Organization of IRS User Fees

IRS charges user fees for various services that assist taxpayers in  complying with their tax liabilities, clarify the application of the tax code to  particular circumstances, and ensure the quality of paid preparers of tax  returns, among others. Each  division provides at least one service to taxpayers for which it charges a  fee. IRS User Fee Collections, Associated Service Volume, and Carryover Amounts Have Increased with Most of the Revenue Used to Fund Taxpayer Services

		IRS User Fee Revenue and the Volume of User Fee Services Have Increased in Recent Years

In fiscal year 2010, IRS collected and retained $290 million in user fees  and transferred an additional $62 million of user fee collections to the  U.S. Treasury General Fund (General Fund). In fiscal year 2010, they accounted  for approximately 68 percent ($198 million of $290 million) of IRS’s total  retained user fee collections. IRS Reviews User Fees Biennially but Does Not Clearly Document Some Processes or Decisions

		IRS Conducts a Biennial Review of User Fees and Has Taken Steps to Improve Its Cost Estimates

As directed by the CFO Act of 1990 and OMB Circular A-25, IRS  conducts a general review of its user fees on a biennial basis. IRS has made efforts to improve its cost estimation process in support of  its user fees, with particular attention given to its largest fee by amount  collected. According to an IRS official, the cost estimate used to  support the advance art determination letter user fee has not been  reviewed or updated since fiscal year 1996 because of very low demand  (fewer than 20 per year from fiscal year 2005 to fiscal year 2010).also omitted from the biennial review the user fees for reproduction of tax  returns and special statistical studies and compilations because it  interpreted these fees as not being covered by the biennial review  requirement. Assumptions Used to Estimate Cost of Some User Fee Programs Were Not Always Correct or Well Documented

According to IRS officials, the CFO’s office works closely with business  divisions and program offices to develop cost estimates, provides  guidance on data to include in the cost estimates, and develops Internal  Revenue Manual guidelines to document IRS’s process for setting and  reviewing user fees. IRS Does Not Always Document Factors Considered or Decisions Made during Biennial Review of Existing User Fee Rates

In setting user fee rates, IRS officials said they consider taxpayer burden,  administrative costs, and potential effects on taxpayer compliance,  among other factors, when determining whether to recover full cost. As described above, IRS officials consider factors  other than cost recovery in setting fee rates. However, we found that IRS  has not thoroughly documented these factors, corroborated anecdotal  support with data analysis, or studied the effect of user fees on taxpayer  behavior. assist staff in identifying potential new user fees. However, IRS may not  be taking full advantage of its process for identifying new user fees. For  example, officials in some divisions or offices said that they had no formal  process for soliciting suggestions from employees on new user fee  proposals. We were unable to determine the extent to which  IRS staff considered these guidelines, and in our survey of division  commissioners, we identified variation in the criteria considered across  the operating divisions and offices. Recommendations for Executive Action

We recommend that the Commissioner of Internal Revenue take the  following five actions to:  Include certain fees in the biennial review that were previously  omitted. Provide clear, specific, and direct guidelines for IRS employees and  managers to follow in identifying potential fee opportunities. Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to (1) describe the types and amounts  of user fees collected and how the Internal Revenue Service (IRS)  collects and uses fees, (2) assess how IRS sets and reviews existing user  fees, and (3) assess how IRS identifies additional areas where new user  fees could be justified. To meet these objectives, we reviewed user fee legislation and guidance,  agency and budget documents, literature on user fee design and  implementation characteristics, and cost estimates for user fees that were  included in IRS’s biennial review process. Income verification express service (IVES): This service provides 2- business-day processing and electronic delivery of tax return transcripts  for users, such as mortgage lenders and other financial market entities, to  confirm the income of a borrower (or taxpayer) during the processing of a  loan application. IRS charges a user fee of $2.00 for each IVES transcript  request. Installment agreement (IA): An IA is a payment option or payment plan  that allows a taxpayer to pay his or her full tax liability with smaller  monthly payments over a period of time for up to 60 months.
Why GAO Did This Study

The President's fiscal year 2012 budget proposal requests $13.6 billion to fund the Internal Revenue Service (IRS), including $204 million in spending funded through user fee collections. Well-designed and well-implemented user fees can reduce taxpayer burden by funding portions of IRS services that provide special benefits to users beyond what is normally provided to the public. As such, GAO was asked to (1) describe the types and amounts of IRS user fees and how IRS collects and uses them, (2) assess how IRS sets and reviews existing user fees, and (3) assess how IRS identifies additional areas where new fees could be justified. GAO reviewed relevant laws, guidance, and literature on user fee design and implementation. GAO reviewed IRS documents and cost estimates and interviewed IRS officials in the Chief Financial Officer's (CFO) office and program divisions.

What GAO Found

Although user fee collections fund less than 2 percent of IRS's budget, fee collections are expected to reach $309 million in fiscal year 2012 and recently involved nearly 20 million transactions with taxpayers. IRS charges user fees for various activities that include assisting taxpayers in complying with their tax liabilities, clarifying the application of the tax code to particular circumstances, and ensuring the quality of paid preparers of tax returns, among others. In fiscal year 2010, two fees accounted for more than 80 percent of total retained user fee collections: (1) Installment agreements (IA): Provides taxpayers who cannot pay their full tax liability the option to pay their full tax liability with smaller monthly payments over a period of time for up to 60 months. This service is offered to most taxpayers for $105 with lower rates for low-income taxpayers and those who opt for a direct debit agreement. This service generated $198 million, or 68 percent of IRS's total retained user fee collections. (2) Income verification express services (IVES): Provides 2-business-day processing and electronic delivery of tax return transcripts for users, such as mortgage lenders and other financial market entities, to confirm the income of a borrower (taxpayer) during the processing of a loan application. IRS charged a fee of $2.25 for each IVES transcript request. This service generated $40 million, or 14 percent of total retained fee collections. IRS conducts a review of its user fees biennially (or every 2 years) and has taken steps to improve its estimates of the cost of providing its user fee services, with particular attention to its largest fee. For example, IRS hired a contractor to evaluate, update, and simplify the IA user fee cost estimate. However, for a few of IRS's smaller fee programs, GAO found that IRS omitted fees from its biennial review, did not clearly document assumptions to be used in some cost estimates, and lacked documentation of factors considered in setting some fees. For example, one user fee has not been reviewed or updated since fiscal year 1996, while program managers for another user fee were uncertain about salary assumptions. GAO also found that while officials stated that they consider factors other than cost (such as potential effects on taxpayer compliance and administrative burden) in setting fee rates, they did not thoroughly document these factors or corroborate anecdotal support with analysis. Finally, GAO found that IRS did not fully document final decisions made on fee rates as a result of its biennial review. IRS has implemented several new user fees in recent years, but it may not be taking full advantage of its process for identifying new user fees. As directed by Office of Management and Budget Circular A-25, IRS's CFO requests that each division review its programs and provide proposals for new user fees on a biennial basis. However, officials in some divisions or offices said that they had no formal solicitation process for employees to suggest new user fee proposals. Further, IRS does not clearly refer staff to consider established guidelines identified in the Internal Revenue Manual or other resources when identifying potential new user fees during its biennial review. GAO was unable to determine the extent to which IRS staff considered these guidelines.

What GAO Recommends

GAO recommends that the Commissioner of Internal Revenue take steps to include certain additional fees in IRS's biennial review, improve guidance on estimating costs of user fees, and improve the documentation of assumptions used, factors considered, and decisions made during the setting and reviewing of existing fees. In addition, steps should be taken to provide clear, specific, and direct guidelines for IRS employees and managers to follow in identifying potential new fee opportunities. In written comments, IRS agreed with our recommendations.