Tax Refunds
Enhanced Prerefund Compliance Checks Could Yield Significant Benefits Gao ID: GAO-11-691T May 25, 2011In 2010, the Internal Revenue Service (IRS) processed about 137 million individual income tax returns and issued 107 million refunds totaling over $312 billion. The compliance checks it performs before refunds are issued thus could affect millions of taxpayers and billions of dollars of refunds by identifying taxpayers who overclaim or underclaim tax benefits to which they are entitled. Math error authority (MEA) is just one example of the prerefund compliance checks that IRS uses. During 2010, IRS sent taxpayers 8.4 million notices for almost 10.6 million math errors identified on their 2009 individual tax returns. GAO's statement today will focus on three key areas: (1) prerefund checks and their benefits, (2) how those checks can be enhanced immediately, and (3) how they may be enhanced in the future. It is mostly based on GAO's previous work issued from 2008 through 2011, including an interim report on IRS's 2011 tax filing season, and our ongoing analysis of the 2011 filing season.
Prerefund compliance checks enable IRS to help confirm taxpayers' identity, quickly and efficiently correct some errors with virtual certainty, and identify and audit some returns before refunds are issued. Math error checks are among the most beneficial of these checks for both IRS and taxpayers. For example, they have the potential to deter billions of dollars in erroneous refunds, especially for refundable tax credits that have increasingly been enacted and that have resulted in significant overclaimed refunds and fraudulent claims. Taxpayers benefit from prerefund checks in several ways, including that IRS identifies those underclaiming benefits. Last year GAO reported that IRS corrected about 7.7 million errors associated with the Making Work Pay credit, including about 60 percent in the taxpayers' favor, meaning that taxpayers received larger refunds (or had lower taxes due) than they had anticipated. For almost a century, Congress has been expanding IRS's MEA on a case-by-case basis. In 2010, GAO suggested that authorizing the use of MEA on a broader basis with appropriate controls to protect taxpayer rights could help IRS immediately address compliance problems with newly created tax credits. In the absence of broader MEA, from 2008 through 2011, GAO also suggested that Congress expand MEA for more limited purposes. Longer term, other IRS initiatives, such as matching information returns to tax returns during the filing season and leveraging new paid preparer requirements, could enhance compliance before refunds are issued. One prerequisite would be a major reworking of some fundamental IRS computer systems.
GAO-11-691T, Tax Refunds: Enhanced Prerefund Compliance Checks Could Yield Significant Benefits
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United States Government Accountability Office:
GAO:
Testimony:
Before the Subcommittee on Oversight, Committee on Ways and Means,
House of Representatives:
For Release on Delivery:
Expected at 10:30 a.m. EDT:
Wednesday, May 25, 2011:
Tax Refunds:
Enhanced Prerefund Compliance Checks Could Yield Significant Benefits:
Statement of Michael Brostek, Director:
Strategic Issues:
GAO-11-691T:
GAO Highlights:
Highlights of GAO-11-691T, a testimony before the Subcommittee on
Oversight, Committee on Ways and Means, House of Representatives.
Why GAO Did This Study:
In 2010, the Internal Revenue Service (IRS) processed about 137
million individual income tax returns and issued 107 million refunds
totaling over $312 billion. The compliance checks it performs before
refunds are issued thus could affect millions of taxpayers and
billions of dollars of refunds by identifying taxpayers who overclaim
or underclaim tax benefits to which they are entitled. Math error
authority (MEA) is just one example of the prerefund compliance checks
that IRS uses. During 2010, IRS sent taxpayers 8.4 million notices for
almost 10.6 million math errors identified on their 2009 individual
tax returns.
GAO‘s statement today will focus on three key areas: (1) prerefund
checks and their benefits, (2) how those checks can be enhanced
immediately, and (3) how they may be enhanced in the future. It is
mostly based on GAO‘s previous work issued from 2008 through 2011,
including an interim report on IRS‘s 2011 tax filing season, and our
ongoing analysis of the 2011 filing season.
What GAO Found:
Prerefund compliance checks enable IRS to help confirm taxpayers‘
identity, quickly and efficiently correct some errors with virtual
certainty, and identify and audit some returns before refunds are
issued. Math error checks are among the most beneficial of these
checks for both IRS and taxpayers. For example, they have the
potential to deter billions of dollars in erroneous refunds,
especially for refundable tax credits that have increasingly been
enacted and that have resulted in significant overclaimed refunds and
fraudulent claims. Taxpayers benefit from prerefund checks in several
ways, including that IRS identifies those underclaiming benefits. Last
year GAO reported that IRS corrected about 7.7 million errors
associated with the Making Work Pay credit, including about 60 percent
in the taxpayers‘ favor, meaning that taxpayers received larger
refunds (or had lower taxes due) than they had anticipated. For almost
a century, Congress has been expanding IRS‘s MEA on a case-by-case
basis. In 2010, GAO suggested that authorizing the use of MEA on a
broader basis with appropriate controls to protect taxpayer rights
could help IRS immediately address compliance problems with newly
created tax credits. In the absence of broader MEA, from 2008 through
2011, GAO also suggested that Congress expand MEA for more limited
purposes as shown below.
Table: GAO Math Error Authority Matters for Congressional
Consideration:
Matter for consideration: Provide IRS with math error authority (MEA)
to use prior years‘ tax return information to ensure that taxpayers do
not improperly claim credits or deductions in excess of applicable
lifetime limits;
Status (May 2011): Not yet enacted.
Matter for consideration: Provide IRS with MEA to use prior years‘ tax
return information to automatically verify taxpayers‘ compliance with
the number of years the Hope credit can be claimed;
Status (May 2011): Not yet enacted.
Matter for consideration: Provide IRS with MEA to (1) use the prior
year‘s tax return information to automatically verify compliance with
the 2008 First-Time Homebuyer Credit payback provision and (2) ensure
that homebuyers do not improperly claim the credit in multiple years;
Status (May 2011): Enacted in Public Law 111-92.
Matter for consideration: Provide IRS with MEA to identify and correct
returns with ineligible (1) individual retirement account (IRA) ’catch-
up“ contributions and (2) contributions to traditional IRAs from
taxpayers over age 70½;
Status (May 2011): Not yet enacted.
Source: GAO.
[End of table]
Longer term, other IRS initiatives, such as matching information
returns to tax returns during the filing season and leveraging new
paid preparer requirements, could enhance compliance before refunds
are issued. One prerequisite would be a major reworking of some
fundamental IRS computer systems.
What GAO Recommends:
GAO makes no new recommendations in this testimony but describes prior
matters for Congress to consider in granting IRS expanded MEA.
View [hyperlink, http://www.gao.gov/products/GAO-11-691T] or key
components. For more information, contact Michael Brostek at (202) 512-
9110 or brostekm@gao.gov.
[End of section]
Chairman Boustany, Ranking Member Lewis, and Members of the
Subcommittee:
Thank you for the opportunity to be here today to discuss the Internal
Revenue Service's (IRS) prerefund compliance checks and the tools used
as part of these checks.
To provide an idea of the universe that these checks could affect, in
2010, IRS processed about 137 million individual income tax returns
and issued 107 million refunds totaling over $312 billion. Its
compliance checks thus could affect millions of taxpayers and billions
of dollars of refunds by identifying taxpayers who overclaim the
amount due to them and taxpayers who underclaim tax benefits to which
they are entitled.
Before processing refunds, IRS checks returns for clerical and
mathematical errors and conducts some additional checks on the
information presented in the return. Math error authority (MEA) is
just one example of the prerefund compliance checks that IRS uses.
[Footnote 1] In 2010, IRS sent 8.4 million notices to taxpayers for
almost 10.6 million math errors identified on their 2009 tax year
returns.
We have long highlighted the importance of improving IRS's prerefund
compliance checks as a means to improve compliance while minimizing
taxpayer burden. In 1998, we found that inadequate controls over
refunds was a material weakness that could adversely affect IRS's
ability to record, process, summarize, and report financial data.
[Footnote 2] We continue to believe that enhanced preventive controls
are keys to improving IRS's ability to correct taxpayer errors by
preventing the disbursement of erroneous refunds, thereby saving the
federal government potentially billions of dollars.
My statement today will focus on three key areas: (1) prerefund checks
and their benefits, (2) how those checks can be enhanced immediately,
and (3) how they may be enhanced in the future. It is based mostly on
our previous work issued from 2008 through 2011, including our interim
report on IRS's 2011 tax filing season, and our ongoing analysis of
the 2011 filing season.[Footnote 3] Those performance audits were
conducted 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.
Current Prerefund Checks Provide Significant Benefits:
Prerefund compliance checks enable IRS to help confirm taxpayers'
identities and ensure that returns have required information, quickly
and efficiently correct certain errors with a virtual certainty of
being right, identify and audit some returns even before refunds are
completed, and help detect possible fraud.[Footnote 4] Figure 1 shows
IRS's prerefund process.[Footnote 5]
Figure 1: Processing and Correcting Returns with Errors:
[Refer to PDF for image: illustration]
Return submitted electronically:
1) IRS attempts to verify identity by automatically checking for
mismatches between IRS systems' data and the return. If mismatch
exists, return to preparer and/or taxpayer.
2A) Processing system captures return data; go to #4; or:
2B) Mismatches for returns that were filed on paper are forwarded to
the Error Resolution System[A].
2C) In the Error Resolution System, IRS specialists correct or resolve
issues for which IRS has math error authority.
3) Automated computer programs check for math errors, cases to audit,
and possible fraud.
4) Math error processing: Errors found; Math errors corrected.
5) If IRS does not have math error authority to correct the error, the
return is identified for potential audit.
6) If noncompliance is detected, IRS sends a statutory notice of
deficiency to the taxpayer.
7) Return data are posted to IRS's master file: If IRS corrected a
math error, it sends a notice to the taxpayer.
Return submitted on paper:
1) IRS examiners screen returns to ensure that all data needed to
process the return are present, including Social Security number,
taxpayer identification number, name, and address. If additional
information is needed, IRS sends correspondence to preparer and/or
taxpayer.
2) IRS examiners screen returns to ensure that all data needed to
process the return are present, including Social Security number,
taxpayer identification number, name, and address.
3) Return data are manually transcribed.
4) IRS attempts to verify identity by automatically checking for
mismatches between IRS systems' data and the return. If mismatch
exists, return to preparer and/or taxpayer.
5A) Processing system captures return data; go to #7; or:
5B) Mismatches for returns that were filed on paper are forwarded to
the Error Resolution System[A].
5C) In the Error Resolution System, IRS specialists correct or resolve
issues for which IRS has math error authority.
6) Automated computer programs check for math errors, cases to audit,
and possible fraud.
7) Math error processing: Errors found; Math errors corrected.
8) If IRS does not have math error authority to correct the error, the
return is identified for potential audit.
9) If noncompliance is detected, IRS sends a statutory notice of
deficiency to the taxpayer.
10) Return data are posted to IRS's master file: If IRS corrected a
math error, it sends a notice to the taxpayer.
Source: GAO analysis of IRS information.
[A] IRS's Error Resolution System is generally used to correct errors
on tax returns so that they can be processed or to change the amount
of tax owed pursuant to math error authority before a refund is issued.
[End of figure]
Steps to Confirm Taxpayers' Identities and Ensure That Required
Information Is Provided:
When tax returns are first received by IRS, the initial process helps
correct taxpayer identification errors and ensure taxpayers have
filled in all fields that are required for IRS to process the return.
The process differs slightly for electronically and paper filed
returns. For electronic returns, IRS checks for possible mismatches
among taxpayers' identity information, such as their names, Social
Security numbers, and addresses. When mismatches occur, IRS rejects
the tax return back to the taxpayer or paid preparer for possible
correction. For paper returns, IRS staff review each return to ensure
that all forms and data needed to process the return are present and
may correspond with the taxpayer for missing information. IRS staff
then transcribe data from the paper return into IRS computer systems
and programming matches taxpayers' identity information if possible.
Later on in the process, IRS staff may also correspond with taxpayers
or their paid preparers to obtain other missing information, as well
as research and correct certain errors that would affect processing
the return, such as transposed numbers within Social Security numbers.
Application of Computerized Filters:
After initial errors are corrected, the return information is captured
in IRS's tax return processing systems. At this point, IRS applies
additional computerized filters. Some filters identify errors that can
be corrected using IRS's MEA. Other filters identify errors that can
be addressed through audits either before a complete refund is sent to
the taxpayer or afterwards. Finally, still other filters identify
possible cases of tax fraud.
Math Error Authority Checks:
When IRS's computer programs identify errors on returns that can be
corrected with virtual certainty, those returns are forwarded to IRS's
Error Resolution System (ERS). Despite the name, math errors encompass
much more than simple arithmetic errors. They also include, for
instance, identifying incorrect Social Security or other taxpayer
identification numbers, problems with taxpayers' filing status or
claiming of dependents, and missing schedules or forms. Some of these
errors are detected from information included on the tax return
itself, and some are detected by comparing information on the return
to other internal IRS databases or databases of information obtained
from others, such as the Social Security Administration.
In ERS, IRS staff manually review the error and enter codes that then
automatically generate a notice to the taxpayer that explains the
error, identifies the revision in the taxpayer's refund amount--or
possibly a new balance due to IRS, and instructs the taxpayer on how
to respond if he or she disagrees with the change IRS has made.
Prerefund and Postrefund Audits:
When IRS filters identify an error not correctable with MEA, the
return is placed in queue for possible prerefund or postrefund audit.
Depending on available resources, IRS will audit a portion of these
returns, generally through correspondence audits with taxpayers,
before complete refunds are sent to the taxpayers. In some cases, IRS
will send the taxpayers the portion of their refunds that was claimed
correctly while withholding the portion that IRS considers likely to
be in error. To the extent returns are not handled in prerefund
audits, IRS will include them for possible postrefund audits.
Fraud Investigations:
Based on IRS's computer filters, IRS identifies some refund claims
that may be fraudulent. These are forwarded to IRS's Criminal
Investigation division. Those investigations may occur simultaneously
as math error or audit corrections are being made to the return. In
some cases, the investigation may be of a taxpayer and in other cases
it may focus on a paid preparer or others who may be engaging in
systematic fraud affecting more than one return.
Benefits of Prerefund Checks:
Collectively and individually, these prerefund checks have benefits
for IRS and taxpayers. The initial checks on taxpayers' identities and
completeness of returns help ensure that returns can be accepted and
processed quickly for taxpayers. It also allows IRS to detect common
errors or noncompliance such as if a taxpayer uses a false Social
Security number to claim a dependent.
Math error checks are among the most beneficial of the prerefund
checks for both taxpayers and IRS. These checks have the potential to
protect billions of dollars in federal revenue from being erroneously
refunded to taxpayers, especially for refundable tax credits that have
been increasingly enacted in recent years, as significant overclaimed
refund amounts result, sometimes through fraudulent claims. For
example, Congress enacted three different versions of the refundable
First-Time Homebuyer Credit (FTHBC) but did not immediately provide
IRS with MEA to automatically verify certain information.[Footnote 6]
In 2009, we proposed that Congress grant MEA to IRS to conduct
prerefund compliance checks to ensure that taxpayers do not claim the
homebuyer credit in multiple years.[Footnote 7] We calculated that IRS
prevented about $95 million in erroneous refunds in fiscal year 2010
using this new authority. In addition, this and various other MEA
provisions for the FTHBC granted to IRS after the credit was first
enacted allowed IRS to deny approximately 350,000 erroneous claims in
2010, thereby saving tax revenue and enabling IRS to use scarce
enforcement resources elsewhere. If not denied, this large volume of
erroneous claims would have roughly translated into a billion dollars
or more in improper payments.
IRS can use MEA to correct errors it identifies and send the corrected
refund amount to the taxpayer instead of trying to recover
overpayments after audit. In postrefund enforcement, IRS may not
recover all funds that are owed, which may be especially true for
cases of fraud, and may incur additional costs in attempting to
collect the delinquent taxes. We have previously reported that prompt
compliance checks are important because as unpaid taxes age, the
likelihood of collecting all or part of the amounts owed decreases.
[Footnote 8]
For taxpayers, some MEA helps them receive tax benefits for which they
are eligible by identifying individuals who underclaimed the benefits.
For example, last year we reported that from January 1 through
September 30, 2010, IRS corrected about 7.7 million errors associated
with the Making Work Pay credit, including about 60 percent in the
taxpayers' favor. These corrections meant that taxpayers received
larger refunds (or had lower taxes due) than they had anticipated.
[Footnote 9]
If IRS conducts a prerefund audit, it holds disputed refund amounts
until the taxpayer's proper tax liability can be determined and the
audit is concluded. As with math error checks, prerefund audits are
preferable because once a refund has been paid, IRS may be unable to
collect all amounts due and can incur significant expenses in the
collection of delinquent tax debts. For taxpayers, prerefund audits
also minimize the possible interest expenses they would incur if the
audits did not occur for months or more after their return was filed.
Generally, taxpayers accrue interest on underpaid taxes from the date
the tax becomes due.
Finally, beginning fraud investigations as quickly as possible has
several advantages for IRS. In general, the more quickly such
investigations are begun, the more likely evidence will be available.
To the extent that investigations lead to quick action, perpetrators
of fraud may be stopped before they can continue their efforts through
the filing season. An affirmative IRS investigative presence and
successfully resolved cases may also deter some who would otherwise be
tempted to engage in fraudulent activities.
Prerefund Checks Can Be Enhanced:
For almost a century, Congress has been expanding IRS's MEA on a case-
by-case basis. Its most recent expansions were to help determine the
eligibility for certain credits such as the FTHBC. The increase over
time has resulted in the 13 existing MEA provisions shown in appendix
I.
Although Congress sometimes quickly extended MEA to address compliance
issues with newly created tax credits, at times a round of initial
errors occurred before IRS was able to obtain the new authority. We
suggested in 2010 that authorizing the use of MEA on a broader basis
rather than on a case-by-case basis, with appropriate controls to
protect taxpayer rights, could minimize the danger of that happening
in the future.[Footnote 10] In the past we identified benefits to IRS
and taxpayers that could arise from broader MEA. I already mentioned
some of these earlier, but, to summarize, broader MEA could:
* enable IRS to correct all or nearly all returns where IRS identifies
the noncompliance and the needed correction with virtual certainty,
not just those it can address through other enforcement means;
* be low cost and less intrusive and burdensome to taxpayers than
audits;
* ensure that taxpayers who are noncompliant on a particular issue are
similarly treated, that is, that a greater portion of them are brought
into compliance, not just those that IRS could otherwise address
through other enforcement means;
* enhance equity between compliant and noncompliant taxpayers because
a greater portion of the noncompliant taxpayers would be brought into
compliance;
* provide a taxpayer service as it would generally allow noncompliant
taxpayers to receive their refunds faster than if IRS had to address
the error through some other compliance mechanism, have their returns
corrected without penalty and before interest is accrued, and avoid
time-consuming interaction with IRS under its other programs for
resolving noncompliance;
* help ensure that taxpayers receive the tax benefits for which they
are eligible by identifying taxpayers who underclaim a tax benefit;
* free up IRS resources to pursue other forms of noncompliance; and:
* allow IRS to quickly address provisions arising from new and quickly
moving initiatives like the American Recovery and Reinvestment Act of
2009 (Pub. L. No. 111-5) without waiting for new MEA to go through the
legislative process.
While providing broad MEA is ideal, we have also suggested that
Congress expand MEA for more limited purposes. As we recently
reported, IRS does not have MEA to review prior year tax returns to
ensure that taxpayers do not claim credits or deductions in excess of
lifetime limits such as for residential energy credits.[Footnote 11]
We have identified four specific cases where IRS could benefit from
additional MEA, including for the FTHBC for which Congress granted
authority. Expanding MEA should also provide many of the same benefits
described above. Table 1 provides a summary of GAO's previous matters
for congressional consideration for expanded MEA.
Table 1: GAO Math Error Authority Matters for Congressional
Consideration:
1. Matter for consideration: Provide IRS with math error authority to
use prior years' tax return information to ensure that taxpayers do
not improperly claim credits or deductions in excess of applicable
lifetime limits;
Date of report: March 29, 2011;
Disposition (as of May 2011): Not yet enacted;
Source: GAO-11-481.
2. Matter for consideration: Provide IRS with math error authority to
use prior years' tax return information to automatically verify
taxpayers' compliance with the number of years the Hope credit can be
claimed;
Date of report: December 10, 2009;
Disposition (as of May 2011): Not yet enacted;
Source: GAO-10-225.
3. Matter for consideration: Provide IRS with math error authority to
(1) use the prior year's tax return information to automatically
verify compliance with the 2008 First-Time Homebuyer Credit payback
provision and (2) ensure that homebuyers do not improperly claim the
credit in multiple years;
Date of report: September 23, 2009;
Disposition (as of May 2011): Enacted 2009 in Public Law 111-92;
Source: GAO-09-1026.
4. Matter for consideration: Provide IRS with authority to use math
error checks to identify and correct returns with ineligible (1)
individual retirement account (IRA) "catch-up" contributions and (2)
contributions to traditional IRAs from taxpayers over age 70½;
Date of report: December 12, 2008;
Disposition (as of May 2011): Not yet enacted;
Source: GAO-09-146.
Source: GAO.
[End of table]
MEA allows IRS to correct a tax return and send a notice to the
taxpayer regarding the correction without going through the statutory
deficiency procedures. Instead, IRS notifies the taxpayer that it has
identified the error and has made a change to the return. Taxpayers
have 60 days to contest the assessment outlined in those notices.
Further, if they do not contest the assessment within that time, they
lose their right to file an appeal with IRS or the U.S. Tax Court but
have the option of filing an amended tax return to be considered by
IRS. The National Taxpayer Advocate and some in Congress are concerned
that not following the statutory deficiency procedures might undermine
taxpayer rights because IRS might use broad authority in situations
where it does not know with a high degree of certainty that the
taxpayer made an error. In addition, taxpayers might not ask, within
60 days after being assessed tax by IRS, to have their assessment
reversed by IRS and thus might be unable to challenge an IRS notice
through normal deficiency procedures or in the Tax Court.
To mitigate these concerns, Congress could extend broader MEA to IRS
but could specify criteria governing when IRS could use the authority.
Traditionally, math error checks have allowed IRS to detect errors or
determine taxpayer eligibility with virtual certainty, thus letting
IRS make corrections without first corresponding with the taxpayer. To
ensure IRS continues to use MEA only in these limited circumstances if
given broader authority, Congress could, for example, require IRS to
submit a report to it or an entity it designates on a proposed new use
of MEA. The report could include how such use would meet the standards
or criteria outlined by Congress. The report could also describe IRS's
or the National Taxpayer Advocate's assessment of any potential effect
on taxpayer rights. Or, Congress could require a more informal
procedure whereby IRS simply notifies a committee, such as the Joint
Committee on Taxation, of its proposed use and subsequently submits a
report after such use is underway. In any case, Congress could provide
IRS broader authority to use MEA than is currently authorized but
still provide appropriate safeguards and require IRS to report in
order to alleviate concerns of improper use of MEA.
The Future Holds Significant Possibilities for Enhancing Prerefund
Checks:
The benefits I listed earlier of broadening MEA or using other
prerefund compliance checks could also result from other initiatives
that IRS has already begun or is contemplating. For example, in April,
2011, the Commissioner of Internal Revenue talked about a long-term
vision to increase upfront compliance activities during returns
processing. In one example, IRS is exploring requiring that
information returns be sent to IRS and taxpayers at the same time as
opposed to the current requirement that some returns go to taxpayers
before going to IRS. The intent is to move to matching those
information returns to tax returns during tax return processing. IRS
currently matches data provided on over 2 billion information returns
to tax returns only after the normal filing season. Matching during
the filing season would allow IRS to detect and correct errors before
it sends taxpayers their refunds, thereby avoiding the costs of trying
to recover funds from taxpayers later.[Footnote 12] This approach
could also allow IRS to use its enforcement resources on other
significant compliance problems. However, the Commissioner made clear
that his vision for more prerefund compliance checks will take
considerable time to implement. One prerequisite would be a major
reworking of some fundamental IRS computer systems.
Other IRS initiatives should also enhance compliance before refunds
are issued. For instance, IRS could leverage new paid tax return
preparer requirements to improve taxpayer compliance before tax
returns are filed. Our work has shown that paid tax preparers play a
vital role in administering our country's tax system and ensuring
compliance with tax laws. Paid preparers prepare about 60 percent of
the federal tax returns filed annually. However, we and others have
found that some paid preparers make significant errors. We also found
that emulating Oregon's paid preparer regulatory regime had the
potential to lead to more accurate federal returns.[Footnote 13] In
response, IRS is currently implementing new regulatory requirements in
order to oversee the conduct and competency of paid preparers.
These new requirements may improve the accuracy of tax returns
initially prepared by paid preparers. The new requirements may also
help IRS address compliance problems that arise during filing seasons.
For instance, IRS may be able to identify specific paid preparers that
are making errors and send them information on their errors, thus
reducing errors on additional returns they may prepare during the
filing season. To achieve the full benefits of the paid preparer
regulatory regime, IRS must continue to make progress with its plans
to develop a comprehensive database containing information on the
preparers and tax returns they prepare. IRS must use information from
this database to test which strategies are most effective for
improving the quality of tax returns prepared by different types of
paid preparers. To help with this effort, we recently recommended that
IRS provide a documented framework for using the paid preparer
requirements to improve taxpayer compliance.[Footnote 14] IRS agreed
with this recommendation.
Concluding Remarks:
In closing, IRS has a massive challenge in ensuring compliance with
the tax laws. Looking forward, with budget constraints a reality and
burden on taxpayers a concern, doing more compliance checks before
refunds are issued has great appeal for both taxpayers and IRS.
Through oversight efforts like today's hearing, Congress can encourage
and authorize the use of appropriately designed prerefund compliance
checks that are critical to stopping erroneous refunds and ensuring
that federal dollars are protected.
Chairman Boustany, Ranking Member Lewis, this completes my prepared
statement. I would be happy to respond to any questions you or other
Members of the Subcommittee may have at this time.
Contacts and Acknowledgments:
For further information regarding this testimony, please contact
Michael Brostek, Director, Strategic Issues, on (202) 512-9110 or
brostekm@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
statement. Individuals making key contributions to this testimony
include Joanna Stamatiades, Assistant Director; Steven J. Berke; Amy
R. Bowser; David Fox; Tom Gilbert; Lawrence M. Korb; Inna Livits; and
Sabrina Streagle.
[End of section]
Appendix I: IRS Math Error Authorities:
Table 2 summarizes the Internal Revenue Service's (IRS) 13 areas of
existing math error authority (MEA). As early as the first
codification of the Internal Revenue law in 1926, Congress granted IRS
MEA so that IRS does not have to provide taxpayers with a statutory
notice of deficiency for math errors. A 1976 statutory revision
defined the authority to include not only mathematical errors, but
other obvious errors, such as omissions of data needed to substantiate
an item on a return, and provided a statutory right to file a request
for abatement of the assessment within 60 days after the notice is
sent. In the 1990s, Congress extended the authority multiple times,
and more recently it has added other provisions to help determine
eligibility for certain tax exemptions and credits, such as the First-
Time Homebuyer Credit.
Table 2: IRS's 13 Existing Math Error Authorities:
Number: 1;
Description: An error in addition, subtraction, multiplication, or
division shown on any return.
Number: 2;
Description: An incorrect use of any table provided by IRS with
respect to any return if other information in the return makes the
incorrect use apparent.
Number: 3;
Description: An entry on a return of an item that is inconsistent with
another entry of the same or different item on that return.
Number: 4;
Description: An omission of information that is required to be
supplied on the return to substantiate an entry on that return.
Number: 5;
Description: An entry on a return of a deduction or credit in an
amount that exceeds the statutory limit for that deduction or credit,
if that limit is expressed as a specific monetary amount or as a
percentage, ratio, or fraction, and if the component items of that
limit appear on the return.
Number: 6;
Description: A correct taxpayer identification number (TIN) not
provided on the return as required for the following provisions:
* Earned Income Tax Credit (EITC);
* child and dependent care credit;
* personal or dependent exemption;
* child tax credit; or;
* Hope and Lifetime Learning credits.
Number: 7;
Description: A return claiming an EITC for net earnings from self-
employment, where the self employment tax imposed by I.R.C. § 1401 on
those net earnings has not been paid.
Number: 8;
Description: An omission of information required for recertification
of eligibility for the EITC.
Number: 9;
Description: An entry on the return of a TIN required for the EITC,
the child credit, and the child and dependent care credit, when
information associated with that TIN indicates that the child does not
meet the age eligibility requirements for those credits.
Number: 10;
Description: An entry on the return of a claim for the EITC where the
Federal Case Registry of Child Support Orders indicates that the
taxpayer is the noncustodial parent of that child.
Number: 11;
Description: A failure to reduce Electronic Stimulus Payment credit on
a return related to the Economic Stimulus Act of 2008 by amounts
previously advanced.
Number: 12;
Description: A failure to reduce the Making Work Pay credit by the
amount of any payment received as a result of tax abatement resulting
from the combat-related deaths of members of the Armed Forces, deaths
of astronauts, and deaths of victims of certain terrorist attacks, or
by the amount of any credit allowed under the American Recovery and
Reinvestment Act of 2009, or a failure to submit a proper Social
Security number with the claim.
Number: 13;
Description: A claim for the First-Time Homebuyer Credit where the
taxpayer has not included the required settlement statement;
or where other information indicates that the taxpayer is under 18
years of age, or where information from the past 2 years of returns
indicates ineligibility for the credit. Additionally, IRS may correct
the return where the taxpayer has failed to include the increased tax
required under the recapture provision for the credit, when applicable.
Source: GAO analysis.
[End of table]
[End of section]
Footnotes:
[1] IRS is granted math error authority in 26 U.S.C. § 6213 (b). It
can be used for certain purposes specified by Congress in 26 U.S.C §
6213 (g)(2) including correcting calculation errors and checking for
other obvious noncompliance such as claims above income and credit
limits. If it is not specified in statute, IRS cannot pursue
assessment and collection activities without issuing a statutory
notice of deficiency.
[2] See GAO, Financial Audit: Examination of IRS' Fiscal Year 1997
Custodial Financial Statements, [hyperlink,
http://www.gao.gov/products/GAO/AIMD-98-77] (Washington, D.C.: Feb.
26, 1998).
[3] GAO, 2011 Tax Filing: IRS Dealt with Challenges to Date but Needs
Additional Authority to Verify Compliance, [hyperlink,
http://www.gao.gov/products/GAO-11-481] (Washington, D.C.: Mar. 29,
2011).
[4] Tax fraud is defined as the willful attempt to defeat or
circumvent the tax law in order to illegally reduce one's tax
liability.
[5] Identity theft becomes a problem for taxpayers and IRS through
refund fraud. The name and Social Security number used by identity
thieves can be stolen from numerous sources outside of IRS's control.
See GAO, Tax Administration: IRS Has Implemented Initiatives to
Prevent, Detect, and Resolve Identity Theft-Related Problems, but
Needs to Assess Their Effectiveness, [hyperlink,
http://www.gao.gov/products/GAO-09-882] (Washington, D.C.: Sept. 8,
2009).
[6] The Housing and Economic Recovery Act of 2008 established a
refundable FTHBC, repayable over 15 years with a $7,500 limit. Pub. L.
No. 110-289, § 3011, 122 Stat. 2654 (July 30, 2008). The American
Recovery and Reinvestment Act of 2009 amended the credit to waive the
repayment requirement and raised the maximum to $8,000. Pub. L. No.
111-5, div. B, tit. I, § 1006, 123 Stat. 115 (Feb. 17, 2009). The
Worker, Homeownership, and Business Assistance Act of 2009 extended
the time frame to claim the credit and allowed claims by certain long-
term homeowners purchasing new homes. Pub. L. No. 111-92, § 11, 123
Stat. 2984 (Nov. 6, 2009).
[7] Congress provided IRS authority to check the previous year's tax
returns when it extended the credit for the final time in November
2009. Pub. L. No. 111-92, § 12(d).
[8] GAO, Tax Administration: IRS's 2008 Filing Season Generally
Successful Despite Challenges, although IRS Could Expand Enforcement
during Returns Processing, [hyperlink,
http://www.gao.gov/products/GAO-09-146] (Washington, D.C.: Dec. 12,
2008).
[9] The refundable Making Work Pay tax credit provided up to $400 for
working individuals and up to $800 for married taxpayers filing joint
returns for 2009 and 2010. Pub. L. No. 111-5, div. B., tit. I § 1001,
123 Stat. 115, 309 (2009). See GAO, 2010 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] GAO, Recovery Act: IRS Quickly Implemented Tax Provisions, but
Reporting and Enforcement Improvements Are Needed, [hyperlink,
http://www.gao.gov/products/GAO-10-349] (Washington, D.C.: Feb. 10,
2010).
[11] [hyperlink, http://www.gao.gov/products/GAO-11-481].
[12] GAO, Taxpayer Account Strategy: IRS Should Finish Defining
Benefits and Improve Cost Estimates, [hyperlink,
http://www.gao.gov/products/GAO-11-168] (Washington, D.C.: Mar. 24,
2011).
[13] GAO, Tax Preparers: Oregon's Regulatory Regime May Lead to
Federal Tax Return Accuracy and Provides a Possible Model for National
Regulation, [hyperlink, http://www.gao.gov/products/GAO-08-781]
(Washington, D.C.: Aug. 15, 2008).
[14] GAO, Tax Preparer Regulation: IRS Needs a Documented Framework to
Achieve Goal of Improving Taxpayer Compliance, [hyperlink,
http://www.gao.gov/products/GAO-11-336] (Washington, D.C.: Mar. 31,
2011).
[End of section]
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