Analysis of Statistical Information for Returns With Potentially Unclaimed Additional Child Tax Credit

 

January 2003

 

Reference Number:  2003-40-046

 

 

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.

 

January 31, 2003

 

 

MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION

 

FROM:     Gordon C. Milbourn III /s/ Gordon C. Milbourn III

                 Acting Deputy Inspector General for Audit

 

SUBJECT:     Final Audit Report - Analysis of Statistical Information for Returns With Potentially Unclaimed Additional Child Tax Credit  (Audit # 200340037)

 

This report presents the results of our analysis of statistical information for returns of taxpayers who appeared eligible for, but did not claim, the Additional Child Tax Credit (ACTC) on their Tax Year 2001 individual income tax returns.  The overall objective of this analysis was to provide the Internal Revenue Service (IRS) with information that may aid it in future outreach efforts to educate taxpayers about the ACTC.

To assist the IRS in its efforts to inform taxpayers of their rights and entitlements, we analyzed statistical information from the over 644,000 returns on which taxpayers did not claim potential ACTC totaling over $255 million.  The analysis of these returns focused on attributes that could help the IRS in targeting its outreach efforts. 

In summary, our analysis revealed that the taxpayers prepared 63 percent of the returns with potentially unclaimed ACTC. Paid preparers prepared 36 percent, and volunteer preparers prepared the remaining returns.  Additionally, 82 percent of the returns were filed on paper, while 18 percent were filed electronically.  Additional results of our analysis, including ratio analysis that identifies specific states where outreach efforts could be targeted, can be found in Appendix IV.

No recommendations were made in this report. However, IRS management officials reviewed it prior to issuance.

Copies of this report are also being sent to the IRS managers 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) 927-7085.

 

 

Attachment

 

Table of Contents

Background

Analysis of Return Attributes to Assist the Internal Revenue Service in Future Outreach Efforts

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Statistical Tables for Returns Identified With Potentially Unclaimed Additional Child Tax Credit

 

Background

The Economic Growth and Tax Relief Reconciliation Act  of 2001 (EGTRRA) included several new provisions for Tax Year (TY) 2001 that provide tax relief to low-income families.  Among these were modifications to the Child Tax Credit (CTC) that made the credit refundable for taxpayers with any number of children, rather than limiting it to families with three or more children as under previous law. Now, all taxpayers are eligible to receive a refund of their CTC when they have no tax liability.  However, refunds of CTC are limited to 10 percent of a taxpayer’s earned income over $10,000.  Refundable CTC is commonly known as the Additional Child Tax Credit (ACTC).

In September 2002, a Treasury Inspector General for Tax Administration (TIGTA) report identified that during the 2002 Filing Season, the IRS processed over 600,000 TY 2001 individual income tax returns with indications that the taxpayers appeared eligible for, but did not claim, the ACTC totaling $238 million.  To address this situation, the Internal Revenue Service (IRS) notified the taxpayers identified of their potential eligibility by issuing special advisory notices, including the necessary tax forms and instructions on how to claim the credit if they were eligible.  The TIGTA assisted in this notification effort by providing computer analysis that identified the names and addresses of taxpayers who appeared eligible for, but did not claim, the ACTC on their TY 2001 individual income tax returns.

This analysis was performed in December 2002 at the IRS Submission Processing Campus located in Austin, Texas, 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.

Analysis of Return Attributes to Assist the Internal Revenue Service in Future Outreach Efforts

During the processing of individual income tax returns between January 1, 2002, and October 4, 2002, we identified 644,008 TY 2001 individual income tax returns with indications that the taxpayers appeared eligible for, but did not claim, potential ACTC totaling over $255 million.  Most of these taxpayers qualified for the credit under the new provisions for the ACTC in the EGTRRA and were primarily taxpayers with earned income of less than $25,000 per year.

In response to this condition, the IRS contacted the taxpayers identified through the mail-out of a special notice, which was created to advise taxpayers that they might be eligible for the ACTC.  Also included in the mail-out were the tax forms needed to claim the credit: Amended United States (U.S.) Individual Income Tax Return (Form 1040X), and Additional Child Tax Credit (Form 8812).

To further assist the IRS in its outreach to educate taxpayers of their rights and entitlements, we are providing the following analysis that identifies specific return attributes that may help the IRS target future outreach efforts that it conducts through programs such as the Stakeholder Partnership, Education, and Communication organization.

Return preparer

Analysis of the 644,008 returns revealed that 403,425 (63 percent) were prepared by the taxpayer. Volunteer tax return preparation groups, such as VITA, prepared 11,261 (2 percent) returns, while paid preparers prepared the remaining 229,322 (36 percent) returns.

The chart was removed due to its size.  To see the chart, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

Filing method

Analysis of the filing method determined that paper returns accounted for 526,475 (82 percent) of the returns and ones electronically filed accounted for 117,533 (18 percent) of the returns.

The chart was removed due to its size.  To see the chart, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

A breakout of the filing method into taxpayer- and preparer-prepared returns showed that taxpayers preparing paper returns accounted for the largest group, with 381,362 (59 percent) of the returns.

The chart was removed due to its size.  To see the chart, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Preparer-prepared paper returns followed with 145,113 (23 percent), and preparer-prepared electronic returns were next with 95,470 (15 percent).  The smallest group was taxpayer-prepared electronic returns with 22,063 (3 percent).

Geographic location

The geographic location for each taxpayer was identified based on the address on the taxpayer’s return. This enabled the number of taxpayers and the potentially unclaimed ACTC to be identified by state or other geographic location.  The states with the largest numbers of taxpayers and potentially unclaimed ACTC were California, Texas, and New York, respectively.  In addition, these data were used with the U.S. Census Bureau population statistics to calculate the number of returns with unclaimed ACTC per 1,000 people.  The comparison creates an indicator to identify locations where outreach efforts could be focused.  The 10 locations with the highest indicators were:

Ø      New Mexico – 3.5678

Ø      District of Columbia – 3.5521

Ø      Mississippi – 3.0809

Ø      Hawaii – 2.9846

Ø      Arizona – 2.9817

Ø      Texas – 2.8

Ø      California – 2.7840

Ø      Louisiana – 2.6641

Ø      Florida – 2.6006

Ø      Nevada – 2.5958

Indicators for the remaining states can be found in Table 6 of Appendix IV.

Appendix I

 

Detailed Objective, Scope, and Methodology

 

The overall objective of this analysis was to provide the Internal Revenue Service with information that may aid it in future outreach efforts to educate taxpayers about the Additional Child Tax Credit (ACTC).  The analysis focused on return attributes that could help target future outreach.

To accomplish our objective, we analyzed 644,008 Tax Year 2001 Individual Income Tax Returns identified between January 1, 2002, and October 4, 2002, with indications that taxpayers appeared eligible for, but did not claim, the ACTC and determined:

·        The preparer of the return.

·        The filing method for the return.

·        The geographic location of the taxpayer.

 

Appendix II

 

Major Contributors to This Report

 

Michael R. Phillips, Assistant Inspector General for Audit (Wage and Investment Income Programs)

Gary L. Young, Acting Director

Steven E. Vandigriff, Acting Audit Manager

Lawrence N. White, Senior Auditor

Glory Jampetero, Auditor

 

Appendix III

 

Report Distribution List

 

Acting Commissioner  N:C

Deputy Commissioner, Wage and Investment Division W

Director, Customer Account Services  W:CAS

Director, Customer Assistance, Relationships, and Education  W:CAR

Director, Submission Processing  W:CAS:SP

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:  Program/Process Assistant Coordinator, Wage and Investment Division  W:HR

 

Appendix IV

 

Statistical Tables for Returns Identified With Potentially Unclaimed Additional Child Tax Credit (ACTC)

 

Table 1

Summary of All Returns by Return Preparer

 

 

Table 2

Summary of All Returns by Filing Method

 

 

Table 3

Summary of Returns Prepared by a Volunteer or Paid Preparer by Filing Method

 

Table 4
Summary of All Returns by Geographic Location

 

 

Table 5
Summary of Returns Prepared by a Volunteer or Paid Preparer by Geographic Location

 

 

Table 6
Analysis of Unclaimed ACTC Per 1,000 People by State

 

 

 

 

Table 7
Analysis of Unclaimed ACTC Per 1,000 People by Top 10 States