TAX

ADMINISTRATION

IRS’ Low-Dollar

Notices Sent to

Individual Taxpayers

United States General Accounting Office

GAO Report to Congressional Requesters

April 2000

GAO/GGD-00-84

United States General Accounting Office General Government Division

Washington, D.C. 20548

Page 1 GAO/GGD-00-84 IRS’ Low-Dollar Notices

B-284264

April 14, 2000

The Honorable Bill Archer

Chairman, Committee on Ways and Means

House of Representatives

The Honorable Amo Houghton

Chairman, Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

IRS begins the process of checking whether taxpayers have reported the

correct tax liability on their tax returns as the returns are being processed

at IRS Service Centers. An example of such checking is when returns are

reviewed for computational errors. IRS’ checking process also includes

computer matching of information reported by taxpayers on their returns

with information reported to IRS by third parties (e.g., a bank report of

interest earnings). Based on the results of such checks, IRS sends

computer-generated notices to communicate with taxpayers about

discrepancies it has found and adjustments it has made to their tax

returns.1

 In 1999, IRS sent 31 million such notices to individual taxpayers.

The notices IRS sends have long been a source of taxpayer complaint and

misunderstanding, especially those that involve relatively small amounts of

money. Recognizing that taxpayers spend time and resources to deal with

these notices, even when small amounts of money are involved, you asked

us to develop information about computer-generated notices involving (1)

amounts due of less than $5 or (2) refunds of less than $1. As agreed with

your office, we met with IRS officials and used IRS data on notices sent

during tax year 1999 to determine

• the number and type of computer-generated low-dollar notices IRS sends

to individual taxpayers;

• IRS’ cost to prepare and send these notices, respond to taxpayer inquiries

related to them, and process any resulting payments; and

• the reasons IRS sends these notices and any plans it might have regarding

them.

 

1

IRS does not consider such checking activities to be audits, and the notices taxpayers receive as a

result of them are not considered audit contacts. Further, these are not the only notices that IRS may

send to taxpayers. Other notices can result from subsequent IRS processes, such as audits and

collections.
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Page 2 GAO/GGD-00-84 IRS’ Low-Dollar Notices

Of the over 31 million computer-generated notices IRS sent to individual

taxpayers in 1999, about 1.5 million were low-dollar notices. Eighty-two

percent of these (about 1.3 million) reflected adjustments IRS had made to

correct discrepancies such as those between information reported to IRS

by a third party and information reported on the taxpayer’s original return.

Most notices had zero balances, requiring no additional action or response

by the taxpayer. However, in considering taxpayer burden issues related to

low-dollar notices, it is important to note that in the vast majority of cases,

while the final dollar amounts reported on the notices were small or zero,

they represented “net” amounts. That is, they were the net result of

changes to the taxpayer’s account involving larger amounts.

According to IRS estimates, the agency cost to prepare and send a lowdollar notice is about $0.42. The cost would rise by about an additional

$1.30 if IRS needed to process a payment received from a taxpayer

because of the original notice, and by another $14.32 if it needed to

respond to a taxpayer inquiry related to the notice.

IRS sends low-dollar notices to taxpayers pursuant to statutory

requirements, such as to correct a math error (Internal Revenue Code

section 6213(b)) or to issue a notice of deficiency (Internal Revenue Code

section 6212), or in accordance with the IRS Internal Revenue Manual. The

notices, which inform taxpayers of any change to their account, are sent

regardless of the dollar amounts involved. IRS is aware of the potential

burden placed on taxpayers in dealing with low-dollar notices and has

formed an internal task team to examine the issue and identify potential

improvements.

In 1998, over 123 million individual taxpayers filed income tax returns. For

most, this ended their interaction with IRS for the year, aside from any

refund they might receive. IRS audits about 1 percent of individual

taxpayers and has nonaudit contacts with millions of other taxpayers

about mistakes (e.g., computational or “math” errors) they might have

made. Computer-generated notices are an important type of nonaudit

contact and a major means through which IRS communicates with

taxpayers about such mistakes on their returns.

Although they are sent to advise taxpayers of changes IRS has made to

their accounts, notices differ in purpose and content. One type of notice

explains changes IRS makes to a taxpayer’s account because it has found

discrepancies between a tax return and information it has received from

one or more third parties. These discrepancies are detected when IRS

performs computer matches of the information it receives from banks and

Results in Brief

Background
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Page 3 GAO/GGD-00-84 IRS’ Low-Dollar Notices

other third parties with that reported on the taxpayers’ original returns.

When discrepancies are found, IRS adjusts the taxpayers’ account and

sends a notice explaining what it has done and the effect on their tax

liability. IRS uses a second type of notice to inform taxpayers of

computational errors in their returns, the corrections it has made, and any

resulting change in their tax liability. A third type of notice concerns

instances in which taxpayers have requested an IRS computation of their

return, and it is sent to inform the taxpayers of IRS’ results. Finally, IRS

uses notices to inform taxpayers when the total estimated tax payments

that they have reported do not agree with IRS’ information.

To determine the number and types of computer-generated low-dollar

notices IRS sent in 1999, we obtained data from IRS on the over 31 million

notices the agency sent to taxpayers notifying them of changes to their

accounts, including those that involved low-dollar amounts. We reviewed

the data in terms of the dollar amounts of the notices, the reasons for

sending them, and the dollar amounts of the underlying account

adjustments causing the notices to be sent.

We obtained data from IRS personnel working in the Taxpayer

Correspondence and Submission Processing areas regarding the cost

involved in preparing and sending notices to taxpayers and other data

reflecting the cost to respond to subsequent taxpayer inquiries or to

process payments made by taxpayers.

To identify the reasons that IRS sends low-dollar notices to taxpayers, we

met with Customer Service officials at IRS’ National Office and Notice

Review officials at the Kansas City Service Center and reviewed relevant

information they provided to us.

We also obtained examples of low-dollar notices sent to taxpayers and

discussed with IRS program staff the causes, reasons, and other issues

related to these and other notices.

We conducted our work from November 1999 to February 2000 in

accordance with generally accepted government auditing standards. We

performed work at the IRS National Office in Washington, D.C., and at the

IRS Kansas City Service Center. We did not assess the internal controls,

completeness, or accuracy of IRS notice records.

On March 13, 2000, we requested comments on a draft of this report from

the Commissioner of Internal Revenue. The comments are discussed at the

end of this letter and reprinted in the appendix.

Scope and

Methodology
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Page 4 GAO/GGD-00-84 IRS’ Low-Dollar Notices

Of the over 31 million computer-generated notices IRS sent to individual

taxpayers in 1999, about 1.5 million were low-dollar notices. As table 1

shows, about 1.3 million, or 82 percent, were to inform taxpayers about

adjustments IRS made to their accounts because of discrepancies it

detected. There were many fewer notices about taxpayer computational

errors, IRS computations made at the request of taxpayers, and mistakes in

estimated tax credits—7, 5, and 4 percent, respectively.

Number of notices

Type of notice

Zero

balance

Refund

due

Payment

due Total

IRS adjustments 931,845 69,269 260,781 1,261,895

Taxpayer error 93,324 4,492 11,390 109,206

IRS computation of tax or refund due 78,721 567 145 79,433

Estimated tax credit discrepancy 43,243 1,022 21,197 65,462

Others 14,105 680 1,493 16,278

Total 1,161,238 76,030 295,006 1,532,274

Source: GAO compilation of IRS data.

Table 1 also shows that most notices did not involve refunds or payments

due. About 1.2 million, or 76 percent, had zero balances, meaning no

further action was required on the part of the taxpayer.

However, in considering the potential effects of low-dollar notices on

taxpayers, it is important to note that while the final dollar amounts shown

on the notices were small or zero, many notices reflected changes

involving larger dollar amounts. To illustrate, a taxpayer may be expecting

to receive a refund of $315 based on the tax return he or she filed (see fig.

1). However, due to an adjustment that IRS made to the tax return, the

taxpayer may now owe $3.92, and IRS would send a notice reflecting the

adjustment.

Number and Type of

Low-Dollar Notices

Sent

Table 1: Low-Dollar Notices Sent by IRS

in Calendar Year 1999
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Note: This is an illustration of page 1 of a multipage notice. The additional pages include information

explaining penalty and interest charges.

Figure 1: Illustration of a Low-Dollar Notice
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Page 6 GAO/GGD-00-84 IRS’ Low-Dollar Notices

Table 2 shows that, for the previously mentioned 1.3 million notices with

discrepancies that IRS detected, a majority (78 percent) involved

underlying adjustments from $150 to $14,999.

Number of notices by corresponding adjustments

Type of notice

$0 to

$14.99

$15 to

$149

$150 to

$1,499

$1,500 to

$14,999

More than

$15,000 Total

Zero balance 27,171 143,955 566,168 185,408 9,143 931,845

Refund due 2,638 11,428 48,243 6,736 224 69,269

Payment due 17,320 65,553 157,015 20,201 692 260,781

Total 47,129 220,936 771,426 212,345 10,059 1,261,895

Source: GAO compilation of IRS data.

IRS estimates that, in most cases, it costs about $0.42 to prepare and send

a notice, an amount that includes labor, supplies, and postage. This cost

reflects the fact that, for the most part, IRS’ process to prepare and send

notices is computerized. The notices are automatically printed and sent to

taxpayers. In a small percentage of cases, when IRS randomly selects a

low-dollar notice for a quality review, the cost rises to $0.70.

There are other instances when the cost is higher, however. For example,

in some cases, IRS notices result in taxpayers submitting payments to IRS.

These payments generally pass through up to 10 separate processing steps,

such as mail sorting, computer data input, data verification, account

resolution, and deposit. Further, depending on the volume of payments to

be processed, the time involved can range from 1 to 15 days. According to

IRS estimates, the cost to process each such taxpayer payment is about

$1.30.

Another instance where the cost is higher is when the receipt of the

original notice by the taxpayer generates further correspondence between

the taxpayer and IRS. In these cases, an IRS staff member would generally

respond directly to the taxpayer regarding the correspondence or the

information provided. IRS estimates the cost for these cases to be about

$14.32 because of the additional amount of labor required.

The fact that most low-dollar notices do not require any taxpayer action

raises a question as to why IRS sends them, particularly those having a

zero balance. The answer is that IRS notifies taxpayers, pursuant to a

statutory provision or in accordance with the IRS Internal Revenue

Manual, of any changes it makes to their account, regardless of the dollar

amounts involved.

Table 2: IRS Adjustment Notices and

Corresponding Adjustments to

Taxpayers’ Accounts

IRS’ Cost to Prepare

and Send Notices

Why IRS Sends LowDollar Notices
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Page 7 GAO/GGD-00-84 IRS’ Low-Dollar Notices

IRS recognizes the possible burden placed on taxpayers as a result of lowdollar notices and has formed an internal task team to examine the issue.

The team, formed in early 1999 and comprised of staff from various IRS

functional disciplines, is obtaining information and developing possible

solutions. In that regard, the team has been analyzing different aspects of

the issue, including computer programming, legal requirements, and

impact on taxpayers.

One possible proposal identified by the team is for IRS to add specific

language to all low-dollar notices informing taxpayers that the notice is not

a bill and that payment by the taxpayer is not required. This would allow

IRS to meet its requirements for advising taxpayers of changes made to

their accounts but reduce the burden on the taxpayers in terms of

responding to IRS. Another idea being considered is the possibility of

reprogramming IRS’ computers so that low-dollar payments due are

changed to zero balances, and the notices sent to taxpayers would explain

the adjustment.

The task team expects to complete its work over the next several months

and send its final report to the IRS Commissioner by the end of calendar

year 2000.

The Commissioner of Internal Revenue provided written comments on a

draft of this report in an April 5, 2000, letter, which is reprinted in the

appendix.

IRS said that it was pleased that we cited its efforts to recognize and

reduce the possible burden placed on taxpayers as a result of low-dollar

notices. IRS also highlighted several examples of recommendations being

considered by its internal task team studying the issue.

We are sending copies of this report to Senators William V. Roth, Jr., and

Daniel P. Moynihan, the Chairman and Ranking Minority Member of the

Senate Finance Committee; Representatives Charles B. Rangel and William

J. Coyne, Ranking Minority Members of the House Committee on Ways and

Means and Subcommittee on Oversight, respectively; the Honorable

Lawrence H. Summers, Secretary of the Treasury; and the Honorable

Charles O. Rossotti, Commissioner of Internal Revenue. We will also make

copies available to others upon request.

IRS’ Internal Task

Team Evaluating LowDollar Notices

Agency Comments
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Page 8 GAO/GGD-00-84 IRS’ Low-Dollar Notices

If you have any questions, please call me or Joseph E. Jozefczyk at (202)

512-9110. A key contributor to this report was Julie A. Cahalan.

Margaret T. Wrightson

Director, Tax Policy and

Administration Issues
Page 9 GAO/GGD-00-84 IRS’ Low-Dollar Notices
Appendix 

Comments From the Internal Revenue Service

Page 10 GAO/GGD-00-84 IRS’ Low-Dollar Notices
Comments From the Internal Revenue Service

Page 11 GAO/GGD-00-84 IRS’ Low-Dollar Notices
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