TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
Accuracy of Volunteer Tax Returns Is Improving, but Procedures Are Often Not Followed
August 29, 2007
Reference Number: 2007-40-137
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
August 29, 2007
MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Accuracy of Volunteer Tax Returns Is Improving, but Procedures Are Often Not Followed (Audit # 200740019)
This report presents the results of our review to determine
whether taxpayers receive quality service, including the accurate preparation
of their income tax returns, when visiting Internal Revenue Service (IRS) Volunteer
Program[1]
sites. This audit is a followup to prior
Treasury Inspector General for Tax Administration reviews.[2]
Impact on the Taxpayer
The Volunteer Program plays an increasingly important role in achieving the IRS’ goal of improving taxpayer service and facilitating participation in the tax system. Although accuracy rates have been increasing, volunteers continue to not follow procedures that assist in the accurate preparation of tax returns. To ensure the continued success of the Volunteer Program, the IRS must focus its oversight on holding volunteers accountable. Incorrectly prepared tax returns increase the risk of taxpayers receiving erroneous payments or not receiving credits to which they are entitled.
Synopsis
Our reviews over the last four filing seasons[3] have determined accuracy rates for tax returns prepared at Volunteer Program sites continue to increase.[4] In addition, improvements have been made to the oversight of the Volunteer Program. However, to ensure continued success in the Volunteer Program, the IRS must focus its oversight on holding accountable those volunteers who do not follow required procedures.
Accuracy
rates increased from 0 percent in the 2004 Filing Season to 56 percent in the
2007 Filing Season.
Of the 39 tax returns prepared for our auditors by Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly sites for the 2007 Filing Season, 17 (44 percent) were prepared incorrectly. If 10 (59 percent) of these incorrectly prepared tax returns had been filed, the taxpayers would not have received $2,803 in tax refunds to which they were entitled. Alternatively, if the remaining 7 (41 percent) of the incorrectly prepared tax returns had been filed, the IRS would have refunded $15,475 incorrectly.
Since the 2004 Filing Season, we have reported that volunteers are not following required procedures designed to assist in the accurate preparation of tax returns. During the 2007 Filing Season, volunteers again did not consistently use intake sheets, including the IRS Intake and Interview Sheet (Form 13614). In addition, volunteers did not perform the required interview that assists in the preparation of page two of the intake sheet. Further, Volunteer Program sites either did not always have a quality review process or the quality review process did not always include the required elements (e.g., use of a checklist, use of the intake sheet).
For each of the 17 tax returns incorrectly prepared, 1 or more requirements were not followed. For example:
Although steps are being taken to protect taxpayer
information, encryption software was not included on all computers containing
prior year electronically filed (e‑filed)
tax information. Protecting taxpayer
information includes using passwords on computers (to prevent unauthorized
access to the computers), using tax preparation software that encrypts[5]
current year e-filed tax information,
and notifying taxpayers whose information will be retained longer than the
current tax year. Two (33 percent) of the 6 sites we visited that retained
prior year e-filed tax information did
not have encryption software loaded on the 2 computers to protect the prior
year e-filed tax information. These two computers were provided by the
partner organizations, not the IRS.
Partner organizations and their volunteers play a significant role in the IRS’ tax return preparation program. The IRS continues to move away from providing tax preparation assistance at its local walk-in offices (Taxpayer Assistance Centers) and is relying more on the Volunteer Program to provide the service. This presents significant challenges to the IRS. The strengths of the Volunteer Program lie with the partner organizations and their volunteers. The IRS has shown a commitment to holding them accountable for following the direction, guidelines, and required processes that have been put in place. This commitment to holding volunteers accountable should be at the forefront to ensure Program success.
Recommendations
We recommended the Commissioner, Wage and Investment Division, (1) require all Volunteer Program sites to use the IRS-developed Form 13614; (2) provide training to site coordinators, focusing on the specific responsibilities for ensuring volunteer compliance with established requirements; (3) strengthen the policy on actions to be taken when a site is not in compliance with requirements; and (4) ensure taxpayers receive required notification if prior year tax information is maintained and encryption software is loaded on all computers on which prior year e-filed tax information is retained.
Response
Management agreed with Recommendations 2 and 3 but disagreed with Recommendations 1 and 4. For Fiscal Year 2008, the IRS will develop a consistent plan and process for volunteer site coordinator training and will review, revise, and strengthen policies to address the consequences for noncompliant sites.
Management did not agree with Recommendation 1 requiring use of the IRS-developed Form 13614. Management noted they will continue to require the use of an intake and interview process and the Quality Assurance Staff will ensure partner organization compliance with partner organization-developed intake sheets. For Recommendation 4, management stated the electronic tax preparation software provided in Fiscal Year 2008 will encrypt all current and prior year e-filed data; however, requirements for taxpayer notification are sufficiently addressed in Privacy and Confidentiality-A Public Trust (Publication 4299). Management’s complete response to the draft report is included as Appendix IX.
Office of Audit Comment
IRS management disagreed with Recommendation 1 requiring all Volunteer Program sites to use the IRS-developed Form 13614 with the option of the site including additional locally developed information. We have repeatedly reported that sites are not including all required questions on their intake sheets. The IRS allows a site to create its own intake sheet, which must include those questions it requires. However, required questions continue to not be included. In addition, in response to our last report, the IRS had developed a process to ensure intake sheets contained all required questions. This process failed to ensure partner organization compliance; we determined 38 percent of the intake sheets reviewed did not include required questions.
Concerning Recommendation 4, while management stated they disagreed with the recommendation, their planned actions together with Publication 4299 address the intent of the recommendation. We did not take exception to the adequacy of Publication 4299. We reported concerns that the Publication is not always being provided to taxpayers. However, management responded that they would continue to stress that partner organizations obtain permission from taxpayers for any data retained beyond December 31 of each year.
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 E. McKenney, Assistant Inspector General for Audit (Wage and Investment Income Programs), at (202) 622-5916.
Accuracy
Rates Continue to Increase; However, Quality Site Requirements Are Not Being
Followed
Steps Are
Taken to Protect Taxpayer Information at Volunteer Program Sites
Appendices
Appendix
I – Detailed Objectives, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – General Characteristics of Tax Year 2005 Tax Returns Prepared by the
Volunteer Program
Appendix V – List
of Cities and States Visited to Have Tax Returns Prepared
Appendix VI – Results
of Tax Returns Incorrectly Prepared at Volunteer Program Sites
Appendix
VII – Accuracy of Eligibility Determinations
Appendix IX
– Management’s Response to the Draft Report
Abbreviations
|
AARP |
American Association of Retired Persons |
|
e-file; e-filed |
Electronic Filing; Electronically Filed |
|
IRS |
Internal Revenue Service |
|
MQSR |
Minimum Quality Site Requirement |
|
SPEC |
Stakeholder Partnerships,
Education, and Communication |
|
VITA |
Volunteer Income Tax Assistance |
|
VRPP-QIP |
Volunteer Return Preparation Program-Quality
Improvement Process |
The Internal Revenue Service (IRS) Volunteer Income Tax Assistance (VITA) Program originated in 1969 due to enactment of the Tax Reform Act of 1969[6] and an increased emphasis on taxpayer education programs. Emphasis has focused continually 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.
Accurately
prepared tax returns establish credibility in and the integrity of the
Volunteer Program.
The Tax Counseling for the Elderly Program provides free tax help to people age 60 and older. The Revenue Act of 1978[7] authorized the IRS to enter into agreements with private or nongovernmental, public, nonprofit agencies and organizations to provide training and technical assistance to volunteers who provide free tax counseling and assistance to elderly individuals in the preparation of their Federal income tax returns. The law authorizes an appropriation of special funds, in the form of grants, to provide tax assistance to persons age 60 or older. The IRS receives the funds as a line item in the budget appropriation. The total funds are distributed to the sponsors[8] for their expenses.
The IRS Volunteer Program includes VITA sites operated in partnership with the military and with various community-based organizations,[9] as well as sites operated by the Tax Counseling for the Elderly Program and the American Association of Retired Persons (AARP). This audit included an assessment of tax returns prepared at community-based VITA sites and Tax Counseling for the Elderly sites sponsored by the AARP. During the 2006 Filing Season,[10] these sites were involved in the preparation of 1,735,231[11] tax returns. Figure 1 provides a breakdown of the Volunteer Program and the volumes of tax returns prepared during the 2006 Filing Season.
Figure
1: Tax Year 2005 Tax Returns Prepared
by the Volunteer Program
|
Volunteer Program |
Volume of Tax Returns Prepared
|
Percentage |
|
VITA |
645,117 |
30.88% |
|
Military VITA |
295,583 |
14.15% |
|
Colocated VITA* |
31,534 |
1.51% |
|
Tax Counseling for the Elderly (Non-AARP) |
39,287 |
1.88% |
|
Tax Counseling for the Elderly (AARP) |
1,058,580 |
50.66% |
|
Other |
19,299 |
0.92% |
|
Totals: |
2,089,400 |
100.00% |
Source: Treasury
Inspector General for Tax Administration analysis of data retrieved from the IRS
management information system containing Tax Year 2005 filing information.
* = Community-based
VITA sites that are located in buildings occupied by one or more IRS offices.
The Volunteer
Program plays an increasingly important role in achieving the IRS’ goal of
improving taxpayer service and facilitating participation in the tax
system. It provides no-cost Federal tax
return preparation and electronic filing (e‑filing) directed toward underserved segments
of individual taxpayers, including low- to moderate-income, elderly, disabled
and limited‑English‑proficient taxpayers. These taxpayers frequently are involved in
complex family situations that make it difficult to correctly understand and
apply the tax law.
The IRS Stakeholder Partnerships, Education, and Communication (SPEC) function is responsible for providing oversight of the Volunteer Program, which includes determining policies and procedures, developing products and training material, and monitoring and managing Volunteer Program activity. The SPEC function’s business objectives include increasing access to tax preparation services for low‑income taxpayers, increasing e-filing, and enhancing tax return accuracy.
Tax scenarios
used by auditors reflected characteristics of taxpayers who seek assistance
from the Volunteer Program
To ensure the 2 tax scenarios
used in this review reflected the characteristics of taxpayers who seek
assistance from the Volunteer Program, we developed the scenarios based on tax
filing characteristics of the 1,735,231 individuals that used community-based VITA
sites and AARP sites to have their Tax Year 2005 tax returns
prepared. These taxpayers had average
earnings of $17,872 (community-based VITA sites) and $23,469 (AARP-sponsored
sites). Appendix IV provides additional
key characteristics of these individuals.
Further, we designed
the scenarios to include tax law topics that assessed the volunteers’ use of
the tools the SPEC function had created to ensure accurate tax returns are
prepared. The two scenarios included tax
topics related to five of the six credits taxpayers most often claimed on the
Tax Year 2005 returns prepared by community-based VITA and AARP sites. The dollar amount of these 5 credits
represented more than 49 percent (approximately $779 million) of the more than 1.5 billion in
refunds shown on the tax returns for these taxpayers. Taxpayers whose tax returns include 1 or more
of the 5 credits in our scenarios accounted for 779,122 (45 percent) of the 1,735,231
tax returns prepared, based on our analysis of all Tax Year 2005 volunteer-prepared
tax returns. The two scenarios developed
for this review were:
Scenario 1 – The taxpayer was divorced and lived with his or her 8-year-old child. The taxpayer had the same job working as a clerk throughout 2006. Wages reported on the Wage and Tax Statement (Form W-2) totaled $26,542. The taxpayer was paid biweekly and contributed to a 401(k) plan. The taxpayer received a statement of Interest Income (Form 1099-INT) totaling $56.14. The taxpayer received $325 a month for child support. The taxpayer had dependent care expenses totaling $1,112.
An accurately prepared tax return would result in the taxpayer receiving a refund of $2,327. The tax return preparer would have correctly determined the taxpayer’s filing status was Head of Household and the dependency exemption could be claimed. Additionally, the taxpayer qualified for an Earned Income Tax Credit of $867, a Child Tax Credit of $910, and an Additional Child Tax Credit of $90. The taxpayer would also qualify for a Child and Dependent Care Credit of $322, a Retirement Savings Contribution Credit of $94, and a Telephone Excise Tax Refund of $40.
Scenario 2 – The taxpayer was single, had never been married, and lived with his or her sister. The taxpayer had 2 children, ages 6 and 8, that lived with the taxpayer in the home of the taxpayer’s sister during school vacations, including the months of June, July, and August (summer). The children lived with the other parent during the school year. The taxpayer worked a part-time evening job as a clerk and was paid $14,364. The taxpayer’s sister earned $48,000 in 2006. The taxpayer attended college part time, and the cost was paid for by the taxpayer’s sister.
An accurately
prepared tax return would result in the taxpayer receiving a refund of $31. The preparer would have correctly determined
the taxpayer’s filing status was Single.
Additionally, because the taxpayer did not provide more than one-half of
the support for the children, they could not be claimed as dependents by the
taxpayer for Child Tax Credit purposes.
The Earned Income Tax Credit would not be available to the taxpayer because
earned income exceeded the maximum allowable amount and because the children
did not live with the taxpayer for more than one-half of the year. The taxpayer would qualify for a Telephone
Excise Tax Refund of $30.
This review was performed at the IRS Customer Assistance, Relationships,
and Education function in the Wage and Investment Division Headquarters in
Accuracy Rates Continue to Increase; However, Quality Site Requirements Are Not Being Followed
Accuracy rates for tax returns prepared at Volunteer Program sites have continued to increase over the last four filing seasons.[13] Figure 2 shows that rates have increased from 0 percent completed correctly in the 2004 Filing Season to 56 percent completed correctly in the 2007 Filing Season.
Figure 2: Overall Tax Return Accuracy Rates for the 2004-2007 Filing Seasons
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.
The SPEC function has made improvements in its oversight of the Volunteer Program. SPEC function management noted that the participation of Volunteer Program partner organizations in the development and implementation of the quality program has been a key factor in the consistent improvement of quality in the Volunteer Program over the last 4 years. Partner organizations have continued to show an increasing commitment to improving the quality of tax returns prepared at volunteer sites. However, to ensure the continued success of the Program, the IRS must focus oversight on holding volunteers accountable when they do not follow required procedures.
Since the 2004 Filing Season, we have reported that VITA site volunteers are not following required procedures designed to assist in the accurate preparation of tax returns. During the 2007 Filing Season, volunteers again did not consistently use intake sheets, including the IRS Intake and Interview Sheet (Form 13614), and perform the required interview that assists in the preparation of the intake sheet. Further, Volunteer Program sites either did not always have a quality review process or did not have a quality review process that always included the required elements (e.g., use of a checklist, use of the intake sheet).
Of the 39 tax
returns we had prepared for Filing Season 2007, 17 (44 percent) were prepared incorrectly
(56 percent accuracy rate).[14] If 10 (59 percent)
of these incorrectly prepared tax returns had been filed, the taxpayers would
not have received $2,803 in tax refunds to which they were entitled. Specific credits not received included the Child
Tax Credit, Additional Child Tax Credit, Child and Dependent Care Credit, Earned
Income Tax Credit, and Retirement Savings Contribution Credit. Alternatively, if the remaining 7 (41 percent)
of the incorrectly prepared tax returns had been filed, the IRS would have
refunded $15,475 incorrectly. Overstated
refunds resulted from taxpayers incorrectly receiving the Child Tax Credit and Additional Child Tax Credit,
dependency exemption, Child and Dependent Care Credit, and/or Earned Income Tax
Credit.[15] Figure 3 shows a 4-year
trend analysis of tax law accuracy at Volunteer Program sites for the tax law topics
included in our two scenarios.
Figure 3:
Comparison of Tax Law Accuracy Rates for the 2004-2007 Filing
Seasons[16]
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 function has improved its oversight of the Volunteer Program
Accuracy rates have improved with the development and continued refinement of the Volunteer Return Preparation Program-Quality Improvement Process (VRPP‑QIP), which has established procedures and controls to ensure a taxpayer’s tax return is accurate based on the supporting documents provided by the taxpayer, the interview with the taxpayer, and the intake and interview sheet.
Enhancements to the Volunteer Program for 2007 Filing Season include the development of nine Minimum Quality Site Requirements (MQSR). The procedures are not new to the Volunteer Program; however, the MQSR made many of the prior procedures requirements. These Requirements are designed to ensure consistent operation of Volunteer Program sites and to provide taxpayers with the confidence that they are receiving accurate tax return preparation and quality service.
The IRS continues its commitment to providing top-quality service to all taxpayers who visit Volunteer Program sites, especially low- to moderate-income, elderly, disabled, and limited‑English-proficient taxpayers. The IRS initiated a Project in October 2006, to validate whether the VRPP-QIP is a clear, prescribed process the SPEC function can use to train its volunteers, identify opportunities for improvement, and implement any necessary changes. The Project team expects to release its report to the IRS management in June 2007.
Oversight
should shift from evaluating the process to holding accountable those
volunteers who do not comply with the process.
Partner organizations and their volunteers play a significant role in the IRS’ tax return preparation program. The IRS continues to move away from providing tax preparation assistance at its local walk‑in offices (Taxpayer Assistance Centers) and is relying more on the Volunteer Program and its partner organizations to provide the service. This presents significant challenges to the IRS and the SPEC function. The strengths of the Volunteer Program lie with the partner organizations and their volunteers. The SPEC function has shown a commitment to holding them accountable for following the direction, guidelines, and required processes that have been put in place. However, this commitment to holding volunteers accountable should be at the forefront to ensure Volunteer Program success.
Volunteers continue to not follow procedures that assist in the accurate preparation of tax
returns
For each of the 17 tax returns prepared incorrectly, 1 or more elements of the MQSR were not followed. For example:
The MQSR includes the following:
When a Volunteer Program site is not in compliance with a particular MQSR, the SPEC function’s policy is to work with the site and assist it with becoming compliant as soon as possible. Any remedy offered should provide the assistance and support necessary to bring the site into compliance with the MQSR. This may include discussions, counseling, and/or mentoring assistance with the site within a reasonable period. Withdrawing support from a site should be the last resort.[18]
Since the 2004 Filing
Season, we have reported that volunteers do not use all tools designed to
assist in the accurate preparation of tax returns.
Since the 2004 Filing Season, we have reported that volunteers do not use all tools designed to assist in the accurate preparation of tax returns (Appendix VIII presents a list of these reports). During the course of this audit, we provided SPEC function management with observations from our anonymous visits, including specific examples of noncompliance with site MQSR. Based on our input, management contacted representatives from the sites to discuss the issues we had presented and requested corrective actions to be taken.
Site coordinators
are volunteers who provide coordination, organization, and supervision for all
aspects of a Volunteer Program site, including overseeing the site’s operation
during the filing season and ensuring the site is using an intake and interview
process as well as a quality review process.
Discussions with site coordinators
and volunteers associated with the sites that incorrectly prepared tax returns
confirmed both site coordinators and volunteers were aware of the requirement
to have a quality review process.
Explanations for not having a quality review process included (1) there
was no quality review checklist available at the site, (2) a quality review was
performed only when there were complex issues, and (3) the site coordinator was
planning to remind volunteers to conduct a review. In other instances, the site coordinators
could not provide explanations as to why there was no quality review process.
The SPEC function also conducts shopping
visits as part of its quality review program.
The results of these visits confirmed the sites were not consistently
complying with the MQSR. Observations
from the 39 SPEC function shopping visits showed:
In addition, we have previously reported that intake sheets do not contain all critical questions. The SPEC function had developed Form 13614, which contains a standardized list of required questions, to guide volunteers when interviewing taxpayers. Every Volunteer Program site is required to use an intake sheet. Although a site is permitted to create its own intake sheet, this sheet must include those questions the SPEC function designates as required and that are included on Form 13614.
Fifteen (38 percent) of the 39 sites we visited used an intake sheet that did not contain all required questions. In response to our last report, the IRS had developed a process requiring that SPEC function employees obtain copies of intake sheets from the sites they oversee prior to the start of the 2007 Filing Season, to ensure intake sheets contained all required questions. This process was not effective for various reasons: the partner organization changed the intake sheet after the SPEC function’s review, the partner organization did not make the recommended changes based on SPEC function review, or function employees did not consistently follow requirements to review intake sheets.
SPEC
function management is reluctant to require that all sites use Form 13614. For example, one partner organization will
not use Forms 13614, based on a prohibition from its Office of General
Counsel. The partner organization cites
the inclusion of Social Security Numbers on Form 13614 as one of the reasons it
opposes using the Form. The partner organization
sees no value in including Social Security Numbers on the intake sheet and
believes inclusion needlessly increases the risk of stolen identities. However, this does not address why all the
required questions are not included on the partner organization’s intake sheet.
Incorrectly prepared tax returns increase the risk of taxpayers receiving erroneous payments or not receiving credits to which they are entitled. This may also create additional burden on taxpayers if the IRS later finds potential errors on the tax returns and requires the taxpayers to face the demands of IRS audits.
Recommendations
The Commissioner, Wage and Investment
Division, should:
Recommendation 1: Require all Volunteer Program sites to use the IRS-developed Form 13614, with the option of the site including additional locally developed information.
Management’s Response: IRS management did not agree with the recommendation. For 2 years, the SPEC function has required the use of an intake and interview sheet in conjunction with the volunteer’s interview with the taxpayer. The SPEC function will continue to require the use of an intake and interview process that includes an intake sheet, such as Form 13614 or partner organization-developed equivalent, to prompt the return preparer to ask questions necessary for accurate return preparation.
Office of Audit Comment: We have repeatedly reported that sites are not including all required questions on their intake sheets. The SPEC function allows a site to create its own intake sheet, which must include those questions the SPEC function requires. However, required questions continue to not be included. In addition, in response to our last report, the IRS had developed a process to ensure intake sheets contained all required questions. This process failed to ensure partner organization compliance; we determined 38 percent of the intake sheets reviewed did not include required questions.
Recommendation 2: Provide training to site coordinators, focusing on the specific responsibilities for ensuring volunteer compliance with the MQSR.
Management’s Response: IRS management agreed with this recommendation. For Fiscal Year 2008, the SPEC function will focus on developing a consistent plan and process for volunteer site coordinators’ training.
Recommendation 3: Strengthen the policy on actions to be taken when a site is not in compliance with the MQSR, including specific actions that will be taken to ensure the site remains compliant.
Management’s Response: IRS management agreed with this recommendation. In Fiscal Year 2007, the SPEC function implemented a policy to address the consequences for noncompliant sites. For Fiscal Year 2008, the Quality Assurance Staff will review, revise, and strengthen this policy, as necessary.
Steps Are Taken to Protect Taxpayer Information at Volunteer Program Sites
Steps are being taken to protect taxpayer information, including using passwords to protect computers (prevents unauthorized access to the computers), using tax preparation software that encrypts[19] current year e-filed tax information, and notifying taxpayers whose information will be retained longer than the current tax year. However, encryption software was not included on all computers containing prior year e-filed tax information.
To promote e-filing, the IRS provides computers and tax preparation software to Volunteer Program partner organizations. SPEC function management stated that all IRS-provided computers are shipped to sites with encryption software loaded. In some cases, the partner organizations provide the computers. The SPEC function provided approximately 9,400 computers to volunteers for use in the 2007 Filing Season. As of April 21, 2007, Volunteer Program sites had prepared 2,422,169 tax returns; 2,175,108 (90 percent) were e-filed.
The SPEC function stresses to its volunteers that the public trust must be protected and confidentiality of the taxpayer information provided must be guaranteed. To this end, the IRS developed the Privacy and Confidentiality-A Public Trust (Publication 4299), which establishes guidelines for volunteers to follow to protect taxpayer information. The Volunteer Protection Act of 1997[20] states that, if a volunteer willfully discloses information, fails to protect personal information, or is otherwise flagrantly irresponsible with information entrusted to him or her, criminal charges or punitive damages could be brought against the volunteer.
Tax
information is regarded as a prime target for identity thieves.
Thirty-eight (97
percent) of the 39 tax returns prepared for our auditors were created on a
computer with a tax software package that encrypts the current year e-filed tax information. The remaining tax return was prepared on paper. For all but 1 of the 38 returns, a password
was used to protect access to the computer.
Most passwords were universal to the site and not computer specific.
However, not all
sites that retain prior year e-filed tax
information had encryption software loaded on the computers to protect this
information. Two (33 percent) of the 6
sites we visited that retained prior year e-filed
tax information did not have encryption software loaded on the 2 computers
to protect the prior year e-filed tax
information. These two computers had
been provided by the partner organizations.
Also, 1 (17 percent)
of the 6 sites that retained prior year tax information did not provide taxpayers
with the required notification that this information was being retained because
the site retains the information in an electronic format and considers this
storage as an acceptable practice, so taxpayer information is not subjected to
disclosure. Specifically, SPEC function
procedures require that partner organizations with a need to retain prior year e-filed tax information provide written
notice to customers outlining what information will be retained and for how
long, how the information will be used, and that the information will be
protected. Partner organizations are
required to obtain customer approval of the notification.
If a computer
without encryption software that contains prior year e-filed tax information is stolen, the perpetrator may be able to
inappropriately access this information. Information on tax
forms (including names; Social Security Numbers; and income, employment, and
bank account details) is regarded as a prime target for identity
thieves. SPEC function management indicated
that, for the 2008 Filing Season, changes are being made to the tax preparation
software package that will include encrypting prior year e-filed tax information.
Recommendation
Recommendation 4: The Commissioner, Wage and Investment Division, should ensure taxpayers receive required notification if prior year tax information is maintained, even if the information is in an electronic format, and ensure encryption software is loaded on all computers (including partner organization-provided computers) on which prior year e-filed tax information is retained.
Management’s Response: IRS management disagreed with this recommendation. They believe the requirements for taxpayer notification are sufficiently addressed in Publication 4299. The SPEC function will continue to stress that partner organizations obtain permission from the taxpayer for any data retained beyond December 31 of each year. In addition, the electronic tax preparation software provided in Fiscal Year 2008 will encrypt all current and prior year e-filed data.
Office of Audit Comment: While management stated they disagreed with the recommendation, their planned actions together with Publication 4299 address the intent of the recommendation. We did not take exception to the adequacy of Publication 4299. We reported concerns that the Publication is not always being provided to taxpayers. However, management responded they would continue to stress that partner organizations obtain permission from taxpayers for any data retained beyond December 31 of each year.
Appendix I
Detailed Objectives, Scope, and Methodology
The overall objective of this review was to determine whether taxpayers receive quality service, including the accurate preparation of their income tax returns, when visiting Volunteer Program[21] sites. We also determined whether Volunteer Program sites were in compliance with privacy and security guidelines relating to the protection of taxpayer information. This review was limited to community-based VITA sites and Tax Counseling for the Elderly sites sponsored by the AARP. To accomplish the objectives, we:
I.
Determined
whether Volunteer Program sites were accurately preparing individual income tax
returns based on facts provided by taxpayers.
A.
Selected
a judgmental sample of 39 VITA/Colocated VITA[22] and AARP sites nationwide and attempted to
have a tax return prepared. We selected
sites in 13 cities, with a total of 3 VITA/Colocated VITA and AARP sites
being selected in each city. Site
selection was based on the volume of tax returns prepared by the sites, auditor
resources, and the sites’ proximity to major cities. The population of Volunteer Program sites is
not fixed because sites open and close throughout the filing season.[23] Therefore, we could not determine the total
population of Volunteer Program sites and could not do a statistical sample. See Appendix V for a list of cities and States
selected. At each site, an auditor:
1.
Asked to
have his or her individual income tax return prepared using
the information from the scenarios we had prepared, to address questions
included on intake sheets or asked by the volunteer preparing the tax return.
2.
Documented
specific information as it relates to the preparation of the tax return.
B.
Determined
whether the tax return prepared by the volunteer was correct, including whether
the volunteer properly evaluated eligibility for deductions, exemptions, and
credits claimed or denied.
C.
If tax
returns were prepared incorrectly, determined why and calculated the potential
impact on taxpayers and tax revenue.
II.
Determined
whether the Volunteer Program sites were in compliance with privacy and
security guidelines relating to the protection of taxpayer information.
A.
Discussed
with IRS management Volunteer Program guidelines relative to privacy and security
of taxpayer information.
B.
At the
completion of the tax return but subsequent to the auditor identifying himself
or herself, determined whether the volunteer’s computer was password-protected
and encryption software was loaded on the computer. In addition, we determined whether taxpayer
information was retained by sites visited.
C.
If sites
were not in compliance with privacy and security guidelines, determined why and
calculated the potential impact on taxpayers who visited the sites to have
their tax returns prepared.
Appendix II
Major Contributors
to This Report
Michael
E. McKenney, Assistant Inspector General for Audit (Wage and Investment Income
Programs)
Augusta
R. Cook, Director
Russell
P. Martin, Audit Manager
Roberta
Fuller, Lead Auditor
Pamela
DeSimone, Senior Auditor
Tracy
Harper, Senior Auditor
Robert
Howes, Senior Auditor
Jerry
Douglas, Auditor
Mary
Keyes, Auditor
Appendix III
Acting
Commissioner C
Office
of the Commissioner – Attn: Acting
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
Director, Strategy and Finance, Wage and Investment Division SE:W:S
Chief, Performance Improvement, Wage
and Investment Division SE:W:S:PI
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 Internal Control OS:CFO:CPIC:IC
Audit
Liaison: Senior Operations Advisor, Wage and Investment Division SE:W:S
Appendix IV
General Characteristics of Tax Year 2005 Tax
Returns Prepared by the Volunteer Program[24]
|
Type of Tax Return |
VITA |
Tax Counseling for the Elderly (AARP) |
|||
|
Tax Return Volume |
Percentage |
Tax Return Volume |
Percentage of Total |
|
|
|
|
538,521 |
79.59% |
1,001,425 |
94.60% |
|
|
Income
Tax Return for Single and Joint Filers With No Dependents (Form 1040EZ) |
57,749 |
8.53% |
14,289 |
1.35% |
|
|
|
72,751 |
10.75% |
42,298 |
4.00% |
|
|
|
357 |
0.05% |
37 |
0.00% |
|
|
|
6,888 |
1.02% |
477 |
0.05% |
|
|
|
378 |
0.06% |
52 |
0.00% |
|
|
|
6 |
0.00% |
2 |
0.00% |
|
|
Other |
1 |
0.00% |
Not Applicable |
Not Applicable |
|
|
Refund Due/ |
VITA |
Tax Counseling for the
Elderly |
||||
|
Dollar |
Tax Return Volume |
Percentage of Total |
Dollar |
Tax Return Volume |
Percentage of Total |
|
|
Refund
Due |
$824,980,184 |
581,527 |
85.94% |
$753,451,912 |
752,421 |
71.08% |
|
Balance
Due |
$52,674,507 |
71,456 |
10.56% |
$193,454,617 |
217,682 |
20.56% |
|
Breakeven |
$0 |
23,668 |
3.50% |
$0 |
88,477 |
8.36% |
|
Filing Status/Dependent
Claims |
VITA |
Tax Counseling for the
Elderly (AARP) |
||
|
Tax Return Volume |
Percentage of Total |
Tax Return Volume |
Percentage of Total* |
|
|
Single |
388,707 |
57.45% |
627,881 |
59.31% |
|
Head
of Household |
150,707 |
22.27% |
79,697 |
7.53% |
|
Married
Filing Jointly |
123,489 |
18.25% |
336,565 |
31.79% |
|
Widow(er)
With Dependent Child |
360 |
0.05% |
451 |
0.04% |
|
Married
Filing Separately |
13,388 |
1.98% |
13,986 |
1.32% |
|
Tax
Return Prepared With One or More Dependent Exemptions, Including Parents |
222,785 |
32.92% |
142,061 |
13.42% |
|
Tax
Return Prepared With No Dependent Exemptions |
453,866 |
67.08% |
916,519 |
86.58% |
* = Percentages for Filing Status do not total to 100
percent due to rounding.
|
Credits
Claimed |
VITA |
Tax
Counseling for the Elderly (AARP) |
||
|
Tax
Return Volume |
Dollar |
Tax
Return Volume |
Dollar |
|
|
Earned
Income Tax* |
242,090 |
$341,777,976 |
158,677 |
$165,663,303 |
|
Additional
Child Tax* |
89,007 |
$78,589,134 |
42,036 |
$38,576,263 |
|
Child
Tax* |
82,850 |
$71,342,687 |
54,652 |
$56,533,557 |
|
Retirement
Savings Contribution* |
39,220 |
$6,105,289 |
43,114 |
$7,923,802 |
|
Education |
32,025 |
$19,520,826 |
21,955 |
$13,584,644 |
|
Child
and Dependent Care* |
18,039 |
$8,426,862 |
9,437 |
$4,151,649 |
|
Other
(Adoption, Gas, and Health Coverage Tax) |
198 |
$288,503 |
462 |
$586,397 |
* = This credit was included in our test scenarios.
|
Income |
VITA |
Tax Counseling for the Elderly (AARP) |
||
|
Tax Return Volume |
Dollar |
Tax Return Volume |
Dollar |
|
|
Average
Income |
Not Applicable |
$17,872 |
Not Applicable |
$23,469 |
|
Other
Income |
44,359 |
$85,876,228 |
70,455 |
$156,500,615 |
Source:
IRS management information system containing all Tax Year 2005 tax
return data.
Appendix V
List of Cities and States Visited to Have Tax Returns Prepared
·
Boston,
Massachusetts
·
Chicago,
Illinois
·
Cincinnati,
Ohio
·
Miami,
Florida
·
Minneapolis,
Minnesota
·
New
York, New York
·
Philadelphia,
Pennsylvania
·
Phoenix,
Arizona
·
San
Antonio, Texas
·
San
Francisco, California
·
Seattle,
Washington
·
Tulsa,
Oklahoma
·
Wilmington,
North Carolina
Appendix VI
Results of Tax Returns Incorrectly Prepared at
Volunteer Program[25] Sites
|
Volunteer Sites Visited |
Type of Site |
Volunteer Site Refund or Balance Due |
Correct Refund or Balance
Due |
Amount of Understated Refund |
Amount of Overstated Refund |
|
Boston, Massachusetts |
VITA |
$5,640 |
$31 |
|
$5,609 |
|
Chicago, Illinois |
VITA |
$5,640 |
$31 |
|
$5,609 |
|
Chicago, Illinois |
AARP |
$2,233 |
$2,327 |
-$94 |
|
|
Cincinnati, Ohio |
VITA |
$2,005 |
$2,327 |
-$322 |
|
|
Miami, Florida |
VITA |
$1,926 |
$2,327 |
-$401 |
|
|
Miami, Florida |
AARP |
$1,104 |
$31 |
|
$1,073 |
|
Minneapolis, Minnesota |
VITA |
$2,017 |
$2,327 |
-$310 |
|
|
Minneapolis, Minnesota |
VITA |
$2,005 |
$2,327 |
-$322 |
|
|
Minneapolis, Minnesota |
AARP |
$2,233 |
$2,327 |
-$94 |
|
|
New York, New York |
VITA |
$1,054 |
$31 |
|
$1,023 |
|
New York, New York |
VITA |
$2,342 |
$2,327 |
|
$15 |
|
Philadelphia, Pennsylvania |
VITA |
-$412 |
$31 |
-$443 |
|
|
Philadelphia, Pennsylvania |
AARP |
$1,104 |
$31 |
|
$1,073 |
|
San Antonio, Texas |
VITA |
$2,020 |
$2,327 |
-$307 |
|
|
San Antonio, Texas |
VITA |
$2,233 |
$2,327 |
-$94 |
|
|
San Antonio, Texas |
AARP |
$1,911 |
$2,327 |
-$416 |
|
|
San Francisco, California |
VITA |
$1,104 |
$31 |
|
$1,073 |
|
Totals: |
|
|
|
-$2,803 |
$15,475 |
Source:
Anonymous visits performed by our auditors.
Appendix VII
Accuracy of Eligibility Determinations
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.[26]
Appendix VIII
Treasury
Inspector General for Tax Administration Audit Reports on the Volunteer Income
Tax Assistance Program
Improvements Are Needed to Ensure Tax Returns
Are Prepared Correctly at Internal Revenue Service Volunteer Income Tax
Assistance Sites (Reference
Number 2004-40-154, dated August 2004).
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 (Reference Number 2006-40-004, dated November
2005).
Oversight and Accuracy of Tax Returns Continue to Be Problems for the Volunteer Income Tax Assistance Program (Reference Number 2006-40-125, dated August 31, 2006).
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.
[1] The IRS Volunteer Program includes the Volunteer Income Tax Assistance and Tax Counseling for the Elderly Programs. During this review, the Tax Counseling for the Elderly sites we visited were those sponsored by the American Association of Retired Persons.
[2] See Appendix VIII for a list of these reports.
[3] The filing season is the period from January through mid-April when most individual income tax returns are filed.
[4] Prior audits included only community-based Volunteer Income Tax Assistance sites.
[5] Encryption software protects the confidentiality of data stored on a computer.
[6] Pub. L. No. 91-172, 83 Stat. 487 (codified as amended in scattered sections of 26 U.S.C. and 42 U.S.C.).
[7] Pub. L. No. 95-600, 92 Stat. 2810.
[8] A sponsor would be similar to the American Association of Retired Persons.
[9] Some community-based VITA sites are located in buildings occupied by one or more IRS offices.
[10] The 2006 Filing Season relates to the processing of Tax Year 2005 tax returns. The filing season is the period from January through mid-April when most individual income tax returns are filed.
[11] Total of 676,651 completed at community-based VITA sites and 1,058,580 completed at AARP-sponsored sites.
[12] Of the 39 prepared tax returns, 13 were prepared at AARP-sponsored sites and 26 were prepared at community-based VITA sites.
[13] Prior audits included only community-based VITA sites.
[14] In comparison, as of April 19, 2007, the 39 tax returns prepared during shopping visits conducted by SPEC function personnel had an overall accuracy rate of 64 percent.
[15] Appendix VI presents details of these results. Appendix VII presents results by tax scenario.
[16] Only tax law topics included in both follow-up reviews and this review are included in this comparison (see Appendix VII for a complete list of tax topics addressed in this review).
[17] Required checklists include IRS documents (e.g., Quality Review Checklist (Form 8158 (EN/SP)), Important Tax Records (Publication 730), and Volunteer Resource Guide (Publication 4012)) or a locally developed checklist that contains the same information.
[18] IRS support includes software, computers, printers, financial assistance, grants, and VITA and Tax Counseling for the Elderly logo references.
[19] Encryption software protects the confidentiality of data stored on a computer.
[20] Pub. L. No. 105-19.
[21] The IRS Volunteer Program includes the VITA and Tax Counseling for the Elderly Programs.
[22] Some community-based VITA sites are located in buildings occupied by one or more IRS offices.
[23] The filing season is the period from January through mid-April when most individual income tax returns are filed.
[24] The IRS Volunteer Program includes the VITA and Tax Counseling for the Elderly Programs.
[25] The IRS Volunteer Program includes the VITA and Tax Counseling for the Elderly Programs.
[26] The IRS Volunteer Program includes the VITA and Tax Counseling for the Elderly Programs. The filing season is the period from January through mid-April when most individual income tax returns are filed.