TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
The Internal Revenue Service Had a Successful 2000 Filing Season; However, Opportunities Exist to More Effectively Implement Tax Law Changes
Reference No. 2001-40-041
The Internal Revenue Service (IRS) is the largest processor of data in the world. The majority of the data for individual tax returns is processed during the first half of each calendar year, commonly referred to as a "filing season," when individual taxpayers file their returns. For the 2000 Filing Season, the IRS faced considerable challenges, including legislated tax law changes; changes in IRS staffing; and updates to IRS computers and equipment, including Year 2000 (Y2K) compliance.
The objective of this audit was to evaluate the effectiveness of the IRSí procedures for processing paper tax returns filed by individual (non-business) taxpayers. This review concentrated on evaluating the adequacy of the IRSí process for tracking filing season activities and reacting to problems as they occurred. In a separate review, the Treasury Inspector General for Tax Administration (TIGTA) will provide an assessment of the IRSí processing of electronically filed individual tax returns.
The Internal Revenue Service Had a Successful 2000 Filing Season
The IRS effectively processed individual paper tax returns filed during the 2000 Filing Season. As of April 28, 2000, the IRS had processed over 54 million paper individual tax returns. Although there were some isolated problems, the IRSí 2000 Filing Season was a success.
Opportunities Exist for the Internal Revenue Service to More Effectively Implement Tax Law Changes
The IRS had not programmed its computer system to properly process changes related to the Child Tax Credit (CTC) and the Additional Child Tax Credit (ACTC). In addition, the IRS modified its computer programming designed to verify Secondary Social Security Numbers (S-SSN). As a result, the IRS cannot ensure that taxpayers are compliant with these tax laws. Also, the database the IRS used to track tax law programming changes was not being updated regularly, thus it was not providing assurance that required tax law programming changes were completed.
Child Tax Credit Claims
The IRS did not identify potentially unqualified CTC claims. This credit, established for tax years beginning in 1998, allows taxpayers to reduce their tax liabilities by $400 ($500 in 1999) for each qualifying child. A qualifying child must be age 16 or below and meet other requirements, such as being a citizen or resident of the United States and claimed as a dependent on the taxpayerís return.
We identified over 750,000 1998 and 1999 tax returns with over $339 million of potentially unqualified CTCs that could not be supported by IRS date of birth information. These potentially unqualified credits were allowed because the IRS had postponed computer programming changes designed to validate the date of birth for CTC claims every year since the CTC was authorized (1998). The IRS advised us that this programming was postponed due to higher priorities (e.g., Y2K programming) and limited programming resources.
We identified and reported this issue to the IRS in March 2000. At that time, the amount of the potentially unqualified claims for 1999 was $10 million on 23,000 returns. However, IRS officials advised us that they were not in a position to implement any corrective actions at that time because of the process used to implement programming changes to its computer systems. By April 6, 2000, the amount of the potentially unqualified credits for 1999 had increased to $54 million on 101,000 returns.
Additional Child Tax Credit Claims
The postponed computer programming changes designed to validate the date of birth for the CTC also prevented the IRS from identifying potentially erroneous claims for the ACTC. The ACTC is allowed for taxpayers who claim three or more children and meet additional qualifying requirements, such as limitations in other credits on the return (e.g., adoption credit, mortgage interest credit, etc.). The ACTC may result in a refund to the taxpayer even if no tax is due.
We identified 33,000 tax returns that had over $12 million in potentially unqualified ACTC claims. By not programming its computers to validate date of birth information, the IRS allowed ACTCs for some dependents who were over the acceptable age.
We presented the CTC and ACTC information to IRS management, who acknowledged that their current tools for tracking filing season activities were not able to verify this information. They requested specific examples to determine what collection actions, if any, should be taken. Due to legal limitations, the IRS may not be able to collect the potentially erroneous refunds resulting from the unqualified ACTC claims. However, collection actions can be initiated on the potentially erroneous refunds resulting from the unqualified CTC claims.
Secondary Social Security Numbers
In 1996, the Congress passed legislation requiring the IRS to ensure that taxpayers provided correct social security numbers on their tax returns. S-SSNs are generally the social security numbers for the spouse on a joint tax return. According to the IRSí own estimates, approximately 2.7 to 3 million taxpayers have invalid S-SSNs.
The IRS initially planned to validate all S-SSNs processed during the 2000 Filing Season. However, based on early volumes of returns received with invalid S-SSNs, the IRS determined that continued processing of these returns would overload the computer systems it uses to resolve errors. Since these returns could be processed with invalid S-SSNs, the IRS approved computer programming changes to bypass the errors due to invalid S-SSNs when the associated SSNs on the return are valid. The IRS also developed a plan to send notices to these taxpayers after the 2000 Filing Season. However, these actions did not ensure that the IRS implemented the legislative requirement.
Database Used to Track Tax Law Programming Changes
A prior TIGTA audit report on the 1999 Filing Season recommended the IRS conduct regular updates to the database used to track tax law programming changes as a means to document completed actions. We determined that the database was not being updated regularly, thus it was not providing assurance that required tax law programming changes were completed.
Summary of Recommendations
The IRS should implement computer programming changes to ensure that taxpayers comply with tax laws relating to the CTC, the ACTC, and S-SSNs and initiate actions to recover the potential lost revenue due to the postponed programming for these issues. The IRS should ensure that its computer system has the capacity to correctly process tax returns and should send notices to taxpayers with invalid S-SSNs in sufficient time to allow for corrections. Finally, the IRS should ensure the database used to track tax law programming changes is updated regularly.
Managementís Response: The IRS agreed with three of our five recommendations. Of the remaining two recommendations, the IRS disagreed with one recommendation and questioned the legality and cost benefit of implementing the other recommendation. The IRS believes that the current capacity of the computer system used to store errors found on returns filed by taxpayers is sufficient and, therefore, does not plan to take any corrective action. The IRS stated that additional legal guidance would be needed regarding the legality of attempting to recover the CTC mentioned in the report and also stated that the collection costs would likely exceed the amount of overpayments.
Managementís complete responses to the draft report are included in Appendices VIII and IX.
Office of Audit Comment: Several discussions we had with IRS executives indicated they had concerns with the computer system used to store errors found on returns and its inability to handle the expected fallout of errors from verifying the S-SSNs during the 2000 Filing Season. However, since we did not test the computer systemís capacity during this review, we will address this issue during our audit of the 2001 Filing Season.
Also, we encourage the IRS to focus on recovering the refunds resulting from the unqualified CTC claims. Unlike the ACTC cases, collection assessments may be made on these cases.
The IRS also initially disagreed with the $351 million outcome measure concerning the potential lost revenue represented by unqualified CTC and ACTC claims. As stated in the report, we could not electronically verify the ages of dependents when more than four were claimed on a tax return; these returns must be manually reviewed. This was due to the fact that the IRS only maintains four date of birth fields on the Returns Transaction File (RTF). Because of this, we revised our outcome measure and will only claim $211 million for the CTC claims with four or less dependents. The IRS agreed with this revised outcome measure.