GAO-01-328

Report to Congressional Requesters

United States General Accounting Office

GAO

March 2001 TAX

ADMINISTRATION

IRS Can Help

Taxpayers Reduce

the Need for Tax

Abatements
Page i GAO-01-328 Reducing Tax Abatements

Letter 1

Results in Brief 2

Background 3

Scope and Methodology 4

Abated Assessments Usually Resulted From Taxpayer Errors on

Exemption Claims 6

IRS Costs for Abating Tax Assessments Could Be Substantial 7

Taxpayer Costs Are Not Known, and the Types of Costs Can Vary 10

IRS Has Taken Steps to Reduce Some Exemption Errors but Could

Take Other Steps 11

Conclusions 15

Recommendations 15

Agency Comments 16

Appendix I GAO Contacts and Staff Acknowledgements 17

Tables

Table 1: IRS Activities Associated With Individual Income Tax

Assessments Abated in Fiscal Year 1998 Due to Errors by

Taxpayers, IRS, or Third Parties 8

Contents
Page 1 GAO-01-328 Reducing Tax Abatements

March 30, 2001

The Honorable William M. Thomas

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

In fiscal year 1998, the Internal Revenue Service (IRS) abated—or,

reduced—2.3 million tax assessments (totaling $3.6 billion) on individual

income tax returns because of an error made by the taxpayer, IRS, or third

party in determining the tax to be assessed.1

 Making and then abating tax

assessments imposes costs on taxpayers as well as on IRS. Avoiding the

errors that led to the assessments would also avoid the need for

abatements, reducing costs in time and money for taxpayers and IRS.

Given your interest in reducing these costs to individual taxpayers and

IRS, you asked us to (1) describe the nature of the errors that led to the

abated income tax assessments, such as who made the error and what the

error involved; (2) quantify the costs to IRS; (3) describe the costs

incurred by taxpayers to correct these errors; and (4) determine what IRS

could do to reduce the errors that led to these abated tax assessments. To

answer these questions, we analyzed IRS data from a random sample of

486 abatements made in fiscal year 1998 because of errors made in the tax

assessed against individual taxpayers. We analyzed IRS data on the costs

and consulted with IRS officials about options for avoiding the errors.

 1

IRS made 2.5 million tax abatements to individual tax returns in fiscal year 1998, totaling

$5.5 billion. Not all abatements arise from errors with tax assessments. For example, a

taxpayer can carry back a net operating loss to an earlier tax year to abate a correct

assessment. Because we focused on abatements of tax assessments created from errors,

we excluded abatements due to these carry backs as well as for substitute returns IRS

prepares using income information from third parties and debt discharges, such as

bankruptcy, that are used to offset correct assessments for the tax year in question.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-328 Reducing Tax Abatements

The errors that led to 2.3 million individual income tax assessments being

abated in fiscal year 1998 had two features that stood out.2

 First, taxpayers

made the errors in an estimated 86 percent of the abated assessments.

Second, the errors for about half of the abated assessments involved

exemption claims, usually in reporting names and Social Security numbers

(SSN) for dependent exemptions.

Abating tax assessments can be costly. According to IRS officials, IRS’

costs to record, collect, and abate the 2.3 million income tax assessments

are in the tens of millions of dollars each year. IRS was unable to provide

data on which to develop more reliable cost estimates in time for this

report. Individual taxpayers also incur costs to get assessments abated,

but the amount is unknown. The types of taxpayer costs can also vary with

the number of IRS contacts and degree of documentation provided to get

the abatement.

IRS has taken two steps intended to reduce exemption errors leading to

the abated tax assessments but could take additional steps. In one step,

IRS revised tax return instructions on claiming exemptions for tax year

2000. For example, IRS added a statement that the names and SSNs used

on tax returns had to match those recorded at the Social Security

Administration. For name and SSN errors that continue to be made, IRS

changed its procedures in January 2001 to try to correct some of the errors

during returns processing before taxes are assessed. However, IRS has not

changed its procedures for correcting the most common type of

exemption error—errors in claiming dependent exemptions.

Under current procedures, IRS corrects dependent exemption errors after

the tax assessment through its abatement process. IRS verifies these

corrections by checking the names and SSNs used on previous tax returns

as well as contacting taxpayers for additional information if necessary. IRS

could do these checks and contacts earlier during returns processing.

Doing so would eliminate some steps currently used to assess and abate

taxes, reducing burden on taxpayers. The effects of earlier checks and

contacts on IRS’ overall costs are not known.

 2

Over a hundred million assessments of individual income taxes are recorded for each tax

year. Because abatements made in a fiscal year involve assessments from various tax years,

which IRS does not track, we do not know the percent of all tax assessments made in a

given tax year that are abated.

Results in Brief
Page 3 GAO-01-328 Reducing Tax Abatements

After our audit work was completed, an IRS official told us that IRS was

considering doing checks for dependent exemption errors and taxpayer

contacts during returns processing in order to avoid assessing additional

taxes. Considering these checks and contacts is worthwhile because a

large number of taxpayers could potentially benefit. However, as noted

above, the effects on IRS’ overall costs are not known. Because IRS did

not provide us with details or documentation on how or when decisions

would be made, we are recommending that IRS determine whether the

costs and benefits justify implementing these checks and taxpayer

contacts during returns processing.

Finding ways to reduce the remaining 1.1 million assessments that are

abated due to nonexemption errors will be challenging. These remaining

abated assessments involve a variety of errors that occur infrequently.

Because little is known about these errors and because of the potential

benefits to a large number of taxpayers, we are recommending that IRS

determine whether research to identify the causes of the errors and

possible solutions is justified.

An assessment is a formal bookkeeping entry in which IRS records the

amount of tax, penalty, or interest charged to a taxpayer’s account each

tax year. An assessment establishes the taxpayer’s liability and IRS’ right

to collect. Taxpayers essentially assess themselves when they report these

taxes on their tax returns. IRS may add to or subtract from tax amounts

reported when its returns processing or enforcement programs identify

errors. Taxpayers also may file an amended return or otherwise notify IRS

of errors, which can change the amount assessed.

An abatement is a formal bookkeeping entry to record a reduction of tax,

penalty, or interest assessments on a taxpayer’s account. Abatements

reduce the amounts that taxpayers owe and that IRS has a right to collect.

Section 6404 of the Internal Revenue Code authorizes IRS to abate an

assessment under certain conditions. For example, IRS can abate an

assessment because of errors made. A taxpayer can make an error on the

original tax return, such as not claiming a deduction. Or, IRS may assess

incorrect tax amounts when auditing a return or matching income

reported by taxpayers with income reported by third parties (such as

employers) on payments made to the taxpayers.

Both taxpayers and IRS can initiate abatements. Taxpayers can request an

abatement by filing an amended tax return (e.g., Form 1040X), by filing an

IRS Form 843 (Claim for Refund and Request for Abatement), or by calling

Background
Page 4 GAO-01-328 Reducing Tax Abatements

or writing to IRS. IRS can also initiate abatements. When, for example, an

IRS auditor finds evidence that a taxpayer overstated the tax liability on a

return, this evidence could lead to an abatement, depending on the results

from the rest of the audit.

To fulfill our objectives, we reviewed a stratified, random sample of 486

individual taxpayer abatements made in fiscal year 1998 due to errors by

taxpayers, IRS, or third parties.3

 Our sample includes abatements in which

taxpayers elected to change their filing status or basis for deductions

when the original assessment also changed. If a taxpayer had multiple

abatements, we studied only the abatement that was drawn into our

sample.

We obtained the final sample of 486 abatements by first drawing a

stratified sample of 500 abatements from a population of 2,351,194

abatements for individual taxpayers who had at least one abatement in

1998 associated with an error in the assessment. After reviewing the 500

IRS case files, we removed 14 sampled abatements that did not contain

these errors, such as abatements due to net operating loss carry backs,

debt discharges, and substitute returns. On the basis of our final sample,

we estimated that the total population of 1998 abatements based on errors

was about 2.3 million with a value of about $3.6 billion.

Each abatement could be associated with more than one error. For each

error, we collected information on which line item on the return was in

error. For example, an error could involve lines for the primary taxpayer’s

SSN, a tax exemption, or a tax deduction. To the extent possible, we also

collected information on whether taxpayer, IRS, or third-party actions led

to an error. Because so many of the errors related to exemptions, we

collected more information, such as whose exemption (taxpayer, spouse,

dependent) was in error and what information was missing or incorrect.

To develop data about IRS’ costs to abate tax assessments made due to

errors by taxpayers, IRS, or third parties, we used IRS’ abatement files to

identify the type and frequency of IRS activities associated with the

recording, collecting, and abating of these assessments. We then talked to

 3

We focused on fiscal year 1998 because more recent data were not available when we

began our work, and we had fiscal year 1998 data from our previous work. See Tax

Administration: IRS’ Abatement of Assessments in Fiscal Years 1995-1998 (GAO/GGD-99-

77, June 4, 1999).

Scope and

Methodology
Page 5 GAO-01-328 Reducing Tax Abatements

IRS officials about the unit costs of these activities and the magnitude of

the overall costs for all activities. These officials represented IRS’ Wage

and Investment Division, IRS’ Chief of Operations and IRS units that

record, collect, or abate assessments, such as those that process or

examine tax returns. We attempted to develop more reliable cost

estimates but IRS was unable to provide sufficient data in time for

including in this report.

To describe the types of taxpayer costs, we recorded the types of activities

associated with each sampled abatement case. We discussed these

activities with IRS officials to understand the potential impacts on costs.

On the basis of this work, we summarized the range of activities and of

time (in calendar days) that taxpayers faced to get the tax assessments

abated. We did not have enough information to compute taxpayers’ costs.

After our analysis, we sought feedback from IRS officials at the National

Office on our sample results and the costs. We sought IRS documentation

and views on options for reducing the number of assessments that

involved exemptions and that were abated due to errors. We also sought

views on these options from officials of four professional associations—

the American Institute of Certified Public Accountants, National

Association of Enrolled Agents, National Association of Tax Practitioners,

and National Society of Accountants.

Because we selected the probability sample following random selection

procedures, each estimate is surrounded by a 95-percent confidence

interval. For example, the estimate that 86 percent of the abatements is

due to taxpayer errors is surrounded by a 95-percent confidence interval

of +/- 3 percentage points. This shows that we are 95-percent confident

that the percentage of taxpayer errors in the actual population is between

82 and 89 percent. All percentage estimates have sampling errors of +/- 6

percentage points or less, unless otherwise noted. Estimates on numbers

of abatements have sampling errors of +/- 6 percent or less of their values

unless otherwise noted.

We did work at IRS offices in Washington, D.C., and New Carrollton, MD,

as well as IRS’ Kansas City Service Center because of our staff’s proximity.

We did our work from November 1999 through December 2000 in

accordance with generally accepted government auditing standards. We

discussed our draft report with representatives of the IRS Commissioner

on March 23, 2001. IRS officials agreed that our recommendations had

merit and said they would review ways to implement them. Their written

comments arrived too late to be reprinted in this report.
Page 6 GAO-01-328 Reducing Tax Abatements

We traced most abated income tax assessments in fiscal year 1998 to

individual taxpayer errors. These errors usually involved claims for tax

exemptions for the taxpayers, spouses, or dependents. Taxpayers usually

erred by not providing any information or by providing inaccurate

information. With exemption claims, these errors usually involved SSNs

for dependent exemptions.

We estimated that 86 percent4

 of the 2.3 million abated assessments arose

from taxpayer errors, and 6 percent arose from IRS errors. Sources for the

remaining errors were third parties or could not be determined due to

insufficient data in IRS’ abatement case files.

We further analyzed how the errors were made. For taxpayer errors, about

74 percent of the abated tax assessments were associated with taxpayers

not correctly reporting an item on the tax return; and about 22 percent

were associated with taxpayers omitting the item from the return.

For IRS errors associated with abated tax assessments, most of the errors

occurred when the IRS unit that processes tax returns did not accept valid

information from these returns. Third-party errors5

 generally arose due to

errors in the Social Security Administration database used by IRS to

validate names and SSNs related to the exemption claims.

For fiscal year 1998, an estimated 50 percent of errors that led to the 2.3

million abated tax assessments involved exemptions claimed on income

tax returns for taxpayers, spouses, or dependents. The remaining abated

assessments involved errors with many other types of claims at much

lower percentages. The next two most frequent errors—Schedule A

deductions (e.g., real estate taxes) and the other income line on the tax

return—each accounted for around 10 percent.

Of the exemption errors, we estimated that about 96 percent involved

dependent exemptions; and the rest involved exemptions for the spouse of

 4

Since we used a random, probability sample, all results are subject to sampling error.

Unless otherwise indicated, all sample estimates are surrounded by 95-percent confidence

intervals of less than +/- 6 percentage points.

5

We only attributed errors to third parties when we found conclusive evidence of their

mistakes.

Abated Assessments

Usually Resulted

From Taxpayer Errors

on Exemption Claims

Taxpayers Made Most of

the Errors When Reporting

Tax Return Data

Tax Exemption Errors

Accounted for Half of the

Abated Assessments
Page 7 GAO-01-328 Reducing Tax Abatements

the primary taxpayer filing the tax return.6 For dependent exemptions,

about 32 percent of the errors were missing SSNs; and about 50 percent

were incorrect SSNs.7

 The remaining errors involved the names of the

dependents or could not be determined due to insufficient data.

These errors in names and SSNs occurred in many ways. For example, in

one instance, an exemption for a dependent was disallowed because the

taxpayer used the spouse’s SSN instead of the dependent’s. Other

dependent exemption errors either occurred because no SSN was

reported, SSNs were transposed, or an SSN was reported as a progression

of numbers (i.e., 123-456-789). Examples also included a taxpayer who

used the same SSN for two different dependents and a taxpayer who used

the last four digits of an SSN for two dependents. Other errors related to

the dependent’s last name not matching SSA records and a spousal

exemption disallowed because the spouse’s last name did not match SSA

data.

The exemption errors were not limited to a type of taxpayer. An estimated

256,000 or more taxpayers with incomes below $25,000 made such errors

as well as about 107,000 taxpayers with incomes over $100,000. Most

exemption errors came from individuals who had no business income, but

about 47,000 taxpayers who had business income made exemption errors.8

IRS did not track its costs to record, collect, and then abate the 2.3 million

tax assessments that were made due to errors by taxpayers, IRS, or third

parties. IRS agreed that these overall costs could be substantial, totaling

at least tens of millions of dollars annually. IRS was unable to provide

accurate cost data for developing more reliable estimates in time for this

report. However, IRS agreed that having such accurate cost information is

important and plans to develop it.

 6

Our sample did not include any abated tax assessments with exemption errors for the

primary taxpayer. IRS has procedures to find and correct these types of errors.

7

The estimate of 32 percent is surrounded by a 95-percent confidence interval of +/- 8

percentage points. The estimate of 50 percent is surrounded by a 95-percent confidence

interval of +/- 9 percent.

8

The estimate of 256,000 is surrounded by a 95-percent confidence interval of +/- 78,000; the

estimate of 107,000 taxpayers by an interval of +/- 52,000; and the estimate of 47,000

taxpayers by an interval of +/- 17,000.

IRS Costs for Abating

Tax Assessments

Could Be Substantial
Page 8 GAO-01-328 Reducing Tax Abatements

We identified three broad activities—recording, collecting, and abating the

tax assessments—associated with IRS’ costs. Table 1 shows the

frequencies of these broad activities.

Table 1: IRS Activities Associated With Individual Income Tax Assessments Abated

in Fiscal Year 1998 Due to Errors by Taxpayers, IRS, or Third Parties

Numbers in thousands

Activity

Frequency of abated

assessments

Percent of abated

assessments

Record 1,304 56

Collect 609 a26

Abate 2,308 100

Total b b

Note: The sample percentage estimates in this table are surrounded by 95-percent confidence

intervals of less than +/- 6 percentage points. The frequency intervals are surrounded by these 95-

percent confidence intervals: 1,304 +/- 122; 609 +/- 72; and 2,308 +/- 30.

a

Only includes collection actions that are attributable solely to the abated tax assessment.

b

Column is not totaled because some abated assessments had more than one type of action.

Source: GAO analysis of IRS activities in our sample cases.

IRS incurred additional costs to record an estimated 1.3 million of the 2.3

million tax assessments abated due to errors. In such cases, IRS did more

work to make additional tax assessments. IRS’ usual costs include those to

record the tax assessment originally reported on the tax returns. The

additional costs would have been avoided if the errors and additional

assessments had not been made. The other 1 million tax assessments did

not incur additional recording costs.

Various IRS units can be involved in recording increases or decreases to

the original tax assessment reported on the tax return. IRS’ processing

units can increase the original assessment because of more obvious errors,

such as invalid SSNs. IRS post-processing units also can make additional

tax assessments that will be recorded. For example, when the taxpayer

files an amended tax return or third-party reports indicate that a taxpayer

did not report all income, IRS’ adjustment units can increase the

assessment. IRS’ examination units can increase assessments during

audits when taxpayers do not provide documents to support their tax

return.

The cost to record tax assessments is higher when a post-processing unit

does the work to create an assessment. The greatest cost is associated

with examination units because their auditors have higher pay grades,

IRS’ Recording Costs
Page 9 GAO-01-328 Reducing Tax Abatements

audit more complex cases, and need more time to work cases compared to

nonaudit staff.

IRS attempted to collect an estimated 609,000 of the 2.3 million abated tax

assessments. IRS could have avoided the associated collection costs if the

tax assessment, which was abated because of errors, had not been made.

For the portion that was abated of the other 1.7 million tax assessments,

IRS did not take collection action.

The process for collecting any unpaid assessment has three steps. The

process starts with a series of computer-generated notices demanding

payment or information to otherwise resolve the unpaid assessment. If the

unpaid assessment is not resolved, IRS might try to call the taxpayer

through its Automated Collection System. If still unresolved, IRS might

assign a field collector to visit the taxpayer. The costs of the collection

activity increase substantially with each step. For example, each notice

costs a fraction of what a field collector visit costs.

IRS also incurred additional costs to abate the 2.3 million tax assessments.

Abatements involve three types of costs, as described below.

First, IRS incurs costs to process abatement requests. These costs are

relatively low compared to later steps. Abatement requests include formal

claims (Form 1040X or Form 843) and informal requests when taxpayers

call or write IRS requesting abatements. Compared with informal requests,

formal claims are more costly because of the extra costs to record them

on IRS’ masterfile of taxpayer accounts to show the pending formal

request.

Second, IRS incurs costs to make and record the abatement decision.

Some abatement decisions are made in IRS examination units while the

bulk are done in nonexamination units. The unit cost of abatements made

in examination units is higher because, among other reasons, they use

higher-graded (or paid) staff.

Third, IRS incurs costs for some abatements when issuing a refund check

that otherwise would have been unnecessary. This check is for tax

amounts overpaid by individuals because of the assessment made in error.

IRS’ Collection Costs

IRS’ Abatement Costs
Page 10 GAO-01-328 Reducing Tax Abatements

Taxpayers also incurred costs when tax assessments were made and then

abated. However, the amount is currently unknown. IRS’ abatement files

lacked sufficient information on taxpayers’ activities, efforts to contact

IRS, and time spent in order to estimate taxpayer costs. Further, taxpayers

usually do not record and maintain such information. As part of its

multiyear effort to estimate taxpayer compliance burdens, IRS is designing

a methodology intended to estimate taxpayer costs for abatements and

other post-filing activities.9

Although we could not measure the costs to taxpayers, we were able to

estimate the number of taxpayers involved in two actions that imposed

some level of burden.10 For both types of actions, taxpayers incurred costs

in time and money, especially if they used a paid preparer. Of the 2.3

million abated assessments,

• an estimated 609,000 involved IRS contacts with taxpayers to collect an

assessment before it was abated, of which the vast majority were IRS

notices; and

• an estimated 575,000 involved amended tax returns that taxpayers filed to

correct errors and request the tax abatements.

The amount of variation in taxpayer costs also cannot be quantified

currently. Taxpayer costs can vary, depending on the actions and time

required to correct the error and abate the tax assessment. Taxpayer

actions could include finding the error, gathering documents to support

the abatement, communicating with IRS, providing any requested

documentation, and responding to IRS notices. Contacts with IRS could be

as inexpensive as a toll-free telephone call or as costly as paying the fees

of tax professionals to work with IRS.

In terms of calendar time required, most abatements we reviewed took 3

months or less to be approved, but some took much longer. At one

extreme in our sample, IRS notified a taxpayer through a collection notice

that it had assessed additional taxes after disallowing a dependent

exemption while processing the tax return. The taxpayer called IRS to

provide the dependent’s correct SSN. After verifying the SSN, IRS made

 9

Tax Administration: IRS Is Working to Improve Its Estimates of Compliance Burden

(GAO/GGD-00-11, May 22, 2000).

10A taxpayer could have been involved in just one or both of these actions.

Taxpayer Costs Are

Not Known, and the

Types of Costs Can

Vary
Page 11 GAO-01-328 Reducing Tax Abatements

the abatement 21 days after the date of the collection notice. At the other

extreme in our sample, IRS disallowed two dependent exemptions,

assessed additional tax, and sent a collection notice. The taxpayer

eventually provided sufficient documents to support the exemptions and

justify the abatement. However, the abatement took 493 days from the

date of the first collection notice. During this time, IRS sent multiple

correspondence and collection notices to the taxpayer about the unpaid

assessment and abatement request.

IRS files also showed variation in the amount of taxpayer documentation

and number of IRS contacts required for abatements. In another case from

our sample, multiple exchanges between IRS and a taxpayer took 245 days

from the first collection notice to the abatement. IRS had notified the

taxpayer that an additional tax form was needed, and the taxpayer’s

representative returned the completed form to IRS showing no additional

tax due. About 1 month later, IRS sent its version of the form showing

additional tax due followed by four subsequent bills. The taxpayer hired a

second representative who wrote IRS, sent documents, and faxed a form

showing no additional tax due. IRS assigned the case to an IRS office that

resolves difficult cases. The second representative faxed another copy of

the form to this office to get the tax assessment abated.

IRS has taken steps to avoid exemption errors or correct certain types of

exemption errors earlier during returns processing rather than through the

abatement process. However, IRS has not taken other steps that could

potentially correct more errors earlier. If the errors were not made or were

corrected earlier, IRS would not create tax assessments that need to be

abated, which could reduce taxpayer and IRS costs. We focused on

reducing exemption errors because, as discussed earlier, they accounted

for half of the 2.3 million assessments that were abated in fiscal year 1998.

After reviewing our data on the number of exemption errors that lead to

abatements, IRS took a step intended to prevent some of the errors. For

tax year 2000 returns, IRS revised tax return instructions to state that (1)

the name and SSN entered on the tax return should agree with the Social

Security card to avoid losing the exemption as well as tax benefits, such as

the Earned Income Credit and (2) taxpayers should call the Social Security

Administration to resolve any discrepancy. IRS made the revisions

because a test of expanded SSN matching for spouse exemptions claimed

on joint tax returns revealed errors with the names and SSNs of the

spouses. IRS officials believe that these revisions will help reduce such

IRS Has Taken Steps

to Reduce Some

Exemption Errors but

Could Take Other

Steps

Avoiding Exemption

Errors
Page 12 GAO-01-328 Reducing Tax Abatements

errors, but the actual effects will not be known until after tax year 2000

returns are processed.

IRS recently decided to revise its procedures during returns processing in

an effort to correct some of the remaining exemption errors earlier.

However, the largest category of exemption errors, errors with the

dependent exemption, will not be corrected by the revisions.

These revised procedures involve IRS’ math-error program. About one

million of the exemption-related tax assessments were created during

returns processing through IRS’ math-error program. In this program, IRS

uses computers to find arithmetic errors on tax returns as well as errors in

reporting SSNs, exemptions, and certain other items. When it finds math

errors on paper returns, IRS processes the return,11 assesses the tax, and

contacts the taxpayer to disclose the reason for the additional tax

assessment and to request payment. Afterward, IRS uses its abatement

process to correct any errors and eliminate the tax assessments.

Further changes to the math-error program could help to correct errors

earlier and avoid assessing taxes that will be abated. Specifically, after

IRS’ computerized processing detects exemption errors, computerized

checks of previous tax returns could help to correct simple errors, such as

transposed SSNs or misspelled or changed names. IRS now does these

checks after returns processing when abatements are requested. To notify

taxpayers of the corrections and need to avoid such errors, IRS could send

so-called “soft notices”—notices that do not ask taxpayers to provide

information or pay additional taxes. If the name or SSN were changed or

missing, IRS could suspend processing and contact taxpayers. In effect,

this would treat paper returns the same as electronic returns. As noted

earlier, IRS does not accept electronic returns with math errors. If the

contacts do not resolve the errors or if more effort is required, IRS could

 11For electronically filed tax returns, IRS has chosen to reject the returns rather than

process them and assess taxes for errors. IRS officials said taxpayers could refile the return

electronically after correcting the error or file a paper return with or without the

correction.

Correcting Remaining

Exemption Errors Earlier
Page 13 GAO-01-328 Reducing Tax Abatements

continue its practice of disallowing the exemptions and assessing

additional taxes.12

After we shared the results of our work with IRS, IRS decided to change

its procedures, effective January 28, 2001, to correct name and SSN errors

with claims for spousal exemptions earlier. IRS officials decided to do the

checks for correcting these errors during returns processing. Before

disallowing exemptions and assessing additional taxes, IRS staff are to

check spouses’ names and SSNs on tax returns against IRS and Social

Security Administration computer data in an attempt to correct the errors.

Recently, an IRS official told us that IRS is considering taking two other

steps to correct exemption errors during returns processing. The first step

would be doing earlier checks for erroneous dependent exemptions. The

second step would be to contact taxpayers for any type of exemption error

that had not been corrected by the checks. This same official said that IRS

had concerns about the time and costs to contact taxpayers during returns

processing in order to correct exemption errors. However, IRS did not

provide any documentation or details on how or when decisions about

these earlier checks and contacts would be made.

Considering steps to correct exemption errors earlier is worthwhile

because of the potential benefits to a large number of taxpayers. While

neither the benefits to taxpayers nor the costs to IRS can be quantified,

some information is known. First, IRS already abates almost all tax

assessments created through the math-error program for exemption errors

in missing or inaccurate names or SSNs. According to our analysis, IRS

abated at least 87 percent of the additional tax assessments for name or

SSN errors in exemptions claimed on tax year 1997 returns.13 In deciding

whether to approve abatements requested by taxpayers, IRS checks

previous tax returns and contacts taxpayers, as needed. Since abatements

are requested for almost all of these assessments, IRS is already doing the

checks and contacts.

 12IRS does checks and contacts in other enforcement programs before assessing additional

tax. For example, audits of tax returns entail checks of documentation and written or faceto-face contacts with taxpayers about errors before assessing any additional taxes.

13Our analysis of the math-error program for tax year 1997 showed that during fiscal year

1998, IRS abated 71 percent of the 983,000 assessments related to disallowed dependent

exemptions. By analyzing previous math-error programs, we calculated that another 16

percent of these assessments was abated during fiscal year 1999; and a smaller percentage

was likely abated in fiscal year 2000.
Page 14 GAO-01-328 Reducing Tax Abatements

Second, although taxpayers’ costs have not been quantified, correcting the

exemption errors earlier could reduce the costs that taxpayers incur to

correct errors through abatements. To the extent that the earlier checks

correct the errors, fewer taxpayers would be contacted. Even if contacted,

taxpayers would likely have an easier time finding or compiling records or

working with tax representatives because the errors would be found

sooner. Some taxpayers (about 26 percent of the cases we reviewed)

would no longer face IRS collection actions. The extent to which taxpayer

costs would be reduced could be influenced by, among other factors, how

many exemption errors continue to be made after IRS clarified its

instructions for claiming exemptions.

In discussing taxpayer burdens, representatives we interviewed from four

groups of tax professionals generally favored the idea of doing the checks

and contacts earlier to avoid tax assessments that have to be abated. They

said that taking care of the errors earlier would reduce taxpayer burden,

particularly when the errors lead to a series of written and telephone

contacts to get the taxes abated.

Third, IRS could reduce annual operating costs by correcting exemption

errors earlier rather than later through abatements. We could not estimate

the amount of operating cost savings because available data did not allow

us to quantify the costs associated with exemption errors separately from

the costs for other types of errors. Even so, by correcting errors earlier,

IRS would no longer incur costs to record and collect the tax assessments

that would be abated. Nor would IRS incur some of the costs of making

abatements, including the costs of processing abatement requests or

issuing refunds after abatements are granted. Other costs savings could

occur from using lower paid staff, rather than audit staff, to make the

checks and contacts earlier.

Whether IRS would have overall cost savings depends on the costs to

implement the earlier checks and contacts. These one-time costs would

offset IRS’ operating cost savings to some extent. Implementation costs

could include, if needed, new equipment, computer programming, moving

equipment or staff, and training. IRS did not have data on the magnitude of

these one-time costs.

Finding ways to reduce the remaining 1.1 million assessments that are

abated due to nonexemption errors will be challenging. As discussed

earlier, these remaining abated assessments involve a variety of errors that

occur infrequently. Since little is known about these errors or their causes,

Researching

Nonexemption Errors
Page 15 GAO-01-328 Reducing Tax Abatements

a promising first step towards reducing the errors would be to do research

on their causes and on ways to avoid the errors.

Doing research on the nonexemption errors has the potential to benefit a

large number of taxpayers. However, research also incurs costs, which we

did not attempt to estimate. Such costs would depend on the design,

scope, and depth of the studies.

Approximately one million taxpayers per year, as well as IRS, incur costs

to abate tax assessments created due to exemption errors. Avoiding the

errors, or correcting them earlier, could reduce the burden on taxpayers of

complying with tax laws.

IRS has taken one step intended to help taxpayers avoid these errors—

revising instructions for claiming exemptions. In another step, aimed at

correcting some exemption errors that continue to be made, IRS decided

to do checks of name and SSN errors for spousal exemption claims during

returns processing.

In addition, IRS is considering implementing earlier—during returns

processing—checks for dependent exemption errors and taxpayer

contacts if the checks do not correct exemption errors. Considering doing

such checks and contacts earlier is worthwhile. While the cost savings to

IRS are not known, a large number of taxpayers could benefit. However,

IRS did not provide us with any details or documentation about how or

when decisions would be made.

Little is known about how to reduce nonexemption errors that lead to

assessments being abated. Because over one million taxpayers were

burdened by such assessments, research to reduce the errors is worth

considering.

Regarding name and SSN errors, we recommend that the Commissioner of

Internal Revenue make a determination on whether the costs and benefits

justify implementing earlier—during returns processing—(1) checks for

dependent exemption errors and (2) taxpayer contacts, as needed, for the

remaining errors in any type of exemption claim.

Regarding the nonexemption errors that lead to assessments that are later

abated, we recommend that the Commissioner of Internal Revenue

determine whether research to identify causes and solutions is justified.

Conclusions

Recommendations
Page 16 GAO-01-328 Reducing Tax Abatements

We discussed our draft report on March 23, 2001, with IRS officials from

Wage and Investment who were representing the IRS Commissioner. They

agreed to implement both of our recommendations. First, they said that

IRS would review the costs and benefits of doing checks and contacts

during returns processing for dependent exemption errors. Second, they

said that IRS would review available data on nonexemption errors to

determine the merits of researching their causes, and solutions. IRS was

unable to provide written comments in time for inclusion in this report.

We are sending copies of this report to Representative Charles B. Rangel,

Ranking Minority Member, House Committee on Ways and Means;

Representative William J. Coyne, Ranking Minority Member,

Subcommittee on Oversight, House Committee on Ways and Means; and

Senator Charles E. Grassley, Chairman, and Senator Max S. Baucus,

Ranking Member, Senate Committee on Finance. We also are sending

copies to the Honorable Paul H. O’Neill, Secretary of the Treasury; the

Honorable Charles O. Rossotti, Commissioner of Internal Revenue; the

Honorable Mitchell E. Daniels, Jr., Director, Office of Management and

Budget; and other interested parties. Copies of this report will be made

available to others upon request.

If you have any questions concerning this report, please contact Tom

Short or me at (202) 512-9110. Key contributors to this work are listed in

appendix I.

James R. White

Director, Tax Issues

Agency Comments
Appendix I: GAO Contacts and Staff

Acknowledgements

Page 17 GAO-01-328 Reducing Tax Abatements

James R. White (202) 512-9110

Tom Short (202) 512-9110

In addition, Royce Baker, Larry Dandridge, Thomas Venezia, James Fields,

Anne Rhodes-Kline, Sam Scrutchins, Thomas Bloom, and Rodney Hobbs

contributed to this report.

Appendix I: GAO Contacts and Staff

Acknowledgements

GAO Contacts

Acknowledgements

(268894)

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