TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION
Evaluation
of the Characteristics of Unnecessarily Filed Individual Income Tax Returns
Issued on August 17, 2007
Highlights
Highlights of
Report Number: 2007-40-130 to the
Internal Revenue Service Commissioner for Wage and Investment Division.
IMPACT ON TAXPAYERS
Many people who do not meet the filing requirements file Federal
income tax returns, either to obtain a refund of taxes already paid or because
they do not understand the law. To
reduce the cost to taxpayers who file these tax returns, the Internal Revenue
Service (IRS) should direct taxpayers to free electronic filing (e‑filing).
WHY TIGTA DID THE AUDIT
Every individual with gross income
that equals or exceeds certain limits for a taxable year is required to file a
Federal income tax return. However, many
people file unnecessary tax returns at a cost to both filers and the IRS. The objective of this review was to determine
the steps the IRS has taken or plans to take to reduce the number of unnecessary
tax returns filed, including the means used to notify and educate taxpayers that
they may no longer be required to file tax returns.
WHAT
TIGTA FOUND
More than 8 million individual income
tax returns were unnecessarily filed in each of the 3 years reviewed. For the
purposes of this report, an unnecessary tax return is defined as a return filed
either to obtain a refund of taxes already paid or because the individual did
not understand the tax law, even though the individual’s income did not meet the
filing threshold. Collectively, taxpayers spent
an average of $390 million and 75 million hours per year preparing and
filing these unnecessary tax returns, and the IRS spent an average of $11
million to process the unnecessary tax returns each year.
Taxpayers
may file unnecessary tax returns only to obtain a refund of taxes already paid
or because they do not understand the tax law.
Fifteen percent of the unnecessary tax returns filed did not generate a
refund, while 85 percent of these returns were filed to obtain a full refund of
withheld taxes. More than one-half of
those filing to obtain a refund were under age 21, and 76 percent of those
under age 21 indicated they could be claimed as dependents on other taxpayers’
returns. These taxpayers would have been
exempt from tax withholding because they earned less income than the amount
required to file a return and they
could be claimed as dependents on other taxpayers’ return. More than 60 percent of the unnecessary tax
returns were filed on paper.
The IRS could, at a minimum, reduce its burden if taxpayers moved from preparing and submitting their returns on paper to e-filing. It costs more to process a paper tax return than an electronically filed return. Fewer mistakes are made by both taxpayers and the IRS with electronically filed tax returns, further reducing processing time and costs. Generally, all the taxpayers filing these unnecessary tax returns would qualify to use the IRS Free File Program, which is a free Federal tax preparation and e-filing program for eligible taxpayers. The Free File Program may offer the best opportunity to direct taxpayers from paper filing to e-filing.
WHAT TIGTA RECOMMENDED
Due to concerns about the
potential negative consequences of advising taxpayers to claim exemption from
withholding, TIGTA made no recommendations at this time. In addition, in a recent report entitled Additional Action Is Needed to Expand the
Use and Improve the Administration of the Free File Program (Reference
Number 2007-40-105, dated June 28, 2007), TIGTA recommended the IRS expand the
marketing of the Free File Program by directing promotional materials to
taxpayers who are eligible for the Free File Program but have filed their
returns on paper.
While TIGTA made no recommendations in this report, key IRS
management officials reviewed it prior to issuance and agreed with the facts
and conclusions presented.
READ THE
FULL REPORT
To view the report, including the scope and methodology, go
to:
http://www.treas.gov/tigta/auditreports/2007reports/200740130fr.html.
Email
Address: Bonnie.Heald@tigta.treas.gov
Phone Number: 202-927-7037
Web Site:
http://www.tigta.gov