Update on the Substitute for Return Issue

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On October 16 TIGTA issued the press release copied below. The release includes a link to the full report. The release and the report make clear that putting the Substitute for Return program on hold represents a significant compliance hole in the IRS system. Persons who do not file their returns, of whom there are many, may now receive a pass because of the lack of resources at the IRS.

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October 16, 2017
TIGTA-2017-27
Contact: Karen Kraushaar, Director of Communications
Karen.Kraushaar@tigta.treas.gov
(202) 622-6500

A Significantly Reduced Automated Substitute for Return Program Negatively Affected Collection and Filing Compliance

WASHINGTON — Due to resource considerations, the Internal Revenue Service (IRS) has significantly curtailed the Automated Substitute for Return Program (ASFR), which it uses to address taxpayers who have failed to file a tax return, according to an audit report that the Treasury Inspector General for Tax Administration (TIGTA) issued today.

From June 2010 through July 2011, the ASFR program collected over $3 billion, whereas from June 2015 through July 2016 the program’s collections were down to approximately $430 million.  IRS management has mainly used the ASFR program to focus on “Refund Hold” cases where the IRS holds a refund on one tax year to secure an unfiled return in another year.  If the IRS refocused priorities away from small Refund Hold cases and focused on high net tax due cases, the IRS could collect $843 million over the next five years.  If the IRS worked Refund Hold cases differently, it could have collected $45 million in unpaid taxes by applying refunds to amounts owed from prior years in which no tax return was filed.

When a taxpayer who has a tax filing requirement fails to file a tax return, the IRS is authorized to use third-party information to determine and assess a tax liability.  The IRS handles these cases primarily through the ASFR Program, which enforces filing compliance on taxpayers who have not filed individual income tax returns but appear to owe a significant tax liability.  TIGTA initiated this review to evaluate the effect of the ASFR Program on enforcement yield and nonfiler compliance and determine whether the program effectively processed its workload.

Refund Hold inventory includes income tax refunds that are withheld from taxpayers to cover any potential tax liability on an unfiled return.  Refund Hold cases are considered the highest priority work for the ASFR Program, because refunds are held for only six months.  High net tax due cases in the ASFR Program are those in which the potential tax liability from an unfiled return is $100,000 or more.

TIGTA’s analysis of 21,533 Refund Hold cases worked in the ASFR Program between June 2011 and November 2016 identified 12,872 cases (60 percent) that were not resolved within six months, and a refund was released to the taxpayer in 8,115 cases.  If the IRS held these refunds until the ASFR process was completed, it could have potentially applied $45 million to the taxpayers’ accounts.

However, TIGTA also estimates that if the IRS had worked the same number of high net tax due cases it closed in the period July 2010 through June 2011 in the most current period, July 2015 through June 2016, it would have potentially increased revenue by about $169 million dollars, which is approximately $843 million over the next five years.  Specifically, replacing nine percent of the Refund Hold cases the ASFR Program closed during FY 2016 with high net tax due cases would achieve these results.

In addition, TIGTA’s analysis of 103 randomly sampled ASFR cases determined that nine percent of ASFR inventory could be eliminated if previously filed tax return and other information was considered during the inventory selection process.  Finally, ASFR Program performance measures are generally limited to the amount of direct time employees spend on the Program, types and numbers of closures, and closure rates.  Additional comparative measures such as the rates of reduction in tax assessments after taxpayers file their own returns and collection of tax dollars for ASFR cases would provide management with information to make informed strategic decisions.

“The IRS needs to bring noncompliant taxpayers into compliance to ensure fairness and reduce the burden on the vast majority of taxpayers who fully pay their taxes on time,” said J. Russell George, the Treasury Inspector General for Tax Administration.  “An effective Automated Substitute for Return Program is an important part of its efforts to bring those who do not file tax returns into compliance,” he added.

TIGTA made seven recommendations in the report.  IRS management plans to take corrective actions relating to five of them, but disagreed with two of them.  In one instance, they did not agree to reassess the suspension of the ASFR Program due to limited resources, and in the other instance, management disagreed with extending the refund hold period due to its view that the hold period is sufficient when the ASFR Program is operating as intended.  Read the report here

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