California Restaurant Industry Compliance Project

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California Restaurant Industry Compliance Project

• An Alternative Approach To
  
• Traditional Tax Compliance

2
INTRODUCTIONS

• John Pointer, Territory Mgr, TEC, SBSE
• Don Hallenbeck, Territory Mgr, TEC SBSE

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AGENDA

• Project Objectives
• Internal Research on Unreported Income
• Overview of Educational Efforts between September
  and December 2001
• FY 2001 Filing Season
• Quantitative and Qualitative Measures
• Future Plans

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PROJECT OBJECTIVES

• Perfect electronic data matching procedures
  between state and IRS data bases
• Achieve a matching rate of 70 - 80
• Develop dollar (tax) criteria to be used to focus
  compliance efforts
• Design measurement criteria for assessing
  taxpayer behavior change
• Secure taxpayer, practitioner and other
  stakeholder feedback using survey focus groups

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PROBLEM SOLVING APPROACH

• Focus has been on problem correction at back-end
  of process

Now, prevent problems up-front through increased
education and assistance
Cant reduce complexity of tax law, but well be
better able to help customers deal with that
complexity
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WHY THE RESTAURANT INDUSTRY?

• Logical progression from several other projects
  
• Home Ownership and the Self-Employed Taxpayer
• Income Verification
• Compliance level in return accuracy was found to
  lower than the National average.
• Matching sales data between the State and IRS
  should be relatively easy.

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Southern California Research Study

• Methodology
• Market segment was defined as sole proprietors of
  Eating Places, Drinking Places, Liquor Stores
• Matched Tax Years 1995, 1996, 1997
• Dollar matches used tolerance of or - 1

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FINDINGS Initial Matching Results

• INCOME REPORTED
• Approximately 33 of matched entities reported
  equal gross receipts and sales.
• Approximately 50 of matched entities reported
  higher gross receipts to IRS.
• Between 10 and 20 of the matched entities
  report higher gross sales to BOE.

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FINDINGSGross Sales Exceed Gross Receipts
Group 3 BOE Sales exceed IRS Receipts
Note that while 1997 is a partial year that the
number of taxpayers were less than half the prior
year figures, gross sales more than doubled as
did the difference between gross sales (GS) and
gross receipts (GR)
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HOME OWNERSHIP THE SELF-EMPLOYED

• Home Owners in Group 3 where BOE sales were
  greater than IRS sales reported lower net profits
  and lower net profit percentages than those in
  Group 1, where IRS receipts equaled BOE sales.
• In TY1996, median net profit for Group 1
  homeowners was 13,424 with a Net Profit
  Percentage of 5.8.
• Group 3 by contrast reported medians of 2,336
  with a 1.8 NPP.

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FINDINGS Results for All Three Years

• Average excess sales - 137,047
• Median excess sales - 54,148
• Total excess sales - 846,678,469
• NPTI averages approximately 3,000 per
  case
• Total NPTI between 1.6 - 3 million
• NPTI Net Predicted Tax Increase

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NONFILERS

• Total Entities closed 37
• Entities closed with changes 31
  (84)
• Entities closed without adjustments 6
• No Change 3
• Unable to Locate 3
• Total income adjustments 16,182,977
• Total EITC adjustments 5,753
• Total SE tax 415,972
• Total tax due 847,091

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NONTRADITIONAL COMPLIANCE APPROACH

• There are several phases envisioned by SB/SE in
  utilizing the above sales tax matching process to
  improve compliance.
• These phases will follow the traditional
  pre-filing and post-filing responsibilities
  assigned to Taxpayer Education and Communications
  (TEC) and Compliance.

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PRE-FILING COMPLIANCE

• OUTREACH EFFORTS
• Work in partnership with
• California Restaurant Association
• Tax Practitioner Associations
• State Board of Equalization (Sales Tax Agency)
• State Congressional Representatives
• to improve return accuracy through various
  educational
• efforts.

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PRE-FILING COMPLIANCE

• EDUCATIONAL EFFORTS
• California Restaurant Association
• Jointly develop a variety of educational messages
  to communicate with their memberships using their
  newsletters, magazines ,etc.
• Share websites to establish links to both the
  IRS.gov/ SBSE/Restaurant as well as the
  CalRest.Org site where an overview of the project
  will be presented in the News and Events Section.
  

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PRE-FILING COMPLIANCE

• E-Services (SBSE TEC)
• Jointly develop a variety of educational messages
  to communicate with the CRA membership on the
  benefits of EFTPS.
• CRA to publish a two-page message in their
  newsletter and magazine on EFTPS and California
  Restaurant Industry Compliance Project.

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PRE-FILING COMPLIANCE

• California Tax Professional Associations
• Jointly develop a variety of educational messages
  to
• communicate with their memberships using their
  
• newsletters, magazines ,etc.
• California Society of Enrolled Agents (CSEA)
• California Association of Tax Practitioners
  (CATP)
• California Society of Tax Practitioners (CSTP)
• Inland Society of Tax Consultants (ISTC)
• Direct taxpayers to contact their preparer to
  deter- mine whether an error was made in
  reporting income

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PRE-FILING COMPLIANCE

• State Congressional Representatives
• Send correspondence to California representatives
  about the project
• Develop an educational message to that could be
  included in their newsletter that talks to the
  project objectives and approach to improving
  compliance.

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Information Matching ResultsTY 2000

• 86 Match of Federal to State Taxpayers
• 5,385 BOE IRS
• 6,307 BOE lt IRS
• 7,678 BOE gt IRS
• 4,970 Potential Non-filers

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PRE-FILING COMPLIANCE

• Educational Letter
• Directed to the population of small business
  restaurant owners who underreported income.
• Mail a copy of the letter to their preparer as
  well.
• The message focuses on working with their
  practitioner (Over 80 of small business
  taxpayers use practitioners) to review the
  return(s) in question, and if an error is found
  self correct the problem.
• Provide an 800 for telephonic information
• Use IRS.gov website to secure information as well

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PRE-FILING COMPLIANCE

• FY 2001 Filing Season
• Field visits to tax professionals that support
  the California Restaurant Industry and prepared a
  discrepant return to determine whether they
  received a copy of the educational letter as well
  as attempt to answer any questions they may have.
• Field visits to sample of restaurant owners in
  California to determine whether they received the
  copy of the educational letter mailed to them and
  attempt to assist them with any questions they
  may have.

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PRE-FILING COMPLIANCE

• MEASURES
• Quantitative Results
• Baseline TY 2000 returns filed by small business
  owners in the California Restaurant Industry
• Use TY 2001 returns to measure change in taxpayer
  reporting accuracy
• Qualitative Results
• Use focus groups to secure customer feedback on
  design of the project as well as nontraditional
  approach to compliance
• Choose participants from CRA membership,
  practitioner community and small business
  restaurant owners. Include Hispanic and Asian
  Pacific restaurant owners.

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POST-FILING COMPLIANCE

• SBSE COMPLIANCE
• Focus on those small business owners that do not
  self-correct by reporting gross receipts that
  correspond to the gross sales reported to the
  State.
• Develop an audit plan that would result in the
  potential for 500-600 taxpayers who failed to
  self-correct to be audited
• Include in this audit plan those taxpayers who
  were identified as nonfilers.
• Audits to begin after results of TY 2001 Filing
  Season can be compared with TY 2000 baseline data

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CONCLUSIONS

• Matching State of California Gross Sales data to
  Gross Receipts reported to the IRS is feasible.
• A combined compliance approach using both TEC and
  Compliance resources will reach the entire
  population within a selected market segment.
• This approach will be an effective means of
  improving compliance in selected market segments.

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FUTURE PLANS

• The lessons learned to date from this pilot
• project in California include
• Early involvement of the State Sales Tax Agency
• Earliest possible acquisition of state and
  federal data. This is critical to timely
  delivery of matching results that will lead to
  the mailing of educational letters.
• Communicating with external and internal
  stakeholders about the project.

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FUTURE PLANS

• Identification of states with state sales tax
• There are over 40 states that have a sales tax.
  These states need to be contacted to determine
  the availability of electronic data and the
  compatibility with IRS data (IRTF).
• Key SBSE Research functions across the country
  need to identified to assist in performing the
  match of the state and federal data.

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FUTURE PLANS

• Stakeholder Relationship Management
• External Stakeholders
• External stakeholders need to be contacted early
  in the
• National project. They include
• State and National Restaurant Associations
• Tax Professional Organizations
• They need to be briefed on the project and the
  approach
• being taken.

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FUTURE PLANS

• Stakeholder Relationship Management
• Internal Stakeholders
• Key internal stakeholders include
• Compliance
• Customer Service
• CAS
• They should be briefed as early as possible on
  the project
• and the national approach being considered.
  Telephone
• traffic will be a critical point of discussion.
  

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FUTURE PLANS

• Data Acquisition Analysis
• Data
• Data acquisition is a critical element of the
  national rollout of this
• project.
• State Sales Tax Data
• The availability of state data is not known
  at this time.
• IRTF
• To date we have not found a reliable source
  of delivery of the IRTF.

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FUTURE PLANS

• Data Acquisition Analysis
• Matching
• Matching of the two data bases is a very tedious
  task that
• requires the continuous involvement of Research
• personnel.
• Analysis
• The subsequent analysis of the matched data
  needs to
• presented in the form of tables and a listing of
  data that
• can be used to generate mailing labels provided.

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FUTURE PLANS

• Educational Letter
• The Ogden Service Center was used to mail letters
  to the
• impacted California Restaurant owners. A
  national mailing
• will require additional coordination to determine
  the
• resources that will be utilized to generate these
  educational
• letters.

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FUTURE PLANS

• TEC Staff Participation
• TEC Area and Territory Offices need to be
  identified that
• will participate in the National rollout. The TEC
  personnel
• need to be trained on their roles when they are
  called upon
• to participate in the National rollout.
• Partnering with stakeholders
• Field visitations with restaurant owners and
  practitioners

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Recent IRS Oversight Board Testimony

• Roger N. Harris, Chair of the IRS Advisory
  Council (IRSAC) January 27, 2003
• "We believe that this type of program can help
  the IRS find potential unreported income with
  limited and better use of its resources . . . the
  IRSAC is pleased that the IRS is pursuing such
  innovative approaches to compliance challenges
  and we would hope that more of these types of
  programs could be developed."

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California Restaurant Industry Compliance Project

• This Concludes Our Presentation