The Internal Revenue Service (IRS) has projected that the number of taxpayers who do not file required individual income tax returns will increase from approximately 7 million in Tax Year (TY) 1996 to over 9 million by TY 2002. To successfully meet this challenge, the IRS must implement a process that will enable management to make informed business decisions. The IRS should also provide national oversight to coordinate Substitute for Return (SFR)-related policies and activities among the Customer Service, Examination, and Collection functions.

The primary objective of this review was to determine if the IRS could measure the effectiveness of its strategy to bring nonfiling taxpayers into compliance by assessing income tax through the SFR process. The Treasury Inspector General for Tax Administration (TIGTA) is conducting a series of reviews to evaluate the effectiveness of the IRS’ process for delivering an effective National Nonfiler Strategy. In separate audit reports, the TIGTA plans to provide assessments of the National Nonfiler Strategy, audit reconsiderations, and collectibility issues. This report specifically addresses the SFR process.

The IRS’ oversight of the SFR process is fragmented and does not provide uniform policies and procedures to ensure equitable treatment of all taxpayers. In addition, IRS management does not gather the necessary information to be able to effectively manage and measure the SFR process. To successfully meet the challenge of a rapidly increasing population of nonfiling taxpayers, the IRS needs to take immediate, corrective action to address these issues.

The IRS’ oversight of the SFR process does not provide uniform policies and procedures among the Customer Service, Examination, and Collection functions. Although the IRS’ National Nonfiler Strategy and its Nonfiler Executive Steering Committee provide a good start, these are recent components that have not had time to implement any new control processes. There are conflicts in the IRS’ cross-functional efforts to form policy and make business decisions. Further, disparate treatment of taxpayers may have occurred because the functions did not coordinate their policy decisions.

IRS management does not have the necessary information to effectively manage the SFR process or ensure the process has achieved its intended results. The IRS cannot determine how many SFR tax assessments were finally resolved through abatements of tax or written off as uncollectible. Also, the amount of revenues and costs generated by the SFR tax assessments are not readily available to IRS management. These components are necessary to enable IRS management to make sound program and business decisions.

To support the IRS’ mission of providing taxpayers top-quality service by applying the tax law with integrity and fairness to all, the IRS should establish uniform policies and procedures to ensure coordination of its efforts among the functions processing the SFR accounts. The IRS should also develop a process to monitor the future filing compliance of taxpayers with SFR tax assessments while tracking and measuring SFR revenues, costs, and account resolutions.

Management’s Response:

Management’s comments were not available as of the date this report was released.