Treasury Finding: IRS Needs to Work More Closely with States

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Fortner Bayens, P.C.

In late August, the Treasury Inspector General for Tax Administration (TIGTA) issued a report.  The report was based on its study of the effectiveness of the IRS’s use of data and information received from state agencies to increase tax compliance by identifying nonfilers and underreporters.

The IRS collaborates with state agencies under the State Audit Report Program (SARP).  Under this program the governmental agencies share income tax data and findings.  TIGTA performed an audit of SARP functions using tax records from 2013 through 2016.

What TIGTA Found

TIGTA had a number of critical findings, including:

  • The IRS can more effectively address issues of noncompliance and underreporting.  Currently, only 12 states participate in SARP.
  • There is a lack of coordination and knowledge regarding the agreements with states with which the IRS participates.
  • There was a lack of coordination among the participating functions of the IRS.
  • As a result, for the four years TIGTA examined, it found that the IRS had dropped over 39,000 records of repeat nonfilers and/or high-income nonfilers.  The estimated amount of uncollected tax liabilities totaled $285 million.

Recommendations

TIGTA recommended that the IRS expand SARP to other state agencies, evaluate high-income and repeat nonfilers before dropping them from the SARP’s nonfiler inventory and document this analysis. It also recommended better coordination among IRS functions and regular reviews and validation of databases containing the states’ tax information.

Additionally, TIGTA recommended that the IRS should ensure that high-priority cases are not dropped from SARP inventory and that the remaining high-priority cases be worked.

IRS Response

The IRS agreed with most of TIGTA’s findings and recommendations.  With respect to nonfilers, the IRS took exception to the estimate of the amount of uncollected tax liabilities.  However, it responded that it would review its evaluation process to determine whether any improvements are necessary.