TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

 

 

Coordination and Monitoring Are Needed for Continued Improvement in the Tax Return Preparation Process at the Taxpayer Assistance Centers

 

 

 

September 2005

 

Reference Number:  2005-40-147

 

 

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.

 

 

Web Site           |  http://www.tigta.gov

 

 

September 9, 2005

 

 

MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION

 

FROM:                            Pamela J. Gardiner /s/ Pamela J. Gardiner

                                         Deputy Inspector General for Audit

 

SUBJECT:                    Final Audit Report – Coordination and Monitoring Are Needed for Continued Improvement in the Tax Return Preparation Process at the Taxpayer Assistance Centers (Audit # 200540001)

 

This report presents the results of our review of the Internal Revenue Service (IRS) Taxpayer Assistance Centers (TAC).  The overall objective of this review was to determine whether taxpayers receive quality service, including accurate tax returns, when visiting the TACs to have their tax returns prepared and filed.  This audit is a follow-up to a prior Treasury Inspector General for Tax Administration (TIGTA) review.[1]  

Synopsis

The TACs provide taxpayers personal, face‑to‑face assistance with tax matters.  IRS assistors that work in the TACs help taxpayers by interpreting tax laws and regulations, resolving inquiries on taxpayer accounts, accepting payments, and providing various other services designed to minimize the burden on taxpayers in satisfying their tax obligations, including preparing certain individual tax returns.  Generally, TAC assistors will prepare basic individual income tax returns for taxpayers with income less than $36,000 and that meet certain requirements and limitations.[2]

A prior TIGTA audit reported that taxpayers do not always receive proper and accurate customer service assistance during tax return preparation.  Specifically, in 21 (72 percent) of the 29 anonymous visits conducted by TIGTA auditors, assistors at the TACs did not inform auditors of tax return preparation requirements prior to preparing or scheduling an appointment to prepare the tax return.  Assistors incorrectly prepared 19 (83 percent) of the 23 tax returns prepared during these visits.  In addition, the Field Assistance Office did not have a quality review process for tax return preparation assistance.

Results from this review show improvements have been made in the tax return preparation process.  Our observations and testing of 47 tax returns showed that in all observations assistors adequately screened taxpayers to ensure they met tax return preparation requirements.  In addition, assistors either helped taxpayers with the preparation of or ensured taxpayers prepared an IRS Return Preparation Checklist, reviewed completed tax returns with taxpayers, and provided them with completed copies of the tax returns.  The accuracy rate of tax returns prepared improved, with 37 of 47 (79 percent) tax returns tested correctly prepared.[3]  Ten of 47 (21 percent) tax returns tested were either incorrectly prepared or we could not determine if the tax return was prepared correctly because the assistors did not ask sufficient questions to determine eligibility for various credits and/or deductions.

However, opportunities exist for the Field Assistance Office to continue to provide quality customer service to taxpayers needing tax return preparation assistance.  Although Field Assistance Office management has continued to emphasize to assistors that the Publication Method Guide (Guide) must be used to prepare tax returns and to determine taxpayer qualifications for various deductions and credits, assistors did not consistently adhere to this requirement.[4]  For 32 of 47 (68 percent) observations, assistors did not use the Guide.  In addition, coordination does not exist between the Field Assistance and the Stakeholder Partnerships, Education, and Communication (SPEC) Offices to share best practices used in the Volunteer Income Tax Assistance (VITA) Program, such as the VITA Program’s Tax Preparation Information Sheet (Form 13614) and Quality Alerts.  Lastly, the Field Assistance Office is not ensuring each TAC is assigned a unique Electronic Filing Identification Number (EFIN)[5] as required by the IRS for any office that electronically files tax returns. 

Recommendations

We recommended the Commissioner, Wage and Investment Division (1) develop a partnership between the Field Assistance and SPEC Offices to share best practices to improve the tax return preparation process and (2) develop a process to ensure each TAC is assigned a unique EFIN. 

Response

IRS management agreed with our recommendations and has initiated actions to work with the SPEC Office to identify best practices to improve the tax return preparation process, including revising the Field Assistance Office intake sheet and coordinating with the SPEC Office on the issuance of Quality Alerts to Field Assistance Office employees to proactively address emerging issues.  In addition, they agreed each TAC should have a unique EFIN and are working to ensure each TAC will have a unique identification number for the 2006 Filing Season.[6]  Management’s complete response to the draft report is included as Appendix VI.

Copies of this report are also being sent to the IRS managers 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 Programs), at (202) 927-0597.

 

 

Table of Contents

 

Background

Results of Review

Improvements Have Been Made in the Tax Return Preparation Process

Opportunities Exist for the Field Assistance Office to Continue to Provide Quality Customer Service to Taxpayers Needing Tax Return Preparation Assistance

Recommendation 1:

Recommendation 2:

Appendices

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Taxpayer Assistance Centers Visited

Appendix V – Volunteer Quality Alerts Issued During the 2005 Filing Season

Appendix VI – Management’s Response to the Draft Report

 

 

Background

 

The Internal Revenue Service (IRS) 2005 - 2009 Strategic Plan states that the IRS is committed to helping people understand their tax obligations and to making it easier for them to participate in the tax system.  To help achieve this, complimentary, need-based tax return preparation is offered to taxpayers that meet certain requirements.  Generally, assistors in walk‑in offices called Taxpayer Assistance Centers (TAC) will prepare basic individual income tax returns for taxpayers with income less than $36,000 (for 2004 tax returns) and that meet certain requirements and limitations.[7] 

The Field Assistance Office, responsible for overseeing the TAC Program, was created in the IRS Customer Assistance, Relationships, and Education organization in the Wage and Investment Division in Fiscal Year 2001.  The TACs provide taxpayers personal, face‑to‑face assistance with tax matters.  Assistors that work in the TACs help taxpayers by interpreting tax laws and regulations, resolving inquiries on taxpayer accounts, accepting payments, and providing various other services designed to minimize the burden on taxpayers in satisfying their tax obligations, including preparing certain individual tax returns. 

To reduce reliance on Small Business/Self-Employed Division support and to redirect resources to face-to-face services that can be provided only in a TAC, beginning in Fiscal Year 2003 the TACs began to reduce the number of returns prepared in the TACs by 20 percent.  This reduction continued in Fiscal Year 2005 and will continue into Fiscal Year 2006.  The Field Assistance Office will continue to support and promote tax return filing alternatives, such as free online services on the IRS web site (IRS.gov) and Volunteer Income Tax Assistance (VITA)/Tax Counseling for the Elderly, when taxpayers do not qualify or tax return preparation assistance is not available at the TACs.

For Calendar Year 2004, the Field Assistance Office assisted in the preparation and electronic filing (e-file) of 215,396 Tax Year 2003 tax returns.  Figure 1 provides key characteristics relating to these 215,396 tax returns.

Figure 1:  Tax Year 2003 Tax Return Characteristics

Source:  Treasury Inspector General for Tax Administration (TIGTA) Data Center Warehouse.

This audit is a follow-up to a prior TIGTA audit.[8]  We previously reported that taxpayers do not always receive proper and accurate customer service assistance during tax return preparation.  Specifically, in 21 (72 percent) of the 29 anonymous visits conducted by TIGTA auditors, assistors did not inform auditors of the tax return preparation requirements prior to preparing or scheduling an appointment to prepare the tax return.  Assistors incorrectly prepared 19 (83 percent) of the 23 tax returns prepared during these visits.  In addition, the Field Assistance Office did not have a quality review process for tax return preparation assistance.

Assistors did not always prescreen taxpayers to ensure their tax returns met the requirements and limitations, such as the type of tax return, types and amounts of income being reported, and deductions claimed.  In addition, assistors modified the facts provided by the auditors, did not use the Paid Preparer’s Earned Income Credit Checklist (Form 8867) to ensure taxpayers met the requirements for claiming the Earned Income Tax Credit, and did not use tax instructions and publications to determine the taxpayers’ eligibility to receive credits and deductions.

In response to the report and TIGTA recommendations, IRS management (1) issued a memorandum to all Field Assistance Office assistors requiring adherence to return preparation screening procedures, (2) issued a memorandum to remind all applicable assistors to adhere to return preparation procedures in the Internal Revenue Manual that require each assistor to use the applicable worksheets prompted by the return preparation software and the publication method or job aids to determine eligibility for deductions and credits, and (3) developed the Embedded Quality Measurement System as a Quality Assurance Program to identify ways to improve the accuracy and quality of services performed at the TACs.[9]

This follow-up review was performed at the IRS Wage and Investment Division Headquarters in Atlanta, Georgia, and in 28 TACs located in the 5 Field Assistance Office geographic areas[10] during the period December 2004 through June 2005.  See Appendix IV for a listing of the TACs visited.  Testing included TIGTA auditors visiting the TACs posing as software vendors to observe 42 TAC assistors prepare tax returns during the week of February 14, 2005.  However, shortly after we began our visits, there were indications assistors may have been aware that we were TIGTA auditors.  This may have affected the results of our observations if assistors changed their behavior and/or prepared the tax returns differently because they knew they were being observed by an auditor.

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.  

 

Results of Review

 

Improvements Have Been Made in the Tax Return Preparation Process

 

Observations and testing of 47 tax returns prepared by TAC assistors showed improvements have been made in the TAC tax return preparation process.  Observations made by TIGTA auditors showed assistors:

·         Adequately screened taxpayers to ensure they met tax return preparation requirements in 47 of 47 observations (100 percent).  Field Assistance Office procedures require assistors to prescreen taxpayers to ensure their tax returns meet income and filing requirements.  There were no instances in which taxpayers’ income exceeded the limit for assistance, and no schedules or forms outside the scope of services were prepared.

·         As required, either assisted taxpayers with the preparation of or ensured taxpayers prepared an IRS Return Preparation Checklist in 47 of 47 observations (100 percent).  Field Assistance Office procedures require taxpayers to complete the Checklist and to bring it and other documentation with them to the appointments to prepare their tax returns.  The Checklist provides the assistors with information such as the names of the taxpayers and any dependents, dates of birth, filing status, etc. 

·         Reviewed completed tax returns with taxpayers and provided them with completed copies of the tax returns in 47 of 47 observations (100 percent).  Field Assistance Office procedures require taxpayers to be provided a paper copy of their prepared returns and related signature documents.

·         Offered to prepare State tax returns in the TACs where State tax returns can be prepared and e-filed.  Taxpayers elected to have their State tax returns prepared and e‑filed in 22 instances.  State tax returns may be prepared in conjunction with Federal tax returns using the same income and schedule limits applicable to the Federal returns.  However, State tax returns will be prepared only when they are based on Federal return data and require no additional computations or input.

In addition, testing of the 47 tax returns to determine if they were prepared correctly (i.e., the tax law was properly applied for the filing status and all income, exemptions, deductions, and credits) showed:

·         Thirty-seven (79 percent) were correctly prepared.

·         Ten (21 percent) were either incorrectly prepared or we could not determine if the tax returns had been prepared correctly.

o       Three tax returns were incorrectly prepared.  For two of the three returns, the Advance Earned Income Credits reported on the Wage and Tax Statements (Form W‑2) were not correctly reported on the taxpayers’ tax returns.  This resulted in overstated tax refunds of $61 and $360.  For the remaining tax return prepared incorrectly, the assistor told the taxpayer he or she qualified for Head of Household filing status but prepared the return using the Single filing status.  Since the taxpayer did not owe any tax, there was no effect on taxes owed or a tax refund due. 

o       Seven tax returns were considered to be incorrectly prepared because assistors did not ask sufficient questions to determine eligibility for various credits and/or deductions.  Counting these tax returns as incorrectly prepared is consistent with the scoring method the IRS uses in its Embedded Quality Measurement System.

Observing assistors while they prepared the 47 tax returns could bias the results.  In a November 2004 report, the Government Accountability Office (GAO) stated that observing taxpayer/assistor interaction could yield “biased data, because assistors will know they are being observed, which could influence their behavior.”[11]  Consequently, the accuracy rates resulting from TIGTA observations may not be representative of true performance.

 

Opportunities Exist for the Field Assistance Office to Continue to Provide Quality Customer Service to Taxpayers Needing Tax Return Preparation Assistance

 

Coordination with another Wage and Investment Division office and improved monitoring are needed to ensure the Field Assistance Office provides enhanced quality customer service to taxpayers needing tax return preparation assistance.

TAC assistors did not consistently use required tools when preparing tax returns

 

Field Assistance Office management issued memoranda to assistors requiring them to use tax return preparation software worksheets when preparing income tax returns.[12]  In addition, they should use the Publication Method Guide (Guide) and existing return preparation instructions for all other credits and deductions not listed in the tax return preparation software worksheets. Assistors should use the Guide to navigate through the complex maze of tax laws and computations and to walk taxpayers through the related IRS publications, highlighting the relevant sections and asking the required probes.  The Guide contains over 1,000 pages and covers approximately 77 tax law topics.  It is available in paper or electronic versions. 

Field Assistance Office management has also issued memoranda to group managers asking them to reinforce the policy requiring assistors to use the Guide when preparing tax returns.  Although Field Assistance Office management has continued to emphasize to assistors that the Guide must be used when preparing tax returns to determine taxpayer qualifications for various deductions and credits, assistors do not consistently adhere to this requirement.  Assistors did not use the Guide for 32 of 47 observations (68 percent). 

However, when the Guide was not used, assistors used worksheets included in the electronic software tax preparation package and/or asked sufficient questions of the taxpayer when determining eligibility.  For example, for:

·         Thirty of 32 observations (94 percent) assistors used required worksheets.

·         Twenty-five of 32 observations (78 percent) assistors asked sufficient questions.

Although the majority of tax returns were accurately prepared, the risk increases that taxpayers may incorrectly receive or not receive credits and/or deductions to which they are qualified if the Guide is not used and procedures are not followed.  The Guide is designed to help assistors in ensuring taxpayers meet the necessary qualifications when determining eligibility to receive certain credits and/or deductions.  In addition, the process is designed to educate the taxpayers on what requirements must be met to receive certain credits and/or deductions. 

Field Assistance Office management advised us they are considering nonuse of the Guide as a conduct issue for assistors.  Therefore, at this time, we are making no recommendation to address this issue.  Field Assistance Office management should continue pursuing this and other options to ensure procedures are followed. 

 

The Field Assistance Office does not coordinate with the Stakeholder Partnerships, Education, and Communication (SPEC) Office to obtain best practices used in its VITA Program 

 

The SPEC Office is responsible for overseeing the VITA Program, which provides Federal tax return preparation and e-filing targeting underserved segments of individual taxpayers, including low-income, elderly, disabled, and limited-English-proficient taxpayers.  The VITA Program plays an increasingly important role in the IRS goal of improving taxpayer service and facilitating participation in the tax system.  The SPEC Office, along with the Field Assistance Office, is within the Customer Assistance, Relationships, and Education organization. 

Taxpayers that visit VITA Program sites to have their tax returns prepared are frequently involved in intricate family situations that make it difficult to correctly understand and apply the complex tax law.  The SPEC Office, in response to concerns raised in a prior TIGTA review, has established and implemented a number of initiatives and processes that have resulted in significant improvements in the VITA Program.[13]

Process improvements made by the SPEC Office could provide a best practice for the Field Assistance Office if implemented in the TACs.  Examples of best practices from the VITA Program that could assist the Field Assistance Office in delivering quality customer service include the use of the Tax Preparation Information Sheet (Form 13614) and Quality Alerts.

·         Form 13614 – This “intake sheet” provides a standardized list of required intake questions to guide volunteers in asking taxpayers basic questions about the taxpayer and his or her situation and circumstances.  The intake sheet is used to open dialogue between the taxpayer and the volunteer, allowing the volunteer to become acquainted with the taxpayer’s unique set of facts.  The VITA Program intake sheet provides assistors with the ability to more effectively determine a taxpayer’s unique set of facts as it relates to tax law. 

Figures 2 and 3 provide excerpts from the two intake sheets used by the Field Assistance Office at TACs and the SPEC Office at VITA Program sites.

Figure 2:  IRS Return Preparation Checklist

 

Figure 2 was removed due to its size.  To see Figure 2, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Figure 3:  VITA Program Form 13614

 

Figure 3 was removed due to its size.  To see Figure 3, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

·         Quality Alerts – Volunteer Quality Alerts are issued to proactively address emerging issues affecting the quality of tax return preparation.  Throughout the 2005 Filing Season,[14] the SPEC Office and its partners[15] issued 11 Alerts.  These Quality Alerts were used to enhance the quality of tax returns prepared in the VITA Program by informing volunteers of certain tax issues that may be adversely affecting the accuracy of tax returns.  See Appendix V for a complete listing of these Quality Alerts. 

One Quality Alert instructed volunteers to use the Form W-2 with the intake sheet and a strong interview as they prepare tax returns.  It stated that every entry on the Form W-2 is critical in completing an accurate tax return.  See Figure 4 for a copy of this Quality Alert. 

Figure 4:  Volunteer Quality Alert 2005-05

Figure 4 was removed due to its size.  To see Figure 4, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

In two of the three incorrectly prepared tax returns tested, assistors did not enter the Advance Earned Income Credit as reported on the Form W-2 when preparing the taxpayers’ tax returns.  If Volunteer Quality Alert 2005-05 had been distributed to the TACs, it may have reminded the assistors of the need to ensure every entry included in the Form W-2 is critical to the accurate preparation of a tax return.

 

Unique Electronic Filing Identification Numbers (EFIN) were not assigned to every TAC

 

The IRS requires that participants in its e‑file program use unique numbers called EFINs to identify who originated the tax return and the office transmitting the electronic return.  The EFIN is a six-digit number assigned by the IRS; there should be only one EFIN for the same business entity and address.  Therefore, each office preparing e-filed tax returns should have a unique EFIN, including each TAC. 

The Field Assistance Office has not developed a process to identify the EFINs currently assigned to each TAC, nor is it ensuring each TAC has a unique EFIN assigned.  An EFIN listing provided in December 2004 by Field Assistance Office management showed EFINs were:

·         Still maintained for closed TACs.

·         Not assigned to all open TACs. 

·         Used by multiple TACs.  For example, four TACs were assigned to one EFIN.

If unique EFINs are not assigned to each TAC, the IRS will not be in conformance with its own e-file requirements.  Further, without the proper assignment of unique EFINs to each TAC, Field Assistance Office management will be unable to assess the quality of the tax return preparation in a particular TAC.  Unique EFINs will allow Field Assistance Office managers to determine by TAC the number of tax returns rejected from the e-file program and the reasons the tax returns were rejected.

 

Recommendations

 

The Commissioner, Wage and Investment Division, should:

Recommendation 1:  Develop a partnership between the Field Assistance and SPEC Offices to share best practices to improve the tax return preparation process.  This would include replacing the Field Assistance Office intake sheet with the one used by the VITA Program and using Quality Alerts to address emerging issues affecting TAC tax return preparation.

Management’s Response:  IRS management agreed with this recommendation and has initiated actions to work with the SPEC Office to identify best practices to improve the tax return preparation process, including revising the Field Assistance Office intake sheet and coordinating with the SPEC Office on the issuance of Quality Alerts to Field Assistance Office employees to proactively address emerging issues.

Recommendation 2:  Develop a process to ensure each TAC is assigned a unique EFIN.

Management’s Response:  IRS management agreed with this recommendation and is working to ensure each TAC has a unique EFIN for the 2006 Filing Season.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

The overall objective of this review was to determine whether taxpayers receive quality service, including accurate tax returns, when visiting the Taxpayer Assistance Centers (TAC)[16] to have their tax returns prepared and filed.  Specifically, we:

I.                   Determined the process the Internal Revenue Service (IRS) follows to ensure tax returns prepared at the TACs are correctly prepared.

A.    Identified key controls designed to ensure tax returns are prepared correctly.

B.     Identified actions the IRS has taken in response to issues cited in a prior Treasury Inspector General for Tax Administration (TIGTA) report.[17]

II.                Determined whether key controls are functioning as intended.

A.    TIGTA auditors posed as software vendors from a fictitious company supposedly hired by the IRS to develop tax preparation software for the TAC Tax Preparation Program.  During the week of February 14, 2005, the auditors observed 42 TAC employees prepare 47 Tax Year 2004 tax returns at a sample of the TACs nationwide and assessed the accuracy of the tax returns prepared, including the customer service provided to the taxpayers. 

We selected the TACs in the States visited during another current TIGTA audit.[18]  This was done in the event a decision was made to perform comparative analysis between the two tax return preparation processes.  During that audit, auditors planned to visit Volunteer Income Tax Assistance sites in Arizona, California, Florida, Georgia, Illinois, Louisiana, Maine, Massachusetts, New Hampshire, New York, North Carolina, Ohio, Pennsylvania, and Texas.  In addition, at the request of Field Assistance Office management, we visited only those TACs with a group manager on site.  See Appendix IV for a listing of TACs visited.

B.     Analyzed data from the Individual Master File[19] Returns Transaction File[20] Subset File at the TIGTA Data Center Warehouse to identify the characteristics of taxpayers that had a 2003 tax return prepared at the TACs.

C.     Performed analyses that included reviewing the information documented by auditors during the observation process, as well as reviewing documentation provided by the taxpayer to the assistors that was maintained by the IRS subsequent to the preparation, and determined whether the assistors’ actions met procedural and regulatory guidelines.

 

Appendix II

 

Major Contributors to This Report

 

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

Randee Cook, Director

Paula Johnson, Audit Manager

Frank Jones, Audit Manager

Russell Martin, Audit Manager

Grace Terranova, Lead Auditor

Deborah Drain, Senior Auditor

Lynn Faulkner, Senior Auditor

Jack Forbus, Senior Auditor

Sharla Robinson, Senior Auditor

Sharon Shepherd, Senior Auditor

Roberta Fuller, Auditor

Joseph Butler, Information Technology Specialist

 

Appendix III

 

Report Distribution List

 

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 Assistance, Relationships, and Education, Wage and Investment Division SE:W:CAR

Acting Director, Strategy and Finance, Wage and Investment Division  SE:W:S

Acting Chief, Performance Improvement, Wage and Investment Division  SE:W:S:PI

Director, Field Assistance, Wage and Investment Division  SE:W:CAR:FA

Acting Director, Stakeholder Partnerships, Education, and Communication, Wage and Investment Division  SE:W:CAR:SPEC

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:  Acting Senior Operations Advisor, Wage and Investment Division  SE:W:S

 

Appendix IV

 

Taxpayer Assistance Centers Visited

 

Source: Treasury Inspector General for Tax Administration Taxpayer Assistance Center Selection.

We visited multiple Taxpayer Assistance Centers in Phoenix, Arizona, and Houston, Texas.

 

Appendix V

 

Volunteer Quality Alerts Issued During the 2005 Filing Season^[22]

 

Source:  Auditor analysis of Quality Alerts issued by the Stakeholder Partnerships, Education, and Communication Office.

 

Appendix VI

 

Management’s Response to the Draft Report

 

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