Improvements Are Needed to Ensure Individual Taxpayers Have
an Easy, No-Cost Option to e-file Their Tax Returns
August 2003
Reference Number: 2003-40-165
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.
August
14, 2003
MEMORANDUM FOR
COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Gordon C. Milbourn III /s/ Gordon C.
Milbourn III
Assistant Inspector General
for Audit (Small Business and
Corporate Programs)
SUBJECT: Final Audit Report - Improvements Are
Needed to Ensure Individual Taxpayers Have an Easy, No-Cost Option to e-file
Their Tax Returns (Audit # 200240083)
This
report presents the results of our review to assess the Internal Revenue
Service’s (IRS) implementation of the free electronic filing (e-file)
initiative for individual tax returns.
The President’s Fiscal Year 2003 budget included a proposal for an easy,
no-cost option for taxpayers to file their tax returns online. The
President noted that “today, individuals have to pay
accountants, buy software, and pay fees just to file their tax returns. It should not be so hard to pay taxes.”
In
response, on October 30, 2002, the IRS entered into a 3-year Agreement with a
group of companies from the electronic tax preparation and filing industry to
provide free e-filing to at least 60 percent of all taxpayers who file
an individual tax return. This Agreement
enabled the IRS to quickly offer certain taxpayers the option to e-file their
tax returns at no cost using tax preparation software developed by industry
experts, rather than having to try to develop its own tax preparation
software. In addition, using
established industry e-file capabilities would require little investment
on the part of the IRS and would provide taxpayers with access to companies
that have proven expertise and experience in the field of electronic tax
preparation and e-filing.
Taxpayers
can obtain information on how to participate in the IRS’ Free File Program by
accessing the IRS’ Internet web site (www.irs.gov). The Free File web page provides a tool to
assist taxpayers in determining whether they meet the eligibility requirements
necessary to participate in the Free File Program. To determine eligibility, a taxpayer enters information that
includes age, income, military status, and state of residence. Based on the information entered, a computer
program determines if the taxpayer is eligible to participate and, if eligible,
from which of the participating companies the taxpayer can select.
Despite
time constraints and inexperience in developing and implementing this Program
in time for the filing season, the IRS exceeded its Free-File Program goal of
providing at least 60 percent of individual taxpayers with the option to
prepare and e-file their tax returns at no cost. Specifically, the Free-File Program,
implemented January 16, 2003, provided the no-cost option of tax preparation
and e-filing to approximately 119
million
of the estimated 127 million taxpayers who file an individual tax return.
However,
the terms of the Agreement result in a population of taxpayers who will incur a
cost if they elect to e-file their tax return, because Agreement
guidelines permit participating companies to change their eligibility
requirements twice during a filing season and from year to year, or to
discontinue participation in the Program at any time. The population of taxpayers not eligible to participate in the
Free File Program included approximately 8 million taxpayers who, if they
elected to e-file, would incur a cost.
If, at any time, companies change their requirements and the total
eligibility is reduced to the IRS’ minimum goal of offering no-cost e-filing
to 60 percent of all individual taxpayers, then nearly 51 million taxpayers
would be ineligible to participate.
Time
constraints contributed to the fact that procedures were not developed and implemented
that could have reduced taxpayer confusion and difficulty. Specifically, taxpayers were not always
provided with clear and accurate participation information, including the
procedures to be followed to ensure taxpayers did not unknowingly receive a
charge for e-filing and to ensure they receive immediate notification of
company eligibility changes. In
addition, the IRS has not developed a formal process by which to independently
monitor and measure the success of the Program. The computer programming to add an indicator to identify those
tax returns filed via the Free File Program could not be performed in time to
enable the IRS to independently monitor the numbers and types of taxpayers
participating during the 2003 Filing Season.
Additionally, time constraints and not having the necessary technical
expertise hindered the IRS’ ability to independently monitor company compliance
with key provisions in the Agreement, including privacy, security, and customer
service.
To enable individual taxpayers to have an easy,
no-cost option to e-file, we recommended that the Director, Electronic
Tax Administration: 1) continue to work
with the electronic
tax preparation and filing industry to
maximize the number of individual taxpayers who have the option to e-file
at no cost, 2) continue to work with the tax preparation software industry to
eliminate barriers affecting eligible taxpayers receiving no-cost e-filing
and ensure taxpayers receive timely and accurate information, and 3) develop a
formal monitoring process outlining the procedures for assessing the Program’s
success and company compliance with Agreement guidelines.
Management’s Response: IRS management agreed with our recommendations and has initiated corrective actions. However, management did not agree that the only performance objective should be ensuring that all individual taxpayers are eligible to use the Free File Program. Instead, the IRS believes an equally important objective is to increase awareness of the Program, which will result in more Free File users.
While 119 million of the 127 million individual taxpayers were eligible to use Free File, IRS management stated that only 2.78 million did so. IRS management did not agree with the methodology and concept we used to determine our outcome measures that assume that 100 percent of all non-eligible taxpayers will use Free File if given the opportunity. In their view, this assumption, coupled with the low probability that 40 percent will not be eligible in the future, yields unreasonable expectations.
In addition, while the IRS acknowledged that the coverage of eligible taxpayers may fluctuate from year to year, the current Administration endorsed the requirement to maintain aggregate eligibility coverage of at least 60 percent of all individual taxpayers. Management’s complete response to the draft report is included as Appendix VIII.
Office of Audit Comment: IRS
management disagreed “that the only performance objective should be ensuring
that all individual taxpayers were eligible to use Free File.” We agree with management’s assertion that
this should not be the only performance objective, and in fact, we did not take
that position in our draft report.
Instead, we recommended that the IRS continue to work with the electronic tax
preparation and filing industry to maximize
the number of individuals eligible to e-file at no cost. In addition, management disagreed with our
cost savings outcome measure with respect to the methodology and concept that
100 percent of all non-eligible taxpayers will use Free File if given the
opportunity. As stated in our outcome
calculation, the estimate is a potential cost savings, because we
acknowledge the uncertainty of the number of taxpayers who, if provided the
option to e-file at no cost, would elect to use this option in lieu of
filing a paper tax return.
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.
The Internal Revenue Service Exceeded Its Goal of Providing At
Least 60 Percent Eligibility
The Group of Taxpayers Eligible to Participate Was Not Consistent
Taxpayers Were Not Always Provided
With Timely and Accurate Participation Information
The Ability to Independently Monitor and Measure the Success of
the Program Was Limited
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 – Requirements for Company
Participation in the Free File Program
Appendix VI – Free File Program Eligibility Requirements
Appendix VII – Range of Customer Service Options Offered Under
the Free File Program
Appendix VIII – Management’s Response to
the Draft Report
The President’s Fiscal Year 2003
budget included a proposal for an easy, no-cost option for taxpayers to file
their tax returns online. The President
noted that “today, individuals have to pay accountants, buy software, and pay
fees just to file their tax returns. It
should not be so hard to pay taxes.” In
addition, the Office of Management and Budget’s Quicksilver Task Force
recommended “EZ Tax Filing,” whereby the Internal Revenue Service (IRS)
provided taxpayers free online tax return preparation and filing services; this
electronic filing is known as e-file.
The IRS elected to use
existing e-file industry expertise rather than develop its own free e-file
system
In response to the President’s
budget proposal and the Quicksilver Task Force recommendation, on October 30,
2002, the IRS entered into a 3-year, public-private partnership Agreement with
the Free File Alliance, LLC, to provide no-cost tax preparation and filing to
at least 60 percent of all taxpayers who file an individual tax return. Based on this level of coverage, the IRS
expected a total of 2.4 million taxpayers to file their tax returns at no cost
during the 2003 Filing Season.
The IRS’ decision to join with the
electronic tax preparation and filing industry was based on a number of factors
including a desire to quickly implement a Free File Program, the lack of
immediate resources to develop a system to enable taxpayers to e-file
their tax returns directly to the IRS, and the industry urging the IRS not to
compete with it. Use of established
industry e-file capabilities would require little investment on the part
of the IRS and would provide taxpayers with access to companies that have
proven expertise and experience in the field of electronic tax preparation and e-filing.
In addition, the IRS already had a
similar program in place under which companies from the electronic tax
preparation and filing industry offered free e-filing to taxpayers who
met certain requirements. For the past
several years, certain companies had offered no-cost tax preparation and e-filing
to select taxpayer groups through an IRS-sponsored web site. These services were offered mainly to assist
low-income and underserved taxpayers.
For example, during the 2002 Filing
Season, 9 companies from the electronic tax preparation and filing industry
offered both free tax preparation and e-file to approximately 58 percent
of all individual taxpayers.
Eligibility for an estimated 73 million individual taxpayers was
generally based on the taxpayers having incomes of less than or equal to
$25,000. Approximately 1.2 million
taxpayers took advantage of the offers during the 2002 Filing Season. These same companies are now part of the
Free File Alliance, LLC.
The Free File Agreement
specifies responsibilities for both the IRS and the participating companies
The Free File Agreement (formally
referred to as the “Free On-Line Electronic Tax Filing Agreement”) includes
specific responsibilities that both the IRS and the participating companies
need to meet. Appendix V lists the key requirements
that need to be met for companies to participate in the Program.
For example, the IRS
agrees to host and manage the content of the Free File web page, refrain
from endorsing any specific offerings or products, promote the free e-file
services provided by the participating companies, and not offer an IRS brand of
e-file during the term of the Agreement. The companies agree to establish
eligibility requirements (see Appendix VI), disclose to users their customer
service support options and privacy policy, and work with taxpayers whose tax
returns are rejected (i.e., not accepted for processing by the IRS because of
an error).
The Free File web page is the gateway to participation
in the Free File Program
Taxpayers can obtain information on how to participate in the Free File Program by accessing the IRS’ Internet web site (www.irs.gov). The Free File web page provides a tool to assist taxpayers in determining whether they meet the eligibility requirements necessary to participate in the Free File Program. To determine eligibility, a taxpayer enters information that includes age, income, military status, and state of residence. Based on the information entered, a computer program determines if the taxpayer is eligible to participate and, if eligible, from which of the participating companies the taxpayer can select. Taxpayers are then provided with a link to the applicable companies.
Once taxpayers select the link for the company they choose,
they leave the IRS’ web site and enter the specific company’s web site. These taxpayers
will then be provided instructions on how to prepare and file their Federal
income tax returns online using software provided by the participating
companies. Upon completing their tax
returns, taxpayers then have the option to e-file the returns to the IRS
or to print and mail them to the IRS.
The audit was conducted from November 2002 through February 2003 at the IRS’ National Headquarters in Washington, D.C., in the office of Electronic Tax Administration. 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.
Despite time constraints and inexperience in developing and implementing this Program in time for the filing season, the IRS’ newest e-file initiative, the Free-File Program, exceeded its goal of providing at least 60 percent of individual taxpayers with the option to prepare and e-file their tax returns at no cost. Specifically, the Free File Program, implemented on January 16, 2003, for the 2003 Filing Season, provided the option of no-cost tax preparation and e-filing to approximately 119 million of the estimated 127 million taxpayers who file an individual tax return. The table below outlines the characteristics of taxpayers who were eligible to participate in the Free File Program as of February 2003. Taxpayers are required to meet one of the listed requirements to participate.
Free File Program Eligibility Requirements
Eligibility
Characteristics
|
Requirements
to Qualify
|
|---|---|
|
Age |
Less than 21 years old or at least 50 years old. |
|
Income |
Income $50,000 or greater or $33,000 or less. |
|
Military Status |
On active military duty. |
|
Residence |
Resident
of Illinois, Georgia, |
|
Tax Credit |
Qualify for the Earned Income Tax Credit. |
|
Type of Tax Form |
File using Income Tax Return for Single and Joint Filers With No Dependents (Form 1040EZ). |
Source: Wage and Investment, Research Group I.
However, to ensure individual taxpayers have an easy, no-cost option to e-file their tax returns, the IRS needs to address the following issues:
· The group of taxpayers eligible to participate was not consistent.
· Taxpayers were not always provided with timely and accurate participation information.
· The IRS was limited in its ability to independently monitor and measure the success of the Program.
Maximizing and holding consistent the number of taxpayers who are eligible to participate in the Free File Program is essential to ensuring equitable taxpayer treatment and to reducing taxpayer burden, a key goal of the Program. Agreement guidelines permit participating companies to change their eligibility requirements twice during a filing season and from year to year, or to discontinue participation in the Program at any time.
The Agreement does not mandate which taxpayers will be covered, only that each participating company must offer free e-file to at least 10 percent of all individual taxpayers based on the eligibility requirements each company establishes. In the aggregate, companies participating must provide 60 percent of all individual taxpayers with the option to e-file at no cost.
As of February 2003, the population of taxpayers not eligible to participate in the Free File Program included approximately 8 million taxpayers. If these taxpayers elected to e-file, they would incur a cost. The following table provides some characteristics of the taxpayers ineligible to participate. Taxpayers ineligible to participate would meet all disqualifying characteristics.
Characteristics of Taxpayers Who Are Ineligible to
Participate in the Free File Program
Eligibility
Characteristics
|
Not
Qualifying
|
|---|---|
|
Age |
Ages 21 to 50. |
|
Income |
Income
over $33,000 but less than $50,000 (not filing a |
|
Military Status |
Not in active military duty. |
|
Residence |
Do not reside in Illinois, Georgia, North Carolina, Arizona, Michigan, Wisconsin, or Ohio. |
|
Tax Credit |
Not eligible for the Earned Income Tax Credit. |
|
Type of Tax Form |
Not eligible to file Form 1040EZ. |
Source: Wage and Investment, Research Group I.
Furthermore, if at any time company offerings are reduced to the IRS’ minimum goal of offering no-cost e-filing to 60 percent of all individual taxpayers, then nearly 51 million taxpayers would be ineligible to participate. Inequitable treatment results as offerings do not cover taxpayers with the same or very similar characteristics. Specifically, some taxpayers will have the option to e-file at no cost, while others with the same or very similar characteristics will incur a cost to e-file, as shown by the following hypothetical examples:
Example
#1
·
Taxpayer A - 20 years of age with an income less
than or equal to $33,000 or greater than $50,000 is eligible to e-file at no
cost.
·
Taxpayer B - 20 years of age with an income between
$33,000 and $50,000 is generally ineligible to participate.
Example
#2
·
Company A - From January 16, 2003, to January 30,
2003, provided residents of New York State with the option to e-file at no
cost.
·
Company A - As of January 31, 2003, changed its
eligibility requirements to rescind the offer of free e-filing to residents of
New York State. Therefore, taxpayers
with the same characteristics as those who filed between January 16 and January
30, 2003, will now incur a cost to e-file.
The only difference is that these taxpayers did not e-file prior to
January 31, 2003.
The quickness with which the IRS developed and implemented its newest e-file initiative shows the IRS’ commitment to expanding e-file opportunities for individual taxpayers. However, a recent IRS study found that taxpayers who prepare their tax returns using tax preparation software, but who elect to print and mail their tax returns to the IRS, often do so because of the cost they would have to incur to e-file their tax returns.
Under the present Agreement, at any time 40 percent of all individual taxpayers (approximately 51 million) are at risk of being excluded from participation in the Free File Program. If these taxpayers were to elect to e-file, they could incur a minimum cost of $7.95 each, or an estimated $403 million annually, just to e-file their tax returns. Also, if these taxpayers were provided with the option to e-file at no cost, and elected this option in lieu of filing a paper tax return, the IRS could save approximately $37 million in processing costs yearly.
To eliminate the costs taxpayers incur to e-file and ensure equitable treatment of taxpayers, the Director, Electronic Tax Administration, should:
1.
Continue to
work with the electronic tax preparation and filing industry to maximize the number of individual
taxpayers who have the option to e-file at no cost.
Management’s Response: Although the IRS agreed with this recommendation, the terms of the existing partnership Agreement with industry are to provide free services to at least 60 percent of taxpayers. The IRS accomplished and exceeded this goal. Even though the Agreement does not include a goal to provide free services to all individual taxpayers, the IRS will work with the industry to identify and implement ways to increase the percent of individuals eligible to use these free services.
Office
of Audit Comment: IRS management
disagreed “that the only performance objective should be ensuring that all
individual taxpayers were eligible to use Free File.” We agree with management’s assertion that this should not be the
only performance objective, and in fact, we did not take that position in our
draft report. Instead, we recommended
that the IRS continue to work with the electronic tax preparation and filing
industry to maximize the number of individuals eligible to e-file
at no cost. In addition, management disagreed
with our cost savings outcome measure with respect to the methodology and
concept that 100 percent of all non-eligible taxpayers will use Free File if
given the opportunity. As stated in our
outcome calculation, the estimate is a potential cost savings because we
acknowledge the uncertainty of the number of taxpayers who, if provided the
option to e-file at no cost, would elect to use this option in lieu of
filing a paper tax return.
Providing taxpayers with timely and accurate participation information is essential to ensuring the Free File Program goal – to make paying taxes easier for individual taxpayers – is fully achieved. Time constraints and not being familiar with implementing such a Program resulted in the IRS being unable to develop and implement procedures that could have reduced taxpayer confusion and difficulty. As a result:
· Taxpayers did not receive clear instructions as to the steps they need to follow for participation in the Program.
· Taxpayers were not immediately informed as to changes in company eligibility requirements or the impact the fluctuating eligibility requirements could have on them.
Taxpayers did not receive clear
participation instructions
One key step needs to be followed by taxpayers who qualify to participate in the Free File Program to ensure they do not inadvertently receive a cost to e-file – taxpayers must access companies participating in the Free File Program through the IRS’ web page. However, the IRS did not inform taxpayers of the need to access companies participating in the Free File Program via the IRS’ web page. As a result, some taxpayers may have inadvertently had to pay to e-file if they began the process by directly entering a participating company’s web site. The following example illustrates the confusion that taxpayers may have experienced:
·
Our auditor directly accessed one participating
company’s web site. Upon completing the
tax return, the auditor was notified that, if he or she wanted to e-file the
tax return, a charge of $7.95 would be incurred. The IRS Free File web page did not provide a caution that, to
ensure no-cost e-file, taxpayers should use links provided on the Free File web
page.
·
The auditor then went back and accessed the same
company’s web site, but this time went through the IRS’ Free File web page;
prepared the same tax return; and before e-filing, was informed that the tax
return filing qualified for free e-file.
Taxpayers were not immediately notified
of company eligibility changes or the impact that these changes could have on
them
As previously discussed, terms of the Free File Agreement
allow companies to change eligibility requirements to be met by taxpayers to
participate in the Free File Program.
However, the IRS did not educate taxpayers to ensure they were aware
that eligibility requirements can change and that the changes could affect the
taxpayers’ ability to participate at any particular time. Without this knowledge, there is the
potential that taxpayers will reach erroneous conclusions regarding whether
they can e-file at no cost. The
following hypothetical example illustrates how this can occur:
·
A taxpayer
with an income of $33,000 determines that he or she earned more than the
$32,000 maximum income requirement for Free File participation posted on the
Free File web page and pays to e-file.
Later, this same taxpayer learns that the income threshold for Free File
participation was increased to $33,000 and, if he or she had waited, he or she
could have e-filed at no cost.
When these issues were brought to IRS management’s attention during the audit, they immediately implemented interim procedures to ensure eligibility requirement changes were timely and consistently updated to the Free File web page. However, taxpayers did not receive cautionary information as to eligibility changes as well as how these changes could affect them. As a result, potential taxpayer burden can exist for any of the approximately 127 million individual taxpayers who may have attempted to determine if they were eligible to participate at any given time.
Management noted that they continue to strive to ensure that timely and accurate information is available. However, regardless of the information provided to taxpayers via the Free File Program web page, the IRS will be continually challenged to ensure that taxpayers take the time and care to read the information being provided, in order to understand requirements for participation in the Program.
To reduce taxpayer burden, the Director, Electronic Tax Administration, should:
2. Continue to work with the tax preparation software industry to eliminate barriers affecting eligible taxpayers receiving no-cost e-filing and ensure taxpayers receive timely and accurate information.
Management’s Response: The IRS agreed with this recommendation. For 2004, the IRS will continue to employ usability practices and work with industry members on improving the way it presents and displays important information to prospective Free File users.
Furthermore, to ensure the best experience possible and eliminate barriers, the IRS has successfully negotiated with the Free File Alliance to modify their operating agreement. This new Agreement will include provisions for the upfront disclosure of supported tax forms and schedules, state programs, and customer service options. These new requirements will help the taxpayer receive accurate and timely information.
The Free File Agreement requires the IRS to develop an assessment process to measure the extent to which the Program is accomplishing its objectives. The objectives of the Program include making tax return preparation and filing easier, reducing the burden on individual taxpayers, and providing greater service and access to taxpayers.
The IRS, in an attempt to monitor the Program, has performed random checks to ensure participating companies were in compliance with various provisions in the Agreement. Time constraints resulted in the IRS being unable to implement a formal process to independently monitor and measure the success of the Program. For example, the computer programming necessary to add an indicator to identify those tax returns filed via the Free File Program could not be performed in time to enable the IRS to independently monitor the numbers and types of taxpayers participating during the 2003 Filing Season. The IRS, instead, had to rely on participating companies to provide this information.
In addition, time constraints and not having the necessary technical expertise hindered the IRS’ ability to independently monitor company compliance with key provisions in the Agreement, including privacy, security, and customer service. The IRS relied in part on the assumption that the companies would police themselves and enforce the prohibitions imposed under Federal rules and regulations. Such prohibitions include the use of tax return data for purposes not specifically authorized by the taxpayer. Violation of these statutes can result in imprisonment of company officials.
Discussions with IRS management indicated that, as of March 12, 2003, the IRS was considering hiring a contractor to develop a process to enable it to perform appropriate oversight of company compliance with Agreement guidelines, while at the same time offering the maximum opportunity for effective partnerships with the private sector.
The inability of the IRS to independently monitor and measure the Program can result in taxpayer dissatisfaction with the Free File Program or inequities in the service provided by the various companies. Without effective Program oversight, the IRS is unable to ensure the success of the Free File Program in providing taxpayers with an easy and truly no-cost option to e-file. For example, our review of customer service options provided by companies participating in the Program showed that those taxpayers who have difficulty preparing and e-filing their tax returns could experience varied levels of customer service depending on the company they choose.
The Free File Agreement requires companies to post their customer service options on their web sites but does not establish minimum standards for customer service. Some companies were charging as much as $14.95 for telephone assistance, and others limited their customer service to frequently asked questions. One company was charging $2.95 for re-filing a tax return that was rejected by the IRS because of an error. See Appendix VII for a summary of customer service options.
To enable independent monitoring of the Free File Program’s success and company compliance with Agreement guidelines, the Director, Electronic Tax Administration, should:
3.
Develop a
formal process to monitor and measure the success of the Program, including
company compliance with Agreement guidelines.
Management’s Response: The IRS agreed with this recommendation. This year, the IRS will review each member’s offerings prior to service being available to taxpayers. All Alliance member sites must be examined and approved before the IRS will post them on its Free File site. The IRS is developing a procedural handbook that it will use to perform and report on the examination of each web site. Additional monitoring of web sites will occur after the initial review and throughout the filing season to ensure that members make no unauthorized modifications.
The IRS will also develop a set of performance measures. These measures will be developed in cooperation with the Alliance members and will be evaluated against the Program’s goals and objectives. This will ensure that the Program continues to grow and respond to taxpayer needs.
Appendix I
Detailed Objective, Scope,
and Methodology
The overall objective of this review was to assess the Internal Revenue Service’s (IRS) implementation of the free electronic filing (e-file) initiative for individual tax returns (referred to hereafter as the “Free File Program”). To accomplish this objective, we conducted the following tests:
I. Obtained and reviewed provisions of the Free File Agreement between the IRS and a group of companies from the electronic tax preparation and filing industry and the separate Agreement that governs the group of companies offering e-file at no cost.
II. Assessed the process the IRS followed that led to the Free File Agreement.
A. Interviewed IRS officials responsible for fulfilling the President’s vision for a no-cost option for individual taxpayers to e-file their tax returns.
B. Identified any alternatives to the final Free File Agreement that were considered and determined/assessed the basis for the IRS’ decision to enter into a partnership with the electronic tax preparation and filing industry.
1. Researched various state free e-file initiatives.
2. Interviewed officials from selected state tax agencies regarding state free e-file methods, experiences, and lessons learned.
III. Determined whether the Free File Agreement results in equitable treatment of taxpayers.
A. Obtained a listing, as of February 11, 2003, detailing the Free File Program eligibility requirements.
B. Obtained a statistically valid sample of Tax Year 2000 tax return information from the Electronic Tax Administration Marketing Database.
C. Based on Tax Year 2000 tax return filing data, assessed the volume of taxpayers who will and will not be eligible to participate in the Free File Program.
D. Prepared an analysis to determine, based on taxpayer characteristics (e.g., prepare returns themselves or use paid preparers; prepare returns electronically but submit paper version to the IRS), whether the Free File Agreement results in no-cost e-file services being offered to the segment of taxpayers who will most benefit from the Agreement.
E. Determined if eligible taxpayers are likely to have access to the Internet that they need to participate in the Free File Program.
F. Obtained a Department of Commerce study that details by age, income, etc., the percentage of individuals who have home Internet access.
G. Stratified eligible taxpayers by income, age, etc., and assessed the percentage of these individuals who are likely or not likely to have home Internet access.
H. Evaluated IRS efforts to ensure Internet access for individual taxpayers.
IV. Determined if controls are in place to ensure that any taxpayers who experience difficulty while using free e-file have effective customer support.
A. Identified the options taxpayers have when experiencing problems while participating in the Free File Program.
B. Assessed the effectiveness of the IRS’ process for communicating customer service matters to taxpayers.
C. Assessed whether sufficient customer service support resources are in place to ensure taxpayers who call the IRS for assistance are effectively assisted.
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
Tanya Boone, Senior Auditor
Robert Howes, Senior Auditor
Appendix III
Commissioner N:C
Deputy Commissioner for Services and Enforcement N:SE
Deputy Commissioner, Wage and Investment Division W
Director, Electronic Tax Administration W:ETA
Director, Strategy and Finance W:S
Chief Counsel CC
National Taxpayer Advocate
TA
Director, Office of 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: GAO/TIGTA Liaison W:S:PA
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:
Funds Put to Better Use – Potential; approximately $37 million annually (see page 5).
Methodology Used to Measure the Reported Benefit:
Computation of the processing cost savings if the Internal
Revenue Service (IRS) provides those taxpayers potentially excluded from the
Free File Program with the option to e-file for free and these
taxpayers elect to use this option.
· Total taxpayers = 126,601,522.
· Total taxpayers at risk of not being provided with an option to e-file at no cost if the number of eligible taxpayers only meets the IRS’ goal of 60 percent, with 40 percent ineligible (126,601,522 * 40%) = 50,640,609.
·
Number of
at-risk taxpayers who file paper tax returns (68.14% of 50,640,609) =
34,506,511. The percentage of
individual taxpayers who file paper tax returns is based on an IRS Research
function analysis of the Tax Year 2000 Electronic Tax Administration Marketing
Database (used by the IRS for Free File Program estimates), which showed that
68.14 percent of all individual taxpayers filed paper tax returns for Tax Year
2000. The remaining taxpayers filed
electronically.
· Cost savings per return if taxpayers who file paper returns elect to file via e-file = $1.08.
·
Potential
annual funds put to better use (34,506,511 * $1.08) = $37,267,032.
Type and Value of Outcome Measure:
Reduction of Burden on Taxpayers –
· Potential; an estimated $403 million in cost savings for individual taxpayers annually (see page 5).
· Potential; reduced difficulty and confusion for an estimated 126.6 million individual taxpayers (see page 9).
Methodology Used to Measure the Reported Benefit:
Potential; an estimated $403 million in cost savings
for individual taxpayers annually
Computation of the tax preparation and e-file costs that taxpayers could save if the IRS ensures that all taxpayers have the option to e-file for free.
· Total individual taxpayers = 126,601,522.
· Total taxpayers at risk of not being provided with an option to e-file at no cost if the number of eligible taxpayers only meets the IRS’ goal of 60 percent, with 40 percent ineligible (126,601,522 * 40%) = 50,640,609.
Potential; reduced difficulty and confusion for an estimated 126.6 million individual taxpayers
Computation of the number of taxpayers who may experience reduced burden as a result of the IRS ensuring that taxpayers receive accurate and timely information regarding proper participation procedures and changes in eligibility requirements.
· Total number of individual taxpayers who file tax returns each year based on Tax Year 2000 tax return records maintained by the IRS = 126,601,522.
· Potentially all individual taxpayers may experience less burden and easier filing of their tax returns if the IRS ensures taxpayers receive accurate and timely information regarding participation procedures and changes in eligibility requirements.
Appendix V
Requirements for Company Participation in the Free
File Program
|
Requirements for Company Participation |
|---|
|
|
|
|
|
|
Source: Free On-Line Electronic Tax Filing
Agreement.
Appendix VI
Free File Program Eligibility Requirements
Free e-file Offers
|
|---|
|
Individual
taxpayers with Adjusted Gross Income (AGI) of $50,000 or more OR who use
Income Tax Return for Single and Joint Filers With No Dependents (Form
1040EZ). |
|
Individual
taxpayers with AGI of $33,000 or less. |
|
Individual
taxpayers age 50 or older OR whose AGI is $12,000 or less. |
|
Individual
taxpayers with AGI of $28,000 or less. |
|
All
individual taxpayers in active duty military OR whose AGI is $30,000 or less. |
|
Individual
taxpayers with AGI of $28,000 or less. |
|
Individual
taxpayers with AGI of $30,000 or less. |
|
Individual
taxpayers with AGI of $28,000 or less. |
|
Individual
taxpayers with AGI of $27,000 or less OR who can claim the Earned Income Tax
Credit. |
|
Individual
taxpayers with AGI of $28,000 or less. |
|
Individual
taxpayers with AGI of $27,500 or less. |
|
Individual
taxpayers with AGI of $25,000 or less. |
|
Individual
taxpayers who live in Illinois, North Carolina, Ohio, or Georgia. |
|
Individual
taxpayers who live in Arizona, Georgia, Michigan, or Wisconsin. |
|
Individual
taxpayers age 20 or younger. |
|
Individual
taxpayers with AGI of $9,200 or less. |
|
Individual
taxpayers with AGI of $40,000 or less who file a Form 1040EZ with 1 Form W-2. |
Source:
Internal Revenue Service Free File web page, as of February 11, 2003.
.
Appendix VII
|
Customer Service Options |
|---|
|
Frequently Asked
Questions (FAQ) available to answer taxpayer questions. |
|
Customer service is
provided completely online, with online FAQ sheets as well as online
questions and answers. |
|
FAQ, online searchable
database, email, and telephonic assistance (toll call). However, taxpayers will have to search the
FAQ or receive email response to be alerted to this option. |
|
Online automated
support module. Telephone service
only for paying customers. |
|
FAQ. This level of customer service is provided at no charge for all users. For the fee-based users, personalized secure email communication is also allowed for assistance. This or any other level of customer service beyond the automated assistance above will be available to the free filers only if they purchase this option during, or subsequent to, data entry process. Online automated support module is available to all taxpayers. Personal assistance by phone or email will only be available to paying customers. |
|
FAQ. Other customer service options available for a fee. |
|
Step-by-step guided
search process. For fee, live chat,
or telephonic services are available. |
|
FAQ and email. |
|
FAQ, toll-free assistance, FAX support, email support, and live chat. |
|
FAQ, email, and message
center. |
|
FAQ, email, and online
manual. |
|
FAQ and online
assistance. |
|
Free online self-help
center and mail support. Telephone
support for a fee. |
|
FAQ and email (24-hour
response). |
|
Email and online text
chat for a fee. |
|
FAQ and email. |
Source: Information provided by the IRS’ E-Government Office, based on 16 companies for which this information was available.
Appendix VIII
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.