Direct Marketing Association, The v. Huber

Filing 99

MOTION for Partial Summary Judgment Counts I and II (Commerce Clause) by Defendant Roxy Huber. (Attachments: # 1 Exhibit 1- Fox Decl. & Rep., # 2 Exhibit 2-1 IRS Tax Gap, # 3 Exhibit 2-2 IRS Tax Gap, # 4 Exhibit 2-3 IRS Tax Gap, # 5 Exhibit 2-4 IRS Tax Gap, # 6 Exhibit 2-5 IRS Tax Gap, # 7 Exhibit 2-6 IRS Tax Gap, # 8 Exhibit 2-7 IRS Tax Gap, # 9 Exhibit 2-8 IRS Tax Gap, # 10 Exhibit 3- Saliman Decl., # 11 Exhibit 4- Corjuo Decl., # 12 Exhibit 5- Gable Decl. & Rep., # 13 Exhibit 6- Barry Dep., # 14 Exhibit 7- Stevens Decl., # 15 Exhibit 8- Thompson Decl., # 16 Exhibit 9- Lichtenstein Decl. & Rep., # 17 Exhibit 10- Adler Dep.)(Snyder, Melanie)

Strem#henhig Ta4drniftistration: Tax administration 'II b strengthened through
Strengthening Tax Administraoem: Tax ~dmlnistration ' will be stre~ned through
disclosure revisions and stronger penalties for nonfillng.
dIsclosure revisions and str;9nser penalties;for nonfl!ing,
• Expand IRS access to k7fo,matio,, in the National LYrejXoIy of NøwHires (NbN) for tax
• EXpand IRS aacess (0 information In the Natlona! DitecfOry of New Hires (NDNH) /or-tax
administration purposes. This propoa1 would amend
admlnlstradon purposes. Thls proposalwoufd amend the SOCial Sec~rity Act to e~nd
Social Security Act to expand
access to NDNH data
general tax administration purposes, including data
IRS aCdeSJ; to NDNH data for general tax adminiStration purposes, includjng data
rnatching verification taxpayer claims durfng retorn processing, preparation of
during return processing,,
matching, vertffcatron of taxp~yer clajms_
noncompliant
substitute returns for noncompliant taxpayers, and Ident/ficat(on of levy sources.
identification

m

•
disclosure ofprion tax scams.
proposal would authorize the IRS disclose
• Permit disdO$ure ofprison tax scams, This prnpo~1 would,al,lthorize the IRS to disclo~

certain
return information about
9Srtafn limited ra(um Information a~ut tax viola'tions by inn,ates so prison Qfficlals could
violations inmates
officials coild
punish and deter su¢h conductt!1rough administrative sanctiol}$. This Is' expected to
such conduct through
pu!,!ish
sanction,s,
is
generate $5 million over the
generate-$5 1TI1Uiol1 over1he next ten years.
ten years

•
failure k n/a taxtefum
• Make repeated willful failute to file a fax retum a felony. This proposal would 's'Ublect any
subject
person who willfUlly fails to file tax retums in any three years Within any five year period,
willfully
returns
within
if
if the aggregated tax liability for such period is at least $50,000. to a new.agQravated
$50000,
new aggravated
file criminal
failure to 61e crimlhal penalty. This proposal Is estimated to generate $12 million over
genera~
is
the next ten years.
ttle
Strengthening
Strent!th8nlnp Penalties: Enhanced penalties will help to deter noncompliance.
t

•

xpndpreparerpnaltles. L~islatl.ef\
Expandpreparer,PBfTilltles. Legislation was Signed May 2$, 2007, implamentin9a
25, 2007.. implem~ng a
signed
modified version ;Oflhis proposal. It expands the scope of the existJog preparer penalties
\lerslan of this
eXi'ar\~s the- scqpe
existing,preparer
to include. non-income tax retims and reIted documents. The pro~1 also increases
include nQrHncome
retUfT'ls
related
ioere.ases
proposal
telated penalty amounts. The change will generate an estimated $80 million over the
reI~ed
char;1ge
@ne~te
next ten years.
yeaFS.

• impose penaizy on failure to comply with electronic filing requirement Ttlis proposal
IlT!posepeos/ty
with. elecftonic
I1JQfJ/rement This propoSal
would establish a penalty for failure to cqlTlpJy with e-file requirements. The amount of.
comply
establish
fer
requi~meots. Th~
pf
the penalty would be $25,000 for a corporation or $5,000 for a tax-exempt organization.
be
a
Q tax-~xempt ofijanization.
• Create an en-oneous refund ciai>n penalty. Legislation was signed May 25, 200,..
CreatffJ
Bn;oneaU$
claim penalty. LegIslation ~ sign~
25. 2007
implementing a version of this proposal. It imposes a penalty, of up to 20 percent of a
of
It
a penalty ~p
percent, a
disallowed portion of a claim for refund or credit for whIch there isno reasonable basis
disallowed portion of!8
fot
or eredlt
whAtCh there is no re8S(>na,ble basiS
for the claimed tax treatment,, or for which the taxpayer did not hsve reasonable cause.
the claimed tax treatment Qr for
~ fa>epsyer
have
cause.
The change will generate an estimated $8 million overthe next ten years
The cf1ange will generate an estimated' $98 mUlion ever the next ten years.
4

. The Treasury Department and the IRS will continue to explore additional possibilities for
The Treasury Department and th~ IRS will GQntlnue to explore addltionaJ possjbUlties..for
legislative proposals, as well as improved methods for using external data and data from
legislative p'ropos~ls, as well as.improved me.thOds fOr using extemar data and data from
information reports.
information reports.
,

Published guidance fri the form of regulations, revenue rulings, revenue procedures notices,
Published .guldance in the form of regulatfo'ls, ~venu~ A,Jlings reve",ue proced'-:lr&S, ~
and announcements is a critical element in the IRS’ efforts to reduce tax avoidance, improve
and announcements is a critical element 10 the IRS' efforts to reduce tax avoid~nce. improve
taxpayer compliance, and close the tax gap.
taxpayer complianoe~ and close the tax ~.

22
22
D038
Exh.2

a

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z
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Enhances compliance by PrQviding detailed substantiVe and procedural rules;

•

proper: ftlter'Pre~oQ of
Reduces disputes between the IRS and taxpayen; regarding the_
i
the tax law and the prOOedures necessary to comply with H and

•

M~kes It more diffic.ult for noncompliant taxpayers t008void detection or incorrecl1y claim
ttiat'1heir be~lor i~ permif:ted .und~r the tax faw.
0

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tat

a
9

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He1ps ~mpliant taxpayers be.tter understand how to determine and pay their tax
liability;

“8

•

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t

PUblished guidance:

I Some tax- statUtes sPQCiflq:llly direct the Treasory Department-afld the IRS to Issue

regulations or othef'gl!i~ance. Certain stat!,JtQry provisions have IIttl&0r no effect until
implemented by regulations or other administrative guidance. and some-provide only
, gen~ral direction and broadlY delegate authority to pUblrsh regutations~ Published
guidanCEl interprets the tax law and articulates how it applies in dlfferentoircurostances,
thus helpil1g taxpayers determine how to comply with their tax obligations.

: The Trea.sury Department and the IRS continlJe to resolve'many difficult iss~sand remove
impediments to voluntary cOmpliance through published guidance, The ever-i ncreasing
~mRlexfty of. contlnulnQ changes In, and temporary nature oftha taX law alse present
significant challenges to addressing long-standing complla~ probtems1hrough gui ance.
The published guidance program also aids In 'dentffioatlon of Issues that guidan~ ,~nnot
address and serves a Significant role in developing $uggestions for leg,sla~v~ solutJons.

1II WH

31

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issued by the

4,

0

0
0

Regulations clarifying -he tax rules and tnfonnation repqrtlng r~uirements for widely
t
held fixed _
investmenl trusts;

n

.

•

H

E)(amp/es of published g1:Jidance designed 10 improve CQmpliance
Treaslilry .Departmentand the IRS include:

‘4,

i

5o

0

1
r

1

. Each year, the Treasury Department and the If~Sissue a Priority Guidance Ptan (PGP}that 1
sets forth the guidance projects targeted for completion over the course of the following 12 !
months. The PGP typically includes m~than 250 separate guidance projects.
:

—

WI H LW

-

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RegUlations Implementing and explah'lfng new tax sh~r disclosure rules and
penalties;

fl

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23

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Guidance explaining the rules gpveming ctlaritable contributions of vehicles;

0>

•

C)

R~ulations'and other guidance eJ8r1fying and explainihg the nM dedl;Jction for
domestiC' prodUction activlties_
'
'

iih

•

R

Regulallons and other guidance on reporting and Inclu8i~n in income of deferred
compensati<m (mill nonqual/f.jlKt deferr~ compensation plans;

.

•

D039
Exh.2

g

•

Guidance implementrng a new exclse1ax en tax-exempt entities and their managers I~
connection-with participation In certain potentially abusive trar:Jssctions;

•

Guidance improving information reporting for certain wt;Igering activities~

I

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of filing retums' (or
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Rulings addressing the consequences, inclUding potential penalties,
failing to file returns) based on friyolous tax positiOns.

o
o,

•

i

Proposed regulations aqdressln.g when expenditures fot ~nglble property may be·
deducted or l'1)ust be capitalized; and

' .

-

•

•

(0

Guidance designating &_
Ioss importation strategy as a lis ad .transaction;

•

I

•

0

Proposed regulations addressing the tax treabnent of private-annuitles;

C.
—
0

•

—

Guidance Gn transfer f)rieing issues related to eross-~rder services and cost-shar:ing
agreements;

.

•

.

-

—

$

(0

CD

0

-‘

•

Patent cross licensing

•

International restructurings (IRe section 367)
CD

0

•

Foreign tax credits ORe <
sectlon 9(1)

•

!.

Transfer pricing (Intemal Revenue Code {lRC} section 482)
C.

•

.•

CD

Some pr9.lects currently underway Include development of guidance In these areas:

a

5-

0

0

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Expand broker Information reporting;

D
CD

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Require basis reporting on security sales;

Z

o

0

Re'quire information repOrting on payments to corporations;

$

o

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0

-4’

o4

Work with Congress to enact remaIning legislative proposals included in'
Administration's FY 200~ BUdget

0

•

—
—

In[datives

0

I

•

.

-

0

Issuing published guidance is an important tool forthfi IRS in cloSing tlie tax gap.
Notwithstanding the Inherent cballEinges, the TreasurVDepartrnem and, the fRS will
continue t9 provide published guidance to Improve compliance by addressing abusIVe tax
avolCfanoa transaCtions, providing clarifications and exPlanations of the tax laws, ensuring
consistengy of treatment of similarty sltdated -taxpayers, and Where possible. reducing
~ burden On co~pllant taxpayers.
-

24
D040
Exh.2

~~ '''

....'

,,,. ,,

~

.. " .. .....
'. ~

. .. .' ..

~."~ ~,,

o

information
Require information reporting on merchant payment card reimbursements;

o

Identification
from
Require a certified Taxpayer IdentificatJon Number fr:om contractors;

o Require increased information reporting for certain government payments fer
for
property and services;

iO

o
o

Increase information return penalties;

a-filing
o Require e-filing by certain large organizations;
o
'0

o

Expand IRS access to information in the NDNH for tax administration purposes;

o

Permit disclosure of prison tax scams;

o

Make repeated willful failure to file a tax ,retuma felony; and
faflure
return a

o

•

employee
Implement standards clarifying when emfi)loyee leasing companies can be held
th~jr clients
liable for their clients' federal employment taxes;

Impose penalty on failure to comply with electronic filing requirement.
en

Develop new legislative proposals for consideration In the Administration's FY 2009
in
Administration’ FY"2009
prQposals
Budget. Approaches under consideration include:
Bu~get.
o

Improvements in coordination with State governments, including coordination
State governments, includJng
rmprovements
concerning licensing activities; and
act.ivities~

o Further expansions of information reporting requirements, including reporting of
requirements.
Furtt'ler
financial activity that currently may not be suIject to information reporting..
actl~lty
subject
reporting,
•

Develop regulations and other published guidance clarifying ambiguous areas of th.a
the
regulations,and other
law, targeting specific areas 'of noncompliance, and preventing abusive behavior.
of noncompliance,
law,
s~it'ic

25
D041
Exh.2

Component 2

Make a Multi-Year Commitment to Research
Research is critical in helping the IRS understand behavior. develop strategies, and
measure progress.
Research enables the IRS to develop strategies 1o <ombat specjflc areas of noncomprianse.
to combat spedfk
noncompliance,
veIuntay compflance.
improve voluntary compliance, allocate resources more effect1vely, and reduce the tax gap.
effectively,
Compliant taxpayers bene1it when the IRS uses the most up-to-date research to impro
taxpayeta benefit
mOst
improveworkload selection fOrTllulas,
bu~en
woikIoad selectiQn formulas, because this reduces the bur4n of untieCessar,y ~payer
unneessery taxpayer
it enabl~s
nd
iRS colløct
with
resources,
contacts arid because if ena*s the IRS to collect more With' a given level of resources.
Research 'jS also critical in helping the IRS establisl1 benchmarkS against which to measure
is
cdtical
Which
establish benchmarks
in
1 progress In improving compliance.
I

The NRP demonstrates the frnportance of comprhensive compliance data. In addition,
importance'Oh~omprehensive
data,
dditfon,
accurate NRP data prøvides a critical benchmark for determining the SQurces of
provides
accl,lrate
sources
noncompliance and hr measuring changes in compliance over time. Data from the $RP
nGncompliance
for
NRP
overtime. bata
teporting compliance study have allowed the IRS to:
reporting
have-allowed
IRS to
•

Target examinations and other compliance activities better, thus increasing the dollarexarj'lfnations-and alhercompliance
better,
lolIar
per-case yield and reducing no change’ audits of compliant expayersan4
~t-case
reducing "-no changetaxpayers; 'and

•

Improve operational audits by using innovations pioneered during the 2001 NRP to
dOring,
NRP
reduøe taxpayer burden.
reduce

Continued compliancø research is a vital component of a sound tax gap strate. AI"! NRP
Is
cotnppl18nt
stratEmY. An NRP
Contif}ued compliance
reporting compliance study of 5,000 S corporation tax returns flied In 200 arid 2004 '(s'
re.ums fIed in 2003 and
t
S,000
Is
currently in process. Since 1985-1 S corporation return flling hav increased dramatlcafly In
Srnce 1B5 corpoFation
fillnga have Increased dramati68l1y.
that year. there were 722.444 Forms 1120S filed. In 2004, that nun*er had grown by nerly
year, thel'e WMe 72Z444 orms
filed
2004,
number
nearly
live times to ov~r 3.6 million, while other corporate returns declfriect by approxImately 500O0O
aver
five
million.
retums d~lhed by approximately 500 ~OOO
for the samepariod,
t,he same periOd.
By 1997, S corporations had become the most common corporate entity. In 2004 lax returns
l 2004. tax
$
filed by S corporations accounted for over 63 percent of all corporate rOtums filed. The last
fllea
S'CGrporations
over percentiOf eorporate-retums
time the IRS conducted an S corporation study was 1984. As a result, the IRS does not have
1954c. As result. the,lRS
have
current S
sWdy
. reliablø reporting compli5nce data for these entities. The currentS corporation study
reliable
compliance
ehtities.
represents the firsttime that the IRS has conducted a reporting compliance study acrosslax
first time
IRS
across tax
years, and it will raquire that the data be knitted together to provide a comprehensive picture.
Y~J
It wilt r&Quira
c;tata
comprehensIVe piOfur'Et.
The study will continue through 2007.
,hrough 2'007.
.
! Without new reporting compliance studies, the IRS must rely on studies condUcted over 20
Wrthout
COlTlplfaOO8 studies, the
most re1y
studies cC:>r)duGted
areas
: yers ago to estimate compIince for arf)aS other than individual income tax or S
yea(S-~go to
compliance
thah'
IncOme
year,
f corporations. Moreover, with each passing yea~, the data from the 2001 study onindividuili
corpO..rations. Moreover With
fmm1he
on Indivrdual
income tax compliance becomes more outdated. Without up-t&date studies in all araas the
tax compliance beComes
outdated. Wltftout up;.to-date studres
areas,
MS is hampered in its ability t respond rapidly to Wends and emerging vulnerabilities in the
IRS Is
Tn Its ability to
rapidry trends
the
tx system. A multi-year commitment to research ensures that the IRS can efficiently target
tax
commitment
ensurea
the
effioiently target
resOurces
neW
emerge.
resources and effectively respond to new sources of noncompliance as they emerge,

26
D042
Exh.2

--.-..

---.-.---~~-------.

---

The Administration’s
for
funds for three signifttl:Snt research
Th~ Admlnistra~ion's FY 2008 Budget request fOf the IRS fl,mds f0r (hree signIficant researoh
initiatives.
in~iatlves.

include:
These include:

•

Increasing
stud/es. The
reporting
studies
Increasing compliance studies: The IRS will conduct reROrtill.Q compliance sttldi~ for
taxpayers
relies
(e.g.,
additional segments of ta~p'ayers for which the IRS now renes on very old data (e.g.,'
corporation income tax, employment tax,
which
partnerships),
oofPoration income.tax, employmfitnt l3x, and partnerships). or for WhiCh the IRS has
studies at all
excise tax).
never conducted any compliance studies-atall (e.g., exeise ~).

•

existing
from
study.
an
Updating exiSting data ffi:Jm the 2001 NRP sJudy. The IRS will conduct !-in annual study
of
Form
based
smaller
size
the 2001
0'( compliance among F9rm 1040 filers based on a smaller sample s~e than tile.20Q1
NRP
provide
compliance data
NR~ study. This will pro)lide fresh compliance·daSa each year and, by combining
y~r and. by
samples over several years, will
a
samples'over seve~1 years, wjll provide a regular update to the larger sample size
needed to keep the IRS’ targeting systems
date.
needeclto k~p 1he IRS',targeting sys;tems and compliance estimates up to date..

•

Researching the effect ofservice
taxpayer compliance. This
ReseafC/1/ng t/ie effect ofserviCe on /iixpayer aomp/ianee. T, is project will undertake
h
new research on the needs. preferences. and behavlors oftaxpayeJ'S. Thfa research will
needs. preferences.
behaviors of taxpayers. The
focus on four areas:

1.
2.
3.
4.
4.

Meeting taxpayer needs by
right
communication:
Meeting ~xpayerneeQsby providing the rigt1t channel of communication;
understanding t$~payer burden:
Better understBndh;J.9 taxpayer burdenj
Understanding
needs
UnCierstand ng taxpayer oe.eds through the errors 1hey make' and
~rrors they make: ~nd
Researching tfte impact
Researonlng the Impact. of service on overall levels of voluntary comphance.
0 erallieveis
vqturitary complIance.

Initiatives

t.
•

Undertake additional compliance studies, including S corporations and individuals.
compliance studies, Including S
Individuals.

•

Update tax gap estimates using new and existing data.
Update
existin~ data.

•

Research the effect of service on taxpayer compliance.
complianGe.

• . Research the relationship between complexity, burden, and compliance.
complexity, burden,
compliance.

27
27
D043
Exh.2

Component 3

Continue Improvements in Information Techno’ogy
Continue Improvements in Information Technology
A combination of new systems and enhancements to existing systems is critical to a
productive use of resources.

Information technology (IT) modernization is critical to ensuring the most productive use of
~ Information tectmoJogv(IT) mOdernization is critreal to ensuring the most productlvause,of
both
service and compliance resources. It provides
. both taxpayer servtce and compliance reseufC$S. It provides the nec:EtSSary infrastructure (bat
necessary infrastructure that
allows
most efficient utilization of resources. which in turn allows the IRS
allows the most efficient utilization of f8Sources, whiCh in tum allows-the IRS to target key
key
components of the
better. Because IT modernization is cornerstone to efficient and
components Qf the tax gap ~t1er. ~use IT modElrnizatlon is a comerstone (0 effici$flt and
effective tax administration,
IRS
eff~ve tax administratlon, the IRS is committed 'to strong oversight and accountabilItY of IT
to
accountability IT
projects.
projec.ts.
I
IRS information technology
The IRS Information technoJogy vision includes systems that
that:
•

Allow for better identification of the cases to be wo. ked;
worked;
r

•

Route those cases to the most appropriate workstream; and
most
workstream:

•

Employ
effective
analytics best manage cases
EWPloy cost effective technology anafytics to b§t rpanage eases once they reach the
correct workstream.

IRS’
in
infrastructure
The IRS' current investment in technology infrastructure includes 8 combination of new
a coml:iinatlon new
systems and enhancements to existing systems, with emphasis on Improving both
with
s~s~ems
6n improving
effectiveness and effi&ienoy. Included In this infrastructure are tools to Increase taxpayer
efficiency.
in
increase
compliance through early detection, Improved case selection, more efficient case delivery, .and
through eariy detection, improved
efficient
deUvery, and
selection,
better case management:
•

Case Selection. The NRP provides Significant data -for improving case selection criteria.
significant datlJ'. for improving case selection
NRP
NRP data facilitates -selection of the most productive returns to examine. Ihl$ not only
NRP data facilitates selection the most productive ralums to
This not
reduces the tax gap, but also allows the IRSto update tax gap estimates. The case
IRS to update tax" gap estiqrates. The case
reduces the tax gap, but also allows
selection process is further enhanced through automated classification processes. The
selection pro¢eSs is further eAhanced throU9h automated classiflcatlofl processes. The
IRS also uses current audit information from ~ue management” systems to provide for
IRS I;Ilso uses current audit information from ‘issue mans,gement'i systems to provide for
immediate identification of emerging issues. For Collection programs. the IRS will use
immediate IdentificaUon of emerging issues. For Collection pregrams~ the IRS will use
improved decision analytics to select cases and route them to the most appropriate
ir!'proved decision anaMics to select cases and route them to the most appropriate
workstream.
wqrkstream.

•

Case Delivery. Delivery systems also are being modified to move audit work into the
case Delivery. Delivery systems also are being modified to move audit wOrk into tJ':le
system more effectively and efficiently. Both return classification and delivery will move
system more effectively and efficielitly. Both return ctas,siflcationantt delivery wllIlT;love
toward digital rather than paper-based returns, eliminating the time consuming and
toward digital rather than paper~based returns, ~limlnating the time coOSljriling and
expensive process of ordering returns and sending examiners out to IRS campus locations
expensive process of ordering returns and sending examiners out to IRS campus 1000tions
for classification details. Additionally, the IRS will replace manual processes with
for classification details. Additionally, the IRS willraplace mafll~al prwesses with
electronic case building and instant access to multi-year tax return information.
eleCtronio case building and instant access to multl",year tax retum hlformation.

•
•

Case Management. Automated systems are being deployed to allow more batched
Case Management Automated syste~ a~ beIng deployed to aU'QW more batCheB
processing of high volume types of examinations. Technology enhancements will allow
processing of high volume types of examinations. TeChMlogy enhancements will allow

28
28
D044
Exh.2

employees work
in an online environment, where
case-related data
employees to work cases in an online ~nvitonment, where returns and case-related Qata
can be downloaded, and actions can be tracked electronically. The IRS will continue to
be
and actions
IRS
continue
can
link multiple internal and external
to enhance overall effectiveness, allowing
link multiple internal and extemaJ databases to enhcmce 9verall effectiveness, allowing
better identification, management, and performanQa monitoring for compliance W0rkload.
identification, management,
performance monitoring for
workload.
The IRS
has several projects
will
criminal enforcement,
spillover
The IRS also has several prolects that will enhance criminal enforcement. with spillover
civil cases.
effects to eivil cases.
Administration’s
Budget request
in
$81
The Administration's FY 2008 Bu(lget request includes an additional $81 million In funding to
improve the IRS’
infrastructure,
is
improving IRS’
Improve the IRS' information technology Infrastructure. which is vital to jmprovinQ IRS'
capabilities. The investments
the
allow
enforcement and services capabilitIes. Tne investmenl$ proposed in fhe Budget will alloW the
IRS to:
~

•

i

ciltica//Tinfrastructure.
provide funding upgrade
Upgrade cliticallT ihfrastruc(iJre. This will provldefundlf'9 to upgrade the backlog of IRS
its life cycle.
replace
infrastructure will
equipment that has exceeded its Jife CYGle. Failure to ~place the IT infrastructure.Will lead
to increased
willI
the risk of disrupting
to Increased maintenance costs and wiJ increase tbe risk-of'dlsrupting business
operations. Planned exper,djJ:ures in F-Y 2008 include proauring and replacing desktbp
expenditures FY
procuring
desktop
computers. automated
distributor hardware.
Area Network/Local Area
computers, autOmated call dlstfibutor h~rdware, and Wide Area Network/L0G81 Ar~
Network routers andsWitch6S.
routers and switches.

•

Enhance the Computer Security Incident Response Center (CSIRC) arrrJ the network
center (‘GS/RG,) and
S~utity
infrastructure sepurity. Thjs ,wtll allow the CSIRC to keep,pace with the ever-cnanging
keep
ever-changing
infra~tructure security. This will
th~CSIRC
security threat c
environment throUgh enhanced detection and analysis capabilItY, improved
through
analysis capability,
forensics, ana the capacity to identify ~d respond to potential intrusions before they occur.
identify and
forensics, and
occur.

.

~
•
I .
,

Enhance the IRS' network Infrastructure security. This will provide the capabilitY. to
/RS’network infrastructure seculity. This-will
capability
G tlie
of
tools,
perform continuous monitoring of the security of operational systems using security tools,
contin oustactics, techniques, and procedures to perform network security compliance mOriitering of
tactiCS, techniques. and
secudty comp lianee monitoring
all IT assets on the l1etworkL
IT
network.

The FY 2008 Budget request also includes a total of $282 million to continue the development
FY
Budget request also includes a
$282 million
development
and deployment of the IRS’ Business Systems Modernization (BSM) prpgram in line with the
deployment
IRS' BuSmess Systems Modernization (SSM) program in line with
. recommendations identified in the IRS’ Modernization, Vision, and Strategy. This funding will
identified in
IRS' Modernization. Vjsion~ ar)d Strategy.
allow the IRS to continue progress on modemization projects. such as the Customer AOCQI,:,Int
IRS
allow
progres:s on modernization project,s, such as the Cl,Istomer Account
Data Engine (CADE), Account Management Services (AMS). Modernized e-FiIe (MeF). and
Data Engine (CADE). Account
Services (AMS), Modernized &-File (MeF). and
Common Services Projects (CSP).
Cammon Ser:vices Projects (CSP).
•

Continue deve/opnientofCADEandAMS. The development of CADE and AMS systems
Continue developm~nt of CADE and AMB. The develoRrnent of CADE and AMS systems
is the heart of IRS’ IT modernization. These two systems., working together, will enable the
is the t:leart of IRS' IT modemlzation. These two system~ working tQgether, will enable the
IRS to process tax returns and deal with taxpayer issues in a near real-time manner. The
IRS to process tax returns and deal with taxpayer issues In a near real-time manner. llJe
objective is for the IRS to operate similarly to a bank, where account transactions occurring
objective is for the IRS to operate similarly to a bank, where account transactions OCCl.Irring
during the business day are posted and available by the next business day. In addition,
duJing the bllsiness d$Y are ~ted and avanabla by the, next bUsiness day. In addition.
AMS will enable the IRS ~pr~ntatives Who woJk With taxpayers to have a~< to all
AMs will enable the ,IRS representatives who work with taxpayers to have access to ~II
current information regarding that taxpayer, including electronic access to tax return data
current information regarding that taxpayer, InclUding electronic access to tax reJum data
and electronic copies of correspondence. Armed with such comprehensive and up-to-date
and e~on~ copies of corresP(!)n~ence. Armed witIi suCh oomprehensWe and up-to-date
information, IRS representatives will be in a much better position to help taxpayers resolve
informatian. IRS rep~nta1ives win be in a much better position to help taxpayers resolve
their issues, which benefits both the IRS and taxpayers while promoting voluntary
their lssues, which benefits both'the,IRS and taxpayers while promoting vOluntary
compliance.
compliance.

I

29
29
D045
Exh.2

The development of CADE and AMS also includes a comprehensive re-working of the notice
development of CAD~ and AMS also inoh.~des a
re-workln9"of the notJce
syste"l to streamline the process and enhance ~ efficlen
In July 2a08, CAbE is
system to streamline 1he process and enhance its efficiency.. In July 2008, CADE Is
scheduled to post and settle tax returns with a balance due condition and amended tax
~heduled to post and settle tax retum&with a
due condition and amended tax
through OADE and
returns, Form 1040X. The daily settlement of these accounts 1h~ugh CADE and the linkage
retums, Fomt 1 040X. Tj:le daity settiernent of these
linkage
with
will enable
due notices to be sent on a daily basis and delivered to the
with AMS will enable the balance due notices to be sent on a daily basis and delivered to the '
taxpayer as much as eight :da¥s faster than current time lines.
as much as eight days faster than current
lines.

•

Continue development ofMeF. MeF is the fUture
COntinue development ofMeF. MeF is the future of electronic filing. It provides a standard
filll'l9. It provfdes a standard
data format for all electronically filed tax returns, which will reduce the cost and time to add
data
all electronically filed-tax retUrns,
Will reduce the cost
time to ~dd
and maintain additional tax form types. MeF is a flexible real-time system that streamlines
and
taX
MeF Is a
real-Ume system
strsamllnes
the processing of c-filed tax returns, resulting in a quicker flUng acknowtedgement to the
e-f1I~
ret~ms,
in a qurcker filing acknowledgement the
development
taxpayer or their representative. In FY 2007, the IRS is beglnnfng the developmenf and
represe~tive. In FY
IRS beginning
enable
MeF
1040 on the MeF platform. The MeF"system will enable the IRS
"040
implementalJon of the Form 1
implementation of
noncompliance
to better analyze tax compliance issues and address noncompliance among taxpayers by
taxpayers by
impediments
removing the Impediments caused by lack of data availability and completeness, access. and
lack data availaollity
completeness. access, and
and
of the current manual and time
accuracy. MeF
muen
data accuracy. MeF will allow the re-engineering of much
processes including the following:
including
consuming compliance
o

data
percent
Completeness of Data. The MeF system provides 100 peroent of the data
system.
attachments, third-party
contained
ttle returns, their
qonlained within the returns, their schedules and attaohments, third-party
documents. and amended
documents, and amended returns in an electronic form. All documentation. will be
electrooic
Atl documentation
copy of the
available completely and electronically, which is eqlJiva!en( ba paper oopy'ofthe
whloh equivalent to a
current e-filing
transportable form.
a more usable
entire return file, but in 'a rnpre usabJe and tra~portable form. The current,e-fllfng
re~m
system only provides returns and does not have the ability to provide
documentation, including
supplemental docume~tion, in,cludlng attachments, electronically. Paper
an
provide only
submissions provide onlY limited transcriptions of return data or ~n image of the
is
return. All
return. 1\11 other documentation Is recalled and analyzed using time consuming
usfng
manual processes.

is

o

electronic
Access. Currently,
Data Availability and A~s. Currently, IRS electronlc systems capture an
To
within tax
percent
average of 20 percent of the data contained wit"'ln fax and information returns. TO ~
average
the
additional information
compliance
gather adtlitlonal Infonnatlon for Compliance needs, tile IRS must conduct manual
consuming. For each form, the
which are
transcriptions, which-are costly and time constlming.' For"88ch .,form "the amount
size.
type, complexity.
of information retained or transcribed varies by form type. complexity and sl e.
available
100
For those returns
Forthose retums submitted through MeF, 100 percent of the data will be available
schedules
IRS electronic format, including
to the IRS in electroniC format inoludlng associated schedules and attachments,
without additional
regardless
"
reg8tdless of the form type and wttho~ addltionaJ expense.

o

resources
currently expends
Accuracy.
Data Atcuracy. The IRS curreottyexpends time and resources ensuring the data
and
tax and information filers and
received
receiv~ from ta>,( and Information fliers and transcriptions are accurate ana
increase
reliable. The MeF system
rellable. The,MeF sy:" tem and its processes Increase data accuracy by reducing
s
manual transcriptions.
and
the incidence
Ule Inoidenqe of errors ~"d by minimizing the need for manual traoscriptioDS. This
The use of
prior to submission. T e use·of
to
possible
is made P9~sible by validating the information
errors.
rules also ensures that the returns are free of computation eirors.
business

30
D046
Exh.2

- -..
C)

Cost Effectiye Oata Capture &Storage. The manual processing of ~tum data,
attachments\ an~ schedules fs time consuming and 'CQ,stfy. E4illng Is- the most
effective means of-capturing. storing. and recalling data. S~vllJgs Ittolode a
reduction io submission processing anti storage "COSts., Additional sav,jng~ )¥III be
achieved'from reduced oostfor retrlevlng and re4ilingretlJrtls fOr examinations lind
transcription for identlflcatibn of eomplfatlce trends or res$arch.

0

0

o

.

"

•

-~_-=-o

FedlSt;lle Electronic FSderal TsJ(. Payment System, The IRS and the T£easury Department~s
AnanOitll Management Seryi~ are developing a pilot In 'conjunction WitJ'l South Garollna and
illinoIs. ' The pilottwill enable fmnQis ~payet'S'(Sol!rth Ccn:ollna wili participat~ln aI~ter pf:la$6}
to pay all tf:leif federal and certain state taxes Qnline via the TreasulYS E;~eetrOnic Federal Tax
Payment Sysfem (EFrPS). This initiat.ve will prov.ide one stop for taxpayers ta make ~ek
i
federal anclstate ~x payments.
ComplianceMo.nitorlPfJ Process. Compliance monitoring Is prem/aed on the nation thaUh&

IRS should make l{se of e'!-lery ayaifable toof and public data source In ttYing fo brtng

oorpora110ns imo'cornpliance.. The Large ana MId.;Size.Bl,Isiness.(LMSB) dfvisiQn tias .
des£gned a 'Compliance Monitoring ProCess (CMP). LMSB de¥eloped and Will be
implementing an enhanced compliance initiative dependent on Information technology that
leverages the increases In transparencY Olandated-by'Sarbanes-Oxley and other
This
program also Jevera.gE!S the jl:lG~sed transpa~ency: of publlo companies' flnaru::ial statement$
that 'W1II res\:llt from implementation of Flnancfal Aecour;lting Standard.s BoanillnteTpre.tation No.
48 (AN 48).
.
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The benefits ac;crulhg from the delivery and implementation of 8SM. projeclS not only prpvlde valae
to t8xpayers 3 and the. ~usiAess community. but also contribute.to op&rationaI1mprov.ementS and
efficiencies within the IRS.

n.

EvalUate the AUR matching process, and implement an im~roved ease scorfng and selectiOn
concept to select the most p('Oductive cases. (Also supports Component 4)

•

Develop enhancements to t~e Compliance Data Warehouse t9 improv~wor1doad identfflqation
and priorit~atjon algorithms, allowing better evaluation of attem~lve treatment streams_
and
ensuring Collection cas.es receive the most efficient and effectiv& tJ'ejltmenl$ (AI~ sgpperts
Component 4)

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•

—

Develop system reqI:Jfrements for expanding the AUR Soft Notice Test. which involves asking
taxpayers to voluritarlly self~rrect for Mure years. (Also supports Component 4)

0

•

CD 0
o
ci

a

.

I

Expa,nd Alitomat~ Underreporter (AUR) Auto Notice Generation to include additional incoma
ty.pes and all Form 1040 f~mily retums. (Also suPPOrts Compo~e~t-~)

-

•

O>

I

Improve high ihcome and noo-EITC e~am workload selectign and m~thod of .delive~ an~
assess the effe.Ctiveness of the exam treatment stream on SeleetEk:t nonfiler oases. (Also
supports CompOAent 4)
2
CDt
CD ()

•

a

.

.

Inttiative$

D047
Exh.2

•

Update the Collection Inventory management system to improve functionality navigation,
inventory
improVe
navigation,
performance, and efficiency. (Also supports Component 4)
penonnance,
supportS
.

•

Automate lien delivery, recording, and release processes with state oand local jurisdictions to
and
delivery. recording.
prooesses whh
Jurisdictions
improve the timeliness of lien filings and the payment of fees. (Also supports Component 4)
payment
suppc;>rts

•

Test the use of statistical modeling technlqLl8s within the Tax Exempt and Government Entities
Exempt
techniques
of
Goveml'"(lent
(TEG.E)
compllcmce
lise
Division (TEGE) to detect high-risk compliance patterns in order to use data to expand and
improve examination case selection. (Also .supports Component 4)
exarn'ination sase
supports

•

Develop and implement a set of compliance decision analytical tools that will SLlPport analysis
support
s. t
e
fools
of TEGE returns and other data to detect compliance trends and improve case and issue
lEGE r:,etums
Improve
selection. (Also supports Component 4)
selectioD.

•

Implement a new TEGE electronic examination system (TREES) that will consolidate agent
oonsollda1e
tools to increase the 'accuracy and efficiency of the examination process.
ttJe accuracy

•

~B~ild and·implement MeF receipt Of electronic transmissions for addItlDn_ 1tax _o_rm.s__~_~~j
I:1_tax f _ . .
~

•_

Build and implement MeF receipt of electronic transmissions for additional

forms.

32
D048
Exh.2

.i
4

F

Improve Compliance Activities
ActivIties
mprove
Obtaining maximum coverage and yield from available resources is necessary for the
as
greatest impact on compliance.
compliance

made significant
in reducing the
improvements in
gap
The IRS has mCllde signifICant progress In ~uctn9 th~ tax gaR through Improvements In
enforcement efforts.
following
demonstrate
progress:
enfo~ment effOrts.. The fallo~ing examples demons.tra(e this PrQ9ress:
•
•

Enforcement
by nearly $15
2001,
EnfOrcement revenues have grown by nearty $1 fr billion since FY 2001" totaling ft8.7 billion in
$48.7
FY2006.
'
FY 2006.

•

FY
Examinations
taxpayer returns increased
between
E-xamir,a.tions of individual ~xpa.yer retums increasetl by 77 percent bel\yeen FY 2001 and rY
Similarly,
2006. when
20061" Wf:Ien the IRS conducted nearly 1.3 million examinations. Sfmllarly, the coverage rate
rose from
percent to 0.98
during
period.
rosefr:om 0.58 ~rcent to: 0.98' percent during.that partod.

•

focused more
individuals with income over
The IRS has facused mare resources on examinations of in(!ividuals with (hcome ol/er $1
million.
in this category
by
FY 2006
mUIJon. The number of examinations tn ttlis eategory rose by almost 80,000 in Py 2008, as
compared to FY 2004.
separately. The coverage rate
<wmpareGI tel) FY 2004, the first year the IRS began tracKing,them se~r.a'(ely~ 'r'ftl6 ooverage Fate
tracking
has
Has similarly risen from '5.03 percent to 6.50 percent tn that ~riod.
5.03
in
period.
6.30

•

r

Audits business returns increased
2001 and FY
Au~1ts of busine&s , retum~ incr~sed by 29 percent between FY 20a1 arid FV 2006. The
coverage
covera~

period rose
the
percent
rate over th~ same Mrf~ ro~ from 0.55 '~reent to 0.60 percent.

•

Audits of corporations with
in
grew from
to Q,578In FY
Aud~ Qf c;ofPOratiof'}S wi,h assets over $10 million grew1r:oro 8,718 In FY 2001 to 10,578 in ,FY
t
2006, and
coverage rate increased
15.1
18.6 percent.
~006: ,and the c&vsrage'\':8te iocreaS'ed from 15.1 percent to 18.&perGEtnt.

•

Examinations of the very
corporations,
with
by
Examinations of1he yery largest cofQ:Otati~nsl those With assets over $2"50 million, increased i»'
$250 million,
nearly
growing
neany 30 percent growing from 3.305 io FY 2001 to 4,276 in FY 2006.
.
3,305 in

•

For ~uditS of~axpayers with assets greater
cycle
per
$10
a
Por audits of taxpayers W~h assefs meater than $1.0 million, the gyole time per audit has been
from 23
months in
This
2001
reduced by 22.6 percent fWI'!123 months in FY 2.001 to 17.8 n;'Ionths In FY 2006. ThIS allows
efficiently and increase the number corporate audits
IRS to use its resources more efficientlY an~ inc~se. the. n/..lmber of cofJ]Qrate au.dlts
con~uated,
.
conducted.

•

increasing
number of
organizations
The IRS has placed more emphasis on tax-exempt organiZations by increaslhg the numberuf
as
examinations by
in
in
2001
2006.
e~mfhations b~ nearly 33 percent from 5.342 in FY 20.01 to 7.079 In FY 2606.

•

criminal
percent conv clion
cases
The IRS achieved a 91.4 percent-conviction rate on G,riminal investigation caps from FY 2001
th ugh December 31" 2006.
through
31,

•

IRS established
position
Commissioner,
oversight of
The IRS ~taqlished the pasiJIon of Deputy Coml11lssioner. International to improve overslgh,t Of'
on
taxation
and focus ~n global taxatl~n issues.
.

k
i

I

results
initiatives.
direct impact
difficult quantify,
t These resulfs reflect the directiil1~ct of IRS enforcement Initiatb/es. Though diffloolt to quamt(y.
there
enforcement, which some research suggests could
a significant indirect
tl;)ere is also -a Significant Indirect effect of IRS enfdrcementJ Which same reSearch S\J9Q8$tS could be
at least three times the direct
seen when an
aHeastihree'times the-dil'ect effect of enforcement efforts. Th'is- indi~ effect is seen When ari
This indirect

33
D049
Exh.2