Internal Revenue Service: Results of Nonfiler Strategy and Opportunities
to Improve Future Efforts (Chapter Report, 05/13/96, GAO/GGD-96-72).

GAO reviewed the results of the Internal Revenue Service's (IRS)
nonfiler strategy and opportunities to improve any similar future
efforts.

GAO found that: (1) IRS actions to achieve its Nonfiler Strategy's goals
included deploying examination staff to work on nonfiler cases,
increasing other IRS functions' emphasis on nonfiler activities,
eliminating old cases from inventory, establishing cooperative
relationships with states and the private sector, and implementing a
refund hold program; (2) IRS believes that its Nonfiler Strategy was
generally a success, since it reduced its nonfiler inventory, eliminated
unproductive cases, increased the number of returns from and dollars
assessed against individual nonfilers, and created closer working
relationships with outside stakeholders and professional associations;
(3) although IRS reduced its nonfiler inventory, there are not enough
data to determine voluntary compliance improvement or the program's
cost-effectiveness; (4) returns from business nonfilers and collection
of delinquent taxes decreased during the 2 years the strategy was in
effect; (5) IRS made measuring the strategy's success more difficult by
failing to establish measurable goals; (6) at least 38 percent of
nonfilers who eventually filed a return became recidivists in the
following year; (7) future IRS nonfilers efforts could be improved by
shortening the time before first notices and telephone contacts are
made, using lower-grade staff to pursue nonfiler cases, and revising
notices sent to recidivists to increase their urgency; and (8) IRS has
reduced the time before sending first notices and developed special
recidivist procedures, but it continues to send several notices before
making telephone contact.

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

 REPORTNUM:  GGD-96-72
     TITLE:  Internal Revenue Service: Results of Nonfiler Strategy and 
             Opportunities to Improve Future Efforts
      DATE:  05/13/96
   SUBJECT:  Voluntary compliance
             Personal income taxes
             Human resources utilization
             Tax nonpayment
             Tax returns
             Tax administration systems
             Delinquent taxes
             Debt collection
             Telephone communications operations
IDENTIFIER:  IRS Early Intervention Project
             IRS Substitute for Return Program
             IRS Automated Collection System
             IRS Nonfilers Program
             IRS Tax System Modernization Program
             TSM
             
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Cover
================================================================ COVER


Report to the Honorable
Margaret Milner Richardson, Commissioner of Internal Revenue

May 1996

INTERNAL REVENUE SERVICE - RESULTS
OF NONFILER STRATEGY AND
OPPORTUNITIES TO IMPROVE FUTURE
EFFORTS

GAO/GGD-96-72

IRS' Nonfiler Strategy

(268626)


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

  ACS - Automated Collection Site
  IRS - Internal Revenue Service
  SFR - Substitute for Return
  TDI - Taxpayer Delinquency Investigation

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


B-260132

May 13, 1996

The Honorable Margaret Milner Richardson
Commissioner of Internal Revenue
Department of the Treasury

Dear Mrs.  Richardson: 

This report discusses the results of our review of IRS' Nonfiler
Strategy and opportunities for improving any similar future efforts. 
We did this review under our basic legislative authority. 

The report contains recommendations addressed to you.  As you know,
31 U.S.C.  720 requires the head of a federal agency to submit a
written statement on actions taken on our recommendations to the
Senate Committee on Governmental Affairs and the House Committee on
Government Reform and Oversight not later than 60 days after the date
of the report and to the House and Senate Committees on
Appropriations with the agency's first request for appropriations
made more than 60 days after the date of the report. 

We are sending copies of this report to the Secretary of the
Treasury; the Director, Office of Management and Budget; and
interested committees and subcommittees.  We will make copies
available to others upon request. 

Please call me at (202) 512-9110 if you or your staff have any
questions about the report.  Other major contributors to this report
are listed in appendix II. 

Sincerely yours,

Natwar Gandhi
Associate Director, Tax Policy
 and Administration Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

At the beginning of fiscal year 1993, the Internal Revenue Service
(IRS) had an inventory of about 10 million known individual and
business nonfilers.  IRS estimated that the amount of unpaid taxes on
nonfiled individual income tax returns for 1992 alone was more than
$10 billion.  Concerned about this noncompliance, IRS implemented a
strategy in fiscal year 1993 to bring nonfilers into the system and
keep them there.  GAO, under its basic legislative authority,
reviewed IRS' strategy to (1) assess the results and (2) determine
whether opportunities existed to improve any future nonfiler efforts. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

IRS identifies potential nonfilers primarily by matching data on
information returns, such as wage and withholding statements from
employers, with data on filed income tax returns.  When the matched
data show income but no corresponding tax return, a potential
nonfiler is identified.  IRS then decides what type of action to
take, if any.  Depending on the facts of the case and available
resources, IRS' decision can range from doing nothing to conducting a
detailed investigation. 

The Commissioner of Internal Revenue, in October 1993 congressional
testimony, cited three goals that IRS established to help achieve the
objective of the Nonfiler Strategy:  (1) use a combination of
outreach and enforcement to improve taxpayer compliance and the
identification of nonfilers, (2) eliminate the backlog in IRS'
inventory of nonfiler investigations by the end of fiscal year 1994
so that IRS can work individual nonfiler cases promptly, and (3)
improve the way IRS directs its enforcement resources in working
nonfiler cases so that it can employ the most effective techniques on
different types of cases to achieve the highest return on its
resource investment.  The Strategy was to be in effect for fiscal
years 1993 and 1994. 

To achieve its review objectives, GAO interviewed officials and
reviewed procedures and results at IRS' National Office, three
regional offices, four district offices, two service centers, and a
compliance center.  Because a major part of the Strategy involved the
use of staff from IRS' Examination function to help investigate
nonfiler cases, GAO randomly selected a total of 140 cases completed
in fiscal years 1993, 1994, and 1995 by Examination staff at the four
district offices visited.  GAO's sample results are not projectable. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

IRS took several positive steps to achieve the goals of the Nonfiler
Strategy.  Among other things, the Examination function deployed
staff to work on nonfiler cases; other IRS functions increased their
emphasis on nonfiler activities; and IRS eliminated old cases from
inventory, established cooperative working arrangements with states
and the private sector, and implemented a refund hold program. 

According to IRS, the Nonfiler Strategy was generally a success. 
Among other things, IRS (1) reduced the size of the nonfiler
inventory; (2) eliminated unproductive cases, which allowed it to
focus enforcement resources more effectively; and (3) increased the
number of returns secured from individual nonfilers.  However, the
results of the Strategy are less conclusive when compared with the
Strategy's goals.  IRS achieved its goal of reducing the backlog of
nonfiler investigations, but there is insufficient information with
which to judge IRS' success in achieving its other two goals.  For
example, it is unclear how much, if at all, voluntary taxpayer
compliance improved as a result of the Strategy, and the absence of
comprehensive cost data makes it difficult to assess return on
investment. 

GAO identified several areas where opportunities existed to improve
any future IRS effort directed at nonfilers.  Those opportunities
relate to (1) the time it takes IRS to make telephone contact with
nonfilers; (2) the use of higher graded staff to perform tasks that
might be effectively done by lower graded staff; and (3) procedures
for dealing with recidivists--i.e., nonfilers who are brought into
compliance and then become nonfilers again. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      WAS THE NONFILER STRATEGY A
      SUCCESS? 
-------------------------------------------------------- Chapter 0:4.1

According to IRS, the Nonfiler Strategy was a success for several
reasons.  By purging old cases and redirecting staff from the
Examination function to help work nonfiler cases, for example, IRS
was able to reduce its nonfiler inventory.  The use of Examination
staff, along with such things as the establishment of cooperative
working arrangements with states and the private sector and
implementation of a refund hold program, also helped IRS increase the
number of returns secured from individual nonfilers.  Under the
refund hold program, IRS held refunds claimed by certain individuals
who had a prior year's return that was more than 1 year overdue until
they either filed the overdue return or explained why there was no
filing requirement.  (See pp.  15 to 17.)

Compared to the goals of the Strategy, however, the results are less
conclusive.  It is unclear how much, if at all, voluntary taxpayer
compliance improved as a result of the Strategy.  For example, of the
nonfilers who were brought into compliance in 1993, 38 percent had
not filed a tax year 1993 return by August 1995--16 months after the
returns were due.  IRS does not know how that rate of recidivism
compared to past years.  IRS also does not have the comprehensive
cost data necessary to assess its return on investment.  Some cost
data, such as the number of Examination and Collection staff years
spent on nonfiler work, were available but not enough to determine
overall cost.  IRS said that it never intended to measure the
Strategy's success by cost.  In GAO's opinion, however, comprehensive
cost data are important if management is to make informed decisions
on the nature and extent of future nonfiler efforts.  (See pp.  17 to
23.)

Assessment of the results of the Nonfiler Strategy was made more
difficult by the general absence of many measurable goals (targets)
against which to compare the results.  For example, IRS did not have
a goal for the number of delinquent returns it wanted to secure
during the Strategy or the number of nonfilers it wanted to bring
into compliance.  IRS agreed that it did not have many specific
targets but pointed out that it had several indicators that were
designed to show positive or negative trends in results.  GAO agrees
that it is useful to track trends, but such an exercise is more
meaningful if there are goals against which to compare those trends. 
(See p.  22.  )


      OPPORTUNITIES TO IMPROVE
      FUTURE NONFILER EFFORTS
-------------------------------------------------------- Chapter 0:4.2

In reviewing the Nonfiler Strategy, GAO identified three areas where
opportunities existed to enhance any future nonfiler initiatives: 
(1) the time that elapses before IRS attempts to contact a nonfiler
by telephone, (2) the staffing of future nonfiler initiatives, and
(3) recidivists. 


         TELEPHONE CONTACT WITH
         NONFILERS
------------------------------------------------------ Chapter 0:4.2.1

IRS officials have said that the faster they can act to obtain
delinquent returns and related taxes, the more likely that the action
will be successful.  At the time of GAO's review, however, IRS did
not send a first notice to an individual nonfiler until about 1 year
after the return was due, and cases that IRS considered to have high
potential were not assigned for telephone contact with the nonfiler
until several notices had been sent--about 1-1/2 years after the
return was due. 

IRS has efforts underway to shorten by several months the time before
the first notice is sent.  As a result of those efforts, IRS expects
to move up first contact with certain nonfilers to November of the
year the return was due.  Besides shortening the time before issuance
of the first notice, resolution of nonfiler cases might also be
enhanced by more timely telephone contact with the nonfiler after
issuance of the first notice--something IRS is trying to do, through
an Early Intervention Project, in cases involving delinquent tax
payments.  As of July 1995, IRS management had under consideration
several recommendations by an IRS business reengineering team, some
of which were directed at shortening the notice process.  (See pp. 
25 to 27.)


         STAFFING OF FUTURE
         NONFILER EFFORTS
------------------------------------------------------ Chapter 0:4.2.2

During each of the 2 years of the Nonfiler Strategy, IRS' Examination
function had about 18,000 revenue agents and tax auditors.  To help
work nonfiler cases, IRS redirected a significant number of those
staff (about 4,000 staff years in total during the 2 years) from
their regular audit duties.  According to IRS data, of the time
charged by revenue agents and tax auditors to nonfiler cases that had
been closed in fiscal years 1993 and 1994, about 66 percent was
charged by GS-11 revenue agents, and another 14 percent was charged
by revenue agents above the GS-11 level.  When not working on
nonfiler cases, revenue agents at those grade levels generally audit
complex returns filed by individuals and returns filed by
corporations. 

GAO is not questioning IRS' staffing decisions for the Nonfiler
Strategy.  Given the importance of the Strategy and available
resources at the time, IRS may have had no other viable option. 
However, it appears, on the basis of GAO's case reviews and
discussions with IRS staff in four district offices, that future
nonfiler efforts could be just as effective without IRS relying as
much on higher graded revenue agents. 

Although Examination managers and staff GAO interviewed in four
district offices had several positive things to say about the
Nonfiler Strategy and Examination's role in it, a common theme
expressed by many of them was that much of the nonfiler case work was
the kind of work that could be done by lower graded staff.  Options
suggested by district office personnel for staffing future nonfiler
efforts included (1) using more tax auditors or service center tax
examiners instead of revenue agents and (2) making greater use of
paraprofessionals or administrative staff.  In many of the cases GAO
reviewed, for example, Examination's success in securing delinquent
returns seemed to be due, in large part, to the agents' and auditors'
persistence in contacting nonfilers by telephone and in following up
with nonfilers when they missed an appointment or when returns or
information they had promised to mail were not received.  Because it
did not appear that the person making the phone calls needed any
special auditing skills, it would seem that IRS could achieve the
same result by using paraprofessionals or other lower graded staff,
leaving higher graded staff more time to audit.  (See pp.  27 to 30.)


         RECIDIVISTS
------------------------------------------------------ Chapter 0:4.2.3

In July 1995, the Deputy Commissioner of Internal Revenue approved a
strategy for dealing with recidivists--nonfilers who are brought into
compliance and then fail to file again in later years.  The strategy
calls for such things as expediting cases by eliminating some
notices.  However, the strategy says nothing about revising the
language in the notices that will be sent.  If IRS plans to send
recidivists fewer notices than it sends other nonfilers and to revise
other procedures relating to the handling of recidivist cases, the
language of the remaining notices may no longer be appropriate for
those cases.  An IRS official responsible for the nonfiler program
acknowledged that if IRS decides to send fewer notices to
recidivists, it may need to revise the wording of those notices.  It
is important that IRS make that determination in a timely manner
because of the long process involved in approving and making the
computer programming changes needed to revise a notice.  (see pp.  30
to 31.)


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

To better assess the results of future nonfiler efforts, if any, and
provide a better foundation for deciding about subsequent efforts,
GAO recommends that the Commissioner of Internal Revenue (1)
establish measurable goals and (2) develop comprehensive data on
program costs. 

To enhance any future IRS efforts directed at nonfiling, GAO
recommends that the Commissioner of Internal Revenue do the
following: 

  -- Revise procedures to provide for more timely telephone contact
     with nonfilers in line with the reengineering team's
     recommendations.  In that regard, IRS should consider whether
     the Early Intervention Project, which includes, among other
     things, earlier telephone contact with taxpayers whose taxes are
     delinquent, should be extended to nonfilers. 

  -- Consider the feasibility and appropriateness of assigning more
     nonfiler work to lower graded professional staff,
     paraprofessionals, and administrative staff.  In considering its
     options, IRS might want to solicit input from district managers
     and staff who worked on the Nonfiler Strategy. 

  -- Determine, if IRS decides to send fewer notices to recidivists,
     whether the language of the remaining notices should be revised. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

GAO obtained comments on a draft of this report at a meeting with IRS
officials on December 4, 1995.  Those comments were expanded on in
memoranda dated December 11, 1995, and February 12, 1996.  (See pp. 
23 and 32.)

IRS officials took strong exception to the "extremely negative tone"
of GAO's draft report.  They said that the draft focused almost
exclusively on criticisms of the Strategy without fully acknowledging
its accomplishments and that an uninformed reader would likely judge
the Strategy a failure when, in IRS' view, it was generally a
success.  In response to those comments, GAO revised this summary and
chapter 2 of the report to give more prominence to the Strategy's
positive aspects and to recognize IRS' position on the Strategy's
success.  However, although IRS is confident that the Strategy was a
success, GAO could not reach the same conclusion given the
statistical data available and the absence of measurable goals and
comprehensive cost data. 

IRS agreed with GAO's recommendation on revising the notices sent to
recidivists but took issue with the other recommendations in GAO's
draft.  In response to IRS' comments and to clarify its intent in
some cases, GAO revised the wording of the recommendations. 

IRS took most exception to GAO's recommendation about the staffing of
future nonfiler efforts.  IRS said that the decision to assign
nonfiler cases to higher graded Examination employees was a
management decision based on the view that maintaining the viability
of the nonfiler program outweighed possible short-term productivity
losses in other areas. 

It was not GAO's intent to second-guess IRS' staffing decisions for
the Nonfiler Strategy but rather to suggest that IRS consider other
options in staffing any future nonfiler initiatives.  GAO revised its
recommendation to give IRS more flexibility in deciding how to staff
future nonfiler efforts.  After seeing the revision, IRS said that it
would, in the future, "consider using appropriately graded employees,
if available."


INTRODUCTION
============================================================ Chapter 1

Section 6012 of the Internal Revenue Code requires individuals,
businesses, and other taxable entities with income over a certain
threshold amount to file income tax returns.  While most individuals
and businesses voluntarily comply with this requirement, millions do
not.  At the beginning of fiscal year 1993, IRS had an inventory of
about 10 million known nonfilers-- about 7 million individuals and
about 3 million businesses that had not filed one or more required
returns.\1 IRS estimated that the amount of unpaid individual income
taxes on returns due but not filed for 1992 alone was more than $10
billion. 

IRS identifies potential nonfilers in several ways.  One of the more
significant ways to identify potential nonfilers of individual income
tax returns is through the document matching program.  Under that
program, IRS matches taxpayers' returns with information returns
(generally Forms W-2 and 1099) showing income, such as wages and
interest, paid by third parties, such as employers and banks.  When
the match shows income but no corresponding tax return, a potential
nonfiler is identified.  IRS identifies business nonfilers by
computer-matching filed returns with the business' filing
requirements.  Once it has identified potential nonfilers, and after
considering what resources are available, IRS decides what action to
take. 

In 1993, IRS received about 114 million individual income tax
returns.  Almost all of those returns were for tax year 1992.  For
that same tax year, IRS identified 59.6 million potential individual
nonfilers.  Of the 59.6 million, IRS took no enforcement action on
54.1 million (91 percent), primarily because IRS subsequently
determined that the individual or business had no legal requirement
to file.  Collection officials at IRS' National Office and regional
offices evaluated the remaining 5.5 million cases to determine the
potential tax due.  Cases that IRS judged to have the least
potential, 2.5 million, or 46 percent, received a reminder to file. 
Cases judged to have medium potential, 0.6 million, or 11 percent,
received up to 2 notices.  Cases judged to have the highest
potential, 2.3 million, or 43 percent, received up to 4 notices. 

Under IRS procedures, nonfiler cases that are not resolved during the
notice process are assigned to either the automated
Substitute-for-Return (SFR) program,\2 an Automated Collection System
(ACS) call site,\3 or a district office.  Generally, cases are
assigned to the automated SFR program when (1) IRS has enough income
information from other sources, such as information documents filed
by employers and banks, to prepare a return for the nonfiler; and (2)
the potential tax due meets established criteria.  Other cases are
assigned, using predetermined criteria, to ACS or a district office,
where they are scored to establish working priority. 

Cases assigned to a district office are put in an automated inventory
called the "queue" at the district office.  Cases with higher
estimated net tax yield are assigned to revenue officers in IRS'
Collection function.  Revenue officers attempt to contact nonfilers
and obtain delinquent returns through telephone calls, letters, or
visits.  Nonfiler cases with low estimated yield may remain in the
queue indefinitely. 


--------------------
\1 For purposes of the Nonfiler Strategy, IRS defined a nonfiler as
an individual or business with an annual tax return more than 360
days past due or a business with a quarterly return more than 90 days
past due. 

\2 Section 6020 of the Internal Revenue Code authorizes the Secretary
of the Treasury or his designee to make "substitute for return" (SFR)
assessments for persons who fail to file their tax returns.  In an
SFR assessment, IRS determines the taxpayer's liability using a
filing status of "single," the standard deduction, and income
information available from third parties and notifies the taxpayer
that it will assess this amount unless the taxpayer responds by
filing a correct return for a different amount.  If the taxpayer
fails to respond or disagrees with IRS' calculation but does not file
a return, IRS pursues the assessment using standard deficiency
procedures. 

\3 ACS call sites are Collection offices that attempt to resolve
nonfiler cases through phone calls.  Before doing so, IRS scores the
cases to determine investigative priorities.  For those nonfiler
cases that have a high score compared to other collection cases, an
ACS tax examiner attempts to identify the nonfiler's telephone number
and, if successful, attempts to contact the nonfiler to secure all
past due returns.  Cases that ACS is unable to resolve, and that meet
certain criteria, are transferred to a district office.  Nonfiler
cases with lower scores may remain inactive in the ACS inventory
indefinitely. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:1

Our objectives, addressed under our basic legislative authority, were
to assess the results of IRS' Nonfiler Strategy and identify any
opportunities for IRS to improve future nonfiler efforts. 

To accomplish our objectives, we did the following: 

  -- We interviewed IRS National Office officials responsible for
     overseeing the Nonfiler Strategy about planning and managing the
     Strategy and about its results. 

  -- We interviewed officials and personnel at the Central,
     Mid-Atlantic, and Southeastern Regional Offices; Atlanta,
     Baltimore, Cincinnati, and Detroit District Offices; and Atlanta
     and Cincinnati Service Centers about their roles in the Nonfiler
     Strategy, their procedures for implementing the Strategy, and
     the results obtained.  We chose the Central Region and
     Cincinnati District Office because of earlier work done at those
     locations.  We selected the other locations because they had
     large inventories of nonfilers.  The four district offices had
     10 percent of IRS' nonfiler inventory as of August 31, 1993. 

  -- We interviewed Austin Compliance Center officials about their
     analysis of IRS' process for identifying nonfilers and selecting
     nonfiler cases. 

  -- We reviewed relevant IRS manuals, instructions, reports, and
     statistics. 

  -- We reviewed IRS Internal Audit reports and met with Internal
     Audit personnel doing work in the nonfiler area. 

Because IRS' Examination function redirected a significant number of
staff to help with nonfiler cases during the Nonfiler Strategy, we
took some specific steps directed at that aspect of the Strategy.  To
help identify the types of nonfiler cases worked by Examination
staff, as well as how they were worked, we randomly selected 35 cases
worked by Examination in each of the 4 district offices we visited. 
In each district, we selected 15 cases from the cases closed by
Examination in fiscal year 1993, 15 cases from the cases closed by
Examination in fiscal year 1994, and 5 cases that had been closed by
Examination in fiscal year 1995 but were still physically located at
the district offices when we visited them in November and December
1994.  These 140 cases involved a total of 464 nonfiled returns.  We
also reviewed IRS' account records as of February and May 1995 to
determine whether the taxpayers in our sample cases remained
compliant by filing returns in subsequent years.  Our sample results
are not projectable.  Appendix I contains a profile of the nonfilers
in our sample and a profile developed by IRS' Statistics of Income
Division from returns filed in fiscal year 1993 that were 360 days or
more late. 

Much of the statistical data in this report on the results of IRS'
Nonfiler Strategy was taken from the Commissioner's Nonfiler Report,
a statistical report prepared by National Office staff responsible
for overseeing the Strategy.  After we finished our review and had
drafted our report, IRS told us that the Commissioner's Nonfiler
Reports on which we had based our analyses were erroneous.  IRS
provided revised reports, which showed significant differences from
the reports we had relied on.  Also, the revised reports covered only
11 months of the fiscal year because data that IRS needed to
reconstruct the reports for the full fiscal year were not available. 
We updated our report and, where appropriate, our analyses to reflect
the revised data provided by IRS.  We did not assess the data's
accuracy or reliability. 

We did our audit work from December 1993 through May 1995 in
accordance with generally accepted government auditing standards.  We
requested comments on a draft of this report from the Commissioner of
Internal Revenue or her designee.  On December 4, 1995, we met with
several IRS officials, including the National Director, Service
Center Compliance; the National Director, Compliance Specialization;
the Acting Director of the Office of Return Delinquency; and the
Acting Director for Special Compliance Programs.  They provided us
with oral comments, which the National Director, Service Center
Compliance, reiterated and expanded on in memoranda dated December
11, 1995, and February 12, 1996.  Their comments are summarized and
evaluated on pages 23 and 32 and are incorporated in this report
where appropriate. 


RESULTS OF IRS' NONFILER STRATEGY
============================================================ Chapter 2

IRS became increasingly concerned about the nonfiler problem in 1991,
when its delinquent return inventory--which had been growing by about
12 percent a year--increased by 30 percent.  In October 1992, IRS
initiated a Nonfiler Strategy with the basic objective of bringing
nonfilers into the system and keeping them there.  During the planned
2 years of the Strategy, fiscal years 1993 and 1994, IRS took several
positive steps to achieve that objective.\4 Those actions included
deployment of staff from the Examination function to work on nonfiler
cases, an increased emphasis on nonfiler activities by other IRS
functions, elimination of aged cases from inventory, cooperative
working arrangements with states and the private sector, and
implementation of a refund hold program. 

IRS considers the Nonfiler Strategy a success because, as a result of
the actions noted in the preceding paragraph, IRS, among other
things, (1) reduced the size of the nonfiler inventory, (2)
eliminated unproductive cases that allowed IRS to focus its
enforcement resources more effectively, (3) eliminated backlogs in
the automated SFR inventory, and (4) increased the number of returns
secured from individual nonfilers. 

While we acknowledge all of those accomplishments, our comparison of
the results IRS achieved during the 2 years of the Strategy (1993 and
1994) with the results achieved in the year before the Strategy
(1992) was inconclusive.  Some of the data showed improved results
compared with 1992, but other data showed the opposite.  The results
of the Strategy were also inconclusive when compared with IRS' three
goals. 

IRS achieved its goal of reducing the backlog of nonfiler
investigations, but there is insufficient information with which to
judge IRS' success in achieving its other two goals.  In that regard,
it is unclear how much, if at all, voluntary compliance improved as a
result of the Strategy.  For example, IRS knows the extent to which
nonfilers who were brought into compliance during the Strategy became
noncompliant again, but it does not know how that rate of recidivism
compares to years before the Strategy.  Likewise, IRS did not have
the comprehensive cost data needed to assess return on investment--a
key component of IRS' third goal.  Also affecting an assessment of
IRS' results was the absence of measurable goals for such things as
the number of overdue returns IRS expected to secure or the number of
nonfilers IRS expected to bring into compliance during the Strategy. 
In our opinion, these various factors would make it difficult for IRS
management to adequately assess its efforts during the Nonfiler
Strategy and make informed decisions on the nature and extent of any
future efforts. 


--------------------
\4 Although the Strategy was for only 2 years, IRS decided to
continue emphasis on nonfilers as part of its ongoing business.  In
that regard, the Chief Compliance Officer said, in an August 22,
1994, memorandum that "[a]lthough the same level of resources will
not be devoted to the program in the new fiscal year, enforcement
activities, outreach and assistance efforts should continue through
fiscal year 1995." As part of that continuing effort, Examination
provided staffing in fiscal year 1995 to complete work on over
200,000 cases that were in process at the end of fiscal year 1994. 


   IRS TOOK SEVERAL POSITIVE STEPS
   TO ADDRESS THE NONFILER PROBLEM
---------------------------------------------------------- Chapter 2:1

The objective of IRS' Nonfiler Strategy, as described by the
Commissioner of Internal Revenue in October 1993 testimony before the
Subcommittee on Oversight of the House Committee on Ways and Means,
was to bring nonfilers into the system and keep them there.  The
Commissioner cited three goals that IRS established to help achieve
that objective:  (1) use a combination of outreach and enforcement to
improve taxpayer compliance and the identification of nonfilers, (2)
eliminate the backlog in the number of nonfiler investigations by the
end of fiscal year 1994 so that IRS can work individual nonfiler
cases promptly, and (3) improve the way IRS directs its enforcement
resources in working nonfiler cases so that it can employ the most
effective techniques on different types of cases to achieve the
highest return on its resource investment. 

A major feature of the Nonfiler Strategy was its crossfunctional
approach to a problem that had primarily been the responsibility of
one function--Collection.  This approach increased the involvement of
other functions, such as Examination, Underreporter,\5 Taxpayer
Service, and Public Affairs.  In that regard, two major components of
the Nonfiler Strategy involved the deployment of (1) revenue agents
and tax auditors from the Examination function to work nonfiler cases
and (2) staff from IRS' Underreporter function to work SFR cases. 
According to IRS, the Examination and Underreporter functions
redirected a total of about 4,000 staff years and 550 staff years,
respectively, to those efforts in fiscal years 1993 and 1994. 

Another major component of the Nonfiler Strategy was to remove
unproductive, low-priority cases from the nonfiler inventory.  That
inventory is the universe of nonfilers known to IRS and selected for
some type of enforcement action.  Within that universe are those
cases that IRS has selected for possible detailed
investigation--known as Tax Delinquency Investigations (TDI). 
According to IRS, at the start of fiscal year 1993, (1) the nonfiler
inventory consisted of about 10.2 million individuals and businesses
that had not filed at least 1 required tax return and (2) the number
of TDI cases stood at 2.3 million. 

By the end of fiscal year 1994, IRS had reduced the nonfiler
inventory to about 6.8 million cases, mostly by purging millions of
cases that IRS deemed to have low potential because of their age. 
IRS plans to continue purging aged nonfiler cases annually.  IRS also
reduced the number of TDIs to 1.8 million cases through the
deployment of additional resources to help with cases and through
other efforts like the refund hold program, discussed later. 

Perhaps the most visible component of the Nonfiler Strategy and
another example of its crossfunctional nature was IRS' effort to
encourage and help nonfilers get back into compliance through
outreach and assistance (as opposed to enforcement).  The Taxpayer
Service function conducted educational workshops and helped taxpayers
meet their return filing requirements while Public Affairs had
primary responsibility for the communications and outreach strategy. 
That strategy generated a considerable amount of positive publicity
for IRS.  As part of the outreach effort, many districts held
"nonfiler days" during which IRS volunteers, sometimes accompanied by
volunteers from professional associations, such as the American
Institute of Certified Public Accountants and the American Bar
Association, were available to answer questions and help taxpayers
prepare returns. 

Many IRS district offices also entered into cooperative working
arrangements with state tax agencies.  As a result of those joint
efforts, IRS obtained tax returns, generated publicity and
educational materials, identified market segments to be targeted for
outreach efforts and enforcement actions, and gained access to state
databases to aid in identifying nonfilers.  For example, one state
did a comparison that identified a large number of individuals and
businesses that had filed state sales tax returns but not federal
income tax returns. 

Also as part of the Strategy, in January 1994 IRS began putting a
hold on refunds claimed by some individuals who had a prior year's
return in TDI status.  The hold applied to returns involving refund
claims above a certain amount filed by persons who were not in
bankruptcy or under criminal investigation.  IRS instructed the
taxpayer by letter to file the delinquent return(s) or explain why
there was no filing requirement.  IRS' letter also said that if it
did not receive either the delinquent return(s) or an acceptable
explanation, IRS could prepare a substitute return based on available
information.  IRS released the refund in cases where there was no
filing requirement or the taxpayer established that a significant
hardship existed.  Otherwise, the refund was applied to the balance
due on any delinquent return(s), with any remaining balance sent to
the taxpayer. 

IRS data show that the refund hold program in 1994 resulted in the
receipt of about 106,000 delinquent returns and the collection of
about $16 million with those returns.  IRS expanded the program in
1995 to include any situation where a refund return for more than a
certain amount was filed for tax year 1994 and a prior year's return
was more than 1 year overdue, even if the overdue return was not in
TDI status.  According to IRS data, as of May 1995 IRS had secured
about 24,000 returns and collected about $1.8 million in revenue with
those returns. 


--------------------
\5 The Underreporter function is generally responsible for
investigating cases of potential income underreporting identified by
matching the income reported on tax returns with wage and other
income information reported by third parties, such as employers and
banks. 


   WAS THE NONFILER STRATEGY A
   SUCCESS? 
---------------------------------------------------------- Chapter 2:2

According to IRS, the Nonfiler Strategy was generally a success.  In
reaching that conclusion, it pointed to several aspects of the
Strategy, some of which were discussed in the preceding section. 
Among other things, IRS cited (1) a decrease in the nonfiler
inventory, (2) creation of the refund hold program, (3) elimination
of unproductive cases that allowed IRS to focus its enforcement
resources more effectively, (4) elimination of backlogs in the
automated SFR inventory, (5) increases in the number of returns
secured from and dollars assessed against individual nonfilers during
the 2 years of the Strategy (fiscal years 1993 and 1994) compared
with the year before the Strategy (fiscal year 1992), and (6) a
closer working relationship between IRS and outside stakeholders and
professional associations. 

We assessed the results of the Strategy by looking at the key
performance indicators tracked by IRS during the Strategy.  We
concentrated on indicators that were identified by the Commissioner
in her October 1993 testimony--total number of nonfiler returns
secured, number of returns filed by unknown nonfilers,\6 and the
dollar amount assessed and collected as a result of these filings. 
For those indicators, we compared data for 1993 and 1994 with
comparable data for the year preceding the Strategy--1992 (we could
not go back before 1992 because, according to IRS, comparable data
were not available).  Also, because the basic objective of the
Strategy was not only to bring nonfilers into the system but also
keep them there, we looked at data on recidivism--the extent to which
nonfilers who were brought into compliance during the Strategy became
nonfilers again. 

While informative, the above analyses were insufficient for us to
determine whether the Nonfiler Strategy was a success.  We were
unable to assess success because IRS (1) did not have specific goals
for any of the measures discussed in the preceding paragraph, such as
the number of returns it expected to secure or an acceptable rate of
recidivism; and (2) did not compile data on the overall cost of the
Strategy. 


--------------------
\6 Unknown nonfilers are individuals or businesses that IRS did not
realize were nonfilers until they filed an overdue tax return. 


      NUMBER OF RETURNS SECURED
      FROM NONFILERS
-------------------------------------------------------- Chapter 2:2.1

IRS' Strategy emphasized bringing individual nonfilers into
compliance, and the number of returns secured from individual
nonfilers increased steadily during the 2-year period over the number
secured in fiscal year 1992.  However, IRS also tracked the results
of its Strategy on business nonfilers, and the number of returns
secured from business nonfilers decreased (see table 2.1). 



                               Table 2.1
                
                Number of Returns Secured From Nonfilers
                  During the Nonfiler Strategy (Fiscal
                  Years 1993 and 1994) and in the Year
                  Preceding the Strategy (Fiscal Year
                                 1992)

                                                            Net change
                         Number of   Number of                    from
                        individual    business       Total      fiscal
Fiscal year\a              returns     returns     returns   year 1992
----------------------  ----------  ----------  ----------  ----------
1992                     2,221,751   1,446,527   3,668,278
1993                     2,305,167   1,290,225   3,595,392     -72,886
1994                     2,360,760   1,196,615   3,557,375    -110,903
----------------------------------------------------------------------
Note:  According to an IRS National Office spokesperson for the
nonfiler program, comparable data for years before 1992 were not
available. 

\a The data in this table are for the first 11 months of each fiscal
year.  IRS was unable to provide complete fiscal year data. 

Source:  Commissioner's Nonfiler Report, National Executive Summary,
October 6, 1994, and October 25, 1995. 

IRS had intended that the redeployment of Examination staff to work
nonfiler cases would free Collection staff in district offices to
concentrate on collecting delinquent taxes and working business
nonfiler cases.  However, IRS' statistics show declining results in
both of those areas. 

The number of returns secured from business nonfilers declined, as
noted earlier.  IRS said that this decline could be attributable to
an increase in timely filings.  Another contributing factor could be
the fact that according to IRS data, the percent of time that
Collection staff in district offices spent on nonfiler work dropped
from 6.3 percent in fiscal year 1992 to 4.9 percent in fiscal year
1993 and 4.2 percent in fiscal year 1994.  Whatever the reason for
the decrease in returns secured from business nonfilers, the fact
remains that during the Nonfiler Strategy and despite the use of
thousands of Examination staff to help work cases, the number of
returns secured from nonfilers in total was less than the number
secured the year before the Strategy was implemented.  In addition,
district office collections of delinquent taxes decreased almost 9
percent--from about $7.9 billion in fiscal year 1992 to about $7.2
billion in fiscal year 1994.  In constant 1994 dollars, the decline
in collections was about 13 percent--from about $8.2 billion in
fiscal year 1992 to about $7.2 billion in fiscal year 1994. 

Table 2.2 shows how many of the returns secured during the Nonfiler
Strategy came from unknown nonfilers.  Compared with 1992, the
average number of returns secured from unknown business nonfilers
increased 6.5 percent during the Strategy while the average number of
returns secured from unknown individual nonfilers decreased slightly. 



                               Table 2.2
                
                 Number of Returns Secured From Unknown
                 Nonfilers in Fiscal Years 1992, 1993,
                                and 1994


                            Fiscal      Fiscal      Fiscal
Type of return           year 1992   year 1993   year 1994     Average
----------------------  ----------  ----------  ----------  ----------
Individual                 132,331     140,760     121,941     131,351
Business                   131,808     145,646     135,080     140,363
======================================================================
Total                      264,139     286,406     257,021     271,714
----------------------------------------------------------------------
Note:  According to an IRS National Office spokesperson for the
nonfiler program, comparable data for years before 1992 were not
available. 

Source:  IRS' Nonfiler Strategy Analysis--Fiscal Years 1993 and 1994. 


      NET TAX ASSESSMENTS AND
      DOLLARS COLLECTED WITH
      RETURNS
-------------------------------------------------------- Chapter 2:2.2

IRS officials responsible for the Nonfiler Strategy said that IRS'
objective was to bring nonfilers into compliance rather than to
generate revenue.  Accordingly, collection of additional revenues was
not a specific goal of the Strategy.  Nevertheless, IRS' key
performance indicators for the Nonfiler Strategy included (1) dollars
assessed and (2) dollars collected at the time the return was
secured. 

As shown in table 2.3, if constant 1994 dollars are used, (1) net
assessments\7 decreased from fiscal year 1992 to fiscal year 1993 and
then increased in fiscal year 1994; and (2) fewer dollars were
collected with the return, in absolute numbers and as a percent of
net assessments, in 1993 and 1994 than in 1992.  The "dollars
collected with return" indicator does not reflect the total amount
eventually collected from the nonfilers; only the amount collected at
the time the return was secured.  Additional amounts may have been
collected later through installment agreements, but IRS did not track
that information. 



                               Table 2.3
                
                  Net Dollars Assessed on and Dollars
                Collected With Nonfiler Returns Secured
                 in Fiscal Years 1992, 1993, and 1994\a

                  (Constant 1994 dollars in billions)

                                        Fiscal      Fiscal      Fiscal
Nonfiler returns                     year 1992   year 1993   year 1994
----------------------------------  ----------  ----------  ----------
Net dollars assessed on individual        $7.1        $7.0        $7.1
 returns
Net dollars assessed on business           3.8         3.7         4.2
 returns
Total net dollars assessed                10.9        10.7        11.3


----------------------------------------------------------------------
Dollars collected with individual        $0.45       $0.39       $0.35
 returns\b
Dollars collected with business           0.41        0.41        0.36
 returns\b
Total dollars collected\b                 0.86        0.80        0.71


----------------------------------------------------------------------
Percent of net assessment                 6.3%        5.6%        5.0%
 collected with return
 (individual)\c
Percent of net assessment                10.9%       10.8%        8.5%
 collected with return
 (business)\c
Percent of net assessment                 7.9%        7.4%        6.3%
 collected with return
 (combined)\c
----------------------------------------------------------------------
Note:  According to an IRS National Office spokesperson for the
nonfiler program, comparable data for years before 1992 were not
available. 

\a The data in this table are for the first 11 months of each fiscal
year.  IRS was unable to provide complete fiscal year data. 

\b IRS may collect additional dollars through subsequent payments,
such as through installment agreements, but it does not track that
information. 

\c Calculations were done using unrounded figures. 

Source:  Commissioner's Nonfiler Report, National Executive Summary,
October 6, 1994, and October 25, 1995, and our calculations of
constant dollars. 


--------------------
\7 IRS defines net dollars assessed as gross dollars assessed less
any prepaid credits (e.g., withheld taxes) plus any dollars refunded
or offset.  For example, in one of our sample nonfiler cases, the net
assessment was $0, based on a $133 gross assessment, less a $385
withholding credit, plus a $252 refund. 


      REPEAT NONFILERS
-------------------------------------------------------- Chapter 2:2.3

In an internal briefing document prepared for the Commissioner in
advance of her October 1993 testimony before the Oversight
Subcommittee of the House Committee on Ways and Means, IRS stated
that the Nonfiler Strategy would be a success "if the taxpayers who
return to the system remain in compliance and we are able to fully
pursue compliance from those who don't."

IRS has since found, and our sample cases corroborated, that many of
the people brought into compliance during the Strategy had apparently
become nonfilers again.  IRS matched computer files to determine
whether nonfilers brought into the system in fiscal year 1993 filed
tax year 1993 returns in 1994.  According to IRS, its match showed
that 38 percent had not filed by August 1995--16 months after tax
year 1993 returns were due.  IRS had no data to show how this rate of
recidivism compared with other years and no specific
rate-of-recidivism goal for the Nonfiler Strategy.  Thus, we had no
basis for determining whether a rate of 38 percent was acceptable. 

Our review of a sample of cases closed by Examination also showed a
large rate of recidivism.  Of the 60 individuals involved in the
sample cases closed in 1993, 29 (48 percent) did not file in 1994. 
Of those 29, 19 also had not filed in 1995 (as of May 1995), and 10
had extensions to file that had not yet expired.\8

Similarly, of the 60 individuals involved in the sample cases closed
in 1994, 31 (52 percent) had not filed in 1995 (as of May 1995);
another 12 had extensions to file that had not expired. 


--------------------
\8 The typical extension to file gives the person an additional 4
months--until August 15--to file. 


      NONMEASURABLE GOALS AND LACK
      OF COST DATA HAMPERED
      ASSESSMENT OF THE NONFILER
      STRATEGY
-------------------------------------------------------- Chapter 2:2.4

IRS did not have measurable goals for most aspects of the Nonfiler
Strategy nor comprehensive cost data against which to compare its
results.  Measurable program goals and reliable data on costs are
important if management is to effectively assess its efforts and make
informed decisions about future efforts. 

Although IRS' basic objective in implementing the Strategy was to
bring nonfilers into the system and keep them there, it had no goals
for such things as the number of nonfilers it expected to bring into
compliance or the percentage of nonfilers it expected to remain
compliant in future years.  The only measurable goal associated with
the Nonfiler Strategy was one that called for reducing the number of
TDI cases to 1.5 million cases by the end of fiscal year 1994. 

The absence of specific goals makes it difficult for IRS officials
responsible for carrying out the Strategy to know exactly what was
expected of them and to measure the Strategy's success.  Some
Examination personnel in the four district offices we visited said
that their objective was to redirect a certain amount of staff years
to the effort and that they believed the Strategy was successful
because they did so.  However, an input measure, such as staff years,
is less likely to produce a desired outcome than an output or outcome
measure, such as the number of nonfilers brought into compliance. 

IRS did not track the overall cost of the Nonfiler Strategy.  Some
cost-related data, such as the number of Examination and Collection
staff years spent on the Nonfiler Strategy, were available, but (1)
data on other costs, such as those incurred by other IRS functions
like Taxpayer Service and Public Affairs, were not available; and (2)
those data that were available were not compiled in a way that would
provide management with information on the Strategy's overall cost. 

IRS officials explained that return on investment was not really an
important consideration with respect to the Nonfiler Strategy and
that IRS never intended to measure the success of the Strategy by
cost.  As noted earlier, however, one of the goals of the Strategy as
described by the Commissioner in her October 1993 testimony was to
"improve the way we direct our enforcement resources in working
nonfiler cases .  .  .  to achieve the highest return on our resource
investment [underscoring added]." Comprehensive cost data are also
important if management is to make informed decisions on the nature
and extent of future nonfiler efforts. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:3

IRS initiated its Nonfiler Strategy to counteract a growing nonfiler
problem, and it took many positive steps to deal with that problem. 
Its outreach effort was commendable as was its recognition that this
was an agency problem that required crossfunctional attention. 
Although IRS considers the Strategy a success, we were not able to
reach that same conclusion on the basis of a review of available IRS
data.  Also, IRS' assessment of the Strategy was limited by the
absence of measurable goals and comprehensive cost data against which
to compare results. 


   RECOMMENDATIONS TO THE
   COMMISSIONER OF INTERNAL
   REVENUE
---------------------------------------------------------- Chapter 2:4

To better assess the results of future nonfiler efforts, if any, and
provide a better foundation for deciding about subsequent efforts, we
recommend that the Commissioner of Internal Revenue (1) establish
measurable goals and (2) develop comprehensive data on program costs. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 2:5

We requested comments on a draft of this report from the Commissioner
of Internal Revenue or her designee.  On December 4, 1995, we met
with several IRS officials, including the National Director, Service
Center Compliance; the National Director, Compliance Specialization;
the Acting Director of the Office of Return Delinquency; and the
Acting Director for Special Compliance Programs.  They provided us
with oral comments, which the National Director, Service Center
Compliance, reiterated and expanded on in memoranda dated December
11, 1995, and February 12, 1996. 

IRS officials took strong exception to the "extremely negative tone"
of our draft report.  They said that the draft focused almost
exclusively on criticisms of the Strategy without fully acknowledging
its accomplishments and that, as a result, an uninformed reader would
likely judge the Strategy to have been a failure when, in IRS' view,
it was generally a success.  In response to those comments, we
revised chapter 2 of the report to give more prominence to the
positive aspects of the Strategy and to recognize IRS' position on
the Strategy's success.  We reiterate, however, that although IRS is
confident that the Strategy was a success, we could not reach the
same conclusion given the statistical data available and the absence
of other data. 

IRS acknowledged that it had only one goal for which a specific
target was set, the TDI goal, but pointed out that it did have
several key performance indicators (such as the number of returns
secured and the net dollars assessed) that were designed to show
positive or negative trends in results.  We agree that it is useful
to track trends, but such an exercise is more meaningful if there are
goals against which to compare those trends.  For example, speaking
hypothetically, a 5-percent increase in the number of returns secured
might look good on its face but would not look as good if the goal
were a 25-percent increase.  IRS said that experience and statistical
information obtained during the 2 years of the Strategy will permit
better planning and goal-setting for any future endeavor. 

As for cost data--IRS said that it never intended to measure the
success of the Strategy by cost and that it is debatable whether all
of the goals of the Strategy are amenable to accurate cost/benefit
analysis.  We are not suggesting that cost should be the sole measure
of success, but we think it should be part of any overall assessment. 

Our draft report also included a recommendation that IRS reconcile
conflicting data on the results of the Strategy.  However, as
discussed in chapter l, IRS subsequently told us that it had revised
some data in the Commissioner's Nonfiler Report.  Because those
revisions resolved the data inconsistencies referenced in our draft,
we dropped that proposed recommendation. 


OPPORTUNITIES TO IMPROVE FUTURE
IRS NONFILER EFFORTS
============================================================ Chapter 3

Our review of the Nonfiler Strategy identified several areas where we
think opportunities exist for IRS to enhance future efforts directed
at nonfilers.  Those areas include (1) the length of time that
expires from the time a return becomes delinquent until IRS first
attempts to make telephone contact with the nonfiler, (2) the use of
higher graded staff to work cases or do tasks that might be
effectively done by lower graded staff, and (3) the absence of
special procedures for dealing with recidivists--nonfilers who are
brought into compliance and then become nonfilers again. 

IRS has taken some action in two of these areas.  It shortened the
time that elapses before a first notice is sent to persons who have
been identified as potential nonfilers.  However, IRS' procedures
still call for sending several notices to a potential nonfiler before
IRS attempts to make telephone contact.  IRS also developed special
procedures for dealing with recidivists.  Those procedures call for,
among other things, eliminating some notices but say nothing about
revising the language of the remaining notices. 


   IRS TAKES A LONG TIME TO MAKE
   TELEPHONE CONTACT WITH
   NONFILERS
---------------------------------------------------------- Chapter 3:1

IRS officials have stated that the faster they can act to obtain
nonfiled returns and related taxes, the more likely that the action
will be successful.  However, as described in chapter 1, IRS' process
for identifying and investigating nonfilers is a lengthy one. 

To identify nonfilers, IRS computer-matches data on information
returns with data on income tax returns.  In the past, this match was
usually not done until December--after IRS had finished processing
information returns and those income tax returns that were filed late
because of extensions.  IRS staff must then review the results of the
match to determine what action to take.  Only after that review is
the nonfiler sent a notice. 

For example, individuals who did not file tax returns in 1993 would
not have received a notice until a year later--April 1994. 
Subsequent notices would have been issued about 6 to 8 weeks later,
with the last notice going out in late August 1994.  If the case was
still unresolved and met the criteria for referral to ACS, it would
not have gone to an ACS site for telephone contact until October
1994--1-1/2 years after the return was due.  Those cases unresolved
by ACS and meeting certain criteria would then be assigned to a
revenue officer who might attempt to visit the taxpayer.  The whole
process may take years, and, as noted earlier, IRS ends up dropping
millions of nonfilers from its inventory--more than 5 million in
1994--whose returns have been in inventory for several years. 

IRS has a project directed at reducing the time it takes to match
data on information returns with data on income tax returns and thus
shortening the time before the first notice is issued by several
months.  As a result of that project, according to an IRS National
Office official responsible for managing the Nonfiler Strategy, IRS
plans to move up first contact with certain nonfilers to the November
after the tax return is due.  More significant changes, according to
IRS, depend on successful implementation of IRS' multibillion-dollar
systems modernization effort, known as Tax Systems Modernization. 

Besides shortening the time before issuance of the first notice, as
it is now doing, IRS could further enhance the resolution of nonfiler
cases by making more timely telephone contact with the nonfiler after
issuance of the first notice.  We took a similar position in a May
1993 report on IRS' methods for collecting delinquent taxes.\9 In
that report, we said the following: 

     "According to private and state collectors, early telephone
     contact is cost-effective and allows the collector to determine
     why payment has not been made, establish future payment
     schedules, and update information on the debtor's status. 
     Collectors can also discuss with the debtor possible adverse
     actions that could be taken if payment is not received."

In the same report, we recommended, among other things, that IRS
restructure its collection organization to support earlier telephone
contact with delinquent taxpayers.  Although that quote and
recommendation relate to the collection of delinquent taxes, they
would seem equally appropriate to the collection of delinquent
returns (and any delinquent taxes associated with those returns). 

In January 1995, IRS implemented an Early Intervention Project
nationwide.  Although the project focuses on the collection of
delinquent taxes from persons and businesses that have filed returns,
its goal (shortening the notice process and contacting the taxpayer
by telephone sooner) is also relevant to delinquent returns.  We were
told that the project was not extended to nonfilers because
sufficient staff would not have been available to handle the
resulting workload. 

In a similar vein, an IRS business process reengineering team
reviewed the collection process and made several recommendations,
some of which were directed at reducing the time taken to resolve
nonfiler cases by eliminating some notices and moving certain cases
more quickly to a call site for attempted telephone contact with the
taxpayer.  As of July 1995, those recommendations were under
consideration by IRS management. 


--------------------
\9 Tax Administration:  New Delinquent Tax Collection Methods for IRS
(GAO/GGD-93-67, May 11, 1993). 


   SOME NONFILER CASE WORK COULD
   BE DONE BY LOWER GRADED STAFF
---------------------------------------------------------- Chapter 3:2

Nonfiler cases that cannot be resolved by ACS and that meet certain
criteria are referred for investigation by field personnel--revenue
officers in IRS' Collection function and, during the Nonfiler
Strategy, revenue agents and tax auditors in IRS' Examination
function.  In 1993 and 1994, IRS' Examination function had about
18,000 revenue agents and tax auditors.  Over that 2-year period,
Examination redirected about 4,000 staff years to work nonfiler
cases. 

Of the 140 cases we reviewed that had been closed by Examination in 4
IRS district offices, 92 (66 percent) were worked by GS-11 revenue
agents.  Of the remaining cases, 40 (29 percent) were worked by staff
(generally tax auditors) below grade GS-11, 4 (3 percent) were worked
by revenue agents above GS-11, and 4 (3 percent) were worked by staff
whose grades could not be determined.\10 Those data are not
projectable.  However, national data from Examination's management
information system showing the hours charged to nonfiler cases closed
in fiscal years 1993 and 1994 also showed that GS-11 revenue agents
accounted for most of the time spent by Examination on nonfiler work. 
Specifically, of the approximately 3.6 million hours charged by
revenue agents and tax auditors on those cases, about 2.4 million
hours (66 percent) were charged by GS-11 revenue agents.  Another
491,000 hours (14 percent) were charged by revenue agents above
GS-11, and 155,000 hours (4 percent) were charged by agents in grades
5 through 9.  The remaining hours were charged by tax auditors. 
Generally, higher graded revenue agents audit more complex tax
returns.  For example, when not working nonfiler cases, GS-11 and
above revenue agents generally audit complex returns filed by
individuals and returns filed by corporations. 

Although it helped IRS to reduce its nonfiler inventory and secure
delinquent returns, the use of GS-11 and above Examination staff on
nonfiler cases might have also contributed to an increase in IRS'
audit rate for individual returns and a decline in the audit rate for
nonindividual returns.  For example, the audit rate for individual
returns went from 0.92 percent in fiscal year 1993 to 1.08 percent in
fiscal year 1994, an increase that IRS has attributed to the Nonfiler
Strategy.\11 At the same time, however, the audit rate for corporate
returns decreased from 3.05 percent to 2.31 percent.  Although other
factors may have contributed to that decrease, several of the revenue
agents and Examination officials we interviewed in four district
offices told us that if the GS-11 and above agents had not been doing
nonfiler work, they would have been doing corporate audits. 
Examination officials in one district, for example, told us that
because of the nonfiler work, the number of corporate audits done in
that district decreased by about 10 percent. 

Although Examination officials, revenue agents, and tax auditors we
interviewed in the four district offices we visited had several
positive things to say about the Nonfiler Strategy and Examination's
role therein, a common theme expressed by many of them was that much
of the nonfiler case work done by revenue agents and tax auditors
could have been done by lower graded staff.  In one district office,
for example, that view was expressed by the Chief and Assistant Chief
of Examination as well as the two Branch Chiefs, one Group Manager,
three revenue agents, and three tax auditors we interviewed.  Our
review of case files in the four districts led to a similar
conclusion--that the nonfiler case work in those districts involved
tasks that could be done by lower graded staff. 

Our case file reviews indicated that with some exceptions, the work
done on those cases was not so complex that it required the expertise
of higher graded staff.  That perception was confirmed by several of
the agents and auditors we spoke with in the four district offices
who said that nonfiler cases were easier to work than audit cases and
were not technically challenging.  One reason why revenue agents and
tax auditors might not have found nonfiler work technically
challenging is that audits of returns secured from nonfilers during
the Nonfiler Strategy were different from normal audits.  As
explained in an August 1992 document on the Nonfiler Strategy signed
by the then Acting Commissioner, the nonfiler audit process was
streamlined so that cases could be worked in a minimal amount of
time.  As noted in the document, audits of nonfiler returns were to
be limited in scope, with the rule of thumb being "if the return
makes sense, accept it."

One presumed advantage of using revenue agents on nonfiler cases is
that they are accustomed to making field visits to contact taxpayers. 
However, in only 15 percent of the cases we reviewed was there any
evidence of a field visit, and an IRS analysis of 1,000 cases
completed by Examination in one district office showed that a field
visit was made in only 23 cases (2.3 percent). 

It is not our intent to second-guess IRS' staffing decisions for the
Nonfiler Strategy.  We do not know what options were available to IRS
when it implemented the Strategy and, even if we did, second-guessing
would serve no useful purpose.  Our intent, rather, is to suggest, on
the basis of our case reviews and our interviews of persons involved
in doing those cases, that different staffing patterns might be
appropriate for future nonfiler efforts, if any.  Those patterns
might involve (1) using lower graded revenue agents instead of
GS-11s, (2) using more tax auditors or service center tax examiners
instead of revenue agents, and/or (3) making greater use of
paraprofessionals or administrative staff. 

The kinds of tasks that could be done by paraprofessionals or
administrative staff, in our opinion, include such things as locating
nonfilers, contacting them by telephone or letter, scheduling and
rescheduling appointments, and preparing SFRs.  In many of the cases
we reviewed, for example, it was our perception that Examination's
success in securing delinquent returns was due, in large part, to the
agents' and auditors' persistence in contacting nonfilers by
telephone and in following up with nonfilers when they missed an
appointment or when returns or information they had promised to mail
were not received.  Because it did not appear that the person making
the phone calls needed any special auditing skills, it seemed that
IRS could achieve the same result by using paraprofessionals or other
lower graded staff, leaving higher graded staff more time to audit. 

One of the district offices we visited had some experience using
paraprofessionals.  The Detroit District Office, in June 1994,
trained 15 Accounting Aides, primarily grade 5, to help prepare
reports and case files for nonfiler cases.  The Detroit office
reported such advantages as enhanced productivity, reduced nonfiler
workload, and more time for revenue agents and tax auditors to do
other duties.  The average annual base salary of a GS-5 in 1995
(figured at step 6, the middle of the pay scale) was $21,827,
compared with $33,070 for a GS-9 and $40,010 for a GS-11. 

Although our work focused on the use of Examination staff during the
Nonfiler Strategy, it seems logical that our observations may also be
pertinent to the use of Collection staff.  Revenue officers range in
grade between GS-5 and GS-12, any of whom, according to Collection
officials, might be asked to perform nonfiler investigations. 


--------------------
\10 The percents add to 101 due to rounding. 

\11 Although the returns secured from nonfilers by Examination were
often given only a cursory review by a revenue agent or tax auditor,
IRS considered them audits for statistical purposes. 


   IRS RECENTLY DEVELOPED SPECIAL
   PROCEDURES TO DEAL WITH
   NONFILER RECIDIVISM
---------------------------------------------------------- Chapter 3:3

IRS has three broad business objectives, the first of which is to
increase voluntary compliance.\12 With that in mind, a key indicator
of the success of IRS' nonfiler efforts, in our opinion, is the
extent to which nonfilers brought into compliance remain compliant. 
As noted in chapter 2, our analysis and a broader analysis done by
IRS showed that many of the nonfilers brought into compliance in 1993
did not file returns in 1994.  IRS spent resources getting these
nonfilers to comply only to have many stop filing 1 year later.  When
they are identified as nonfilers again, IRS must spend additional
resources and begin the enforcement cycle again. 

IRS developed a strategy for dealing with these repeat nonfilers,
whom we refer to as recidivists, that was approved by the Deputy
Commissioner in July 1995.  The strategy calls for such things as
expediting cases against certain nonfilers by eliminating some
notices, developing a separate scoring system for recidivists, and
referring some cases for possible criminal investigation.  IRS
officials told us in November 1995 that those procedures were being
reconsidered since the extent of recidivism (38 percent) was less
than what they thought at the time the procedures were prepared.  At
that time, IRS' initial analysis of recidivism had indicated a rate
of more than 50 percent. 

While the proposed strategy for dealing with recidivists calls for
eliminating some notices, there is no mention of any intent to revise
the language of the notices that will be sent.  If the intent is to
reduce the number of notices from four to two, for example, by simply
eliminating the second and third notices and keeping the first and
fourth, then the language in the remaining two notices might have to
be revised to reflect the truncated process. 

Because a notice's content and format may affect the recipient's
ability and willingness to comply, it is important that notices be
clear, informative, and comprehensive.  The first notice IRS now
sends nonfilers, for example, is very low key.  It notes that IRS has
yet to receive a return and asks the person or business to either (1)
file a return, (2) notify IRS if a return has already been filed, or
(3) explain why the person or business has no filing requirement. 
Subsequent notices are increasingly more urgent in tone.  If IRS
intends to reduce the number of notices it sends to recidivists, the
first notice may have to convey a greater sense of urgency than is
now the case while still giving the apparent recidivists the
opportunity to explain why they have no filing requirement. 

An IRS official responsible for the nonfiler program acknowledged
that if IRS decides to send fewer notices to recidivists, it may need
to revise the wording of those notices.  It is important that IRS
make that determination in a timely manner because of the lengthy
process involved in approving and making the computer programming
changes needed to revise a notice.\13


--------------------
\12 The other two objectives are to (1) maximize customer
satisfaction and reduce burden and (2) achieve quality-driven
productivity through systems improvement and employee development. 

\13 We discussed this issue in a recent report entitled Tax
Administration:  IRS Notices Can Be Improved (GAO/GGD-95-6, Dec.  7,
1994). 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:4

We believe that opportunities exist for IRS to further enhance its
efforts to deal with nonfilers. 

We believe that the quicker IRS can make telephone contact with a
nonfiler, the better its chances of making that nonfiler compliant. 
IRS is moving in that direction by speeding up issuance of the first
notice to potential nonfilers.  We believe that IRS could move even
further in that direction if, as recommended by an internal study
group, it reduced the number of notices sent to nonfilers and moved
nonfiler cases more quickly to a telephone call site--similar to its
Early Intervention Project for delinquent taxes.  IRS should consider
extending that project to nonfilers, at least to the extent deemed
feasible given the amount of staff available to work on the project. 
In that regard, IRS might want to consider testing early intervention
for nonfilers to see what impact, if any, it has on compliance. 

Related to our views on telephone contact is our belief that IRS
could use its enforcement resources more efficiently in dealing with
nonfilers.  We believe that it is to IRS' benefit to limit as much as
possible the extent to which higher graded enforcement staff are
doing work that could be done effectively by lower graded enforcement
staff or even, in some instances, by paraprofessionals or
administrative staff.  As we discussed earlier, for example,
successful closure of many of the cases we reviewed seemed to be due,
in no small part, to the revenue agent's persistence in calling
nonfilers.  We see no reason why lower graded staff could not be just
as persistent. 

Keeping nonfilers compliant once they have been brought into
compliance is critical if IRS is to increase voluntary compliance and
maintain control over its nonfiler workload.  IRS' recently approved
strategy for dealing with recidivism, if implemented, would be a big
step in the right direction.  Part of that strategy calls for
reducing the number of notices sent to recidivists.  There is no
mention, however, of any intent to review the language of the
remaining notices to ensure that it is still appropriate. 


   RECOMMENDATIONS TO THE
   COMMISSIONER OF INTERNAL
   REVENUE
---------------------------------------------------------- Chapter 3:5

To enhance any future IRS efforts directed at nonfiling, we recommend
that the Commissioner of Internal Revenue do the following: 

  -- Revise procedures to provide for more timely telephone contact
     with nonfilers in line with the reengineering team's
     recommendations.  In that regard, IRS should consider whether
     the Early Intervention Project, which includes, among other
     things, earlier telephone contact with taxpayers whose taxes are
     delinquent, should be extended to nonfilers. 

  -- Consider the feasibility and appropriateness of assigning more
     nonfiler work to lower graded professional staff,
     paraprofessionals, and administrative staff.  In considering its
     options, IRS might want to solicit input from district managers
     and staff who worked on the Nonfiler Strategy. 

  -- If IRS decides to send fewer notices to recidivists, it should
     determine whether the language of the remaining notices should
     be revised. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 3:6

We requested comments on a draft of this report from the Commissioner
of Internal Revenue or her designee.  On December 4, 1995, we met
with several IRS officials, including the National Director, Service
Center Compliance; the National Director, Compliance Specialization;
the Acting Director of the Office of Return Delinquency; and the
Acting Director for Special Compliance Programs.  They provided us
with oral comments, which the National Director, Service Center
Compliance, reiterated and expanded on in memoranda dated December
11, 1995, and February 12, 1996. 

In commenting on our draft, IRS said that it agreed with only one of
our three recommendations--the one dealing with the language of
notices sent to recidivists. 

IRS said that our proposed recommendation on timely contact with
nonfilers was unnecessary because IRS has been working to accelerate
the processing of information returns for several years with the
intent of making earlier contacts with nonfilers and filers who have
underreported their income.  We have revised the body of our report
to more clearly acknowledge those efforts.  However, our
recommendation was intended to go beyond the initial identification
of and contact with nonfilers.  Our intent was to encourage IRS to
make more timely telephone contact with nonfilers.  Although the
accelerated processing of information returns should speed up the
entire process and lead to quicker telephone contact, we believe that
there are other steps IRS could take, similar to its Early
Intervention project for delinquent taxes, to help achieve that end. 
In that regard, we think our recommendation is necessary, and we have
reworded it to clarify the focus on earlier telephone contact. 

In response to our revised recommendation, IRS said that it (1) has
established the framework for expanding the Early Intervention
Project to business nonfilers, if sufficient resources become
available; and (2) does not anticipate having sufficient staffing to
expand the Project to individual nonfilers.  IRS said that if
circumstances change in the future, it may find it feasible to
consider including individual nonfilers in the Project.  Although we
acknowledge the resource limitations, we wonder whether it might be
feasible for IRS to revise the Early Intervention Project to include
a mix of delinquent tax and nonfiler cases, even if that means having
to exclude some delinquent tax cases, rather than limiting the
Project to only delinquent tax cases.  That might enable IRS to
assess the relative benefits of early intervention on both types of
cases. 

IRS took most exception to our proposed recommendation on assigning
nonfiler case work.  IRS said that the recommendation was unnecessary
and reflected a basic misunderstanding of the purpose of the Nonfiler
Strategy.  IRS said that the decision to assign nonfiler cases to
Examination employees, even those capable of working higher graded,
more productive cases, was (1) a management decision based on the
view that maintaining the viability of the nonfiler program
outweighed possible short-term productivity losses in other areas and
(2) a short-term response to stem the growth of the nonfiler
inventory that was never intended as an ongoing work assignment
practice.  IRS also said that a review of the special nonfiler
auditing standards makes it clear that techniques needed under the
nonfiler initiative required more technical expertise than could be
provided by paraprofessionals. 

As noted earlier, it was not our intent to second-guess IRS' staffing
decisions for the Nonfiler Strategy but rather to suggest that IRS
consider other options in staffing any future nonfiler initiatives. 
Our work at four district offices indicated that other options might
be more efficient, depending on the availability of staff.  In that
regard, our review of case files in four district offices indicated
that the audit work on nonfiler cases in those districts was often
less involved than suggested by the auditing standards referred to by
IRS and thus often did not require the expertise of GS-11 revenue
agents.  That perception was supported by many of the district office
Examination staff and managers we interviewed who said that nonfiler
work could be done by lower graded staff.  Those lower graded staff
could be revenue agents below GS-11 or tax auditors or, for some
tasks, paraprofessionals or administrative staff.  We revised the
report and reworded the recommendation to avoid the impression that
we are advocating that all nonfiler work be done by
paraprofessionals. 

IRS also questioned how we could draw conclusions about staffing when
our review was limited to four districts and our results are not
projectable.  We believe the scope of our work was sufficient to
raise questions about the level of staffing needed to do the kind of
nonfiler case work that was done during the Nonfiler Strategy.  We
agree, however, that it was not sufficient to support a specific
recommendation that IRS adopt different staffing patterns for any
future nonfiler effort (which is how we had worded the recommendation
in our draft report).  Thus, we revised our recommendation to (1)
give IRS more flexibility in deciding how, if at all, the staffing of
future nonfiler efforts should differ; and (2) suggest that IRS, in
considering its options, solicit input from managers and staff in
district offices that we did not visit. 

After we revised our recommendation, IRS advised us that it will, in
the future, "consider using appropriately graded employees, if
available."


PROFILES OF INDIVIDUAL NONFILERS
=========================================================== Appendix I

IRS' Statistics of Income Division developed a profile of individual
nonfilers from returns filed in fiscal year 1993 that were 360 days
or more late.  That profile showed that 1.7 million taxpayers filed
2.6 million returns that were 360 days or more late in fiscal year
1993.  Of the 1.7 million taxpayers, 71 percent filed 1 return, 18
percent filed 2 returns, and 11 percent filed 3 or more returns. 

Of the 2.6 million returns: 

  -- Forty-three percent were at least 1 year but less than 2 years
     past due, 41 percent were either 2 or 3 years late, and 16
     percent were more than 3 years overdue. 

  -- Forty percent were from wage earners with no self-employment
     income; 23 percent were filed by those claiming self-employment
     income or some combination of wages and self-employment income;
     and 5 percent were filed by persons claiming income only from
     other sources, such as interest and dividends, alimony, and
     capital gains.  No data were available for the other 32 percent. 

  -- Fifty-five percent involved a balance due, 38 percent involved a
     refund, and 7 percent had a zero balance. 

  -- Eighty-three percent were filed by taxpayers older than 31. 

  -- Forty-five percent were from persons who filed as "single,"\14
     31 percent were from persons who claimed the "married filing
     jointly" status, 14 percent were from persons who filed as the
     "head of household," and 10 percent were from persons who
     claimed the "married filing separately" status. 

Table I.1 shows some profile data from the returns in our sample of
individual nonfiler cases closed by the Examination Division in four
IRS district offices in fiscal years 1993, 1994, and 1995.  Our
sample included 140 cases--60 cases closed in fiscal year 1993, 60
cases closed in fiscal year 1994, and 20 cases closed in fiscal year
1995.  Those cases involved 182, 207, and 75 returns,
respectively--an average of about 3 returns per case. 



                               Table I.1
                
                Profile Data From Returns in Our Sample
                      of Individual Nonfiler Cases

                                     Closed in   Closed in   Closed in
Individual nonfiler cases              FY 1993     FY 1994     FY 1995
----------------------------------  ----------  ----------  ----------
Filing status (returns)
----------------------------------------------------------------------
Single                                      60         110          27
Married filing jointly                      64          47          21
Married filing separately                   42          43          23
Head of household                           15           7           1
Other/unknown                                1           0           3
======================================================================
Total                                      182         207          75

Preparer of return
----------------------------------------------------------------------
Taxpayer                                    63          67          15
Preparer                                    79          70          16
Exam staff                                  32          62          41
Other                                        4           3           0
Unknown                                      4          55           3
======================================================================
Total                                      182         207          75

Taxpayer self-employed?
----------------------------------------------------------------------
Yes                                        133         170          57
No                                          44          32          15
Unknown                                      5           5           3
======================================================================
Total                                      182         207          75
----------------------------------------------------------------------
We also stratified our 140 sample cases by average annual adjusted
gross income.  We computed the average for each case by adding the
adjusted gross income shown on each return secured from the nonfiler
and dividing the total by the number of returns secured from that
nonfiler.  The results are shown in table I.2. 



                               Table I.2
                
                  Stratification of Our Nonfiler Case
                Sample by Average Adjusted Gross Income

                                                Number of cases in our
Average adjusted gross income                                   sample
----------------------------------------  ----------------------------
Under $10,000                                                       37
$10,000 to $19,999                                                  48
$20,000 to $29,999                                                  26
$30,000 to $39,999                                                   9
$40,000 to $49,999                                                   8
$50,000 to $59,999                                                   1
$60,000 and over                                                    11
======================================================================
Total                                                              140
----------------------------------------------------------------------
Source:  Nonfiler cases in GAO's sample. 


--------------------
\14 The number of returns on which the "single" filing status was
claimed would include all returns prepared by IRS under the SFR
program.  In computing the tax liability to be assessed on an SFR
return, IRS assumes that the taxpayer is single. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II


   GENERAL GOVERNMENT DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix II:1

David J.  Attianese, Assistant Director
Carrie Watkins, Evaluator


   CINCINNATI REGIONAL OFFICE
-------------------------------------------------------- Appendix II:2

Homer N.  Carrington, Evaluator-in-Charge
Robert I.  Lidman, Tax Group Manager
Lori A.  Koehne, Evaluator
Jennifer C.  Jones, Evaluator
Shirley A.  McGuire, Evaluator
Mary Jo Lewnard, Technical Assistant


   ATLANTA REGIONAL OFFICE
-------------------------------------------------------- Appendix II:3

Sally P.  Gilley, Evaluator
Alton C.  Harris, Tax Group Manager
David W.  Schechter, Evaluator

*** End of document. ***