4.22.1  NRP Overview

4.22.1.1  (10-01-2008)
Introduction

  1. Under the Reform and Restructuring Act of 1998 (RRA '98), Congress mandated the IRS to deliver service to taxpayers at a new and much higher level of performance. As a result, the IRS redefined its mission, launched a transformation effort that is structured around its customer segments, and identified "Top-quality service to each taxpayer in every interaction" as its first strategic goal.

  2. Current information about taxpayer needs is critical to the IRS' ability to make each taxpayer's interaction with the IRS as positive and satisfactory as possible. Taxpayer belief in the IRS' ability to meet their expectations is essential for meeting customer service objectives, and even more importantly for maintaining the integrity of a tax system founded on voluntary compliance. Administering a tax system that promotes fairness is dependent on the IRS' ability to distinguish between the many factors that impact compliance with the tax laws.

  3. "The tax gap does not arise solely from tax evasion or cheating. It includes a significant amount of noncompliance due to tax law complexity that results in errors of ignorance, confusion, and carelessness. This distinction is important even though, at this point, the IRS does not have sufficient data to distinguish clearly the amount of noncompliance that arises from willful, as opposed to unintentional mistakes. Moreover, the line between intentional and unintentional mistakes is often a grey one." ("Reducing the Federal Tax Gap: A Reporting on Improving Voluntary Compliance" , IRS, August 2, 2007, Page 6).

  4. See also, Document 5707-001, Module A, Overview, for NRP training materials in this program.

4.22.1.2  (04-25-2008)
Need for Compliance Measurement

  1. Patterns of noncompliance in the population change over time. Measuring changes in the extent of, and reasons for, noncompliance helps the IRS determine how well it is meeting the needs of America's taxpayers, and identifies the real vulnerabilities of the system so that weak links can be fortified or redesigned. The National Commission on Restructuring the IRS pointed out that ..."one of the most significant criticisms of the IRS compliance research approach is the lack of current reliable data on noncompliance." (National Commission on Restructuring the IRS, final report, Paragraph 83). Without reliable compliance measures, the IRS will have limited capability to determine what key areas of noncompliance to address and what treatments to apply to maximize the use of its limited resources.

  2. The IRS must realize its organizational goals and strategic objectives in order to demonstrate to Congress and America's taxpayers that it is capable of maintaining the integrity of the federal tax system. This challenge is comparable to a corporation demonstrating to its shareholders that it is worthy of their investment and their business. Optimally, this is accomplished through objective measurement of the corporate financial health and the factors that contribute to it. Likewise, the IRS needs to measure taxpayer compliance with federal income tax laws along with contributing factors so that customer-focused programs and services can be enhanced or developed, and compliance information and tools can be improved.

4.22.1.3  (04-25-2008)
The National Research Program (NRP)

  1. The IRS meets its need for current compliance information through the National Research Program (NRP). NRP seeks to increase public confidence in the fairness of our tax system by helping the IRS identify where compliance problems occur so that the IRS can efficiently utilize its resources to address those problems.

  2. Types of voluntary compliance include reporting compliance, filing compliance and payment compliance. The measure of filing compliance is the percent of required returns that are timely filed. The measure of payment compliance is the percent of reported tax on timely filed returns that are timely paid. The measure of reporting compliance is the percent of true tax liability that is correctly reported on timely filed returns. Emphasis in this IRM is given to measuring reporting compliance as it is the most sensitive, presents the most challenges, and represents the largest share of the gap between what the IRS estimates is owed to the Treasury and what is actually collected.

  3. NRP is a comprehensive effort by the IRS to measure compliance for different types of taxes and various sets of taxpayers. NRP will provide a statistically valid representation of the compliance characteristics of taxpayers. For strategic planning and budget purposes, the IRS requires regular estimates of compliance. NRP supports this critical need. Payment and filing compliance data are generated annually. NRP measures payment compliance by analyzing IRS Master Files for timely payment of taxes. The IRS measures filing compliance by comparing known filers (using IRS records) with expected filers using Census Bureau current population surveys. IRS receives no taxpayer specific data from the Census Bureau. The first NRP reporting compliance study focused on individual income taxpayers filing Form 1040 returns for Tax Year 2001. NRP then launched a reporting compliance study of taxpayers filing Form 1120S (Subchapter S Corporation) returns for Tax Years 2003 and 2004. Building on the methodology developed for the Form 1120S study, NRP returned to individual income taxpayer sampling returns on an annual basis beginning with Tax Year 2006. Future reporting compliance studies will include corporate taxes, Form 1040 filers living abroad, employment and other speciality taxes, and partnerships.

  4. NRP is critical to the organizational transformation of the IRS. NRP is one of several efforts the IRS is undertaking to retool its compliance-oriented programs. The IRS' newly defined strategic goals and balanced measures are integrated into the NRP design and output. NRP results will increase the fairness of tax administration . They will improve the IRS' ability to detect noncompliance, reduce the burden of unnecessary IRS contacts on compliant taxpayers and support the strategic goals, program development and resource allocation of the IRS Operating Divisions.

4.22.1.4  (04-25-2008)
The NRP Approach for Reporting Compliance

  1. Although the idea of compliance measurement is not new to the IRS, the NRP approach is entirely new. The NRP approach to measuring reporting compliance balances research quality, efficiency and the reduction of taxpayer burden. It establishes a tax return sample that is representative of the individual taxpayer population. NRP focuses on obtaining reliable data in the most cost-effective manner possible by using innovative and efficient techniques that maintain taxpayer rights to privacy. Using this approach, NRP will:

    1. Measure reporting compliance by collecting audit data on individual and different types of business taxpayers.

    2. Provide Business Operating Divisions and Headquarters with data to aid in strategic planning.

    3. Use case building data, comprised of internal IRS data and publicly available data associated with each tax return, to determine if the return should be considered accurate as filed.

    4. Streamline electronic data collection methods.

  2. If more data collection is necessary, the classifier will use the process illustrated in to make a determination about the best way to obtain the data. See Exhibit 4.22.1-1.

  3. The NRP process for determining return accuracy, or reporting compliance, will minimize taxpayer burden through reliance on data available to the IRS (some of which was not previously available) instead of line-by-line audits. Experienced examiners will be specially trained to analyze this data associated with every return in the program. Use of this data is intended to rule out compliance issues that can be determined to be correct before ever contacting a taxpayer.

4.22.1.5  (10-01-2008)
Benefits of NRP

  1. NRP will produce a number of benefits. The primary benefit is improvement to the workload selection systems.

  2. When a compliant taxpayer is unnecessarily or ineffectively contacted by the IRS, the public's perception of the effectiveness and fairness of the federal tax system is hurt. Additionally, compliant taxpayers want to know that the IRS is capable of ensuring that everyone pays their fair share of taxes. The IRS uses a variety of techniques such as document matching, correspondence and audits to verify that taxpayers accurately report their tax liability on their returns. The IRS should audit those returns most likely to have errors. Various methods are used to identify errors with the most common method using Discriminant Function (DIF) formulas to select returns for examination.

  3. This data will be used to update the DIF formulas. Better formulas will ensure that non-compliant taxpayers are more likely to be selected for examination and compliant taxpayers are less likely to be unnecessarily audited. With its new multi-year sampling approach, the IRS will be able to update its workload selection models annually.

  4. The IRS needs to use its limited resources where they are of most value in reducing noncompliance while ensuring fairness, observing taxpayer rights, and reducing the need to burden those who do comply. The IRS does not intend to return to the high audit rates of the past, but will use NRP results to more effectively manage its compliance programs and design pre-filing activities that help taxpayers comply with the tax law.

  5. To ensure the validity of NRP's reporting compliance studies, IRS examiners will verify information on the sampled returns and capture all adjustments, no matter how small or whether the adjustments favor the IRS or the taxpayers. As randomly selected returns, NRP taxpayers can represent thousands of similar taxpayers in the population. Therefore, even the smallest adjustments can have significant impacts in compliance measurements. Reporting errors can favor either taxpayers or the IRS, and for NRP to properly define misreporting, both types of errors need to be identified.

  6. Lastly, NRP cases with no adjustments are just as important as cases with large adjustments. Proper estimation of DIF formulas requires accurately reported returns against which to compare misreported items. Similarly, the IRS reporting compliance measures and tax gap estimates depend on proper accounting of both accurately-reported returns and returns with adjustments.

  7. Other important benefits of NRP include:

    1. NRP data will identify line items on tax returns that create the most difficulty for taxpayers trying to comply with the tax law. Taxpayers will benefit from redesigned forms, improved communications and suggested law changes.

    2. Enforcement focused on non-compliant taxpayers will improve the public's perception of the fairness and accuracy of the tax system.

    3. NRP pioneered a comprehensive case building approach that provides examiners with a wide range of information about the taxpayer. This allows the examiner to focus on significant tax issues, potentially shortening examination time.

    4. Obtaining a measure of overall income tax compliance. This will allow the IRS to allocate resources efficiently to improve overall performance.

  8. Quality review throughout the NRP process will ensure that high quality data is collected. The IRS has consulted with a variety of sources including other federal agencies, in the area of best practices to ensure its sample design, data and procedures are of the highest quality possible.

4.22.1.6  (10-01-2008)
Summary

  1. NRP provides the IRS with current, reliable data on filing, payment, and reporting compliance that will support strategic decisions about the placement and type of resources necessary to effectively address the needs of taxpayers. This is done in the most cost-effective and least burdensome manner possible.

  2. For information about the National Research Program visit our website at http://nrp.web.irs.gov.

Exhibit 4.22.1-1  (10-01-2008)
Reporting Compliance Verification Process

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