Tax Administration: IRS's 2008 Filing Season Generally Successful Despite Challenges, although IRS Could Expand Enforcement during Returns Processing
Published: 2008-12-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The tax filing season is when the Internal Revenue Service (IRS) has most of its contacts with taxpayers, answering questions and processing returns and refunds. The 2008 filing season was particularly challenging due to the unanticipated mandate to make economic stimulus payments. The filing season is also the start of IRS's efforts to ensure the newly filed returns are compliant with the tax laws. GAO was asked to assess IRS's performance, describe the costs and foregone revenue of administering the economic stimulus payments, and identify any opportunities for improving filing season compliance checks. GAO analyzed IRS performance data, reviewed IRS operations, and interviewed IRS officials.
section_title: What GAO Found
paragraphs: IRS successfully processed150 million returns and issued 105million refundsfor $246 billion as of September 12, 2008. In addition, IRS issued 116 million stimulus payments totaling $94 billion. However, taxpayers' access to IRS's telephone assistors was substantially lower than last year because of an unanticipated increase in telephone call volume. Calls to IRS more than doubled to 118 million as many taxpayers had questions about the amount of their stimulus payment or its timing. IRS acted to answer the calls including shifting hundreds of staff from collection cases to telephone assistance. IRS took other actions such as adding features to its Web site that answered stimulus-related questions and likely diverted some calls. Regardless, taxpayers' ability to get through to IRS telephone assistors declined from about 81 percent of waiting callers getting through last year to about 57 percent from January through June 30 of this year. IRS expects the costs and foregone revenue associated with issuing the economic stimulus package (ESP) payments to reach about $960 million, of which $655 million is revenue foregone due to the shift of collections staff to telephone service. There are two areas where IRS does not use its current legal authority to automatically correct errors when processing tax returns. One involves eligibility for the child and dependent care credit by taxpayers who are "Married Filing Separately." Taxpayers in this filing status are not eligible for the credit, but IRS allows the credit to be claimed, issues refunds, and then audits taxpayers to try to recover the money. The second is that IRS does not use its existing legislative authority to verify earned income tax credit claims by noncustodial parents--in 2006, $91 million of claims were unverified. IRS has plans to study one option for verifying these claims, but is not planning to study another option, combining federal data on noncustodial parents and other taxpayer characteristics to automatically determine eligibility. Finally, there are two areas where IRS lacks legal authority, but has the technical ability to use automated error checks. IRS could prevent (1) individuals from deducting contributions to individual retirement accounts above the allowable limit and (2) individuals from violating the age requirements for such contributions.

section_title: Letter
paragraphs: Effective and timely taxpayer service and enforcement programs, working  together, can provide faster refunds, reduce the burden on taxpayers of  complying with tax laws, help identify and correct errors before interest is  owed by the taxpayer, and help to ensure that taxpayers receive tax  benefits for which they are eligible. The filing season is when most  taxpayers interact with the agency and perhaps is the Internal Revenue  Service’s (IRS) best opportunity to combine service and enforcement.
Filing season services include processing individual income tax returns  and refunds and providing taxpayer services through telephone, Web site,  and face-to-face assistance. In previous reports and testimonies, we said  that IRS has made significant progress improving taxpayer service since  the passage of the IRS Restructuring and Reform Act of 1998. A significant  challenge for IRS during the 2008 filing season was the passage of the  Economic Stimulus Act of 2008, which mandated that IRS send stimulus  payments to over 100 million households.
During the filing season, enforcement begins with IRS’s math error  program, where IRS uses its computers to identify errors such as  calculation mistakes or omitted or inconsistent entries. Where possible,  IRS uses its math error authority (MEA) to correct certain errors before  interest is owed by the taxpayer, to provide faster refunds and to help  ensure that taxpayers receive tax credits for which they are eligible.
In light of the importance of IRS’s performance during the tax filing  season, you asked us to (1) assess IRS’s performance relative to goals and  prior years’ performance, including identifying factors that affect  performance such as the economic stimulus package (ESP); (2) describe  IRS’s time frames and planned versus actual costs, including foregone  revenue, associated with the passage and implementation of ESP  legislation; and (3) identify opportunities, if any, for improving compliance  by expanding MEA. We provided testimony on IRS’s 2008 interim  performance before the Subcommittee on Financial Services and General  Government, Committee on Appropriations, U.S. Senate, on April 16, 2008,  and the Subcommittee on Oversight, Committee on Ways and Means,  House of Representatives, on June 19, 2008; we also issued a report to the  Subcommittee on Oversight, Committee on Ways and Means, House of  Representatives, on March 13, 2008.
We based our assessment on the results and analyses of IRS data and  reports, workload and performance information, observations of IRS’s  operations, interviews with IRS officials, information from representatives  of some of the larger tax preparation companies and professional  associations that represent preparers providing tax assistance, and reports  by the Treasury Inspector General for Tax Administration (TIGTA). We  conducted this performance audit from January through October 2008, in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We assessed the reliability of  data used in this report by (1) performing electronic testing of required  data elements, (2) reviewing existing information about the data and the  system that produced them, and (3) interviewing agency officials  knowledgeable about the data. We determined that the data were  sufficiently reliable for the purpose of this report. More detail on our  scope and methodology can be found in the scope and methodology  section.
subsections: section_title: Scope and Methodology
paragraphs: To assess IRS’s 2008 filing season performance in the key filing season  activities compared to goals and past performance, report on the effect of  ESP, and highlight areas where IRS could expand use of MEA, we  reviewed and analyzed IRS reports, testimonies, budget submissions,  and other documents and data, including workload data, data related  to IRS’s performance measures and goals, and data on taxpayer usage  of services and other statistics such as the number of paid preparers;    observed operations at IRS’s Atlanta, Georgia, paper submission  processing center, the Atlanta call site, the Joint Operations Center  (which manages IRS’s telephone services) in Atlanta, and IRS’s walk-in  locations in Atlanta and Baltimore, Maryland, and selected these  offices for a variety of reasons, including the location of key IRS  managers, such as those responsible for telephone and walk-in site  services;  tested for statistically significant differences between annual  performance measures based on IRS sample data;  analyzed staffing data for paper and electronic filing, and telephone  assistance;  reviewed information from organizations, such as Keynote Systems,  which evaluate Internet performance;  interviewed representatives of some of the larger private and nonprofit  organizations that prepare tax returns, such as H&R Block, and trade  organizations that represent both individual paid preparers, tax  preparation companies, and professional associations, including the  American Institute of Certified Public Accountants;  reviewed TIGTA reports and interviewed TIGTA officials about IRS’s  performance and initiatives;  interviewed IRS officials about current operations, performance  relative to 2008 performance goals and prior filing season  performance, trends, significant factors, and initiatives that affected or  were intended to improve performance, monitoring, and oversight of  paid tax preparers;  reviewed IRS data on math errors, information on IRS’s process for  identifying and correcting math errors, legislation providing IRS with  math error authority;  interviewed IRS officials, including those from the EITC office, about  MEA;  reviewed reports on MEA from the National Taxpayer Advocate (NTA)  and TIGTA; and  reviewed our prior reports and followed up on our recommendations  made in those reports.
This report discusses numerous filing season performance measures and  data that cover the quality, accessibility, and timeliness of IRS’s services.  We assessed the reliability of data used in this report by (1) performing  electronic testing of required data elements, (2) reviewing existing  information about the data and the system that produced them, and   (3) interviewing agency officials knowledgeable about the data. We  determined that the data were sufficiently reliable for the purpose of this  report. To the extent possible, we corroborated information from  interviews with documentation and data and where not possible, we  attribute the information to IRS officials. We reviewed IRS documentation,  interviewed IRS officials about computer systems and data limitations, and  compared those results to our standards of data reliability. Data  limitations are discussed where appropriate. We conducted our work  primarily at IRS headquarters in Washington, D.C., walk-in sites offices at  Baltimore, Maryland, the Wage and Investment Division headquarters and  walk-in sites in Atlanta, Georgia.
section_title: Background
paragraphs: IRS’s filing season is an enormous and critical undertaking and consists of  two primary activities, processing well over 100 million individual income  tax returns and refunds and providing millions of taxpayers with  telephone, Web site, and face-to-face assistance. The following describes  the processing of tax returns.
Most taxpayers file their individual income tax returns electronically,  although millions still mail paper returns. Electronic filing is faster,  which allows taxpayers to receive refunds faster, and is less prone to  transcription and other errors, and provides IRS with significant cost  savings.
Taxpayers below an income ceiling can access the Free File program  offered through IRS’s Web site by a consortium of 19 tax preparation  companies that offer free on-line tax preparation and filing services for  qualifying taxpayers.  IRS continues to develop and deliver a number of Business Systems  Modernization programs, including releases of the Customer Account  Data Engine (CADE). CADE is intended to eventually replace IRS’s  antiquated Master File legacy processing system and facilitates faster  refund processing and provides IRS with more up-to-date account  information.
IRS provides a variety of taxpayer services, including the following.
IRS has toll-free assistance telephone lines which taxpayers can call  with questions about tax law or their refunds. Depending on how  taxpayers respond to menu choices, questions are answered by  automated messages or calls are routed to telephone assistors located  at 24 call sites around the country.  IRS offers assistance through its Web site, including “Where’s My  Refund?”, which enables taxpayers to use the Web site to determine  whether the agency received their tax returns and processed their  refunds. Taxpayers can also download forms, instructions, and  publications, research their own tax law issues through Frequently  Asked Questions or Tax Topics, and receive help with specific tax law  questions and procedural questions via e-mail.  IRS offers assistance at nearly 12,000 volunteer sites, which helps IRS  serve traditionally underserved taxpayer segments, including elderly,  low-income, and disabled taxpayers, and taxpayers with limited- English proficiency. Additionally, IRS has 401 walk-in sites where  taxpayers can receive basic tax law and account assistance from IRS  staff and have returns prepared if their annual income is $40,000 or  less.
In addition to depending on IRS, taxpayers depend heavily on paid tax  return preparers or commercial tax prepartion software during the filing  season. Paid preparers are a critical part of the nation’s tax administration  system because of the wide variety of assistance they offer taxpayers,  including help understanding tax obligations, return preparation and  electronic filing, and providing forms and publications. In 2007, 59 percent  of individual taxpayers had their return prepared and filed by paid  preparers and about 16 percent prepared their return using commercial  tax preparation software.
Late tax law changes create filing season challenges for IRS. This can be  particularly true if, like ESP, the changes are complex and significantly  increase filing season workload (for a detailed description of IRS’s  implementation of ESP, see app. II). ESP contained complex rules about  eligibility, amount of the rebate, and filing requirements.
Over the years, the Congress granted IRS legal authority to cover 11 areas  so that the agency could correct return errors during processing, including  calculation errors and entries that are inconsistent or exceed statutory  limits, without having to issue the taxpayer a statutory notice of deficiency  (see app. III for further details on the MEA process and authorities). We  have reported that prompt compliance checks such as these are important  because as unpaid taxes age, the likelihood of collecting all or part of the  amount owed decreases, due in part to continued accrual of interest and  penalties on the outstanding federal taxes. MEA also provides a taxpayer  service as it allows taxpayers to receive their refunds faster, corrects  return errors before interest is accrued, and can avoid time consuming  interaction with IRS while the error is being resolved.
MEA can also help ensure taxpayers receive the tax benefits for which  they are eligible. For example, between tax years 2003 and 2006, using its  MEA, IRS identified over 500,000 occurrences of taxpayers under-claiming  the EITC with the result that an additional $130 million was provided to  those claimants. Without MEA, most of these errors would not likely have  been identified and thousands of low income taxpayers would likely have  received less than they were entitled.
Because math error checks are automated and require little contact with  taxpayers, they provide IRS with an enforcement tool that is low cost and  less intrusive and burdensome to taxpayers than audits. By using its MEA,  IRS reported preventing $460 million from reaching ineligible taxpayers in  fiscal year 2006.
The NTA—who heads the program that helps resolve taxpayers’ tax  problems with IRS and recommends changes to mitigate taxpayer  problems—noted some concerns about IRS’s use of MEA in its 2006 report  to Congress. NTA reported that, because MEA allows IRS to summarily  assess the tax before a taxpayer has the opportunity to challenge the  assessment, it should be used in specific and narrow circumstances.  Because taxpayer rights are different under MEA, NTA expressed concern  that math error notices did not provide enough detail for the recipient to  understand what had occurred, their rights, and how they could request  abatement. NTA also reported that IRS was using math error checks in  some limited areas where it was not clear that IRS had the authority. In its  response to the NTA’s 2006 report, IRS reported that it resolved the issues  raised by NTA. While the NTA acknowledges that the IRS has made  significant improvements to the math error notice process, it still notes  that IRS could improve how it is administering MEA.
section_title: Despite the Increased Volume of Tax Returns Due to the Economic Stimulus, IRS’s Filing Season was Successful Compared to Previous Years’ with the Exception of Access to Telephone Assistance
paragraphs: As of September 12, 2008, IRS processed 150 million individual income tax  returns, including almost 9 million ESP-only returns, and processed   105 million tax refunds totaling $246 billion. IRS processed 16 million  Form 1040As on paper, a 92 percent increase from last filing season,  largely due to ESP. According to IRS officials, this increase was especially  burdensome not only because paper processing is more labor-intensive  and expensive then electronic processing, but also because claimants  made many errors on ESP-only returns, which IRS had to manually  correct. As of September 12, IRS had processed 116 million stimulus  payments totaling almost $94 billion.
As shown in table 1, the percentage of electronically filed returns is similar  to last year’s when ESP-only returns are included. Excluding the almost   9 million ESP-only returns, most of which were filed on paper, the number  of taxpayers who filed electronically increased from 59 percent to   62 percent of total returns.
The increase in electronic filing is due, in part, to the Free File program.  The number of taxpayers who filed electronically through Free File  increased 24 percent, after a 2 percent decline in participation last year, to  3.8 million. According to IRS officials, this increase is due to greater  taxpayer awareness and enhanced marketing.
As of August 8, CADE posted 30.5 million returns, slightly exceeding IRS’s  goal of 30 million and significantly up from the 11 million returns CADE  posted as of last year. As we have previously reported, a major benefit of  CADE is that direct deposit refunds are issued by CADE 1 to 5 business  days faster than the current legacy system, and paper check refunds are  issued 4 to 8 business days faster because CADE posts information daily.  CADE also was successful in processing 24 million stimulus payments and  contributed to IRS’s early distribution of some stimulus payments. ESP- only payments processed through CADE, rather than the legacy Master  file, were issued up to 4 days earlier than the first scheduled disbursement  date.
Despite the additional volume, IRS met or exceeded goals for seven out of  eight of the processing measures (see app. IV for details). The one measure  where performance was significantly below IRS’s goal and last year’s level  was the refund error rate, i.e., the percentage of refunds with IRS-cause  errors issued to taxpayers by IRS. According to IRS officials, this  performance was due to a programming change and did not delay the  processing of returns or refunds.
We have previously reported that IRS’s ability to maintain or improve  taxpayer service will likely depend on its continued ability to find  efficiencies, particularly through increased electronic filing. Consistent  with this approach, IRS released the “Advancing E-File Study” in  November 2008, which is the foundation for the agency’s strategy and  planned actions to reach the congressionally-set goal of 80 percent of  individual returns filed electronically.
In recent reports, we suggested two options for increasing electronic filing  or reducing paper processing. One would be for Congress to mandate  electronic filing by large paid tax return preparers. Currently, many  returns prepared by preparers on computers are printed and mailed to  IRS, which then have to be transcribed. Our other option is to require bar  coding on paper returns that were prepared by taxpayers using  commercial tax preparation software. Bar coding would eliminate IRS’s  transcription costs and errors. IRS agreed to study this recommendation.
Paid preparers prepared over 81 million returns, which was 59 percent of  all individual tax returns in the 2007 filing season. Because IRS has limited  ability to identify paid preparers and match them with the returns they  prepared, we recently reported that IRS has limited information about the  accuracy of these returns and recommended that IRS develop a plan to  require a single identification number for paid preparers, which could  facilitate research on paid preparers’ influence on taxpayer compliance.  IRS agreed to explore the use of a single identification number to enhance  IRS’s ability to identify paid preparers.
subsections: section_title: Telephone Performance Was Substantially Lower Compared to Last Year’s Due to the High Volume of Stimulus-Related Calls, with the Greatest Downturn Beginning in Early May
paragraphs: Taxpayers’ access to IRS’s telephone assistors was substantially lower  than last year’s because, according to IRS, it received an unprecedented  number of calls primarily due to ESP-related questions. As table 2 shows,  through June 30 of this year, IRS received over 118 million calls, more than  double the total number of calls from last year. However, compared to last  year, more than twice as many callers abandoned their calls and nearly   10 times as many were disconnected by IRS.
On the basis of its experience with the stimulus rebates in 2001 and 2003,  IRS took steps to facilitate telephone service, including establishing a  dedicated toll-free Rebate Hotline for callers with ESP-related questions in  February. As of June 30, IRS answered 37 million calls made to its Rebate  Hotline. However, the unprecedented call volume strained IRS telephone  resources and contributed to a significant decline in the telephone level of  service. Calls to IRS spiked in the first three weeks of May around the  same time that the first rounds of stimulus checks were issued (see fig. 1).  According to IRS officials, taxpayers’ confusion over when they would  receive their payment, or how much they received contributed to the high  call volume. During these weeks, the percentage of callers waiting for an  assistor and getting through fell below 50 percent and subsequently did  not surpass that mark.
The increased call volume also contributed to a decline in related  performance indicators and measures. As previously noted, the number of  callers who received busy signals or were disconnected from IRS  increased as did the caller abandon rate. Further, as shown in table 3, the  average speed of answer—the length of time taxpayers wait to get their  calls answered—nearly doubled from last year.
In addition to the Rebate Hotline, service on other toll-free lines, such as  tax law and account assistance, was affected as well. For example, IRS  estimated that from early May, when IRS began issuing ESP payments,  through the end of June about 30 percent of callers to other toll-free lines  asked ESP-related questions in addition to their primary question. When  the caller asked an ESP-related question, the assistor was instructed not to  transfer the caller to the rebate hotline, but instead to answer the question.  As a result, the level of service on some other telephone applications not  related to the Rebate Hotline also declined this year, according to IRS  officials.
Even with the increased volume of calls, the accuracy of the telephone  assistors’ responses to tax law and account questions was comparable to  the same time period last year and met IRS’s goals (see table 4). Since  2005, IRS has maintained a level of accuracy of about 90 percent.
During the course of our filing season work, we identified some  opportunities to reduce ESP-related calls. On May 21, 2008, we sent a  letter to the IRS Commissioner that suggested four options for his  consideration. IRS implemented three of the four options. IRS re-ordered  the Frequently Asked Questions page on IRS’s Web site to put the most  common questions addressed by assistors first. IRS added text to the  payment schedule page on its Web site and a message for telephone  assistors that provided more detail as to when various types of taxpayers  should expect to receive their refunds. IRS modified the Rebate Hotline  script to include an automated “Most Frequently Asked Questions” (FAQs)  option by adding the FAQs to the automated messaging in the call waiting  queue. The option IRS did not implement was to expand outreach efforts  in the press about the timing and calculation of stimulus payments. IRS  officials concluded that this information might unintentionally create more  calls. Although we believe that additional and more accurate outreach  would have been useful for reducing public confusion, we acknowledge  IRS’s position that many of the calls have required specific explanations  that could not have been handled in mass public outreach.
section_title: IRS Provided Tools through its Web Site That Significantly Increased Use and Potentially Diverted Calls
paragraphs: IRS provided tools and information through its Web site on ESP and  adjusted the information quickly. For example, on the day the legislation  was passed, IRS posted information on IRS.gov with details about ESP.  Within a month, IRS launched the Stimulus Payment Calculator. IRS also  provided a “Where’s My Stimulus Payment?” feature, launched May 1, 2008  (see app. II for more details on ESP timeline).
These ESP-related features resulted in a dramatic increase in the volume  of taxpayer visits, as shown in table 5; visits to IRS’s Web site increased 74  percent; however, if taxpayer visits to ESP-related features were excluded,  visits were slightly down from last year.
Although difficult to quantify, considering the large number of visits to  ESP-related features on IRS’s Web site, it is likely that ESP information  and features on IRS.gov provided sufficient information to divert  taxpayers’ questions from IRS’s Rebate Hotline.
One measure of the quality of IRS’s Web site is its ranking in the Keynote  Systems top 40 government Web sites. During the 2008 filing season,  IRS.gov ranked first or second in response time out of the top 40  government Web sites in the Keynote Government Index weekly ratings,  compared to ranging between third and sixth place last filing season.
section_title: Taxpayer Usage Increased at Volunteer Sites, and although IRS is Making Limited Progress Assessing Quality, Tax Law Quality Declined at Walk-in Sites
paragraphs: Volunteer partners prepared 3.2 million returns, which is a 31 percent  increase compared to last year, with virtually the same number of sites.  IRS officials attribute this growth mainly to increased word-of-mouth  promotion of sites and ESP outreach efforts of volunteer partners. In  contrast, the total number of taxpayer contacts at IRS’s 401 walk-in sites  declined slightly in the 2008 filing season compared to previous years.
In order to assess the quality of the assistance at volunteer sites, IRS  conducts mystery shopping, site, and tax return reviews. This filing  season, IRS officials conducted 85 mystery shopping reviews for which the  accuracy rate for return preparation averaged 75 percent at volunteer  sites. While this is an improvement from last year, we are still concerned  that, because of the low number of mystery shopping reviews conducted,  the quality of volunteer-prepared returns remains largely unknown and  information as a whole is unavailable.
IRS is in the process of improving how it measures the efficacy of its  outreach efforts. In response to our recommendation, IRS has hired a  contractor to conduct surveys and focus groups to assess the IRS  partners’, such as the AARP, ability to reach their target populations, e.g.,  the elderly and limited English proficiency and rural populations, and  measure the effectiveness and quality of that outreach.
In response to another one of our recommendations, to further improve its  quality assessment at walk-in sites, IRS has expanded contact recording— a system IRS uses to record and assess the quality of other interactions  between its employees and taxpayers—at walk-in sessions to include  return preparation. According to IRS officials, the agency hired adequate  staff to review the recorded sessions, which are considerably longer for  return preparation assistance than for tax law or account assistance.  Further, IRS officials report that by the start of the 2009 filing season,  contact recording of return preparation will be operational at 306 sites.
The accuracy of account assistance at IRS walk-in sites was 85 percent,  similar to last year. However, the accuracy of tax law assistance declined  significantly to 68 percent, down from 80 percent last year. According to  IRS officials, this decline was, in part, due to the timing for hiring and  training hundreds of new staff, which was dependent on when IRS  received funding. Further, those staff had to be trained on a new IRS’s  interactive tax law assistance guide at the beginning of the filing season.  IRS officials expect tax law accuracy to improve for the 2009 filing season  as walk-in site staff gain experience with the new guide.
section_title: The Costs and Foregone Revenue Associated with Implementing ESP Are Expected to Reach over $900 Million and IRS Plans to Document Lessons Learned
paragraphs: Based on IRS data, the estimated costs and foregone revenue of  implementing ESP will reach up to $960 million. This includes $202 million  IRS received in a supplemental appropriation in fiscal year 2008, plus  funding transferred from the Financial Management Service and IRS’s user  fee accounts (see table 6). Because IRS anticipates the need for  continued funding associated with the implementation of ESP, it requested  an amendment to its fiscal year 2009 budget to receive an additional $68  million, $29 million of which it has already received under a continuing  resolution. This funding would be used, in part, to cover telephone  demand, which IRS expects to remain well above normal in 2009 due in  part to ESP.
Because of the timing of ESP, IRS officials said that they did not have time  to hire, conduct background checks on, and train additional staff to handle  the increased telephone volume. Instead, IRS shifted hundreds of  Automated Collection System (ACS) staff to answer calls to the Rebate  Hotline from March through August 2008.
As of August, IRS reported $655 million in foregone revenue because of  ACS staff being taken off their collections work to answer the  unprecedented volume of calls related to ESP. As we previously reported,  IRS considered alternatives to shifting ACS staff, including contracting  out, using other staff, or using Social Security Administration (SSA) staff,  but decided the alternatives were not feasible. According to IRS officials,  while IRS expected some foregone revenue and paper backlog associated  with the use of collections and other staff, it determined that delivering  and supporting ESP was its highest priority, after the filing season.
According to IRS officials, volunteer partners helped IRS mitigate the  costs of delivering ESP to the targeted population of benefits recipients.  These partners played a key role in funding and carrying out outreach to  inform targeted groups, e.g., elderly, limited English proficiency, disabled,  about their eligibility for the economic stimulus. For example, AARP  supplied economic stimulus information on its Web site and in its monthly  bulletin, and IRS officials reported that AARP paid for one of the mailings  to people over 65 who may have been eligible for a stimulus payment, but  had not yet filed a tax return. According to IRS officials, partly because of  the efforts of the volunteer partners, 82 percent of the targeted individuals  eligible for the economic stimulus participated in the program. This level  of participation is relatively high compared to some other programs. For  example, we have previously reported that participation rates in  entitlement programs generally range from about 47 percent for the Food  Stamp Program, to 75 percent for the EITC program.
Consistent with best practices for government organizations, IRS is  compiling a report on ESP that will summarize the costs to implement ESP  and the effects on filing season operations. IRS is working to verify the  cost information associated with ESP. As part of its report, IRS hired a  contractor to conduct a lessons-learned study, which is due to be issued in  December 2008.
section_title: IRS Does Not Fully Use Its Existing MEA and Congressional Expansion of MEA in Two New Areas Could Enhance Enforcement at Low Cost
paragraphs: IRS has authority to disallow child and dependent credit claims on returns  with the filing status of “Married Filing Separately;” however, if taxpayers  use this filing status, they would not be eligible for the credit. Under IRS’s  procedures, it processes all returns with child and dependent care claims  and issues refunds as appropriate. IRS then audits the taxpayer who made  the claims using “Married Filing Separately” as appropriate. IRS audited  about 6,000 of these cases in 2005. After verifying the claim is ineligible,  IRS would be left trying to collect the money from taxpayers, who may  have spent the money and now owe back taxes, plus penalties and  interest. For lower-income taxpayers, this may represent a substantial  financial burden.
Some taxpayers claiming child and dependent care credits may file as  “Married Filing Separately” by mistake. They could be eligible for the  credit if they file using a different status, such as “Single,” “Married Filing  Jointly,” “Head of Household,” or “Qualifying Widow(er) with a Dependent  Child. Using audits to correct such mistakes is labor intensive for IRS. IRS  officials confirmed that, if IRS used its MEA in these cases, then it could  inform the taxpayer of their potential eligibility in the associated math  error notices.
A second area where IRS has MEA but does not use it is to disallow EITC  clams is when taxpayers are listed as the noncustodial parent in the FCR.  Noncustodial parents are generally ineligible for EITC, because in most  but not all cases, the child have not lived with the noncustodial parent  for more than the required 6 months of the tax year to meet EITC  eligibility. According to EITC officials, IRS does not use its MEA in these  cases because the child may have lived with the non-custodial parent for  more than 6 months, meeting the residency requirements for eligibility;  however, the FCR may not reflect this living arrangement. Instead of using  its MEA, IRS audits less than 2 percent of these cases; however, it does not  audit more cases because audits are labor intensive. As a consequence,  most of the more than 41,000 claims for $91 million in 2006 by  noncustodial parents were allowed without verification. IRS does not  know how many of these claims were incorrect, but for the claims it  audited, the error rate was about 91 percent of claims for 2006.
IRS officials reported that, as part of their 2009 EITC Research Plan, they  plan to review the reliability and applicability of linking the custodial  information in the FCR to EITC eligibility. They stated that if the FCR is  found to be sufficiently reliable, IRS could use its MEA to automatically  identify and correct ineligible EITC claims.
By focusing on FCR data alone, IRS’s review may be missing another way  to use MEA to verify EITC claims by noncustodial parents and minimize  the chance of disallowing eligible claims. IRS could combine FCR data  with factors it currently uses to select returns for audits, factors such as  taxpayer characteristics like filing status. In a limited sample of returns  from tax year 2006, audit data show that the FCR combined with audit  selection factors such as filing status allowed IRS to accurately identify  ineligible EITC claims by noncustodial parents in 98 percent of cases.  Without including a more thorough assessment of this approach in its FCR  review, IRS will not know the extent to which more accurate eligibility  decisions could be made. Because the agency has MEA to use the FCR, the  agency does not need additional authority to use FCR together with the  audit selection factors.
subsections: section_title: Two Areas Where IRS Could Use Math Error Checks, but Would Need Legislative Authority
paragraphs: We identified two areas related to IRA contributions where IRS officials  reported that they have the technical ability to accurately identify and  correct math errors and did so as recently as 2006. However, at that time,  IRS Chief Counsel determined that the Congress would need to grant IRS  additional MEA to use age-based information to automatically disallow  certain ineligible IRA contributions and thus IRS discontinued the use of  math error checks in these areas.
First, some taxpayers under the age of 50 claim IRA contribution amounts  that are more than allowed. These taxpayers incorrectly claim the amount  intended for people over 50 making IRA “catch-up” contributions. In 2004,  IRS identified 24,000 incidences of these IRA contribution overclaims  resulting in $23.2 million in underreported taxes. IRS used age data from  the SSA database to check for age eligibility of these contributions. IRS  counsel determined that the agency does not have MEA to use age-based  data in this manner, although IRS has and does use age data from the SSA  database for other math error types, such as EITC eligibility.
Second, some taxpayers over the age of 70-½ claim contributions to a  traditional IRA, which they are not entitled to make. By law, taxpayers  over the age of 70-½ cannot make contributions to traditional IRAs. TIGTA  found that in 2006, 1,826 taxpayers over the age of 70-½ improperly  claimed $4 million in IRA deductions for an estimated loss of revenue of  $601,000. IRS used age data from the SSA database to check for age  eligibility of these contributions. IRS officials believe that this problem is  likely to become significantly larger as the population ages. However, IRS  currently lacks MEA to identify and correct ineligible claims.
section_title: Conclusion
paragraphs: Despite the challenges of the economic stimulus program, IRS was  generally successful providing service to taxpayers during the 2008 filing  season. The major exception was telephone service, where the large,  unanticipated increase in call volume caused by ESP significantly affected  performance.
Although IRS focuses on taxpayer service during the filing season, it also  uses MEA to conduct important compliance checks while processing tax  returns. There are two areas where IRS could use its existing authority  more fully and where the agency could improve service through notices  informing taxpayers of potential eligibility for child and dependent care  credits. With additional MEA, IRS could further increase compliance,  improve taxpayer service, and gain additional efficiencies.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Commissioner of Internal Revenue direct the  appropriate officials to  (1) use IRS’s existing MEA to identify and correct child and dependent  care credit claims on “Married Filing Separately” returns;  (2) include information on math error notices to inform taxpayers that  they may be eligible for the child and dependent care credit if they file  under a different status, such as “Single,” “Married Filing Jointly,”  “Head of Household,” or “Qualifying Widow(er) with a dependent  child”; and  (3) assess the effectiveness of combining FCR and other data on taxpayer  characteristics to verify the eligibility of EITC claims from  noncustodial parents.
section_title: Matters for Congressional Consideration
paragraphs: Given the potential for improving compliance now and in the future, the  Congress should provide IRS with the authority to use math error checks  to identify and correct returns with ineligible (1) IRA “catch-up”  contributions, and (2) contributions to traditional IRAs from taxpayers  over age 70-½.
section_title: Agency Comments and Our Evaluation
paragraphs: The Deputy Commissioner of Internal Revenue provided written  comments in a December 4, 2008 letter in which she agreed with all our  recommendations and outlined IRS’s actions to address those  recommendations. With respect to child and dependent care credit claims  on “Married Filing Separately” returns, IRS plans to make programming  changes that will allow the agency to use math error checks to identify and  correct claims, and create notices to inform taxpayers of their possible  eligibility for the child and dependent care credit if they file under a  different status. For the recommendation to assess the effectiveness of  combining FCR with other data on taxpayer characteristics, IRS plans to  do so as part of its study on the reliability and applicability of non- custodial information in the FCR.
The Deputy Commissioner also supported our suggestions for  congressional consideration to provide IRS with legal authority to  automatically correct returns for individual retirement account  contributions that violate the dollar or age limits. She further stated that  they could increase compliance and improve taxpayer service.
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section_title: Appendix I: Comments from the Internal Revenue Service
section_title: Appendix II: Key Dates and Activities of the 2008 Filing Season
section_title: Appendix III: Using IRS’s Math Error Authority to Process and Correct Returns with Math Errors
paragraphs: In the math error program, IRS uses computer programmed comparisons  and calculations to systemically identify math errors during tax return  processing (see fig. 3) for correction. These corrections involve  mathematical calculation errors, incorrect taxpayer identification  numbers, filing status and dependents, and missing schedules or forms.  Once the computer programming detects an error, it forwards the tax  return account to the Error Resolution System, where an IRS employee  takes the appropriate action to resolve the error condition and provide the  information needed to generate a notice to the taxpayer.
As early as the first codification of the Internal Revenue law in 1926, the  Congress granted IRS math error authority (MEA) so that IRS does not  have to provide the taxpayer with a statutory notice of deficiency for math  errors. In general, these are errors that must be corrected in order for IRS  to process the tax return. A 1976 statutory revision defined the authority to  include not only mathematical errors, but other obvious errors such as  omissions of data needed to substantiate an item on a return, and provided  a statutory right to file a request for abatement of the assessment within 60  days after the notice is sent. In the 1990s, the Congress extended the  authority five times to help determine eligibility for certain tax exemptions  and credits. Table 7 summarizes the legislative authority on math error  provisions for individual tax returns.
section_title: Appendix IV: IRS’s Processing Performance Relative to 2004-2008 Performance and 2008 Goals
paragraphs: Despite the added individual return volume due to the Economic Stimulus  legislation, as of June 30, 2008, IRS met or exceeded seven out of the eight  processing performance goals. As shown in table 8, IRS met or exceeded  its goals for the percentage of errors included in deposits and  correspondence (which was separated into letter and notice errors in  previous years); deposit and refund timeliness (i.e., interest foregone by  untimely deposits); and productivity and Individual Master File efficiency.
The one measure where performance was below IRS’s goal and last year’s  level was the refund error rate, i.e., the percentage of refunds with IRS- cause errors issued to taxpayers by IRS. According to IRS officials, the  increase in the refund error rate is attributed to a programming change  that resulted in IRS catching, for example, changes of address or name  changes, as it began transcribing data from paper returns. According to  IRS officials, because the changes did not result in significant additional  transcription, the increased error rate did not result in a delay of refunds  or a delay in processing of returns.