Tax Refunds:

IRS Is Exploring Verification Improvements, but Needs to Better Manage Risks

GAO-13-515: Published: Jun 4, 2013. Publicly Released: Jun 4, 2013.

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What GAO Found

The Internal Revenue Service (IRS) receives few information returns before issuing most tax refunds. In 2012, IRS issued 50 percent of tax year 2011 refunds to individuals by the end of February, but had only received 3 percent of information returns. Most information returns are not received by IRS until after mid-April, and IRS conducts the first match of tax and information returns in July, with subsequent matches in February and May of the following year. For tax year 2010, over a year passed on average before IRS notified taxpayers of matching discrepancies, and IRS recognizes that this long time lag burdens taxpayers.

IRS is generally following leading practices in its Real Time Tax exploratory effort by, for example, dedicating a team and defining program goals. IRS did not develop an overall timeline because management views Real Time Tax as a broad goal, and officials wanted to avoid causing concern that IRS had already decided on a path. Without a timeline for the overall exploratory effort, IRS cannot know if its efforts will be completed in even the broad time frames IRS is considering, and Congress may not be able to determine what legislative action might be required. IRS officials stated that managing risk is a high priority, but they have not developed an overall risk management framework, as they are still in the early stages of the exploratory effort. They said they plan to further develop the strategy if IRS pursues Real Time Tax. Without systematically identifying and evaluating the risks of Real Time Tax options, IRS officials may miss critical factors that could complicate the effort. A record of prior risk analyses could help prevent unnecessarily repeating the same analyses.

Why GAO Did This Study

For tax year 2011, IRS matched over 140 million individual income tax returns against the 1.6 billion information returns it received from third parties such as employers. Generally, this match does not occur until well after refunds are issued. In early 2011 the then IRS Commissioner outlined a vision for a "Real Time Tax" system--a strategy to improve verification by matching third party information to income tax returns before refunds are issued, and IRS began exploring options for Real Time Tax later that year. GAO was asked to review IRS's strategy for exploring Real Time Tax. This report (1) describes when IRS receives and matches individual tax and information returns and (2) assesses the extent to which IRS is following leading practices for managing an exploratory effort of this importance. GAO reviewed IRS documents and guidance, including the Internal Revenue Manual, information return forms, and drafts of Real Time Tax planning documents. GAO generated descriptive data on the timing and volume of 25 information returns using IRS's Compliance Data Warehouse database. GAO identified leading practices on planning new initiatives at IRS using past GAO reports, internal control standards, and IRS documents.

What GAO Recommends

GAO recommends IRS identify time frames for the exploratory effort's critical phases and activities and develop a risk management framework for Real Time Tax. IRS agreed with our recommendations.

For more information, contact James R.White at (202) 512-9110 or whitej@gao.gov

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

    Recommendations for Executive Action

    Recommendation: To help ensure managers are able to assess the progress of exploratory efforts and have the information needed to weigh the potential risks, costs, and benefits of options, the Acting Commissioner of Internal Revenue should identify time frames for the Real Time Tax exploratory effort's critical phases and essential activities.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Open

    Comments: In August 2013, IRS officials said that establishing a timeline that includes critical phases and essential activities of the Real Time Tax exploratory effort is necessary to ensure transparency and accountability. While noting that IRS is not currently converting to a Real Time Tax system, officials said it is now appropriate for the IRS to identify contingency-based timeframes for the exploratory effort. Officials noted they plan on implementing the recommendation by March 31, 2014.

    Recommendation: To help ensure managers are able to assess the progress of exploratory efforts and have the information needed to weigh the potential risks, costs, and benefits of options, the Acting Commissioner of Internal Revenue should develop a risk management framework for Real Time Tax that includes a record of risk analyses.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Open

    Comments: In August 2013, IRS officials said that their Real Time Tax activities to date have been extremely low risk because they are exploratory in nature and involved almost no interactions with taxpayers. However, they recognized that a risk management framework is appropriate to successfully manage the effort as it moves forward. Officials said they anticipate implementing the recommendation by March 31, 2014.

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