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Weekly UpdatesWe illustrate these differences by focusing on filing compliance, though a similar explanation would apply to the other two compliance measures. Much of the work going on in the IRS with regard to addressing concerns with filing compliance is operational in nature. These efforts are geared toward securing delinquent returns, collecting the tax due, and reducing nonfiling through various pre-filing outreaches. For example, an individual taxpayer files one year and then fails to file the following year. The IRS would try to investigate the reasons why that taxpayer failed to file, and would take actions to collect any / all tax associated with those returns. Or, suppose a taxpayer requests an Employer Identification Number and then fails to file or pay any employment taxes. The IRS might investigate whether the taxpayer hired employees and, if so, would then pursue any employment and income taxes associated with the business.
The common threads running through each of these examples are that the IRS knew the nonfiling taxpayer, and that the IRS' efforts are targeted at contacting them as appropriate. The IRS would take similar approaches to late filers.
The primary concern of the strategic filing compliance measures, on the other hand, is not collecting taxes from late or delinquent returns. Instead, the purpose of the Filing Rate is to monitor the percentage of the taxpayer population that files timely to detect any substantial shifts. The Nonfiling Tax Gap will identify the overall shortfall in tax revenues associated with tax returns that come in late or not at all. These measures are descriptive rather than prescriptive (e.g., enforcement-oriented), and will provide the IRS with a means of evaluating efforts to educate the taxpaying public in its filing responsibilities. These strategic measures will not supplant the operational measures currently in use; hopefully, these measures will complement each other.
The major difference between the two types of measures is the population of taxpayers that they cover. Operational measures concentrate on known taxpayers, while strategic measures seek to cover the entire population--including those who are unknown to the IRS. Obviously, programs intended to promote filing among those who are so far unknown to us would be radically different from programs dealing with known nonfilers and late filers. However, well-designed operational efforts should lead to improved strategic performance measures, everything else being equal. Developing linkages between operational and strategic measures will indicate how this will occur.
CONCLUSIONS
The National Research Program represents the commitment the IRS has made to improve the efficiency and fairness of the tax administration process. With measures of strategic compliance the IRS will be able to make more informed strategic decisions about workload allocation, resource planning, and taxpayer communication and support. These measures will also provide a benchmark against which the IRS can measure the effectiveness of programs to promote voluntary compliance with the Tax Code.
The NRP has made significant progress in the development and delivery of its strategic measures. The IRS now has Filing Rate measures for Tax Years 1992 through 2000, and Voluntary and Cumulative Payment Compliance Rates for Tax Years 1999 through 2001. Mechanisms are in place to deliver these measures on an ongoing basis. NRP is currently engaged in a significant research effort to obtain estimates of reporting compliance on individual income tax returns. Future reporting compliance studies are likely, with an initial focus on business returns, which have not been systematically studied in this way since the mid-1980s.
APPENDIX
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Acknowledgments
The authors are an economist in the National Research Program and Director, Research, Analysis, and Statistics, both at the Internal Revenue Service. This paper is an expansion of a presentation given at the National Tax Association Spring Symposium in May 2003. Opinions expressed in this paper are those of the authors and should not be attributed to the Internal Revenue Service or the Department of Treasury.
(1) This earlier paper covered some of the concepts discussed in this paper, but the intended audience was quite different.
(2) "Report to Congress on the Current State of Knowledge about Federal Tax Noncompliance," Internal Revenue Service, Department of the Treasury, February 2000, page 3.
(3) The tax gap is a portrayal of noncompliance with the Tax Code that has been estimated by the IRS. The chart in the Appendix provides a breakdown of the components of the tax gap. The Report to Congress on overall compliance referenced in footnote 2 provides an explanation of how the IRS attempts to measure the tax gap.
(4) The IRS has engaged in several research efforts examining the compliance behaviors related to these topics. The most recent Earned Income Tax Credit compliance study is "Compliance Estimates for Earned Income Tax Credit Claimed on 1999 Returns," Internal Revenue Service, Department of the Treasury, February 28, 2002.
(5) For Fiscal Year 2002, individual income tax revenue was $858 billion and employment tax revenue was $701 billion, as reported in the Budget of the United States Government, Fiscal Year 2004, Historical Tables, pages 29-30.
(6) "Compliance Estimates for Earned Income Tax Credit Claimed on 1997 Returns," Internal Revenue Service, Department of the Treasury, September 2000, and "Compliance Estimates for Earned Income Tax Credit Claimed on 1999 Returns," Internal Revenue Service, Department of the Treasury, February 28, 2002,
(7) IRS Strategic Plan (Fiscal Years 2000-2005), p. 87.
(8) While the trend is upward, the IRS has not determined whether the year to year changes are statistically significant.
(9) A good example of this predicament is when proprietors fail to report any business income. These individuals may appear in IRS data to be wage earners, but will appear in Census data to be self employed. Moreover, the primary way the IRS knows that an entity (whether an individual acting as a small business or a corporation) might have an employment tax-filing requirement is when that entity requests an Employer Identification Numben Without that request, the IRS may not know whether an entity should be filing employment tax forms. Indeed, not even all entities with EINs have an employment tax-filing requirement (for example, those with no employees).
(10) The issue is the development time needed to create the data. Using IRS data on individual income tax filers as an example, the filing deadline for individual income tax is April 15, so the very earliest the IRS could sample data is approximately four months after the end of a given tax year. Taxpayers, however, can and do file for extensions, which can push the filing deadline back to October, ten months after the end of the tax year. The IRS then needs to wait for all data to enter its computer systems, which can take another two to four months. Following that, the database administrators test the data to ensure that it is correct, which can involve several additional months. In the end, the entire process takes 18 months from the close of the tax year until reliable data is ready for analysis. A similar situation exists for the capture of CPS data.
(11) The CPCR focuses only on the tax due and ignores interest and penalties.
(12) The challenge in developing these measures is not in the availability of data, but in the definitions of what is (or is not) a payment and what is (or is not) a late payment. There are many additional payments, credits, adjustments, and other items that can affect reported income and reported tax on a return, and the IRS takes great pains in determining whether and how a transaction impacts the VPCR and CPCR. For example, the IRS master file database treats the Earned Income Tax Credit (EITC) as a payment that reduces the income tax that a taxpayer owes. By that definition, the EITC would appear in both the numerator and the denominator of the VPCR and the CPCR. The EITC, however, is not truly a payment of taxes, and NRP and the NHQ Office of Research decided that the best way to treat it was as a direct reduction to the total tax reported. The payment compliance calculations, then, subtract any EITC from the total tax reported on the return and then take the ratio of timely payments to the adjusted total tax reported.
(13) The amount misreported is the net of the amounts underreported and the amounts over reported.
(14) Paramount in the access and use of taxpayer data by NRP examiners is that taxpayer privacy is maintained, and that only the data necessary to help make a compliance determination be used.
(15) While a sample of nearly 47,000 individual income tax returns will provide a wealth of data, it will limit the IRS' ability to examine non-compliance in great detail. For instance, the sample will likely not yield enough observations to provide insights to non-compliance for some specific line items, or even on some of the less frequently filed Forms. Geographic breakdowns of non-compliance may be problematic because the sample was designed to be national in scope. The data may not yield statistically reliable compliance estimates for specific industries or other groupings of individual taxpayers.
REFERENCES
Brown, Robert E., and Mark J. Mazur. "The National Research Program: Measuring Taxpayer Compliance Comprehensively." Paper presented to the 2003 Kansas University Law Review Symposium, Lawrence, March, 2003.
Office of Management and Budget. Budget of the United States Government, Fiscal Year 2004. Historical Tables: 29-30. Washington, D.C.: Government Printing Office, 2003.
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