E-Filing Tax Returns
Penalty Authority and Digitizing More Paper Return Data Could Increase Benefits
Gao ID: GAO-12-33 October 5, 2011
The Internal Revenue Service's (IRS) goal is to receive 80 percent of all major types of tax returns electronically by 2012. Legislation passed in November 2009 supports the 80 percent goal for individual income tax returns by requiring tax return preparers who file more than 10 individual returns per year to file them electronically, or e-file. GAO was asked to review IRS's implementation of this e-file mandate. Specifically, GAO (1) described e-file rates and preparers' experiences implementing the mandate, (2) assessed IRS's plans to enforce the mandate, (3) assessed IRS's analysis of options for digitizing more data from paper returns, and (4) determined whether there are any tax forms IRS cannot accept electronically and assessed IRS's plans for adding them to the e-file system. To conduct these analyses, GAO reviewed IRS processing data and e-file planning documents, and interviewed IRS officials and 26 members of national preparer organizations.
In 2011, 79 percent of all individual tax returns were e-filed, a noticeable increase over prior years. Both preparer and self-prepared e-file rates increased, which IRS officials attributed to different factors. They said the e-file mandate was one key factor in the growth of preparer e-filing. Preparers GAO interviewed who were new to e-filing said they experienced increased costs and administrative burdens due to the mandate. Several preparers who had been e-filing prior to the mandate said they experienced some of these same problems when they first e-filed, but they now find that e-filing helps their business--for example, by reducing the time needed to file returns. IRS's plans to identify preparers who are not complying with the mandate are not fully developed because IRS does not know the extent of noncompliance and it may be low. Nonetheless, officials stated some noncompliance likely exists and may increase in 2012 when the mandate applies to more preparers. Regardless of the extent, IRS does not have authority under the IRC to assess penalties on preparers who fail to comply. IRS may be able to impose sanctions under Department of Treasury regulations that govern practice before IRS. However, the process is costly and the penalties, which could include suspension of practice, may be harsher than needed. IRS is considering pursuing two options to digitize more data--bar coding and additional transcription. IRS does not transcribe all lines from paper returns. IRS's policy is to post the same information from electronic and paper returns to its databases, so that similar paper and electronic returns have equal chances of being audited. IRS has not analyzed the costs and benefits of these options, which could support informed funding decisions. Some forms cannot be e-filed, including two relatively high-volume forms for amended returns and nonresident aliens. IRS has not developed a complete list of forms that cannot currently be e-filed nor does it have a time line for adding them to the e-file system. Without adding forms such as these to the system, IRS will limit e-filing's growth potential. Congress should consider amending the Internal Revenue Code (IRC) to provide IRS with penalty authority for preparer noncompliance with the mandate. GAO also recommends, among other things, that IRS conduct analyses on the costs and benefits of implementing bar coding and additional transcription and create a time line and list of forms to be added to the e-file system. IRS agreed with the recommendations.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director:
James R. White
Team:
Government Accountability Office: Strategic Issues
Phone:
(202) 512-5594
GAO-12-33, E-Filing Tax Returns: Penalty Authority and Digitizing More Paper Return Data Could Increase Benefits
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United States Government Accountability Office:
GAO:
Report to the Subcommittee on Financial Services and General
Government, Committee on Appropriations, U.S. Senate:
October 2011:
E-Filing Tax Returns:
Penalty Authority and Digitizing More Paper Return Data Could Increase
Benefits:
GAO-12-33:
GAO Highlights:
Highlights of GAO-12-33, a report to the Subcommittee on Financial
Services and General Government, Committee on Appropriations, U.S.
Senate.
Why GAO Did This Study:
The Internal Revenue Service‘s (IRS) goal is to receive 80 percent of
all major types of tax returns electronically by 2012. Legislation
passed in November 2009 supports the 80 percent goal for individual
income tax returns by requiring tax return preparers who file more
than 10 individual returns per year to file them electronically, or e-
file.
GAO was asked to review IRS‘s implementation of this e-file mandate.
Specifically, GAO (1) described e-file rates and preparers‘
experiences implementing the mandate, (2) assessed IRS‘s plans to
enforce the mandate, (3) assessed IRS‘s analysis of options for
digitizing more data from paper returns, and (4) determined whether
there are any tax forms IRS cannot accept electronically and assessed
IRS‘s plans for adding them to the e-file system. To conduct these
analyses, GAO reviewed IRS processing data and e-file planning
documents, and interviewed IRS officials and 26 members of national
preparer organizations.
What GAO Found:
In 2011, 79 percent of all individual tax returns were e-filed, a
noticeable increase over prior years. Both preparer and self-prepared
e-file rates increased, which IRS officials attributed to different
factors. They said the e-file mandate was one key factor in the growth
of preparer e-filing. Preparers GAO interviewed who were new to e-
filing said they experienced increased costs and administrative
burdens due to the mandate. Several preparers who had been e-filing
prior to the mandate said they experienced some of these same problems
when they first e-filed, but they now find that e-filing helps their
business”for example, by reducing the time needed to file returns.
Figure: E-file Rates for Preparers and Self-Prepared, Calendar Years
2006 to 2011:
[Refer to PDF for image: multiple line graph]
IRS e-file goal: 80%.
Calendar year: 2006;
Preparer: 65.28%;
Self-prepared: 41.66%.
Calendar year: 2007;
Preparer: 68.96%;
Self-prepared: 44.74%.
Calendar year: 2008;
Preparer: 71.65%;
Self-prepared: 44.28%.
Calendar year: 2009;
Preparer: 75.36%;
Self-prepared: 58.88%.
Calendar year: 2010;
Preparer: 77.85%;
Self-prepared: 64.05%.
Calendar year: 2011;
Preparer: 89.23%;
Self-prepared: 71.45%.
Source: IRS's Individual Return Transaction File data.
[End of figure]
IRS‘s plans to identify preparers who are not complying with the
mandate are not fully developed because IRS does not know the extent
of noncompliance and it may be low. Nonetheless, officials stated some
noncompliance likely exists and may increase in 2012 when the mandate
applies to more preparers. Regardless of the extent, IRS does not have
authority under the IRC to assess penalties on preparers who fail to
comply. IRS may be able to impose sanctions under Department of
Treasury regulations that govern practice before IRS. However, the
process is costly and the penalties, which could include suspension of
practice, may be harsher than needed.
IRS is considering pursuing two options to digitize more data-”bar
coding and additional transcription. IRS does not transcribe all lines
from paper returns. IRS‘s policy is to post the same information from
electronic and paper returns to its databases, so that similar paper
and electronic returns have equal chances of being audited. IRS has
not analyzed the costs and benefits of these options, which could
support informed funding decisions.
Some forms cannot be e-filed, including two relatively high-volume
forms for amended returns and nonresident aliens. IRS has not
developed a complete list of forms that cannot currently be e-filed
nor does it have a time line for adding them to the e-file system.
Without adding forms such as these to the system, IRS will limit e-
filing‘s growth potential.
What GAO Recommends:
Congress should consider amending the Internal Revenue Code (IRC) to
provide IRS with penalty authority for preparer noncompliance with the
mandate. GAO also recommends, among other things, that IRS conduct
analyses on the costs and benefits of implementing bar coding and
additional transcription and create a time line and list of forms to
be added to the e-file system. IRS agreed with the recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-12-33]. For more
information, contact James R. White, (202) 512-9110, WhiteJ@gao.gov.
[End of section]
Contents:
Letter:
Background:
Individual E-filing Rate Approaches 80 Percent Goal After First Year
of Mandate, but Some Taxpayers Still Choose to File on Paper:
IRS Is Developing Plans to Deal with Noncompliant Preparers and Study
Lessons Learned from E-file Mandate Implementation:
The Benefits and Costs of Different Options for Digitizing Remaining
Paper Returns Have Not Been Fully Analyzed:
IRS Does Not Have a Complete List of Forms That Cannot Be Accepted
Electronically Nor Does It Have a Time Line for Adding Them to the E-
file System:
Conclusions:
Matter for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Possible Changes Affecting Preparers as a Result of the E-
file Mandate:
Appendix III: Trends in Preparer and Self-Prepared Filing Methods:
Appendix IV: E-file Application Processing:
Appendix V: Calculation of Costs of Transcribing Data Lines from Paper
Returns:
Appendix VI: Comments from the Internal Revenue Service:
Appendix VII: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: E-filing Rates for Major Return Types Subject to the 80
Percent Goal, Fiscal Year 2010:
Table 2: Estimated Average Filing Season Transcription Cost Per Line
on High Volume Forms and Schedules:
Table 3: Estimated Number of New E-file Applications, 2011 and 2012:
Figures:
Figure 1: Key Parties in Providing Tax Information and Preparing
Returns:
Figure 2: E-file Rates for Returns Prepared by Preparers and Self-
Prepared, Calendar Years 2006 to 2011:
Figure 3: Preparer Reasons for Paper Filing Based on 1.5 Million Form
8948s, "Preparer Explanation for Not Filing Electronically:"
Figure 4: Preparation and Filing Methods for Preparers:
Figure 5: Trends in Preparer and Self-prepared Filing Methods,
Calendar Years 2006 to 2011 (percentages, with volumes in millions):
Figure 6: E-file Rates for High Volume Forms and Schedules, Calendar
Year 2009:
Figure 7: Frequencies of Keystroke Lengths for Different Lines to
Transcribe:
Abbreviations:
2-D: two-dimensional
E-file: electronically file
EFIN: Electronic Filing Identification Number
EMS: Electronic Management System
FTE: full-time equivalent
IIRAPHQ: Individual Income Received and Processed - Headquarters
IRC: Internal Revenue Code
IRS: Internal Revenue Service
MeF: Modernized e-File
OCR: optical character recognition
OPR: Office of Professional Responsibility
PDF: Portable Document Format
PTIN: Preparer Tax Identification Number:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
October 5, 2011:
The Honorable Richard J. Durbin:
Chairman:
The Honorable Jerry Moran:
Ranking Member:
Subcommittee on Financial Services and General Government:
Committee on Appropriations:
United States Senate:
The Honorable Susan Collins:
United States Senate:
Electronically filed (e-filed) tax returns have many benefits for
taxpayers such as improved convenience, higher accuracy rates, and
faster refunds. According to the Internal Revenue Service (IRS),
taxpayers who e-file can expect to get a refund within 3 weeks, while
taxpayers who paper file should expect their refund within 6 to 8
weeks. E-filed returns also cost less to process--about $3.50 less per
return, according to IRS officials. IRS officials said that increased
e-filing could make it possible to transcribe more data from paper
returns, which could result in increased enforcement revenue and
improved service to taxpayers. Nevertheless, tens of millions of
individual tax returns are still filed on paper. If these remaining
paper returns were e-filed, IRS could have saved about 85 percent of
its processing costs during 2010, or about $131 million.
To support increased e-filing, Congress passed the Worker,
Homeownership, and Business Assistance Act of 2009, which requires tax
return preparers who expect to file more than 10 federal income tax
returns for individuals, estates, and trusts during a calendar year to
e-file, starting on January 1, 2011 (i.e., for tax year 2010).
[Footnote 1]
Given the potential benefits for IRS, taxpayers, and preparers, you
requested that we review IRS's implementation of this e-file mandate
and IRS's plans and capacity to maximize its use of digital data. In
March 2011, we issued an interim report that assessed IRS's initial
implementation of the mandate and made recommendations to simplify the
e-filing process for preparers and better inform the taxpayers of the
benefits of e-filing, to which IRS agreed.[Footnote 2] To complete
your request, in this report we (1) describe e-file rates, IRS
processing capacity, reasons why preparers did not e-file, and their
experiences implementing the mandate; (2) assess IRS's plans to
enforce the mandate and determine lessons learned; (3) assess IRS's
analysis of options for digitizing more data from paper returns; and
(4) determine whether there are any tax forms IRS cannot accept
electronically and assess IRS's plans for adding them to the e-filing
system.
To accomplish our objectives, we obtained and analyzed e-file data
prior to and during IRS's 2011 filing season, examined preparer e-file
and waiver applications, and interviewed 9 tax preparation software
companies and 26 representatives from tax preparation firms to obtain
their views about the mandate's implementation. Companies and
preparers were identified through referrals from industry groups. We
reviewed IRS compliance and enforcement plans and interviewed
officials from IRS's Office of Professional Responsibility (OPR). We
analyzed prior proposals to add a bar coding system to process paper
returns as well as IRS's priority transcription list and calculated
line-by-line transcription costs. Finally, we reviewed IRS's list of
forms that can currently be e-filed and analyzed when remaining forms
would be added to the e-file systems. For all objectives, we
interviewed relevant IRS officials to collect information on IRS's
mandate implementation efforts and future plans to increase e-filing.
We reviewed documents and interviewed IRS officials and determined
that the data presented in our report were sufficiently reliable for
our purposes. We conducted this performance audit from March to
October 2011, in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform
the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives. (See appendix I for more information on our scope and
methodology.)
Background:
The IRS Restructuring and Reform Act of 1998 established a goal of
having 80 percent of individual returns filed electronically by 2007.
[Footnote 3] IRS worked to promote e-filing, and although rates
increased steadily between 1998 and 2007, IRS did not meet the 80
percent goal. The IRS Oversight Board recommended extending the goal's
time period to 2012 and expanding the scope of the goal to include all
major individual, business, and exempt organization returns.[Footnote
4] Table 1 shows e-filing rates by type of return for fiscal year
2010. Except for individual returns, those rates were far from the 80
percent goal.
Table 1: E-filing Rates for Major Return Types Subject to the 80
Percent Goal, Fiscal Year 2010:
Individual (1040);
Total number of returns filed: 141.2 million;
Total number of returns e-filed: 98.3 million;
Percentage of returns e-filed[B]: 69.6%;
Number of additional e-filed returns required to reach 80 percent
goal[C]: 14.6 million.
Employment (940/941);
Total number of returns filed: 29.8 million;
Total number of returns e-filed: 6.9 million;
Percentage of returns e-filed[B]: 23.3%;
Number of additional e-filed returns required to reach 80 percent
goal[C]: 16.9 million.
Corporate (1120);
Total number of returns filed: 6.8 million;
Total number of returns e-filed: 2.2 million;
Percentage of returns e-filed[B]: 32.5%;
Number of additional e-filed returns required to reach 80 percent
goal[C]: 3.2 million.
Partnership (1065);
Total number of returns filed: 3.5 million;
Total number of returns e-filed: 1.3 million;
Percentage of returns e-filed[B]: 36.1%;
Number of additional e-filed returns required to reach 80 percent
goal[C]: 1.5 million.
Fiduciary (1041);
Total number of returns filed: 3.1 million;
Total number of returns e-filed: 0.9 million;
Percentage of returns e-filed[B]: 28.2%;
Number of additional e-filed returns required to reach 80 percent
goal[C]: 1.6 million.
Tax exempt (990);
Total number of returns filed: 1.3 million;
Total number of returns e-filed: 0.5 million;
Percentage of returns e-filed[B]: 40.0%;
Number of additional e-filed returns required to reach 80 percent
goal[C]: 0.5 million.
Total[D];
Total number of returns filed: 185.7 million;
Total number of returns e-filed: 110.1 million;
Percentage of returns e-filed[B]: 59.3%;
Number of additional e-filed returns required to reach 80 percent
goal[C]: 38.4 million.
Source: GAO analysis of IRS Document 6292, Fiscal Year Return
Projections for the United States 2011 through 2018 (revised June
2011).
[A] IRS's 2012 e-file goal also includes real estate mortgage
investment conduits and excise tax returns. These returns are small in
volume and not included in this chart.
[B] Percentages are based on non-rounded return counts.
[C] While the number of returns needed to the reach the 80 percent
goal may appear small in several cases (e.g., corporate returns), the
percent needed is large. Numbers are based on non-rounded return
counts.
[D] Numbers may not sum to totals due to rounding.
[End of table]
IRS is implementing the e-file mandate in two phases. In 2011, paid
preparers who reasonably expect to file 100 or more individual,
estate, or trust income tax returns are required to e-file. In 2012,
the e-file requirement will apply to paid preparers who reasonably
expect to file more than 10 individual, estate, or trust tax returns.
[Footnote 5] IRS decided to implement the mandate in two phases to
give preparers time to make any necessary changes to their business
practices and to help IRS prepare for the anticipated volume in e-file
applications. (See appendix II for possible business changes affecting
preparers as a result of the mandate as well as a comparison of the
paper filing and e-filing processes.)
In recent years, taxpayers have relied heavily on third party software
companies and preparers to get tax information and prepare their tax
returns. Figure 1 illustrates how taxpayers avoid direct interaction
with IRS by working with third parties. In 2010, 91 percent of all tax
returns were prepared using tax software--some by preparers and some
by taxpayers.[Footnote 6] Approximately 70 percent of all 2010 returns
were e-filed while the remainder were printed and mailed in on paper
(see more details of preparation and filing methods in appendix III).
Also, as reported in IRS's Return Preparer Review, many taxpayers
often rely on third parties to assist them with their tax law
questions.[Footnote 7]
Figure 1: Key Parties in Providing Tax Information and Preparing
Returns:
[Refer to PDF for image: illustration]
Taxpayers;
IRS;
Third Parties:
Paid preparers; tax preparation software.
Source: GAO analysis of IRS information.
[End of figure]
IRS accepts e-filed tax returns through two systems, the legacy
Electronic Management System (EMS) and the new Modernized e-File (MeF)
system. During filing season 2011, only certain forms were accepted
through the MeF system, so not all tax returns could be processed with
the new system. IRS plans to add all of the forms currently accepted
in EMS to MeF and discontinue use of EMS in October 2012. IRS
officials said that MeF provides several benefits; for example, MeF
accepts or rejects individual tax returns faster than the EMS and
provides better explanations for rejections.[Footnote 8] MeF will also
allow taxpayers to attach Portable Document Format (PDF) files to
their tax returns, which will be useful in instances where taxpayers
are required to submit additional documentation, such as settlement
statements when claiming the First Time Homebuyer Credit. Another
benefit is that MeF accepts prior year returns starting with tax year
2009. As we previously reported, IRS tested MeF during the 2010 filing
season, but use was low.[Footnote 9] Industry stakeholders, who are
major users of the e-filing systems, said MeF was unstable (i.e., the
system often had down time, time-outs, slow servers, and delayed
acknowledgments). Use of MeF increased during the 2011 filing season
and industry stakeholders reported improvements and positive
experiences with the system. IRS officials said that plans to
exclusively use MeF for the 2013 filing season are viable.
E-filed tax returns provide IRS with digital information. IRS
transcribes select data from paper returns to convert it to a digital
format. IRS's policy is to post the same information from electronic
and paper returns to its databases. Only information posted to its
databases is readily available for use in IRS's enforcement programs
and audit selections, which means that similar paper and electronic
returns have equal chances of being selected for audit.[Footnote 10]
In addition to e-filing or transcribing, IRS can potentially obtain
digital tax data from two-dimensional (2-D) bar coding. A 2-D bar code
is a black and white grid that encodes tax return data. Tax software
would print bar codes on paper tax returns and high-speed scanners
would scan them and import the data into IRS's systems. IRS released a
study in December 2010 that found that using 2-D bar codes would
provide significant flexibility and generate cost savings.[Footnote
11] Paper returns that were prepared with pens or typewriters rather
than software would still have to be transcribed.
Individual E-filing Rate Approaches 80 Percent Goal After First Year
of Mandate, but Some Taxpayers Still Choose to File on Paper:
2011 E-filed Returns Have Surpassed Projections and Were Processed
Smoothly:
As of August 12, 2011, IRS processed 108 million returns
electronically and 29 million returns on paper, for an e-filing rate
of about 79 percent, according to IRS's weekly processing data.
[Footnote 12] IRS officials had estimated that the mandate would
increase the individual e-filing rate to 75 percent in 2011 and 77
percent in 2012.
The e-file rate for preparers increased this year, to about 89
percent, which is an increase of about 11 percentage points over last
year's rate, according to data as of July 2, 2011, from the Individual
Return Transaction File.[Footnote 13] Although the e-file mandate did
not apply to individual taxpayers who self-prepared their returns
using commercial tax software, their e-file rate also increased to
about 71 percent or about 7 percentage points over last year's rate.
(See figure 2.) Based on IRS processing data and interviews with
select software companies, IRS did not have any problems processing
the 7.9 million additional returns e-filed in 2011.
Figure 2: E-file Rates for Returns Prepared by Preparers and Self-
Prepared, Calendar Years 2006 to 2011:
[Refer to PDF for image: multiple line graph]
IRS e-file goal: 80%.
Calendar year: 2006;
Preparer: 65.28%;
Self-prepared: 41.66%.
Calendar year: 2007;
Preparer: 68.96%;
Self-prepared: 44.74%.
Calendar year: 2008;
Preparer: 71.65%;
Self-prepared: 44.28%.
Calendar year: 2009;
Preparer: 75.36%;
Self-prepared: 58.88%.
Calendar year: 2010;
Preparer: 77.85%;
Self-prepared: 64.05%.
Calendar year: 2011[A];
Preparer: 89.23%;
Self-prepared: 71.45%.
Source: IRS's Individual Return Transaction File data.
[A] Calendar year 2011 data are part-year data through July 2, 2011.
[End of figure]
While IRS has not conducted an analysis to determine what factors
influenced e-file growth, officials in the Return Preparer Office said
that the mandate was one of the main contributors. According to IRS
Forecasting Office officials, the increased e-file rate for self-
prepared returns may have been due, in part, to IRS no longer mailing
the paper forms and instructions to taxpayers, and to taxpayers
becoming more comfortable with technology.
Most Preparers Who Did Not E-file Cited Taxpayer's Choice as the
Explanation:
By far the most common reason preparers cited for not e-filing was
that the taxpayer asked to file on paper, as shown in figure 3.
[Footnote 14] Preparers subject to the mandate who did not e-file a
tax return were required to complete Form 8948, "Preparer Explanation
for Not Filing Electronically," and submit it with the return.
[Footnote 15] IRS has not analyzed why taxpayers chose to file on
paper, but it plans to do so in the future. Other reports about e-
filing suggest some taxpayers have security concerns with e-filing.
[Footnote 16]
Figure 3: Preparer Reasons for Paper Filing Based on 1.5 Million Form
8948s, "Preparer Explanation for Not Filing Electronically:"
[Refer to PDF for image: horizontal bar graph]
Reason for not filing electronically: Taxpayer choice[A];
Paper filing (Number of Form 8948s): 1,236,000 (81.6%).
Reason for not filing electronically: Other[B];
Paper filing (Number of Form 8948s): 186,000 (12.3%).
Reason for not filing electronically: Rejected return[C];
Paper filing (Number of Form 8948s): 45,000 (3.0%).
Reason for not filing electronically: Waiver[D];
Paper filing (Number of Form 8948s): 26,000 (1.7%).
Reason for not filing electronically: Form not supported by
software[E];
Paper filing (Number of Form 8948s): 18,000 (1.2%).
Reason for not filing electronically: Religious exemption[F];
Paper filing (Number of Form 8948s): 3,000 (0.2%).
Source: GAO analysis of IRS Preparer Explanation Form count data.
[A] The taxpayer requested that the return be filed on paper.
[B] Other can include various things, such as a foreign preparer
without a Social Security number.
[C] The tax return was rejected by the e-file system and the error
could not be resolved.
[D] The preparer obtained a hardship waiver from IRS for instances
such as economic hardship.
[E] Some e-file software packages may not support lesser-used forms.
[F] A religious exemption is allowed for a preparer who is a member of
a recognized religious group that is conscientiously opposed to filing
electronically.
[End of figure]
Preparers' Views about Implementing the Mandate Varied Based on Prior
E-filing Experiences:
The preparers we talked with who were new to e-filing said they
experienced increased costs and administrative burdens as a result of
the mandate. Other preparers, who previously e-filed returns, told us
that the mandate had little effect on their practice. We interviewed
26 preparers who were members of national preparer groups. Their views
are not representative of the entire population of preparers, but they
provide some examples of preparer experiences.[Footnote 17]
Five of the 26 preparers we interviewed had not previously e-filed,
and they provided a variety of examples of how the mandate affected
them. One preparer noted that her software provider charged an
additional fee to e-file returns. Another preparer stated he hired an
additional administrative employee to help manage requirements that
were new to him when e-filing, such as Form 8879, "IRS e-file
Signature Authorization." Several preparers told us that it took them
several hours to make changes to rejected returns--a step that may not
occur until months later, if at all, when filing a paper return.
Another preparer who had not previously e-filed reported that she
experienced a learning curve for e-filing, but after e-filing the
first 10 or so returns, the process went more smoothly. Several
preparers who had been e-filing prior to the mandate said they
experienced some of these same problems when they first e-filed, but
do not any longer.
Some preparers who previously e-filed said that e-filing helped their
businesses and found that the mandate did not change their operations
greatly from the previous years. These preparers liked the convenience
of e-filing and told us that it reduced the time needed to file
returns, ensured the receipt of returns at IRS, and did not cost them
any additional money, but in fact saved them money. One preparer noted
that he had e-filed some returns in previous years, but this year was
the first time that almost all of his clients e-filed due to his
encouragement because of the mandate. He said he saved money by
placing PDF versions of his clients' returns on a secure network space
for them to review before he e-filed the return with IRS, reducing
printing costs.
Some preparers we interviewed relied heavily on software companies.
One preparer noted that he attends tax law training conducted by his
software company to get annual updates. Three of the preparers we
interviewed noted that their software automatically generated the new
forms needed to comply with the mandate (e.g., Form 8948), and two
preparers said that they heard about the mandate through their
software companies.
IRS Is Developing Plans to Deal with Noncompliant Preparers and Study
Lessons Learned from E-file Mandate Implementation:
IRS Does Not Know the Extent of Preparer Noncompliance with the
Mandate or Have the Authority to Issue Monetary Penalties:
IRS officials believe there are potentially three types of preparers
who may not comply with the e-file mandate: Preparers who:
* are unaware of the mandate or do not fully understand the
requirements;
* know about the mandate, sign the tax return, but intentionally
choose not to e-file; or:
* complete tax returns, but do not sign the returns or submit them
electronically. IRS refers to these preparers as "ghost preparers."
IRS has preliminary plans to identify each of these types of
noncompliant preparers, but the plans are not yet fully developed. To
identify preparers who may be unaware of or deliberately noncompliant
with the mandate, IRS plans to review paper tax returns and identify
ones that were completed by a preparer and appear eligible for e-
filing but have no Form 8948, "Preparer Explanation for Not Filing
Electronically."[Footnote 18] To further identify preparers who are
willfully noncompliant with the mandate, officials plan to review
preparers' use of Form 8948, but have not yet determined how they will
use this information to identify noncompliant preparers. Officials in
IRS's Return Preparer Office also stated they plan to modify the
existing e-file monitoring program--currently focused mostly on e-file
security--to include compliance with the e-file mandate. However,
officials have not yet developed the selection criteria to determine
which preparers they will send notices to and visit, nor have they
determined how compliance with the e-file mandate will fit into the
scope of their visits. IRS has some plans regarding ghost preparers
that were developed to enforce new regulations for preparers. Among
other things, IRS plans to send letters to taxpayers who submitted
returns without preparer signatures yet appear to have had assistance
completing their returns.[Footnote 19]
IRS officials said that one reason they have not completed their
compliance plans is that they do not yet know the extent of
noncompliance with the mandate. IRS officials said an extensive
compliance strategy may not be needed unless noncompliance rates are
high. They said that because this is the first year of the mandate's 2-
year implementation period, there is not sufficient data to know
whether noncompliance with the e-file mandate is high or will be high
in the future. In fact, they suspect that noncompliance may be low,
because e-file rates exceeded projections in the first year of the
mandate. Nonetheless, they acknowledged that some noncompliance likely
exists, and that there could be more next year when the mandate is
fully effective and the threshold for the e-file requirement drops to
more than 10 returns (down from 100 in 2011).
Regardless of the extent of noncompliance, IRS does not have authority
under the Internal Revenue Code (IRC) to impose penalties on preparers
who fail to comply with the e-file mandate, but does have some
authority to discipline preparers under the Department of Treasury's
Circular No. 230.[Footnote 20] Circular 230 governs the practice of
practitioners, including tax return preparers, before IRS, and
provides IRS with a limited ability to sanction preparers for failing
to e-file.[Footnote 21] IRS's Office of Professional Responsibility
(OPR) administers and enforces Circular 230 standards. OPR officials
said that they do not plan to frequently impose sanctions against
preparers for noncompliance with the e-file mandate because the
administrative process is resource-intensive and the sanctions may
also be harsher than necessary. Prior to imposing sanctions, OPR must
provide practitioners with notice and an opportunity for a hearing.
Building a case against a preparer is time-consuming, often taking
longer than a filing season. Sanctions can include censure, suspension
from practice before IRS, or disbarment. IRS can also impose monetary
sanctions under Circular 230, but officials said they likely would not
because the agency does not have the authority to collect any unpaid
amounts--such cases must be referred to the Department of Justice,
adding to the time and costs of enforcement.
Because imposing monetary sanctions under Circular 230 is time-
consuming and costly, IRS could benefit from separate penalty
authority under the IRC. IRS already has authority under the IRC to
impose penalties in other, similar circumstances.[Footnote 22] For
example, IRS may impose a $50 penalty per return if a preparer
neglects to sign a tax return or include a Preparer Tax Identification
Number (PTIN) on a return.[Footnote 23] According to IRS's penalty
handbook, penalties exist to encourage voluntary compliance by
supporting the standards of behavior required by the IRC.[Footnote 24]
Granting IRS the authority to penalize for failing to e-file would
build upon IRS's existing penalty regime and provide a more
commensurate sanction than those which can be imposed under Circular
230. Without such penalty authority, IRS may be limited in its ability
to deter noncompliance and enforce the e-file mandate.
Analyzing and Documenting Lessons Learned Could Improve the
Implementation of Any Future E-file Mandates:
According to the Director of the Return Preparer Office, IRS intends
to conduct a "lessons learned" review of steps taken to implement the
e-file mandate, but does not have a plan or schedule for doing so. As
discussed in our previous reports, lessons learned can be useful tools
for an organization to identify areas of improvement or document
things that worked well.[Footnote 25] Areas of focus could include a
review of staffing levels, timeliness of management decision making,
and communication with the public. One lesson learned during the first
year of the e-file mandate may be that additional staff helped IRS
process e-file applications in a timely manner.[Footnote 26] (See
appendix IV for more information on the e-file application process.)
Performing a lessons learned analysis on the e-file mandate for
preparers could have future benefits because the fiscal year 2012
budget request for IRS included five legislative proposals for
additional e-file mandates.[Footnote 27] Without identifying and
documenting lessons learned, the knowledge could be lost for reasons
such as staff turnover. The scope and depth of a lessons learned study
should, of course, balance the costs of the study against the
potential benefits.
The Benefits and Costs of Different Options for Digitizing Remaining
Paper Returns Have Not Been Fully Analyzed:
Paper returns limit the effectiveness of IRS's enforcement and service
programs. To control costs, IRS does not transcribe all the
information on paper tax returns into its computer databases. In
addition, as previously noted, IRS has a policy of posting the same
information from electronic and paper returns to its databases, so
that similar paper and electronic returns have equal chances of being
selected for audit. In part, IRS's intention with this policy is to
avoid disincentives to e-filing. Consequently, if a line is not
digitized from paper returns, it is not posted from electronic returns
either, which limits the amount of information readily available for
enforcement and service purposes. For example, taxpayers' telephone
numbers are not digitized. When IRS wants to obtain a phone number
from a paper tax return, the number must be retrieved from the
originally filed return, which takes extra time.
Digitizing data can benefit taxpayers. In addition to faster refunds
and improved convenience, IRS officials said that having more tax
return information available electronically would improve audit
selection, thus reducing burdensome audits for compliant taxpayers.
[Footnote 28] Additionally, digital information can help some
taxpayers get larger refunds, or reduce their taxes due. For example,
using automated error checking, IRS corrected 7.7 million returns from
taxpayers claiming the Making Work Pay credit, about 60 percent of
which were in the taxpayer's favor.[Footnote 29] These automated
corrections, which reduced taxes, may not have been possible without
digitizing relevant data from paper returns.
According to IRS officials, digitizing and posting more comprehensive
information from individual income tax returns could also facilitate
enforcement efforts, expedite contacts for faster resolution, reduce
handling costs, and increase compliance revenue. For example, in
fiscal year 2010, IRS increased the amount of data it transcribed from
Form 5405, "First-Time Home Buyer Credit." It used this additional
information to conduct prerefund compliance checks to ensure that
taxpayers do not claim the credit in multiple years. We calculated
IRS's increased enforcement efforts prevented about $95 million in
erroneous refunds in fiscal year 2010.[Footnote 30]
Options for digitizing more paper tax return data include optical
character recognition (OCR), bar coding, and transcription.[Footnote
31] An OCR system would read text directly from paper returns using
optical scanners and recognition software and convert the text to
digital data. IRS is not currently considering implementing OCR to
obtain more digital data because of the high expense of the additional
equipment needed.[Footnote 32] Instead, IRS is pursuing what it
considers to be a less costly bar coding system and transcribing more
data from paper returns.
Bar Coding Could Be Operational In Several Years:
Two-dimensional (2-D) bar coding technology would capture data on v-
coded returns, which are those returns that are prepared using
software but are printed and mailed to IRS. All of the information on
a return can be coded in bar codes, and unlike transcription, bar
codes transfer data with 100 percent accuracy (although poorly printed
bar codes may be rejected by the scanners). On a limited basis, IRS
already uses bar coding technology to digitize the Schedule K-1,
"Partner's Share of Income, Deductions, Credits, etc." This system,
implemented in the early 1990s, was used to digitize about 15 million
Schedule K-1s in fiscal year 2010. IRS also recently started to use
bar codes to mask Social Security numbers on communication letters to
preparers.
IRS's Submission Processing officials told us that they have written a
proposal for a bar coding system, and IRS may request funding for it
in the near future. Officials believe bar coding will improve tax
return processing and reduce costs. As we previously reported, bar
coding could contribute to IRS's agency modernization goals and
produce some of the same efficiencies as e-filing by replacing the
labor-intensive transcription process and eliminating transcription
errors.[Footnote 33] However, returns that were prepared without
software--for example, with a typewriter or pen--would still require
manual transcription, and bar coded returns would require some paper
processing such as receiving and opening mail. A cost-benefit analysis
for bar coding could include costs for processing and transcribing
remaining paper returns.
In our prior report, we recommended that IRS determine actions needed
to require bar coding and related costs.[Footnote 34] IRS's 2012
Revenue Proposals included a legislative proposal that would require
all taxpayers who prepare their returns electronically but print and
file them on paper to print the returns with a 2-D bar code.[Footnote
35] As of September 1, 2011, there had been no action on this
legislative proposal.
Officials also told us that even if a potential request is funded, it
will be another 18 to 24 months before IRS could begin scanning
individual paper returns using the technology. IRS has not yet
produced a cost-benefit analysis or a return on investment study
related to the bar coding initiative. Without a cost-benefit study,
IRS management and Congress will lack key information useful for
deciding whether to fund bar coding.
IRS officials told us that if IRS is able to implement bar coding,
they plan to model the bar code system on systems that states have
developed and standardized, working in collaboration with software
companies. As of 2007, 24 states and the District of Columbia were
using bar code scanning to process some or all of their tax returns.
[Footnote 36] State tax agencies reported that bar coding is quicker,
more accurate, and less expensive than manual transcription of paper
tax return data. A 2007 survey by the Federation of Tax Administrators
asked the states that bar coded various state tax returns that year
about savings they realized by bar coding instead of transcribing data
manually. Eleven states provided answers with quantitative cost
information; each of them reported that bar coding cost less than
manual transcription.
Transcribing More Lines of Data from Paper Returns May Have Net
Benefits:
Manual transcription of data is the primary method currently available
to IRS to digitize data from paper returns. IRS has analyzed the cost
of transcribing all remaining lines on individual paper tax forms, and
estimates that it would require 1,714 full-time equivalent (FTE)
staff, costing about $71 million, for fiscal year 2012. However, IRS
officials told us that IRS does not have funding at this time to
transcribe all the remaining data lines from paper returns. According
to IRS officials, IRS may increase the digital data available to its
programs by transcribing selected lines, although the amount of
transcription needed would be reduced if bar coding were implemented.
If the additional transcription is phased in, a cost-benefit analysis
that prioritizes data on a line-by-line basis could be used to
determine which lines would have the lowest costs and greatest
benefits. IRS has not completed such an analysis. IRS has taken some
steps, such as developing priority lists of additional lines to
transcribe, but has not quantified the costs or benefits of
transcribing each line. Also, these listings were developed in
different business operating divisions and are not integrated across
divisions, so there is no ranking of the agency's transcription
priorities as a whole.
Ranking transcription priorities could have benefits because the cost
of transcription varies by line. We used IRS data to develop
calculations to illustrate the potential variability of transcription
costs across different tax return lines that IRS included in its
priority listing.[Footnote 37] We estimated the costs of transcribing
different lines from all paper tax returns submitted during a filing
season, and found that costs varied from less than $1,000 to more than
$500,000.
We illustrate the variability of transcription costs by presenting
averages for all lines on selected forms. For example, if IRS were to
transcribe an average line on Form 1040 Schedule C from all paper tax
returns for a filing season, it would cost $123,400. Costs for
different lines on Schedule C would vary substantially around this
average. Table 2 illustrates some of the average costs for lines on
high-volume forms and schedules. (More details on our calculations are
in appendix V.)
Table 2: Estimated Average Filing Season Transcription Cost Per Line
on High Volume Forms and Schedules[A]:
Form/Schedule: Form 8863, "Education Credits;"
Estimated average filing season transcription cost for line on
form/schedule: $217,800.
Form/Schedule: Form 1040, "U.S. Individual Income Tax Return;"
Estimated average filing season transcription cost for line on form/
schedule: $159,700.
Form/Schedule: 1040 Schedule C, "Profit or Loss From Business;"
Estimated average filing season transcription cost for line on form/
schedule: $123,400.
Form/Schedule: 1040 Schedule E, "Supplemental Income and Loss;"
Estimated average filing season transcription cost for line on form/
schedule: $50,400.
Form/Schedule: Form 4562, "Depreciation and Amortization;"
Estimated average filing season transcription cost for line on
form/schedule: $11,600.
Form/Schedule: 1040 Schedule D, "Capital Gains and Losses;"
Estimated average filing season transcription cost for line on
form/schedule: $8,100.
Source: IRS data.
[A] Based on lines listed by IRS as priorities for transcription.
Averages do not include lines that are already transcribed. Averages
are rounded. Costs for individual lines vary substantially around the
averages. Cost information is based on IRS labor cost projections for
2012.
[End of table]
Because an increasing percentage of returns are e-filed, IRS could be
at the tipping point where the service and compliance benefits of
digitizing additional data from paper returns are greater than costs.
Given today's tight budget environment, additional resources for
transcription would likely have to be moved from other areas within
IRS. In deciding on whether to transcribe more lines, IRS would have
to balance the benefits of additional transcription against the value
of the work foregone.
IRS Does Not Have a Complete List of Forms That Cannot Be Accepted
Electronically Nor Does It Have a Time Line for Adding Them to the E-
file System:
Preparers and taxpayers wanting to e-file may not be able to because
some forms have not been added to IRS's e-file systems. We identified
two high-volume individual forms that currently cannot be e-filed and
do not have a time line to be added to MeF.[Footnote 38]
* Form 1040-X, "Amended U.S. Individual Income Tax Return." About 6.9
million taxpayers submitted a Form 1040-X in fiscal year 2010. Several
tax preparers we spoke with said it was a burden not to be able to e-
file this form. Electronic Tax Administration officials said
eventually they would like to enable e-filing of the 1040-X, but they
have not done so because the technology would need to be developed to
check the amended data against what was originally filed.
* Form 1040-NR, "U.S. Nonresident Alien Income Tax Return." About
621,000 taxpayers submitted a Form 1040-NR in 2010. IRS officials said
that Form 1040-NR was not included in the decision process when IRS
decided on the sequence of adding forms to e-file, but it might be in
the future.
Having a time line to add these high-volume or other forms to the e-
file system could help IRS further achieve its e-filing goals,
consistent with IRS's e-Strategy for Growth.[Footnote 39] Without a
time line, these high-volume or other forms may not be added to the e-
file system.
One reason IRS does not have a complete time line is that it has not
developed a complete list of forms that cannot currently be e-filed.
IRS's Strategic Plan calls for using data and research across the
organization to make informed decisions and allocate resources.
[Footnote 40] Adding forms to the e-file system requires one-time
expenditures, but ultimately may have compliance benefits, save IRS
money, and reduce the burden on preparers and taxpayers. Without a
list of forms that are not currently e-filed, IRS would not be able
analyze the costs and benefits of adding different forms in order to
prioritize which forms to add. Further, as with additional
transcription, IRS would need to weigh the benefits of shifting
resources to enable forms to be e-filed against the value of the work
forgone.
Conclusions:
E-filing provides important benefits to taxpayers, including faster
refunds and more accurate returns. It provides a low-cost option for
IRS to improve enforcement operations and services to taxpayers. This
is especially important in an era of tight budgets when federal
agencies will be expected to do more with less. The increased e-filing
rates from the first year of the mandate are helping IRS do this.
IRS would benefit from having increased penalty authority to enforce
the mandate and deter noncompliance. There are also several steps IRS
could take to reduce costs, obtain more digital data, and facilitate
further growth in e-filing. Documenting lessons learned from the
current mandate might help with the implementation of future e-file
mandates. Analysis of the costs and benefits of bar coding technology
and additional transcription could better inform decisions about
whether to digitize more data from paper returns. Similarly,
developing a list and scheduling the addition of more forms to the e-
file system could inform resource allocation decisions.
Matter for Congressional Consideration:
Congress should consider amending the Internal Revenue Code to
authorize IRS to assess penalties on preparers for failure to comply
with section 6011(e)(3).
Recommendations for Executive Action:
To help increase electronic filing and to better target IRS's efforts,
we recommend that the Commissioner of Internal Revenue direct the
appropriate officials to take the following five actions:
* develop a plan for and schedule to conduct a study that identifies
and documents lessons learned from the implementation of the e-file
mandate;
* determine whether and to what extent the benefits of bar-coding
would outweigh the costs;
* determine the relative costs and benefits of transcribing different
individual lines of tax return data;
* develop and prioritize a list of forms that still need to be added
to the Modernized e-File system; and:
* create a timetable to add additional forms to the Modernized e-File
system, particularly for high-volume forms, such as the 1040-X and
1040-NR.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Commissioner of Internal
Revenue for his review and comment. The Deputy Commissioner for
Services and Enforcement provided written comments, which are
reprinted in appendix VI. IRS also provided us with technical
comments, which we incorporated into the report as appropriate.
In response to our draft report, the Deputy Commissioner expressed
appreciation to GAO for recognizing the noticeable increase in e-file
participation this year and agreed with all five of our
recommendations. However, the steps IRS outlined in its comments may
not fully address two of our recommendations. Regarding our
recommendation on the relative costs and benefits of transcribing
different individual lines of tax return data, IRS stated that it has
determined the relative costs of transcribing individual lines. To
fully address this recommendation, however, IRS should also quantify
the benefits of transcribing individual lines and compare them to the
individual costs. This analysis could inform budget decisions by
allowing IRS to compare the option of additional transcription against
any work foregone. Regarding our recommendation to develop and
prioritize a list of forms that still need to be added to MeF, IRS
outlined the next three releases scheduled for MeF (through filing
season 2014). While IRS has a list of forms it plans to transfer from
EMS to MeF, there are still some forms that cannot be e-filed on
either system. To fully address this recommendation, IRS should also
develop a list of forms and schedules that cannot currently be e-
filed. A complete list would enable IRS to analyze the costs and
benefits of adding different forms to MeF as well as prioritizing
which forms to add first.
We plan to send copies of this report to the Chairmen and Ranking
Members of other Senate and House committees and subcommittees that
have appropriation, authorization, and oversight responsibilities for
IRS. We are also sending copies to the Commissioner of Internal
Revenue, the Secretary of the Treasury, the Chairman of the IRS
Oversight Board, and the Director of the Office of Management and
Budget. This report is also available at no charge on the GAO Web site
at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions or wish to discuss the
material in this report further, please contact me at (202) 512-9110
or WhiteJ@gao.gov. Contact points for our offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Individuals making key contributions to this report can be
found in appendix VII.
Signed by:
James R. White:
Director, Tax Issues Strategic Issues:
[End of section]
Appendix I: Scope and Methodology:
To describe electronic filing (e-file) rates, the Internal Revenue
Service's (IRS) processing capacity, reasons why preparers did not e-
file, and their experiences implementing the mandate, we obtained and
analyzed data from IRS's weekly processing reports and the Individual
Return Transaction File from Submission Processing and the Return
Preparer Office, respectively.[Footnote 41] Data included numbers of
returns that were completed by taxpayers and preparers as well as the
filing method--e-filed, "v-coded," and paper filed. In addition, we
obtained and analyzed data about Form 8948, "Preparer Explanation for
Not Filing Electronically," and Form 8944, "Preparer e-file Hardship
Waiver Request." To determine the reliability of IRS's data, we
interviewed IRS officials who created the reports, reviewed related
documentation, and reviewed the data for obvious errors. We found the
data to be sufficiently reliable for our purposes. We interviewed
Submission Processing officials and representatives from the National
Association of Computerized Tax Processors about how well IRS
processed additional e-filed returns this year. We also interviewed 9
tax software companies and 26 representatives from tax preparation
firms to obtain their views about the mandate's implementation. We
chose a nonrepresentative sample of preparers affiliated with national
preparer groups: American Institute of Certified Public Accountants,
National Association of Tax Professionals, and National Association of
Enrolled Agents. Each group gathered 6 to 9 preparers for group
interviews, and two of the groups identified 4 preparers whom we spoke
with individually. Additionally, we spoke with one preparer who
contacted us in response to our previous report on e-filing.
To assess IRS's plans to enforce the mandate and determine lessons
learned, we reviewed the 2011 planning documents for the integrated
preparer compliance strategy and E-file Monitoring Program. We also
interviewed officials from the Return Preparer Office about their
compliance and enforcement plans for ensuring preparers were following
the mandate. We interviewed officials from the Chief Counsel's Office
and the Office of Professional Responsibility to determine current
options available to sanction preparers noncompliant with the e-file
mandate. We also interviewed IRS officials from the Return Preparer
Office about IRS plans for conducting a lessons learned study on the
mandate's implementation.
To assess IRS's analysis of options for digitizing more data from
paper returns, we reviewed IRS's 2008 proposal, Modernized Submission
Processing: Solution Concept Briefing, to add a bar coding system to
process paper returns and analyzed IRS's priority transcription list
developed by IRS's Deputy Commissioner's Office for Service and
Enforcement (Service and Enforcement). Using IRS data, such as staff
cost per keystroke and volume of paper forms, we estimated costs to
transcribe additional lines of data (see appendix V). To determine the
reliability of IRS's data, we interviewed IRS officials who developed
the transcription priority listing, reviewed related documentation,
and reviewed the data for obvious errors. We found these data to be
sufficiently reliable for our purposes. We shared our calculations
with IRS officials in Service and Enforcement who agreed with our
approach. Also, we interviewed IRS officials from Submission
Processing and Service and Enforcement about their plans to implement
bar coding technology and transcribe additional lines of data and any
analysis of the costs and benefits of implementing such methods.
To determine whether there are any tax forms IRS cannot accept
electronically and assess IRS's plans for adding them to the e-filing
system, we compared a list and time line of all tax forms that
Submission Processing planned to add to the e-file system to a list of
all existing IRS forms obtained from the Forms and Publications
division. We also interviewed officials from the Wage and Investment
division and the offices of Electronic Tax Administration and
Submission Processing about their plans to add more forms to the e-
file system.
For each objective, we also interviewed officials at IRS's office of
Electronic Tax Administration and Return Preparer Office. Our work was
done primarily at IRS Headquarters in Washington, D.C. and its
division offices in New Carrolton, Maryland, and Atlanta, Georgia
where the IRS officials who manage the e-file mandate implementation
are located.
We conducted this performance audit from March 2011 to October 2011,
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Possible Changes Affecting Preparers as a Result of the E-
file Mandate:
Tax return preparers who have never electronically filed (e-filed) a
tax return may need to make some changes in their business practices
as a result of the e-file mandate. Some preparers may need to purchase
a tax software package to enable them to e-file. Most preparers will
also need to apply to become an Authorized E-file Provider with the
Internal Revenue Service (IRS), which allows them to submit electronic
tax returns to IRS.
New steps in preparing returns for those who have never e-filed could
include obtaining a taxpayer's signature on Form 8879, "IRS e-file
Signature Authorization," to document that the taxpayer has reviewed
the return and that it is ready for transmission to IRS. Also,
preparers who e-file receive an acknowledgment from IRS stating that
the return was accepted or rejected into IRS's e-file system.[Footnote
42] When a return is rejected, the preparer must correct the error,
sometimes with more information from the taxpayer, in order to
resubmit it to IRS. In instances when a preparer needs to file a
return on paper, the preparer must submit Form 8948, "Preparer
Explanation for Not Filing Electronically."
Figure 4 compares the processes preparers go through to submit a
return electronically versus on paper.
Figure 4: Preparation and Filing Methods for Preparers:
[Refer to PDF for image: process illustration]
Paper process:
1) Preparer obtains information from taxpayer to fill out paper forms.
2) Preparer fills out Form 8948, ’Preparer Explanation for Not Filing
Electronically.“ Return is filed on paper, known as a v-coded return.
3) Preparer gives return back to taxpayer.
4) At IRS, staff:
* Open and sort mail;
* Code and edit return;
* Transcribe selected data.
5) Return information posted to IRS‘s databases.
Electronic process:
1) Preparer obtains information from taxpayer to fill out return using
software.
2) Preparer reviews return with taxpayer. Taxpayer signs Form 8879,
"IRS E-file Signature Authorization.“
3) Preparer transmits return to IRS:
Return is accepted: or:
Return is rejected: Preparer corrects return, sometimes with more
information from taxpayer.
4) Return information posted to IRS‘s databases.
Source: GAO analysis of IRS information.
[End of figure]
[End of section]
Appendix III: Trends in Preparer and Self-Prepared Filing Methods:
As of July 2, 2011, almost 60 percent (about 76 million) of all
individual income tax returns were completed by a preparer and the
remainder (54 million) were self-prepared by taxpayers (see figure 5).
Filing methods include electronic filing (e-filing) and paper filing.
Returns that are prepared using software, but are printed and mailed
to the Internal Revenue Service (IRS), are called "v-coded" returns.
Figure 5: Trends in Preparer and Self-prepared Filing Methods,
Calendar Years 2006 to 2011:
[Refer to PDF for image: stacked vertical bar graph]
Calendar year: 2006;
Preparer/e-filed: 39.8%;
Preparer/v-coded: 19.6%;
Preparer/filed on paper: 1.6%;
Self-prepared/e-filed: 16.2%;
Self-prepared/v-coded: 9.9%;
Self-prepared/filed on paper: 12.9%;
Volume: 131 million.
Calendar year: 2007;
Preparer/e-filed: 42.0%;
Preparer/v-coded: 17.5%;
Preparer/filed on paper: 1.4%;
Self-prepared/e-filed: 17.5%;
Self-prepared/v-coded: 9.7%;
Self-prepared/filed on paper: 11.9%;
Volume: 134 million.
Calendar year: 2008;
Preparer/e-filed: 41.6%;
Preparer/v-coded: 14.8%;
Preparer/filed on paper: 1.7%;
Self-prepared/e-filed: 18.6%;
Self-prepared/v-coded: 9.0%;
Self-prepared/filed on paper: 14.4%;
Volume: 149 million.
Calendar year: 2009;
Preparer/e-filed: 45.1%;
Preparer/v-coded: 13.6%;
Preparer/filed on paper: 1.1%;
Self-prepared/e-filed: 23.7%;
Self-prepared/v-coded: 7.2%;
Self-prepared/filed on paper: 9.3%;
Volume: 139 million.
Calendar year: 2010;
Preparer/e-filed: 46.3%;
Preparer/v-coded: 12.1%;
Preparer/filed on paper: 1.1%;
Self-prepared/e-filed: 26.0%;
Self-prepared/v-coded: 6.8;
Self-prepared/filed on paper: 7.8%;
Volume: 137 million.
Calendar year: 2011[A];
Preparer/e-filed: 51.9%;
Preparer/v-coded: 5.7%;
Preparer/filed on paper: 0.5%;
Self-prepared/e-filed: 29.9%;
Self-prepared/v-coded: 6.0%;
Self-prepared/filed on paper: 6.0%;
Volume: 130 million.
[A] Data as of July 2, 2011.
[End of figure]
[End of section]
Appendix IV: E-file Application Processing:
In order to e-file, a preparer must be an Authorized E-file Provider.
The requirements to become an Authorized E-file Provider include
submitting an application and passing background and suitability
requirements. The Internal Revenue Service (IRS) issues an Electronic
Filing Identification Number (EFIN) to firms or sole practitioners who
meet these requirements.
As of June 30, 2011, IRS processed 36,714 applications for preparers
to become Authorized E-file Providers, 19 percent more than during the
same time period in 2010--an increase that IRS officials said was due
predominantly to the mandate. Applications that were submitted
electronically had an average processing time of 18 days, while those
submitted on paper had an average processing time of 26 days--both
within IRS's normal 45-day processing time. Overall, 89 percent of e-
file applications were processed in fewer than 45 days. For 2012, when
the mandate threshold is lowered to more than 10 returns, IRS
officials project that e-file applications will increase by 38 percent
over the average annual applications based on prior years. Electronic
Products and Support Services officials anticipate the preparers who
apply to become Authorized E-file Providers in 2012 will require
additional assistance resulting in longer calls or multiple calls. As
shown in table 3, IRS officials told us they will need 11 additional
full-time equivalents (FTE) to manage this workload.
Table 3: Estimated Number of New E-file Applications, 2011 and 2012:
Fiscal year: E-file applications:
Average annual applications based on prior years;
Fiscal year: 2011: 30,000;
Fiscal year: 2012: 30,000.
Increase projected due to e-file mandate;
Fiscal year: 2011: 22,401;
Fiscal year: 2012: 11,643.
Total;
Fiscal year: 52,401;
Fiscal year: 41,643.
Percent increase over average annual applications based on prior years;
Fiscal year: 2011: 75%;
Fiscal year: 2012: 38%.
Additional full-time equivalents (FTE) needed to process applications;
Fiscal year: 2011: 41;
Fiscal year: 2012: 11 (in addition to the 41 added in 2011).
Source: IRS data.
[End of table]
[End of section]
Appendix V: Calculation of Costs of Transcribing Data Lines from Paper
Returns:
We used the Internal Revenue Service (IRS) data to develop
calculations to illustrate the potential variability of transcription
costs across different tax return lines that IRS included in its
priority listing. The formula we used to calculate the cost of
transcribing a line of data is the following:
Cost of transcribing: equals:
Cost per keystroke;
multiplied by average keystrokes per line;
multiplied by paper volume of form;
multiplied by: occurrence rate of line.
All of these elements can vary:
* Cost/keystroke is based on the hourly rate for transcription staff
multiplied by number of keystrokes per hour. Number of keystrokes per
hour varies slightly for different forms.
* Average keystrokes per line varies for different data lines, from 1
to several hundred, with most under 10, as shown in figure 7.
* Paper volume of the form is the number of forms that are submitted
to IRS on paper. For example, if 10,000 taxpayers submit paper returns
that include a given form, the paper volume of that form is 10,000.
Paper volume is related to the total volume of the form and the e-file
rate of the form:
* E-file rates vary significantly for different forms, as shown in
figure 6; for example, 78 percent of Form 8863s were e-filed for tax
year 2009, compared to 55 percent of Schedule C's.
* Number of taxpayers who submit the form varies significantly for
different forms, from under 10,000 to over 50 million.
* Occurrence rate of the line is the rate at which the line is filled
in. Some lines are left blank most of the time, while others are
filled in more often or always. Occurrence rates vary from 1 percent
to 100 percent.
IRS has all of these data for over 500 lines identified by its
Business Operating Divisions as high priorities for transcription. As
an example of variations in these factors, different e-file rates for
some high-volume forms are shown in figure 6. All other variables
being equal, a line on a form such as Schedule C with a 55 percent e-
file rate (45 percent paper file rate) would be about twice as
expensive to transcribe as a line on a form such as Form 8863 with a
78 percent e-file rate (22 percent paper file rate). This is because
there would be about twice as many returns from which to transcribe
that line (45 ÷ 22).
Figure 6: E-file Rates for High Volume Forms and Schedules, Calendar
Year 2009:
[Refer to PDF for image: horizontal bar graph]
Forms and schedules: Form 8863, Education Credits: 78%.
Forms and schedules: Form 4562, Depreciation and Amortization: 63%.
Forms and schedules: Form 1040, U.S. Individual Income Tax Return: 62%.
Forms and schedules: 1040 Schedule D, Capital Gains and Losses: 59%.
Forms and schedules: 1040 Schedule E, Supplemental Income and Loss:
59%.
Forms and schedules: 1040 Schedule C, Profit or Loss From Business:
55%.
Source: GAO analysis of IRS data.
[End of figure]
As another example, figure 7 is a frequency chart showing that most
lines would require 1 to 15 keystrokes to transcribe, while some would
require 46 or more. All other variables being equal, a line that
required 46 keystrokes would be 46 times more expensive to transcribe
than one requiring 1 keystroke.
Figure 7: Frequencies of Keystroke Lengths for Different Lines to
Transcribe:
[Refer to PDF for image: horizontal bar graph]
Keystrokes: 46 or more;
Number of lines: 22.
Keystrokes: 41 to 45;
Number of lines: 2.
Keystrokes: 36 to 40;
Number of lines: 6.
Keystrokes: 31 to 35;
Number of lines: 7.
Keystrokes: 26 to 30;
Number of lines: 5.
Keystrokes: 21 to 25;
Number of lines: 0.
Keystrokes: 16 to 20;
Number of lines: 3.
Keystrokes: 11 to 15;
Number of lines: 56.
Keystrokes: 6 to 10;
Number of lines: 418.
Keystrokes: 1 to 5;
Number of lines: 91.
Source: GAO analysis of IRS data.
[End of figure]
[End of section]
Appendix VI: Comments from the Internal Revenue Service:
Department Of The Treasury:
Internal Revenue Service:
Deputy Commissioner:
Washington, D.C. 20224
September 26, 2011:
Mr. James R. White:
Director, Tax Issues:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. White:
I have received your draft report entitled, "E-Filing Tax Returns:
Penalty Authority and Digitizing More Paper Return Data Could Increase
Benefits" (GAO-12-33). Increasing electronic filing has been a
priority for the IRS and we appreciate the recognition of the
noticeable increase in e-file participation this year. As mentioned in
the Report, the preparer e-file mandate is one of the reasons for the
increase.
We are committed to enhancing efficiency of return processing as we
recognize paper returns will continue to be filed. We are taking a
number of steps to better align electronic and paper data capture and
to increase processing efficiency. Analysis is currently being
performed in areas such as barcoding and transcription of additional
tax return information. We are also working to ensure that all tax
forms become eligible for e-file in order to continue to increase
electronic submissions.
We will take appropriate actions to address or further review issues
as they are identified. We agree with your recommendations, and look
forward to continued engagement by the Government Accountability
Office. Our specific comments regarding your recommendations are
enclosed.
If you have any questions, please contact me, or members of your staff
can contact David R. Williams, Return Preparer Office, at (202) 927-
6428.
Sincerely,
Signed by:
Steven T. Miller:
Enclosure:
[End of letter]
Enclosure:
Recommendation #1:
Develop a plan for and schedule to conduct a study that identifies and
documents lessons learned from the implementation of the e-file
mandate.
Comments:
The IRS agrees with this recommendation. A lessons learned study will
be conducted in order to gather important information that could be
useful in implementing any future e-file mandates.
Recommendation #2:
Determine whether and to what extent the benefits of barcoding would
outweigh the costs.
Comments:
The IRS agrees with this recommendation. A cost/benefit analysis of 2-
D barcoding is already in process and will be finalized in the near
future.
Recommendation #3:
Determine the relative costs and benefits of transcribing different
individual lines of tax return data.
Comments:
The IRS agrees with this recommendation. Submission Processing has
determined the relative costs of transcribing individual lines of tax
forms and schedules. This information was provided to GAO in June
2011. If the budget environment supports additional transcription,
prioritization from a compliance perspective will be determined.
Recommendation #4:
Develop and prioritize a list of forms that still need to be added to
the Modernized E-File systems.
Comments:
The IRS agrees with this recommendation. Budget permitting, Modernized
e-File (MeF) Release 7 (Filing Season 2012) will deploy the remaining
1040 forms and schedules currently processed through Electronic
Management System/Electronic Filing System (EMS/ELF). Budget
permitting, MeF Release 8 (Filing Season 2013) will migrate the 94x
form family from EMS/ELF to MeF. MeF Release 9 (Filing Season 2014)
will migrate the 1041 form family from EMS/ELF to MeF. After the
deployment of MeF Release 9 all components of the legacy EMS/ELF
system will be retired.
Recommendation #5:
Create a timetable to add additional forms to the Modernized E-File
systems, particularly for high volume forms, such as the 1040X-and
1040-NR.
Comments:
The IRS agrees with this recommendation. The IRS is currently updating
its MeF Sequencing Plan for future MeF releases beyond Filing Season
2014, and Forms 1040-X and 1040-NR are included in the discussion.
[End of section]
Appendix VII: GAO Contact and Staff Acknowledgments:
GAO Contact:
James R. White, (202) 512-9110, or WhiteJ@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Libby Mixon, Assistant
Director; Amy Bowser; Michele Fejfar; Cynthia Saunders; Robyn Trotter;
and Meredith Trauner made key contributions to this report.
[End of section]
Footnotes:
[1] Pub. L. No.111-92, § 17, 123 Stat. 2984 (Nov. 6, 2009).
[2] GAO, Electronic Tax Return Filing: Improvements Can Be Made Before
Mandate Becomes Fully Implemented, [hyperlink,
http://www.gao.gov/products/GAO-11-344] (Washington, D.C.: Mar. 7,
2011).
[3] Pub. L. No. 105-206, title II, § 2001, 112 Stat. 685 (July 22,
1998).
[4] IRS Oversight Board, Electronic Filing 2006: Annual Report to
Congress, Feb. 28, 2007. The IRS Oversight Board's responsibility is
to oversee the IRS in its administration, management, conduct,
direction, and supervision of the execution and application of the
internal revenue laws.
[5] Specified Tax Return Preparers Required to File Individual Income
Tax Returns Using Magnetic Media (Final Regulations), 76 Fed. Reg.
17,521 (Mar. 30, 2011). The regulations specify that the determination
of whether a preparer reasonably expects to file more than 10 returns
is made by adding together all of the individual tax returns the
preparer or the preparer's firm reasonably expects to prepare and file
in the calendar year, except for returns subject to administrative
exemptions and returns for which the taxpayer signs an opt-out
statement.
[6] Calendar year data from Individual Return Transaction File.
[7] Department of the Treasury, Internal Revenue Service, Return
Preparer Review, Publication 4832 (Rev 12-2009) (Washington, D.C.:
December 2009).
[8] We previously recommended that IRS provide paid preparers and
software providers with clearer descriptions of why returns are
rejected. See GAO, Tax Administration: Opportunities Exist for IRS to
Enhance Taxpayer Service and Enforcement for the 2010 Filing Season,
[hyperlink, http://www.gao.gov/products/GAO-09-1026] (Washington,
D.C.: Sept. 23, 2009).
[9] GAO, Tax Filing Season: IRS's Performance Improved in Some Key
Areas, but Efficiency Gains Are Possible in Others, [hyperlink,
http://www.gao.gov/products/GAO-11-111] (Washington, D.C.: Dec. 16,
2010).
[10] Information not posted to IRS databases can be obtained from the
original source documents (i.e., paper or e-filed return) when needed.
[11] The MITRE Corporation, Advancing E-file Study Phase 2 Report: An
Examination of Options to Increase Electronic Filing of Individual
Returns. A special report sponsored by the Internal Revenue Service.
(Dec. 15, 2010.)
[12] Individual Income Received and Processed Headquarters (IIRAPHQ)
Cumulative Individual Income Tax Return report for week ending Aug.
12, 2011.
[13] IRS officials stated that the Individual Return Transaction File,
which provides data broken down by preparers vs. individual taxpayers,
is updated after and less frequently than the IIRAPHQ report.
[14] Waivers were a less common reason but they are noteworthy as
well, because they require a separate administrative process by IRS.
Preparers could apply for hardship waivers, which IRS could grant for
bankruptcy or economic hardship in cases where preparers are located
in a declared disaster area, and for "other" reasons. As of June 21,
2011, IRS received and processed 938 preparer hardship waiver
applications, 72 percent of which were approved.
[15] As of June 17, 2011, IRS received and processed 1.5 million Form
8948s.
[16] The MITRE Corporation, Advancing E-file Study Phase 2 Report: An
Examination of Options to Increase Electronic Filing of Individual
Returns. A special report sponsored by the Internal Revenue Service.
(Dec. 15, 2010.)
[17] We interviewed members from three national groups: American
Institute of Certified Public Accountants, National Association of Tax
Professionals, and National Association of Enrolled Agents.
[18] A return that appears eligible for e-filing could include a paper
return with a preparer tax identification number (PTIN) but not a Form
8948, "Preparer Explanation for Not Filing Electronically." Starting
in 2011, tax return preparers must obtain a PTIN, and use it to sign
all returns they prepare, paper and electronic. 26 C.F.R. § 1.6109-2.
[19] IRS uses different methods to determine if taxpayers appear to
have had assistance in preparing their returns. IRS safeguards such
details of its compliance strategy.
[20] IRS has the authority under the IRC to impose and collect
penalties on paid preparers for certain misconduct in the preparation
of tax returns. See, for example, 26 U.S.C. §§ 6694, 6695, 6701 and
6713. IRS currently cannot impose or collect penalties for a paid
preparer's failure to e-file. Section 330 of title 31 of the United
States Code allows the Secretary of the Treasury, delegated to OPR, to
regulate the practice of representatives of persons before IRS. The
regulations governing practice are in 31 C.F.R., part 10, which was
published as Circular 230. Under Circular 230, OPR may initiate
disciplinary proceedings against these practitioners for certain
incompetent or disreputable conduct.
[21] Practice before IRS encompasses all matters connected with a
presentation to IRS relating to taxpayer's rights, privileges, or
liabilities under tax laws, including preparing documents or filing
documents with IRS. Practitioners are attorneys, certified public
accountants, enrolled agents, enrolled actuaries, enrolled retirement
plan agents, and as of August 2, 2011, registered tax return
preparers. 31 C.F.R. § 10.2(a). Circular 230 includes failure to e-
file in the definition of disreputable conduct for which a preparer
can be sanctioned. 31 C.F.R. § 10.51(a)(16).
[22] IRS is authorized to assess penalties on paid preparers for a
variety of reasons including failure to (a) furnish a copy of the
return to taxpayer, (b) sign the return, (c) obtain and include a PTIN
on the return, and (d) retain copy of the return. 26 U.S.C. § 6695.
[23] Starting in 2011, tax return preparers must obtain a PTIN, and
use it to sign all returns they prepare, paper and electronic. PTINs
will allow IRS to identify preparers and help ensure they are in
compliance with rules relating to tax return preparers. 26C.F.R. §
1.6109-2.
[24] Internal Revenue Manual 20.1.
[25] GAO, Recovery Act: IRS Quickly Implemented Tax Provisions, but
Reporting and Enforcement Improvements Are Needed, GAO-10-349
(Washington, D.C.: Feb. 10, 2010) and GAO, Information Reporting: IRS
Could Improve Cost Basis and Transaction Settlement Reporting
Implementation, [hyperlink, http://www.gao.gov/products/GAO-11-557]
(Washington, D.C.: May 19, 2011).
[26] IRS added 41 full-time equivalents (FTE) to process the increased
e-file applications in fiscal year 2011, which allowed IRS to process
89 percent of the applications within IRS's target time period of 45
days.
[27] As an example, IRS asked for regulatory authority to require that
all information returns and Form 5500s, "Annual Return/Report of
Employee Benefit Plan," be e-filed.
[28] See GAO, Tax Administration: 2007 Filing Season Continues Trend
of Improvement, but Opportunities to Reduce Costs and Increase Tax
Compliance Should be Evaluated, [hyperlink,
http://www.gao.gov/products/GAO-08-38] (Washington, D.C.: Nov. 15,
2007).
[29] The error corrections were made January 1 through September 30,
2010. See GAO, Tax Refunds: Enhanced Prerefund Compliance Checks Could
Yield Significant Benefits, [hyperlink,
http://www.gao.gov/products/GAO-11-691T] (Washington, D.C.: May 25,
2011).
[30] See [hyperlink, http://www.gao.gov/products/GAO-10-349] and
[hyperlink, http://www.gao.gov/products/GAO-11-691T].
[31] Other options may be available or could be developed in the
future.
[32] IRS officials did not provide us documentation showing that OCR
is a more expensive option than bar coding or additional
transcription. Our analysis only considered the options IRS officials
say they are pursuing.
[33] [hyperlink, http://www.gao.gov/products/GAO-08-38].
[34] Ibid.
[35] Due to the limitations under Section 6011(e)(1), a statutory
change is necessary to require individuals, estates, and trusts to
print their returns with a 2-D bar code.
[36] These data have not been updated since 2007.
[37] These calculations are based on the cost per keystroke
transcribed, the average number of keystrokes for the line, the e-file
rate of the form or schedule that the line appears on, the number of
taxpayers who submit the form or schedule that the line appears on,
and the rate at which the line is filled in rather than left blank.
[38] Other forms exist that cannot be e-filed--for example, Form 1041-
QFT, "U.S. Income Tax Return for Qualified Funeral Trusts" and Form
1042, "Annual Withholding Tax Return for U.S. Source Income of Foreign
Persons." These forms may be lower in volume, but having them
available electronically may help with IRS's compliance efforts.
[39] IRS, e-Strategy for Growth: Expanding e-Government for Taxpayers
and Their Representatives, Pub 3187 (Washington, D.C.: Rev. January
2005).
[40] IRS, "Strategic Plan 2009-2013," Pub. 3744 (Washington, D.C.:
Rev. April. 2009). [hyperlink,
http://www.irs.gov/pub/irs-pdf/p3744.pdf].
[41] Weekly processing reports are from the Individual Income Received
and Processed Headquarters (IIRAPHQ) Cumulative Individual Income Tax
Return report.
[42] IRS does not send an acknowledgment when a paper return is filed.
IRS may send correspondence to the taxpayer when an error is
identified.
[End of section]
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