Individual Income Tax Return Transactions Were Timely and
Accurately Recorded to Taxpayer Accounts
January 2004
Reference
Number: 2004-40-035
This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.
January
2, 2004
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 - Individual Income Tax Return Transactions
Were Timely and Accurately Recorded to Taxpayer Accounts (Audit # 200240078)
This
report presents the results of our review of the posting of individual income
tax return transactions and the subsequent generation of refunds or
assessments. The overall objective of
this review was to determine whether the Internal Revenue Service (IRS) timely
and accurately posted individual income tax return transactions to the
Individual Master File (IMF) and timely and accurately generated related
refunds or assessments. This audit was
the last in a series of audits conducted to review key areas critical to the
success of the IRS’ 2003 Filing Season.
In
summary, we found that the IRS timely and accurately recorded individual income
tax return transactions to taxpayers’ IMF accounts. We used statistically valid methods to sample return transactions
from 1.2 million Tax Year (TY) 2002 individual income tax returns recorded on
IMF accounts between January and June 2003.
In addition, the IRS timely issued refunds for TY 2002 individual income
tax returns, and the refunds were issued in the manner requested by the
taxpayer, whether by direct deposit, paper check, or as a credit applied to next
year’s taxes.
The
IRS was not required to respond to this report because it does not include any
recommendations. However, IRS
management officials reviewed it prior to issuance.
Copies of this
report are also being sent to the IRS managers who are affected by the report
findings. 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.
Tax Refunds Were Timely Issued
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
During 2003, the Internal Revenue Service
(IRS) processed over 131 million individual income tax returns and issued over
$202 billion in individual income tax refunds.
Information from each of these returns must be recorded to the
individual taxpayer’s account on the IRS’ Individual Master File (IMF).
The IMF is the IRS database that maintains the return transactions, which are recorded to individual taxpayer accounts for each tax year. Return transactions are recorded as a debit or credit amount that originates from the tax return. Return transactions include:
·
Tax liability.
·
Credit for withholdings.
·
Overpayment credit applied
from prior years.
·
Earned Income Tax Credit.
·
Estimated tax payments.
·
Refund of overpayment.
·
Overpayment credit applied to
next year.
In order for the IRS
to issue correct and timely refunds or balance due notices, the return
transactions must be timely and accurately recorded to the IMF.
As part of our overall audit strategy, we have conducted several reviews (see Appendix IV for a listing of these reviews) to assess the IRS’ preparation for and processing of individual income tax returns during the 2003 Filing Season. This review is the last in the series of audits conducted to review key areas critical to the success of the 2003 Filing Season.
This review was performed in the IRS’ Wage and Investment Division office at its Submission Processing Site in Austin, Texas, from July through November 2003. 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.
The IRS
timely and accurately recorded individual income tax return transactions to
taxpayers’ IMF accounts. We used
statistically valid methods to sample return transactions from 1.2 million Tax
Year (TY) 2002 individual income tax returns recorded on taxpayer IMF accounts
between January and June 2003. All of
the transactions we reviewed were accurately recorded, and all but one
transaction was timely recorded.
Refund returns
We reviewed
a statistical sample of 73 individual income tax returns from a population of
949,211 refund returns and found:
·
100 percent of the return
transactions were accurate.
·
98.6 percent of the return
transactions were timely.
To determine whether return transactions were accurately
recorded, we reviewed the returns and identified the specific items that were
recorded as return transactions on the taxpayer’s IMF account. These included items such as tax liability,
tax withholdings, estimated payments, Earned Income Tax Credit, and refund
amount.
On 70 of
the refund returns reviewed, the transaction amounts recorded to the taxpayer’s
IMF account matched the amounts reported on the income tax return. In the remaining three instances, there were
differences between the amounts reported on the taxpayer’s return and the
amount recorded on the taxpayer’s IMF account; however, in each instance, the
difference was a result of either a refund offset or a taxpayer error that had
been corrected by the IRS during return processing.
To assess whether the return
transactions were timely recorded, we measured the time between the date the
IRS received the tax return and the date the return transactions were recorded
to the taxpayer’s IMF account. We used 40
calendar days as the criteria for determining timeliness. IRS guidelines for timeliness are primarily
for the processing of returns at submission processing sites and do not include
the overall time needed to record the return transactions to the taxpayer’s IMF
account. To arrive at the 40 calendar
day timeliness criteria, we took the submission
processing timeliness criteria of 16 workdays, added 6 calendar days to account
for non-workdays, and then added an additional 18 calendar days to account for
the IMF processing cycle.
On 72 of
the 73 tax returns, the return transactions were recorded on the taxpayer’s IMF
account within 40 calendar days. The
remaining tax return took 45 days to be recorded on the taxpayer’s IMF
account. The average number of days for
the return transactions to be recorded was 25 days.
The sample of 73 refund returns included 43 electronically
filed returns and 30 paper returns. All
43 of the electronically filed return transactions were recorded timely and
averaged 21 days. Paper return
transactions averaged 31 days.
Non-refund returns
We reviewed
a second statistical sample of 73 non-refund individual income tax returns from
a population of 241,472 returns, and found:
·
100 percent of the return
transactions were accurate.
·
100 percent of the return
transactions recorded were posted timely.
All return
transaction amounts shown on the return either matched the amounts recorded on
the taxpayer’s IMF account or were properly adjusted to reflect the correct
amount. There were six instances in
which the amount on the return differed from the return transaction amounts;
however, these differences were all due to taxpayer errors that were corrected
by the IRS during return processing.
Unlike the refund returns, the
non-refund returns are comprised of a variety of return types with
different timeliness criteria. Of the
73 returns in the non-refund return sample, 49 were Fully Paid (FP) returns,
and 24 were non-refund Other Than Full Paid (OTFP) returns. Because the IRS has different
timeliness criteria for processing refund, FP, and OTFP returns, we could not use the same 40 calendar day criteria used
in our sample of refund returns.
FP returns are traditionally stored upon receipt and not processed until after the peak processing period has been completed. The IRS assumes that the taxpayer’s figures on the return are correct and that notification of a balance due is not necessary. This practice allows the IRS to expedite the processing of time-sensitive refund returns. However, it can increase the number of calendar days it takes to process an FP return. IRS timeliness guidelines simply provide that processing of FP returns at submission processing sites must be completed by July 10. We then accounted for the additional 18 calendar days for IMF processing and considered all FP return transactions processed to taxpayer IMF accounts by July 28 to be timely.
Non-refund OTFP returns have a completion date of May 22 for processing at submission processing sites. When the additional 18 calendar days for IMF processing are included, we considered all non-refund OTFP return transactions timely if recorded to taxpayer IMF accounts by June 9.
In addition to our reviews for timeliness and accuracy of
recording return transactions to taxpayer IMF accounts, we reviewed non-refund
returns to determinate whether unpaid taxes were assessed timely on balance due
notices. We found that 10 of the 73
returns we reviewed had unpaid balances due and that in each case, the balance
due notice was issued timely.
The IRS timely issued refunds for
TY 2002 individual income tax returns filed and processed during the 2003
Filing Season. In addition, the refunds
were issued in the manner requested by the taxpayer, whether by direct deposit,
paper check, or as a credit applied to next year’s taxes. Our review of the statistically selected
sample of 73 individual income tax returns from the population of 949,211 TY
2002 refund returns filed between January and June 2003 found:
·
98.6 percent of the refunds
were issued in 40 days or less.
·
100 percent of the refunds
were issued as the taxpayer requested.
The IRS measures refund timeliness as the percentage of refunds from paper returns issued in 40 days or less. The IRS calculates refund timeliness by computing the number of days it takes the taxpayer to receive his or her refund starting 2 days prior to the date the taxpayer’s return is received by the IRS through the day the taxpayer receives his or her refund. By computing timeliness in this manner, the measurement is taken from the taxpayer’s perspective.
To evaluate the timeliness of our
sample of refund returns, we duplicated the IRS’ method for computing
timeliness. However, because our sample
of refund returns was selected to evaluate the accuracy and timeliness in
recording return transactions to taxpayers’ IMF accounts in addition to refund
timeliness, both electronically filed and paper tax returns were included in
our measurement. The IRS’ timeliness
measurement is limited to paper tax returns.
In 72 of the 73 returns we
reviewed, the refunds were issued in less than 40 days. For 1 return, it took 45 days to issue the
refund; no reason for the delay could be identified. Of the 73 returns, 43 were electronically filed tax returns and
30 were paper tax returns. We found
that all the electronically filed return refunds were issued within 40 days,
and the average refund issue time was 12 days from the return transmission date
to the refund received date. For 29 of
the 30 paper returns, refunds were issued within 40 days. The average refund issue time for paper
returns was 30 days.
In FY 2003, the IRS had a
corporate goal for refund timeliness of 98.4 percent. According to IRS data, the FY 2003 refund timeliness measure was
98.8 percent, which exceeded the IRS’ goal.
Appendix I
Detailed Objective, Scope,
and Methodology
The overall objective of this audit was to determine whether the Internal Revenue Service (IRS) timely and accurately posted individual income tax return transactions to the Individual Master File (IMF) and timely and accurately generated related refunds or assessments. This review was included in our Fiscal Year 2003 Annual Audit Plan for the Wage and Investment Income Programs and is part of our overall strategy to review key areas critical to the success of the IRS’ 2003 Filing Season. To accomplish our objective, we:
I.
Determined whether individual income tax returns with
refund transactions were correctly posted to the IMF.
A.
Identified a
population of 949,211 Tax Year (TY) 2002 individual income tax returns due
refunds included in the IMF 1 Percent Sample File between January and June
2003.
B.
Selected and reviewed a statistically valid sample of
73 individual income tax returns with refunds, using a 95 percent confidence
level, a precision of + 5 percent, and a 5 percent expected error rate.
C.
Reviewed the refund transactions from the statistical
sample in I.B to determine whether return transactions were timely and
accurately posted to the IMF and that tax refunds were issued timely.
II. Determined
whether individual income tax returns where the tax liability has either been fully
paid or has a balance due were correctly posted to the IMF.
A.
Identified
a population of 241,472 TY 2002 individual income tax returns with a zero or
balance due tax liability included in the IMF 1 Percent Sample File between
January and June 2003.
B.
Selected and reviewed a statistically valid sample of
73 individual income tax returns with a zero or balance due tax liability,
using a 95 percent confidence level, a precision of + 5 percent, and a 5
percent expected error rate.
C.
Reviewed 10 returns from the sample in II.B with
outstanding balances due and determined that all taxpayer notices were issued
timely.
Appendix II
Major Contributors to This Report
Michael R. Phillips, Assistant Inspector
General for Audit (Wage and Investment Income Programs)
Scott A. Macfarlane, Director
Gary L. Young, Audit Manager
Tina M. Parmer, Senior Auditor
Steven D. Stephens, Senior Auditor
Steven E. Vandigriff, Senior Auditor
Bonnie G. Shanks, Auditor
Appendix III
Commissioner C
Office of the
Commissioner – Attn: Chief of
Staff C
Deputy
Commissioner for Services and Enforcement
SE
Deputy
Commissioner, Wage and Investment Division
SE:W
Director,
Customer Account Services SE:W:CAS
Director,
Strategy and Finance SE:W:S
Director,
Submission Processing SE:W:CAS:SP
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of
Program Evaluation and Risk Analysis
RAS:O
Office of
Management Controls OS:CFO:AR:M
Audit Liaison:
GAO/TIGTA Liaison SE:W:S:PA
Appendix IV
Listing of Prior Reviews to Assess the Internal Revenue
Service’s Preparation for the 2003 Filing Season
The following is a list of five 2003 Filing Season reviews
that are included in our Fiscal Year 2003 Annual Audit Plan for the Treasury
Inspector General for Tax Administration’s Wage and Investment (W&I) Income
Programs, Customer Account Services business unit. The overall purpose of the reviews was to evaluate the Internal
Revenue Service’s (IRS) success in planning and executing the 2003 Filing
Season. The specific objective for each
review is shown below.
The Internal Revenue Service Has Procedures to Ensure There
Is Sufficient Trained Staff to Process Individual Income Tax Returns in 2003 (Reference Number:
2003-40-055, dated February 2003)
·
Overall Objective: To determine whether the IRS’ W&I
Division has procedures in place to ensure there is a sufficient number of
trained staff to process individual income tax returns during the 2003 Filing
Season.
Pre-Filing Season Activities to Address Specific Individual
Electronic Filing Issues Were Adequately Conducted (Reference Number:
2003-40-073, dated March 2003)
·
Overall Objective: To determine the state of readiness of the
IRS to accept electronically filed individual income tax returns for processing
during the 2003 Filing Season. The
audit was limited to the activities necessary to ensure the acceptance of
electronic returns that may be affected by tax law change provisions relating
only to the education and retirement provisions.
Forms and Publications for the New Education and Retirement
Tax Provisions Were Addressed for the 2003 Filing Season (Reference Number:
2003-40-105, dated April 2003)
·
Overall Objective: To determine whether the IRS identified the
new tax law provisions that had a significant impact on W&I Division
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.
Computer Programming Requests for the 2003 Filing Season
Were Timely Prepared and Generally Accurate
(Reference Number: 2003-40-112, dated
May 2003)
·
Overall Objective: To determine whether the IRS timely prepared
and accurately initiated computer programming requests for new tax law
provisions that impact individual income tax return processing during the 2003
Filing Season. The audit focused on
those requests for computer programming changes needed to implement the
education and retirement provisions in the EGTRRA.
The 2003 Filing Season Was Completed Timely and Accurately,
but Some New Tax Law Changes Were Not Effectively Implemented (Reference Number:
2004-40-003, dated October 2003)
· Overall Objective: To determine whether the IRS timely and accurately processed paper and electronic individual income tax returns during the 2003 Filing Season. The audit focused on the implementation of tax law changes that affected Tax Year 2002 individual income tax returns.