Forms and Publications for the New Education and Retirement
Tax Provisions Were Addressed for the 2003 Filing Season
April 2003
Reference Number: 2003-40-105
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.
April
29, 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 - Forms and
Publications for the New Education and Retirement Tax Provisions Were Addressed
for the 2003 Filing Season (Audit # 200240062)
This
report presents the results of our review to determine whether the Internal
Revenue Service (IRS) identified the new tax law provisions that had a
significant impact on Wage and Investment (W&I) taxpayers and ensured that
tax forms, instructions, and publications related to these new provisions were
clearly and accurately updated for the 2003 Filing Season. The audit focused on the education and
retirement provisions in the Economic Growth and Tax Relief Reconciliation Act
of 2001 (EGTRRA). These provisions
could affect an estimated 86.5 million taxpayers by providing tax benefits of
up to $7.6 billion in Fiscal Year 2003.
Overall,
the IRS successfully identified and controlled the new education and retirement
provisions of the EGTRRA and ensured the tax forms, instructions, and
publications related to these provisions were clearly and accurately updated
for the 2003 Filing Season. The IRS
properly revised 22 of the 23 items we reviewed that were changed as a result
of the education and retirement provisions of the EGTRRA. However, one publication omitted revisions
related to the new education provisions.
The
publication, Net Operating Losses (NOLs) for Individuals, Estates, and
Trusts (Publication 536), did not reflect the new tuition and fees
deduction. This deduction must be
included to correctly recalculate the amount of the NOL carryover to a
subsequent year. The omission of this
update to the Publication 536 will not affect taxpayers who claim NOLs for Tax
Year (TY) 2002 returns or who carry back NOLs to prior years, since the tuition
and fees deduction was not available in prior years. However, this omission will affect those taxpayers who carry
forward NOLs to TY 2003 and claim a tuition and fees deduction in TY 2002. It will also affect these taxpayers in
future years if the NOL is not fully used in TY 2003.
Since
many taxpayers depend on the IRS publications each year and expect them to be
reliable and accurate, we recommended the Commissioner, W&I Division,
ensure that Publication 536 is updated to reflect the new tuition and fees
deduction.
Management’s
Response: IRS management agreed with our
recommendation and has already updated Publication 536 to reflect the new
tuition and fees deduction. In addition, the IRS notified the Taxpayer
Assistance Centers of the correction to ensure taxpayers were provided with the
correct information on NOLs.
Management’s complete response to the draft report is included as
Appendix VII.
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.
The Net Operating Loss Publication Was Not Updated for the New Tuition and Fees Deduction
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Outcome Measures
Appendix VI – List of Tax Products Reviewed
Appendix VII – Management’s Response to the Draft Report
Each year, the
Internal Revenue Service (IRS) faces the challenge of incorporating new tax
legislation into many of its publications and processes. Implementing new legislative changes becomes
more challenging when there are numerous provisions with effective dates that
extend over several years. An example
of this is the Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA), which contains 85 major provisions that will require 441 changes to
the Internal Revenue Code effective over a 10-year period.
For Tax Year (TY)
2002, two EGTRRA provisions will have a significant effect on individual
taxpayers. These are Title IV,
Affordable Education Provisions, and Title VI, Pension and Individual
Retirement Arrangement (IRA) Provisions.
These two provisions included changes to education savings accounts,
qualified tuition programs, and IRAs.
In addition, they create a new tuition and fees deduction and a new
retirement savings contribution credit.
TY 2002 changes to education and retirement provisions were considered
significant because they could affect an estimated 86.5 million taxpayers by
providing tax benefits of up to $7.6 billion in Fiscal Year (FY) 2003.
Controlling the overall implementation of new tax legislation, such as the EGTRRA, is the responsibility of the IRS’ Office of Tax Administration Coordination (OTAC). The OTAC coordinates with IRS functional areas to identify and control the changes that are necessary to implement new legislation. An important element within these required changes is the revision of various tax forms, instructions, and publications (i.e., tax products).
Annually, the IRS must revise or create new tax products to implement new legislation. The IRS function responsible for tax products is the Tax Forms and Publications Division. Tax law specialists in this function are assigned specific tax products and are responsible for interpreting the tax law, determining the changes needed, and making the changes that the Congress intended in the legislation.
We conducted this review from August 2002 through January 2003 with IRS executives and personnel in the Wage and Investment (W&I) Division in Atlanta, Georgia; the Submission Processing Headquarters in New Carrolton, Maryland; and both the Tax Forms and Publications Division and the OTAC in the National Headquarters in Washington, D.C. This audit was conducted in accordance with Government Auditing Standards. Detailed information on the audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Overall, the IRS
successfully identified and controlled the new education and retirement
provisions of the EGTRRA and ensured the tax products related to these
provisions were clearly and accurately updated for the 2003 Filing Season.
Coordination between the OTAC and other IRS functional areas identified 779 actions required to effectively implement changes for the EGTRRA provisions that become effective between TYs 2002 and 2011. These actions were controlled on the OTAC’s Legislative Implementation Tracking System. We determined that 100 of the 779 actions were related to the education and retirement provisions effective for TY 2002. In addition, most of these 100 actions pertained to revisions to tax forms, instructions, and publications affected by these provisions.
To manage the tax form and publication development process, the Tax Forms and Publications Division uses a system called the Tax Forms and Publications Oracle Program Tracking System. This Oracle program tracks milestone dates, computes taxpayer burden, and tracks legislation implementation plans for more than 800 forms and publications.
Analysis of both the OTAC tracking system and the Tax Forms Oracle system identified 71 specific actions that were required to revise tax products for the education and retirement provisions that affect W&I taxpayers. These 71 specific actions included changes to 23 separate tax products (7 forms, 7 instructions, and 9 publications). Examples of these specific actions included the 2002:
·
U.S. Individual Income Tax
Returns (Form 1040 and 1040A) and instructions
to reflect the new line for the deduction for tuition and fees.
·
Form 1040 and Form 1040A
instructions to reflect changes in the student loan interest deduction.
·
Form 1040 and Form 1040A
instructions to reflect the increase in the IRA contribution limit.
In addition to the changes to the Form 1040, Form 1040A, and instructions, we identified four existing tax forms that required changes and one new form that was created:
·
Investment Credit (Form
3468).
·
Additional Taxes on Qualified
Plans (including IRAs) and Other Tax-Favored Accounts (Form 5329).
·
Nondeductible IRAs (Form
8606).
·
Education Credits (Form
8863).
·
Credit for Qualified Retirement
Savings Contributions (Form 8880).
Taxpayer burden computations showed the number of taxpayers that could be affected by the changes and the estimated time it would take them to prepare these forms. For example, it is estimated that 1 million taxpayers will require approximately 1 hour and 19 minutes to prepare the new Form 8880.
Taxpayer Burden Computations
|
Form |
3468 |
5329 |
8606 |
8863 |
8880 |
|---|---|---|---|---|---|
|
Estimated
Number of Taxpayer Respondents |
22,573 |
1 Million |
1.8 Million |
12
Million |
1 Million |
|
Estimated
Time per Response |
20 hours and 26 minutes |
56 minutes |
1 hour and 21 minutes |
1 hour and 6 minutes |
1
hour and |
Source: IRS Special Programs Branch, Tax Forms and Publications Division.
The revisions to each of the 23 tax products must be consistent with the statute enacted by the Congress. Comparison of each tax product with the EGTRRA education and retirement provisions determined that 22 of the 23 tax products were properly revised. However, one publication omitted revisions related to the new education provisions.
When a taxpayer’s deductions for the year exceed income for the year, a net operating loss (NOL) could result. The publication, Net Operating Losses (NOLs) for Individual, Estates, and Trusts (Publication 536), was designed to assist taxpayers in determining whether they have an NOL, how to calculate and claim a deduction, and how to calculate a carryover deduction to another tax year if necessary.
Review of the Publication 536 determined that it had not been updated to reflect the new tuition and fees deduction included in the EGTRRA. This deduction must be included to correctly recalculate the amount of the NOL carryover to a subsequent year. The omission of this update to the Publication 536 will not affect taxpayers who claim NOLs on their TY 2002 returns or who carry back NOLs to prior years, since the tuition and fees deduction was not available in prior years.
The action plans from the OTAC tracking system and the Tax Forms Oracle system indicated that Publication 536 and other publications needed to be revised to reflect the new tuition and fees deduction. Updates to the applicable sections of the Publication 536 were considered; however, a decision to omit these updates was made because the corresponding section for the NOL form, Application for Tentative Refund (Form 1045), was not being revised to reflect the same information. Other publications were correctly updated with this information.
The omission will affect those taxpayers who carry forward NOLs to TY 2003 and claim a tuition and fees deduction in TY 2002. It will also affect these taxpayers in future years if the NOL is not fully used in TY 2003. Although this omission may affect only a small number of taxpayers, it is essential that all IRS publications be accurate and reliable since many taxpayers depend on them for tax guidance each year.
1. The Commissioner, W&I Division, should ensure Publication 536 is properly updated to reflect the new tuition and fees deduction.
Management’s Response: The IRS agreed with our
recommendation and has already updated both the 2002 and 2003 versions of
Publication 536 to reflect the new tuition and fees deduction. In addition, the IRS notified the Taxpayer
Assistance Centers of the correction to ensure taxpayers were provided with the
correct information on NOLs.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to determine whether the Internal Revenue Service (IRS) identified the new tax law provisions that have a significant impact on Wage and Investment (W&I) taxpayers and ensured that tax forms, instructions, and publications related to these new provisions were clearly and accurately updated for the 2003 Filing Season.
The audit focused on the education and retirement provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). To accomplish our objective, we:
I.
Identified the tax law
changes that could have a significant effect on returns filed by W&I
taxpayers during the 2003 Filing Season by reviewing non-IRS and IRS
information on recent tax legislation.
Used the Congressional
Budget Office cost estimates for the EGTRRA and the Job Creation and Worker
Assistance Act of 2002 provisions to identify the projected tax dollars that
would be expended to implement these provisions. Used statistics from the United States (U.S)
Bureau of Labor, U.S. Department of Education, and IRS Statistics of Income Division
to estimate the numbers of taxpayers that could be affected by recent tax
legislation.
II.
Determined if the IRS
identified and controlled new and expiring tax legislation provisions affecting
W&I taxpayers in its action plan by reviewing 71 action items from the IRS’
Office of Tax Administration Coordination (OTAC) Legislative Implementation
Tracking System and the Tax Forms and Publications Oracle Program Tracking
System.
A. Reviewed the OTAC tracking system and identified 779 open
action items as of September 26, 2002, that pertained to the EGTRRA provisions
to be implemented between 2002 and 2011.
An analysis of the 779 action items identified 100 pertaining to the
education and retirement provisions with completion dates on or before December 31, 2002.
After further analysis, identified 49 action items from this system that
pertained to the education and retirement provisions, affected W&I
taxpayers, and had completion dates on or before December 31, 2002.
B.
Obtained and analyzed 234
action items pertinent to the education and retirement provisions of the EGTRRA
from the Tax Forms Oracle system as of November 19, 2002. Using the same criteria as those used for
the action items from the OTAC tracking system, identified 70 action items that
met our criteria. Matched the 70 Tax
Forms Oracle system action items to the 71 OTAC tracking system action
items. Found that 48 were included on
both systems, 22 were included in Tax Forms Oracle system but not in the OTAC
tracking system, and 1 was included in the OTAC tracking system but not in the
Tax Forms Oracle system, for a total of 71 action items reviewed. The 71 action items included 56 education
provision items and 15 retirement provision items.
III.
Determined if the changes to
the forms and instructions for the significant changes were clear and accurate by
reviewing the 23 tax products (7 forms, 7 instructions, and 9 publications)
included in the 71 action items from the OTAC tracking system and the Tax Forms
Oracle system. See Appendix VI for this
listing.
A. Reviewed the 23 tax products affected by the revisions to
the education and retirement provisions to determine if the changes were clear
and accurate.
B. Compared the 23 tax products affected by the education and
retirement provisions to the actual tax legislation to determine if they were
consistent with the law.
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
Steve
E. Vandigriff, Acting Audit Manager
Tina M. Parmer, Senior Auditor
Cari
D. Fogle, Auditor
Bonnie G. Shanks, Auditor
Appendix III
Acting Commissioner N:C
Director, Customer Account Services W:CAS
Director, Customer Assistance, Relationships, and Education W:CAR
Director, Media and Publications W:CAR:MP:FP
Director, Strategy and Finance W:S
Director, Submission Processing W:CAS:SP
Director, Tax Administration Coordination N:ADC:T
Director, Tax Forms and Publications W:CAR:MP:FP
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:AR:M
Audit Liaison:
Program/Process Assistant Coordinator, Wage and Investment Division W:HR
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective action will have on tax administration. This benefit will be incorporated into our Semiannual Report to the Congress.
Type and Value of Outcome Measure:
Taxpayer Burden – Actual; one tax publication was not updated to include the new tuition and fees deduction (see page 4).
Methodology Used to Measure the Reported Benefit:
Analysis of both the Office of Tax Administration Coordination (OTAC) Legislative Implementation Tracking System and the Tax Forms and Publications Oracle Program Tracking System identified 71 specific actions that were required to revise tax products for the education and retirement provisions that affect Wage and Investment taxpayers. Review of these 71 specific actions included changes to 23 separate tax products (7 forms, 7 instructions, and 9 publications).
The revisions to each of the 23 tax products must be consistent with the statute enacted by the Congress. Comparison of each tax product with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) education and retirement provisions determined that 22 of the 23 tax products were accurately revised. However, one publication omitted revisions related to the new education provisions.
Net Operating Losses (NOLs) for Individuals, Estates, and
Trusts (Publication 536) had not been updated to reflect the new tuition
and fees deduction included in the EGTRRA. This deduction must be included to correctly
recalculate the amount of the NOL carryover to a subsequent year. The omission will affect those taxpayers who
carry forward NOLs to TY 2003 and claim a tuition and fees deduction in TY 2002. It will also
affect these taxpayers in future years if the NOL is not fully used in TY 2003.
Appendix V
Economic Growth and Tax Relief Reconciliation Act of
2001 Education and Retirement Provisions
·
Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA) Title IV, Affordable Education Provisions
The Title IV provisions could affect an estimated 15.6 million taxpayers by providing tax benefits up to $3.5 billion in Fiscal Year (FY) 2003. We focused on the following four provisions that we determined would have the greatest affect on Wage and Investment (W&I) taxpayers:
Sec.
401.
Modifications to Coverdell Education Savings Accounts (ESA).
A Coverdell
ESA is a trust or custodial account created or organized in the U.S. for the
sole purpose of paying the qualified education expenses of a designated
beneficiary under the age of 18 or with special needs. Non-deductible contributions are limited to
$2,000 cash per year per beneficiary.
Earnings grow tax free until distributed.
Sec.
402.
Modifications to Qualified Tuition Programs (QTP).
A QTP (also
known as a 529 plan or program) is a program set up to allow taxpayers to
either prepay, or contribute to an account established for paying, a student’s
qualified higher education expenses at an eligible educational
institution. Contributions are not
deductible and distributions are generally not taxable.
Sec. 412. Elimination of the 60-month limit
and increase in income limitation on student loan interest deduction.
Taxpayers
who paid interest on a student loan in 2002 may be able to deduct up to $2,500
of the interest paid for themselves, their spouse, or their dependent.
Beginning in 2002, taxpayers are no longer limited to deducting interest paid
only during the first 60 months that interest payments are required.
Sec.
431.
Deduction for Higher Education Expenses.
Beginning
in 2002, taxpayers may be able to deduct, as an adjustment to income, up to
$3,000 of qualified tuition and related expenses paid for higher education for
themselves, their spouse, or their dependent.
Taxpayers whose filing status is married filing separately cannot claim
the deduction.
·
EGTRRA Title VI, Pension and Individual Retirement
Arrangement (IRA) Provisions
The Title VI provisions could affect an estimated 70.9 million taxpayers by providing tax benefits up to $4.1 billion in FY 2003. We focused on the following three provisions that we determined would have the greatest affect on W&I taxpayers:
Sec.
601.
Modification of IRA Contribution Limits.
An IRA is a personal savings plan that provides tax advantages for setting aside money for retirement. Contributions to an IRA may be fully or partially deductible depending on the type of IRA instrument used. Generally, earnings and gains are not taxed until distributed. In 2002, the contribution limits for traditional and Roth IRAs were increased from $2,000 to $3,000 for taxpayers under 50 and from $2,000 to $3,500 for taxpayers 50 or older.
Sec. 618. Nonrefundable credit to certain individuals for elective deferrals and IRA contributions.
Beginning in 2002, taxpayers may be able to take a tax credit of up to $1,000 (up to $2,000 if filing jointly) for eligible contributions to a qualified retirement plan, an eligible deferred compensation plan, or an IRA. Taxpayers must have adjusted gross incomes less than $25,000 for single, $37,500 for head of household, and $50,000 for married filing jointly filers.
Sec.
631.
Catch-up contributions for individuals age 50 or over.
This section amends Internal Revenue Code Section 414 (relating to definitions and special rules) and places limits on additional elective deferrals to a retirement plan for a given year.
Appendix VI
|
|
|
Tax Forms |
|---|---|---|
|
|
Tax Product |
Title |
|
1. |
Form 1040 |
United States (U.S.) Individual Income Tax Return |
|
2. |
Form 1040A |
U.S. Individual Income Tax Return |
|
3. |
Form 3468 |
Investment Credit |
|
4. |
Form 5329 |
Additional Taxes on Qualified Plans (including Individual Retirement Arrangements (IRA)) and Other Tax-Favored Accounts |
|
5. |
Form 8606 |
Nondeductible IRAs |
|
6. |
Form 8863 |
Education Credits |
|
7. |
Form 8880 |
Credit for Qualified Retirement Savings Contributions |
|
|
|
Tax Instructions |
|
|
Tax Product |
Title |
|
1. |
F1040 Instructions |
U.S. Individual Income Tax Return |
|
2. |
F1040A Instructions |
U.S. Individual Income Tax Return |
|
3. |
F1040EZ Instructions |
U.S. Individual Income Tax Return |
|
4. |
F5329 Instructions |
Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts |
|
5. |
F8606 Instructions |
Nondeductible IRAs |
|
6. |
F8815 Instructions |
Exclusion
of Interest From Series EE and I U.S. Savings Bonds Issued After 1989 |
|
7. |
F8863 Instructions |
Education Credits |
|
|
|
Tax Publications |
|---|---|---|
|
|
Tax Product |
Title |
|
1. |
Publication 17 |
Your Federal Income Tax (For Individuals) |
|
2. |
Publication 225 |
Farmer’s Tax Guide |
|
3. |
Publication 517 |
Social Security and Other Information for Members
of the Clergy and Religious Workers |
|
4. |
Publication 525 |
Taxable and Nontaxable Income |
|
5. |
Publication 536 |
Net Operating Losses (NOLs) for Individuals,
Estates, and Trusts |
|
6. |
Publication 590 |
Individual Retirement Arrangements (IRAs) |
|
7. |
Publication 678 |
Volunteer Assistor’s Guide, Volunteer Income Tax
Assistance (VITA) Student Text |
|
8. |
Publication 970 |
Tax Benefits for Higher Education |
|
9. |
Publication 1155 |
Volunteer Assistor’s Guide, VITA Instructor Guide |
Appendix VII
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.