The Government Accountability Office (GAO) has recommended that the Internal Revenue Service (IRS) better leverage existing data sources to identify abusive schemes that involve tax-exempt entities, among other steps.
In a report issued last month, GAO found that in some abusive tax schemes, a tax-exempt entity can be complicit in the scheme, but in other cases it may not be.
“For example, an abusive tax scheme could involve multiple donors grossly overvaluing charitable contributions, where the tax-exempt entity is not part of the scheme,” the report said. “Conversely, some patient assistance programs – which can help patients obtain medical care or medications – have been used by pharmaceutical manufacturers to make charitable donations that can be viewed as furthering private interests.”
GAO identified a few internal control weaknesses where data use was often inconsistent, which has hindered the IRS’s ability to identify and respond to abusive tax schemes:
- Database project codes that identify data on abusive tax schemes were not linked across the agency’s audit divisions, thus failing to identify if a tax-exempt entity was involved in the scheme;
- The IRS hasn’t leveraged data with cross-divisional information to analyze and monitor audit data across IRS divisions; and
- Existing analytic tools to mine narrative fields of tax forms have not been used by the agency.
GAO said that that shoring up those inconsistencies “could provide audit leads on abusive schemes involving tax-exempt entities.”
GAO made five recommendations – all of which were agreed to by the IRS – including:
- The IRS Commissioner should “undertake a risk assessment of tax-exempt entity Form 8886-T filings” to determine whether steps are needed to increase compliance;
- Abusive tax scheme audit data should be linked across operating divisions, and the data should be used to assess emerging issues and develop responses;
- Return Inventory Classification Systems abilities should be tested “to facilitate analysis and monitoring of audit data across the operating divisions”;
- IRS should use data analytic tools to mine Form 8886 and Form 8916 data to find audit leads on tax-exempt entity involvement in abusive tax schemes; and
- The agency should develop guidance on helping managers ensure referrals involving abusive schemes involved tax-exempt entities are made across IRS’ operating divisions.