HEARING BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
February 26, 2009
The Honorable J. Russell
George
Treasury Inspector General
for Tax Administration
STATEMENT OF
THE HONORABLE J. RUSSELL
GEORGE
TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
before the
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE
ON WAYS AND MEANS
“IRS Assistance for
Taxpayers Experiencing Economic Difficulties”
February 26, 2009
Chairman Lewis, Ranking Member Boustany,
and Members of the Subcommittee, I thank you for the opportunity to submit
testimony for this hearing. My comments will
focus on the Treasury Inspector General for Tax Administration’s (TIGTA) audit
actions pertaining to the Internal Revenue Service’s (IRS) efforts to assist
taxpayers experiencing economic difficulties.
The American economy is in the midst of an
economic crisis. The economy lost 3.6
million jobs in the last 13 months, the biggest job loss since the end of the
Second World War. Many experts believe
unemployment could reach double digits if no action is taken. In light of this historic economic weakness,
President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA
2009), a nationwide effort to create jobs and transform our economy to compete
in the 21st century.[1] The legislation represents the most ambitious
effort to stimulate the economy in our nation’s history.
According to the Administration, nearly
40 percent of the benefits of the
ARRA 2009 are derived from direct relief to working and middle class families. The ARRA 2009 includes a Making Work Pay tax
credit for 95 percent of workers and their families. In addition, the ARRA provides direct relief
for families by expanding unemployment insurance and offering payments to
Social Security beneficiaries and veterans.
The ARRA 2009 also enacted the most
significant expansion in tax cuts for low- and moderate-income households ever. Under prior law, a family of four earning the
minimum wage currently lived below the poverty line. Under the ARRA 2009, that family should be
lifted out of poverty by a combination of an $800 Making Work Pay tax credit
and $1,200 from an expanded child tax credit. All told, the Administration estimates that more
than 2 million people would be lifted out of poverty.
According to Recovery.gov, tax relief accounts for
approximately $288 billion of ARRA 2009 provisions. Tax relief accounts for about one-third of the
recovery benefits expected from the ARRA 2009.
Therefore, the IRS plays a key role in helping to accomplish the economic
recovery.
Filing Season[2]
Each year, legislated tax law changes create challenges
for both the IRS and individual taxpayers.
The ARRA 2009 is no exception.
However, experience has shown that the IRS can effectively meet those
challenges. Last year, the IRS
implemented tax law changes correctly with no significant delays in the processing
of tax returns during the 2008 Filing Season.[3] Overall, through May 30, 2008, the IRS had
received 144.2 million individual tax returns.
Of those, approximately 86.7 million were electronically filed and
approximately 57.5 million were filed on paper.
The 2008 Filing Season presented
additional challenges for the IRS due to the late and unexpected enactment of
two significant tax laws.
·
The Tax Increase Prevention Act of 2007 limited
the number of taxpayers who would be subject to the Alternative Minimum Tax for
Tax Year 2007.[4]
·
The Economic Stimulus Act of 2008 provided an
economic stimulus payment to more than 130 million people.[5]
In spite of the
additional challenges, the IRS generally had a successful 2008 Filing
Season. Most key tax law and administrative changes were
correctly implemented, and the IRS completed processing returns on
schedule and issued refunds within the required 45 calendar days of the April
15, 2008, due date.[6]
Individual
return receipts for electronic and paper returns exceeded the IRS estimates and
the receipts from the same time in 2007 by more than 11 percent. The largest increase was in the number of
paper U.S. Individual Income Tax Returns (Form 1040A), which increased by
almost 84 percent from the same time in 2007.
This increase was largely due taxpayers who do not normally file tax
returns, filing returns in
Tax Year 2007 in order to receive the economic stimulus payment.
However, while
the IRS was able to meet the challenges of late and unexpected enacted legislation
and accurately process most returns in a timely manner, TIGTA identified the
following opportunities to improve the processing of some tax
deductions:
·
Taxpayers improperly claimed and were allowed
the Qualified Mortgage Insurance Premiums deduction.
·
Taxpayers age 70½ or older improperly claimed
and were allowed the Individual Retirement Account deduction.
·
Taxpayers did not claim the sales tax deduction.
·
Taxpayers who improperly claimed a “dual
benefit” for both the tuition and fees deduction and the Education Credit are
not receiving the dual benefit. However,
improvements still need to be made in processing these returns.
TIGTA recommended that the IRS: identify improperly claimed deductions; inform taxpayers regarding possible eligibility for a sales tax deduction; and implement procedures to correctly address "dual benefit" education credit and deduction cases. In response to the report, the IRS plans to update computer programs to identify taxpayer returns where improper deductions may be claimed, ensure IRS employees are correctly addressing education "dual benefit" cases, and plans to add a cautionary statement on sales tax deduction eligibility to a tax form.
Given the opportunities for improvement
that TIGTA identified during the
2008 Filing Season, TIGTA is committed to continued oversight of each Filing Season. As part of that oversight, TIGTA will review
the implementation of tax relief provisions included in the ARRA 2009 during
the 2009 and 2010 Filing Seasons.
Toll-free Telephone Assistance
Each year,
millions of taxpayers contact the IRS by calling the various toll-free
telephone assistance lines to seek help in understanding tax laws and meeting
their tax obligations. Given the tax provisions of the ARRA 2009, it
is likely that some taxpayers will call the IRS for assistance with those. The tax provisions of the ARRA 2009 could significantly
challenge the IRS to provide toll-free telephone assistance during the 2009 and
2010 Filing Seasons.
Over the years, the IRS has encountered
issues that affect access to its toll-free telephone services, such as natural
disasters and the late passage of legislation.
For example, for the 2006 Filing Season, the IRS planned for more
services on the toll-free telephone lines and dedicated disaster relief
applications to help reduce any potential impact of callers inquiring about
filing extensions related to Hurricanes Katrina and Rita.[7] For the 2007 Filing Season, the IRS planned
for additional calls to assistors and the automated lines in anticipation of
questions about the Telephone Excise Tax Refund.
However, the Economic Stimulus Act of
2008 was passed in February 2008, after the IRS had completed planning for the
2008 Filing Season. The Act was passed
to provide economic stimulus through recovery rebates to individuals,
incentives for business investment, and an increase in conforming and Federal
Housing Authority loan limits.[8] About 130 million taxpayers were expected to
receive economic stimulus payments beginning in late April and early May. During the 2008 Filing Season, the IRS
averaged 69,000 rebate calls per day, with a peak volume of 208,000 in one day.[9]
Taxpayers rely heavily on the IRS’s
toll-free telephone assistance for help with their tax obligations. During the 2008 Filing Season, taxpayers
called the IRS toll-free telephone assistance lines approximately 59.7 million
times.[10] Of these calls, about
22.2 million were made to the toll-free telephone number that taxpayers call to
ask account or tax law questions (1-800-829-1040). In addition, about 6.1 million calls were
made to the IRS automated TeleTax system that provides recorded tax law and tax
refund information. Figure 1 shows the
number of calls made to the toll-free telephone assistance lines, including
about 16.1 million calls answered by customer service representatives
(assistors).[11]
Figure 1: Calls Handled
by the IRS in the 2008 Filing Season
Source: IRS Enterprise Telephone Data Warehouse.[12]
Call volume usually decreases after the filing
season. However, due to calls about the
economic stimulus payments and taxpayers repeatedly trying to call, not only
did demand not decrease, it increased significantly after the 2008 Filing
Season.[13] Because of the additional call volume
associated with the economic stimulus payments, the IRS continued to struggle
with extremely high call volumes after the 2008 Filing Season and did not
achieve some of its fiscal year performance goals. The ability of taxpayers to access the
toll-free telephone system was much lower than that in prior years. For example, the IRS had planned to achieve
an 82 percent Level of Service and a 270-second Average Speed of Answer. Instead, through August 30, 2008, it achieved
a
54 percent Level of Service and a 589-second Average Speed of Answer.[14]
Taxpayers made about 189 million calls to the IRS
toll-free telephone assistance lines during Fiscal Year 2008.[15] The IRS received approximately 125 million
call attempts after the 2008 Filing Season, with approximately 45 million (36
percent) call attempts made to the Rebate Hotline (the telephone line dedicated
to calls related to the economic stimulus payments/rebates). IRS assistors answered about 17 million calls
after the 2008 Filing Season; approximately 4.2 million (24.5 percent) were for
those taxpayers calling the Rebate Hotline.
Volunteer Taxpayer Assistance Program[16]
The Volunteer Taxpayer Assistance Program plays an
increasingly important role in achieving the IRS’s goal of improving taxpayer
service and facilitating participation in the tax system. It provides no-cost Federal tax return
preparation and electronic filing directed
toward underserved segments of individual taxpayers, including low-income to
moderate-income, elderly, disabled, and limited‑English‑proficient
taxpayers. TIGTA has conducted annual
assessments of the VITA program since 2004.
The accuracy rate for returns prepared at volunteer sites has increased
from 0 percent in 2004 to
69 percent in 2008. TIGTA’s review of the
2008 Filing Season also found improvements to the oversight of the volunteer
program.[17]
Although accuracy rates for tax returns prepared by volunteers have increased from those in prior years, the quality assurance process is still not consistently followed. Incorrectly prepared tax returns can increase the risk of taxpayers receiving erroneous tax refunds by not receiving credits to which they are entitled or receiving additional credits for which they do not qualify.
Posing as taxpayers, TIGTA auditors had
tax returns prepared by volunteers at VITA and TCE sites sponsored by the
American Association of Retired Persons. Of the 36 tax returns prepared during the
course of the audit, 11 returns (31 percent) were prepared incorrectly. For the 11 tax returns incorrectly prepared, 1
or more requirements were not followed. For
example:
·
For
1 return (9 percent), the volunteer did not use an intake sheet when preparing
the tax return.
·
For
3 returns (27 percent), the volunteers did not correctly prepare the intake
sheet.
·
For
3 returns (27 percent), the sites had no quality review process.
·
For
3 returns (27 percent) that were quality reviewed, the volunteers did not use a
quality review checksheet.
Some volunteer sites also offer Refund
Anticipation Loans (RAL).[18] However, little oversight for these loans is
offered through the Volunteer Program.
The IRS could not provide the number of Volunteer Program sites or a
list of sites that offer RALs. In
addition, the volunteers cannot input RAL indicators on taxpayer accounts for
those who applied or obtained the loans, which is a requirement for commercial
tax preparation companies.
Improvements are needed to the Volunteer
Program. Return review procedures used
to monitor effectiveness were not consistently followed from site to site. Return reviews are unannounced IRS visits to
volunteer sites to evaluate tax law and tax return accuracy. In addition, TIGTA’s review of 91 Return
Review cases showed that 43
(47 percent) had missing or illegible documents. Therefore, TIGTA could not validate the
accuracy of those tax returns. TIGTA
recommended that the IRS improve documentation of its reviews, require
volunteer applicants to disclose any criminal convictions, and require sites to
document whether they offer Refund Anticipation Loans.
In
general, the IRS agreed with TIGTA’s recommendations. However, the IRS disagreed that it should
ensure that volunteers are able to input a RAL indicator, citing a variety of
procedural and other issues. TIGTA
agreed that the IRS needs to consider the additional costs and investigate
further before making a final determination. However, the IRS currently cannot determine
which sites offer RALs or the number of—and/or which—taxpayers visit volunteer
sites to obtain RALs. This is necessary
to determine the effect of RALs on the Volunteer Program and to ensure that all
procedures and regulations are followed.
According to the IRS, oversight of volunteers offering RALs will be
accomplished within the parameters of an existing program. TIGTA plans to follow up on this action
during its 2009 Filing Season audit of the Volunteer Program.
Refund
Anticipation Loans
In times of economic hardship, more
taxpayers may seek to receive their tax refunds more quickly. Already, millions of taxpayers borrow against
all or part of their expected tax refunds to receive their money. This is accomplished through short-term loans
that cost taxpayers fees and interest payments.
However, many of these taxpayers are eligible for free tax preparation
services offered by the IRS and its partners.
During the 2008 Filing Season, almost 10
million taxpayers borrowed against all or part of their expected tax refunds
using RALs. A RAL is a short‑term
loan based on a taxpayer’s expected income tax refund and is a contract between
the taxpayer and a lender. The IRS is
not involved in this contract, cannot grant or deny the loan, and cannot answer
any questions about it. The loans last
from 5 to 14 days.
TIGTA surveyed by telephone 350 taxpayers
whose IRS Tax Year 2007 tax accounts contained RAL indicators. Respondents stated that they were aware they
received loans and they did obtain their money more quickly. For 250 respondents who indicated that they
had received RALs, 213 (85 percent) stated that they obtained their loans so
they could more quickly receive their tax refunds.[19] The other 100 indicated they did not obtain a
RAL despite what the IRS’ records indicated.
Taxpayers who chose to wait and receive
their tax refunds from the IRS waited from 5 days to 8 weeks, depending on how
they filed and how they chose to receive their tax refunds (by check or direct
deposit). For the 250 respondents who
responded that they received RALs:
·
131
(52 percent) received their loans the same day of or within
2 business days of their tax return preparation.
·
213
(85 percent) stated that preparers made it clear they were receiving loans. In addition, 220 (88 percent) stated that the
preparers explained the fees. However,
only 85 respondents (34 percent) stated that they were provided with the
interest rates for the loans.
·
167
(67 percent) preparers explained how long it would take for the taxpayers to
receive their tax refunds if they chose not to obtain the loans.
·
213
(85 percent) obtained loans because they wanted faster access to their tax
refunds and 185 (74 percent) used the money to pay bills. Another 14
(6 percent) used the money to buy or repair a car or for home repairs and
expenses. Eight percent stated they put
the money in savings.
Proponents of RAL reform have expressed
concerns that preparers might be taking advantage of taxpayers by aggressively
marketing the loans. More than one-half
of the respondents—159 (64 percent)—had checking or savings accounts with
financial institutions. In fact, 81
preparers suggested that these taxpayers accept their loan proceeds via a
direct deposit to their accounts—11 stated that they followed the preparers’
suggestions. Assuming that these
taxpayers could afford the tax return preparation and filing fees, they
alternatively could have had the IRS directly deposit their refunds to their bank
accounts in as few as five days.
Most respondents actually received their loan
proceeds within five days. Fifty-two percent of respondents (131 of 250)
stated that they received their loan proceeds within two days. Forty‑five percent (113 of 250) of the
respondents who indicated that they had received RALs stated that they would
have been willing to wait less than a week to receive their tax refunds from
the IRS, and 85 percent (212 of 250) stated they would have been willing to
wait up to nine days to receive their tax refunds.
The IRS is actively working to reduce the
amount of time required to process tax returns.
By reducing the number of days required to process tax returns, the IRS
will be able to issue tax refunds sooner.
This will shorten the number of days between the time taxpayers receive
their RALs and the time it takes the IRS to issue the tax refunds.
Additionally, TIGTA’s analysis of
taxpayer account data for the respondents showed that 158 (63 percent) received
the Earned Income Tax Credit. The Earned
Income Tax Credit has been cited by many experts as the single Federal
Government program that does the most to help get working families out of
poverty. However, tax return preparation
and fees to obtain RALs ranged from 10 to 39 percent of the taxpayers’ Earned
Income Tax Credit, with the percentage generally higher for low‑income
taxpayers.
The majority of survey respondents would
have qualified for the IRS’s free tax preparation assistance. However, 81 percent (284 of 350) stated that
they were unaware of these free services.
Taxpayers may visit Taxpayer Assistance Centers,[20] VITA
sites and TCE sites, or use the Free-File Program to file their tax returns for
free. During the 2008 Filing Season,
more than 9 million taxpayers took advantage of these services.
TIGTA recommended that the IRS use
taxpayer account data for taxpayers who apply for RALs and Refund Anticipation
Checks to better focus the IRS’s marketing and education efforts so that more
taxpayers can make use of the available free services. The IRS agreed with the recommendation.
Self-Assistance
The IRS’s current methods for assisting
customers with e‑file reject
conditions create burdens for the customers and unnecessary expenses for the
IRS, including costs for providing toll‑free telephone assistance and
maintaining redundant systems. The IRS noted that each system was developed
for a different purpose and for a different type of user. In Calendar Year 2007, the IRS spent more
than $3 million[21] providing
customers with telephone assistance to address e-file reject conditions.
Requiring customers to call the IRS to obtain assistance in correcting
reject conditions increased the burden for the 154,986 customers who had to
call the IRS for assistance with rejected e‑filed
tax returns in Calendar Year 2007.
For Tax Year 2006, the IRS
received nearly 80 million e-filed
tax returns. E-filed returns
benefit both the IRS and taxpayers because their processing costs and error
rates are lower than
those for paper returns. To help achieve
a high level of accuracy, the IRS’s e-file
system has automated, upfront tax return validity checks. The IRS rejects
e-filed tax returns that do not pass
its validity checks and sends the electronic files back to the customers, who are responsible for correcting the
reject conditions and resubmitting the tax returns.
The information provided to a customer in
the e-file acknowledgement does not
by itself enable the customer to address the reject condition(s). Customers are required to review publications
and/or contact the IRS to obtain a detailed description of what caused the
reject conditions and, more importantly, how to correct the conditions.
A
self-assistance option could be created.[22] The IRS provided TIGTA with documentation
outlining a system that would give customers self-assistance options. The original request date for implementation
was August 2005. However, resource
constraints have prevented the system’s implementation. The IRS currently has a system that could be modified
to include information on how to resolve the reject conditions, and this system
could be placed on IRS.gov (the public IRS Web site) as a self-assistance
option. Updates to this system could
provide the IRS with a short-term solution for providing self-assistance.
The IRS has already taken action in
response to our concerns by adding to IRS.gov a new option that lists common
reject codes along with suggested solutions.
This is a first step toward providing a complete electronic self-assistance
option for resolving rejected e‑filed
tax returns. For the long term, the IRS
should focus on providing customers with both a description of the reject
condition and information on how to resolve it by including a description of
the reject condition with steps to correct the error in the e-file acknowledgement file. This would provide customers with one-stop
self-assistance. The IRS has been moving
to a new electronic platform to process e-filed
tax returns, referred to as the Modernized e-file
Program. IRS officials noted that
expansion of the Modernized e-file
Program to include individual tax returns will begin in Fiscal Year 2009 and
will be completed by Fiscal Year 2011.
The e-file acknowledgment file
that will be generated from the Modernized e-file
Program has the possibility of including a description of the reject conditions
and information as to how to address them.
TIGTA recommended that the IRS: 1) develop a self-assistance option on
IRS.gov that allows customers to obtain detailed explanations of e-file reject conditions, including the
steps to resolve them; and, 2) develop a business case on the feasibility of
providing in the e-file
acknowledgement the information that would allow customers to resolve their
reject conditions once individual tax returns are transitioned to the
Modernized e-file Program. IRS management agreed in part with one
recommendation and disagreed with the other one. For 13 e-file
error reject codes, a self-assistance option was added to IRS.gov, which
provides descriptions and suggested solutions.
These commonly issued error reject codes accounted for 78 percent of the
10.2 million error reject codes issued in 2008 and 81 percent of the 9.9
million error reject codes issued during 2007.
The IRS also agreed to study the feasibility of adding a more
comprehensive self-assistance option to IRS.gov.
While the IRS agreed that the e-file acknowledgement should provide
information that would allow customers to resolve their reject conditions, it
does not agree that a business case to determine the feasibility of providing
this functionality is necessary.
According to the IRS, the Modernized e-file
Program will provide customers with reject codes written in plain English and
clear and concise explanations of the reject conditions.
Tax Practitioners
In Fiscal Year 2007, the IRS, including
the National Taxpayer Advocate and the Director, Office of Professional
Responsibility, participated in a Return Preparer Summit, characterized as a
first step toward creating an agency-wide preparer strategy. The
In Calendar Year 2007, the IRS processed
approximately 83 million individual Federal income tax returns prepared by paid
preparers. Anyone—regardless of
training, experience, skill, or knowledge—is allowed to prepare Federal income
tax returns for others for a fee. In
February and March 2008, TIGTA auditors posed as taxpayers in a large
metropolitan area and paid to have 28 tax returns prepared at 12 commercial
chain and 16 small, independently owned tax return preparation offices. Auditors paid commercial chains approximately
$2,800, averaging $234 per tax return, and independently owned offices
approximately $2,100, averaging $132 per tax return.
The preparers were unlicensed and
unenrolled. That is, they were not
practitioners (attorneys, certified public accountants, enrolled agents, or
enrolled actuaries). Preparers often
made substantial errors when completing tax returns and correctly prepared only
11 (39 percent) of the 28 tax returns (i.e., the tax returns showed the correct
amount of taxes owed or refunds due).
However, 17 tax returns (61 percent) were prepared incorrectly.
·
11
(65 percent) of the 17 contained mistakes and omissions TIGTA considered to
have been caused by human error and/or misinterpretation of the tax laws.
·
6
(35 percent) of the 17 contained misstatements and omissions TIGTA considered
to have been willful or reckless.
If these incorrect tax returns had been filed,
the net effect to the Federal Government would have been $12,828 in understated
taxes (this is the net effect–there were instances in which tax liabilities and
tax refunds were both overstated and understated).
The Internal Revenue Code includes requirements
that all preparers be diligent in determining taxpayer eligibility for the
Earned Income Tax Credit, sign the tax return, furnish their identification
number on the tax return,[24] and not
improperly or recklessly disclose tax return information. However, none of the seven preparers required
to exercise due diligence when determining whether auditors were eligible to
receive the Earned Income Tax Credit did so.
In addition, two preparers did not furnish the required identification
numbers on the completed tax returns.
The IRS does not have one list or
database that collects information on preparers such as the preparer’s name,
associated identifying numbers, or whether the preparer is a practitioner or
unenrolled preparer. The IRS
acknowledges that it does not know how many paid preparers exist and cannot
determine the full extent of noncompliance and incompetence among
practitioners. This hinders the IRS’s
efforts to expand its outreach and education initiatives and to identify
potentially problematic preparers and all the tax returns they prepared.
While taxpayers are ultimately
responsible for the information reported on their tax returns, millions rely on
preparers to prepare correct returns. In
Fiscal Year 2007, legislation was introduced in Congress to regulate paid
preparers.[25] A unique identification number would enable
the IRS to use its current databases to identify and evaluate preparers’
compliance. Being able to identify all
preparers would allow the IRS to better pursue abusive or incompetent tax
preparers in its stepped-up campaign against tax fraud and other forms of
noncompliance. TIGTA recommended that
the IRS develop and require a single identification number to control and
monitor all paid preparers. The IRS
agreed to study this issue.
With its current processes, the IRS
cannot determine how many complaints against tax return preparers it receives,
how many complaints are worked, and the total number of multiple complaints
against a specific firm or preparer.[26] Guidelines provided to taxpayers and
employees about filing a tax return preparer complaint are confusing and
inconsistent. Finally, the form used to
submit complaints against unenrolled preparers is not designed to provide adequate
information with which complaints can be worked.
The IRS’s current process for handling
taxpayer complaints against preparers does not identify potential problem
preparers so that the IRS can determine the extent of noncompliance, if any, or
how the noncompliance should be addressed.
Complaints are generally not controlled and tracked. Therefore, neither the volume of complaints
received from taxpayers and worked, nor their resolutions are known. Moreover, complaints are reviewed multiple
times and mailed to multiple offices before most are ultimately destroyed.
Several functions and offices are
involved in the process of resolving taxpayer complaints. Complaints are not centrally recorded to
identify duplicates, and many complaints are redirected to another function. Because of this, the IRS spends unnecessary
time sorting and redirecting complaints.
In addition, the IRS does not acknowledge all taxpayer complaints. An ineffective complaint system erodes public
trust as taxpayers become frustrated with the IRS’s apparent non-response.
TIGTA recommended that the IRS: 1) clarify guidance to taxpayers on the
public IRS Web site (IRS.gov) regarding the preparer complaint process; and, 2)
develop a form, both web-based and paper, specifically for tax return preparer
complaints that routes to the correct function based on the type of tax return
preparer and includes the items necessary for the IRS to appropriately evaluate
the legitimacy of the complaint. Once a
form is developed to ensure that sufficient information is captured about the
complaint, a database(s) or tracking system should be developed to efficiently
control the complaints. The IRS agreed
to update guidance on IRS.gov and create a cross-functional team to develop
recommended action items to identify opportunities for improvement that may
include changes to forms and creation of an automated tracking system.
Compliance Issues
Automated Underreporter Program
The Automated Underreporter (AUR) Program
is an important component of the IRS’s efforts to ensure voluntary taxpayer
reporting compliance. This Program uses
third-party payer information (such as that from banks and brokers) to
determine whether taxpayers have reported all of their income. Notices are sent advising taxpayers of
additional tax on any unreported income.
During a recent review of the AUR Program, TIGTA found that some
taxpayers were negatively affected by inaccurate information on the notices.[27] TIGTA believes these taxpayers agreed to
inaccurate assessments as a result of the confusion caused by the complexity of
the notices.
The Computer Paragraph (CP) 2000 notice
is the primary notice that the IRS issues to taxpayers as a result of
underreporting discrepancies. During Fiscal
Year 2007, the AUR Program closed approximately 1.3 million cases after sending
notices to taxpayers for underreporting discrepancies identified on their Tax
Year 2005 returns. TIGTA selected and
analyzed a statistically valid random attribute sample of AUR Program notices
sent to 138 taxpayers in Fiscal Year 2007 and found that 7 (5.1 percent)
taxpayers were sent inaccurate information.
Errors on CP 2000 notices resulted in taxpayers being both overassessed
$18,968 and underassessed $1,146 in tax.
Based on the analysis, TIGTA estimated that in Fiscal Year 2007, 48,669
taxpayers received
CP 2000 notices with inaccurate information that might have resulted in
overassessments of tax. TIGTA also
estimated that an additional 19,468 taxpayers might have been erroneously
underassessed tax as a result of inaccurate notices. If the number of AUR Program notices remains
constant over the next five years, TIGTA estimates that
243,345 taxpayers might be overassessed tax and 97,340 taxpayers might be
underassessed tax based on erroneous information in the CP 2000 notices.
While the IRS attributed the problems to
employee mistakes, the complexity of the CP 2000 notices may also be a
contributing factor. During Fiscal Year
2007, customer satisfaction surveys for the AUR Program indicated that,
depending on the survey quarter, 24 percent to 32 percent of the taxpayers
stated that their primary reason for calling the IRS was to have someone
explain the CP 2000 notice to them. The
complexity of the CP 2000 notice could be why some taxpayers do not question
the information provided on the notice even when that information is incorrect.
In addition, although required by the
Internal Revenue Manual, some of the AUR Program managers did not always comply
with the requirement to submit a corrective action plan when the weekly notice
quality review error rate exceeded 10 percent.
During the first 7 months of Fiscal Year 2008, there were 12 occasions
when corrective action plans should have been submitted to the Program Office
because weekly notice error rates exceeded 10 percent. However, only 5 (41.7 percent) corrective
action plans were submitted, and only 3 (25 percent) of these corrective plans
were submitted within the 2-day requirement.
Although the IRS has established a
quality review process for identifying employee errors on notices, AUR Program
management has not ensured that managers consistently take action to address
notice inaccuracies. In addition, as of
September 2007, 261 (28.6 percent) of the 911 AUR Program employees had fewer
than two years experience. According to
the IRS, increased oversight of the quality program has led to more involvement
in establishing corrective action plans, developing error tracking reports, and
resolving procedural issues with their employees. However, more action is needed. The combination of inexperienced staff and
managers who were not adequately addressing employee errors has resulted in a
higher rate of inaccurate CP 2000 notices being issued to taxpayers.
TIGTA recommended that the IRS: 1) ensure that AUR Program management
incorporates additional information on notice review procedures and quality
service expectations into its refresher training for Program employees; 2)
simplify the CP 2000 notices issued by the Program; and, 3) ensure that Program
management monitors compliance with requirements to submit and implement
corrective action plans when notice review error rates exceed 10 percent. The IRS agreed with all of the
recommendations.
Federal Payment Levy
Program
The IRS is
authorized to continually levy against certain types of Federal Government
payments issued to taxpayers and contractors with outstanding tax debts.[28] The IRS uses the
Federal Payment Levy Program (FPLP) to impose systemic levies on these types of
payments. However, in some cases, these
systemic levies have caused hardships for taxpayers.
Congress has expressed concern that some
Federal Government contractors, vendors, and employees who received Federal
Government payments were delinquent in meeting their tax obligations. Accordingly, Congress amended the tax code[29]
and authorized the IRS to continuously levy against specified Federal
Government payments through the FPLP.
The FPLP was created to systemically levy against these payments.
In Fiscal Year 2004, IRS collections on
delinquent taxes through the FPLP totaled
$114 million. In Fiscal Year 2007, the
total collections through the FPLP rose to
$345 million. The increase in
collections can be directly attributed to the efforts of the FPLP in accessing
additional Federal Government payment streams that were previously not available
for levy. However, even with this
growth, IRS management still could do more to prevent hardships on low-income
taxpayers.
TIGTA identified a number of areas in the
FPLP that need to be improved. Some
low-income Social Security beneficiaries are experiencing hardship due to the
FPLP. Initially, the IRS had an income
threshold in place. If a taxpayer’s
overall income amount as reported on the most recently filed tax return was
less than this threshold, the taxpayer was excluded from the Program. However, starting in July 2005, the income
threshold began to be phased out. It was
first reduced by one-half; six months later, it was completely removed. Since then, the Taxpayer Advocate Service has
experienced a large increase in the number of Social Security beneficiaries
claiming hardship due to the issuance of FPLP automated levies. Although the previous income threshold
criteria were flawed in some respects, some method of screening is needed.
TIGTA recommended that the IRS establish
specific criteria to identify and exclude from the FPLP those Social Security
beneficiaries for whom a levy would create a hardship situation. The IRS
partially agreed with the recommendation.
The IRS agreed with the principle, but does not know if the model it currently
has under development to screen low-income taxpayers for potential hardship is
feasible to implement. TIGTA is
concerned about the lack of a solution in place to prevent as many hardships as
possible for low-income taxpayers. It has been
seven years since the IRS first put in place a filter to prevent
hardships. There has been more than
enough time to refine and test the criteria.
Delays come at the expense of low-income taxpayers who experience
hardship due to levies on their Social Security payments. The IRS has an operational responsibility to
reduce taxpayer burden and protect taxpayer rights.
Bankruptcy
The United States Bankruptcy Code’s
automatic stay provision is designed to protect taxpayers from collection
activities while they are in bankruptcy.
Nonetheless, an estimated 495 potential taxpayer rights violations
occurred between October 2005 and December 2007 because the IRS filed liens
while taxpayers were in bankruptcy.[30] There were also 27,838 taxpayers at risk of
having their rights violated because a bankruptcy freeze code was not posted to
their accounts in a timely manner. The
bankruptcy freeze code designates that the account is in bankruptcy
status. The code is an important control
component for protecting taxpayer rights during bankruptcy proceedings by
helping the IRS and its Centralized Insolvency Operation function identify and
address potential automatic stay violations.
TIGTA found that controls need to be
strengthened in two areas. First, the
IRS could take better advantage of reports generated from automated systems to
identify and resolve potential stay violations. TIGTA identified cases in which taxpayers’
rights were violated because the IRS filed liens on taxpayers’ accounts while
the taxpayers were in bankruptcy. TIGTA
also identified taxpayers’ accounts that were at risk of having their rights
violated because a bankruptcy freeze code was not posted to their accounts in a
timely manner.
Second, managers need to be held more
accountable for initiating bankruptcy closing actions in a timely manner. Failure to initiate bankruptcy closing
actions in a timely manner affects the IRS’s ability to collect taxes and also
can place undue hardship and burden on taxpayers by withholding refunds. As of June 28, 2008, TIGTA identified 2,442
taxpayers’ accounts in which closing actions had not been initiated within
30 calendar days of the Bankruptcy Courts’ closing determination.
TIGTA recommended that the IRS: 1) develop and implement guidance for the
identification and correction of potential lien stay violations when
establishing bankruptcy cases on the Automated Insolvency System; 2) improve
the Centralized Insolvency Operation function Weekly Inventory Reports to
include aging information on taxpayers accounts; 3) enhance efforts to resolve
freeze codes that do not post to accounts by ensuring that managers
consistently work Potentially Invalid Taxpayer Identification Number reports;
and, 4) evaluate the frequency, consistency, and effectiveness of team manager
reviews of the quality and timeliness of bankruptcy closing actions in future
operational reviews. The IRS agreed with
the recommendations.
Conclusion
Mr. Chairman and Members of the
Subcommittee, thank you for the opportunity to comment on the IRS’s efforts to
assist taxpayers experiencing economic difficulties. Although the IRS has improved its service to
taxpayers in recent years, more needs to be done. In this time of economic difficulty, the IRS
must ensure that it remains sensitive to the situation of the public it
serves. The IRS must effectively
implement the tax relief provisions of the ARRA 2009 and assist taxpayers with
filing their tax returns and meeting their tax obligations. This is an enormous challenge. TIGTA will continue to assist the IRS in
meeting this challenge by providing proper oversight and audits in helping to
ensure the integrity, economy, and efficiency of our tax system.