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Tax Administration: Opportunities Exist for IRS to Enhance Taxpayer Service and Enforcement for the 2010 Filing Season

GAO-09-1026 Published: Sep 23, 2009. Publicly Released: Oct 16, 2009.
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Highlights

Preparing for the tax filing season is a significant undertaking for Internal Revenue Service (IRS). The filing season is when most individuals file their tax returns, receive refunds, and contact IRS if they have questions. As returns are received, IRS begins a series of automated compliance checks to correct errors on tax returns and ensure that refunds are justified. For example, IRS rejects electronically filed returns with basic errors requiring taxpayers to correct and resubmit them. It uses what is called "math error authority" to automatically correct obvious noncompliance such as violations of limits on deductions or credits, which allows IRS to avoid costly audits. IRS must begin preparing for each filing season months in advance and preparations include the following. (1) Revising tax forms and publications to implement tax law changes. Recent major law changes that affected the 2009 filing season include the (a) Economic Stimulus Act of 2008, which contained the recovery rebate credit allowing taxpayers who did not receive the full economic stimulus payment last year to claim some or all of the unpaid credit on their 2008 returns; (b) Housing and Economic Recovery Act of 2008 (Housing Act), which included a first-time homebuyer credit of up to $7,500; and (c) American Recovery and Reinvestment Act of 2009 (Recovery Act), which increased the maximum credit to $8,000 and eliminated the payback provision of the first-time homebuyer credit for homes purchased before December 1, 2009. (2) Reprogramming and testing computer systems to incorporate tax law changes. (3) Hiring and training telephone assistors, many of whom are temporary hires employed for the filing season. (3) Coordinating with the paid preparer and tax software industries, which serve as important intermediaries between IRS and taxpayers and prepare close to 90 percent of all returns and all electronically filed returns. IRS also coordinates with a network of volunteer tax return preparers who help elderly individuals and others prepare their tax returns at over 12,000 volunteer sites. Because of the magnitude and importance of the filing season, you requested that we review IRS's 2009 filing season performance.

Recommendations

Matter for Congressional Consideration

Matter Status Comments
In order to provide a low-cost option that helps ensure compliance with recent legislation, Congress may wish to consider providing IRS with math error authority to (1) use the prior year's tax return information to automatically verify taxpayers' compliance with the 2008 first-time homebuyer credit payback provision, and (2) ensure that taxpayers do not improperly claim the credit in multiple years.
Closed – Implemented
Congress granted IRS with math error authority to use the prior year's tax return information to automatically verify taxpayers' compliance with the 2008 first-time home buyer credit payback provision, and (2) ensure that taxpayers do not improperly claim the credit in multiple years. This mandate applies to returns for taxable years ending on or after April 9, 2008.

Recommendations for Executive Action

Agency Affected Recommendation Status
Internal Revenue Service The Commissioner of Internal Revenue should develop and document a strategy to prevent and resolve errors causing electronically filed returns to be rejected.
Closed – Implemented
In January 2012, IRS developed a reject prevention strategy for resolving errors causing rejects. As a result, IRS will be better able to reduce errors causing rejects for electronically filed returns thus reducing taxpayer burden and potentially reducing paper filing.
Internal Revenue Service The Commissioner of Internal Revenue should involve stakeholders from the paid preparer and tax software industries in IRS's current reject working group.
Closed – Implemented
In January 2012, IRS developed a reject prevention strategy that engaged stakeholders. IRS's reject working group solicited stakeholder input on ways to improve the communication of error reject code issues. Stakeholder suggestions included requests for IRS to document processes available for them to report error reject code issues, and issue Quick Alerts as soon as major problems were identified. As a result, IRS will be better able to reduce errors causing rejects for electronically filed returns thus reducing taxpayer burden and potentially reducing paper filing.
Internal Revenue Service The Commissioner of Internal Revenue should develop an action plan for its reject working group that includes such elements as the scope of responsibility, a plan for testing changes, and a schedule for implementing changes.
Closed – Implemented
In January 2012, IRS developed an action plan, which the agency explicitly acknowledged was in response to our recommendation. The plan was designed in part to improve the communication of error reject code issues to IRS industry partners. The plan included the elements recommended such as the scope of responsibility, a plan for testing changes, and a schedule for implementing changes. With this action plan, IRS helped ensure the working group would be more effective and thus communication of error reject codes would be clearer to industry partners.
Internal Revenue Service The Commissioner of Internal Revenue should provide paid preparers and software providers with clearer descriptions of why returns are rejected.
Closed – Implemented
In December 2009, IRS revised its Error Reject Code descriptions in Publication 1346 to provide clearer descriptions as well as identify the form or schedule and exact field where the error occurred. IRS informed transmitters, software developers, and electronic return originators of those revisions and provided them with a draft of Publication 1346. IRS no longer uses that publication but instead posts draft of the Error Reject Codes to the IRS.gov website. Also, IRS's new e-filing system, which because fully operational in the 2013 filing season, provides clearer descriptions.
Internal Revenue Service The Commissioner of Internal Revenue should implement a low-cost automated method for providing volunteer site locations and hours of operation to taxpayers.
Closed – Implemented
In 2011, IRS included a list of selected open VITA sites by state. Because certain VITA sites are subject to frequently changing days of service and hours of operation, the list does not include all VITA sites.

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Topics

Cost effectiveness analysisCustomer serviceData integrityDatabasesElectronic formsErrorsFinancial managementIncome taxesInternal controlsNoncompliancePersonal income taxesSystems testingTax administrationTax administration systemsTax information confidentialityTax returnsTaxpayersTelephone servicesTraining utilizationVoluntary compliancePolicies and procedures