Improvements Need to Be Made to Publications and
Instructions to Assist Taxpayers in Successfully Signing Their Tax Returns
Electronically
March 2002
Reference Number: 2002-40-046
This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.
March 12, 2002
MEMORANDUM FOR Commissioner, Wage and Investment Division
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for Audit
SUBJECT: Final Audit Report - Improvements Need to
Be Made to Publications and Instructions to Assist Taxpayers in Successfully
Signing Their Tax Returns Electronically (Audit # 200140040)
This
report presents the results of our review of the Internal Revenue Service’s
(IRS) Self-Select Personal Identification Number (PIN) Program. The objective of our review was to determine
if the IRS provided the taxpayers and tax preparers with accurate, clear,
complete, and consistent guidance on the use of the Self-Select PIN Program for
Filing Season 2002.
The IRS successfully implemented the Self-Select PIN Program
in Filing Season 2001. This program
enabled 9 million of the 35 million taxpayers that filed an electronic tax return
to sign their tax returns electronically.
However, many taxpayers attempted to sign their tax returns
electronically but were not successful.
Specifically, the authentication information the IRS requires taxpayers
to provide (including name and date of birth) did not match the IRS’ records
for the taxpayer. For Filing
Season 2001, the IRS did not accept 24 percent of the
submitted returns with an electronic signature because it was unsuccessful in
validating the authentication information provided by the taxpayer.
In our review of the Filing Season 2002 publications and
instructions detailing the qualifications and other information needed by
taxpayers to sign their tax returns electronically, we identified that the
internal and external guidance contained inaccuracies and inconsistencies and
was incomplete and unclear in some areas.
Management’s
Response: IRS management agreed with our first and
third recommendations and has already implemented corrective actions. A process for the development and approval
of public information already existed but was not previously published as an
employee guide. Written guidelines are
attached to management’s response, and the IRS will follow this established
process in the future.
While
IRS management did not specifically disagree with our second recommendation,
they pointed out that the development of software packages is not within the
purview of the IRS. However, IRS
management stated that they will work closely with the private sector as they
develop tax preparation software by providing current and accurate information.
Management’s
complete response to the draft report is included as Attachment VI.
Copies of this
report are also being sent to the IRS managers who are affected by the report
recommendations. Please contact me at
(202) 622-6510 if you have questions or Michael R. Phillips, Acting Assistant
Inspector General for Audit (Wage and Investment Income Programs), at (202)
927-7085.
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Case Examples for Publications/Instructions
Appendix V – Case Examples for Software Packages
Appendix VI – Management’s Response to the Draft Report
In its continuous efforts to implement paperless tax return filing, the Internal Revenue Service (IRS) successfully implemented the Self-Select Personal Identification Number (PIN) Program to enable taxpayers to sign their tax returns for Filing Season 2001 using an electronic signature.
Of the 35 million tax returns filed electronically for Filing Season 2001, approximately 9 million (25 percent) were signed with an electronic signature (see table below). For that same year, the IRS did not accept approximately 24 percent of the submitted electronic returns with an electronic signature because it was unsuccessful in authenticating the information provided by the taxpayer.
Electronically Filed Tax Returns With
Electronic Signatures
|
|
Electronically Filed Returns |
Signed
Electronically |
Percent
Signed Electronically |
|---|---|---|---|
|
Filed From Home Computer |
6,779,960 |
4,256,904 |
62.79 |
|
Filed by Tax Preparer |
28,809,599 |
4,717,926 |
16.38 |
|
Total |
35,589,559 |
8,974,830 |
25.22 |
Source:
IRS Electronic Tax Return Filing Reports for the period January 12,
2001, to July 27, 2001.
The Self-Select PIN Program is available to taxpayers who
meet IRS qualifications and who have their tax returns filed electronically by
a tax preparer or who file tax returns on-line from their home computers. The Self-Select PIN Program reduces the
burden for both taxpayers and tax return preparers because it eliminates the
need for a paper signature document, United States (U.S.) Individual Income Tax
Declaration for Electronic Filing (Form 8453), to be completed and mailed to
the IRS. In addition, the use of
electronic signatures benefits the IRS by eliminating the costly and time
consuming processing and storing of paper signature forms.
To ensure tax returns are signed by the appropriate
taxpayer(s), the IRS included in the Self-Select PIN Program authentication
requirements that need to be met before the IRS accepts an
electronically-signed tax return. To
authenticate taxpayers’ signing of a tax return, taxpayers are required to
provide personal information (name and date of birth) as well as key
information the IRS considers to be known only by the taxpayers who
electronically sign the tax returns (Adjusted Gross Income (AGI) and Total Tax
from the prior year’s tax return). Upon
the IRS’ successful authentication of the information provided (information
provided by the taxpayer matches the IRS records for this taxpayer), it accepts
the tax returns for processing which includes the taxpayers’ self-selected PIN
as the electronic signature.
If the IRS is unsuccessful in authenticating the taxpayer-provided information, it notifies the taxpayer that the tax return was not accepted for processing. This notification also informs the taxpayer of the specific information the IRS was unable to validate. The taxpayer then has the option of: (1) providing the correct information and resubmitting the tax return with an electronic signature, (2) electronically filing the tax return and mailing in a paper Form 8453, or (3) completing and mailing a paper tax return.
This audit was performed at the National Headquarters Electronic Tax Administration from June to October 2001. The audit was conducted in accordance with Government Auditing Standards. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Our review of external and internal guidance on the Self-Select PIN Program’s signing of tax returns electronically found that:
·
IRS publications and instructions contained
inaccuracies and were not clear, complete, and consistent.
· Instructions included in electronic tax return software preparation packages contained inaccuracies and were unclear and incomplete.
· Internal IRS guidance used by IRS employees who answer questions from taxpayers who contact the IRS by telephone was inaccurate and unclear.
When taxpayers are unable to understand instructions or are provided inaccurate guidance, they cannot successfully sign their tax returns electronically. The ease by which taxpayers and tax preparers can understand instructions to electronically file and sign their tax returns is critical as the IRS moves towards its goal of at least 80 percent of tax returns to be electronically filed by the year 2007. For Filing Season 2001 alone, 26 million (74 percent) taxpayers who filed electronically did not sign their tax returns electronically.
We identified the following factors that contributed to the issues identified above:
·
The office responsible for developing the Self-Select
PIN Program publications and instructions indicated that time and resource
constraints resulted in an inability to develop a structured process for the
creation and review of IRS guidance to ensure the accuracy and clarity of the
information included in these documents before it is made available to
taxpayers and tax return preparers.
·
The IRS does not have a process for the review of
instructions and tax guidance included in electronic tax return software
preparation packages to ensure the information provided is accurate, clear, and
complete. Responsible officials
indicated that a lack of resources was the primary factor for not having a
process to review electronic tax return software preparation packages.
·
IRS employee guidance relating to the Self-Select PIN
Program was not reviewed and approved before being used by employees to answer
taxpayer questions, even though a process was in place to assess the accuracy
and consistency of this internal guidance.
The process calls for internal employee guidance to be developed by the
Individual Electronic Tax Administration Incentives and Customer Service team
and then provided to the Electronic Tax Administration functional manager for
review and approval prior to distribution to IRS employees. The employee assigned responsibility for
forwarding the developed documents for review and approval was a newly hired
employee and was not familiar with the established procedures.
An integral part of the IRS’ mission is to provide taxpayers with accurate, clear, complete, and consistent instructions to aid taxpayers in meeting their tax responsibilities. The IRS includes specific instructions detailing requirements and qualifications in both external and internal guidance to assist taxpayers in understanding how to sign their tax returns electronically. To enhance information available to both taxpayers and tax return preparers for Filing Season 2002, the IRS needs to ensure the instructions and publications containing detailed qualifications and other information are accurate, clear, complete, and consistent. Management is responsible for establishing a system of internal controls to ensure the accuracy of information in notices and publications.
IRS publications and instructions contained inaccuracies and were not clear, complete, and consistent
Our review of seven publications and instructions that included requirements and qualifications relating to the use of the Self-Select PIN Program found that they contained inaccuracies and were not clear and complete in providing sufficient guidance to enable taxpayers to successfully sign their tax returns electronically (see table below). Inaccurate and unclear guidance will hamper taxpayers abilities to easily understand the requirements and qualifications for signing tax returns electronically.
Treasury Inspector General for Tax
Administration’s Review of Self-Selected PIN Program Guidance
|
Publications/ |
Inaccurate |
Unclear |
Incomplete |
Inconsistent |
|---|---|---|---|---|
|
Instructions 1040
Series - U.S. Individual Income Tax
Return |
|
X |
X |
X |
|
Publication 17 - |
|
X |
X |
|
|
Publication 1857 - |
|
X |
X |
X |
|
Publication 3007 -Questions and Answers for Taxpayers |
|
|
X |
X |
|
Publication 3452 - Questions
and Answers for Tax Professionals |
X |
|
X |
|
|
Publication 910 - |
|
|
X |
|
|
Publication 8160E - |
X |
|
X |
|
Source:
Treasury Inspector General for Tax Administration’s (TIGTA) review of
publications and instructions for Filing Season 2002.
See Appendix IV for specific examples noted from our review of the above publications and instructions.
Our findings were discussed with IRS management during
the course of the review and immediate revisions were made to the IRS
instructions, publications, and guidance documents to clarify the requirements
and qualifications for electronically signing tax returns.
Instructions
included in electronic tax return software preparation packages contained
inaccuracies and were unclear and incomplete
Our review of four electronic tax return software preparation packages available for taxpayers to file tax returns electronically from a home computer found the various software packages contained inaccuracies and were unclear and incomplete (see table below). These software preparation packages contained instructions relating to the requirements and qualifications that need to be met to enable taxpayers to successfully sign their tax returns electronically.
Treasury Inspector General for Tax
Administration’s Review of Self-Select PIN Program Instructions Included in
Electronic Tax Return Software Preparation Packages
|
Electronic Tax Return Software
Preparation Package |
Inaccurate |
Unclear |
Incomplete |
|---|---|---|---|
|
Package Number 1 |
X |
X |
X |
|
Package Number 2 |
|
|
X |
|
Package Number 3 |
|
X |
X |
|
Package Number 4 |
|
X |
X |
Source: TIGTA’s review of electronic tax return
preparation software packages sold to consumers for use in Filing Season 2001.
See Appendix V for specific examples noted from our review of the above electronic tax preparation software packages.
Internal IRS
guidance used by IRS employees who answer questions from taxpayers who contact
the IRS
by telephone was inaccurate and unclear
Our review of internal IRS guidance for use by IRS employees
who answer Self-Select PIN Program questions from taxpayers who contact the IRS
by telephone identified that these instructions contained inaccuracies and were
unclear. For example:
·
IRS guidance for Filing Season 2001 incorrectly stated
that taxpayers who filed a U.S. Individual Income Tax Return (Form 1040), U.S.
Non-Resident Alien Income Tax Return (1040 NR), U.S. Self-Employment Tax
Return—Puerto Rico (1040 PR), or U.S. Self-Employment Tax Return - Virgin
Islands, Guam, American Samoa (1040 SS) for Tax Year 2000 could not use the
Self-Select PIN Program. This is
incorrect. Taxpayers that file 1040 NR
returns and 1040 PR returns could use the Self-Select PIN Program if they were
over 16, but entered a zero for the AGI.
·
IRS guidance for Filing Season 2002 inaccurately stated
that certain taxpayers who were non-citizens could not sign their tax returns
electronically with a Self-Select PIN.
This is incorrect. This was the
condition for Filing Season 2001, but has been changed for Filing Season 2002;
they will be eligible to use the Self-Select PIN Program.
The Commissioner, Wage and Investment Division, should:
1. Design and document a process to ensure the accuracy and clarity of publications and instructions developed by the Individual Electronic Tax Administration Channel Management and Marketing Branch. This process should include specific completion time frames and quality reviews to ensure the accuracy, clarity, completeness, and consistency of the publications and instructions that are made available to the taxpaying public.
Management’s Response: IRS management agreed with recommendations 1 and 3 and has already implemented corrective actions. A process for the development and approval of public information already existed but was not previously published as an employee guide. Written guidelines are attached to management’s response, and the IRS will follow this established process in the future.
2. Ensure the guidance included in electronic tax return preparation software packages is reviewed to ensure that the information included is accurate and clear. This should be done before Filing Season 2002 and continued for each filing season thereafter.
Management’s Response: While IRS management did not specifically disagree with this recommendation, they pointed out that the development of software packages is not within the purview of the IRS. However, IRS management stated that they do review for technical accuracy the information they provide to everyone, including software developers, and that they will work closely with the private sector as it develops tax preparation software by providing current and accurate information.
3. Ensure that the managerial oversight process for review and approval of newly developed or revised internal guidance relating to electronic filing initiatives is followed.
Management’s Response: See “Management’s Response” to Recommendation 1.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of the audit was to determine if the Internal Revenue Service (IRS) effectively provided taxpayers and tax preparers accurate, clear, complete, and consistent guidance on the use of the Self-Select Personal Identification Number (PIN) Program for Filing Season 2002. To accomplish our objective, we:
I. Obtained and reviewed IRS guidance for the development of publications and instructions for taxpayers and tax preparers.
A. Reviewed seven publications and instructions that included IRS guidance relating to the use of the Self-Select PIN Program.
B. Reviewed Self-Select PIN Program instructions and guidance included in four Electronic Tax Return Software Preparation Packages.
C. Reviewed Self-Select PIN Program instructions and guidance included in IRS internal guidance.
II. Reviewed “read” files in National Headquarters Electronic Tax Administration regarding the Self-Select PIN Program to determine what problems occurred during Filing Season 2001.
III. Analyzed instructions and publications for Filing Season 2002 to determine if problems identified during Filing Season 2001 had been adequately addressed. If not, we:
A. Interviewed Electronic Tax Administration management to determine the process they follow for the development of publications.
B. Obtained any documents that document the process used to develop publications.
IV. Determined what changes are being implemented for the Self-Select PIN Program for Filing Season 2002 (Tax Year 2001).
V. Analyzed instructions and publications that will be used for Filing Season 2002 and determined if they have been accurately and consistently updated to clearly present any changes. Specifically, we:
A. Determined the anticipated volumes of forms, instructions, and publications that the IRS plans to distribute during Filing Season 2002.
Appendix II
Major Contributors to This Report
Michael R. Phillips, Acting Assistant Inspector General for Audit (Wage and Investment
Income Programs)
Kerry Kilpatrick, Director
Russell Martin, Audit Manager
Edith Lemire, Senior Auditor
John Piecuch, Senior Auditor
Mary
Keyes, Auditor
Appendix III
Commissioner N:C
Director, Electronic Tax Administration W:ETA
Director, Strategy and Finance W:S
Chief Counsel CC
Director, Legislative Affairs CL:LA
Director, Office of
Program Evaluation and Risk Analysis
N:ADC:R:O
National Taxpayer Advocate TA
Office of Management Controls N:CFO:F:M
Audit Liasion:
Director, Electronic Tax Administration W:ETA
Appendix IV
Case
Examples for Publications/Instructions
Instructions -
United States (U.S.) Individual Income Tax Returns – 1040 Series:
Unclear instructions included:
· No specific instructions for filing jointly, first-time filers, or taxpayers who filed a U.S. Non-Resident Alien Income Tax Return (1040 NR) or a U.S. Self-Employment Tax Return - Puerto Rico (1040 PR) in the prior year.
· 1040 instructions stated, “…taxpayers should use Adjusted Gross Income (AGI) from your 2000 tax return (prior to any adjustment)….” Instead, the instructions should state, “…Adjusted Gross Income (AGI) from your originally filed 2000 tax return….”
Incomplete instructions included:
· No specific website link for more information.
Inconsistent instructions included:
· “…DOB (date of birth) will be used to verify the taxpayer’s identity .…” However, Self-Select PIN (Personal Identification Number) Postcard (Publication 8160E), stated that, “…you need only four readily available items to use the Self-Select PIN, the Name, SSN (Social Security Number), DOB, and AGI….”
Your Federal
Income Tax for Individuals (Publication 17):
Unclear instructions included:
· No specific instructions for filing jointly, first-time filers, or taxpayers who filed a 1040 NR or a 1040 PR in the prior year.
Incomplete instructions included:
· No specific website link for more information.
The Future of Tax
Filing (Publication 1857):
Unclear instructions stated:
· “…DOB will be used to verify taxpayer’s identity.” Instead, the instructions should state, “…DOB, along with other information in the return, will be used to verify the taxpayer’s identity….”
Incomplete instructions included:
· No specific website link for more information.
Inconsistent instructions stated:
· “…DOB will be used to verify the taxpayer’s identity.” However, Publication 8160E stated, “…you need only four readily available items to use the Self-Select PIN, the Name, SSN, DOB, and AGI….”
Questions and
Answers for Taxpayers (Publication 3007):
Unclear instructions stated:
· “…taxpayers should use AGI from your 2000 tax return (prior to any adjustment)….” Instead, the instructions should state, “…AGI from your originally filed 2000 tax return….”
Incomplete instructions included:
· No specific website link for more information.
Inconsistent instructions stated:
·
“…input AGI from your prior year….” However, other Publications
(Publication 1857 and Internal Revenue Service (IRS) Guide to Free Tax Services
(Publication 910)) stated, “…input AGI from
your 2000 tax return….”
Questions and
Answers for Tax Professionals (Publication 3452):
Inaccurate instructions stated:
· “…taxpayers who did not file for Tax Year 2000, but have filed previously…are eligible.” Instead, the instructions should state, “…taxpayers over sixteen who did not file for Tax year 2000, but have filed previously are eligible….”
Unclear instructions stated:
· “…taxpayers should use AGI from your 2000 tax return (prior to any adjustment)….” Instead, the instructions should state, “…AGI from your originally filed 2000 tax return….”
Incomplete instructions included:
· No specific website link for more information.
IRS Guide to Free
Tax Services (Publication 910):
Incomplete instructions included:
· No specific website link for more detailed information.
Self-Select PIN
Postcard (Publication 8160E):
Inaccurate and incomplete
instructions stated:
·
“…Taxpayers who did not file for Tax Year 2000, but
have filed previously…are eligible.”
Instead, the instructions should state, “…Taxpayers over sixteen who
did not file for tax year 2000, but have filed previously are eligible….”
Unclear instructions stated:
· “…taxpayers should use AGI from your 2000 tax return (prior to any adjustment).…” Instead, the instructions should state, “…AGI from your originally filed 2000 tax return….”
Incomplete instructions stated:
·
“…taxpayers who filed Form 1040, 1040A, or 1040EZ for
Tax Year 2000 are eligible….” Instead,
the instructions should state, “…taxpayers
who filed in Tax Year 2000, regardless of their age, are eligible….”
Case Example:
Illustrates a potential taxpayer problem when using any of the above
instructions based on the instructions not being clear in informing the
taxpayer of the need to use the AGI from the “originally filed tax return.”
A taxpayer files his or her tax return and wants to sign the tax return
electronically using the Self-Select PIN.
The taxpayer enters the AGI from his or her prior year tax return as one
of the required items to electronically sign the tax return. However, the taxpayer had filed an amended
return in the prior year and used the AGI ($23,500) from that return. The return is not accepted with the
Self-Select PIN signature since the taxpayer did not use the AGI from the originally filed tax return ($25,000).
Appendix
V
Case
Examples for Software Packages
Inaccurate instructions:
· One software package was inaccurate by instructing taxpayers to enter “Taxes Due,” not “Total Tax.” (Electronic Tax Return Software Preparation Package Number 1)
Incomplete instructions:
·
None of the packages reviewed instructed that if the
taxpayer was claiming married filing jointly, he/she should put the same amount
for Adjusted Gross Income and Total Tax for the prior year for both taxpayer
and spouse. (Electronic Tax Return
Software Preparation Package Numbers 1 through 4)
Unclear
instructions:
· Only one package had easily accessible information instructing how to obtain the prior year’s information or what to do if the taxpayer filed an amended return in the prior year. (Electronic Tax Return Software Preparation Package Number 2)
Case Example:
Illustrates a potential taxpayer problem when following inaccurate
instructions included in the electronic tax return software preparation package
the taxpayer is using to file his or her tax return.
A taxpayer prepares his or her tax return using a tax return software
preparation package and wants to sign the tax return electronically using the
Self-Select PIN. The instructions in
the software package state to enter “Taxes Due” from the prior year’s
return. Since the taxpayer got a refund
in the prior year, he or she entered “0” as there were no taxes due. The return is not accepted with the Self-Select
PIN since the taxpayer should have entered the “Total Tax” from the prior year.
Appendix VI
Management’s
Response to the Draft Report
The response was removed due to its size. To see the complete response, please go to the Adobe PDF version
of the report on the TIGTA Public Web Page.