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GAO backs IRS taxpayer compliance initiatives.

Both the Government Accounting Office and the Internal Revenue Service agree it is time to increase efforts to ensure taxpayers are filing accurate returns. As a result, the IRS has increased funding to all of its enforcement programs. The IRS plans to devote $405 million of its fiscal 1995 budget to its overall compliance initiative, which includes 5,000 additional full-time equivalent enforcement positions and 450,000 additional examinations. The IRS expects the increase in audits to lift the overall audit rate from 0.85% in fiscal 1993 (the most recent available figure) to between 1.2% and 1.25% for fiscal 1995.

A large chunk of this funding will be used to implement the Taxpayer Compliance Measurement Program (TCMP) for the 1995 tax year. TCMP audits will begin in October 1995. The last TCMP audits in 1987 and 1988 supplied the IRS with the baseline data it now uses to measure voluntary compliance. This TCMP cycle, which will examine 153,000 returns, will not be complete until March 1998. Said John Monaco, IRS assistant commissioner, examination, "It is very important to alert people that the IRS is doing business differently now."

TCMP will make it possible to examine returns on a line-by-line basis to measure whether they are accurately completed, timely and fully paid. It will use a new market segment approach to determine compliance by different industries as well as location. "There are significant differences in approaches to taxes around the country," said Monaco. "The new market segment approach will help us improve the selection of returns for future examinations."

The program will cover individuals, partnerships and corporations, including small and foreign controlled corporations. The statistical data it generates will be used to determine characteristics of the noncompliance problem, to evaluate alternative resources to solve these problems and to improve the efficiency and effectiveness of existing operations.

Addressing the American Institute of CPAs fall tax division conference in Phoenix, Jennie Stathis, GAO tax policy and administration issues director, said "about 16% of federal income taxes owed the federal government is not paid." She said more emphasis is needed on identifying the causes of noncompliance as well as the characteristics of the taxpaying population. A recent GAO study suggested the IRS make better use of existing TCMP data to identify the root causes of sole proprietor noncompliance. Stathis said two-thirds of all returns filed by sole proprietors are noncompliant, amounting to $33 billion of unpaid taxes.

The IRS is relying on its tax system's modernization to play a big role in the success of its compliance initiative. Electronic improvements at the IRS have made preliminary information more available to agents in the field. "We have a lot more information than ever as part of regular audit procedure," said Monaco. "But the first real feel for this new information is going to come with TCMP." Urging accountants to accept electronic filing, Stathis said it "will reduce errors and produce efficiency gains that will allow the IRS more resources in the compliance area. This error reduction is the greatest promise for tax practitioners as well as taxpayers."

The IRS says the goal of its compliance initiatives is to help limit audits to those who should be audited. A substantial amount of the information from the TCMP will be devoted to taxpayer education and outreach programs. "TCMP is a research tool," said Monaco. "We are going to identify patterns of error on returns and the population that commits those errors. We will learn the probability of error and how we can stop them up front instead of relying on enforcement resources."
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Title Annotation:US General Accounting Office
Publication:Journal of Accountancy
Date:Feb 1, 1995
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