WASHINGTON - The Internal Revenue Service (IRS) has adequately planned,

implemented, and managed a pilot project to improve taxpayers' compliance by mailing

them informational materials when there is an income discrepancy in their tax return,

according to a report publicly released today by the Treasury Inspector General for Tax

Administration (TIGTA).

The pilot project calls for the Automated Underreporter Program (AUR) to mail notices

designed to serve as educational tools to taxpayers whose returns show income

discrepancies between the information they report to the IRS on tax returns and related

information that employers and financial institutions provide the IRS. Such "soft

notices" do not require the taxpayer to pay more tax, provide documentation, or even

respond. Briefly stated, the notices are designed to serve as educational tools, encourage

self-correction, and improve voluntary compliance.

TIGTA's report found that the IRS did an adequate job planning, implementing, and

managing the initiative through its initial phase. However, auditors found that the IRS

has not gathered sufficient information yet to properly evaluate the burden the soft

notices place on taxpayers and has yet to commit to taking specific actions or establishing

a specific date defining how or when it will ensure all costs are quantified and used to

determine the program's net benefit.

"I commend the IRS for using a creative alternative approach to address compliance

issues in an effort to reduce the Tax Gap," said J. Russell George, Treasury Inspector

General for Tax Administration. "Now it must follow through by developing appropriate

cost-benefit measures so that the pilot program's full impact can be evaluated."

TIGTA recommended that IRS officials 1) obtain a more complete picture of the time

and costs taxpayers are spending on soft notices, and 2) determine the net benefit of using

soft notices in the AUR program as an alternative approach for addressing compliance

issues.

IRS officials agreed with TIGTA's recommendations and said they plan corrective

actions, however, TIGTA is concerned that that their planned corrective actions do not

address the conditions that gave rise to the recommendations.