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:

  • For 12 returns (71 percent), the volunteers did not conduct interviews with the auditors.
  • For 10 returns (59 percent), the intake sheet was not prepared completely. 
  • For 2 returns (12 percent), the volunteer used the intake sheet only to obtain the auditor’s name and address.
  • For 14 returns (82 percent), the sites had either no quality review process (7 sites) or a quality review process that was not in compliance with requirements (7 sites), including volunteers not using the checklist or intake sheet.

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.

 

 

Table of Contents

 

Background

Results of Review

Accuracy Rates Continue to Increase; However, Quality Site Requirements Are Not Being Followed

Recommendation 1:

Recommendations 2 and 3:

Steps Are Taken to Protect Taxpayer Information at Volunteer Program Sites

Recommendation 4:

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 VIII – Treasury Inspector General for Tax Administration Audit Reports on the Volunteer Income Tax Assistance Program

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

 

 

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[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 Atlanta, Georgia, during the period December 2006 through May 2007.  Additionally, from February through April 2007, Treasury Inspector General for Tax Administration auditors performed 39 anonymous visits (called shopping) and had 39 tax returns[12] prepared at judgmentally selected Volunteer Program sites located in 13 States.  Appendix V provides a list of the 13 States and the specific cities where the sites were located.  The audit was conducted in accordance with Government Auditing Standards.  Detailed information on our audit objectives, scope, and methodology is presented in Appendix I.  Major contributors to the report are listed in Appendix II.

 

 

Results of Review

 

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:

  • For 12 returns (71 percent), the volunteers did not conduct interviews with the auditors.
  • For 10 returns (59 percent), the intake sheet was not prepared completely. 
  • For 2 returns (12 percent), the volunteer used the intake sheet only to obtain the auditor’s name and address.
  • For 14 returns (82 percent), the sites had either no quality review process (7 sites) or a quality review process that was not in compliance with SPEC function requirements (7 sites), including volunteers not using the checklist or the intake sheet.

The MQSR includes the following:

  • All volunteers must use an intake and interview process, including completion of an intake and interview sheet.  This includes (1) an interview with the taxpayer, (2) use of Form 13614 or a partner organization‑developed intake sheet with the same questions, (3) confirmation of the taxpayer’s responses on the Form 13614 (or similar form), and (4) review of supporting documentation.
  • A quality review process must be in place and functioning.  This includes volunteer quality reviewers using the intake and interview sheet, taxpayer-provided documentation, and the completed tax return as part of the quality review process and using a quality review checklist.[17]

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:  

  • Twelve percent of the sites did not use the intake sheet during tax return preparation.
  • Thirty-six percent of the sites did not conduct an interview with the shopper.
  • Forty-four percent of the sites did not have the required quality review process.

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

 

Report Distribution List

 

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
of Total

Tax Return Volume

Percentage of Total

 

U.S. Individual Income Tax Return (Form 1040)

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%

U.S. Individual Income Tax Return (Form 1040A)

72,751

10.75%

42,298

4.00%

U.S. Nonresident Alien Income Tax Return (Form 1040NR)

357

0.05%

37

0.00%

U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents
(Form 1040NR-EZ)

6,888

1.02%

477

0.05%

U.S. Individual Income Tax Return (PC) (Form 1040PC)

378

0.06%

52

0.00%

U.S. Self-Employment Tax Return – Puerto Rico
(Form 1040-PR)

6

0.00%

2

0.00%

Other

1

 

0.00%

Not Applicable

Not Applicable

 

Refund Due/
Balance Due

VITA

Tax Counseling for the Elderly
(AARP)

Dollar
Totals

Tax Return Volume

Percentage of Total

Dollar
Totals

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
Totals

Tax Return Volume

Dollar
Totals

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
Totals

Tax Return Volume

Dollar
Totals

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.