TD P 15-71
Increased Taxpayer Awareness and
Improved Guidance Are Needed to Ensure Accurate Direct Deposit of Tax Refunds
Claimed on E-Filed Tax Returns
October 2003
Reference
Number: 2004-40-016
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.
Phone Number | 202-622-6500
Email Address | TIGTACommunications@tigta.treas.gov
Web Site
| http://www.tigta.gov
October 31, 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 -
Increased Taxpayer Awareness and Improved Guidance Are Needed to Ensure
Accurate Direct Deposit of Tax Refunds Claimed on E-Filed Tax Returns
(Audit # 200340029)
This report presents the results of our review of the direct
deposit of tax refunds claimed on electronically filed (e-filed) tax
returns. The overall objective of this
review was to determine the effectiveness of controls to prevent the diversion
of tax refunds claimed on e-filed tax returns to direct deposit[1]
bank accounts not authorized by the taxpayers.
The
Internal Revenue Service’s (IRS) Electronic Filing (e-file) Program
offers taxpayers an alternative to filing a traditional paper tax return. The e-file Program enables taxpayers
to send their tax returns to the IRS in an electronic format via an IRS
authorized e-file Provider.[2] E-file Providers can transmit tax
returns they prepared and/or transmit tax returns prepared by taxpayers. E-file Providers include individuals
or organizations that serve as volunteers in IRS-sponsored programs such as the
Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE)
Programs.[3] As of July 2003, there were 154,468[4]
IRS-authorized e-file Providers.
Since
1988, the IRS has offered taxpayers who e-file the option of having
their tax refunds directly deposited. To
obtain a tax refund via direct deposit, taxpayers are required to provide on
their tax returns the Routing
Transit Number, Deposit Account Number, and type of account (checking or
savings) to which the refunds will be deposited.
The tax return
instructions caution taxpayers that the IRS is not responsible for a lost tax
refund if the taxpayer enters the wrong account information on the tax return. During the 2002 Filing Season,[5]
the IRS processed over 39 million e-filed individual income tax returns,
prepared and/or transmitted by an e-file Provider, that had claims for
tax refunds totaling approximately $90 billion, with approximately 30 million
of the tax refund claims (for approximately $75 billion) paid via direct
deposit.
Opportunities
exist for e-file Providers to change or add direct deposit account
numbers on a taxpayer’s tax return prior to e-filing the tax return to
the IRS. This impropriety can result in
a tax refund claimed on an e-filed tax return being directly deposited
to a bank account not authorized by the taxpayer. For example, ****************************************************************************************************************************(b)(3):26 U.S.C. 6103 (b)(7)(C)**************************. In another case, ************************(b)(3):26 U.S.C. 6103 (b)(7)(C
*************************************** ******************************************************************************************
***********************************************************************************************************************************************************************************************************
A
number of factors contribute to the weaknesses identified. One is that the instructions for completing
the United States (U.S.) Individual Income Tax Return (Form 1040) do not
require the taxpayer to void the direct deposit field on the tax return if he
or she wants to receive a paper tax refund check. In addition, cautionary information and/or
educational efforts have not been provided or undertaken to increase taxpayers’
awareness of the need to obtain and retain copies of their tax returns and
signature authorization documents, as well as to ensure the accuracy of direct
deposits. Further, refund inquiry
guidance does not contain specific steps to be followed to validate a
taxpayer’s intention when a tax refund is inaccurately directly deposited, and
specific legal guidance does not exist regarding erroneous direct deposits for e-filed
tax returns.
Implementation of our recommendations will reduce the risk
of tax refunds claimed on e-filed tax returns being diverted to
unauthorized bank accounts.
Additionally, our recommendations will improve the consistency with
which taxpayers are treated when their tax refunds are inaccurately directly
deposited. We recommended that the
Commissioner, Wage and Investment (W&I) Division, add a cautionary
statement on e-file signature
authorization forms[6]
alerting taxpayers to the importance of accurately providing direct deposit
bank account information and retaining copies of their tax returns; undertake
educational efforts to increase taxpayer and e-file Provider awareness
of the importance of taxpayers obtaining and retaining copies of tax returns;
and provide adequate resources to volunteer sites to ensure copies of tax
returns are provided to taxpayers who use these services. We further recommended that the Commissioner,
W&I Division, revise refund inquiry guidance, and explore whether a
legislative change to address the IRS’ authority to reissue a taxpayer’s tax
refund in the event of theft via direct deposit is appropriate.
Management’s Response: Management
agreed to implement the majority of our recommendations, which will reduce the
risk of tax refunds claimed on e-filed tax returns being diverted to
unauthorized bank accounts and improve the consistency with which taxpayers are
treated when their tax refunds are inaccurately direct deposited. Specifically, the IRS is adding a statement
to the IRS e-file Signature Authorization (Form 8879) to remind
taxpayers that they should get a copy of their return. The IRS will develop messages for filing
season and practitioner communications and will advise taxpayers of the need to
retain copies of returns and signature forms in national print and broadcast
media in the 2004 e-file marketing campaign. To ensure volunteer tax preparation sites
provide copies of returns to taxpayers, the IRS will include the requirement in
guidance provided to volunteers and site coordinators when establishing
volunteer sites and include the requirement as part of the volunteer training. The IRS revised guidance to instruct
employees to obtain copies of the taxpayer’s return and compare it with the
electronically transmitted data. The IRS
will work with the National Taxpayer Advocate to determine if current
procedures for forged checks could be applied when a theft of a direct deposit
has been verified.
Management
disagreed with our recommendation to add a cautionary statement to the U.S.
Individual Income Tax Declaration for an IRS e-file Return (Form
8453). Management cited that the e-file
Provider signs a statement on the Form 8453 agreeing to provide the taxpayer
with copies of all forms and information filed with the IRS. Taxpayers sign Form 8453 declaring that the
information given to the e-file Provider agrees with the electronic
return; therefore, the taxpayer would have reviewed the direct deposit
information for accuracy and would receive a copy of the Form 8453 showing the
direct deposit information.
In addition,
management acknowledges the outcome measure we reported as being “potential”
revenue protection; however, they do not believe that our outcome measure
reflects a realistic representation of the risk associated with improprieties
by e-file Providers. Further,
management indicated that they realize that there are risks associated with
direct deposit; however, existing safeguards minimize these risks. Management’s complete response to the draft
report is included as Appendix V.
Office of Audit Comment: While we still believe our
recommendation regarding the inclusion of a cautionary statement on Form 8453
is worthwhile, we do agree that improved safeguards will minimize the risk of
improprieties by e-file Providers.
We do not intend to elevate our disagreement concerning this matter to
the Department of Treasury for resolution.
As we indicated in our audit report, the outcome is
provided in quantifiable terms to demonstrate the value that our audit
recommendations will have on tax administration and business operations and to
show the number of taxpayers who are potentially at risk when filing an electronic
tax return with the assistance of an e-file Provider and the estimated
refund dollars claimed.
The Treasury Inspector General for Tax Administration
(TIGTA) has designated this report as Limited Official Use (LOU) pursuant to
Treasury Directive TD P-71-10, Chapter III, Section 2, “Limited Official Use
Information and Other Legends” of the Department of Treasury Security
Manual. Because this document has been
designated LOU, it may only be made available to those officials who have a
need to know the information contained within this report in the performance of
their official duties. This report must
be safeguarded and protected from unauthorized disclosure; therefore, all
requests for disclosure of this report must be referred to the Disclosure Section
within the TIGTA’s Office of Chief Counsel.
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.
TD P 15-71
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
TD P 15-71
The Internal Revenue
Service’s (IRS) Electronic Filing (e-file) Program offers taxpayers an
alternative to filing a traditional paper tax return. The e-file Program enables taxpayers
to send their tax returns to the IRS in an electronic format via an
IRS-authorized e-file Provider.[7] E-file
Providers can transmit tax returns they prepared and/or transmit tax returns
prepared by taxpayers. E-file
Providers include individuals or organizations that serve as volunteers in
IRS-sponsored programs such as the Volunteer Income Tax Assistance (VITA) and
Tax Counseling for the Elderly (TCE) Programs.[8] As of
July 2003, there were 154,468[9] IRS-authorized e-file Providers.
Since 1988, the IRS
has offered taxpayers who e-file the option of having their tax refunds
directly deposited.[10] Tax
refunds paid via direct deposit provide benefits to both the taxpayer and the
IRS, including:
·
Faster
and more convenient receipt of the tax refund.
·
Security of tax refund payment – no paper check to lose.
·
Reduced
tax refund issuance cost for the IRS when compared with issuing a paper tax
refund check.
To obtain a tax
refund via direct deposit, the taxpayer is required to provide on the tax
return the Routing Transit Number, Deposit Account Number, and type of
account (checking or savings) to which the refund will be deposited. The
tax return instructions caution the
taxpayer that the IRS is not
responsible for a lost tax refund if the taxpayer enters the wrong account
information on the tax return.
During the 2002 Filing
Season,[11]
over 39 million electronically filed (e-filed)
tax returns were prepared and/or transmitted by an e-file Provider
and had claims for tax refunds totaling approximately $90 billion. Approximately 30 million of the tax refund
claims (for approximately $75 billion) were paid via direct deposit.
|
Volume of Tax Refunds Issued |
Dollars Claimed in Tax Refunds |
|---|---|---|
|
Paper Check |
9,655,103 |
$14,735,202,248 |
|
Direct Deposit |
29,923,547 |
$75,350,244,407 |
|
Total |
39,578,650 |
$90,085,446,655 |
Source: Wage and Investment
Division Electronic Tax Administration Final Tax Year 2001 National Service
Center Report Through October 20, 2002, and IRS
personnel.
The IRS generally processes an e-filed tax return and issues the tax refund within 3 weeks from the date the tax return is received. Subsequent to the 3-week period, taxpayers who do not receive their tax refunds can contact any of the various IRS Customer Service functions to inquire about their missing tax refunds. The IRS’ Customer Service options include calling the toll-free telephone service, using the automated tax refund inquiry system, visiting a Taxpayer Assistance Center, sending in correspondence, and contacting the Taxpayer Advocate Service.[12] The identification of missing tax refunds is based solely on taxpayers contacting the IRS, as the IRS has no process to proactively identify missing tax refunds.
Contacting the IRS through the above Customer Service options initiates the IRS’ tax refund inquiry process. The IRS’ Refund Inquiry Unit will work with the taxpayers to obtain pertinent information and perform research to determine what may have happened to the missing refunds.
Audit work was performed at the National Headquarters for Electronic Tax Administration (Washington, D.C.) and the five Electronic Individual Return Submission Processing Sites[13] that accept and process e-filed individual income tax returns. Audit work was performed from October 2002 through June 2003 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.
Opportunities
Exist for E-File Providers to Change or Add Direct Deposit Account Numbers on a
Taxpayer’s Tax Return Prior to E-Filing
Opportunities exist for e-file
Providers to change or add direct deposit account numbers on a taxpayer’s tax
return prior to e-filing the tax return with the IRS. This impropriety can result in tax refunds
claimed on e-filed tax returns being directly deposited to bank accounts
not authorized by the taxpayers.
Specifically, instances have occurred where e-file Providers and
volunteers participating in the IRS’ VITA Program have altered direct deposit
information on e-file tax returns prior to transmitting the tax returns
to the IRS. These alterations, whether
intentional or inadvertent, have resulted in tax refunds being directly
deposited to bank accounts not authorized by the taxpayers. For example:
·
*******(b)(3):26 U.S.C. 6103 (b)(7)(C)***************************************************************************** ************************************************************************************************
·
*******(b)(3):26 U.S.C. 6103 (b)(7)(C)******************************************************************************* *******************************************************************************************************
**********************************(b)(3):26 U.S.C. 6103 (b)(7)(C)***************************************************
***********************************************************
Furthermore, the IRS policy is not consistent in how it resolves stolen tax refund checks and fraudulently diverted direct deposits of tax refunds. In situations that involve inaccurate direct deposits, the burden is on the taxpayer to show that the refund was deposited to a bank account other than the bank account he or she designated on the tax return. An IRS Chief Counsel Advice[14] dated September 6, 2002, stated that in the context of direct deposit, the IRS satisfies its burden of proof by showing that the tax refund was sent to the bank account designated on the tax return. If the taxpayer does not show that the tax refund was deposited to an account other than the bank account he or she designated on the return, then the IRS does not have authority to replace the incorrectly deposited tax refund.
This advice differs significantly
from the IRS’ policy related to stolen tax refund checks. For example, if a taxpayer’s tax refund check
is stolen, the IRS will reissue the refund.
In comparison, if a tax refund is fraudulently directly deposited to an
unauthorized bank account, in most cases the IRS will not reissue the tax
refund. The IRS’ position is that the
tax refund was deposited to the account specified on the tax return. This does not take into account possible
manipulation of the direct deposit information prior to the tax return being
transmitted to the IRS.
In many cases
involving theft of tax refunds via direct deposit, the IRS functions assisting
a taxpayer with a tax refund inquiry may obtain a legal opinion from the IRS
Chief Counsel to determine if the IRS has the authority to replace the
taxpayer’s tax refund. Varied responses
have been received and have led to inconsistent treatment of taxpayers even
when the circumstances involved in the cases are identical. For example, one taxpayer could be informed
by the IRS that he or she is not entitled to a reissuance of the tax refund,
while another taxpayer may have already had his or her tax refund reissued by
the IRS.
Contributing factors
Several factors present opportunities for inaccurate direct deposit of tax refunds by e-file Providers and inconsistent treatment of taxpayers:
Instructions
for completing the United States (U.S.) Individual Income Tax Return (Form
1040) do not require the taxpayer to void the direct deposit fields if the
taxpayer does not use them (i.e., elects to receive a paper check tax
refund). Specifically, the instructions do not require the taxpayer
to take any preventive steps to ensure the direct deposit fields on the tax
return cannot be manipulated prior to the transmission of the tax return to the
IRS (e.g., place “x’s” in the direct deposit fields,
thereby voiding them rather than leaving them blank).
In
response to a previously issued Treasury Inspector General for Tax
Administration (TIGTA) report,[15] IRS
management agreed to coordinate with the tax software developers to initiate
modifications to their Tax Year (TY) 2003 software programs. These modifications will eliminate direct
deposit fields on e-filed tax returns if a taxpayer elects to receive a
paper tax refund check. Therefore, we
did not include a specific recommendation to address this issue.
E-file signature authorization forms do not contain
cautionary statements alerting taxpayers of
the need to ensure the direct deposit information is accurate and to obtain and
retain copies of their tax returns. E-file signature authorization forms authenticate
the e-filed tax returns and provide certification from the taxpayers
that the tax returns are true, correct, and complete. Cautionary information is not provided on two
e-file signature authorization forms, the U.S. Individual
Income Tax Declaration for an IRS e-file Return (Form 8453) and the IRS e-file Signature
Authorization (Form 8879). A cautionary statement is needed for
taxpayers to ensure direct deposit information is accurate and to ensure they
obtain and retain copies of their tax returns.
Instructions for
completing these forms do caution taxpayers to verify the accuracy of
their tax returns. However, the cautionary statement is included as part of
the Form 1040 instruction package, which the taxpayers will most likely not
have read since they are using a paid tax return preparer and are not preparing
the returns themselves.
Taxpayers may not
be adequately educated as to the need to obtain and retain copies of their tax
returns. Educational efforts have not been made to
alert taxpayers of the need to obtain and retain copies of their returns and
signature authorization forms. These
documents are the sole support the taxpayers have to validate their intention
as to how and where their refunds should have been issued.
For those taxpayers
who have their tax returns prepared by VITA/TCE volunteers at VITA/TCE sites,
resources may not be adequate to ensure these taxpayers are provided copies of
their tax returns. During TY 2002, a
total of 12,975 VITA/TCE sites prepared over 1.4 million tax returns, of which
approximately 922,000 (66 percent) were e-filed. IRS management has acknowledged the
shortage of equipment, which affects the IRS’ ability to provide taxpayers who
use VITA/TCE sites with copies of their tax returns and signature authorization
forms.
Guidance used by
the IRS function that assists taxpayers with refund inquiries does not contain
specific steps to be followed to validate a taxpayer’s intention when a tax
refund is inaccurately directly deposited. Specifically, the guidance does
not require a comparison of the direct deposit information as provided by the
taxpayer on his or her copy of the e-filed tax return to information
transmitted to the IRS. In addition,
guidance does not provide steps to be taken subsequent to the TIGTA Office of
Investigations’ processing of diverted direct deposit tax refund cases.
Guidance has not been not clearly established to reissue tax refunds regarding erroneous direct deposits, to ensure consistent treatment of taxpayers. Internal Revenue Code (I.R.C.) Section (§) 6402[16] provides guidance on the authority of the IRS to issue a tax refund. However, the I.R.C. addresses only those instances involving the theft of a paper tax refund check by forgery; it does not address theft of a tax refund via direct deposit. In summary, there is no clear legal guidance addressing the IRS’ legal authority to reissue direct deposit tax refunds.
Impact of control weaknesses
If controls are not
strengthened, the opportunity for e-file Providers to divert tax refunds
claimed on e-filed tax returns to unauthorized bank accounts remains
high. At risk is the potential revenue
protection of over $75 billion in tax refunds claimed by 30 million individuals
who filed electronic tax returns using an e-file Provider and elected to
receive their tax refunds via direct deposit.[17]
Therefore, it is important that taxpayers who elect to e-file ensure they obtain and retain copies of their tax returns and associated signature authorization documents. These documents are the sole support for the taxpayers in situations that involve inaccurate direct deposits to unauthorized bank accounts. Further, the tax return preparer is required by law[18] to provide a completed copy of the original tax return to the taxpayer.
Implementation of our recommendations will
reduce the risk of tax refunds claimed on e-filed tax returns being
diverted to unauthorized bank accounts.
Additionally, our recommendations will improve the consistency with
which taxpayers are treated when their tax refunds are inaccurately directly
deposited.
The Commissioner,
Wage and Investment (W&I) Division, should:
1. Include a cautionary statement on e-file signature authorization forms explaining the need for the taxpayer to ensure direct deposit information is accurate and to obtain and retain a copy of his or her tax return and signature authorization form. The Commissioner should also design and execute an education campaign to increase taxpayer and e-file Provider awareness of the need for taxpayers to obtain and retain copies of their tax returns and signature authorization forms.
Management’s Response: The IRS agreed in part with this recommendation. For the first part, the IRS is adding a statement to Form 8879 to remind taxpayers that they should get a copy of their return. The reminder will be prominently displayed in bold face type beside the Part II caption, Taxpayer Declaration and Authorization Statement, on the front of the form. However, the IRS does not agree that additional cautionary statements are needed on Forms 8879 or 8453. The IRS believes that sufficient cautionary statements are already present.
To address the second part of this recommendation, the IRS will develop messages for filing season and practitioner communications. It will alert taxpayers to the need to retain copies of returns and signature forms in national print and broadcast media in the 2004 e-file marketing campaign and on a more personal level through community based coalitions.
While IRS management agreed with the accuracy of our figures as “potential” revenue protection, they did not believe that our outcome reflects a realistic representation of the risk associated with improprieties by e-file Providers. Further, management indicated that they realize that there are risks associated with direct deposit; however, existing safeguards minimize these risks.
Office of Audit Comment: While we still believe our recommendation regarding the inclusion of a cautionary statement on Form 8453 is worthwhile, we do agree that improved safeguards will minimize the risk of improprieties by e-file Providers. Further, as we indicated in our audit report, the outcome is provided in quantifiable terms to demonstrate the value that our audit recommendations will have on tax administration and business operations and to show the number of taxpayers who are potentially at risk when filing an electronic tax return with the assistance of an e-file Provider and the estimated refund dollars claimed.
2. Ensure that VITA and TCE sites have the resources to provide taxpayers who elect to e-file their tax returns with copies of their completed tax returns and signature authorization forms.
Management’s Response: Since the inception of e-file into IRS’ volunteer programs, volunteers have been required to supply a copy of the tax return and the signature authorization form to each taxpayer assisted. Computer equipment and printers are provided to volunteer tax preparation sites in order to e-file returns and to print copies of the necessary documents for taxpayers.
To ensure volunteer tax preparation sites provide copies of returns to taxpayers, the IRS will include the requirement in guidance provided to volunteers and site coordinators when establishing volunteer sites and include the requirement as part of the volunteer training.
3.
Revise refund inquiry guidance to ensure copies
of e-filed tax returns are obtained from the taxpayers and compared to
what was transmitted to the IRS, and include the specific steps to be taken
subsequent to the TIGTA Office of Investigations’ review of referred cases.
Management’s Response: Guidance was revised to instruct employees to obtain copies of the taxpayer’s return and compare it with the electronically transmitted data. Procedures include forwarding copies of the return and the Integrated Data Retrieval System[19] prints of the transmitted data to the TIGTA Office of Investigations for review. The IRS is coordinating with the TIGTA Office of Investigations on the processing of completed cases and will include additional instructions concerning the processing of completed cases in a revision to the Internal Revenue Manual 21.4, Refund Inquiry.
4.
Develop interim procedures
and work with the National Taxpayer Advocate to explore whether a legislative
change to the I.R.C. to address the IRS’ authority to reissue a taxpayer’s tax
refund in the event of theft via direct deposit is appropriate.
Management’s Response: The IRS will work with the National
Taxpayer Advocate to determine if current procedures for forged refund checks
could be applied when a theft of a direct deposit has been verified. If current procedures are determined to be
inadequate, the IRS will support efforts to improve the process through policy
directives or legislative remedy, if appropriate.
TD P 15-71
Appendix I
Detailed Objective, Scope, and
Methodology
The overall
objective of this review was to determine the effectiveness of controls to
prevent the diversion of tax refunds claimed on electronically filed (e-filed)
tax returns to direct deposit bank accounts[20] not authorized by the taxpayers. To accomplish this objective, we:
I.
Obtained
and reviewed the Internal Revenue Service’s (IRS) guidance relating to the
processing of e-filed tax returns.
II.
Identified
the process followed for processing e-filed tax returns.
A. Identified the filing requirements for
taxpayers who request a direct deposit of their individual income tax return
refunds.
B.
Held discussions with representatives from
the Submission Processing function[21] to identify controls in place for processing
e-filed tax returns.
III.
Determined
if the IRS had controls in place to ensure that all e-filed tax returns
requesting a tax refund were not directly deposited to unauthorized bank
accounts.
A. Identified tax refunds claimed on e-filed
individual income tax returns that were potentially being diverted to
unauthorized bank accounts.
B.
Calculated the number of tax returns with
direct deposits as well as the amount of the tax refunds issued.
IV.
Interviewed
management to identify factors that contributed to the inadequate IRS controls
to prevent unauthorized direct deposit tax refunds and what actions the IRS had
taken to improve controls.
V.
Identified
the process to assist taxpayers who experience losses due to tax refund fraud.
A.
Identified
the Refund Inquiry Unit process to assist taxpayers whose tax refunds were
either inadvertently or intentionally diverted to incorrect bank accounts via
direct deposit.
B.
Performed a walk-through at the Andover
Submission Processing Site to determine how taxpayers are assisted in obtaining
a replacement tax refund.
C.
Held discussions with representatives from
the Accounts Management function to identify controls to identify potential
cases of tax refunds diverted via direct deposit to bank accounts not
authorized by the taxpayers.
TD P 15-71
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, Acting Director
Lynn Faulkner,
Senior Auditor
Edith Lemire,
Senior Auditor
Grace
Terranova, Senior Auditor
TD P 15-71
Appendix III
Deputy Chief Financial Officer, Department of the Treasury
Commissioner C
Office of
the Commissioner – Attn: Chief of Staff C
Deputy
Commissioner for Services and Enforcement SE
National Taxpayer Advocate TA
Deputy
Commissioner, Wage and Investment Division SE:W
Director, Electronic Tax Administration OS:CIO:I:ET
Director,
Stakeholder Partnerships, Education, and Communication SE:W:CAR:SPEC
Director, Strategy and Finance SE:W:S
Director, Submission Processing SE:W:CAS:SP
TD P 15-71
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. This benefit will be incorporated into our Semiannual Report to the Congress.
This issue is of interest to Internal Revenue Service (IRS) and Department of the Treasury executives, the Congress, and the taxpaying public and is expressed in quantifiable terms to provide further insights to the value of the entity affected and potential impact of the issue. The value of entity measure is presented to express in quantifiable terms the number of taxpayers who file an electronic return with the assistance of an authorized electronic filing (e-file) Provider[22] and estimated refund dollars claimed. While we cannot determine the specific number of taxpayers or refund dollars that may be affected through improprieties by authorized e-file Providers, the risk exists if controls are not strengthened.
Type and Value of Outcome Measure:
Revenue protection is used here to demonstrate the value of our audit recommendations on tax administration and business operations.
· Revenue Protection – Potential; an estimated $75 billion in tax refunds claimed by taxpayers who file an individual electronic tax return with the assistance of an authorized e-file Provider and use the direct deposit option (see page 3).
Methodology Used to Measure the Reported Benefit:
We determined the number of taxpayers claiming tax refunds on electronically filed (e-filed) individual income tax returns filed by an e-file Provider by identifying the number of Tax Year (TY) 2001[23] e-filed individual income tax returns based on the final TY 2001 Service Center Report.[24] We then subtracted the number of balance due e-filed tax returns (no tax refund issued to the taxpayer) and subtracted the number of TeleFiled[25] tax returns (no e-file Provider required to e-file tax return) based on the same report (see page 16).
We determined the amount of tax refunds on e-filed individual income tax returns filed by an e-file Provider based on information provided by the Electronic Tax Administration (ETA) function, since the TY 2001 Service Center Report does not identify dollars. We subtracted the tax refund dollars for all TeleFiled tax returns obtained from the ETA Analyst, from the tax refund dollars for all e-filed tax returns, to obtain tax refunds on e-filed tax returns filed by an e-file Provider for the taxpayers (see page 16).
Table 1 -
Calculation of Revenue Protection Numbers
|
|
|
Dollar Amount |
|---|---|---|
|
Total E-Filed Tax Returns Accepted |
46,890,813 |
|
|
Less: Balance
Due Returns |
3,326,778 |
|
|
Total E-Filed Tax Returns Claiming a Tax Refund |
43,564,035 |
$92,422,294,124 |
|
Less: TeleFiled Tax Returns Claiming a Tax Refund |
3,985,385 |
$2,336,847,469 |
|
Total E-Filed Tax Returns Claiming a Tax Refund Filed by an E-File Provider |
39,578,650 |
$90,085,446,655 |
|
Total E-Filed Tax Returns Requesting a
Paper Check Tax Refund |
9,655,103 |
$14,735,202,248 |
|
Total E-Filed Tax Returns Requesting a Direct Deposit Tax Refund |
29,923,547 |
$75,350,244,407 |
Source: Wage and Investment Division Electronic Tax
Administration Final Tax Year 2001 National Service Center Report through
October 20, 2002, and IRS personnel.
TD P 15-71
Appendix V
Management’s Response to the Draft
Report
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
ATLANTA, GA 30308
COMMISISONER
OCTOER
16, 2003
MEMORANDUM
FOR TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION
FROM: Henry
O. Lamar Jr. /s/ Henry O. Lamar, Jr.
Commissioner, Wage and Investment Division
SUBJECT: Draft Audit Report - Increased Taxpayer Awareness and Improved Guidance Is Needed To Ensure Accurate Direct Deposit of Tax Refunds Claimed on E-filed Tax Returns
(Audit No. 200340029)
One of our
primary goals for electronic filing is to protect the privacy of taxpayer
information. Taxpayers have the right
to expect the IRS will collect, maintain, and use identifiable personal information and data
only as authorized by law and as necessary to carry out the agency's responsibilities.
As such, we
are committed to reducing the risk of tax refunds claimed on e-filed tax
returns from being diverted to
unauthorized bank accounts and improving the consistency with which taxpayers are treated when their tax refunds are
inaccurately direct deposited.
To address these concerns, we will modify our forms and instructions to increase taxpayer awareness of the use of
personal information. We will also review our procedures for any inconsistencies and make modifications, as necessary.
However, we do not believe that an
additional cautionary statement on the e-file signature authorization form is needed. As noted in your report, there
are laws to prohibit third
parties from misusing tax information. Section 7216 of the Internal Revenue Code requires tax practitioners to
ensure the privacy of tax information and they are subject to
civil and criminal penalties if they fail to do so.
We acknowledge that the outcome measure is stated as "potential" Revenue Protection. However, we believe that your statement regarding the inability to determine the number of taxpayers or refund dollars that may be affected by improprieties by authorized e-file providers is a more pertinent point. While we realize that there are risks associated with direct deposit, they are minimized by our existing safeguards. We do not believe that your Outcome Measure reflects a realistic representation of the risk associated with improprieties bye-file providers.
If you have any questions,
please contact Terence H. Lutes, Director, Electronic Tax Administration, at (202) 622-7990.
Attachment
Attachment
RECOMMENDATION
1a
The Commissioner, Wage and Investment Division should:
Include a
cautionary statement on e-file signature authorization forms explaining the
need for the taxpayer to ensure direct
deposit information is accurate and to obtain and retain a copy of his/her tax return and
signature authorization.
CORRECTIVE
ACTION
We agree in
part with of this recommendation:
Form 8879
-IRS e-file Signature Authorization
We have added
a statement to Form 8879, IRS e-file Signature Authorization, to remind taxpayers that they should get a copy of
their return. The reminder will be prominently
displayed in bold face type beside the
Part II caption, Taxpayer Declaration and Authorization Statement, on the front of the form.
We do not
agree an additional cautionary statement is needed on- Form 8879 to address
the need for accurate direct deposit
information. Direct deposit information is included as part of the taxpayers electronic return.
Form 8879 includes several statements cautioning taxpayers to verify the accuracy of their return. The
statement on Form 8879 signed by
the taxpayer under penalties of perjury declares that they have examined the copy of their electronic return. In addition,
the first item listed under "Taxpayer Responsibilities", of Form 8879 instruction, informs the taxpayer
to verify the accuracy of the
prepared income tax return. We have not revised Form 8879 to include any
specific guidance regarding direct
deposit information.
Form 8453 - U.S. Individual Income Tax Declaration for and IRS e-file Return
Instructions for Form 8453 in Publication 1345, IRS e-file Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, require the Electronic Return Originators (EROs) provide a complete copy of the return to the taxpayer. Publication 1345, page 45, specifically states that Form 8453 is considered part of the return. The statement of Form 8453 signed by the ERO under penalty of perjury indicates that they will give the taxpayer a copy of all forms and information to be filed with the IRS.
Taxpayers
sign Form 8453 under penalties of perjury declaring that the information
given to the ERO agrees with the
electronic return. Since the direct deposit information is included in the electronic return
provided for taxpayer review, we have not added a specific statement on Form 8453 regarding
accuracy of direct deposit information.
IMPLENTATION
DATE
The reminder
statement for taxpayers on Form 8879 will be completed November 7, 2003.
RESPONSIBLE
OFFICIAL
Director,
Submission Processing Division
CORRECTIVE
ACTION MONITORING PLAN
Implementation
will be monitored though our internal control system and managerial oversight. We will ensure the 2003 version of
Form 8879 includes the updated information.
RECOMMMMENDATION
1b
The Commissioner, Wage and Investment Division, should:
Design and
execute an education campaign to increase taxpayer and e-file provider awareness of the need for the taxpayer to
obtain and retain a copy of his/her tax return and signature authorization form.
CORRECTIVE
ACTION
We agree with
this recommendation. Wage and Investment Divisions' Communications and Liaison (C&L) will coordinate with
Stakeholder Partnerships, Education and Communication (SPEC) Small Business and Self-Employed Divisions'
C&L and Taxpayer Education
(TEC) Offices to develop messages for filing season and practitioner communications. We will
disseminate taxpayers' need to retain copies of return and signature forms in national print and broadcast media in our
2004 e-file marketing campaign,
and on a more personal level trough community based coalitions.
IMPLEMENTATION
DATE
July 1, 2004
RESPONSIBLE
OFFICIAL
Director,
Communications and Liaison, Wage and Investment Division
CORRECTIVE
ACTION MONITORING PLAN
Implementation
of these corrective actions will be monitored though our internal control
system and managerial oversight.
RECOMMENDATION
2
The
Commissioner, Wage and Investment Division, should:
Ensure that volunteer sites have the resources to provide taxpayers who elect to e-file their tax return with copies of the completed tax returns and signature authorization forms.
CORRECTIVE
ACTION
We agree with this recommendation. Since the inception of e-file into our volunteer programs, volunteers have been required to supply a copy of the tax return and the signature authorization form to each taxpayer assisted. SPEC loans computer equipment and printers to volunteer tax preparation sites in order to e-file returns and to print copies of the necessary documents for taxpayers.
To ensure
volunteer tax preparation sites provide copies of returns to taxpayers, SPEC
will include the requirement in
guidance provided to volunteers and site coordinators when establishing volunteer sites and include
the requirement as part of the volunteer training.
IMPLENTATION DATE
December 31,
2003
RESPONSIBLE
OFFICIALS
Director,
Stakeholder Partnerships, Education and Communications
CORRECTIVE
ACTION MONITORING PLAN
Monitoring
will be incorporated during annual review visits.
RECOMMENDATION
3a
The Commissioner, Wage and Investment Division, should:
Revise refund
inquiry guidance to ensure copies of e-file tax returns are obtained from
the taxpayers and compared to what was
transmitted to the IRS.
CORRECTIVE
ACTION
We agree with
this recommendation. Refund Inquiry IRM 21.4.1.4.7.4 was revised to instruct employees to obtain copies of the
taxpayers' return and compare it with the electronically transmitted data. Procedures include forwarding copies
of the return and Integrated
Data Retrieval System (IDRS) prints of the transmitted data to the TIGTA
Office of Investigation for review.
IMPLEMENTATION
DATE
Completed
October 1, 2003
RESPONSIBLE
OFFICIAL
Director,
Accounts Management
CORRECTIVE
ACTION MONITORING PLAN
Implementation
of these corrective actions will be monitored though our internal control
system and managerial oversight.
RECOMMENDATION
3b
The Commissioner, Wage and Investment Division, should:
Revise refund
inquiry guidance to include the specific steps to be taken subsequent to
TIGTA Office of Investigations review
of referred cases.
CORRECTIVE
ACTION
We agree with
this recommendation. We are coordinating with the TIGTA Office of Investigations on the processing of completed
cases. We will include additional instructions
concerning the processing of completed cases in a revision to the IRM 21.4., Refund Inquiry.
IMPLENTATION
DATE
February 4,
2004
RESPONSIBLE
OFFICIAL
Director,
Accounts Management
CORRECTIVE
ACTION MONITORING PLAN
Implementation
of these corrective actions will be monitored though our internal control
system and managerial oversight.
RECOMMENDATION
4
The Commissioner, Wage and Investment Division, should:
Develop
interim procedures and work with the Taxpayer Advocate to explore whether a
legislative change to the Internal
Revenue Code (IRC) to address the IRS' authority to re-issue a taxpayer's tax refund in the event
of theft via direct deposit is appropriate.
CORRECTIVE
ACTION
We agree with
this recommendation. We will work with the Taxpayer Advocate to determine if current procedures for forged
refund checks could be applied when a theft or a direct deposit had been verified. If current procedures are
determined to be inadequate, we
will support efforts to improve the process through policy directives or
legislative remedy, if appropriate.
IMPLEMENTATION
DATE
January 1,
2005
RESPONSIBLE
OFFICIALS
National
Taxpayer Advocate
Director, Accounts Management Division
CORRECTIVE
ACTION MONITORING PLAN
Implementation
of these corrective actions will be monitored though our internal control system and managerial oversight.
TD P 15-71
[1] Direct deposit is an electronic transfer of a tax refund to an account specified by the taxpayer.
[2] For the purpose of this report, authorized e-file Providers include individuals or businesses that prepare tax returns and transmit the tax returns electronically to the IRS, or individuals or businesses that electronically transmit tax returns to the IRS from taxpayers who elect to prepare their own tax returns. This does not include TeleFile tax returns where taxpayers can e-file their tax returns using a telephone.
[3] The VITA
and TCE Programs provide free tax return preparation including e-filing.
[4] The IRS provided this figure, and we did not validate it. However, it is overstated, as e-file Providers can be authorized to transmit e-filed tax returns to more than one Electronic Individual Return Submission Processing Site.
[5] The period from January through mid-April when most individual income tax returns are filed.
[6] Signature authorization forms are required to authenticate the electronic tax return and provide certification that the return is true, correct, and complete. These forms include the U.S. Individual Income Tax Declaration for an IRS e-file Return (Form 8453) and the IRS e-file Signature Authorization (Form 8879).
[7] For the purpose of this report, authorized e-file Providers include individuals or businesses that prepare tax returns and transmit the tax returns electronically to the IRS, or individuals or businesses that electronically transmit tax returns to the IRS from taxpayers who elect to prepare their own tax returns. This does not include TeleFile tax returns where taxpayers can e-file their tax returns using a telephone.
[8] The VITA and TCE Programs provide free tax return preparation including e-filing.
[9] The IRS
provided this figure, and we did not validate it. However, it is overstated, as e-file
Providers can be authorized to transmit electronically filed tax returns to
more than one Electronic Individual Return Submission Processing Site.
[10] Direct deposit is an electronic transfer of a tax refund to an account specified by the taxpayer.
[11] The period from January through mid-April when most individual tax returns are filed.
[12] “Lost
or stolen refunds” was ranked 8th of 25 reasons why taxpayers
contacted the Taxpayer Advocate Service for Fiscal Year 2002, based on the
Taxpayer Advocate Management Information System receipts from October 1, 2001,
to September 30, 2002.
[13]
Electronic Individual Return Submission Processing Sites are located at the
Andover, Massachusetts; Austin, Texas; Cincinnati, Ohio; Memphis, Tennessee;
and Ogden, Utah IRS campuses. The campuses are the data processing arms of
the IRS; they process submissions, correct errors, and forward data to the
computing centers for analysis and posting to taxpayer accounts.
[14] A Chief
Counsel Advice is written advice or instruction prepared by the Office of Chief
Counsel that is issued to IRS employees.
It conveys legal interpretation of internal revenue law either in
general or as applied to specific taxpayers or groups of specific taxpayers.
[15] Controls
Need to Be Improved to Ensure Accurate Direct Deposit of Tax Refunds
(Reference Number 2003-40-108, dated May 2003).
[16] I.R.C. § 6402 (2002).
[17] For more details on the calculation, see Appendix IV.
[18] I.R.C.
§ 6107 (2002) – Income tax return preparer must furnish a copy of the return to
the taxpayer and must retain a copy or record.
[19] IRS computer system capable of retrieving or updating stored information; it works in conjunction with a taxpayer’s account records.
[20] Direct
deposit is an electronic transfer of a tax refund to an account specified by
the taxpayer.
[21]
Electronic Individual Return Submission Processing Sites are located at the
Andover, Massachusetts; Austin, Texas; Cincinnati, Ohio; Memphis, Tennessee;
and Ogden, Utah IRS Campuses. The
campuses are the data processing arms of the IRS. The campuses process submissions, correct
errors, and forward data to the computing centers for analysis and posting to
taxpayer accounts.
[22] An authorized e-file Provider originates the electronic submission of income tax returns to the IRS.
[23] TY 2001 tax returns were processed in the Electronic Individual Return Submission Processing Sites located at the Andover, Massachusetts; Austin, Texas; Cincinnati, Ohio; Memphis, Tennessee; and Ogden, Utah IRS Campuses starting January 11, 2002. The campuses are the data processing arms of the IRS. The campuses process submissions, correct errors, and forward data to the computing centers for analysis and posting to taxpayer accounts.
[24] Final
TY 2001 Service Center Report dated October 20, 2002.
[25] The TeleFile Program allows taxpayers to file their tax returns electronically using a telephone.