2011 Tax Filing:
IRS Dealt with Challenges to Date but Needs Additional Authority to Verify Compliance
GAO-11-481: Published: Mar 29, 2011. Publicly Released: Mar 31, 2011.
Every tax filing season is a large-scale undertaking during which the Internal Revenue Service (IRS) interacts with taxpayers by processing returns, issuing refunds, answering telephone calls, and providing other services, both face-to-face and on its Web site. As part of processing returns and before refunds are issued, IRS uses its statutory authority to automatically correct errors. This allows IRS to avoid costly and burdensome audits and taxpayers to be made aware of additional taxes owed before being required to pay interest and penalties. For the 2011 filing season, IRS is administering a number of complex tax law changes, including the Residential Energy Property Tax Credit and provisions enacted in December 2010 as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (commonly known as the tax extenders). Other changes for the 2011 filing season include paid preparer regulations and expanded efforts to provide refunds on debit cards. In 2011, for the first time, paid preparers must register with IRS. In the future, certain paid preparers will be subject to competency tests and continuing education requirements to be allowed to prepare tax returns. This year IRS is offering refunds on debit cards to taxpayers at almost all of its roughly 12,000 Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) sites. Also, the Department of the Treasury (Treasury) is pilot testing whether offering refunds on debit cards on a larger scale would be feasible. As part of our ongoing assessment of IRS's 2011 filing season being conducted at your request, on March 23 and 24, 2011, we briefed the offices of the Senate Committee on Finance and the Subcommittee on Oversight, House Committee on Ways and Means, respectively, on IRS's performance to date. This report includes updated materials presented at the briefing. Based on discussions with your offices, our objective was to provide an interim assessment of IRS's performance during the 2011 filing season, including its efforts to streamline returns processing, conduct pre-refund compliance checks, improve taxpayer service, and issue refunds on debit cards.
We found: (1) As of March 18, 2011, IRS had processed about 73 million returns and issued about 65 million refunds totaling close to $193 billion. (2) The percentage of e-filed returns continues to grow, which remains important because it significantly reduces IRS's costs and speeds refunds. For fiscal year 2009, IRS reported that it costs 19 cents to process an e-filed return compared to $3.29 for a paper return. (3) Late tax law changes in 2010 resulted in IRS not being able to accept certain returns until mid-February 2011 because of the time it took to complete programming changes. According to officials from IRS's Business Modernization Office, when Customer Account Data Engine (CADE) 2 and IRS's Modernized E-file (MeF) are fully implemented, IRS will be able to reprogram its computers more efficiently. (4) IRS's inability to accept certain returns until mid-February also affected paid preparers and tax preparation software providers. Representatives from those groups told us that some taxpayers believed that the delay applied to all tax returns and delayed filing as a result, effectively condensing the filing season. According to IRS data, IRS received about 21 percent fewer returns through mid-February 2011 compared to mid-February 2010. Those same representatives also expressed some concerns about the new paid preparer registration process. (5) IRS has rejected about 13 percent of e-filed returns for reasons such as incorrect personal identification numbers. According to IRS officials, when returns are rejected through MeF, taxpayers receive better information on why returns are rejected and MeF allows taxpayers to submit additional documentation electronically, both of which reduce IRS's costs. (6) IRS lacks math error authority (MEA) to review prior year tax returns to verify compliance with lifetime limits on amounts that can be claimed. For example, IRS does not have MEA to verify that the Residential Energy Credits claimed for 2009 and 2010 do not exceed the lifetime credit limit of $1,500. According to IRS officials, evidence exists that some taxpayers may be claiming Residential Energy Credits beyond the limit. Without MEA, IRS must ensure compliance through audits, which are time consuming for taxpayers and too costly to conduct in large numbers. (7) Total telephone call volume increased by nearly 13 percent compared to volume during the same time period last year. Wait times to speak to an assistor averaged about 10 minutes, slightly longer than last year. (8) The number of visits to IRS's Web site has increased by about 9 percent compared to visits during the same time period last year. (9) It is too early to tell the extent to which the various debit card offers are being accepted by taxpayers. Both IRS and Treasury officials said they will evaluate their programs after the filing season.
Matter for Congressional Consideration
Comments: As of March 2020, Congress has expanded IRS's math error authority in certain circumstances, but not as broadly as GAO suggested in February 2010. Section 208 of division Q of the Consolidated Appropriations Act, 2016 (Public Law 114-113 enacted in December 2015) gave IRS the authority to use math error authority if (1) a taxpayer claimed the Earned Income Tax Credit, Child Tax Credit, or the American Opportunity Tax Credit (AOTC) during the period in which a taxpayer is not permitted to claim such credit as a consequence of either having made a prior fraudulent or reckless claim; or (2) a taxpayer omitted information required to be reported because the taxpayer made prior improper claims of the Child Tax Credit or the AOTC. While expanding math error authority is consistent with what GAO suggested in February 2010, GAO maintains that a broader authorization of math error authority with appropriate controls would enable IRS to correct obvious noncompliance, would be less intrusive and burdensome to taxpayers than audits, and would potentially help taxpayers who underclaim tax benefits to which they are entitled. If Congress decides to extend broader math error authority to IRS, controls may be needed to ensure that this authority is used properly such as requiring IRS to report on its use of math error authority. The Administration also requested that Congress expand IRS's math error authority as part of the Service's Congressional Budget Justification and Annual Performance Report and Plan for fiscal year 2021. Specifically, the Administration requested authority to correct a taxpayer's return in the following circumstances: 1) the information provided by the taxpayer does not match the information contained in government databases or Form W-2, or from other third party databases as the Secretary determines by regulation; 2) the taxpayer has exceeded the lifetime limit for claiming a deduction or credit; or 3) the taxpayer failed to include with his or her return certain documentation that is required to be included on or attached to the return. As of March 2020, the Congress had not provided IRS with such authority.
Matter: To ensure that IRS can adequately enforce certain tax provisions, Congress may wish to consider providing IRS with MEA to use tax return information from previous years to ensure that taxpayers do not improperly claim credits or deductions in excess of lifetime limits where applicable.