TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

 

 

Significant Improvements Have Been Made in the Oversight of the Volunteer Income Tax Assistance Program, but Continued Effort Is Needed to Ensure the Accuracy of Services Provided

 

 

 

November 2005

 

Reference Number:  2006-40-004

 

 

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   |  202-927-7037

Email Address   |  Bonnie.Heald@tigta.treas.gov

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

 

November 4, 2005

 

 

MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION

 

FROM:                            Michael R. Phillips /s/ Michael R. Phillips

                                         Deputy Inspector General for Audit

 

SUBJECT:                    Final Audit Report – Significant Improvements Have Been Made in the Oversight of the Volunteer Income Tax Assistance Program, but Continued Effort Is Needed to Ensure the Accuracy of Services Provided (Audit # 200540002)

 

This report presents the results of our review to determine whether taxpayers receive quality service, including the accurate preparation of their tax returns, when visiting Volunteer Income Tax Assistance (VITA) sites to have tax returns prepared.[1]  We also assessed the ease with which taxpayers can locate VITA sites and determine the specific services offered and the Internal Revenue Service’s (IRS) process for ensuring the overall quality of VITA Program operations.  This audit is a follow-up to a prior Treasury Inspector General for Tax Administration (TIGTA) review.^[2] 

Synopsis

The Tax Reform Act of 1969[3] resulted in the formation of the VITA Program.  Emphasis has continually focused on expanding the VITA Program through increased recruitment of social service, nonprofit, corporate, financial, educational, and government organizations; involvement of the military on a national level; and expansion of assistance provided to the limited-English-proficient community.  VITA sites are often located at neighborhood centers, libraries, schools, churches, and shopping malls.  The VITA Program provides no-cost Federal tax return preparation and electronic filing to target underserved segments of individual taxpayers, including low-income, elderly, disabled, and limited-English-proficient taxpayers.  These taxpayers are frequently involved in complex family situations that make it difficult to correctly understand and apply the tax law.

The prior TIGTA review identified that VITA volunteers did not always correctly prepare tax returns and taxpayers did not always receive accurate information about VITA site locations, hours of operation, and scope of services from the IRS.  IRS management committed to emphasizing the requirement for VITA volunteer training certifications; implementing an automated system to improve the Stakeholder Partnerships, Education, and Communication (SPEC) function’s ability to provide VITA volunteers with Quality Alert updates; implementing a plan for quality review and quality assurance; and building an indicator in the IRS computer system used to control VITA sites for field offices to use to acknowledge verification of VITA site information accuracy.

From February through April 2005, TIGTA auditors performed 36 anonymous visits and had 35 tax returns prepared.[4]  We determined the IRS had established and implemented a number of initiatives and processes that have resulted in improvements to the VITA Program, including the SPEC function’s increased ability to oversee and monitor the Program.  The SPEC function is requiring all VITA volunteers, regardless of their professional background and experience, to pass[5] a tax law examination and sign a Standards of Conduct Volunteer Return Preparation Program (Form 13615), enhancing training and tax reference materials, developing a multiyear quality business plan, and upgrading the management information system. 

In addition, the SPEC function began issuing Quality Alerts to proactively address emerging issues affecting the quality of tax return preparation.  The extent to which the Quality Alerts are reaching the frontline VITA volunteers remains somewhat unanswered because there is no system in place to ensure all VITA sites and VITA volunteers receive the Alerts.  After the Quality Alerts were issued, TIGTA auditors asked volunteers at 18 VITA sites if the sites had received the Alerts; 6 (33 percent) of the 18 VITA sites had not.

Challenges remain for an effective quality assurance process.  Key controls implemented by the SPEC function to help ensure the accuracy of tax returns prepared by VITA volunteers were not consistently followed.  As a result, 23 (66 percent) of the 35 tax returns prepared during this review were incorrect.  If 18 (78 percent) of the 23 incorrectly prepared tax returns had been filed, the IRS would have incorrectly refunded $17,818.  Alternatively, if the remaining 5 (22 percent) incorrectly prepared tax returns had been filed, the taxpayers would not have received $3,215 in tax refunds to which they were entitled.

Reviews of the selected VITA sites showed that VITA volunteers did not always use or refer to intake sheets or resource guides when preparing tax returns and did not always perform a quality review of the completed tax returns.  In addition, controls developed to ensure VITA site information provided by the IRS is accurate were not always followed.  VITA site information provided by IRS toll-free telephone program assistors was inaccurate for 29 (45 percent) of 64 sites tested.

Furthermore, although a comprehensive quality assurance process was proposed in response to the prior TIGTA review, a number of obstacles, including stakeholder concerns about the intrusiveness of an observation process and data collection restrictions, have prevented the implementation of an effective process.

Recommendations

We recommended the Commissioner, Wage and Investment Division, develop a process to ensure Quality Alerts are distributed to all VITA volunteers, revise the Tax Preparation Information Sheet (Form 13614)[6] to include questions to determine whether taxpayers are divorced and anyone else can claim their children as dependents, ensure Site Information Sheets are received from each participating VITA site and the information from the Sheets is accurately reflected in the information used by IRS toll-free telephone program assistors, and pursue methods to achieve the objectives for the quality assurance process planned for the 2005 Filing Season.[7]

Response

IRS management appreciates our continued recognition of the immense challenges that VITA volunteers face in preparing accurate returns, considering the complexity of the tax law and the often complicated family situations.  IRS management also agrees challenges remain and the process could be improved.  IRS management agreed with our recommendations and is taking corrective actions.  The SPEC function will educate partners and site coordinators on the Quality Alerts at site coordinator meetings and will conduct random checks at the Territory level to determine if volunteers received the Quality Alerts.  It also revised the Form 13614 to include questions to determine whether taxpayers are divorced and anyone else can claim their children.  In Fiscal Year 2006, the SPEC function will require mandatory use of the newly designed SPEC Volunteer Site Information Sheet (Form 13715).  Area Offices will ensure site accuracy by conducting at least 10 percent test calls to VITA appointment-only sites by March 1, 2006.  The SPEC function will develop procedures for continuous updates by sharing the Form 13715 electronically with site coordinators to provide real-time changes that may occur throughout the filing season.  Finally, the SPEC function is planning a three-tier approach to its Quality Improvement Program to include site reviews, shopping reviews, and tax return reviews.  The tax return reviews will be in lieu of observation reviews because of stakeholder concerns and SPEC function management’s belief that the observations did not yield valid data because individuals act differently when being observed.  Management’s complete response to the draft report is included as Appendix IX.

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 Scott Macfarlane, Acting Assistant Inspector General for Audit (Wage and Investment Income Programs), at (925) 210-7027, ext. 102.

 

Table of Contents

 

Background

Results of Review

Significant Improvement in the Oversight of the Volunteer Income Tax Assistance Program Has Been Made

Recommendation 1:

Challenges Remain for an Effective Quality Assurance Process

Recommendations 2 and 3:

Recommendation 4:

Appendices

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Sites Reviewed and Volume of Tax Returns Prepared During the 2005 Filing Season

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

Appendix VI – Results of Tax Returns Incorrectly Prepared at Volunteer Income Tax Assistance Sites

Appendix VII – Tax Preparation Information Sheet

Appendix VIII – Quality Review Checklist

Appendix IX – Management’s Response to the Draft Report

 

 

Background

 

The Internal Revenue Service (IRS) Volunteer Income Tax Assistance (VITA) Program originated in 1969 due to enactment of the Tax Reform Act of 1969[8] and an increased emphasis on taxpayer education programs.  Emphasis has continually focused on expanding the VITA Program through increased recruitment of social service, nonprofit, corporate, financial, educational, and government organizations; involvement of the military on a national level; and expansion of assistance provided to the limited-English-proficient community.  The location of community-based VITA sites[9] is often neighborhood centers, libraries, schools, churches, and shopping malls.

The VITA Program plays an increasingly important role in the IRS goal of improving taxpayer service and facilitating participation in the tax system.  The VITA Program provides no-cost Federal tax return preparation and electronic filing (e-filing) to target underserved segments of individual taxpayers, including low‑income, elderly, disabled, and limited-English-proficient taxpayers.  These taxpayers are frequently involved in complex family situations that make it difficult to correctly understand and apply the tax law. 

Oversight of the VITA Program is the responsibility of the IRS Stakeholder Partnerships, Education, and Communication (SPEC) function.  The SPEC function is responsible for determining policies and procedures, developing products and training material, and monitoring and managing VITA Program activity.  The SPEC function’s business objectives include increasing access to VITA sites for low‑income taxpayers, increasing e‑filing, and enhancing tax return accuracy.  During the 2005 Filing Season,[10] 4,620 community-based VITA sites were involved in the preparation of over 600,000 tax returns.

For the 2005 Filing Season, taxpayers using the VITA Program to prepare and e‑file their tax returns potentially saved a minimum of $30 million.

 

The VITA Program model is based on the assumption that national and local partners will invest in tax administration

 

While preparing accurate tax returns is an immediate business objective of the VITA Program, sustaining current levels of tax preparation service is a critical strategic challenge.  Supporting and delivering significant tax return preparation volume is resource intensive.  The SPEC function’s partner-based business model is rapidly evolving to address this issue.  It is based on the fundamental assumption that national and local partners will invest in tax administration (i.e., outreach and tax return preparation) if such programs provide tangible benefits for their constituents. 

Therefore, an early component of the model linked funds produced through tax refunds and tax credits to broader financial literacy and asset-building initiatives for taxpayers that seek the services provided by a VITA site.  Accurate tax return preparation became the catalyst for the SPEC function’s partners to offer financial workshops; bring the “unbanked” into the financial system; provide debt and credit counseling; and, in many cases, offer individual development accounts.  SPEC function management supports these initiatives because they believe there is a link between financial viability and ongoing tax compliance.

That tax administration can serve as the means to broader ends is central to the SPEC function’s strategic vision.  To expand the value of community-based partnerships or coalitions and, more importantly, expand the scope of potential resources, the SPEC function and its partners are introducing multibenefit services to volunteer programs.  Increasingly, services such as food stamps and children’s health insurance, food and nutrition education, energy assistance, and transportation subsidies directed to low-income individuals and families are being offered at VITA sites.

Developing an integrated portfolio of community services is central to a strategy of expanding and sustaining tax administration programs over an extended period.  The SPEC function’s national partner recruitment strategy identifies organizations, including many Federal Government agencies, interested in providing critical funding to the VITA Program because of an intersection of interests and goals.  For example, a recent Memorandum of Understanding was signed between the SPEC function and the Department of Justice.  It represents the Department of Justice providing $1 million dollars in grants for volunteer tax preparation and individual development accounts under a program entitled “Weed and Seed.” 

 

A prior Treasury Inspector General for Tax Administration (TIGTA) audit identified that improvements were needed to ensure tax returns are prepared correctly at VITA sites

 

A prior TIGTA audit identified that tax returns were not always correctly prepared by VITA volunteers and taxpayers did not always receive accurate information about VITA site locations, hours of operation, and scope of services from the IRS.^[11]  The lack of tax return accuracy was generally attributed to the absence of or need to improve oversight and processes relating to (1) gathering and using key taxpayer information, (2) ensuring accountability and appropriate training, and (3) reviewing the quality of completed tax returns.  The lack of accurate VITA site information was associated with inconsistent adherence to guidelines in place to ensure VITA site information is input timely and accurately into the IRS computer system used to control VITA sites.

We recommended the IRS review the existing process for ensuring volunteers are qualified to prepare tax returns, develop a quality review program that ensures volunteers are correctly applying the law, and ensure VITA Program site information is current and accurate.  In response, IRS management committed to emphasizing the requirement for volunteer training certifications, implementing an automated system to improve the SPEC function’s ability to provide volunteers with Quality Alert updates, implementing a plan for quality review and quality assurance, and building an indicator in the IRS computer system used to control VITA sites that field offices will use to acknowledge verification of VITA site information accuracy.

 

Scenarios used in the follow-up review by auditors during anonymous visits reflected characteristics typical of taxpayers that seek assistance from the VITA Program

 

In response to the previous TIGTA audit, IRS management expressed concerns that the scenarios used during anonymous visits may not have been representative of taxpayers that seek assistance from the VITA Program.  To ensure the scenarios used in this current review reflected the characteristics of taxpayers that seek assistance from the VITA Program, we based the scenarios on the tax filing characteristics of individuals that used a community-based VITA site to have their Tax Year 2003 tax returns prepared.[12]  These taxpayers, on average, earned approximately $15,050 annually, and about 34 percent of them claimed 1 or more dependents.  Figure 1 provides some additional key characteristics of the 518,604 individuals that had their Tax Year 2003 tax returns prepared at VITA sites.

Figure 1:  General Characteristics of the Tax Returns Prepared by the VITA Program in 2004 (Tax Year 2003)

Figure 1 was removed due to its size.  To see Figure 1, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

The two scenarios developed for this follow-up review include:

Scenario 1 – The taxpayer is divorced and lives with his or her 7-year-old child.  The taxpayer had the same job working as a clerk throughout 2004.  Wages reported on the Wage and Tax Statement (Form W-2) totaled $25,483.  The taxpayer was paid bimonthly and contributed to a 401(k) plan.  The taxpayer received an Interest Statement (Form 1099-INT) totaling $110.  As part of the taxpayer’s divorce, the taxpayer signed a Release of Claim to Exemption for Child of Divorced or Separated Parents (Form 8332).  The taxpayer receives $300 a month for child support.  The taxpayer had dependent care expenses totaling $1,312.

Scenario 2 – The taxpayer is single, has never been married, and lives with his or her mother.  The taxpayer has 2 children, a 10-year-old and 8-year-old that live with the taxpayer in the home of the taxpayer’s mother during June, July, and August.  The children live with the other parent during the school year.  The taxpayer works a part-time evening job as a cashier and is paid $10,210.  The taxpayer’s mother earns $40,000 a year.  The taxpayer attends college part time; the cost is paid for by the taxpayer’s mother.

This follow-up review was performed at the IRS Customer Assistance, Relationships, and Education function in the Wage and Investment (W&I) Division Headquarters in Atlanta, Georgia, during the period January through May 2005.  From February through April 2005, TIGTA auditors performed 36 anonymous visits and had 35 tax returns prepared[13] at randomly selected VITA sites located in 13 States (see Figure 2).  Appendix IV provides the specific city and State of the VITA sites visited as well as the volume of tax returns prepared by the VITA sites during the 2005 Filing Season.  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.

Figure 2:  States Included in the TIGTA’s 2005 Filing Season Assessment of the VITA Program

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.

 

 

Results of Review

 

Significant Improvement in the Oversight of the Volunteer Income Tax Assistance Program Has Been Made

 

In response to concerns raised in the prior TIGTA review, the IRS established and implemented a number of initiatives and processes that have resulted in improvements in the VITA Program.  These improvements have increased the ability of the SPEC function to oversee and monitor the Program.  They include:

·         All VITA volunteers, regardless of professional background or experience, are now required to pass a tax law examination to be certified to prepare tax returns.  SPEC function guidelines require each VITA volunteer directly involved in the preparation of tax returns (including quality reviewers) to pass a tax law examination regardless of the individual’s tax preparation experience.  Specifically, guidelines require VITA volunteers, prior to engaging in the tax return preparation process, to demonstrate that they have received an appropriate minimum level of training by passing a tax law examination.  To “pass” an examination, the VITA volunteer must earn a score of 70 percent or better.  For the 36 VITA sites we visited, 120 volunteers were present and directly involved in the quality review and preparation of tax returns.  Of the 120 VITA volunteers, 115 (96 percent) had passed the required tax law examination.

·         VITA volunteers are now required to sign a rules of conduct statement.  VITA volunteers are required to sign a Standards of Conduct Volunteer Return Preparation Program (Form 13615) that includes a commitment to apply the tax laws equitably and accurately to the best of their ability and to prepare tax returns only within the scope of their training and experience.  Of the 120 volunteers present at the VITA sites during our visits, 116 (97 percent) had signed the required Form 13615.

·         Training is concentrated on areas identified as deficiencies in the prior TIGTA review.  New minimum required training topics were identified for all VITA volunteers to ensure the Program training included tax issues most common to the Program’s customer base.  In addition, several key topics in the VITA Program volunteer training material were enhanced with interview tips and decision trees to affect learning.  The revised training topics covered adjustments to income and tax computation, filing status, dependents, Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and the use of reference materials.  Figure 3 presents a comparison of the accuracy of specific tax law topics from our prior review to those in this review.  VITA volunteers increased the accuracy relating to two topics where increased training was provided, the EITC and filing status.

 

Figure 3:  Comparison of Tax Law Accuracy for the 2004 and 2005 Filing Seasons[14]

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.

·         The SPEC/Partner Quality Improvement Team developed a multiyear quality business plan.  In April 2004, the SPEC function established a SPEC/Partner Quality Improvement Team (Quality Team).  The Quality Team developed a multiyear quality business plan, which involved preparing a map outlining the end-to-end VITA Program process and identifying specific intervention points that provided an opportunity to improve the overall quality of the Program (see Figure 4).  Subsequent to outlining the process, the Quality Team identified five strategies focusing on improving the quality of tax returns prepared by VITA volunteers:  (1) volunteer training; (2) standard operating procedures; (3) participants in the VITA Program understanding their respective roles, responsibilities, and capabilities; (4) continual assessment of the quality of the VITA Program; and (5) proactive communication of the progress, quality, success, and evolution of the VITA Program to internal and external stakeholders.  Because of the complexity of the VITA Program and in appreciation of all stakeholders’ capacities to respond to the recommendations in the plan, the plan calls for a multiyear approach.

Figure 4:  VITA Program Process (Mapped by the Quality Team)

 

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 addition, to provide an opportunity for the SPEC function and its VITA Program partners to maintain continuous communications concerning the VITA Program, the Quality Team hosts weekly SPEC function and partner conference calls.  These calls serve as a forum for participants to share concerns and work together as a group to identify solutions to any problems surfaced, discuss development of best practices for Program-wide implementation, and identify product improvement opportunities. 

·         An improved system is in place to monitor VITA Program quality indicators.  The SPEC function’s implementation of its upgraded “Volunteer Site Monitoring Tool” provides management and other stakeholders with new broad capabilities for overseeing numerous VITA Program quality and production indicators.  The information contained on this system is updated weekly to ensure management information reports generated by the system provide current perspective concerning activities of the Program.  Reports can be generated by Area Office, Territory,[15] partner, and national partner levels and by a specific VITA site if necessary.  As a result, SPEC function management is able to rely on the system to monitor the VITA Program and make informed tactical adjustments as deemed necessary at any point during the filing season.

·         Volunteer Quality Alerts are issued to proactively address emerging issues affecting the quality of tax return preparation.  Throughout the 2005 Filing Season, in response to emerging trends relating to the quality of tax returns being prepared, the SPEC function and its partners developed and issued 11 Volunteer Quality Alerts.  See Appendix V for a list of the 11 Quality Alerts with a brief description of the topic covered in each Alert.  These Alerts bring to the VITA Program volunteer community’s attention certain tax issues that may adversely affect the accuracy of tax returns.  They also provide IRS management with a vehicle to immediately address issues brought to their attention by the TIGTA. 

For example, TIGTA auditors identified that VITA volunteers were not always taking into account all information contained on the Form W-2 auditors presented, which included an amount contributed to retirement savings.  As a result, VITA volunteers did not always correctly claim the Retirement Savings Contributions Credit on the tax return.  When this was brought to SPEC function management’s attention, the Quality Team immediately developed and distributed Quality Alert 2005-5, “Form W-2 Wage and Tax Statement,” reminding VITA volunteers that every entry on Form W-2 is critical in completing an accurate tax return and that they should consider it for entry to the tax return.  Figure 5 provides a copy of Volunteer Quality Alert 2005-5. 

Figure 5:  Volunteer Quality Alert 2005-05 – Form W-2 Wage and Tax Statement

Figure 5 was removed due to its size.  To see Figure 5, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

Volunteer Quality Alerts may not be reaching all volunteers.  Whether these valuable communiqués reached all frontline VITA volunteers remains unanswered because there is no system to ensure all VITA sites and volunteers are receiving the Quality Alerts.  After the Quality Alerts were issued, our auditors asked VITA volunteers at 18 VITA sites if the site had received the Alerts; 6 (33 percent) of the 18 VITA sites had not.

 

Recommendation

 

Recommendation 1:  The Commissioner, W&I Division, should develop a process to ensure Quality Alerts reach all VITA volunteers.

Management’s Response:  The SPEC function will educate partners and site coordinators at site coordinator meetings on the Quality Alerts and will conduct random checks at the Territory level to determine if volunteers received the Quality Alerts.  As part of the site review process, tax specialists will determine if Quality Alerts were made available to all volunteers.

 

Challenges Remain for an Effective Quality Assurance Process

 

Key controls implemented by the SPEC function to help ensure the accuracy of tax returns prepared by VITA volunteers were not consistently followed.  As a result, 23 (66 percent) of the 35 tax returns prepared were incorrect.  If 18 (78 percent) of the 23 incorrectly prepared tax returns had been filed, the IRS would have incorrectly refunded $17,818.  Alternatively, if the remaining 5 (22 percent) incorrectly prepared tax returns had been filed, the taxpayers would not have received $3,215 in tax refunds to which they were entitled.[16]  Although a comprehensive quality assurance process was proposed in response to the prior TIGTA review, a number of obstacles, including stakeholder concerns about the intrusiveness of an observation process and data collection restrictions, have prevented the implementation of an effective process.

 

Keys controls outlined in the “Integrated Return Preparation Process Model” were not consistently followed

 

Central to the SPEC function’s strategy for ensuring the accuracy of tax returns completed by VITA volunteers is its “Integrated Return Preparation Process Model.”  This Model outlines a step‑by‑step method for preparing accurate tax returns at VITA sites.  The Model’s premise is that, to complete accurate tax returns, VITA Program volunteer preparers must ask certain questions about the taxpayers and, if relevant, their families.  The Model reinforces the importance of completing a Tax Preparation Information Sheet (Form 13614)[17] and conducting a probing interview using the Volunteer Resource Guide (Publication 4012).

The Model also outlines the need to ensure a quality review of the completed tax return is conducted.  To measure the quality of the tax return, the quality review process is designed to ensure calculations and the name(s) and Social Security Number(s) of the taxpayer(s), including a spouse and any dependents, are correct.  Additionally, it requires a validation to determine whether sufficient questions were asked to establish the taxpayer’s filing status and whether income from all Forms W-2 and other income documents is reported on the tax return.

For the 35 tax returns prepared during this review, key controls outlined in the Model were not consistently followed.  For example:

·         Intake sheets containing critical questions were not always used.  The SPEC function developed the Form 13614, which contains a standardized list of required intake questions to guide VITA volunteers in asking taxpayers basic questions about themselves.  The purpose of the intake sheet is to open dialogue between the taxpayer and the VITA volunteer, providing the opportunity for the volunteer to get acquainted with the taxpayer’s unique set of facts.  Each VITA site is required to use the Form 13614.  However, VITA sites were allowed to create their own intake sheet as long as the questions included those listed on the Form 13614.  For the 35 tax returns prepared:

• Five (14 percent) of 35 VITA sites did not use an intake sheet at all.
• Eight (27 percent) of the 30 VITA sites that used an intake sheet did not include all the required critical questions on the intake sheet.

·         VITA volunteers did not always use the information auditors provided on the intake sheets.  Although the intake sheet captures information that, if used correctly, provides the VITA volunteer with sufficient information to correctly determine eligibility for many tax issues (Dependent Care Credit, income, etc.), volunteers did not always use this information to prepare the tax returns.  For example, on Form 13614:

o       A question asks, “Did you pay for childcare [sic] during the tax year that allowed you to work?”  For 13 tax returns, auditors checked that they had child care expenses.  However, for 7 (54 percent) of the 13 tax returns, the VITA volunteers did not address the child care expense issue and, as a result, did not claim a Dependent Care Credit on the tax returns.

o       A question asks, “Did you or your spouse have income during the tax year that was not reported on a [Form] W-2?”  For 13 tax returns, auditors checked that they had other income.  However, for 4 (31 percent) of the 13 tax returns, the VITA volunteers did not address the other income issue and, as a result, did not include the interest income on the tax returns.

We shared this information with SPEC function management, and they immediately developed and issued Quality Alert 2005-3, “Asking the Right Questions,” to remind volunteers of the importance of effectively using the information provided by taxpayers on Forms 13614.

Opportunities exist to improve the intake sheet by including additional critical questions.  If used correctly, the intake sheet is an effective tool for ensuring critical taxpayer information is obtained and applied during the interview process.  The addition of the following two questions may further assist VITA volunteers in obtaining facts relative to a taxpayer’s marital status and ability to claim dependents, if applicable. 

1.      Are you divorced?  The intake sheet includes the question “Were you legally married as of December 31^st?” 

2.      Can anyone else claim the children as dependents?  The intake sheet includes the question, “Can someone else claim your spouse on their tax return?” 

Had either of these questions been included, VITA volunteers might have asked if the auditors had signed an agreement during divorce proceedings granting the ex‑spouse the right to claim the child as a dependent.

·         VITA volunteers did not always use Publication 4012 when making tax determinations.  In 31 (89 percent) of 35 VITA sites where a tax return was prepared, auditors observed that the newly revised Publication 4012 was available to VITA volunteers.  However, only 10 (29 percent) of the 35 VITA volunteers referred to it when preparing the tax returns.

Figure 6 shows an excerpt from Publication 4012 that illustrates the importance of using the guide to ensure VITA volunteers have all the information needed to accurately prepare tax returns.  Had VITA volunteers used Publication 4012 when preparing tax returns for auditors using Scenario 1, the volunteers would most likely have determined the auditors were not entitled to claim the child.  Scenario 1 presented the auditor as a divorced taxpayer who had signed a Form 8332 granting the ex-spouse the right to claim the 7-year-old child as a dependent.  If referred to, a table in Publication 4012 would have led VITA volunteers through a series of questions concluding that the auditors were not entitled to claim the child.  Only 5 (28 percent) of 18 tax returns prepared involving this scenario were accurate with respect to the dependent exemption.

Figure 6:  Interview Tips for Determining Dependent Eligibility

Figure 6 was removed due to its size.  To see Figure 6, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

·         VITA volunteers did not always ensure completed tax returns were subjected to the required quality review process.  For 14 (40 percent) of 35 tax returns prepared at the VITA sites, there was no onsite quality review completed.  When VITA volunteers completed the tax returns, they did not review the tax returns with the taxpayers and/or the tax returns were not reviewed by other volunteers.  Additionally, checklists developed to guide and assist VITA volunteers in quality reviewing the tax returns were not used.  See Appendix VIII for an example of the Quality Review Checklist.

The two different TIGTA scenarios portray tax law issues that VITA volunteers commonly handle.  Figure 7 shows VITA volunteers did not always determine the correct income, filing status, tax credits, and dependent exemptions. 

Figure 7:  Accuracy of Eligibility Determinations

Figure 7 was removed due to its size.  To see Figure 7, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

Incorrectly prepared tax returns not only increase the risk of taxpayers receiving erroneous payments, they also may create additional burden on taxpayers if the IRS later finds potential errors on the tax returns.  These taxpayers may later be required to face the demands of an IRS audit of their tax returns due to potential errors identified on the returns.

 

VITA site information used by IRS toll-free telephone program assistors was not always accurate

 

For 29 (45 percent) of 64 VITA sites tested, the site information used by IRS toll-free telephone program assistors to answer taxpayer calls regarding the locations of and/or services offered by VITA sites was inaccurate.  Testing included validation of each VITA site’s telephone number, address, and dates/hours of operation for which tax return preparation service is offered. 

SPEC function guidelines require field managers to verify, as part of filing season readiness plans and site reviews, that VITA site information is current and accurate so IRS toll‑free telephone program assistors can direct a caller to the right VITA site based on the caller’s needs.  Additionally, according to the IRS Volunteer Coordinator’s Handbook (Publication 1084), by January 1^st of each year, VITA site coordinators must complete a Site Information Sheet indicating the locations, days, and hours of operations for their respective sites and provide it to the appropriate SPEC function contact to ensure the database of information provided to IRS toll-free telephone program assistors is updated to accurately reflect VITA site information.

For 12 (41 percent) of 29 VITA sites for which the site information was inaccurate, the VITA site coordinator could not confirm receipt of the required Site Information Sheet.  For the remaining 17 of 29 VITA sites, 4 had not informed the SPEC function of changes made to the information contained in the original Site Information Sheet.  For the remaining 13 of 17 VITA sites, the information from the Site Information Sheet was either incorrectly updated or system limitations resulted in inaccurate or incomplete information being made available to toll-free telephone program assistors.

Based on 31,329 responses from taxpayers surveyed at various VITA sites during the 2005 Filing Season, only about 5.8 percent of the taxpayers indicated they contacted the IRS to learn about VITA sites.[18]  The majority of taxpayers instead learned about the VITA Program from friends, relatives, employers, the media, the Internet, etc.  However, for those taxpayers that rely on the IRS for VITA site information, inaccurate information can create significant burden.  When we informed SPEC function management about the errors, they took immediate actions to correct the information for the respective VITA sites to minimize the risk of incorrect VITA site information being made available to taxpayers.

 

In Fiscal Year 2005, the SPEC function faced obstacles implementing a comprehensive quality assurance process

 

During Fiscal Year 2005, the SPEC function proposed to implement a new, three-tier quality assurance process to assess the VITA Program’s adherence to and effectiveness of quality standards and procedures.  The quality assurance plans proposed:

·         Three thousand site reviews.  IRS employees visit VITA sites to determine if they have prescribed processes in place.

·         One hundred shopping reviews.  American Institute of Certified Public Accountants (AICPA) members pose as taxpayers using an invented scenario to have tax returns prepared by VITA volunteers. 

·         Six hundred direct observation reviews.  IRS employees observe VITA volunteers preparing tax returns and measure compliance with procedures. 

However, efforts to effectively implement all three tiers of this new quality assurance process were significantly hampered.  Factors hindering the implementation of the quality assurance process included:

·         Lack of a system of records.  The IRS did not have a specifically assigned System of Records Notification in place alerting the public about the data it would be capturing as part of the site reviews.  This is a lengthy legal requirement requiring the agency to disclose, through the Federal Register, specific information about the system, including (1) the name and location of the system; (2) the categories of individuals on whom records are maintained in the system; (3) each routine use of the records contained in the system, including the categories of users and the purpose of such use; and (4) the policies and practices of the agency regarding storage, access controls, retention, and disposal of the records.  As a result, although VITA site reviews were conducted, the SPEC function was unable to record which site was reviewed, which prevented it from tracking specific VITA site review results and consequently eliminated the possibility of effectively following up the reviews with actions for improvement.  However, to resolve this limitation, the Quality Team has drafted a comprehensive System of Records Notification, which is in the approval process.

·         Incomplete shopping reviews.  The number of completed shopping reviews to secure a neutral-party perspective on the tax return preparation process and the taxpayer qualitative experience did not meet expectations.  Only 14 of the 100 reviews planned were actually performed.  The anticipated level of participation never materialized.  The timing of the training was a key factor that contributed to the smaller number of available shoppers.  However, based on our discussion with the Director, AICPA, Tax Division, the AICPA is committed to expanding its involvement in the VITA Program quality assurance process during the 2006 Filing Season and beyond.

·         Discontinuance of observation reviews.  Observation reviews were discontinued as of February 1, 2005, with just 70 of the planned 600 reviews completed.  This decision was based on growing stakeholder concerns that taxpayers may be deterred from having their tax returns prepared by VITA volunteers when they learned that IRS representatives might be overseeing and perhaps unfairly scrutinizing the preparation of their tax returns.  The resulting sample size was too small to draw any strong conclusions regarding the quality of the VITA Program.

Without an effective quality assurance process, management lacks sufficient information to monitor VITA Program quality and properly manage corrective actions.  Specifically, current limitations associated with the VITA Program quality assurance process have resulted in the lack of data needed to steer efforts to update publications and forms and to improve VITA Program volunteer training for the 2006 Filing Season.  Further, without an effective quality assurance process, the risk will continue that VITA volunteers will inappropriately apply the tax law, which may result in incorrectly prepared tax returns and significant losses to the Federal Government.

 

Recommendations

 

The Commissioner, W&I Division, should:

Recommendation 2:  Revise the Form 13614 to include questions to determine whether 1) taxpayers are divorced and 2) anyone else can claim their children as dependents.

Management’s Response:  The SPEC function revised the Form 13614 to include questions to determine whether taxpayers are divorced and anyone else can claim their children.  It will check for use of the Form 13614 during planned Volunteer Return Preparation Program Quality Improvement Plan and discretionary visits throughout the filing season.

Recommendation 3:  Ensure Site Information Sheets are received from each participating VITA site and the information from the Sheets is accurately reflected in the information used by IRS toll-free telephone program assistors. 

Management’s Response:  In Fiscal Year 2006, the SPEC function will require mandatory use of the newly designed SPEC Volunteer Site Information Sheet (Form 13715).  Area Offices will ensure site accuracy by conducting at least 10 percent test calls to VITA appointment-only sites by March 1, 2006.  In addition, the SPEC function will develop procedures for continuous updates by sharing the Form 13715 electronically with site coordinators to provide real-time changes that may occur throughout the filing season.

Recommendation 4:  Pursue methods to achieve the objectives for the quality assurance process planned for the 2005 Filing Season.  These objectives included observation and site reviews and shopping visits.

Management’s Response:  The SPEC function is planning a three-tier approach to its Quality Improvement Program to include site reviews, shopping reviews, and tax return reviews.  The tax return reviews will be in lieu of observation reviews because of stakeholder concerns and SPEC function management’s belief that the observations did not yield valid data because individuals act differently when being observed.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

Our overall objective was to determine whether taxpayers receive quality service, including the accurate preparation of their tax returns, when visiting Volunteer Income Tax Assistance (VITA) sites to have tax returns prepared.  We also assessed the ease with which taxpayers can locate VITA sites and determine the specific services offered and the Internal Revenue Service’s (IRS) process for ensuring the overall quality of VITA Program operations.

Specifically, we:

I.            Identified the IRS’ process for measuring the quality and accuracy of the VITA Program.

A.           Determined actions taken in response to a prior Treasury Inspector General for Tax Administration (TIGTA) audit[19] to improve quality and accuracy.

B.           Obtained and reviewed the IRS’ response to Senate Appropriations Committee Report 108-342, detailing the IRS’ proposed method for properly educating and training VITA volunteers to ensure tax returns prepared on the taxpayers’ behalf are done correctly.

C.           Identified key controls implemented to assist in ensuring tax returns are prepared accurately and information provided to taxpayers regarding the VITA site is accurate. 

D.           Obtained and reviewed internal guidance to identify key controls that assist the IRS in ensuring the accurate preparation of tax returns. 

E.            Obtained and reviewed guidance provided to VITA volunteers to identify key controls the VITA sites use to ensure the accurate preparation of tax returns.

 II.            Determined if taxpayers are provided with accurate information as to the VITA sites’ locations, hours of operation, and types of services provided.

A.       Determined the process followed by the IRS to populate the VITA site listing and ensure the information contained remains accurate.

B.        Confirmed the accuracy of the information contained on the listing provided to toll‑free telephone program assistors for 64 VITA sites judgmentally selected from February 1 through April 14, 2005, covering all 4 Stakeholder Partnerships, Education, and Communication function Area Offices.[20]  The population of VITA sites is not fixed; VITA sites open and close throughout the filing season.  Therefore, we could not determine the total population of VITA sites and could not do a statistical sample.  Our sample of sites was judgmentally selected based on the sites’ proximity to major cities and available resources on the dates of the actual visits.

C.        For the VITA site information provided to taxpayers determined to be incorrect, determined why and attempted to measure the potential effect on taxpayers.

III.            Determined if the VITA sites are accurately preparing tax returns based on facts provided by taxpayers.

A.       Obtained and analyzed an extract of Tax Year 2003 tax returns prepared at community-based VITA sites to identify characteristics of these taxpayers.  This information was used as a basis for the scenarios used by TIGTA auditors.  Tax Year 2003 data were used because they were the most current and complete data available.

B.        Selected a judgmental sample of 36 VITA sites nationwide and attempted to have a tax return prepared.  Sites were judgmentally selected in each of the four Stakeholder Partnerships, Education, and Communication Area Offices and included at least two States from each Area Office.  Site selection was based on resources and the sites’ proximity to major cities.  See Appendix IV for a list of VITA sites visited. 

C.        Determined if the tax returns prepared by the VITA volunteers were correct.  For the tax returns prepared incorrectly, we determined why and attempted to measure the potential effect on taxpayers and tax revenue.

IV.            Determined if VITA sites were operating as intended, including ensuring VITA volunteers are certified to prepare tax returns.

A.       Conducted VITA site reviews evaluating items included on the IRS Volunteer Return Preparation Program Site Reviews (Form 6729).

B.        Compared VITA volunteers certified as reported to the IRS on Volunteer Assistance Summary Reports (Form 13206) to volunteers working at the VITA sites.

C.        Confirmed if the 120 VITA volunteers involved in the preparation of tax returns on the days of our visits had passed the IRS-approved test for certification on minimum required training topics, including the “Basics” – income, adjustments to income and tax computation, filing status, dependents, Earned Income Tax Credit, Child Tax Credit, and use of reference materials. 

D.       Confirmed if the 120 VITA volunteers involved in the preparation of tax returns on the days of our visits had signed a Standards of Conduct Volunteer Return Preparation Program (Form 13615).

E.        For the VITA sites not operating as intended, attempted to determine why as well as the effect on taxpayers.

 

Appendix II

 

Major Contributors to This Report

 

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

Scott A. Macfarlane, Acting Assistant Inspector General for Audit (Wage and Investment Income Programs)

Augusta R. Cook, Director

Russell P. Martin, Audit Manager

Lena M. Dietles, Lead Auditor

Robert Howes, Senior Auditor

Mary L. Keyes, Auditor

Sylvia Sloan-Copeland, Auditor

Joseph C. 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

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

 

Sites Reviewed and Volume of Tax Returns Prepared During the 2005 Filing Season

 

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

 

No VITA site identification information is provided, only the State and city of each VITA site visited.  The volume of tax returns prepared is for the 2005 Filing Season[21] through May 21, 2005, for the specific VITA site visited.

 

Appendix V

 

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

 

Source:  Internal Revenue Service public Internet site (IRS.gov) and the Stakeholder Partnerships, Education, and Communication function.

**  Indicates the issuance of the Quality Alerts was due to information provided to the Stakeholder Partnerships, Education, and Communication function by the Treasury Inspector General for Tax Administration.

 

Appendix VI

 

Results of Tax Returns Incorrectly Prepared at Volunteer Income Tax Assistance Sites

 

Source:  Anonymous visits performed by Treasury Inspector General for Tax Administration auditors.

 

Appendix VII

 

Tax Preparation Information Sheet

 

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

 

Appendix VIII

 

Quality Review Checklist

 

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

 

Appendix IX

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.