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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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.

IRS may be missing opportunities to improve taxpayer service and enhance compliance for the 2010 filing season for the following reasons. (1) IRS lacks a strategy for preventing and resolving errors that cause electronically filed returns to be rejected. Without a strategy that documents, for example, its objectives, the role of external stakeholders, and schedules for specific actions, IRS may be missing an opportunity to make electronic filing less cumbersome for taxpayers. (2) IRS does not fully leverage the expertise of external stakeholders in its efforts to reduce rejected electronic returns, according to industry representatives, the Treasury Inspector General for Tax Administration, and an IRS advisory group. IRS has established an internal working group to reduce rejects and simplify error codes, but that group does not include industry representatives. Without soliciting the expertise of these stakeholders, IRS may be missing an opportunity to better understand why rejects occur and what can be done to prevent them. (3) IRS acknowledges that its codes for errors on electronically filed tax returns are not very useful for helping taxpayers resolve the errors and has established the reject working group, but IRS does not have an action plan for implementing improvements. Without such an action plan, the working group risks being less effective in developing more useful reject codes. (4) The electronic acknowledgments that IRS sends to paid preparers, software providers, and taxpayers about rejected electronic returns are confusing and unclear. Unclear notices frustrate taxpayers and increase IRS's costs because such notices generate phone calls from taxpayers (see app. II for more information on the common error reject codes in 2009 and IRS's electronic acknowledgments). (5) According to IRS, its assistors answered 3 million calls from taxpayers needing authentication to file electronically, nearly 10 percent of all assistor calls, at a cost of $36 million through June 2009. Instead of relying on assistors to provide taxpayers with this information, IRS recently began developing an automated application for authenticating electronic filers, which could increase efficiency by diverting some calls currently answered by IRS telephone assistors. The new application is scheduled to launch on January 18, 2010. As of August 26, 2009, IRS officials reported that they were on schedule. If IRS were to experience any slippage in the launch date, it would be missing an opportunity to reduce call volume at the beginning of the filing season. (6) IRS lacks an automated means for helping taxpayers locate its 12,000 volunteer tax preparation sites or their hours of operation. In the 2009 filing season, taxpayers contacting IRS for this information had to call IRS and speak to an IRS assistor. Assistors have a list of volunteer site locations and hours that is updated twice a week. However, that information is not on IRS's Web site. Low-cost options, such as posting IRS's existing list of volunteer sites on its Web site, could eliminate some calls currently being answered by IRS assistors. (7) IRS lacks math error authority, which must be provided by statute for specific purposes, to verify compliance with two aspects of the first-time homebuyer tax credit. First, IRS would have to use labor-intensive audits to ensure compliance with the repayment provision of the 2008 credit--according to IRS, 1.2 million taxpayers claimed the 2008 credit for a total of $8.6 billion that must be repaid. Similarly, IRS has to use audits to ensure taxpayers do not claim the credit for both 2008 and 2009. Because math error checks are automated and could substitute for burdensome audits, IRS could check all returns at relatively low cost with such authority.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matter for Congressional Consideration

    Matter: 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.

    Status: Closed - Implemented

    Comments: 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

    Recommendation: The Commissioner of Internal Revenue should implement a low-cost automated method for providing volunteer site locations and hours of operation to taxpayers.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: 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.

    Recommendation: The Commissioner of Internal Revenue should provide paid preparers and software providers with clearer descriptions of why returns are rejected.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: 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.

    Recommendation: The Commissioner of Internal Revenue should involve stakeholders from the paid preparer and tax software industries in IRS's current reject working group.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: 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.

    Recommendation: The Commissioner of Internal Revenue should develop and document a strategy to prevent and resolve errors causing electronically filed returns to be rejected.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: 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.

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