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Cost Saving > General government

Broadening IRS's authority to correct simple tax return errors could facilitate correct tax payments and help IRS avoid costly, burdensome audits

Why Area Is Important

In 2009, IRS sent out more than 12 million math error notices. Math error notices result from cases of mathematical or other simple tax return errors where Congress has granted the Internal Revenue Service (IRS) math error authority (MEA), or the ability to assess tax or take other actions to correct such errors in limited circumstances. For example, when a taxpayer claims a credit amount exceeding a statutory limit, IRS uses MEA to fix the error during return processing.

For almost a century, Congress has been expanding IRS's MEA on a case-by-case basis. However, because IRS can use MEA only in specifically authorized situations, it has been unable to timely use MEA in several notable instances where substantial numbers of taxpayers made similar easily correctable errors.

What GAO Found

IRS's use of recent additions to MEA have efficiently corrected hundreds of thousands of taxpayer errors and ensured proper payments of tax. For example, in September 2009, GAO suggested that Congress consider providing IRS with additional MEA to help IRS enforce compliance with the First-Time Homebuyer Credit (FTHBC). In November 2009, after learning about compliance problems with this tax credit that froze refunds and prompted civil and criminal investigations, Congress extended MEA to cover certain eligibility requirements for the FTHBC. As of July 2010, more than 3 million taxpayers have made more than $23 billion in FTHBC claims. Broader MEA has given IRS the ability to automatically verify those claims, correct errors where necessary, and deny approximately 350,000 erroneous claims in 2010 alone, thus saving tax revenue and enabling IRS to use resources elsewhere.

Similarly, in 2009, after finding more than $600 million of inappropriately claimed Hope credits for higher education (currently called the American Opportunity tax credit), both GAO and the Treasury Inspector General for Tax Administration suggested that Congress give IRS broader MEA. Specifically, GAO suggested that broader MEA be provided so IRS could use prior years' tax return information to automatically verify taxpayers' compliance with the limit on the number of years the Hope credit can be claimed. In the absence of this authority, IRS relies on audits to ensure compliance. However, audits may not be effective because they are labor-intensive, costly, and often do not yield high revenues. Consequently, IRS does relatively few audits on the millions of credits claimed.

When using MEA, IRS need not follow its standard deficiency procedures, which allow taxpayers an appeal and petition to the Tax Court. Instead, IRS must only notify the taxpayer that it has identified the error and has made a change. While MEA helps IRS avoid costly audits, which are burdensome to taxpayers, the National Taxpayer Advocate and some in Congress are concerned that not following standard deficiency procedures might undermine taxpayer rights because IRS might use broad authority in situations where it does not know with a high degree of certainty that the taxpayer made an error. However, as discussed below, other steps could be taken to address this concern.

Actions Needed

To ensure the proper amount of taxes are paid and help IRS avoid costly, burdensome audits, Congress many want to consider granting IRS broader math error authority, with appropriate safeguards against misuse of that authority, to correct errors during tax return processing. With broader MEA granted by Congress, IRS could take the steps necessary to ensure proper payment of taxes in many situations. Although the amount of increased revenues would depend on the nature of future MEA use, revenue increases could be substantial based on past uses. Such authority could also reduce taxpayers' burdens by giving IRS an alternative to more intrusive enforcement actions. Broader authority could take several forms. For instance, it could be granted for newly created or revised refundable credits. Refundable credits, which provide cash payments to taxpayers irrespective of the amount of their tax liabilities, are growing in popularity, and automatic authority could enable IRS to monitor low-dollar amounts on individual returns that would be too labor intensive and costly to audit. Or, authority could be granted for any situation where IRS could check for obvious noncompliance. Had such authority existed, IRS could have addressed FTHBC compliance issues more quickly.

Controls may be needed to ensure MEA is properly used. For example, as GAO has previously reported, Congress could require IRS to submit a report on each proposed new use of MEA. The report could include how such use would meet Congress's standards or criteria for MEA use. The report could also describe IRS's or the National Taxpayer Advocate's assessment of any potential effect on taxpayer rights. Or, Congress could require a more informal procedure whereby IRS simply notifies a committee, such as the Joint Committee on Taxation, of its proposed MEA use and submits a report after such use is under way.

Authorizing the use of MEA on a broader basis could have several benefits for IRS and taxpayers. It could

  • enable IRS to correct all or nearly all returns with types of noncompliance for which IRS identifies with virtual certainty the noncompliance and the needed correction, not just those it can address through other enforcement means;
  • be low cost and less intrusive and burdensome to taxpayers than audits;
  • ensure that taxpayers who are noncompliant on a particular issue are more often treated alike, that is, that a greater portion of them are brought into compliance, not just those that IRS could otherwise address;
  • provide a taxpayer service as it would generally allow noncompliant taxpayers to receive their refunds faster than if IRS had to address the error through some other compliance mechanism, have their returns corrected without penalty and before interest is accrued, and avoid time-consuming interaction with IRS under its other programs for resolving noncompliance;
  • help ensure taxpayers receive the tax benefits for which they are eligible by identifying taxpayers underclaiming a tax benefit;
  • free up IRS resources to pursue other forms of noncompliance; and
  • allow IRS to quickly address provisions arising from new and quickly moving initiatives, such as the American Recovery and Reinvestment Act of 2009, without waiting for new MEA to go through the legislative process.

Framework for Analysis

The information contained in this analysis is based on the related products listed under the "Related GAO Products" tab and additional work following up on the recommendations from those products.

Area Contact

For additional information about this area, contact Michael Brostek or James White at (202) 512-9110 or brostekm@gao.gov or whitej@gao.gov.

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