‘New and Improved’ Taxpayer Compliance Measurement Program?
After more than three decades of constant use, the IRS is replacing the Taxpayer Compliance Measurement Program (TCMP) with more current— and user-friendly—guidance: the Market Segment Specialization Program (MSSP).
The new program’s major advantages stem from its development during the transition to a kinder, gentler IRS. The MSSP also benefits from having emerged during the Internet Age: The manuals and audit guides upon which the system relies can be easily updated and obtained, and most of the information is accessible to the public. The objective of the IRS’s newfound openness is to increase voluntary compliance.
The MSSP audit guides, issued by the Treasury Department, derive from a list of “areas of focus,” industries and types of businesses that the IRS has determined need highly specialized information and guidance in order to prepare tax returns fully and adequately.
After using the Taxpayer Compliance Measurement Program (TCMP) from 1964 to 1998 to assess taxpayer compliance and focus auditing efforts, the IRS has developed a new audit selection program: the Market Segment Specialization Program (MSSP).
During the years they were used, TCMP audits supposedly resulted in very reliable computations of each audited taxpayer’s income, deductions, and tax liability. Upon being randomly selected for such an audit, a taxpayer had to document and support every item on the return, in some cases providing a marriage license to support the filing of a joint return. The IRS’s next step was to use the information collected during the audit phase to develop a discriminant function analysis (DIF), which it could then use to score every filed tax return. A high score indicated a high probability of noncompliance, allowing an IRS employee to examine the return and determine whether to audit it.
But in the mid-1990s, political and budget battles blocked the TCMP process, and the program was last updated with current audit information in 1988. Many had expressed doubts about TCMP long before it became outdated, and by the mid-1990s the IRS, perhaps seeing the writing on the wall, was already developing the
Market Segment Specialization Program (MSSP) as an alternative or supplement to the TCMP. In 1994, the IRS commissioner described the redirection of responsibility away from the national office to the IRS districts. The new program being developed had already identified 28 categories of taxpayers, including 24 business and farm categories and four nonbusiness categories.
The MSSP has been a major undertaking. Its main objectives are to increase the rate of voluntary taxpayer compliance and make the audit process more efficient and effective. The refocused effort by examiners and by other employees will be a challenge. It remains to be seen whether the MSSP will be attacked as the TCMP was. But if the new program succeeds, it has the potential for assisting taxpayers and the IRS in the audit process and enhancing the level of voluntary compliance.
Inner Workings of the MSSP
Chapter 1 of the MSSP Handbook (in Part 4 of the Internal Revenue Manual) describes the program as a change in approach to the examination of income tax returns in the general program. The general goal is to organize district compliance activity around market segments, where practical. A market segment can be an industry, such as gasoline retailing; a profession, such as accounting; or an issue, such as the alternative minimum tax. Individual market segments are then assigned to examiners with auditing experience, training, and research responsibilities in that area.
The IRS national office has developed a list of “areas of focus” ((Exhibit 1) from which it selects specific topics for audit guides. In some cases, the national office may conduct an analysis using historical voluntary compliance levels, closed case data, filing populations, current compliance initiatives, and other available information. In other cases, a regional or district office may provide a suggested area for development based on an analysis at the regional or district level.
The overriding goal of the program is to enhance voluntary compliance. The audit guides listed in Exhibit 2 are available to the public from the superintendent of documents or online at www.irs.gov. Each audit guide discusses the market segment and the relevant tax law and lists specific audit techniques. Taxpayers and practitioners can use these audit guides to understand the applicable tax law and prepare the documentation that an examiner might eventually require.
After an area has been identified and selected, the districts are responsible for implementing the MSSP and using MSSP techniques to identify returns and conduct examinations. The handbook states that the districts are to “use interim approaches to supplement the current DIF ordering system … until a statistically valid method is developed.” Eventually, the districts will use a Market Segment Plan rather than the current Exam Plan.
In addition, a specific district is responsible for developing the Audit Technique Guide (ATG), using the following list as a guide. The district office is also responsible for the following:
The national and regional offices and the Office of Chief Counsel oversee the process, which to date has resulted in 55 audit guides (see Exhibit 2 on the next page).
Recent Audit Guides
Audit guides have been released on a number of topics, some of broad relevance, others more specific. One recently developed audit guide with widespread application is “Alternative Minimum Tax for Individuals,” issued in December 1999. More specific guides include “Garden Supplies,” issued in February 2000, and “Gas Retailers,” which, although the IRS website indicates it was issued in December 1999, has been available since the mid-1990s. The gas retailers guide has now been removed from the website.
Alternative minimum tax audit guide. The alternative minimum tax (AMT) guide begins with a discussion of the history of the AMT and the current law. Chapter 2 includes a line-by-line discussion of Form 6251, “Alternative Minimum Tax: Individuals,” including the adjustment or computation and a list of specific audit techniques for each line. Chapter 3 discusses other areas of law that may affect the computation of the AMT, such as the passive loss limitations and the at-risk limitations. Chapter 4 discusses the minimum tax credit, and Chapter 5 discusses prior law.
Garden supplies guide. This highly targeted guide discusses garden centers and equipment dealers, greenhouses, nurseries, and mulch and compost companies. The background material focuses on accounting methods, inventory, income recognition, and capitalization and depreciation. The primary audit technique discussed consists of a list of interview questions for each type of gardening business.
The guide also discusses employment and excise taxes, changes in accounting methods, and nonfilers. A section on collections concerns points out that the business should have an installment payout agreement that takes into account the seasonality of the market segment.
Gas retailers guide. Unlike the two ATGs discussed above, this guide’s position on underreported income seems to be “guilty until proven innocent.” Almost every chapter focuses on the likelihood that a gas retailer underreports income. Chapter 2 discusses the gas retailing market segment in general and ways to determine whether income was properly reported. Chapter 3 discusses pre-audit techniques, underreported income, and the legal steps (such as a summons) necessary to ensure that the proper amount of gross receipts is reported. Chapter 4 discusses audit techniques and describes in detail issues such as site visitations, fraud, bankruptcy, and the basic issues of special income and deductions available to gas retailers. Chapter 5 discusses nationwide retailer issues.