TIGTA Says IRS Is Improving International Individual Tax Compliance

IMPACT ON TAXPAYERS

As globalization grows, so do concerns about the International Tax Gap -- that is, taxes owed but not collected on time from a U.S. person or foreign person whose cross-border transactions are subject to U.S. taxation. To address these concerns, the IRS developed a strategic plan to increase its international efforts, including the creation of the International Campus Compliance Unit (CCU) to enhance its efforts to expand audit coverage of tax returns with international aspects and to increase compliance among international individual taxpayers.

WHY TIGTA DID THE AUDIT

Before creating the CCU, the IRS did not have resources dedicated to specifically address the needs of the international individual taxpayer. The overall objective of this review was to determine whether the benefits envisioned by establishing the CCU to improve international individual tax compliance are being achieved.

WHAT TIGTA FOUND

The IRS successfully planned the CCU and followed general Government guidelines and steps for implementing a new business process during the planning. The IRS is still developing inventory selection criteria for the CCU. However, for Fiscal Years 2011 through 2013 (through March 13, 2013), the CCU conducted almost 18,000 audits and assessed approximately $36 million. Further, the no-change rate decreased from Fiscal Year 2012 to Fiscal Year 2013, while agreed assessments increased.

Despite its accomplishments, the CCU does not have specific performance measures for its operations. The current performance measures incorporate all tax examiner groups in the Individual International Compliance Program. However, tax examiner groups outside of the CCU work different issues and cases. Ideally, an agency should develop and implement measures for all its major processes to track costs, quality, and timeliness.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS enhance the performance measures for the CCU to more specifically reflect the work performed by CCU examiners.

The IRS agreed with this recommendation and plans to evaluate the current performance measures and CCU inventory results to determine how to enhance the performance measures that are specific to work performed by CCU examiners. The IRS plans to use these performance measures to establish effective performance goals and measure the CCU's success in achieving them.

Management's complete response to the draft report is included as Appendix V.

Copies of this report are also being sent to the Internal Revenue Service managers affected by the report recommendations. If you have any questions, please contact me or Nancy Nakamura, Assistant Inspector General for Audit (Compliance and Enforcement Operations).

                    Table of Contents

To address the International Tax Gap, the IRS developed an international tax strategic plan with two major goals:

Creation of the International Campus Compliance Unit

In October 2010, the LB&I Division established the International Campus Compliance Unit (CCU) in Austin, Texas. The CCU was created to expand audit coverage of tax returns with international aspects and to increase compliance among international individual taxpayers. The CCU addresses and resolves less complex issues through correspondence examinations and serves as the first point of contact for initiatives involving soft notices or contacts with taxpayers regarding their taxes.

The primary goal of the CCU is to increase coverage of international tax return filings or international tax issues reported or underreported on Form 1040, U.S. Individual Income Tax Return, or Form 1040NR, U.S. Nonresident Alien Tax Return. The CCU also works closely with the Wage and Investment Division's Submission Processing function to expediently address emerging abusive tax schemes involving international tax returns or tax issues and supports international initiatives relative to individual taxpayers to facilitate early resolution of cases without field involvement.

Figure 1 shows the CCU's location in the International Individual Compliance Program's organizational structure.

 

Figure 1: LB&I Division's International Individual Compliance

 

Program's Organizational Structure

 

 

 

The CCU is engaged in a number of diverse projects, including:

• Creating tax returns for certain taxpayers who failed to file Forms 1040PR (the Spanish version of Form 1040 for residents of Puerto Rico).

• Examining filed Forms 1040NR claiming certain treaty benefits.

• Processing applications for Central Withholding Agreements by nonresident alien athletes and entertainers.

This review was performed at the CCU in Austin, Texas. It also includes an analysis of data provided by the International Individual Compliance Program, Planning and Special Programs, during the period September 2012 through June 2013. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.

Before the creation of the CCU, the IRS did not have resources dedicated to specifically address the international individual taxpayer. This created noncompliance conditions, which were especially significant in the U.S. territories and possessions. The IRS created the CCU to align resources to enhance tax compliance and customer service for individual taxpayers with less complex international tax issues. Since its creation in October 2010, the CCU has conducted almost 18,000 audits with approximately $36 million in assessments.

The IRS's vision for the CCU is that it will identify and quickly respond to less complex industry and international tax issues resulting in an overall improvement in tax compliance and customer service. The approach used to implement this vision included the following six-step process.

When developing and implementing new business processes, or for improving existing ones, it is important to establish detailed steps for carrying out the various phases of the initiative. The Government Accountability Office's Business Process Reengineering Assessment Guide² contains nine major assessment issues considered by experts to be stepping stones to successful business process reengineering. The issues in the guide provide a general framework for assessing a reengineering project from initial strategic planning and goal setting to post-implementation assessments. Figure 2 shows the nine major assessment issues and how IRS management addressed these issues in their creation of the CCU.

The CCU was established and staffed

In deciding where to locate the CCU, the IRS used initial criteria of whether there was:

To estimate the number of employees required to staff the CCU, the IRS needed to determine the unit's workload, i.e., the volume of international tax returns to be audited and the time needed to audit them. However, many of the work types that had been identified were new or emerging compliance risks and were not currently being worked. Therefore, volumes and processing times were unknown.

In addition, the volume of some work types is directly tied to external variables and a submission processing site's ability to process fluctuating capacity is dictated by those variables rather than available resources. Based on all of these factors, the IRS determined that the initial staffing for the CCU was to be 30 tax examiners. As of Fiscal Year 2012, the number of tax examiners has slightly increased to 31.

The CCU has audited almost 18,000 tax returns since its creation

In Fiscal Year 2011, the CCU primarily worked substitutes for returns related to Form 1040PR. Under the Substitute for Return Program, the IRS prepares tax returns for taxpayers who have not filed their required tax returns based on income and other information provided to the IRS by third parties, such as employers and banks. These tax returns are generally not complex and only take about an hour to create and assess. The CCU worked three years of tax returns for each taxpayer and these returns accounted for approximately 75 percent of the CCU's inventory during that fiscal year.

In Fiscal Year 2012, the CCU started working more complex tax returns related to Information Returns Processing. Information Returns Processing involves comparing what the taxpayers reported on their tax returns to the information the IRS was provided from third parties. These tax returns took an average of 3.5 hours to work; therefore, CCU examiners could not work as many tax returns as they did in Fiscal Year 2011. However, working these types of tax returns resulted in higher tax dollar assessments per tax return and thus overall higher dollars assessed even though not as many tax returns were worked as in Fiscal Year 2011.

As shown in Figure 3, for Fiscal Years 2011 through 2013 (through March 13, 2013) the CCU conducted almost 18,000 audits and assessed approximately $36 million. Further, the no-change rate decreased from Fiscal Year 2012 to 2013, while agreed assessments increased.

                      Figure 3: The CCU's Accomplishments

Planning and Special Projects³ function management stated that workload identification for the CCU is a significant challenge. Unlike other areas in the IRS where computer programs identify the inventory, identifying the workload for the CCU involves manually analyzing data. There is a large amount of IRS data to review as well as data from foreign treaty partners and other Government agencies such as the Department of State.

Additionally, the Planning and Special Projects function must ensure that the tax returns selected for audit are appropriate for correspondence audits and match the skills of the staff. In contrast to the more detailed and lengthy face-to-face audits in the field, the correspondence audit process is less intrusive, more automated, and includes less complex tax issues.

When the CCU receives inventory from the Planning and Special Projects function, the work is assigned to one of the CCU groups. Each group's team leader reviews the tax returns and assigns them to the individual tax examiners based on their training and experience. Feedback on inventory selection is provided to the Planning and Special Projects function to help ensure that adjustments to the inventory selection process can be made if needed.

Currently, the Planning and Special Projects function is working closely with the CCU to identify additional data sources to ensure that the workload continues to be productive. This process is ongoing and changing annually as international tax issues change. For example, better case selection has led to a decrease in no-change cases. In addition, only about 15 cases a quarter are referred to other IRS functions because CCU employees cannot work them due to their complexity. This accounts for less than 1 percent of the 5,177 examinations closed in Fiscal Year 2012.

Performance Measures Still Need to Be Established

Although the IRS established a multilayered quality review process to ensure that the CCU inventory is correctly and consistently worked, it has not established the performance measures needed to measure the CCU's success in achieving its goals. Now that the CCU has been operating for a number of years, sufficient data would be available at the end of three years to establish meaningful performance measures to determine if the CCU is achieving its goals.

The LB&I Quality Measurement System (LQMS) provides an independent review of CCU casework

The LQMS provides an independent quality review of a statistically valid sample of CCU cases. The LQMS reviews each case for 17 different issues including audit planning, income determination, audit technique, timeliness, and professionalism. The results of the first LQMS reviews for the CCU showed overall quality scores in the 90 percent range.

In addition, CCU management, which includes the Territory manager and the unit manager, perform operational reviews of the cases being worked in the CCU's inventory. The CCU management team has been performing operational reviews on a consistent basis and the Territory manager performs monthly reviews of cases more than 60 days old that are still in the inventory. The feedback received from the LQMS and the CCU management reviews are extensive and are used to determine planning and training needs. The current results of all reviews have been positive.

The CCU's performance improved, even though there are no specific performance measures for the program

The CCU's performance results improved from Fiscal Year 2011 to Fiscal Year 2012. Even though the CCU reviewed 4,437 fewer tax returns in Fiscal Year 2012 than it did in Fiscal Year 2011, it assessed $5.4 million more in taxes, for an average of approximately $2,000 more per tax return.

Figure 4 shows the categories of tax returns worked by the CCU and the dollars assessed.⁴ The decision to change the category of the tax returns selected had a big impact on the dollars assessed between Fiscal Years 2011 and 2012.

          Figure 4: Tax Return Categories Worked by the International

Despite its accomplishments, the CCU does not have specific performance measures for its operations. The current performance measures incorporate all tax examiner groups in the International Individual Compliance Program. However, tax examiner groups outside of the CCU work different issues and cases. Ideally an agency should have measures for all of its major processes to track cost, quality, and timeliness.

The inventory reports in the Examination Returns Control System can be queried by the group number to provide data on the inventory results of the CCU. Based on our review of this data, the CCU is accomplishing what it was created to do. However, without specific performance measures, the IRS cannot establish effective performance goals or measure the CCU's success in achieving them. Performance measures specific for the CCU can help the program achieve its goals and measure its success from year to year.

Recommendation

Recommendation 1: The Commissioner, LB&I Division, should enhance the performance measures for the CCU to more specifically reflect the work performed by CCU examiners.

² Government Accountability Office (formerly known as the General Accounting Office), GAO/AIMD-10.1.15 (version 3), Business Process Reengineering Assessment Guide (April 1997).

³ The Planning and Special Projects function within the International Individual Compliance Program is responsible for selecting the majority of the case inventory for the International Individual Compliance Program, including the CCU.

⁴ The assessments over $1 million are rounded, so the average dollar assessments for these categories will be slightly different due to rounding.

⁵ The difference between the assessments in Figure 3 ($15.7 million) and Figure 4 ($15.8 million) is due to rounding.

I. Determined whether the IRS properly planned for and implemented the CCU by determining the LB&I Division's roles, responsibilities, and resource commitments to the CCU.

Internal controls relate to management's plans, methods, and procedures used to meet their mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. We determined the following internal controls were relevant to our audit objective: the LB&I Division's plan for creating the CCU, the CCU's mission and policies, the selection criteria for the CCU inventory, the quality review process, and the performance measures. We evaluated these controls by interviewing management, reviewing the planning documentation for the CCU, reviewing quality review results, and analyzing inventory reports to determine if the CCU was productive and fulfilling its mission.

Bryce Kisler, Director

Tina Parmer, Audit Manager

John Chiappino, Lead Auditor

Marge Filippelli, Senior Auditor

Frank O'Connor, Auditor

Office of the Commissioner -- Attn: Chief of Staff C

Office of the Deputy Commissioner for Services and Enforcement SE

Deputy Commissioner (International), Large Business and International Division SE:LB:IN

Director, International Individual Compliance, Large Business and International Division SE:LB:IN

Chief Counsel CC

National Taxpayer Advocate TA

Director, Office of Legislative Affairs CL:LA

Director, Office of Program Evaluation and Risk Analysis RAS:O

Office of Internal Control OS:CFO:CPIC:IC

Audit Liaison: Large Business and International Division SE:LB

A contract between a nonresident alien athlete or entertainer, a designated withholding agent, and an authorized representative of the IRS for a specific tour or series of events, which provides for the correct amount of withholding based upon net income at graduated rates.

Examination Returns Control System

The Examination Returns Control System provides detailed management information on returns under examination. Management and clerical personnel in the Small Business/ Self-Employed and LB&I Divisions use the Examination Returns Control System to request tax returns and update examination status. The Examination Returns Control System provides the capability to assign returns to individual examiners and record their time charges. The Examination Returns Control System also tracks technical time spent on the cases and monitors the cases for proximity to statute expiration.

Exchange of Information Program

The Exchange of Information Program administers the exchange of information provisions of U.S. tax treaties and tax information exchange agreements. It helps IRS field personnel obtain foreign-based records and other information from foreign countries.

Fiscal Year

A 12-consecutive-month period ending on the last day of any month. The Federal Government's fiscal year begins on October 1 and ends on September 30.

Foreign Person

A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person who is not a U.S. person.

Information Returns Processing

Information Returns Processing identifies taxpayers who have underreported their income by matching information documents received by third parties to the income reported on the individual's tax return.

Internal Revenue Manual

Contains the policies, procedures, instructions, guidelines, and delegations of authority that direct the operation and administration of the IRS. Topics include tax administration, personnel and office management, and others.

International Individual Taxpayer

A U.S. citizen or resident alien working, living, or doing business abroad or receiving investment income from abroad or a foreign individual working, living, or doing business in the United States or receiving investment income from the United States.

International Practice Networks

A strategic part of the International Individual Compliance Program involves the creation of International Practice Networks aligned with a framework used to organize all international issues. The International Practice Networks allow all international personnel, counsel, and other interested parties to come together to share and collaborate on strategic international issues.

No-Change Rate

The no-change rate is the percentage of cases where no tax assessment was made.

Nonresident Alien

An individual who is not a U.S. citizen or U.S. national who has not passed the green card test or the substantial presence test.

Nonresident Compliance Initiatives

The Nonresident Compliance Initiatives office is responsible for workload identification, case building and delivery for examiners in the International Individual Compliance Program, providing automation support to field groups, and compliance program monitoring and reporting.

Offshore Compliance Initiatives

The Offshore Compliance Initiatives office promotes voluntary compliance with U.S. tax and foreign information reporting laws through strategic enforcement actions directed at identifying U.S. taxpayers involved in abusive offshore tax schemes and the banks, other financial institutions, and third parties that provide, facilitate, or enable their offshore financial arrangements.

Submission Processing Sites

The data processing arm of the IRS. The sites process paper and electronic submissions, correct errors, and forward data to the Computing Centers for analysis and posting to taxpayer accounts.

Substitute for Return

A tax return prepared by the IRS under the authority of Internal Revenue Code Section 6020(b) using information from third-party sources because the taxpayer did not file a tax return.

Tax Gap

The estimated difference between the amount of tax that taxpayers should pay and the amount that is paid voluntarily and on time.

Tax Year

The 12-month period for which tax is calculated. For most individual taxpayers, the tax year is synonymous with the calendar year.

• The IRS took all the appropriate steps to create the CCU, and as a result, it was successfully implemented.

• The CCU is productive. Performance improved since its establishment in October 2010. For Fiscal Years 2011 through 2013 (through March 13, 2013), the CCU conducted almost 18,000 audits and assessed approximately $36 million. Furthermore, the no-change rate decreased from Fiscal Years 2012 to 2013, while agreed assessments increased.

• The LB&I Division Quality Measurement System (LQMS) provides an independent review of CCU casework.

Attachment

The Commissioner, LB&I Division, should enhance the performance measures for the CCU to more specifically reflect the work performed by CCU examiners.

CORRECTIVE ACTIONS:

The Director, International Individual Compliance, will work with the CCU senior management team to evaluate the current IIC performance measures and CCU inventory results to determine how best to enhance the performance measures specific to work performed by CCU examiners. Additionally, we will work with Planning, Analysis, Inventory and Research (PAIR) as they have responsibility for performance measures for LB&I. These performance measures will then be used to establish effective performance goals and measure the CCU's success in achieving them.

IMPLEMENTATION DATE:

Estimated: August 31, 2014

RESPONSIBLE OFFICIAL(S):

Director, International Individual Compliance (SE:LB:IN:IIC)

CORRECTIVE ACTION(S) MONITORING PLAN:

The LB&I Internal Control Coordinator will track the implementation date for the corrective actions through the Joint Audit Management Enterprise System that tracks implementation of corrective actions addressing audit recommendations.