Taxpayer Information
Increased Sharing and Verifying of Information Could Improve Education's Award Decisions
Gao ID: GAO-03-821 July 18, 2003
Data sharing can be a valuable tool for federal agencies in determining applicants' eligibility for benefit and loan programs. Congress has authorized the Department of Education, among others, to have limited access to federal taxpayer information collected by the Internal Revenue Service (IRS). Likewise, IRS is able to use personal information collected by outside sources to better ensure that taxpayers are meeting their tax obligations. GAO was asked to determine whether Education uses taxpayer information to verify information provided by student aid applicants, and the benefits of increasing data verification activities, and whether IRS uses personal information maintained by Education to ensure that taxpayers meet their tax obligations, and the benefits of increasing these activities.
Education uses taxpayer information for several purposes, such as locating loan defaulters; researching and computing statistical data on overall borrower debt; and, upon taxpayers' consent, determining loan repayment amounts. However, Education is not authorized to directly receive taxpayer information from IRS to verify eligibility for student financial aid provided under Title IV of the Higher Education Act of 1965 (HEA). In academic year 2001-02, 11.4 million students applied for $54 billion in aid. A 1998 amendment to HEA was intended to authorize the matching of student aid applicant information with several elements of federal income tax return information. However, HEA could not be used as intended because Internal Revenue Code Section 6103 was not specifically amended so that Education and its contractors, which assist Education in administering the various financial aid programs, could have access to taxpayer information. Based on a study that matched Education data and IRS income information, Education estimates that it made approximately $602 million in grant overpayments during fiscal years 2001 and 2002. IRS does not use personal information collected from applicants and maintained by Education to ensure that taxpayers meet their tax obligations because IRS officials believe the taxpayer information IRS receives is more accurate. In general, IRS officials' views are supported by IRS's past estimates of taxpayers' levels of compliance and by the results of Education's studies and investigations. For example, in the mid-1990s, IRS estimated that taxpayers with only wage income had a 99 percent voluntary compliance rate and taxpayers with interest and dividend income were 95 percent compliant in reporting this income. However, Education's student aid application data are not suited to IRS's tax administration purposes because the applications ask students and/or their parents to report data that come directly from their tax returns.
GAO-03-821, Taxpayer Information: Increased Sharing and Verifying of Information Could Improve Education's Award Decisions
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entitled 'Taxpayer Information: Increased Sharing and Verifying of
Information Could Improve Education's Award Decisions' which was
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Report to the Committee on Finance, U.S. Senate:
United States General Accounting Office:
GAO:
July 2003:
Taxpayer Information:
Increased Sharing and Verifying of Information Could Improve
Education's Award Decisions:
GAO-03-821:
GAO Highlights:
Highlights of GAO-03-821, a report to the Committee on Finance, U.S.
Senate
Why GAO Did This Study:
Data sharing can be a valuable tool for federal agencies in
determining applicants‘ eligibility for benefit and loan programs.
Congress has authorized the Department of Education, among others, to
have limited access to federal taxpayer information collected by the
Internal Revenue Service (IRS). Likewise, IRS is able to use personal
information collected by outside sources to better ensure that
taxpayers are meeting their tax obligations.
GAO was asked to determine whether Education uses taxpayer information
to verify information provided by student aid applicants, and the
benefits of increasing data verification activities, and whether IRS
uses personal information maintained by Education to ensure that
taxpayers meet their tax obligations, and the benefits of increasing
these activities.
What GAO Found:
Education uses taxpayer information for several purposes, such as
locating loan defaulters; researching and computing statistical data
on overall borrower debt; and, upon taxpayers‘ consent, determining
loan repayment amounts. However, Education is not authorized to
directly receive taxpayer information from IRS to verify eligibility
for student financial aid provided under Title IV of the Higher
Education Act of 1965 (HEA). In academic year 2001-02, 11.4 million
students applied for $54 billion in aid.
A 1998 amendment to HEA was intended to authorize the matching of
student aid applicant information with several elements of federal
income tax return information. However, HEA could not be used as
intended because Internal Revenue Code Section 6103 was not
specifically amended so that Education and its contractors, which
assist Education in administering the various financial aid programs,
could have access to taxpayer information. Based on a study that
matched Education data and IRS income information, Education estimates
that it made approximately $602 million in grant overpayments during
fiscal years 2001 and 2002.
IRS does not use personal information collected from applicants and
maintained by Education to ensure that taxpayers meet their tax
obligations because IRS officials believe the taxpayer information IRS
receives is more accurate. In general, IRS officials‘ views are
supported by IRS‘s past estimates of taxpayers‘ levels of compliance
and by the results of Education‘s studies and investigations. For
example, in the mid-1990s, IRS estimated that taxpayers with only wage
income had a 99 percent voluntary compliance rate and taxpayers with
interest and dividend income were 95 percent compliant in reporting
this income. However, Education‘s student aid application data are not
suited to IRS‘s tax administration purposes because the applications
ask students and/or their parents to report data that come directly
from their tax returns.
What GAO Recommends:
GAO is not making any recommendations. However, earlier this year GAO
recommended that Congress consider legislation to authorize IRS to
release individual income data to Education so that Education could
verify income on student aid applications. The IRS Commissioner and
Education‘s Chief Operating Officer of Federal Student Aid raised no
concerns in commenting on a draft of this report. The Chief Operating
Officer said Education would continue to support a legislative
change.
www.gao.gov/cgi-bin/getrpt?GAO-03-821.
To view the full report, including the scope and methodology, click on
the link above. For more information, contact Michael Brostek at (202)
512-9039 or brostekm@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Education Could Benefit from Access to Taxpayer Information to Verify
Student Eligibility for Financial Aid Programs:
IRS Does Not Use Education's Student Aid Data and the Potential Benefit
of Doing So Appears to Be Limited:
Concluding Observations:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Internal Revenue Service:
Appendix III: Comments from the Department of Education:
Table:
Table 1: Selected Examples of Federal Student Aid Fraud Identified by
Education's OIG:
Figures:
Figure 1: Title IV Federal Student Aid by Source for Academic Year
2001-02 (Constant Dollars):
Figure 2: Total Title IV Federal Student Aid Dollars from Academic
Years 1991-92 to 2001-02 (in Constant Dollars):
United States General Accounting Office:
Washington, DC 20548:
July 18, 2003:
The Honorable Charles E. Grassley
Chairman
The Honorable Max Baucus
Ranking Minority Member
Committee on Finance
United States Senate:
Each year, federal agencies make billions of dollars of improper
payments under various federal programs. Over the years, Congress has
authorized a number of federal agencies to have access to federal
taxpayer information[Footnote 1] collected by the Internal Revenue
Service (IRS) to improve the accuracy of eligibility determinations
made by those agencies. The authorized agencies are able to verify
(i.e., match or cross-check) some personal information[Footnote 2]
provided by applicants against corresponding information reported to
IRS.
Similarly, IRS is able to use some of the personal information obtained
from federal and state agencies to better ensure that taxpayers are
meeting their tax obligations. Various federal laws and agency policies
regulate agencies' use and disclosure of taxpayer and personal
information. Section 6103 of the Internal Revenue Code (IRC) allows IRS
to disclose taxpayer information to federal agencies and authorized
employees of those agencies, but only under specific conditions. Such
privacy protection is an important component of continued voluntary
compliance with the internal revenue laws.
Because of continued concerns about balancing taxpayer privacy
interests with potential increased benefits from the sharing of
taxpayer information among agencies administering federal benefit and
loan programs, you asked us to assess whether IRS and selected federal
agencies--the Bureau of Citizenship and Immigration Services (formerly
the Immigration and Naturalization Service), the Social Security
Administration, and the Department of Education--are making use of
opportunities to use taxpayer information and personal applicant
information to improve eligibility determinations and tax
administration.
During the course of this work, you asked us to report separately on
the data sharing and verifying activities between IRS and Education and
provide information that can be used as Congress considers legislative
changes to IRC Section 6103. As agreed with your offices, our
objectives were to determine whether (1) Education uses IRS taxpayer
information to verify information provided by applicants for federal
student financial aid and the benefits, if any, of increasing
verification activities and (2) IRS uses personal information
maintained by Education to ensure that taxpayers meet their tax
obligations and the benefits, if any, of increasing these activities.
To respond to your request, we performed our work at various IRS
offices, including compliance and research offices, and various program
offices at Education. As used in this report, "data sharing" means
obtaining and disclosing information on individuals between Education
and IRS to determine eligibility for student financial aid and to
ensure that taxpayers have met their obligations. We collected and
analyzed information on data sharing and verifying activities between
IRS and Education, including the type of information received and how
the information is used. We reviewed federal laws and agency guidance
regarding the collection, disclosure, and use of taxpayer and other
personal information. We also interviewed IRS and Education officials
to obtain views on possible impediments or missed opportunities to
share and verify taxpayer and other personal information, as well as
the potential benefits of increasing these activities. We conducted our
work from August 2002 through June 2003 in accordance with generally
accepted government auditing standards. For details on our scope and
methodology, see appendix I.
Results in Brief:
Education is not authorized to directly receive taxpayer information
from IRS to verify eligibility for its student financial aid programs,
for which Education estimates it made hundreds of millions in Pell
Grant overpayments in fiscal years 2001 and 2002. Education uses
taxpayer information for several purposes, such as locating loan
defaulters; researching and computing statistical data on overall
borrower debt; and, upon taxpayers' consent, determining loan repayment
amounts. However, Education is not authorized to directly receive
taxpayer information from IRS to verify eligibility for student
financial aid provided under Title IV of the Higher Education Act of
1965 (HEA).
In 1998, HEA was amended to allow increased data sharing. However, the
provision could not be used as intended because IRC Section 6103 was
not specifically amended so that Education and its contractors could
have access to taxpayer information. In academic year 2001-02, 11.4
million students applied for $54 billion in aid under these programs.
Education demonstrated the benefits of using taxpayer information to
verify the personal information that is used to determine student aid
applicants' need for assistance. Based on a study that matched
Education data and IRS income information, Education estimates that it
made approximately $602 million in Pell Grant overpayments during
fiscal years 2001 and 2002.
IRS does not use personal information collected from applicants and
maintained by Education to ensure that taxpayers meet their tax
obligations because IRS officials believe the taxpayer information they
already receive is more accurate. In general, IRS officials' views are
supported by IRS's own data and by the results of Education studies and
investigations. For example, in the mid-1990s, IRS estimated that
taxpayers with only wage income had a 99 percent voluntary compliance
rate and taxpayers with interest and dividend income were 95 percent
compliant in reporting this income. Taxpayers with certain other
sources of income are much less compliant. However, Education's student
aid application data are not suited to aiding IRS's efforts because the
applications ask students and/or their parents to report data that come
directly from their tax returns.
We are not making any recommendations. However, in September 2000 we
recommended that Congress consider amending IRC Section 6103 to
authorize IRS to disclose certain taxpayer information to Education for
the purpose of verifying information reported on federal student aid
applications. Earlier this year, we also reported that Education could
benefit from receiving taxpayer information for this purpose.
On July 15, 2003, the Commissioner of Internal Revenue and the Chief
Operating Officer of Education's Office of Federal Student Aid raised
no concerns in responding to a draft of this report. (See the Agency
Comments and Our Evaluation section and apps. II and III.) Officials
representing the Office of Federal Student Aid provided technical
comments, which we have incorporated into the report where appropriate.
Background:
IRC Section 6103 allows IRS to disclose taxpayer information to federal
agencies and to authorized employees of those agencies for specified
purposes. It was enacted, in part, to control whether and how tax
information submitted to IRS on federal tax returns could be shared.
IRC Section 6103 specifies which agencies (or other entities) may have
access to certain types of tax return information, for what purposes
such access may be granted, and under what conditions the information
will be received. For example, before receiving taxpayer information,
agencies are required to advise IRS how they intend to use the
information and to establish detailed plans that ensure the
confidentiality and safeguarding of the information.
Similar to IRC Section 6103, the Privacy Act of 1974 regulates the
federal government's use of personal information by limiting the
collection, disclosure, and use of personal information maintained in
an agency's system of records. Personal information is further
protected by the Computer Matching and Privacy Protection Act of 1988
(Privacy Act). It requires that agencies enter into written agreements,
referred to as matching agreements, when they share information that is
protected by the Privacy Act for the purpose of conducting computer
matches.
IRS receives tax returns from about 88 million individual taxpayers who
have wage and investment income, and approximately 45 million small
business and self-employed taxpayers. IRS performs a variety of checks
to ensure the accuracy of information these taxpayers report on their
tax returns. These checks include verifying computations on returns,
requesting more information about items on tax returns, and matching
information reported by third parties to income reported by taxpayers
on returns (e.g., document matching). IRS's document matching program
has proven to be a highly cost-effective way of identifying
underreported income, thereby bringing in billions of dollars of tax
revenue while at the same time boosting voluntary compliance.
Approximately 11 million individuals applied for over $50 billion in
federal student financial aid in academic year 2001-02. Title IV of HEA
authorized several student aid programs, including the following:
* Pell Grants--grants to undergraduate students who are enrolled in
degree or certificate programs and have federally defined financial
need;
* Supplemental Educational Opportunity Grants (SEOG)--grants for
undergraduate students with federally defined financial need;
* Stafford[Footnote 3] and Parent Loans for Undergraduate Students
(PLUS) loans[Footnote 4]--loans that are made by private lenders and
guaranteed by the federal government (guaranteed loans) or made
directly by the federal government through a student's school (Direct
Loans);
* Perkins loans--low-interest loans to undergraduate and graduate
students for which interest does not accrue while the students are
enrolled at least half-time in eligible programs; and:
* Work-study--on-or off-campus jobs for which students who have
federally defined need earn at least the current federal minimum wage
and for which institutions or off-campus employers pay a portion of
their wages.
As shown in figure 1, for academic year 2001-02, 78 percent of federal
student aid came from loans, 20 percent came from grants, and 2 percent
came from federal work-study programs.
Figure 1: Title IV Federal Student Aid by Source for Academic Year
2001-02 (Constant Dollars):
[See PDF for image]
Notes: Percentages based on estimated dollar amounts for academic year
2001-02. Percentage of grants includes both Pell Grants and SEOGs.
Percentage of loans includes Stafford loans, PLUS loans, and Perkins
loans. Current year dollars adjusted for inflation using the Consumer
Price Index as calculated by the Bureau of Labor Statistics, U.S.
Department of Labor.
[End of figure]
Education has created many information systems to support the various
student financial aid programs it administers. In many cases, these
systems are maintained and operated by contractors, which are
responsible for processing the student financial aid application data
and providing such data to the schools, as well as to Education to use
in managing and overseeing the programs. As such, a student's financial
aid process begins when he or she submits the Free Application for
Federal Student Aid (FAFSA). The student (and parents of a dependent
student) submits the FAFSA to the contractor that enters the data from
the application. On behalf of Education, the contractor calculates the
expected family contribution figure and performs database matches and
edits to ensure that all needed information is included and that the
student meets eligibility requirements, including not having defaulted
on a prior student loan. The contractor then sends the results of the
matches and other processing results to the student and the school(s).
The school(s) request any supporting documents needed to verify
application data and determine the student's eligibility for aid, and
construct an award package of available types of aid. Funds are then
disbursed to the school(s) according to the student financial aid
program requirements.
Education Could Benefit from Access to Taxpayer Information to Verify
Student Eligibility for Financial Aid Programs:
Education uses taxpayer information for some eligibility determinations
and other purposes, but is not authorized to directly receive taxpayer
information from IRS to verify student financial aid eligibility or
determine payment amounts for its federal student aid programs--due to
IRC Section 6103 restrictions. During fiscal years 2001 and 2002,
Education could have benefited from using taxpayer information to
verify personal information from student aid applicants. Using
aggregate IRS income information, Education estimates that $602 million
in grant overpayments occurred during this time.
Education Uses Taxpayer Information for Several Purposes:
Education uses the taxpayer information it receives from IRS to
determine approximately 100,000 borrowers' monthly loan repayment
amounts, to determine the addresses for approximately 4.6 million
records of borrowers who may have defaulted on their student loans, and
to develop aggregate borrower debt statistics.
In order to determine the monthly repayment amount for borrowers
participating in the income contingent repayment (ICR) plan, Education,
under IRC Section 6103(l)(13), receives income information on the
borrower from IRS. The ICR plan allows Federal Direct Loan Program
borrowers to repay loans as a percentage of their income. To
participate in this program, the borrower must authorize IRS (i.e.,
give his or her consent) to share income information with
Education.[Footnote 5] Approximately 100,000 consents are processed
under the ICR plan for repayment each year.
Under the Taxpayer Address Request (TAR) program, as authorized by IRC
Section 6103(m)(4), IRS provides the mailing addresses of taxpayers to
Education to be used in collecting debt from student loan
defaulters.[Footnote 6] Specifically, Education furnishes the name and
Social Security number (SSN) to the IRS for each defaulted student. IRS
then conducts a match of the information and provides Education the
most recent address for the taxpayer. Education sends about 4.6 million
records annually to IRS for matching under the TAR program.
Additionally, as part of its research activities, Education receives
aggregate taxpayer income information from IRS in the form of tables
that it uses in establishing performance measures and selection
criteria for its student aid application verification process.
Education also uses these data in researching and computing statistical
data on overall borrower debt, such as determining the average and
median debt burden ratios for any given year.
As part of the federal student aid application process, every year
since the mid-1980s, Education selects approximately 30 percent of its
student aid applicants for verification purposes.[Footnote 7] When a
student is selected for verification, he or she is required to provide
copies of his or her (or parents') tax returns to the school.[Footnote
8] If the student refuses to do so, he or she will not receive federal
aid. The school then compares the information on the tax return to
information on the FAFSA and corrects any inconsistencies on the FAFSA
to match the information on the tax return.[Footnote 9] This current
verification process has at least two drawbacks. The process is time
consuming and paper intensive because it involves approximately 3.6
million paper copies of tax returns that schools match. In addition,
the process relies on applicants providing copies of their tax returns,
which may not be the same as those submitted to IRS.
Beginning in October 2002, Education began an electronic verification
pilot project involving 148 of these selected students who were asked
to authorize IRS to release their tax information to their academic
institutions via the Internet. The purpose of this pilot was to take
the student and/or his or her parents out of the middle of the
verification process between the IRS and the school so that the school
relies on income information it obtains directly from IRS, thereby
making the process more efficient.
Under this pilot project, once the student, parent, or spouse
authorized the release of his or her tax information, IRS sent the tax
transcripts for that individual to the school, which then resolved any
inconsistencies between information on the tax transcript and on the
FAFSA. This pilot match ended on March 31, 2003, and, according to an
Education official, the initial feedback from the participating schools
and taxpayers was very positive. Education officials are currently
compiling data from the pilot schools and taxpayers and will be issuing
a report in the fall of 2003 on the ease of use, statistical data, and
any needed changes.
Legal Impediment Hinders Data Sharing for Education's Student Financial
Aid Programs:
Although Education receives some taxpayer information in conjunction
with some of its programs, IRC Section 6103 does not authorize
Education to obtain taxpayer information directly from IRS to verify
eligibility or determine payment amounts for its federal student aid
programs. Approximately 11.4 million individuals applied for over $50
billion in federal student financial aid in academic year 2001-02. As
shown in figure 2, over a 10-year academic period, the amount of
student aid awarded grew 92 percent, from approximately $28 billion in
academic year 1991-92 to approximately $54 billion in academic year
2001-02.
Figure 2: Total Title IV Federal Student Aid Dollars from Academic
Years 1991-92 to 2001-02 (in Constant Dollars):
[See PDF for image]
Note: Percentages based on estimated dollar amounts for academic years
2000-01 and 2001-02.
[End of figure]
Also, because IRC Section 6103 does not authorize Education to directly
obtain taxpayer information from IRS to establish the repayment amount
for ICR student loans, taxpayer consent is required for IRS to share
income information with Education.
IRC Section 6103 was enacted, in part, to control whether and how tax
information submitted to IRS on federal tax returns could be shared. It
was amended in 1976 in an attempt to balance confidentiality and the
need to disclose returns and return information for legitimate
purposes. Determining the most appropriate way to balance these two
considerations has been an issue that has faced Congress for a number
of years. Congress believed that not only did taxpayers have a right to
expect the personal information they report to IRS to remain private,
but that such privacy protection was also an important component of
continued voluntary compliance. Moreover, many observers and privacy
advocates believe that disclosure of return information may decrease
taxpayers' willingness to comply with the tax law and that tax
administration suffers when return information is disclosed for nontax
purposes.
IRC Section 6103 restrictions were the focus of past legislative action
taken to address limitations on data sharing and matching activities
between IRS and Education in connection with student financial aid
programs. According to Education officials, a 1998 amendment to HEA was
intended to authorize the matching of student aid applicant information
with several elements of federal income tax return information.
However, that provision could not be used as intended because IRC
Section 6103 was not specifically amended so that Education and its
contractors, which assist Education in administering the various
financial aid programs, could have access to taxpayer information.
In an October 2000 report to Congress on taxpayer confidentiality and
the use of taxpayer information, Treasury's Office of Tax Policy
recommended that IRC Section 6103 be amended to permit disclosure of
necessary items to Education for income verification, and to permit the
use of contractors as contemplated by HEA, if Education could show that
such disclosure was warranted.[Footnote 10] Further, in August 2002,
officials from Treasury, the Office of Management and Budget, and
Education proposed a legislative amendment to IRC Section 6103 that
would allow IRS to match the income reported on federal student aid
applications with income tax return information and share the results
with Education.
The language in the proposed amendment stresses balancing the need for
accurate student aid applicant information with the importance of
maintaining the integrity of IRS taxpayer information. The proposed
legislative amendment specifies, "the tax data would be disclosed only
for very limited purposes, only to the Department of Education and its
contractors, and then only after a series of rigorous safeguards were
implemented." The proposed amendment was included in the President's
Fiscal Year 2004 Budget, which stated that IRS matching of student aid
application income data with applicant tax data "is projected to save
$638 million in Pell Grant costs over 2003-2004, significantly reducing
existing funding shortfalls."[Footnote 11] However, it does not appear
in the Taxpayer Protection and IRS Accountability Act of 2003--the most
recent tax bill that contains several other confidentiality and
disclosure provisions.[Footnote 12] Moreover, as of June 2003, Congress
had not acted on the proposed amendment.
Apart from the proposed legislative amendment, Education officials
noted that several operational details remain to be addressed by IRS
and Education, many of which depend ultimately on the final language in
the legislation. For example, because the schools act as agents for
Education in the review, collection, and disbursement of financial aid
awards, the details surrounding how best to make the matching program
work for both the schools and the applicants must be addressed. In
addition, Education officials said careful consideration must be given
to the timing for matching student aid applications with tax returns.
According to the officials, most students can submit their FAFSAs
starting January 1. The applications provide details on their income,
or that of their parents', for the previous year. However, taxpayers
have until April 15 to file their tax returns and can request
extensions. Therefore, IRS information may not be available for
matching purposes until well after initial student aid eligibility
determinations have been made. In a September 2000 report, we noted
that while such a match may not be timely enough for initial
eligibility verification purposes, it may be possible to conduct a
match with IRS using fairly complete taxpayer data because financial
aid payments are typically not made until late August or
September.[Footnote 13]
Education officials contend that while the timing of the match would be
less than ideal for helping to make initial student financial aid
decisions, they have established interim steps to address the timing
issue, such as multiple disbursement periods and withholding of
payments until income verification is completed. Even with these
interim steps in place, they acknowledge that the timing of the
matching program still remains a challenge. Education officials said
they are also in the process of identifying other ways to address all
operational details, and are committed to working with IRS to make the
matching program a success.
Increased Data Sharing Can Improve Student Financial Aid Decisions:
Increased data sharing and verification between IRS and Education could
result in better decision making when awarding student financial aid
and reduced fraud. Both Education's Office of the Inspector General
(OIG) and we have reported that increased data sharing can improve
Education's student financial aid decisions. Additionally, Education is
currently conducting a project that supports the need for increased
data sharing.
In a September 2000 report, we recommended that Congress consider
amending IRC Section 6103 to improve the ability of certain federally
funded benefit and loan programs to obtain and share information to
make timely and accurate eligibility determinations, while protecting
personal privacy and the confidentiality of personal
information.[Footnote 14] Specifically, we said "the Congress should
consider amending Section 6103(l) of the Internal Revenue Code to
authorize IRS to disclose certain taxpayer data to officers, employees,
and contractors or other agents (such as schools) of Education for
purposes of verifying information reported on applications for
financial aid." Additionally, our recent January 2003 Performance and
Accountability Series report indicates that Education could benefit
from receiving IRS taxpayer information to verify income information
reported on student aid applications.[Footnote 15]
According to Education's OIG, some students report inaccurate
information either through error or fraud on their federal student aid
applications through, for example, underreporting of income. In a
statement before Congress in 2000, the Education's Inspector General
stated that underreporting of income by student aid applicants costs
federal taxpayers over $100 million annually in overawards of Pell
Grants and awards to ineligible persons. In addition to underreporting,
Education's OIG found numerous examples of fraud, as shown in table 1.
Applicants' ability to receive student aid fraudulently could be
reduced if Education could verify applicant information using IRS
taxpayer data.
Table 1: Selected Examples of Federal Student Aid Fraud Identified by
Education's OIG:
Date: 1993-96; Program: Pell Grant; Description of fraud: Falsification
of student eligibility documents (including false IRS documents) that
made ineligible students appear eligible. Received in excess of
$250,000 in Pell Grant funds.
Date: 1994-2000; Program: Pell Grant; Description of fraud: Eight
admissions representatives charged with three multicount criminal
indictments for procuring students to falsify financial information to
qualify for Pell Grant funds.
Date: 1998; Program: Federal student aid; Description of fraud:
Financial aid consultant lowered clients' incomes on FAFSA and tax
forms to increase students' chances of receiving financial aid.
Date: 1999; Program: Pell Grant; Description of fraud: Scheme involving
program fraud, false statements, and tax fraud in connection with
postsecondary programs the defendants falsely claimed to be
administering.
Date: 2001; Program: Federal grants, work-study, and loans; Description
of fraud: Twenty-six people charged in 23 separate criminal cases with
fraudulently obtaining over $2.6 million in federal grants, work-study,
and loans.
Date: 2003; Program: Pell Grant; Description of fraud: Defendant found
guilty of embezzling $600,000 of Pell Grant funds through false
ownership tactics.
Source: Office of Inspector General, Department of Education.
[End of table]
In addition to these examples of fraud, Education's research indicates
it may have overpaid an estimated $602 million in Pell Grants over a 2-
year period. As part of its efforts to show the effect of IRC Section
6103 restrictions on eligibility and payment decisions, Education is
conducting the Pell Grant Payment Study by matching information
provided on student aid applications with IRS taxpayer information. The
study began in 1999 and measures the extent of underreporting and
overreporting of income based on student aid applicants'
characteristics, such as income, tax filing status, and recipients'
schools.
To enable this match, Education provides IRS with a file of student aid
applicants' SSNs. IRS officials match these SSNs with taxpayer income
information and provide the aggregated results to Education. This
format protects the taxpayers' confidentiality, in accordance with IRC
Section 6103, which prohibits IRS from revealing the identity of these
taxpayers to Education. Since Education does not know the identity of
the taxpayers, it can estimate the amount of overpayments but cannot
associate a specific overpayment with a particular individual and
cannot ascertain when a mismatch may be legitimate. Thus far, the study
has estimated the percentage of Pell Grant overpayments to be 3.4
percent, or $272 million dollars, in fiscal year 2001 and 3.3 percent,
or $330 million dollars, in fiscal year 2002, for a total of $602
million. Education has not done a similar study for its loan programs,
which account for approximately 80 percent of federal student aid
funds.
Education officials believe amending IRC Section 6103 to enable
Education to match student aid applicant information with several
elements of federal income tax return information "would substantially
reduce the risk of fraud and overpayments" associated with Education's
student financial aid program, would eliminate the need for taxpayer
consent in conjunction with the ICR program, and would make the program
more administratively efficient. This, in turn, would enhance the
integrity of the federal student aid programs and ensure that students
are receiving the amounts of assistance for which they are eligible.
IRS Does Not Use Education's Student Aid Data and the Potential Benefit
of Doing So Appears to Be Limited:
IRS does not use personal information from applicants that Education
collects and maintains to ensure that taxpayers meet their tax
obligations because IRS officials believe the taxpayer information IRS
receives is more accurate. In general, IRS officials' views are
supported by its past estimates of taxpayers' levels of compliance and
by the results of Education studies and investigations.
IRS officials cite a number of reasons for not using information
Education collects and maintains to ensure that taxpayers meet their
tax obligations. IRS officials said they believe the taxpayer
information IRS collects and maintains on over 100 million individual
taxpayers, who file income tax returns annually, is more accurate than
that collected and maintained by Education from applicants applying for
federal student aid. The officials noted that because federal student
aid is based on income, applicants seeking financial aid might be
inclined to underreport their income to Education in hopes of securing
larger aid awards. The officials said they believe most taxpayers know
that failure to fully disclose income to IRS could result in an audit
or the use of IRS enforcement authorities to collect delinquent
taxes.[Footnote 16] Further, the officials also said they believe the
requirement to file a tax return annually helps to ensure that some of
the information IRS maintains, such as taxpayers' addresses, is more
current when compared to similar information maintained by Education.
IRS routinely relies on information from third-party sources (e.g.,
banks) to ensure that taxpayers meet their tax obligations, including
both whether taxpayers correctly report information necessary to
determine the taxes due, if any, and whether any taxpayers who should
have filed returns did not. Through its document matching programs, IRS
uses these third-party documents to verify what taxpayers report on
their tax returns.[Footnote 17] Similarly, IRS identifies individuals
who did not file tax returns if it receives third-party documents for
these individuals.
Past IRS estimates of taxpayers' compliance have indicated that
taxpayers whose incomes are subject to document matching are among the
most compliant. For example, in the mid-1990s, IRS estimated that
taxpayers with only wage income had a 99 percent voluntary reporting
compliance rate, and taxpayers with interest and dividend income were
95 percent compliant in reporting this income. IRS is currently
conducting a study that is intended to update these compliance
estimates.
However, although document matching programs work well for taxpayers
whose incomes are subject to third-party reporting to IRS, they do not
help when taxpayers have sources of income that are not subject to such
reporting. Both the Treasury Inspector General for Tax Administration
and we have previously reported that taxpayers whose incomes are not
subject to information reporting, like those who are self-employed, are
much less compliant in fulfilling their tax obligations than those
whose incomes are subject to such reporting.[Footnote 18]
However, the data collected and maintained by Education are not suited
to helping IRS identify taxpayers who are not covered by existing
document matching programs. The student aid applications ask students
and/or their parents to report income information directly from their
tax returns and generally do not ask for other corroboration of income.
IRS officials' view that IRS data are likely to be more accurate than
Education's data is also supported by Education's studies. As noted
earlier, Education's Pell Grant Payment Study results have found that
some student aid applicants have underreported income on their
applications compared to the income that they reported to IRS. Although
Education estimates some underpayments to students during these
studies, officials say that these, in their judgment, appear to result
from mistakes in filling out applications. The work of the Education
OIG also suggests that a significant number of student aid applicants
falsify copies of tax returns or other information that they submit to
Education to show lower incomes and thereby claim higher amounts of
student aid.
Given that Education data may have limited utility for tax
administration, IRS has not investigated use of the data for tax
administration. If Congress does authorize Education to obtain taxpayer
information to verify students' eligibility for financial aid, the
resulting database of mismatches between data reported to each
institution may represent a ready and low-cost opportunity for IRS to
investigate whether there is any reasonable potential for using
Education information for tax administration purposes. The database
mismatches would identify how many, if any, student aid applicants
reported less income to IRS than to Education and the number of cases
in which the applicants may not have filed tax returns at all.
Concluding Observations:
Education obtains some information from IRS to use in administering its
programs but is unable to obtain information that could help it reduce
financial aid overpayments that it estimated to total $602 million in
fiscal years 2001 and 2002. As government agencies continue to seek
efficient ways to improve federal benefit and loan program decisions by
reducing fraud and error, data sharing has been a valuable tool for
supporting integrity in federal programs. However, the need to verify
self-reported information must be balanced with privacy concerns.
Existing disclosure laws help ensure that federal agencies properly
handle the personal information they collect. Modifying the legal
constraints in IRC Section 6103 for sharing taxpayer information--with
accompanying requirements to ensure that the data are used only for
authorized purposes--is one way to address student aid program
vulnerabilities while retaining protections for personal privacy. We
have previously recommended that Congress consider such a change.
IRS does not use student aid application data because IRS officials
believe that the data IRS receives are more accurate than student aid
application data. This belief is supported by IRS data and by Education
studies, and thus there appears to be little benefit to attempting to
use the Education data for tax administration purposes.
Agency Comments and Our Evaluation:
We requested comments on a draft of this report from the Commissioner
of Internal Revenue and the Secretary of Education. On July 15, 2003,
the Commissioner of Internal Revenue and the Chief Operating Officer of
Education's Office of Federal Student Aid each provided written
comments on a draft of this report. (See apps II and III,
respectively.) Officials representing the Office of Federal Student Aid
also provided technical comments to clarify specific sections of the
draft report. We have incorporated these comments into the report where
appropriate.
The IRS Commissioner and Education officials raised no concerns. In his
comments, the Commissioner noted that although we did not make any
recommendations, the report provides an accurate and comprehensive
review of the issue, and will be a good source document for
policymakers as they address increased sharing of taxpayer information.
Additionally, the Chief Operating Officer acknowledged the potential
for saving hundreds of millions of dollars annually in overpayments and
other benefits through an effective data matching program with IRS, and
said that Education officials would continue to support necessary
legislative changes.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from its date. At that time we will send copies to the Chairman and
Ranking Minority Member, House Committee on Ways and Means; the
Chairman and Ranking Minority Member, Subcommittee on Oversight, House
Committee on Ways and Means; the Secretary of Education; the Secretary
of the Treasury; and the Commissioner of Internal Revenue. We will also
make copies available to others on request. In addition, the report
will be available at no charge on the GAO Web site at http://
www.gao.gov.
If you or your staffs have any questions about this report, please
contact me at (202) 512-9110 or on brostekm@gao.gov, or Signora May at
(404) 679-1920 or on maysj1@gao.gov. Other staff who made key
contributions to this report were Michelle Bowsky, Michele Fejfar,
Jyoti Gupta, Shirley Jones, Anne Laffoon, and Miltresa McMichael.
Michael Brostek:
Director, Tax Issues:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
To respond to your request, we performed our work at various Internal
Revenue Service (IRS) offices, including the Office of Governmental
Liaison; the Office of Safeguards; the Office of Program, Evaluation,
and Risk Analysis; and the Privacy Advocate's Office. Our work also
included interviews with employees in IRS's Wage and Investment
Operating Division and IRS's Small Business/Self Employed Operating
Division, the Department of the Treasury's Office of Tax Policy and the
Office of the Treasury Inspector General for Tax Administration, and
program offices at the Department of Education. We collected and
analyzed information on data sharing and matching between IRS and
Education during fiscal years 2000 through 2002.
To determine whether Education uses IRS taxpayer information to verify
information provided by applicants for federal student aid and the
benefits of increasing verification activities, we analyzed the student
financial aid application and determined what personal information
Education collects from applicants. We interviewed Education officials
as well as IRS officials to obtain data on the type of taxpayer
information received from IRS, including how, when, and for what
purpose the information is received. We identified the legislative and
regulatory authorities that govern IRS's disclosure of taxpayer
information to Education.
Additionally, we determined how Education is using the information
received from applicants and IRS, and whether it is matching/cross-
checking the information to improve eligibility determinations. To
determine the benefits of increasing verification activities, we
collected and analyzed data to assess how increased disclosure of
information would affect taxpayer confidentiality and privacy
interests. We interviewed IRS and Education officials to obtain views
on possible impediments or missed opportunities to match/cross-check
information to make better programmatic decisions, and we reviewed
existing studies or reports on data matching/cross-checking activities.
We determined what personal information Education collects but does not
match/cross-check with IRS and why not, and whether officials believed
matching/cross-checking would be useful for eligibility
determinations.
To determine whether IRS uses personal information maintained by
Education to ensure that taxpayers meet their tax obligations and the
benefits of increasing such activities, we collected data to determine
what personal information IRS obtains from Education. We interviewed
IRS and Education officials to obtain data on the type of personal
information that is received from Education, including how, when, and
for what purpose the information is received. We identified the
legislative and regulatory authorities that govern Education's
disclosure of personal information to IRS.
Additionally, we assessed how IRS is using the information received
from Education, and whether it is matching/cross-checking the
information to better ensure taxpayers are meeting their tax
obligations. To determine the benefits of increasing verification
activities, we collected and analyzed data to determine what personal
information IRS receives from Education but does not match/cross-check
and why not, and whether officials believe the information would be
useful for tax administration. We determined what personal information
IRS does not receive from Education, whether IRS is aware of the
information, and whether IRS officials believe receiving it would be
useful for tax administration.
As used in this report, "data sharing" means obtaining and disclosing
information on individuals between Education and the IRS to determine
eligibility for student financial aid and to ensure that taxpayers have
met their obligations. Education's use of taxpayer information to
verify information obtained from applicants refers to the matching or
cross-checking procedures that are conducted, and is covered by
interagency computer matching agreements between IRS and Education.
Our review was subject to some limitations. We did not assess the
reliability or quality of taxpayer and other personal information that
is shared and verified between Education and IRS. We relied on
officials to identify those IRS offices that use personal information
because there is no central, coordinating point within IRS for receipt
of this type of information. Additionally, we relied on IRS and
Education officials' views on possible impediments or missed
opportunities to match/cross-check information, any additional data
sharing and verification needs, and the benefits and challenges of
increased disclosure of taxpayer information.
We conducted our work from August 2002 through June 2003 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Internal Revenue Service:
COMMISSIONER:
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, D.C.
20224:
July 15, 2003:
Mr. Michael Brostek Director, Tax Issues United States General
Accounting Office Washington, DC 20548:
Dear Mr. Brostek:
I have completed a review of the General Accounting Office (GAO) draft
report titled, "Taxpayer Information: Increased Sharing and Verifying
of Information Could Improve Education's Student Aid Award Decisions"
(GAO-03-821, June 2003). The intent of the study was to determine
whether:
1) The Department of Education (Education) uses taxpayer information to
verify information provided by applicants for federal student financial
aid and the benefits.
2) The IRS uses personal information maintained by Education to ensure
that taxpayers meet their tax obligations and the benefits.
You determined that Education would benefit by receiving additional
information from us; however, Internal Revenue Code Section 6103 would
need to be modified to allow us to share additional information. As
always, if the Congress chooses to amend the federal disclosure statue,
we will implement it accordingly.
We agree that obtaining data from Education's student aid application
would not benefit us because the information on the application is
based on the tax return already in our possession.
In summary, although you did not make any recommendations for the IRS,
your report provides an accurate and comprehensive review of this
issue. It will be a good source document for policy-makers as they
address the sharing of taxpayer information. If you have any questions,
please contact David R. Williams,
Chief Communications and Liaison at (202) 622-5440.
Sincerely,
Mark W. Everson:
Signed by Mark W. Everson:
[End of section]
Appendix III: Comments from the Department of Education:
FEDERAL STUDENT AID:
CHIEF OPERATING OFFICER:
July 15, 2003:
Mr. Michael Brostek Director, Tax Issues Government Accounting Office
Washington, D.C. 20548:
Dear Mr. Brostek:
Thank you for the opportunity to respond to your draft audit report
entitled, "Taxpayer Information: Increased Sharing and Verifying of
Information Could Improve Education's Student Aid Award Decisions"
(GAD-03-821). I am responding on behalf of the Department.
The Title IV, Higher Education Act (HEA), programs play an important
part in assisting millions of Americans each year in attaining their
higher education goals. Ensuring the integrity of these programs --
getting the right amount of funds to eligible students at the right
time --is a critical and primary goal of the Department.
As stated in your draft report, an effective data match of taxpayer
information with the Internal Revenue Service has the potential to save
hundreds of millions of dollars in overpayments each year. In addition,
it would assist in reducing the amount of student aid received as a
result of fraud.
Even though we estimate that the amount of overpayments in the Federal
Pell Grant program is only a small percent of the disbursements, it
still translates to well over $300 million each year. We are anxious to
significantly reduce this amount and we continue to work with our
counterparts in the Department of Treasury and the Office of Management
and Budget to support the necessary legislative changes to do this.
Again, thank you for the opportunity to comment on the draft report.
Sincerely,
Theresa S. Shaw:
Signed by Theresa S. Shaw:
830 First Street, NE, Washington, D.C. 20202 1-800-4-FED-AID www.
studentaid. ed. gov:
FOOTNOTES
[1] Taxpayer information includes all federal tax returns and return
information. This may consist of an individual's name, Social Security
number, address, wages, self-reported earnings, unearned income from
interest and dividends, tax returns, and miscellaneous income
statements.
[2] Personal information is defined as all information associated with
an individual and includes both identifying information (e.g., name,
Social Security number, and E-mail address) and nonidentifying
information (e.g., financial information, education, age, gender, and
physical attributes).
[3] Stafford loans consist of subsidized and unsubsidized loans.
Subsidized loans are loans for which the federal government pays the
interest costs while the student is in school. Unsubsidized loans are
loans for which the student is responsible for paying all interest
costs.
[4] Both graduate and undergraduate students receive Stafford loans
while parents of dependent students receive PLUS loans.
[5] IRC Section 6103 (l)(13) temporarily permits IRS to disclose the
taxpayer's identity information, filing status, and adjusted gross
income to Education employees for use in establishing the appropriate
ICR amount for an applicable student loan. In practice, disclosures for
these purposes are only made with the taxpayer's consent under IRC
Section 6103(c) because Education uses contractors to administer its
ICR program and 6103(l)(13) prevents disclosure to contractors. The
6103(l)(13) provision has an expiration date of September 30, 2003.
[6] Unlike IRC Section 6103 (l)(13) disclosures, which may only be made to
Education employees, IRC Section 6103(m)(4) disclosures can be made to
contractors.
[7] Education determines who falls into that sample based on analyses
of past years' data on the characteristics of those individuals who are
most likely to commit errors on their applications. Education primarily
focuses on selecting students who are eligible for federal grants.
[8] Not all individuals selected for the 30 percent sample are required
to provide copies of their tax returns. Some of these individuals are
legitimately not required to file tax returns, and instead, provide the
school with statements attesting to their nonfiling status and the
amount and type of their untaxed income.
[9] Education has established a $400 tolerance level for the
discrepancy amount.
[10] U.S. Department of the Treasury, Office of Tax Policy, Report to
Congress on Scope and Use of Taxpayer Confidentiality and Disclosure
Provisions, Vol. I: Study of General Provisions (Washington, D.C.:
October 2000).
[11] Office of Management and Budget, Executive Office of the President
of the United States, "Department of Education," Budget of the United
States Government: Fiscal Year 2004 (Washington, D.C.: U.S. Government
Printing Office, 2003), http://www.whitehouse.gov/news/usbudget/
budget-fy2004/education.html (downloaded June 11, 2003).
[12] H.R. 1528, The Taxpayer Protection and IRS Accountability Act of
2003, April 1, 2003.
[13] U.S. General Accounting Office, Benefit and Loan Programs:
Improved Data Sharing Could Enhance Program Integrity, GAO/HEHS-00-119
(Washington, D.C.: Sept. 13, 2000).
[14] GAO/HEHS-00-119.
[15] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Education, GAO-03-99 (Washington, D.C.:
January 2003).
[16] In general, if taxes remain unpaid after IRS gives appropriate
notice and demand for payment, IRS is authorized by the IRC to use its
enforcement authority in the form of a levy, seizure, or lien. The levy
of assets such as bank accounts and wages that are in the possession of
third parties, such as banks and employers, is referred to as a levy,
and the levy of assets in the possession of the taxpayer is referred to
as a seizure. A lien is a legal claim that attaches to property to
secure the payment of a debt. The filing of a lien would prevent the
taxpayer from selling an asset, with clear title, without payment of
the tax debt.
[17] IRS's Automated Underreporter Program is designed to identify wage
earners who do not report all of their income on their tax returns. The
program compares the income reported on their tax returns to the income
reported by employers and other third-party sources on Forms W-2 and
1099.
[18] U.S. General Accounting Office, Reducing the Tax Gap: Results of a
GAO-Sponsored Symposium, GAO/GGD-95-157 (Washington, D.C.: June 2,
1995), and Treasury Inspector General for Tax Administration,
Management Advisory Report: Comparing the Internal Revenue Service's
Verification of Income for Wage Earners and Business Taxpayers,
Reference No: 2001-30-166 (Washington, D.C.: September 2001).
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