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 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. 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 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. 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 percent 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 errors 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 the primary taxpayer filing the tax return. For dependent exemptions, about 32 percent of the errors were missing SSNs; and about 50 percent were incorrect SSNs. 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. 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. 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. 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.