Wednesday, July 11, 2012

IRS Oversight Board gives IRS mixed reviews in latest annual report

IRS Oversight Board gives IRS mixed reviews in latest annual report

The IRS Oversight Board delivered its "Annual Report to Congress 2011" on June 5, 2012, as required by law. The latest report highlighted the drop in the IRS's level of service by the IRS toll-free telephone assistors, the continued trend of focusing examination resources on higher income taxpayers, and serious concerns about the effect that IRS budget cuts will have on the agency's strategic goals. The Board concluded that while the IRS has generally met its performance goals and made achievements related to e-filing and online services, the agency is still challenged in its efforts to reduce the tax gap.

Recent IRS achievements

The Board reported several positive developments within the IRS over FY 2011, including: --Launching the first IRS smartphone application, IRS2Go, which enables users to check the status of their tax refunds and access tax tips form their phones; --Increasing significantly the number of individual tax returns filed electronically; --Stopping $14.4 billion in fraudulently claimed tax refunds; and --Implementing the Preparer Tax Identification Number (PTIN) system.

E-filing. The Board reported that the number of individual tax returns filed electronically had increased by 13 percent, from 98.3 million e-filed returns in 2010 to 111 million in 2011. The overall e-filing rates for individual returns are close to 80 percent, and the online filing rate for individual returns from self-preparers using tax software is approximately 64 percent, representing a six-percentage-point gain from 2010.

Among paid return preparers the e-file rate is 89 percent. This and the overall increase in e-filed returns results in some degree from the mandate that tax return preparers who file more than 100 individual returns to file electronically.

Refund processing. The IRS processed approximately 107 million tax refunds in 2011, totaling $303 billion and with an average refund amount of $2,836. In addition, the IRS was able to meet its goal of issuing a refund within a 45-day period 99.4 percent of the time.

Refund fraud. The Board also reported that refund fraud was a growing problem fueled by identity theft. In 2011, the IRS was able to stop 1,756,242 fraudulent returns for a total of nearly $14.4 billion in fraudulent refunds stopped.

Customer service

The IRS Oversight Board reported a drop in the level of service on IRS toll-free telephone lines from 74 percent in FY 2010 to 70 percent in FY 2011, which indicates that three out of every 10 phone callers to the IRS were unable to connect with a telephone assistor. The length of time that the callers waited on average before reaching an assistor was 11.7 minutes, irrespective of the accuracy of the advice received, the Board reported.

The Board questioned if telephone service will be funded adequately in the near future, especially considering the heavy pressure that all federal agencies face to reduce costs. As a consequence, the IRS must take positive steps to lower demand on toll-free telephones by shifting taxpayers to alternative channels that are more cost-effective.

Online tools

The IRS website has become one of the most popular means by which taxpayers can access tax information, according to the IRS Oversight Board. The IRS Oversight Board reported that in FY 2011 the IRS website received nearly 305 million visits and approximately 76 million taxpayers checked their refund status with the agency's online tool "Where's My Refund?"


The Board reported that the examination coverage rate for taxpayers with income over $1 million was 12 times higher than for individual taxpayers with lower incomes. According to the Board, the audit coverage rate for higher income taxpayers has nearly doubled during the past two years.

Corporations with higher net assets show a higher examination rate, the Board discovered. In 2005 more than 40 percent of tax returns from corporations with $250 million or more in assets were examined.

Tax gap

The Board reported that the most recent tax gap estimate was released by the IRS in January 2012 based on information from the 2006 tax year. The estimated $385 billion tax gap is approximately $95 billion more than the $290 billion net tax gap reported in 2001. The estimated voluntary rate of compliance (VCR) for 2006 is 83.1 percent, which is within the range of error of the previous estimate of 83.7 percent for 2001. The Board noted several IRS programs to reduce the tax gap. These include the return preparer initiative, Schedule UTP, and other programs. The Board had previously approved a long-term goal to achieve a VCR of 86.0 percent by 2012.

IRS budget

According to the IRS Oversight Board's FY 2013 IRS Budget Recommendation Special Report released in April 2012, over the last decade up until two years ago, Congress had slowly and steadily increased the agency's budget. For example, in FY 2002 the IRS had a budget of approximately $9.5 billion, which by FY 2010 had increased to $12.2 billion. During this eight-year period, the Board stated that IRS performance had improved but that budget reductions in FY 2011 and FY 2012 arrested progress in numerous areas such as customer service and tax revenue.

IRS strategic goals

Important strategic IRS goals including improving voluntary compliance through better customer service, improved technology, compliance programs such as the Compliance Assurance Process (CAP) for large business taxpayers, and enhanced identity theft detection. The Board reported that the IRS's outdated information technology systems and the $385-billion tax gap and the IRS's declining resources have made it more difficult for the agency to provide quality service and to enforce the tax laws. The Board predicted that the level of performance will decline again in FY 2012 as a result of reduced IRS budgets.

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