Tax Administration: FedState Efforts Offer Opportunities but Program
Needs Improvement (Letter Report, 10/96, GAO/GGD-97-16).
GAO reviewed the status of the Internal Revenue Service's (IRS) FedState
Cooperative Program, focusing on: (1) potential program benefits to
taxpayers, IRS, and the states; (2) conditions that may impede program
success; and (3) states' concerns on the impact of IRS reorganization on
the program.
GAO found that: (1) the potential benefits of the FedState program
include increasing taxpayer compliance, reducing taxpayer burden, and
improving the efficiency of tax administration functions; (2) the
FedState joint electronic filing program reduces administrative costs
for IRS and the states by detecting math errors and eliminating
transcription errors; (3) taxpayer data tape exchanges enable IRS and
the states to identify taxpayers who fail to file a return or who owe
more taxes; (4) the state refund offset program allows IRS to levy state
refunds to fulfill the federal tax debt; (5) IRS lacks a centralized,
strategic plan for ensuring that the FedState program is achieving the
agency's objectives; (6) IRS and the states do not have a system to
monitor and assess the results of individual FedState projects; (7) IRS
needs to establish performance-based criteria for the program so that
district offices can make more informed decisions on resource
allocations and program priorities; and (8) some states have expressed
concern that the reorganization of IRS will have a negative impact on
the FedState program.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-97-16
TITLE: Tax Administration: FedState Efforts Offer Opportunities
but Program Needs Improvement
DATE: 10/96
SUBJECT: Interagency relations
Federal/state relations
Tax administration
Tax refunds
Federal agency reorganization
Tax administration systems
Tax returns
Strategic information systems planning
Electronic forms
IDENTIFIER: IRS FedState Cooperative Program
IRS Refund Offset Program
IRS FedState Electronic Filing Program
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO report. Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved. Major **
** divisions and subdivisions of the text, such as Chapters, **
** Sections, and Appendixes, are identified by double and **
** single lines. The numbers on the right end of these lines **
** indicate the position of each of the subsections in the **
** document outline. These numbers do NOT correspond with the **
** page numbers of the printed product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
** A printed copy of this report may be obtained from the GAO **
** Document Distribution Center. For further details, please **
** send an e-mail message to: **
** **
** **
** **
** with the message 'info' in the body. **
******************************************************************
Cover
================================================================ COVER
Report to the Commissioner of Internal Revenue
October 1996
TAX ADMINISTRATION - FEDSTATE
EFFORTS OFFER OPPORTUNITIES BUT
PROGRAM NEEDS IMPROVEMENT
GAO/GGD-97-16
FedState Program Improvements Needed
(268668)
Abbreviations
=============================================================== ABBREV
AGI - adjusted gross income
EP/EO - employee plans/exempt organizations
FTA - Federation of Tax Administrators
FTI - federal taxable income
IRS - Internal Revenue Service
SITLP - State Income Tax Levy Program
Letter
=============================================================== LETTER
B-260174
October 31, 1996
The Honorable Margaret Milner Richardson
Commissioner of Internal Revenue
Dear Ms. Richardson:
The income tax laws of many states are built upon the federal tax
code. Consequently, cooperation between the Internal Revenue Service
(IRS) and state tax agencies offers opportunities for helping to
achieve IRS' strategic goals of increasing taxpayers' compliance with
tax laws, improving taxpayer service, reducing burden on taxpayers,
and increasing the efficiency of tax administration. IRS and the
states are aware of the advantages of working together and have been
involved in a federal/state (FedState) cooperative program for years.
This report discusses the potential benefits of the FedState program,
conditions that may impede the success of the program, and concerns
raised by state officials regarding the potential impact of IRS'
latest reorganization of the FedState program.
BACKGROUND
------------------------------------------------------------ Letter :1
IRS and state revenue offices are both charged with responsibility
for collecting taxes. More than half of the states have based their
income tax systems on the federal tax system, with an overlap of many
taxpayers.\1 For the most part, this common customer base is dealt
with separately by IRS and the state agencies. Given their common
roles and customer bases, opportunities for collaboration among IRS
and states' revenue offices exist. IRS is facing budget reductions
and downsizing. Because of decreasing resources, it becomes even
more important to identify ways that IRS and the states can cooperate
to improve efficiencies and maximize their return on investment.
IRS and the states have been involved in cooperative tax
administration efforts since the 1920s. By engaging in cooperative
efforts, state agencies and the federal government have attempted to
achieve greater compliance and efficiency than they could by working
separately. Early cooperative efforts involved the sharing of
taxpayer income and tax liability information. In 1957, these
activities became governed by formal agreements between IRS and the
states to specify the types of tax information to be shared. In
1978, IRS fixed responsibility for the exchange of federal and state
tax information with the disclosure officers in its regional and
district offices.\2 IRS also charged its district directors with
responsibility for working personally with state tax agencies to
establish and conduct FedState cooperative projects. In 1991, the
Office of FedState Relations was established in the National Office
to facilitate cooperative tax administration and foster joint
projects. IRS originally assigned a senior executive and five staff
to this office. IRS chose to not provide full-time field staff to
facilitate and foster projects. District directors continued to be
responsible for liaison and personal involvement. Most disclosure
officers were assigned responsibility for coordinator and facilitator
duties on a part-time basis. As of November 1995, 49 states were
participating in the FedState program, and, according to IRS
officials, approximately 600 to 700 projects were ongoing or
proposed.
In recent years, IRS and the Department of the Treasury have drafted
and proposed legislation to further the FedState program. In June
1995, the President announced that he would submit to Congress
proposed legislation to facilitate additional FedState cooperative
efforts to streamline tax administration, such as joint filing and
processing of return information. The proposed legislation would
allow IRS and state taxing agencies to delegate tax administration
powers and compensate one another pursuant to agreements. The most
recent version of the legislation was submitted to Congress in March
1996. No action has been taken yet.
In 1978 and 1985, we issued reports on the FedState program.\3 The
1978 report to the Joint Committee on Taxation concluded that the
program had a low priority within IRS and had no unified direction
because responsibility for the program was not fixed. In response,
IRS assigned program responsibility to the Office of Disclosure
Operations. Both the 1978 and 1985 reports concluded that IRS and
the states were not using much of their exchanged data and were not
sharing other potentially useful information. In response, IRS
established reviews to determine if states needed and used the
confidential return information provided by IRS.
--------------------
\1 See app. I for a listing of states with income taxes and their
conformity with federal income tax system requirements.
\2 Disclosure officers are responsible for overseeing the access to
taxpayer data, which is protected under Section 6103 of the Internal
Revenue Code.
\3 See Better Management Needed in Exchanging Federal and State Tax
Information (GAO/GGD-78-23, May 22, 1978); and TAX ADMINISTRATION:
The Federal/State Tax Information Exchange Program (GAO/GGD-86-8,
Dec. 13, 1985).
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
Potential benefits of the FedState program include increasing
taxpayers' compliance with tax laws, improving taxpayer service,
reducing burden, and improving the efficiency of tax administration
functions. For example, joint federal and state taxpayer education
efforts can reduce taxpayer burden by making it easier for taxpayers
to get information about tax requirements.
To ensure optimal use of the FedState program by local IRS and state
offices, IRS' Office of FedState Relations is responsible for
providing guidance and monitoring program accomplishments. A primary
responsibility of the director of the office is to plan and direct a
program involving the integration and coordination of IRS resources
devoted to FedState activities, and evaluating these overall
activities to ensure optimum results. Although IRS has undertaken
many different types of FedState projects, IRS' FedState office has
made little effort to ensure that the current project mix constitutes
the optimal use of FedState program resources. FedState projects
were generally initiated at the local IRS district office or state
level without the benefit of an overarching strategic planning
function to help identify areas where the greatest potential
contributions could be made. Similarly, the Office of FedState
Relations provided little guidance to the local units. Changes in
the organizational location, turnover of staff, and fluctuating
staffing levels for the Office of FedState Relations may have
affected the consistency of the FedState efforts. Also, the FedState
program lacks the performance-based data needed to monitor project
accomplishments.
According to the state officials we spoke with, the success of
FedState cooperative efforts has hinged on the good working
relationships established over time by IRS officials and their
counterparts in state agencies. Some state officials have raised
concerns about how the latest IRS reorganization--which reduces the
number of IRS district offices and shifts IRS senior managers out of
many states--could affect FedState arrangements and the future
success of the program. Some state and IRS officials we spoke with
said that personal commitment to the program is important for
developing a productive FedState program. In this regard, IRS has
developed a transition plan to respond to states' concerns about the
reorganization. Because of the recency of the reorganization, it is
too early to determine whether the plan will adequately address the
states' concerns.
OBJECTIVES, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :3
Our review of the FedState program arose from a December 9, 1994,
hearing on compliance costs and taxpayer burden held by the
Subcommittee on Oversight of the House Committee on Ways and Means.
At that hearing, the Subcommittee expressed interest in how the
states and the federal government could work together to reduce
taxpayer burden. Our objectives for this report were to (1) identify
the potential benefits of FedState cooperative efforts; (2) determine
what, if any, conditions may impede the success of the program; and
(3) determine what, if any, FedState program concerns the states have
with IRS' planned reorganization.
To achieve our interrelated objectives, we interviewed IRS officials
responsible for the FedState program in IRS' national and southeast
regional offices, as well as its Albany, NY; Atlanta, GA; Baltimore,
MD; Columbia, SC; Phoenix, AZ; and St. Paul, MN, district offices.
We interviewed state revenue department officials knowledgeable of
FedState activities in Arizona, Georgia, Maryland, Minnesota, New
York, and South Carolina. These locations were selected on the basis
of their proximity to our offices or because IRS officials said they
were characterized by a high level of FedState activity.
We also (1) reviewed FedState documents, such as the 1994 FedState
Cooperative Ventures Catalog and the FedState Concept of Operations
Report from IRS, and program reports from state department of revenue
offices we visited; (2) collected detailed information, such as
project descriptions and any data on costs and benefits, on FedState
projects in the states we visited; and (3) reviewed various
legislative proposals related to FedState activities.
We interviewed Federation of Tax Administrators (FTA) officials
knowledgeable of the FedState program. FTA represents state tax
administrators and is actively involved in promoting effective
working relationships among IRS and state tax agencies. We held a
group discussion with and surveyed state tax administrators on their
views regarding cooperative FedState efforts at the June 1995 FTA
conference in Cleveland, OH. Participation in the discussion and
survey was voluntary.
Our work was done between January 1995 and April 1996 in accordance
with generally accepted government auditing standards. We provided a
draft of this report to the Commissioner of Internal Revenue and the
Executive Director, FTA, for their comments. We met with FTA on
August 15, 1996, and with IRS officials on September 4, 1996, to
discuss this report. Their comments are summarized and evaluated
beginning on page 13 and incorporated into this report where
appropriate.
FEDSTATE COOPERATIVE EFFORTS
OFFER OPPORTUNITIES TO IMPROVE
COMPLIANCE, IMPROVE TAXPAYER
SERVICES, REDUCE BURDEN, AND
IMPROVE TAX ADMINISTRATION
------------------------------------------------------------ Letter :4
Due to the similarities in the functions of IRS and state revenue
departments, numerous opportunities exist to improve tax
administration efficiencies through FedState cooperative efforts.
For example, taxpayer data tape exchanges can improve compliance and
enforcement by enabling IRS and the states to identify noncompliant
taxpayers and take appropriate action. Similarly, joint federal and
state taxpayer education and assistance efforts can reduce taxpayer
burden by making it easier for taxpayers to obtain information about
tax requirements. More sophisticated technology provides additional
ways for IRS and the states to reduce taxpayer burden. For example,
in one district the state and IRS can automatically transfer
telephone taxpayer assistance calls to each other to respond to
taxpayers more quickly and efficiently.
Data limitations prevented us from ascertaining whether the existing
mix of FedState projects has helped IRS toward meeting its goals of
improving compliance, increasing efficiency, and reducing taxpayer
burden. A project designed to increase compliance may also have the
positive effect of reducing burden or increasing efficiency. An
official in IRS' Office of FedState Relations told us that four of
the most common efforts have been taxpayer data tape exchanges,
federal/state joint electronic filing programs, state refund offset
programs, and the joint dyed diesel fuel program.
TAXPAYER DATA TAPE EXCHANGES
---------------------------------------------------------- Letter :4.1
Taxpayer data tape exchanges, which began in the 1960s, constitute
one of the oldest FedState cooperative efforts. According to IRS,
currently almost all states participate in tape and information
exchanges. By exchanging tapes that include taxpayer return data,
IRS and the states have been able to identify taxpayers who failed to
file returns or who filed returns but owed more taxes. Although
comprehensive data on the revenues collected through this effort have
not been systematically tracked, the data collected by some states
and IRS districts demonstrate that computer tape exchanges have
increased revenues. For example, one state billed taxpayers for
$37.5 million in 1990 state income taxes on the basis of data in IRS
tapes that showed IRS adjustments to taxpayers' federal taxes. The
state billed those taxpayers who had failed to report and pay
additional state income tax due as a result of the federal
adjustments.
FEDERAL/STATE JOINT
ELECTRONIC FILING
---------------------------------------------------------- Letter :4.2
The joint electronic filing effort--which was initiated in 1991 as a
limited research test with the South Carolina Tax Commission--is an
initiative among IRS and the states to allow taxpayers to
simultaneously file state and federal returns electronically.
According to IRS, 31 states will participate in the 1996 FedState
Electronic Filing program. Electronic returns go to IRS, which then
is to send the states their portions of the filing. While no
systematic effort has been made to assess the benefits of joint
electronic filing, IRS believes that joint filing increases
efficiency because it encourages electronic filing and thus
eliminates the costs of processing and storing paper returns. Also,
according to IRS, electronic filing reduces administrative costs to
both IRS and the states because mathematical errors are detected
electronically and transcription errors are eliminated. Finally, IRS
said that joint electronic filing reduces taxpayer burden by enabling
taxpayers to submit their state and federal returns in a single
electronic transmission, thus avoiding corresponding mathematical
errors.
STATE REFUND OFFSET PROGRAM
---------------------------------------------------------- Letter :4.3
The state refund offset program, also referred to as the State Income
Tax Levy Program (SITLP), allows IRS to levy state tax refunds to
fulfill federal tax debts. According to IRS, a levy is more
efficient than other collection enforcement actions. The program has
been in operation since 1985. According to an IRS official, 31
states participated in SITLP, which in 1995 netted IRS $81.7 million
in due taxes.
JOINT DYED DIESEL FUEL
PROGRAM
---------------------------------------------------------- Letter :4.4
To increase the efficiency of its motor fuels compliance efforts, IRS
is part of the dyed diesel fuel program, which was established in
1994 and involves sampling fuel in storage and vehicles to ensure
that red-dyed fuel, which is tax free, is not used as taxable fuel on
highways. According to IRS, 15 states have contracted with IRS to
sample and test diesel fuel in vehicles used on highways. IRS
believes the program has increased compliance. IRS' preliminary data
indicate that diesel fuel excise tax collections increased by about
$1.2 billion, or 22.5 percent, from calendar year 1993 to 1994.
OTHER FEDSTATE EFFORTS
---------------------------------------------------------- Letter :4.5
In addition to these four common efforts, numerous efforts have been
initiated at the IRS district and state levels. For example, IRS and
1 state revenue department conducted a joint video conference seminar
linked to 19 locations statewide to inform tax practitioners of
changes in the tax laws. IRS and the state hoped this combined video
conference would (1) improve taxpayer service by informing a greater
number of practitioners in more remote locations and (2) increase
efficiency by reducing the amount of time and money IRS and state
employees spent traveling to such seminars. Another IRS district and
state tax agency targeted a localized group of nonfiling and
underreporting self-employed taxpayers. To increase efficiency, IRS
and the state tax agency each audited a segment of such taxpayers'
returns and assessed taxes, shared audit results, and based
assessments on each other's audits. According to an IRS official,
this effort yielded approximately $5 million in state and federal
taxes and added 400 filing taxpayers. Other examples of joint
efforts are included in appendix II.
ADDITIONAL FEDSTATE PROGRAM
ACTIONS COULD INCREASE
POTENTIAL BENEFITS
------------------------------------------------------------ Letter :5
While the FedState program offers opportunities for increasing
taxpayer compliance, improving taxpayer service, reducing the burden
on the taxpayer, and increasing the efficiency of tax administration,
IRS has not developed an overall strategy to guide FedState projects
to better assure the most efficient use of IRS resources. The Office
of FedState Relations was established to foster and facilitate
FedState cooperative efforts. The Director of the Office of FedState
Relations has been responsible for planning and directing FedState
efforts that involve the integration and coordination of IRS
resources, and reviewing and evaluating FedState activities to ensure
optimum results. However, IRS has not developed an overall strategy
for the Office of FedState Relations to fulfill its purpose, to link
FedState efforts with IRS' overall agency goals and objectives, or to
establish an evaluation mechanism for the program.
Strategic planning at the program level offers a framework for tying
agency goals and objectives with program-level actions. This helps
to ensure that budget trade-offs at the program level are directly
tied to the agency's overall strategy. In the absence of such
planning efforts, the agency will lack assurance that the individual
programs in which it participates represent the best choices for
achieving its overall goals and objectives.
WEAKNESSES IN THE FEDSTATE
NATIONAL OFFICE
---------------------------------------------------------- Letter :5.1
Currently, FedState efforts vary from state to state. While these
variances generally reflect differences in state and regional
operating agendas, they also underscore a weakness in IRS' FedState
efforts--namely, the lack of a centralized strategic planning
function. Currently, no unit within IRS is responsible for providing
a strategic framework for the projects. While IRS' Office of
FedState Relations is responsible for facilitating cooperative
projects between IRS and the states, the office offers little
guidance to help local units choose the most productive projects, nor
does it help local units to determine whether their project efforts
are helping IRS to achieve its strategic goals. For example, such
guidance to local units might identify FedState efforts that are most
beneficial to both IRS and state offices, efforts that link
strategically to IRS' main goals, and efforts that help ensure that
IRS resources are most efficiently used. Absent such guidance, local
units may be missing out on projects that offer greater benefits or
operating projects that are not worthwhile.
We found that most decisionmaking about FedState programs occurred at
the district level, where IRS district and state officials worked
together to identify and initiate projects. The local level was a
natural decisionmaking location since participation by the district
or state was voluntary and depended on the project. State and IRS
officials told us that it is important to maintain the local focus of
the efforts because of the variation in needs, resources, and
taxpayer issues. According to the IRS district and state officials
we interviewed, the level of FedState activity that existed between
district IRS offices and state tax agencies was highly dependent on
the working relationship between their respective managers and the
top managers' commitment to the FedState program. To assist in
developing this working relationship, it seems to us that local
districts and state agencies could benefit from guidance to help
ensure that they are pursuing the FedState efforts that would benefit
them the most.
The Office of FedState Relations views its role as an advocate for
the program and as a clearinghouse for project ideas. In addition,
IRS officials said the Office of FedState Relations worked to develop
legislation designed to make it easier for state revenue offices and
IRS to engage in joint or reciprocal tax administration functions
such as filing of returns and processing of returns and return
information. The most recent version of the legislation was
submitted to Congress in March 1996, and no subsequent action has
been taken yet. The proposed legislation would authorize IRS to
enter into tax agreements with the states and to delegate tax
administration responsibilities and compensate each other for
activities. As a clearinghouse, the Office of FedState Relations
provided information to districts on existing and proposed projects,
primarily through a catalog that included descriptions of FedState
projects provided by the IRS districts themselves. According to IRS,
the catalog was not intended to be comprehensive and did not include
information on such things as status, costs, and results.
IRS has not developed a strategic framework for achieving FedState's
purpose of facilitating and fostering cooperative efforts between IRS
and the states. Without a strategic plan, IRS cannot be assured that
FedState resources are being focused on those projects that will
contribute most to IRS' mission. Nor has the office set performance
goals to guide cooperative efforts or determine how well its programs
are doing. Setting performance goals is an integral part of managing
for results and is a current organizational emphasis in IRS. IRS
also has not provided guidance as to what types of FedState efforts
have the greatest potential to further IRS' mission.
ORGANIZATIONAL AND STAFFING
CHANGES MAY AFFECT THE
CONSISTENCY OF FEDSTATE
EFFORTS
---------------------------------------------------------- Letter :5.2
The Office of FedState Relations has undergone several organizational
and staff changes. As a result, the office has not had the benefit
of stable and continuous support and direction in terms of resources
and staffing. In the past 2 years, at least six different
individuals have held the position of FedState director or acting
director and the organizational location of the office has changed
twice. According to IRS officials, the size of the staff has
fluctuated between 5 and 21 people. Further, the director position
has been downgraded from a senior executive position to a GS-15
position. According to an official in the Office of FedState
Relations, the current staff comprises 19 individuals, most at the
GS-12 level or higher. Four of these staff persons were transferred
to the Office of FedState Relations because their former offices were
reorganized or their positions were abolished. IRS officials said
that further staffing changes may take place.
FEDSTATE PROGRAM DOES NOT
MONITOR OR ASSESS
COOPERATIVE EFFORTS
---------------------------------------------------------- Letter :5.3
Neither IRS nor the states have systematically monitored or assessed
the results of individual FedState projects. With performance-based
data, IRS national and district offices could make more informed
decisions on resource allocations and program priorities. Such data
might also provide support for IRS' national office to encourage
broader participation by IRS district and state revenue offices.
Currently, IRS does not have the project information needed to ensure
that the FedState program is managed in a way that maximizes resource
investments. In 1994, IRS compiled a FedState catalog of projects
that listed more than 280 proposed or actual FedState efforts.
FedState officials told us that this listing was not comprehensive.
Further, the FedState office generally does not have information on
the status of these projects, such as project implementation dates,
the resources required to operate the projects, or project benefits.
Quantitative, results-focused data have been collected for some
FedState projects. Of the 126 projects we reviewed in 6 districts,
data to monitor or assess the projects were collected on 31, or 25
percent. Further, none of the 126 projects we reviewed was evaluated
in terms of total project costs. Of the 31 measured projects, few
provided measures that linked project outcomes to IRS' main goals of
increasing compliance, reducing burden, and improving tax
administration efficiency. The most common measure was the amount of
additional revenue generated by the projects. For the remaining 95
projects, success was measured intuitively or projects were just
assumed to provide benefits.
IRS has recognized the need to evaluate the results of FedState
projects. However, the results of these efforts have been limited.
For example, in 1994, a former Director of the Office of FedState
Relations said the office planned to create an information-sharing
cost model to show the benefits of the FedState program and generate
greater interest in FedState projects among the states. However,
this model has not been created. According to the current Director
of the Office of FedState Relations, the project was terminated due
to a lack of resources.
In another effort to evaluate FedState projects, in 1994 the Office
of FedState Relations instituted a best-practices approach that
encouraged local offices to submit information on their most
successful FedState projects. The office developed guidance for
local offices to use in describing projects, resources required, and
results achieved. Thus far, only two projects have been selected as
best practices, according to IRS officials. IRS has sent
descriptions of the projects, along with implementation guidelines,
to its local offices nationwide in the hope that they will be widely
adopted.
According to IRS officials, the Office of FedState Relations also
planned to work with field FedState staff to complete plans by
November 1995 to measure the benefits of selected FedState projects.
According to an IRS official, few measurement plans have been
submitted because FedState field staff were overwhelmed by the
demands of measuring projects, coordinating ongoing FedState
projects, and handling staffing changes and duties related to IRS'
reorganization. IRS did not provide more specific details on the
nature of the issues and the impact of staffing and organizational
changes on IRS' ability to measure program results.
In addition, IRS' Western Region Internal Audit group reviewed
federal and state information sharing in the Western Region. In May
1994, it reported that district management could not accurately
identify and track the costs or accomplishments of FedState
activities and that current systems did not capture this type of
data. The review also found that without accurate tracking
techniques, the districts could not address the effectiveness of
FedState projects in reducing taxpayer burden, increasing compliance,
and improving quality. In response, the Western Region's Chief
Compliance Officer created a working group to develop a cost/benefit
model to measure the success of FedState projects. They later rolled
this project into a National Office Research and Analysis plan.
IRS' REORGANIZATION HAS CAUSED
CONCERN AMONG SOME STATES ABOUT
THE FUTURE OF FEDSTATE
OPERATIONS
------------------------------------------------------------ Letter :6
The FedState program's ability to contribute significantly to IRS'
strategic objectives relies considerably on the participation of IRS
districts and states. Due to the voluntary nature of the program,
the quality of the relationships among the states and IRS district
offices is a critical component of the decision to initiate projects.
However, because of IRS' latest reorganization, some states have
voiced concerns about the possible deterioration of FedState
relationships that have developed over the years.
In May 1995, IRS announced a planned reorganization of its field
office structure to reduce the number of IRS district offices from 63
to 33 and the number of regions from 7 to 4 by the end of fiscal year
1996. Before the reorganization, each state had at least one
district office. Along with a district director, most district
offices had part-time FedState coordinators who acted as liaisons to
the states. With the reduction in the number of districts, IRS plans
to put the area covered by the districts to be eliminated under
consolidated management of another district. IRS staff is to remain
in locations that were formerly district offices; however, the
district director and other management positions are to be
eliminated.
CONCERNS ABOUT IRS'
REORGANIZATION ON FEDSTATE
RELATIONSHIPS
---------------------------------------------------------- Letter :6.1
In our discussions with state officials, many expressed concern about
the effect that reorganization would have on their relationships with
IRS. To help better understand these concerns, we held a joint
meeting with representatives from nine state tax agencies. Many
participants told us that they placed a high premium on the personal
commitment of top managers at IRS district offices. They also said
that they viewed the good lines of communications that they had
developed through ongoing personal contacts and close working
relationships with their district IRS counterparts as being important
to the success of FedState activities. The participants said that
the elimination of district offices in some states may impede
FedState cooperation because (1) there may be no IRS counterparts for
state officials in those states that have lost IRS district offices
and (2) the geographical distance between state offices and some
district directors may tend to discourage the development of a close
working relationship. In essence, these participants were concerned
about the continuation of ongoing FedState projects and the prospect
of future projects.
IRS' RESPONSE TO THE STATES'
CONCERNS
---------------------------------------------------------- Letter :6.2
In 1995, the IRS Transition Executive, responsible for overseeing
IRS' reorganization, produced a transition plan that, according to
officials from the Office of FedState Relations, will be implemented.
The plan addresses the states' concerns by recommending to regional
IRS commissioners that a full-time FedState coordinator and a
full-time disclosure officer be established in each of the continuing
district and regional offices. In the past, district FedState
coordinators were not full-time positions; rather, FedState
activities were typically considered a collateral duty of the
district disclosure officer. Some IRS officials had expressed
concern about disclosure officers being given the role of
coordinator, since their primary responsibility is to safeguard data,
not to look for ways to share it. According to IRS officials, the
highest-level official remaining in each district office scheduled to
be closed will be designated FedState liaison as a collateral duty.
It is too early to assess whether the plan will address the states'
concerns because of the recency of the reorganization.
CONCLUSIONS
------------------------------------------------------------ Letter :7
FedState cooperative efforts provide IRS and the states with
opportunities to increase taxpayer compliance, improve taxpayer
service, reduce taxpayer burden, and improve the efficiency of tax
administration activities. However, IRS has not provided the
strategic framework, guidance, and performance goals for the FedState
program that would enable it to take fuller advantage of these
opportunities. Specifically, IRS' Office of FedState Relations has
not provided guidance to local IRS districts and states, and the
level and types of efforts undertaken appear to rely primarily on the
commitment of IRS district management and the state. It is important
to maintain the local focus of the efforts because of the variation
in needs, resources, and taxpayer issues. At the same time, data
that identify best practices would better enable IRS to promote the
practices' adoption on a wider scale.
Further, IRS has not developed performance goals for the FedState
program and has not collected data on most programs to monitor or
assess program progress and results. Consequently, IRS national and
district offices do not have the information needed to manage and
assess the FedState program as a whole and make informed decisions
about individual FedState projects. As a result, IRS may be missing
opportunities to target program efforts and maximize potential
program benefits.
Finally, some state tax officials are concerned that IRS'
reorganization of its district offices may impede or even end the
long-standing relationships with IRS district officials that have
made cooperative FedState projects possible. It is too early to
determine what impact the reorganization will have on the program.
RECOMMENDATIONS TO THE
COMMISSIONER OF INTERNAL
REVENUE
------------------------------------------------------------ Letter :8
To enhance opportunities for increased benefits from the FedState
program we recommend that you
-- develop and monitor, in conjunction with the states,
implementation of a strategic framework that links FedState
project objectives to IRS and state mission objectives; and
-- establish performance goals and ways to monitor and assess
program results.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :9
We requested comments on a draft of this report from you or your
designated representatives. Responsible IRS officials, including the
Director, Governmental Liaison and Disclosure, and the Director,
Office of FedState Relations, provided comments and supplementary
documents in a September 4, 1996, meeting and additional comments
dated September 27, 1996. We have incorporated modifications in
response to their comments in this report where appropriate.
FedState officials emphasized that the conditions identified in our
report related to the way the program operated before they took
charge. They are in the process of making changes they think will
improve the program and they said our concerns would be addressed in
that process.
In response to our recommendation to develop a strategic framework,
Office of FedState Relations officials said they believed they had
already undertaken important steps toward a strategic plan, in
particular by establishing FedState plans and procedures in Spring
1996. By definition, they said, the program focuses on the
identification, exploration, and implementation of innovative
solutions to mutual challenges at the local level. Further, they
commented that while they recognized the importance of strategic
planning at the national level, IRS will continue to look to IRS
executives to leverage these opportunities with their state
counterparts at the local level.
IRS officials said they have established plans and procedures that
will link FedState project objectives to IRS and state mission
objectives. For example, they told us they established the National
FedState Steering Committee. Among other responsibilities, the
Committee has been developing FedState policies and procedures to
ensure that specific FedState goals are consistent with IRS goals.
The Committee developed FedState project guidelines which were
forwarded to IRS regional offices in August 1996. This guidance is
responsive to our recommendation and should help IRS improve its
program.
The Office of FedState Relations also has been developing a "FedState
Program Letter" for fiscal year 1997. According to IRS officials,
the Program Letter will provide general guidance about the FedState
program, its objectives, current priorities, and other information.
FedState officials said the Program Letter will outline long-range
objectives as well as set priorities for fiscal year 1997. Further,
they commented that they have stabilized the management team and have
filled director positions with permanent, top-level managers which
should help to overcome concerns about the instability of the Office.
We believe that IRS has taken important steps toward a strategic
framework, but it is too early to assess the effectiveness of these
steps because they were recently implemented or have not been
finalized.
IRS officials also agreed with our recommendation to establish
performance goals and ways to monitor and assess program results.
They said steps to improve in these areas have already been taken.
For example, the Office of FedState Relations distributed guidance to
district and service center FedState coordinators on how to report
the results of individual FedState projects. The guidance requests
that coordinators quarterly report information on their FedState
projects, including baseline measures for new initiatives and
specific results for ongoing projects. Also, in August 1996, the
Office of FedState Relations provided FedState coordinators
guidelines on how to develop projects and propose projects that might
be replicated nationwide. Among other things, these guidelines
request that coordinators specify how projects results are to be
measured and how the measurements relate to the goals of the project.
We believe that, when fully implemented, these steps may provide more
of the information IRS needs to manage and assess the program.
We are encouraged by the enthusiasm and commitment current IRS
officials show for the FedState program. However, during our review
various FedState officials have told us about plans or procedures to
develop FedState program and project measures. Many of these were
abandoned or were never fully realized. To be successful, IRS'
current plans to develop a strategic framework and measures must be
fully implemented and supported by the appropriate IRS officials at
the national and local levels.
In a meeting on August 15, 1996, we obtained comments on a draft of
this report from Federation of Tax Administrators (FTA) officials
responsible for FedState-related issues, including the Executive
Director and Government Affairs Associate. The officials generally
agreed with our recommendations. However, the officials said that
the strategic framework must allow enough flexibility for state
taxing agencies and local IRS officials to decide which FedState
projects they will pursue. Also, the officials said FTA conducted a
study that showed the revenue benefits to the states from IRS'
taxpayer data tape exchange program. FTA issued its report on
September 25, 1996.
---------------------------------------------------------- Letter :9.1
The head of a federal agency is required by 31 U.S.C. 720 to submit
a written statement on actions taken on these 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 this report. A written statement must also be sent to the House
and Senate Committee on Appropriations with the agency's first
request for appropriations made more than 60 days after the date of
this report.
We are sending copies of this report to interested congressional
committees, including the Chairman and Ranking Minority Member of the
House Committee on Ways and Means and its Subcommittee on Oversight,
the Chairman and Ranking Minority Member of the Senate Finance
Committee, the Secretary of the Treasury, and other interested
parties. Copies will also be made available to others upon request.
Major contributors to this report are listed in appendix III. Please
contact me on (202) 512-9110 if you have any questions concerning the
report.
Sincerely yours,
Lynda D. Willis
Director, Tax Policy and
Administration Issues
STATES WITH AN INCOME TAX AND THE
DEGREE OF CONFORMITY TO FEDERAL
INCOME TAX
=========================================================== Appendix I
Degree of
conformity to
State State income tax? federal income tax
------------------------------ ------------------ ------------------
Alabama Yes None
Alaska No Not applicable
Arizona Yes Adjusted gross
income (AGI)
Arkansas Yes None
California Yes AGI
Colorado Yes Federal taxable
income (FTI)
Connecticut Yes AGI
Delaware Yes AGI
District of Columbia Yes AGI
Florida No Not applicable
Georgia Yes AGI
Hawaii Yes FTI
Idaho Yes FTI
Illinois Yes AGI
Indiana Yes AGI
Iowa Yes AGI
Kansas Yes AGI
Kentucky Yes AGI
Louisiana Yes AGI
Maine Yes AGI
Maryland Yes AGI
Massachusetts Yes AGI
Michigan Yes AGI
Minnesota Yes FTI
Mississippi No None
Missouri Yes AGI
Montana Yes AGI
Nebraska Yes AGI
Nevada No Not applicable
New Hampshire Yes Only interest and
dividends are
taxed
New Jersey Yes None
New Mexico Yes AGI
New York Yes AGI
North Carolina Yes FTI
North Dakota Yes State tax
calculated as a
percentage of
federal liability
Ohio Yes AGI
Oklahoma Yes AGI
Oregon Yes FTI
Pennsylvania Yes None
Rhode Island Yes State tax
calculated as a
percentage of
federal liability
South Carolina Yes Based on FTI
South Dakota No Not applicable
Tennessee Yes Only certain
interest and
dividends are
taxed
Texas No Not applicable
Utah Yes FTI
Vermont Yes State tax
calculated as a
percentage of
federal liability
Virginia Yes AGI
Washington No Not applicable
West Virginia Yes AGI
Wisconsin Yes AGI
Wyoming No Not applicable
----------------------------------------------------------------------
Note: If a state's income tax conforms to the federal income tax,
its "starting point" will be (1) federal adjusted gross income (AGI);
(2) federal taxable income (FTI); or (3) federal tax liability, with
certain modifications to deal with areas where the state may wish to
differ from federal rules.
Source: Significant Features of Fiscal Federalism, Volume I - Budget
Processes and Tax Systems (1994), Advisory Commission on
Intergovernmental Relations, June 1994, pages 58-60.
TYPE, DESCRIPTION, AND
ILLUSTRATIVE EXAMPLES OF FEDSTATE
PROJECTS
========================================================== Appendix II
Type Description Example
-------------------- ---------------------------- ----------------------------
Assistance to The development of materials IRS and a state revenue
taxpayers and the provision of agency opened a "New
customer service by all Business Assistance Center"
functions. to inform new business
owners of their federal and
state tax responsibilities
and how to comply.
Initial processing The receipt and processing To prevent erroneous Earned
of returns of tax returns, payments, Income Credit refunds, a
and information documents, state obtained a list from
both paper and electronic. IRS of taxpayers with
freezes on their accounts
that they used to determine
whether to also freeze a
taxpayer's account.
Adjustments to Account adjustments to tax, In one state, after IRS
accounts penalties, and interest, audits a taxpayer's return,
including amended returns, it informs the taxpayer that
taxpayer requests, claims, any changes to federal tax
and service-initiated liability may affect state
changes. tax liability and the
taxpayer may be required to
file an amended state tax
return.
Document matching The matching of information IRS obtained state tax
and nonfiler documents against tax filing records to identify
programs returns and accounts to taxpayers filing a state
identify nonfilers. income tax return but not a
federal income tax return.
Examinations and The selection and IRS and a state conducted a
determinations examination of income, joint sweep of auto
excise, employment, employee dealerships to determine
plans/exempt organizations whether they were filing IRS
(EP/EO), and estate and gift Form 8300s and reporting
returns to determine tax state sales tax for cash
liability (including sales over $10,000.
appellate review). Also
includes EP/EO
determinations.
Collections Includes all efforts to In some states, if a
secure payment of tax taxpayer owes both the IRS
liabilities. and state revenue agency,
the taxpayer can go to
either IRS or the state
revenue agency and set up an
installment agreement to
resolve both accounts.
Investigations Encompasses all civil and Two IRS districts and a
criminal investigative state department of revenue
activities. have a project to identify
and conduct joint
investigations of
individuals who are filing
fraudulent tax returns
electronically.
Information systems The development and A state department of
maintenance of information revenue provides one IRS
systems, including district with all
telecommunications, systems information the state
security and privacy, and receives on fuel sales,
systems standards. purchases, licenses, and
distributors' reports. Using
this information, the
district created an
automated database to
promote and monitor
compliance in the motor fuel
industry.
Resources Financial, human resource, In several states, IRS and
and asset management. the state revenue office
share training resources.
For example, an IRS district
trained state revenue
employees on federal
corporate tax laws.
--------------------------------------------------------------------------------
Source: IRS FedState Cooperative Ventures Catalog, 1994; and
information gathered in GAO visits to IRS offices between January
1995 and April 1996.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III
GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C.
Harriet C. Ganson, Assistant Director
Tax Policy and Administration Issues, (202) 512-9045
Anthony Assia, Assignment Manager
Kelsey M. Bright, Senior Evaluator
Rodney F. Hobbs, Senior Evaluator
ATLANTA FIELD OFFICE
Ronald W. Jones, Evaluator-in-Charge
Troy D. Thompson, Evaluator
*** End of document. ***