2. In fiscal year 2016, almost 30.5 million  employment tax returns were filed. IRS selected a  random sample of about 7,200 taxpayers that filed Form 941 employment  tax returns from tax years 2008 to 2010. Instead, IRS officials  described high-level concepts of what they would like to do with the NRP  results in 2017 or beyond. RAAS officials said they have not developed specific  plans to analyze the data due to competing priorities and limited  resources. IRS also uses the NRP data to help update its estimate  of the tax gap. Moreover, by not analyzing these data, IRS will not have  current tax gap estimates, continuing to rely on outdated information. Noncompliance Varied across Employment Tax Issues and Employer Size

Given that IRS has not completed its own analysis, we reviewed the NRP  employment tax results for tax years 2008 through 2010 to identify  areas—known as issues—of noncompliance in terms of the examination  proposing adjustments to the amount of taxable wages. Worker Classification and Fringe Benefits Were Among the Most Frequent Issues of Noncompliance and Led to Highest Percentage of Wage Adjustments

By reviewing the results from the NRP employment tax examinations for  tax years 2008 through 2010, we identified issues where employers were  noncompliant in reporting taxable wages. Worker  classification issues included reclassifications involving corporate officers,  statutory employees such as drivers who distributed certain food items  and the factors that may be used to determine whether the worker was an  independent contractor or employee based on, among other things,  whether the employer controlled how the worker was to provide the  service, such as through written contracts and training. IRS Business Units Applied Aspects of NRP Examination Practices to Operational Employment Tax Examinations

		NRP Examinations Led to Changes in Planning, Documenting, and Reporting of Operational Employment Tax Examinations

Certain practices that were used for NRP examinations were carried over  and are now used for operational employment tax examinations by the  three business units that participated in the NRP study. According to IRS examiners,  having the related income tax return, the Exempt Organization  return, or specific lines of information from those returns help to  identify issues to examine. IRS officials said  that the purpose of the NRP employment tax study was not to improve  the operational examination process, but to improve tax gap estimates  and identify noncompliance areas. IRS Examiners See Benefits to NRP Practices for Operational Employment Tax Examinations, but Half Were Unaware They Could Request Access to Certain Practices

		Examiners Would Like Access to NRP Practices at the Start of Operational Examinations but IRS Officials Raised Concerns

IRS examiners who have worked on both NRP employment tax  examinations and operational employment tax examinations identified  NRP practices that they would like to have access to when operational  employment tax examinations start. When the CP2100 and cash transaction data did apply, survey  respondents who used both types of data on operational employment tax  examinations since completing the NRP study generally found them  helpful. However, examiners  are not always aware of how to access each NRP practice. This is  inconsistent with IRS’s strategic plan to empower employees with the  tools and training to further develop skill proficiency and improve business  performance. However, IRS does not uniformly remind all examiners how to access  them. Without examiners being aware of these practices and able to utilize them  when needed, they may be limited in their ability to effectively examine  employment tax returns. IRS examiners said CP2100 can help an examiner  narrow the scope and better plan the examination. Ensuring that examiners are given  the opportunity to access certain NRP practices—and are aware of how  to do that—once they move from NRP examinations to operational  examinations could reduce the burden placed on taxpayers and help  examiners identify examination issues. 2. 3. GAO staff who made key contributions to this  report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to (1) evaluate how the Internal Revenue Service  (IRS) plans to analyze the National Research Program (NRP) data, (2)  review NRP data available on areas of noncompliance, (3) describe NRP  examination practices that IRS applied to operational employment tax  examinations, and (4) assess additional NRP examination practices that  could be applied to operational employment tax examinations. To evaluate IRS’s plans to analyze the NRP data and use the NRP  results on noncompliance areas, we interviewed IRS research and  examination officials about their research and analysis plans and  gathered documentation where available. However, according to IRS, this would not  be possible based on resources available for the study. Second, we sent a survey to all  IRS examiners who worked on NRP and operational examinations to get  their views on additional potential improvements. These included:  1.
Why GAO Did This Study

Employers report employment taxes for Social Security, Medicare, unemployment insurance, and income taxes to IRS. In fiscal year 2016, these totaled almost $2.28 trillion. Each year, IRS examines a small percentage of employment tax returns to check employer compliance (known as operational examinations).
GAO was asked to review how practices from NRP examinations could improve operational examinations. This report (1) evaluates how IRS plans to analyze the NRP results, (2) describes GAO's review of available NRP data, and (3) describes NRP practices IRS applied to operational examinations and assesses whether additional improvements could be made to operational examinations. GAO reviewed documentation, interviewed officials, and reviewed the NRP results. GAO also surveyed all IRS examiners who completed both NRP and operational examinations on ideas for improving operational examinations.

What GAO Found

The Internal Revenue Service (IRS) uses its National Research Program (NRP) to study tax compliance issues. These NRP studies generally rely on detailed examinations of a random sample of tax returns and use different practices (including tools and procedures) than IRS's routine operational examinations. IRS recently completed the examinations for an NRP study on employment tax returns filed from tax years 2008 to 2010. This study was the first IRS had done on employment taxes in over 30 years. Based on IRS guidance, NRP results are intended to factor into IRS decisions about compliance areas and to be used to estimate the tax gap—the difference between taxes owed and those voluntarily paid on time. Although the examinations for the study are done, IRS has not developed formal plans to analyze the results to (1) identify areas of noncompliance, (2) address such noncompliance, or (3) update its employment tax gap estimate. IRS officials said they have not developed such formal plans due to competing research priorities and limited resources, and because the NRP results have not yet been finalized. Without completed analysis of the NRP employment tax results, IRS risks using outdated data to make decisions about compliance and areas of the tax gap to pursue.
GAO reviewed the available NRP study results on noncompliance and found that taxable wages for worker classification and fringe benefits were among the most frequently misreported and led to the highest wage adjustment amounts on average. Worker classification issues arise when employers misclassify employees as independent contractors or other nonemployees. If employees are misclassified, the employer's obligation to withhold and pay employment taxes is not established and goes unpaid. Fringe benefits issues involve property, a service, or cash received that should be treated as taxable wages but are not.
IRS carried over certain NRP practices to operational employment tax examinations, including tools to help plan, document, and report the results of examinations but IRS examiners who responded to GAO's survey identified additional improvements that could be made to operational examinations.
More than 90 percent of examiners said that they would like to have a certain tool—electronic data on the information returns of employers—when operational examinations start instead of on request, which they said would help identify issues to examine sooner and put fewer burdens on taxpayers. Although IRS officials said that providing the tool when all examinations start would not be a good use of IRS resources, they did not have data to evaluate whether and when providing this tool would improve examinations.
Half of IRS examiners who were asked about two specific NRP tools in GAO's survey were not aware of how to request them for use during operational examinations. According to IRS officials, these tools may only be used infrequently during employment tax examinations. However, ensuring IRS examiners are aware of how to access them would be in line with IRS's strategic goal of empowering employees with tools and training. Without examiners being aware of these tools and able to utilize them when needed, they may be limited in their ability to effectively examine employment tax returns.

What GAO Recommends

GAO recommends that IRS develop plans to analyze the NRP results in 2017 to address areas of noncompliance identified, and update its employment tax gap estimates; determine whether and when to provide certain data upfront before an examination starts; and periodically remind IRS examiners how they can access certain tools. IRS agreed with GAO's recommendations.