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Weekly UpdatesBecause the data for the payment compliance measures cover the entire population of timely filers, the only limits on the analysis using these measures would be those associated with the reliability of the data and the programs to access the data. (12) At present, the NRP Office creates tables that report the VPCR and CPCR by IRS Operating Division, by tax year, and by type of tax to meet the IRS needs for strategic performance measures.
Status
The IRS has completed development and programming and is now generating both the Voluntary and Cumulative Payment Compliance Rates on a regular basis. The IRS has both measures for Tax Years 1999 through 2001. The preliminary VPCR for Tax Year 2002 will be available in October 2003, with the final measure available in January 2004.
REPORTING COMPLIANCE
The most widely known program under NRP is a reporting compliance measurement study of individual taxpayers. NRP has designed a study that will provide the same level of reporting compliance data as the earlier Taxpayer Compliance Measurement Programs (TCMP) and will also significantly reduce burden levels of participating taxpayers.
The IRS's reporting compliance measure (the Voluntary Reporting Rate, or VRR) is the proportion of tax liability accurately reported on timely filed returns. Past reporting compliance studies for the individual income tax (the last of which was conducted for tax year 1988) yielded reporting compliance estimates in the 91 percent to 92 percent range. In these previous reporting compliance studies, IRS generally reported the Voluntary Compliance Level (VCL), which included only the amounts of tax liability under-reported in the denominator. However, note that the denominator of the VRR includes an estimate of the amount of tax misreported. (13) This refinement of the compliance measure more appropriately accounts for inadvertent over-reporting of income and, hence tax liability.
There are two categories of data sources related to reporting compliance. The first is the source of the data the IRS will use for its case building and classification exercises. The second is the source of the data the IRS will use to create the various strategic reporting compliance measures.
Case building is the process of adding information from a variety of systems and data sources (known as case building tools) to the case file, both from IRS and non-IRS sources, prior to the examiner contacting the taxpayer (if necessary). Case building allows the IRS to make maximum use of available data and to focus taxpayer contacts on items that cannot otherwise be verified. This is a key element of the approach to reduce taxpayer burden. Some examples of the information used in case building are prior year tax returns, banking reports on large cash transactions, and data on real estate transactions.
Many of the case building tools to be used by NRP are not new, but have been successfully used by various areas of the IRS. What is new and unique about NRP case building is that the data sources are collectively applied to each return in the sample in a way that facilitates improved analysis and enhanced decision making by NRP examiners. These examiners all received training to understand and use these tools and have been given management support and sufficient time to maximize use of the data. (14)
The second category is that data the IRS will use to compute the VRR. The data for the strategic reporting compliance measures will come from the NRP study itself. Since access to the data is fundamental to its use, the IRS plans to ensure that the NRP results are easily accessible to analysts throughout the Service.
Obviously, the NRP reporting compliance study has numerous analytical purposes. The sample design will yield much information, but it will not provide enough data to answer all potential questions regarding individual income tax compliance, given resource and burden constraints. (15)
It is also important to realize that the last national compliance study conducted by the IRS was based on Tax Year 1988 filings, and used a substantially different method for auditing taxpayers. Furthermore, there have been many tax law and economic changes over the past 13 years, so any analyses comparing the TY1988 and TY2001 data must be viewed with caution.
Status
The individual income tax compliance study is in full swing. The IRS has selected the entire sample of 46,860 returns, has built case files for virtually the entire sample, and has trained the classifier and examiner work forces that will conduct those aspects of the study. Classifiers had reviewed more than 42,000 returns by the end of May, and examiners had contacted more than half the study participants during that time. By early June, the IRS had closed nearly 5,000 cases, including those returns accepted at classification. The IRS expects preliminary results from the study to be available sometime in calendar year 2004.
INTERACTION AMONG THE MEASURES
The NRP strategic measures examine different aspects of compliance behavior and are designed to complement one another. The design of the measures prevents any double-counting of noncompliance in the estimate of the Tax Gap. For example, by eliminating delinquent returns from the payment and reporting compliance measures the IRS ensures that late- or non-filing issues do not affect those other measures. The three classes of compliance measures are designed to answer three questions in order.
1. Did the taxpayer file on time? If the answer to this question is no, the associated noncompliance is captured by the filing compliance measures. If the answer is yes, one can proceed to the next question.
2. Did the taxpayer report his/her tax liability accurately? If the answer to this question is no, the associated noncompliance is captured by the reporting compliance measures. After determining the appropriate reporting compliance, one can proceed to the next question.
3. Did the taxpayer pay the full amount he/she reported as tax liability? If the answer to this question is no, the associated noncompliance is captured by the payment compliance measures.
Each form of noncompliance will affect the overall Tax Gap. Table 2 illustrates the relationships between the measures using a hypothetical case of ten taxpayers, each with a tax liability of $1,000. In the baseline (optimal) case, each of the ten taxpayers is fully compliant with regard to the strategic filing, reporting, and payment measures. In this case there is no Tax Gap. In the next three columns, we examine the impact on the Tax Gap by three types of noncompliance in isolation, each of which leaves the overall voluntary compliance rate (the percentage of what the IRS receives in tax revenue to the total due to the IRS) at 90 percent or higher. The final column points to the impact of the Tax Gap and the overall voluntary compliance rate when these various forms of noncompliance combine. The compounding of minimal noncompliance may yield a significant drop in the overall compliance rate.
USES OF STRATEGIC COMPLIANCE MEASURES
The primary use of these strategic measures is to provide the Commissioner and other senior IRS executives with an indication of the current state (and recent trends) of the voluntary compliance behaviors of U.S. taxpayers. The ultimate goal of the measures is to provide benchmarks against which the IRS can evaluate the effectiveness of programs designed to improve taxpayer compliance with the Tax Code.
The Filing Rate and Nonfiling Tax Gap will assist IRS management in the evaluation of efforts to improve voluntary filing compliance. As the IRS undertakes specific operational filing compliance efforts, the Filing Rate and Nonfiling Tax Gap could provide a means of assessing the effectiveness of those operational measures. However, this is predicated on developing linkages between the operational efforts and the strategic measures.
Similarly, the VPCR and CPCR will help the IRS evaluate efforts to improve voluntary payment compliance. We foresee an eventual linkage between operational payment compliance measures and these strategic measures, and when that occurs, the VPCR and CPCR could provide a means of assessing the effectiveness of those operational efforts.
The reporting compliance study of individual taxpayers has several desired outcomes or goals. One goal is to gather the sort of strategic information about taxpayer compliance behavior that will allow the IRS to better allocate its resources to enforcement and other activities. A second goal recognizes the deterioration of the workload selection formulas in use, due to the reliance on dated data. In recent years, the percentage of audits closed with no tax change has been increasing (see Figure 2 following). The increased "no change" rate means that the IRS is devoting resources to unproductive examinations and that compliant taxpayers are being unnecessarily burdened. A third goal is to collect data that will provide insight into the causes of reporting errors, to aid in providing improved taxpayer service. For example, if examinations turn up systematic compliance errors on particular items for otherwise compliant taxpayers, the IRS may be able to address the source of these errors through redesigned forms, better communications, improved taxpayer education, or perhaps even through legislative changes. Finally, a fourth goal of the individual taxpayer reporting compliance study is to develop data that can be used to update IRS estimates of the tax gap. As mentioned earlier, most of the estimates for individual tax gap components are based on old data and studies.
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DIFFERENCES BETWEEN STRATEGIC MEASURES AND OPERATIONAL MEASURES
It is important to realize that the compliance measures developed as part of the NRP are strategic measures. These measures support the IRS's strategic goal of improving taxpayers' voluntary compliance with the Tax Code; as such, NRP defined the measures to focus on the voluntary nature of taxpayer compliance. These measures have a different focus than those designed to provide insight into how well the IRS does in meeting its day-to-day operating compliance obligations. These operational compliance measures concern themselves with the enforcement activities associated with compelling non-compliant taxpayers to meet their tax obligations. The two serve very different purposes.
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