Definitions — Auditing the IRS

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How much do you know about IRS operations?

Did you know that in fiscal year 2014, the IRS collected nearly $3.1 trillion in tax revenue, processed more than 242 million tax returns and other forms, and issued approximately $374 billion in tax refunds?

Or that between fiscal year 2010 and 2014, the IRS budget declined by $850 million to approximately $11.3 billion and the IRS lost approximately 13,000 full-time employees?

Or that in fiscal year 2015, the IRS’s budget was reduced to $10.9 billion, a cut of approximately $346 million from the prior year level and more than one billion dollars less than the 2010 level?

Those figures are from the required annual summary of the top management and performance challenges confronting the IRS that the Treasury Inspector General for Tax Administration (TIGTA) releases.

Here’s a quiz on other interesting facts about the IRS, from TIGTA’s 2016 list of top management and performance challenges, in order of priority.

Security For Taxpayer Data And IRS Employees

According to the Department of Homeland Security’s US Computer Emergency Readiness Team, Federal agencies reported 69,851 cyber attacks in fiscal year 2014.

 

Implementing The Affordable Care Act And Other Tax Law Changes

The Affordable Care Act represents the largest set of tax law changes in more than 20 years and presents a continuing challenge for the IRS as provisions take effect. The Affordable Care Act provisions provide incentives and tax breaks to individuals and small businesses to offset health care expenses. The provisions also impose penalties, administered through the tax code, for individuals and businesses that do not obtain health care coverage for themselves or their employees.

 

Tax Compliance Initiatives

Legislation required information returns to be filed for reportable payment card transactions starting in 2012. The IRS committed to a multiyear pilot initiative leveraging information from Form 1099-K, Payment Card and Third Party Network Transactions, to reduce the tax gap. Included were backup withholding provisions that require payers to withhold 28% of the amounts reported on Forms 1099-K for payees that failed to provide a valid Taxpayer Identification Number.

However, TIGTA found that payers are not in compliance with these withholding requirements. A review of 2013 Forms 1099-K identified 10,216 Forms 1099-K with a missing Taxpayer Identification Number. These Forms 1099-K reported gross transactions totaling more than $10.6 billion with no withholding taken.

 

Fraudulent Claims And Improper Payments

The Taxpayer Relief Act of 1997 created two permanent education tax credits, the Hope Credit and the Lifetime Learning Credit. The American Recovery and Reinvestment Act of 2009 temporarily replaced the Hope Credit with a refundable tax credit known as the American Opportunity Tax Credit. This credit was initially set to expire at the end of the 2010, but has been extended through 2017.

TIGTA found the IRS does not have effective processes to identify erroneous claims for education credits.

 

Achieving Program Efficiencies And Cost Savings

TIGTA determined that the IRS paid monthly service fees for almost 6,800 wireless devices that were not captured in inventory records. Because these devices are not tracked in inventory, the IRS does not have assurance that the employees using them have a valid business need. While service fees associated with almost 6,800 devices may be justifiable, the IRS is not in a position to determine which fees are valid because inventory and billing records cannot be reconciled.

 

Improving Tax Systems And Online Services

The IRS Restructuring and Reform Act of 1998 mandated that the IRS, not later than December 31, 2006, develop procedures for taxpayers and their designees to review taxpayers’ accounts electronically. The Service on Demand Initiative is the IRS’s latest attempt to deliver such capability and contains specific projects that will provide online account access options.

However, the projects intended to provide these online options ultimately cannot be delivered until the IRS commits to fully completing three key “pillar” information technology projects. The completion of these projects is needed to provide the account features to enable taxpayers to view their accounts online, to accurately authenticate their identities online, and to enable the IRS and taxpayers to communicate with secure electronic messages.

 

Providing Quality Taxpayer Service Operations

As a result of budget cuts, the IRS forecasted a 37.1% level of service for the 2015 filing season. As of May 2, 2015, there were approximately 83.2 million attempts by taxpayers to contact the IRS by calling the various customer service toll-free telephone assistance lines seeking help to understand the tax law and meet their tax obligations.

 

Globalization

TIGTA determined the IRS does not have sufficient controls and processes in place to identify erroneous foreign tax credit claims.

 

Taxpayer Protection And Rights

The phone impersonation scam has proven to be so large that it is one of TIGTA’s Office of Investigation’s top priorities, and it has also landed at the top of the IRS’s “Dirty Dozen” tax scams this year. It is a surprisingly effective and fast way to steal taxpayers’ money, and in this fast-paced electronic environment, the money can be gone before the victims ever realize that they have been scammed. The hundreds of thousands of complaints we have received about this scam makes it the largest, most pervasive impersonation scam in the history of our agency.

 

Human Capital

At most Federal agencies, personnel costs account for the large majority of operating costs.

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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided to read the entire case.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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An increase of about 15%.

Source: Office of Management and Budget, Annual Report to Congress:  Federal Information Security Management Act (Feb. 2015).

Minimum Essential Coverage and the Shared Responsibility Payment, and the Premium Tax Credit.

Almost $3 billion ($10.6 billion x 28%).

Source: Source: IGTA, Ref. No. 2015-40-089, Additional Actions to Enforce Payment Card Reporting Requirements Could Reduce the Tax Gap (Sept. 2015).

Based on TIGTA’s analysis of education credits claimed and received on 2012 tax returns, we estimate that more than 3.6 million taxpayers received more than $5.6 billion ($2.5 billion in refundable credits and $3.1 billion in nonrefundable credits) in potentially erroneous education credits.

Source: TIGTA, Ref. No. 2015-40-027, Billions of Dollars in Potentially Erroneous Education Credits Continue to Be Claimed for Ineligible Students and Institutions (Mar. 2015).

The annualized cost equates to nearly $2 million in service fees for devices that were not inventoried in fiscal year 2013.

Source: TIGTA, Ref. No. 2014-10-075, Wireless Telecommunication Device Inventory Control Weaknesses Resulted in Inaccurate Inventory Records and Unsupported Service Fees (Sept. 2014).

Criminals used taxpayer-specific data acquired from non-IRS sources to gain access to information for more than 330,000 taxpayer accounts.

Source:  IRS, Additional IRS Statement on the “Get Transcript” Incident, dated August 17, 2015.

IRS assistors answered approximately 8.3 million calls and provided a 37.6% percent level of service with a 23.5 minute average speed of answer. In comparison, the level of service for the 2014 filing season was 70.8%, with the IRS answering more than 11 million telephone calls with a 14.4 minute average speed of answer.

Source: TIGTA, Ref. No. 2015-40-080, Results of the 2015 Filing Season (Aug. 2015).

TIGTA’s analysis of paper and electronically filed individual tax returns for tax years 2010 through 2012 identified that the IRS potentially:  improperly allowed $94.9 million in foreign tax credits (FTCs) on 65,499 tax returns; allowed taxpayers to file 16,058 tax returns that claimed nearly $2.9 million in FTCs as a deduction, as well as a credit on the same foreign taxes paid; and allowed nearly $40 million in erroneous FTCs on 188,102 tax returns when third-party information return documents did not support the FTCs claimed.

Source: TIGTA, Ref. No. 2015-30-052, Improvement Is Needed in Compliance Efforts to Identify Unsupported Claims for Foreign Tax Credits (July 2015).

The scam has claimed thousands of victims with reported losses totaling more than $22 million as of August 2015.

The IRS is no exception, with approximately 75% of its budget going toward personnel costs. Between fiscal year 2010 and 2014, the IRS lost approximately 13,000 full-time employees and expects to lose an additional 3,000 employees through attrition in fiscal year 2015.

Additionally, by the end of fiscal year 2017, approximately 69% of all IRS executives and 48% of the IRS’s non-executive managers are projected to be eligible for retirement.

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