A Cost-Benefit Analysis Is Needed for the Compliance Assurance Process
Why did we do this audit?The Compliance Assurance Process (CAP) is a voluntary Large Business and International (LB&I) Division program to identify and resolve tax issues through open, cooperative, and transparent interaction between the IRS and large corporate taxpayers in real time prior to the filing of a return. The CAP engagements are different from traditional audits in that they generally do not result in significant audit adjustments. Some goals of the CAP program are to improve federal tax compliance by resolving issues prior to filing the return, increase transparency and cooperation between the IRS and its participants, and reduce the burden of tax administration and compliance. The IRS adjusted the CAP program in Tax Year 2019. We assessed if those changes are helping the IRS enforce complex tax filing and identify high-dollar noncompliance. We also evaluated the IRS’s actions taken in response to our recommendations from a prior report.
What did we find?The IRS lacks financial metrics to assess the efficiency and effectiveness of the CAP program. Although our prior audit recommended that the IRS develop and implement an evaluation plan to verify that tax administration benefits are being realized in relation to costs incurred, the IRS has not established effective metrics to evaluate program savings and does not conduct cost-benefit analyses of the CAP program. Without these metrics, the IRS cannot determine the program’s true value or impact on tax compliance. We also determined that the IRS still does not charge a user fee for taxpayer participation in the CAP program. In a prior audit, we recommended that the IRS evaluate the CAP program as a potential source of new user fees. From Fiscal Years 2019 through 2024, the CAP program labor costs averaged $10 million per year. We believe this use of IRS resources meets the criteria for a user fee because participation is voluntary and provides benefits to participants. Implementing a user fee would help ensure that the CAP participants fund these services and would enhance efficiency by encouraging more responsible use of the CAP while increasing cost transparency. One of the primary objectives of the CAP program is to resolve taxpayer issues in real time providing tax certainty prior to filing the return. When a taxpayer receives a partial acceptance letter, it means not all issues were resolved at the time of filing the return, which is inconsistent with the CAP program’s primary objective. Our review of Tax Years 2019 through 2023 determined that nearly half of CAP participants received partial acceptance letters and that a substantial number of cases remained open beyond expected time frames.
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