The Internal Revenue Service Continues to Pay Tax Refunds on
E-Filed Tax Returns Prior to Ensuring a Signature Document Is
Processed
September 2002
Reference
Number: 2002-40-202
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.
September
27, 2002
MEMORANDUM FOR
COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Acting Deputy Inspector
General for Audit
SUBJECT: Final Report - The Internal Revenue
Service Continues to Pay Tax Refunds on E-Filed Tax Returns Prior to
Ensuring a Signature Document Is Processed (Audit # 200240040)
This
report presents the results of our review to determine what actions the
Internal Revenue Service (IRS) takes to ensure taxpayers are not receiving tax
refunds on unsigned electronically filed (e-filed) tax returns.
In February 2001, the
General Accounting Office (GAO) reported that for the 2000 Filing Season an
estimated $2.1 billion in tax refunds had been issued to taxpayers who filed an
electronic tax return without the required signature document –U.S. Individual
Income Tax Declaration for an IRS e-file Return (Form 8453) – being
received and processed by the IRS as of August 2000. The GAO recommended that the IRS implement an alternative
signature process to the Forms 8453 for taxpayers to authenticate (sign) e-filed
tax returns or to strengthen procedures for receiving and processing Forms
8453. In an attempt to create an
entirely paperless electronic tax return filing process, the IRS tested the use
of electronic signatures (no Form 8453 required to be sent to the IRS) to sign
electronic tax returns in the 1999 and 2000 Filing Seasons.
Internal Revenue Code
section 6061 requires all tax returns, both paper and e-filed, to have
the taxpayer’s signature. A taxpayer’s
signature authenticates a tax return and provides certification from the
taxpayer that the tax return is true, correct, and complete to the best of the
taxpayer’s knowledge and belief.
In summary, our review
identified that the IRS continues to pay tax refunds on unsigned e-filed
tax returns prior to ensuring a signature document (Form 8453) is received and
processed. Specifically, taxpayers who
file electronically and do not sign their returns via an electronic signature
are issued their tax refunds regardless of whether the required Form 8453 is
received and processed by the IRS.
To ensure taxpayer
compliance with signature requirements, the IRS should ensure a Form 8453 is
received and processed for each electronic tax return prior to issuing a tax
refund. If the IRS were to make a
business decision to begin to ensure a Form 8453 is received and processed
prior to issuing a tax refund, delays in taxpayers obtaining refunds will
result when compared to tax refund issuance time periods under its current
process. However, a change in IRS
policy with regard to the processing of e-filed tax returns requiring a
Form 8453 is unlikely. Therefore, to
alleviate any tax refund delays resulting from the IRS’ receiving and
processing of Forms 8453, we recommend that the IRS continue to educate
taxpayers on the use of electronic signatures and take immediate steps to
require electronic signatures be used for all electronic tax returns, thereby
making the e-file process truly paperless. For Tax Year 2001, there were
46.2 million e-filed tax returns, of which approximately 53
percent (24.4 million) were signed electronically.
Management’s Response: The IRS
agreed with Recommendation 1 and stated that it is continuing to educate
individual taxpayers and tax practitioners on the use of electronic signatures
through various means detailed in its response. However, the IRS does not agree with Recommendation 2 and as a
result also does not agree with the funds put to better use impact of requiring
electronic signatures for all electronic tax returns. The IRS did point out that it has been working with tax
professionals to eliminate the paper signature document for taxpayers who e-file. It has initiated and then expanded programs
over the past few years (since 1999) to allow taxpayers the option to sign
their returns electronically.
Despite the electronic
options offered, the IRS believes it may not be able to eliminate signature
documents from income tax returns completely because some forms contain
secondary signatures and must be attached to the income tax returns. Taxpayers filing these forms must file a
Form 8453 and attach the forms with the secondary signatures. In conclusion, the IRS does not believe it
is feasible to mandate electronic signatures for all e-filed returns at
this time. Management’s complete
response to the draft report is included as Appendix V.
Office of Audit Comment: Our
recommendation was made to address the fact that the IRS continues to pay tax
refunds on unsigned e-filed tax returns prior to ensuring a signature
document (Form 8453) is received and processed. While we agree that the IRS has made significant strides in
increasing the number of e-filed tax returns signed via an electronic
signature, we understand that the elimination of paper signature documents
(Forms 8453) is not feasible without the IRS’ continued intervention. In addition we also recognize that a change
in IRS policy with regard to ensuring a Form 8453 is received and processed
prior to issuing a tax refund is unlikely.
We remain concerned that the
IRS’ payment of tax refunds on e-filed tax returns prior to verifying
that a signature document is received from the taxpayer does not ensure
taxpayer compliance with legal signature requirements and the IRS’ own policy
regarding the issuance of refunds, which stresses that tax returns filed with a
tax refund claim are to be signed by the taxpayer. Therefore, we continue to believe that the IRS should take
immediate steps to require electronic signatures be used for all electronic tax
returns, thereby gaining efficiencies for taxpayers and IRS resources. However, we do not
intend to elevate our disagreement concerning this matter to the Department of
the Treasury for resolution.
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, 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
A taxpayer’s
signature authenticates a tax return and provides certification from the
taxpayer that the tax return is true, correct, and complete to the best of the
taxpayer’s knowledge and belief.
The Internal
Revenue Service (IRS) allows electronically filed (e-filed) tax
returns to be signed with an electronic signature or with the traditional
(paper) submission of a U.S. Individual Income Tax Declaration for an IRS
e-file Return (Form 8453) to the IRS.
The Form 8453 contains the taxpayer’s original signature for an e-filed tax return. IRS guidelines state that, for an e-filed tax return filed by an Electronic Return Originator (ERO), the ERO must mail the Form 8453 to the IRS within 3 business days after the IRS acknowledges acceptance of the e-filed tax return. For those taxpayers preparing their electronic tax returns on their home computers, IRS guidelines require a U.S. Individual Income Tax Declaration for an IRS e-file On-Line Return (Form 8453-OL) to be submitted to the IRS within the next working day after the electronic tax return has been acknowledged as accepted.
IRS procedures require the IRS to enter information from the Form 8453 into its computers. Once the information is entered, the IRS performs a computerized match of the individuals who submitted a Form 8453 to the file containing those individuals who e-filed and were required to send a Form 8453 signature document to the IRS. If the IRS does not find a match, correspondence is sent to either the ERO or the taxpayer requesting the missing Form 8453 be sent to the IRS.
In February 2001, the General Accounting Office (GAO) reported that for the 2000 Filing Season an estimated $2.1 billion in tax refunds had been issued to taxpayers who filed an electronic tax return without the required signature document (Form 8453) being received and processed by the IRS as of August 2000. The GAO recommended that the IRS implement an alternative signature process to the Forms 8453 for taxpayers to authenticate (sign) e-filed tax returns or to strengthen procedures regarding the receipt and processing of Forms 8453.
In an attempt to create an entirely paperless electronic tax return filing process (no Form 8453 required to be sent to the IRS), the IRS tested the use of electronic signatures to sign e-filed tax returns. The 1999 and 2000 Filing Season tests resulted in a reduction in the number of Forms 8453 required to be sent to and processed by the IRS. For Tax Year (TY) 2001, there were 46.2 million e-filed tax returns, of which approximately 24.4 million (53 percent) were signed electronically.
Audit work was performed from January 2002 to May 2002 at the National Headquarters for Electronic Tax Administration in Washington, D.C., and the five IRS Tax Processing Sites that accept and process electronic tax returns. The review 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.
The IRS continues to pay tax refunds on unsigned e-filed tax returns prior to ensuring a signature document is received and processed. Specifically, taxpayers who file electronically and do not sign their tax returns via an electronic signature are issued their tax refunds regardless of whether a Form 8453 is received and processed by the IRS. For TYs 2000 and 2001, the IRS processed an estimated 13.5 million e-filed tax returns and paid tax refunds totaling an estimated $25.8 billion prior to ensuring a signature document was received and processed (see table 1).
Table 1 - Tax
Refunds Paid on E-Filed Tax Returns Requiring Submission of a Form 8453
|
Tax Year |
Total |
Average Tax Refund Paid |
Total Tax Refunds Paid |
|
2001 |
5,700,783 |
$1,910 |
$10,888,495,530 |
|
2000 |
7,818,985 |
$1,910 |
$14,934,261,350 |
|
Total |
13,519,768 |
|
$25,822,756,880 |
Source: IRS
e-filed reports, 6240 Program Analysis reports, and GAO report Information
Security: IRS Electronic Filing Systems
(Reference Number GAO-01-306, dated February 2001).
The IRS’ payment of tax refunds on e-filed tax returns prior to verifying that a signature document is received from the taxpayer does not ensure taxpayer compliance with legal signature requirements and the IRS’ own policy regarding the issuance of refunds. Specifically, Internal Revenue Code section 6061 requires all tax returns, both paper-filed and e-filed, to have the taxpayer’s signature. In addition, IRS policy stresses that tax returns filed with a tax refund claim are to be signed by the taxpayer.
In addition, the IRS’ Criminal Investigation (CI) Division
is concerned that the absence of a taxpayer’s signature may affect its ability
to prosecute taxpayers for perjury for providing false information on their tax
returns to inflate tax refunds.
However, the CI Division has the ability to prosecute a case involving
absence of taxpayer signatures as a false claim against the government. The CI Division has noted that prosecuting a
false claim against the government is much more difficult; however, to
management’s recollection no case has been lost because of a missing
signature.
Contributing factors
Several factors contribute to the IRS not ensuring that a signature document is received and processed prior to tax refunds being paid on e-filed tax returns. These factors result primarily from IRS policy decisions as well as the promotion of electronic filing as a quicker means of obtaining a tax refund. Specifically:
Ø The processing of e-filed tax returns is separate from the processing of the Forms 8453. The processing of e-filed tax returns is primarily via computer, whereas the processing of the Form 8453 requires IRS employees to review and input information from the paper Form 8453 into IRS computers. Organizational priorities result in delays in entering information from the Forms 8453 into IRS computers (see below). Once the information (from Form 8453) is transcribed into IRS computers, the IRS performs a match on a weekly basis to ensure it has received a Form 8453 for each e-filed tax return without an electronic signature.
Ø Time periods for tax refund issuance on electronic tax returns do not always allow for the timely processing of Forms 8453 before a tax refund is issued. Tax refunds on e-filed tax returns are generally issued within 10 days of the IRS’ receipt and acknowledgement of an electronic tax return. Although IRS guidance states that Forms 8453 should be processed by the IRS within 8 days of receipt, Forms 8453 are often put aside during the filing season when the volume of paper refund tax returns is high. If the processing of these paper tax returns is not timely (within 45 days of receipt or due date, whichever is later), the IRS is subject to paying interest on the tax refund payments, which (depending on the number of tax returns unprocessed) could be substantial.
Effect of not verifying a signature document is received
The manner in which the IRS handles the processing of electronic compared to paper-filed tax returns with tax refund claims results in disparate treatment for taxpayers. Specifically, the IRS will not process a paper-filed tax return with a tax refund claim without a signature (the taxpayer will not receive his or her refund until the tax return is signed). The paper tax return with the missing signature is sent back to the taxpayer as unprocessable. In contrast, the IRS will process and pay tax refunds for e-filed tax returns without ensuring signature documents were received and processed.
If the IRS were to make a business decision to begin to ensure a Form 8453 is received and processed prior to issuing a tax refund, delays in taxpayers obtaining refunds will result when compared to tax refund issuance time periods under its current process. However, a change in IRS policy with regard to the processing of e-filed tax returns requiring a Form 8453 is unlikely. Therefore, the use of an electronic signature will alleviate these tax refund delays, as the IRS would not have to ensure a Form 8453 is received and processed prior to a refund being issued.
The continued expansion and use of electronic signatures will allow the IRS to reallocate into other areas the average $8 million it budgets each year for the processing of Forms 8453. In addition, if the IRS does not continue to move toward the use of electronic signatures, the cost to process paper Forms 8453 will significantly increase as the IRS moves toward its goal of having 80 percent of all tax returns filed electronically by 2007 (see table 2).
Table 2 - Estimated Costs to Process Forms 8453 for Tax Years 2002–2006
|
Tax Year |
E-Filed Tax Returns Requiring |
Estimated Processing Costs |
|
2002 |
19,008,660 |
$6,914,020 |
|
2003 |
20,649,970 |
$7,511,014 |
|
2004 |
22,138,600 |
$8,052,473 |
|
2005 |
23,512,720 |
$8,552,282 |
|
2006 |
24,657,820 |
$8,968,789 |
|
Total |
109,967,770 |
$39,998,578 |
|
Average |
21,993,554 |
$7,999,716 |
Source: The IRS Calendar Year
Projections for E-Filed Individual Returns to be filed 2002-2008 for the U.S.
and the IRS’ Form 8453 cost per thousand costing model. See Appendix IV for computation details.
To ensure taxpayer compliance with signature requirements, the Director, Electronic Tax Administration should:
1.
Continue to educate taxpayers on the use of electronic
signatures.
Management’s Response: The IRS stated that it is continuing to educate individual taxpayers and tax practitioners on the use of electronic signatures through various means detailed in its response.
2.
Take immediate steps to require electronic signatures be
used for all electronic tax returns, thereby making the e-file process
truly paperless.
Management’s Response: The IRS pointed out that it has been working with tax professionals to eliminate the paper signature document for taxpayers who e-file. It has initiated and then expanded programs over the past few years (since 1999) to allow taxpayers the option to sign their returns electronically. With this expansion and the growth in tax preparation software that allows individual filers to electronically sign their returns, the IRS believes the number of taxpayers signing their returns electronically will increase.
Despite the electronic options offered, the IRS believes it may not be able to eliminate signature documents from income tax returns completely because some forms contain secondary signatures and must be attached to the income tax returns. Taxpayers filing these forms must file a Form 8453 and attach the forms with the secondary signatures. In conclusion, the IRS does not believe it is feasible to mandate electronic signatures for all e-filed returns at this time.
Office of Audit Comment: Our recommendation was made to address the fact that the IRS continues to pay tax refunds on unsigned e-filed tax returns prior to ensuring a signature document (Form 8453) is received and processed. While we agree that the IRS has made significant strides in increasing the number of e-filed tax returns signed via an electronic signature, we understand that the elimination of paper signature documents (Forms 8453) is not feasible without the IRS’ continued intervention. In addition, we recognize that a change in IRS policy with regard to ensuring a Form 8453 is received and processed prior to issuing a tax refund is unlikely.
We remain concerned that the IRS’ payment of tax refunds on e-filed
tax returns prior to verifying that a signature document is received from the
taxpayer does not ensure taxpayer compliance with legal signature requirements
and the IRS’ own policy regarding the issuance of refunds, which stresses that
tax returns filed with a tax refund claim are to be signed by the
taxpayer. Therefore, we continue to
believe that the IRS should take immediate steps to require electronic
signatures be used for all electronic tax returns, thereby gaining efficiencies
for taxpayers and IRS resources.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to
determine what actions the Internal Revenue Service (IRS) takes to ensure
taxpayers are not receiving tax refunds on unsigned electronically filed (e-filed)
tax returns. To accomplish this
objective, we conducted the following tests:
I.
Obtained and reviewed IRS guidance for the taxpayer
signature requirements on paper and e-filed tax returns.
II.
Identified the process followed for securing and
processing electronic signature documents received from taxpayers filing
on-line with a U.S. Individual Income
Tax Declaration for an IRS e-file On-Line Return (Form
8453-OL) and U.S. Individual Income
Tax Declaration for an IRS e-file Return (Form 8453) received
from Electronic Return Originators (ERO).
A.
Performed a walk-through at the Andover Tax Processing
site to determine how Forms 8453 were processed.
B.
Held discussions with representatives from Submission
Processing and Electronic Tax Administration (ETA).
III.
Determined if the IRS has controls in place to ensure
that all e-filed tax returns claiming a refund have the required
taxpayer’s signature prior to refund issuance.
A. Analyzed ETA statistics/reports for the period January 1, 2002 to May 23, 2002, to determine if taxpayer signatures are obtained prior to refund issuance.
B. Because testing identified that refunds are issued on unsigned electronic tax returns, determined why refunds have been issued and calculated the number of e-filed tax returns with tax refunds, as well as the amount of refunds issued.
IV.
Determined actions taken by the IRS to obtain missing
Forms 8453.
A. Determined the type and volume of notices issued to EROs and taxpayers.
B. Determined how effective these notices are in obtaining missing Forms 8453.
C. Identified the impact of not sending in Forms 8453 on both on-line filers and EROs.
V. Determined the costs associated with processing Forms 8453 and the costs to obtain missing and incomplete Forms 8453.
A. Determined the processing (labor and indirect labor) costs and storage costs to process the Forms 8453.
B. Determined the costs for issuing notices for missing or incomplete Forms 8453 to the taxpayer and ERO.
C. Estimated the increased cost to process Forms 8453 as the IRS moves toward its goal of having 80 percent of all tax returns filed electronically by 2007.
VI. Analyzed the impact of electronic signatures on reducing the number of Forms 8453 required to be sent to the IRS.
A. Determined the volume of e-filed tax returns signed with the Self-Select Personal Identification Number (PIN) and the Practitioner PIN for Tax Years 2000 and 2001.
B. Projected for future years how many electronic signature alternatives should be used as the IRS moves toward its goal of having 80 percent of all tax returns filed electronically by 2007.
VII. Determined if non-receipt of a signature document has any impact on the IRS’ tax return fraud detection process.
A. Interviewed Criminal Investigation (CI) Division personnel to determine if non-receipt of a signature document is any factor assessed as part of their Questionable Return Program criteria.
B. Determined if the CI Division was not able to prosecute a case because of an unsigned electronic tax return.
Appendix II
Major Contributors to This Report
Michael R. Phillips, Assistant Inspector
General for Audit (Wage and Investment Income Programs)
Kerry Kilpatrick, Director
Russell Martin, Audit Manager
Robert Howes, Senior Auditor
Grace Terranova, Acting Senior Auditor
Mary Keyes, Auditor
Appendix III
Commissioner N:C
Director, Electronic Tax Administration W:E
Director, Refund Crimes CI:RC
Director, Strategy and Finance W:S
Director, Submissions Processing W:CAS:SP
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:
Director,
Electronic Tax Administration W:ETA
Program/Process
Assistant Coordinator, Wage and Investment Division W:HR
Appendix IV
This appendix presents detailed information on the
potential measurable impact that our recommended corrective actions will have
on tax administration. This benefit
will be incorporated into our Semiannual Report to the Congress.
Type and Value of the Outcome Measure:
· Funds Put to Better Use – Potential; an estimated $40 million over 5 years (see page 2).
Methodology
Used to Measure the Reported Benefit:
We determined the potential number of U.S. Individual Income Tax Declarations for an IRS e-file Return (Form 8453) the Internal Revenue Service (IRS) would need to process for Tax Years (TY) 2002-2006 by identifying the potential e-filed volume for those years using Electronic Tax Administration (ETA) Calendar Year Projections. We then subtracted from the potential volume of e-filed tax returns the projected volume of the e-filed tax returns that would be signed electronically or filed electronically via the IRS Telefile program (.6183 percent) by using ETA figures for these volumes. The ETA did not have a projection report showing the anticipated increase in alternative signatures for TYs 2002-2006. Therefore, we applied the same projected rate of e-filed tax returns signed electronically to each year based on our review of TY 2001 (see table below).
|
Tax Year |
E-Filed Tax |
E-Filed Tax Returns Signed Via Electronic Signature/Telefile |
E-Filed Tax Returns Requiring Form
8453 |
|
2002 |
49,800,000 |
30,791,340 |
19,008,660 |
|
2003 |
54,100,000 |
33,450,030 |
20,649,970 |
|
2004 |
58,000,000 |
35,861,400 |
22,138,600 |
|
2005 |
61,600,000 |
38,087,280 |
23,512,720 |
|
2006 |
64,600,000 |
39,942,180 |
24,657,820 |
Source: See above detailed description of sources used to create table.
We obtained from Submissions Processing the Fiscal Year (FY) 2000 direct and indirect labor cost per thousand to process the Forms 8453, which was $363.73 per thousand. We estimated the annual volume of Forms 8453 (TYs 2002-2006) that the IRS will need to process. Each annual volume was divided by 1,000. The resulting figures were multiplied by the per thousand process rate identified above. The calculations below detail the methodology we followed for estimating annual average and total Forms 8453 processing costs for TYs 2002-2006:
|
1) |
The
projected direct and indirect labor costs for |
|
|
|
2) |
From the information in row #1
above, computed the average combined direct & indirect labor cost
(39,998,578/5) (see table 2). Average combined direct & indirect
labor cost: |
|
|
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.