Advance Refunds Were Accurately Calculated and Issued to
Eligible Taxpayers, But Some Undelivered Refunds Were Unnecessarily Delayed
June 2002
Reference
Number: 2002-40-116
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.
June
26, 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 – Advance Refunds Were
Accurately Calculated and Issued to Eligible Taxpayers, But Some Undelivered
Refunds Were Unnecessarily Delayed (Audit # 200140056)
This
report presents the results of the second phase of our reviews of the advance
refund provisions of H.R. 1836, also known as the Economic Growth and Tax
Relief Reconciliation Act of 2001. In
the initial phase of our reviews, we evaluated whether the Internal Revenue
Service (IRS) timely and accurately notified taxpayers about their advance
refunds. The overall objective of our
current review was to determine whether the IRS accurately calculated and
issued advance refunds to eligible taxpayers.
We also evaluated the IRS’ year-end actions to reverse the remaining
advance refund credits to prevent issuance of advance refunds after the
December 31, 2001, legislative deadline.
In the third phase of our reviews, we reviewed advance refunds to
determine how well the IRS handled the advance refund amounts during the 2002
Filing Season for purposes of computing the Rate Reduction Credit. We will be issuing a separate report on the
third phase of our review shortly.
The
Congress enacted H.R. 1836, requiring the Treasury to provide advance refunds
to eligible taxpayers as rapidly as possible.
These advance refunds of Tax Year (TY) 2001 individual income taxes were
to be calculated based on information from the taxpayers’ TY 2000 tax
returns. From July through December
2001, the IRS credited approximately 90 million taxpayer accounts with
approximately $39 billion in advance refund amounts. Additionally, the IRS determined that over 30 million taxpayers
were not eligible to receive advance refunds.
In
some situations, the IRS credited taxpayers’ TY 2000 accounts for the advance
refund amounts, but did not issue the refunds.
These situations occurred when taxpayers’ accounts had certain
conditions that would “freeze” the accounts, preventing any refunds until the
freeze conditions were resolved. In
addition, advance refunds returned as undelivered by the Post Office were
credited back to taxpayers’ accounts and frozen. However, the law prohibited the IRS from issuing advance refunds
after December 31, 2001. To prevent
refunds after this date, the IRS had to reverse remaining advance refund
credits from taxpayers’ accounts at the end of 2001. The net
advance refund amounts received by taxpayers (the advance refund credit amounts
less any reversal amounts) were needed by both the IRS and taxpayers to
determine the amount of Rate Reduction Credit taxpayers could claim on their TY
2001 tax returns. The IRS provided these net advance refund
amounts to taxpayers via a toll-free telephone number.
The
IRS accurately calculated and issued advance refunds to eligible
taxpayers. In addition, the IRS
analyzed taxpayers’ accounts with credit balances at year-end and properly
reversed remaining advance refund credits to prevent refunds after December 31,
2001.
However,
the IRS did not always reissue undelivered refunds when it received more
current addresses. This occurred
because the IRS did not program its computer system to automatically reissue
undelivered refunds for all types of address changes made to taxpayers’
accounts. Also, when reviewing undelivered
refund notices, IRS employees did not always perform required research or
adequate research on IRS computer systems to identify more current addresses
and reissue the refunds.
On
October 12, 2001, we informed IRS management about the undelivered refunds with
more current addresses. Subsequently,
as of late October 2001, the IRS identified over 34,000 accounts with
undelivered refunds that had not been reissued even though the IRS computer
files showed more current addresses. We
estimate these 34,000 refunds totaled over $10 million and had been delayed for
an average of 8 weeks. In late December
2001, as a result of our raising this concern, the IRS identified unresolved
undelivered refunds on accounts with more current addresses and reissued the refunds.
Management’s
Response: IRS management believes the IRS’ efforts
were highly successful in meeting the intent of the legislation in a timely
manner. They also believe that this
report is accurate and balanced and that our efforts helped them to successfully
implement and administer the provisions of this law.
The
IRS agreed with our recommendations as presented in the report. Management’s complete response to the draft
report is included as Appendix V.
Copies of this
report are also being sent to the IRS managers who are affected by the
report. Please contact me at (202)
622-6510 if you have questions or Michael R. Phillips, Assistant Inspector
General for Audit (Wage and Investment Income Programs), at (202) 927-0597.
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Outcome Measures
Appendix V – Management’s Response to the Draft Report
On June 7, 2001, H.R. 1836, also known as the Economic Growth and Tax Relief Reconciliation Act of 2001, was signed into law. This legislation included a reduction in tax rates beginning in Tax Year (TY) 2001. The rate reduction for TY 2001 was provided to eligible taxpayers as (1) an advance refund of TY 2001 taxes calculated based on information from the taxpayer’s TY 2000 tax return, and/or (2) a Rate Reduction Credit claimed on the taxpayer’s TY 2001 return. Taxpayers who did not receive the maximum advance refund amount might be able to claim the additional amount as a Rate Reduction Credit on their TY 2001 tax returns.
The legislation required advance refunds to be issued by Treasury as rapidly as possible to all eligible taxpayers. To prevent errors by taxpayers who might file their TY 2001 returns early in 2002 and claim the Rate Reduction Credit, the law prohibited the Internal Revenue Service (IRS) from issuing advance refunds after December 31, 2001.
Over 120 million taxpayers filed Individual Income Tax Returns for TY 2000. In July 2001, the IRS began mailing notices to inform these taxpayers whether they were eligible for an advance refund. Notices to eligible taxpayers included the advance refund amounts and the approximate dates their checks would be issued. After issuing the notices, the IRS credited taxpayers’ TY 2000 accounts for the advance refund amounts and issued refund checks.
In some situations, the IRS credited taxpayers’ accounts for the advance refund amounts, but did not issue the refunds. These situations occurred when taxpayers’ accounts had certain conditions that would “freeze” the accounts, preventing any refunds until the freeze conditions were resolved. In addition, advance refunds returned as undelivered by the Post Office were credited back to taxpayers’ accounts and frozen. To prevent issuance of advance refunds from unresolved accounts after December 31, 2001, the IRS had to reverse remaining advance refund credits from taxpayers’ accounts at the end of 2001.
The net advance refund amounts received by taxpayers (the advance refund credit amounts less any reversal amounts) were needed by both the IRS and taxpayers to determine the amount of Rate Reduction Credit taxpayers could claim on their TY 2001 tax returns. The IRS provided these net advance refund amounts to taxpayers via a toll-free telephone number.
This audit was conducted at the IRS National Headquarters and the Fresno Campus from October 2001 through February 2002 and 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.
From July through December 2001, the IRS credited approximately 90 million taxpayers with approximately $39 billion in advance refunds. The IRS also determined that over 30 million taxpayers were not eligible to receive an advance refund.
The IRS accurately calculated and issued advance refunds to eligible taxpayers. This included determining whether over 120 million taxpayers were eligible to receive advance refunds and calculating the advance refund amounts for the eligible taxpayers. These significant accomplishments were performed in a very limited time. We analyzed a 0.1 percent sample of TY 2000 individual tax accounts and did not identify any ineligible taxpayers who received a rebate and found that 99.9 percent of the advance refunds were calculated correctly.
To prevent issuance of advance refunds after December 31, 2001, the IRS had to analyze taxpayer accounts with an advance refund credit and a credit balance (caused by certain freeze conditions, including undelivered refunds) at year-end to reverse any remaining advance refund credits. To assist the IRS, we reviewed IRS test data for the computer programming of the reversals and provided the IRS with our results. We identified accounts where:
· The credit was reversed, but should not have been.
· The credit was not reversed, but should have been.
· The credit was reversed, but for the wrong amount.
The IRS used our results in conjunction with its own to refine the programming and properly reversed the advance refund credits remaining at year-end.
The year-end reversal process involved reversing over $140 million in advance refund credits on approximately 465,000 taxpayers’ accounts. We reviewed approximately 300 accounts with advance refund credits and credit balances at year-end. The IRS properly determined whether a reversal was needed and correctly computed any reversal amount on over 99 percent of the accounts reviewed.
The advance refund program created a large number of refund checks, which increased the volume of checks returned as undelivered by the Post Office. Including all types of refunds, both advance refunds and others, over 86 million refunds were issued from July 2001 through December 2001. During the same period, over 500,000 refunds were returned as undelivered.
Undelivered refunds are credited back to taxpayers’ accounts and frozen to prevent the refunds from being reissued until a more current address is obtained. Notices stating, “we need to know your current address” are then generated to request current addresses from the taxpayers. Before mailing these notices, employees should obtain and review original returns and research IRS computer systems for more current addresses. Employees may find that a return address was input incorrectly during return processing or that a more current address was received after the refund was issued. Employees should reissue the refunds when more current addresses are obtained through research or from taxpayers. The refunds will also be reissued when taxpayers update their addresses by filing subsequent tax returns.
The IRS did not always reissue undelivered refunds when it received more current addresses. This occurred because:
· The IRS did not program its computer system to reissue undelivered refunds for all types of address changes made to taxpayers’ accounts. Some address changes made after undelivered refunds were credited back to taxpayers’ accounts would reissue the refunds and some would not.
· IRS employees did not always perform required research or adequate research to identify more current addresses on IRS computer systems. In over 50 percent of the 250 cases we analyzed, employees should have identified more current addresses and reissued the refunds, but did not.
On October 12, 2001, we informed IRS management about the undelivered refunds with more current addresses. Subsequently, as of late October 2001, the IRS identified over 34,000 accounts with undelivered refunds that had not been reissued even though the IRS computer files showed more current addresses. We estimate these 34,000 refunds totaled over $10 million and had been delayed for an average of 8 weeks. These taxpayers might have received notices requesting their current addresses, even though they had already provided their current addresses to the IRS or to the Post Office, which may have caused taxpayer confusion. In late December 2001, as a result of our raising this concern, the IRS identified unresolved undelivered refunds on accounts with more current addresses and reissued the refunds.
If the IRS computer system had been programmed to reissue undelivered refunds whenever more current addresses were received, fewer Undelivered Refund Check notices would have been generated. In addition, the IRS would have been able to eliminate certain computer system research for more current addresses on over 250,000 notices each year before mailing the notices.
1. The Commissioner, Wage and Investment (W&I) Division, should revise computer programming to automatically reissue undelivered refunds for any address changes occurring after the date of the original refund. Adopting this recommendation would allow these taxpayers to receive their refunds sooner and also reduce the number of Undelivered Refund Check notices generated.
Management’s Response: Management agreed with this recommendation and on February 4, 2002, submitted a Request for Information Services (RIS) asking for the programming changes. The RIS was amended on May 22, 2002, to show that it was based on a corrective action.
2. If Recommendation 1 is adopted, the Commissioner, W&I Division, should eliminate certain required IRS computer system research used to look for more current addresses before mailing the Undelivered Refund Check notices. The computer would be performing this research.
Management’s Response: Management agreed with this recommendation and will change their process guidelines once the RIS is implemented.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of our review was to determine whether the Internal Revenue Service (IRS) accurately calculated and issued advance refunds to eligible taxpayers. We also evaluated the IRS’ year-end actions to reverse remaining advance refund credits to prevent issuance of advance refunds after the December 31, 2001, legislative deadline.
I.
We determined if the IRS
accurately credited taxpayer accounts and issued the advance refunds.
A.
We obtained a computer extract
of Tax Year (TY) 2000 Individual Masterfile (IMF) data and related information
from the IRS’ Individual Return Transaction File as of cycle 200139. To obtain a manageable number of records to
analyze, we extracted a 0.1 percent random interval sample of 124,060 accounts
from approximately 124,060,000 TY 2000 returns posted. We computer-analyzed the sample accounts for
any indications that the advance refund credit was not accurately calculated. For any potential problems identified, we
evaluated account information and determined if the credits were accurately
calculated.
B.
From the 0.1 percent sample
in Objective I.A., we used computer-generated random numbers to select a random
sample of 1,000 accounts. We reviewed
the accounts to determine if there were any unknown problems present that would
adversely affect the accounts.
C.
We validated the extract data
from Objective I.A. We took a
judgmental sample of 30 accounts and compared the data to the source data on
the IMF by researching the accounts on the Integrated Data Retrieval System
(IDRS). We also performed
various computer sorts to determine if the extract data was reasonable.
II.
We determined whether the IRS
effectively handled accounts having both an advance refund credit and an
unresolved undelivered refund.
A.
We obtained a computer
extract of IRS data and identified approximately 314,000 TY 2000 accounts on
the IMF with an advance refund credit and an unresolved undelivered refund
(indicated by an undelivered refund check freeze) as of cycle 200139.
1.
We used computer queries to
determine how many of the 314,000 TY 2000 accounts had more current addresses
available as of cycle 200139. We
considered an address to be more current if it had been updated after the issuance
date of the related refund that was undelivered. This identified approximately 25,000 accounts with more current
addresses available. We took an
interval sample of 250 of the 25,000 accounts by selecting every 100th
account.
a.
We determined whether
employees had researched the related Undelivered Refund Check notices (CP 31)
and reissued the refunds.
b.
We determined the average
number of weeks the 250 refunds were delayed because the IRS did not always
automatically reissue undelivered refunds when it received more current
addresses.
2.
We validated the computer
extract data in Objective II.A. To
obtain a small, random sample of the accounts extracted, we took an interval
sample of 30 accounts by selecting every 10,000th account and
compared the data to the source data on the IMF by researching the
accounts on the IDRS. We also
determined if the number of accounts extracted was reasonable by comparing the
extract volume to the volume estimated from our 0.1 percent sample in Objective
I.A.
B.
In October 2001, we advised
the IRS that we had identified accounts frozen due to undelivered advance
refund checks even though the addresses had been updated after the advance
refunds were issued. We subsequently
determined the IRS corrective actions to resolve such accounts prior to
December 31, 2001.
III.
We determined if the IRS took
appropriate actions to reverse remaining advance refund credits at year-end.
A.
To assist the IRS, we
reviewed IRS test data for approximately 1,200 accounts provided by the
IRS. We evaluated these accounts to
determine if the advance refund credits needed to be reversed and if the
reversal amounts were correct.
B.
From our sample in Objective
I.A., we identified approximately 650 accounts with an advance refund credit,
any one of a number of specified freeze conditions, and a credit balance on the
account when the data was extracted in cycle 200139. We analyzed these accounts and identified approximately 300 that
had credit balances when the reversals were calculated, and would have been analyzed
by the IRS in its reversal process. We
determined if the advance refund credits on these 300 accounts needed to be
reversed and if the credit reversals were accurately calculated and posted to
the accounts.
Appendix II
Major
Contributors to This Report
Michael R. Phillips, Assistant Inspector
General for Audit (Wage and Investment Income Programs)
Stanley Rinehart, Director
Richard Calderon, Audit Manager
Carola Gaylord, Senior Auditor
Larry Mart, Senior Auditor
Sharon Summers, Senior Auditor
Appendix III
Commissioner N: C
Deputy Commissioner N: DC
Senior Advisor to
the Office of the Commissioner N: DC
Commissioner, Small Business/Self-Employed Division S
Chief, Customer Liaison
S:COM
Deputy Commissioner, Wage and Investment Division W
Director, Strategy and Finance W:S
Chief Counsel CC
National Taxpayer Advocate TA
Director, Legislative Affairs CL:LA
Director,
Office of Program Evaluation and Risk Analysis
N:ADC:R:O
Office of
Management Controls N:CFO:F:M
Audit Liaison:
Commissioner,
Wage and Investment Division W
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to the Congress.
Type and Value of Outcome Measure:
Methodology Used to Measure the Reported Benefit:
From all Tax Year (TY) 2000 accounts on the Individual Masterfile (IMF), the Internal Revenue Service (IRS) identified approximately 34,000 accounts as of cycle 200143 with a frozen undelivered refund and an address change on the IMF after the advance refund had been issued. We estimated the dollar value of these refunds using the average undelivered advance refund amount of approximately $320 provided by the IRS.
From our Office of Information Technology, we obtained a Masterfile extract that identified approximately 314,000 TY 2000 accounts on the IMF with an advance refund credit and an undelivered refund check freeze as of cycle 200139. From this extract we used computer queries to identify approximately 25,000 accounts with more current addresses available. We evaluated a random interval sample of 250 of these accounts by selecting every 100th account and determining the average number of weeks the refunds were delayed.
Type and Value of Outcome Measure:
Methodology Used to Measure the Reported Benefit:
We used the following to calculate the benefit.
· Based on IRS notice volume reports, the average number of Undelivered Refund Check notices (CP 31) for the 4 years prior to 2001 was approximately 320,000 per year.
· We were not able to obtain sufficient information to determine the amount of time it takes to perform the specified computer system research to obtain more current addresses for the CP 31 notices before mailing. Therefore, to be conservative in our cost savings estimate, we used a rate of 60 per hour worked by employees earning $17.20 per hour.
· To arrive at the number of notices for which certain computer system research by employees could be eliminated, we reduced the total volume of notices by an estimate of those that could still require this research. According to IRS procedures, the CP 31 notices for paper returns have to be researched on IRS computer systems if the address on the original return is different from that on the CP 31. Based on discussions with IRS employees regarding the percentage of CP 31 notices for which Refund Inquiry employees find updated addresses, and considering the percentage of electronically filed returns, we estimate that certain computer system research could be eliminated for at least 80 percent of the notices.
Using the above, our calculations are:
|
320,000 |
Times |
80 percent |
= |
256,000 notices per year not needing certain IRS computer system research |
|---|---|---|---|---|
|
256,000 |
Divided By |
60 per hour |
= |
4,267 hours of research eliminated per year |
|
4,267 |
Times |
$17.20 per hour |
= |
$73,392 saved per year |
|
$73,392 |
Times |
5 years |
= |
$366,960 saved over 5 years |
Appendix V
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.