          02/
 (GAO/T-GGD-95-74)                                                         01/95
Tax Policy and Administration: 1994 Annual Report on GAO's Tax-Related       02/
 Work (GAO/GGD-95-66)                                                      16/95
Tax Systems Modernization: Unmanaged Risks Threaten Success (GAO/T-          02/
 AIMD-95-86)                                                               16/95
Tax Administration: IRS' Fiscal Year 1996 Budget Request and the 1995        02/
 Filing Season (GAO/T-GGD-95-97)                                           27/95
Tax-Exempt Organizations: Information on Selected Types of Organizations     02/
 (GAO/GGD-95-84BR)                                                         28/95
High-Risk Series: Internal Revenue Service Receivables (GAO/HR-95-6)       02/95
Information on Tax Liens Imposed by IRS (GAO/GGD-95-87R)                     03/
                                                                           03/95
Addressing the Deficit: Budgetary Implications of Selected GAO Work for      03/
 Fiscal Year 1996                                                            15/
 (GAO/OCG-95-02)                                                              95

Earned Income Credit: Targeting to the Working Poor (GAO/GGD-95-122BR)       03/
                                                                           31/95
Tax Policy: Information on the Research Tax Credit (GAO/T-GGD-95-140)        04/
                                                                           03/95
Tax Policy: Experience With the Corporate Alternative Minimum Tax (GAO/      04/
 GGD-95-88)                                                                03/95
Earned Income Credit: Targeting to the Working Poor (GAO/T-GGD-95-136)       04/
                                                                           04/95
Telephone Assistance: Adopting Practices Used by Others Would Help IRS       04/
 Serve More Taxpayers (GAO/GGD-95-86)                                      12/95
International Taxation: Transfer Pricing and Information on Nonpayment       04/
 of Tax (GAO/GGD-95-101)                                                   13/95
Paid Tax Preparers and Tax Software (GAO/GGD-95-125R)                        04/
                                                                           14/95
Tax Administration: Administrative Improvements Possible in IRS'             05/
 Installment Agreement Program (GAO/GGD-95-137)                            02/95
Options Reporting to IRS (GAO/GGD-95-145R)                                   05/
                                                                           05/95
Tax Policy: Additional Information on the Research Tax Credit (GAO/T-        05/
 GGD-95-161)                                                               10/95
Money Laundering: Needed Improvements for Reporting Suspicious               05/
 Transactions Are Planned                                                  30/95
 (GAO/GGD-95-156)
Reducing the Tax Gap: Results of a GAO-Sponsored Symposium (GAO/GGD-95-      06/
 157)                                                                      02/95
Taxpayer Compliance: Reducing the Income Tax Gap (GAO/T-GGD-95-176)          06/
                                                                           06/95
Earned Income Credit: Noncompliance and Potential Eligibility Revisions      06/
 (GAO/T-GGD-95-179)                                                        08/95
Tax-Exempt Organizations: Activities and IRS Oversight (GAO/T-GGD-95-        06/
 183)                                                                      13/95
Tax Administration: IRS' Partnership Compliance Activities Could Be          06/
 Improved (GAO/GGD-95-151)                                                 16/95
Welfare Benefits: Potential to Recover Hundreds of Millions More in          06/
 Overpayments (GAO/HEHS-95-111)                                            20/95
Tax-Exempt Organizations: Additional Information on Activities and IRS       06/
 Oversight (GAO/T-GGD-95-198)                                              29/95
Tax Policy and Administration: California Taxes on Multinational             07/
 Corporations and Related Federal Issues                                   11/95
 (GAO/GGD-95-171)
Tax Compliance: 1994 Taxpayer Compliance Measurement Program (GAO/T-         07/
 GGD-95-207)                                                               18/95
Other Income Reporting (GAO/GGD-95-199R)                                     07/
                                                                           19/95
Tax Systems Modernization: Management and Technical Weaknesses Must Be       07/
 Corrected If Modernization Is to Succeed (GAO/AIMD-95-156)                26/95
Tax Administration: Issues Involving Worker Classification (GAO/T-GGD-       08/
 95-224)                                                                   02/95
College Savings: Information on State Tuition Prepayment Programs (GAO/      08/
 HEHS-95-131)                                                              03/95
Financial Audit: Examination of IRS' Fiscal Year 1994 Financial              08/
 Statements (GAO/AIMD-95-141)                                              04/95
Tax Administration: IRS Could Do More to Verify Taxpayer Identities          08/
 (GAO/GGD-95-148)                                                          30/95
Tax Administration: Sole Proprietor Identification Numbers Can Be            09/
 Improved (GAO/GGD-95-160)                                                 18/95
Tax Administration: Recurring Issues in Tax Disputes Over Business           09/
 Expense Deductions (GAO/GGD-95-232)                                       26/95
--------------------------------------------------------------------------------

LISTING OF ASSIGNMENTS FOR WHICH
GAO WAS AUTHORIZED ACCESS TO TAX
DATA IN FISCAL YEAR 1995 UNDER 26
U.S.C.  6103(I)(7)(A)
========================================================== Appendix VI

Subject Matter             Objectives
-------------------------  -----------------------------------------------------
Compliance                 To identify (1) the types of income being reported on
characteristics for other  the other income line and (2) the compliance rate for
income                     each type of reported income and, if possible,
                           determine the reasons for the noncompliance.

Examination and            To determine (1) why the assessment processes
Information Returns        currently take so long, (2) what IRS is doing to
Program                    speed up the assessment processes, and (3) what
                           additional actions IRS can take to further speed up
                           the processes.

Low Income Housing Tax     To determine (1) how efficiently IRS is administering
Credit (LIHTC)             and monitoring LIHTC, (2) what controls are in place
                           at the state level to ensure that the credit is
                           applied as intended and costs are reasonable, (3)
                           what controls exist to ensure that states do not
                           certify buildings as eligible for the credit beyond
                           the amount allocated by state housing authorities,
                           (4) the characteristics of the individuals residing
                           in the units produced by the credits, and (5) such
                           other issues as may arise during the course of
                           examination.

IRS' Taxpayer Compliance   To (1) monitor testing of IRS' computerized data
Measurement Program        capture mechanism, (2) evaluate auditor training, (3)
                           review quality review procedures, (4) evaluate the
                           case building techniques and (5) assess IRS' ability
                           to make use of interim data from program audits.

1995 filing season         To (1) assess IRS' performance during the 1995 tax
                           return filing season and (2) review the
                           administration's FY 1996 budget for IRS.

Unrelated Business Income  To update our 1987 study relating to the competition
Tax                        between tax-related organizations and taxable
                           businesses.

Nonwage earners'           To (1) review the filing patterns and sources of
compliance with income     income of nonwage earners, (2) develop profiles of
requirements               the taxpayers, (3) provide taxpayer-specific case
                           studies of nonwage earners, (4) review the adequacy
                           of IRS requirements, (5) analyze the accounts
                           receivable inventory attributable to these taxpayers,
                           and (6) develop recommendations to improve tax
                           compliance and collection programs related to nonwage
                           earners.

Impact of revenue          To determine (1) the impact of field collection
officers on collection of  staff, particularly revenue officers, and (2) whether
overdue taxes              revenue officers' duties were done efficiently and
                           economically.

IRS' delinquent tax        To determine how IRS' delinquent tax collection
collection                 process can be reengineered or restructured.

IRS' Compliance 2000       To determine how IRS selected, managed, and captured
effort                     results for Compliance 2000 initiatives and
                           coordinated the initiatives with other enforcement
                           activities.

Audits of large            To determine what factors affect the rate at which
corporations               taxes recommended by revenue agents get assessed.

Elimination of computer    To determine (1) how IRS restricts access to computer
security risks             data, systems, and facilities; (2) manages changes to
                           IRS' computer systems software; (3) prepares for
                           disasters and contingencies; and (4) safeguards its
                           communications network against unauthorized access.
--------------------------------------------------------------------------------

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

David J.  Attianese, Assistant Director, Tax Policy and
 Administration Issues
Rodney F.  Hobbs, Evaluator-in-Charge
Carrie Watkins, Evaluator
Judy Lanham, Secretary


*** End of document. ***