The IRS needs to improve its instructions to the public on how to report tax schemes for the agency to clampdown on such practices, according to the Government Accountability Office (GAO).
Increased input from taxpayers to the IRS could help close the tax gap, the difference between taxes owed and paid, the GAO said in a report released January 17, entitled Abusive Tax Schemes (GAO-23-105843).
One of IRS’ tools to combat such schemes is its Dirty Dozen list. This annual publication lists schemes that taxpayers may encounter. However, the GAO found that this list does not include instructions on how the public can report potential abusive tax schemes to the IRS.
The GAO now recommends that the IRS amend the Dirty Dozen list publication to tell taxpayers how to refer information on promoters to IRS. In addition, the government watchdog recommended the agency finalize outcome-oriented goals and performance measures for the Office of Promoter Investigations. The IRS agreed with the recommendations.
The report contains a December 15, 2022 letter to the GAO from Iowa Republican Charles Grassley, ranking member of the Senate Judiciary Committee. Grassley asked the GAO to investigate the proliferation of tax schemes, noting that IRS has stated it needs to improve its ability to identify and deter promoters and stop abusive tax schemes before the promoter can widely market them.
Currently, the IRS is aware of over 40 types of abusive tax schemes involving promoters. One method IRS uses to identify these promoters is information referrals from the public. GAO found that the public can refer information to IRS on several forms, few of which can be submitted online. GAO previously recommended that IRS take steps to improve its referral programs by developing a consolidated, online referral submission tool.
The report describes how the IRS conducts promoter investigations and presents summary data on these investigations; evaluates how IRS educates taxpayers about referring information on promoters to IRS; and evaluates to what extent the IRS’s reorganization plan for promoter investigations was consistent with key practices and the extent to which IRS is prepared to evaluate the performance of its new office.
“Currently, taxpayers wanting to refer information to the IRS about promoters of abusive tax schemes encounter a referral process that can be confusing,” said the GAO. “Taxpayers also have limited options to submit this information online,” it added. In 2016 the GAO recommended that the IRS take steps to improve its referral programs by developing a consolidated, online referral submission tool. “By taking action to implement this recommendation, the IRS may be able to decrease taxpayer confusion and increase the number of referrals it receives,” stated the GAO.
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