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Budget (OMB) and Clinger-Cohen Act 4 requirements; and, in some instances, the business cases did not comply with the IRS’ Exhibit 300 Business Case Guide. As a result, senior IRS executives and Department of the Treasury and OMB officials should not rely on the data in these business cases to manage and fund projects. The IRS prepares about 30 business cases each year to support funding for its major Information Technology (IT) investments. To make business cases more reliable and useful, the IRS should ensure existing guidance is followed in computing costs for IT projects and work performed by contractors is adequately reviewed before acceptance. In addition, the IRS should require a comprehensive evaluation of all vendor proposals and an assessment of three viable alternatives for IT investments. The IRS should also hold IT Project Managers accountable to ensure that all sections of a business case are consistent, accurate, and complete, and correct all software problems that lead to incorrect earned value 5 calculations. The IRS agreed with these recommendations and has taken action to change its BY 2007 submissions. Report Reference No. 2005-20-074 Tax Compliance Initiatives The IRS recognized that underreporters account for the largest portion of the tax gap. 6 As a result, the IRS developed an extensive Employment Tax Strategy that addresses many facets of employment tax compliance. The seven-pronged approach includes Tip Income, Non-Filers, Workload Identification, Collection, Legislative Initiatives, Education, and Reporting Compliance. 7 However, while approximately two-thirds of the Federal Government’s revenue receipts are reported on Forms 941 (Employer’s Quarterly Federal Tax Return), the IRS has not evaluated the extent of tax underreporting on these forms for at least 15 years. Currently, according to the IRS, there are 720,612 Forms 941 nationwide that do not balance with the Forms W-2 data for TY 2003. These inaccuracies could represent significant amounts of unpaid tax as the table below illustrates. Results of Employment Tax Forms When Reviewed IRS Function Year Returns Reviewed Additional Tax Assessed CAWR TY 2002 58,416 $905,249,357 EXAMINATION FY 2004 17,698 $422,264,000 Source: The Combined Annual Wage Reporting (CAWR) program is an IRS program that helps the Social Security Administration ensure all workers get credit for the wages they earn towards retirement benefits. Additionally this program can be used to identify unreported and unpaid tax. 4 Pub. L. No. 104-106, 110 Stat. 642 (codified in scattered sections of 5 U.S.C., 5 U.S.C. app., 10 U.S.C., 16 U.S.C., 18 U.S.C., 22 U.S.C., 28 U.S.C., 29 U.S.C., 31 U.S.C., 38 U.S.C., 40 U.S.C., 41 U.S.C., 44 U.S.C., 49 U.S.C., 50 U.S.C.). 5 Earned value management is a method of analysis that provides management with an objective measurement of how well an IT investment in the development stage is progressing in terms of planned costs and schedule. TIGTA recommended that the IRS develop methodologies within the Employment Tax 6 The tax gap includes nonfilers, underreporters of tax, and underpayers of tax. 7 Reporting compliance can be measured by comparing the tax reported by a taxpayer with what should be reported. 10 April 1, 2005 to September 30, 2005
Strategy to evaluate the extent of underreporting by employers. IRS management agreed with the recommendation and is taking steps to evaluate the extent of the problem. Report Reference No. 2005-30-126 The IRS has not used State tax amnesty information as an ongoing tool to help ensure compliance with Federal tax laws. As a result, it is missing a unique opportunity to address noncompliant taxpayers who have acknowledged their noncompliance with tax laws to State governments and who also may owe Federal taxes. Although an IRS study included considerable analysis of tax amnesty data for individual taxpayers from two states, it did not fully explore the benefits of this information and its usefulness in IRS compliance programs. Tax amnesty programs are designed to collect taxes owed from prior years and place those who previously avoided taxation on the tax rolls. Over the past 23 years, at least 41 states and two cities have collected more than $5.7 billion from tax amnesty programs. To encourage taxpayers to participate, these programs generally forgave all civil and criminal penalties. However, they differed as to whether all or a portion of the interest was forgiven. TIGTA recommended that the IRS evaluate current Federal and State exchange programs to determine whether State tax amnesty information could be obtained and, if so, how this data could be used in IRS compliance programs. IRS management agreed with the recommendations and proposed corrective action. Report Reference No. 2005-30-165 The IRS estimates it will achieve approximately $1.17 billion in additional revenues if additional funding for its proposed FY 2006 enforcement initiatives is approved. This would equate to a 4.4 to 1 return on the additional investment when the employees become fully productive in FY 2008. IRS officials believe the 4.4 to 1 return on investment is a conservative estimate, but TIGTA’s analysis indicates the estimate may be too high. IRS revenue projections were based on historical averages that weighted data equally from years when IRS priorities and technology were substantially different than in recent years. In addition, business units did not always provide specific information to correlate revenue projections to the goals of the initiatives. Furthermore, the IRS currently does not have a methodology to measure revenue resulting from any adopted initiatives, such as the results of increased investment in enforcement activities. The absence of such a measurement limits the IRS’ estimating ability to assist in budgeting and resource allocation. TIGTA recommended that the business units provide more information on the type of work expected to be completed by the additional staff to allow the IRS to more accurately project revenues. Additionally, the IRS should consider using a forecasting model that assigns greater weight to more recent years’ data, such as exponential smoothing, when appropriate. The IRS should also develop a methodology to evaluate the results of increased investments in enforcement activities. April 1, 2005 to September 30, 2005 11
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