TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
Computer Programming Changes Are Needed to Reduce Delays in Reissuing Some Undelivered Refund Checks
August
22, 2008
Reference Number: 2008-30-155
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 |
202-622-6500
Email Address | inquiries@tigta.treas.gov
Web Site |
http://www.tigta.gov
August 22, 2008
MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Computer Programming Changes Are Needed to Reduce Delays in Reissuing Some Undelivered Refund Checks (Audit # 200730002)
This report presents the results of our review to determine
the frequency of occurrence and the reasons why tax refund checks returned as
undeliverable were later reissued to the same addresses to which notices were
delivered to taxpayers asking for updated address information. This
audit was part of our discretionary audit coverage and was included in the Treasury
Inspector General for Tax Administration Fiscal Year 2007 Annual Audit Plan.
Impact on the Taxpayer
When the United States Postal Service (USPS) determines that a tax refund check is undeliverable because the address to which the check was sent is not the taxpayer’s current or correct address, the check is returned to the Financial Management Service.[1] The Internal Revenue Service (IRS) corresponds with the taxpayer to try to obtain a current address, even in some cases when the IRS already has an updated address on record for the taxpayer.[2] This process delays receipt of the refund by the taxpayer, and the IRS generally does not pay interest to the taxpayer for the time required to get the refund check reissued. We identified 14,759 taxpayer accounts in Calendar Year 2007 in which reissued refund checks were delayed because the IRS unnecessarily corresponded with taxpayers for new addresses they already had. The IRS needs to ensure that undelivered refund checks are reissued promptly to taxpayers with updated addresses already on record.
Synopsis
From two judgmental
samples of IRS notices sent to and returned by taxpayers whose refund checks
were returned by the USPS as undeliverable, we found that some taxpayers indicated
that the address to which the notice was mailed was, in fact, their current
address. Working with the IRS, we
determined that many of the notices were not sent to the same addresses as the
original undelivered refund checks because these taxpayers had address changes
posted to their accounts between the time the original refund checks were
issued and the time the checks were returned as undeliverable. Therefore, although these taxpayers had informed the IRS of their new addresses,
the IRS did not reissue their refund checks to these new addresses. Rather, the IRS sent notices to their new
addresses asking them for new addresses.
As a result, these taxpayers received unnecessary notices and
experienced avoidable delays in receiving their refund checks.
To determine how
often this condition was occurring, we developed a computer program to identify
all individual and business accounts on the IRS Master File[3] that met the following criteria:
We identified 8,134 individual and 6,625 business accounts that met these criteria. The undelivered refund checks on these accounts averaged $1,829 for individual taxpayers and $5,093 for business taxpayers. They totaled almost $15 million for individuals and $34 million for businesses.
We estimate that over a 5-year period, 73,795 taxpayers could be burdened by being asked to provide information the IRS already has and by having delivery of their refund checks delayed. We also estimate that the IRS could incur additional expenses of $36,160 to mail the notices. This could occur because the IRS has not properly programmed its computer system to reissue undelivered refund checks when it has new addresses on record for the affected taxpayers.
This issue was brought to the attention of the IRS in a
prior Treasury Inspector General for Tax Administration report,[4]
and the IRS implemented computer programming changes to correct the
situation. However, the programming
changes did not fully correct the problem.
In addition, the IRS implemented no programming corrections for business
accounts.
Recommendation
We recommended that the Commissioner, Wage and Investment Division, revise computer programming to automatically reissue an undelivered refund check when an address change is reflected on a taxpayer’s account between the date on which the check was originally issued and the date on which it is returned as undeliverable. Finally, the programming should be implemented on both individual and business accounts.
Response
IRS management agreed with our recommendation. A programming change to implement the recommendation was submitted on June 27, 2008, with a requested operational date of January 15, 2010. Management’s complete response to the draft report is included as Appendix V.
Please
contact me at (202) 622-6510 if you have questions or Margaret E. Begg, Acting Assistant
Inspector General for Audit (Small Business and Corporate Programs), at (202)
622-8510.
Background
Results of Review
Some Taxpayers Are Receiving Unnecessary Notices
and Delayed Refund Checks
Recommendation 1:
Appendices
Appendix I – Detailed
Objective, Scope, and Methodology
Appendix II – Major Contributors
to This Report
Appendix III – Report
Distribution List
Appendix IV – Outcome
Measures
Appendix V – Management’s
Response to the Draft Report
Abbreviations
|
FMS |
Financial Management Service |
|
IRS |
Internal Revenue Service |
|
USPS |
|
When tax returns and refunds
are processed by the Internal Revenue Service (IRS), any associated refund
checks are ultimately generated to taxpayers through the Financial Management
Service (FMS). The FMS is a bureau of
the Department of the Treasury and acts as the Federal Government’s money
manager. Tax refund checks issued by the
FMS are mailed to taxpayers through the United States Postal Service (USPS). If the USPS determines that a refund check is
undeliverable because the address to which
the check was sent is not the taxpayer’s current or correct address, the check is returned to the FMS. When the
FMS receives the returned refund check, it notifies the IRS.
Once the IRS receives this information, it sends a notice[5] to the affected taxpayer. This notice is mailed to the address the IRS has on record for the taxpayer.[6] It states, “A refund check mailed to you at the above address has been returned by the Postal Service as undeliverable. To have the check reissued to you, we need to know your current address.” The figure below shows the volumes of undelivered refund check notices issued by the IRS in Calendar Years 2004 – 2007.
The figure was removed due to
its size. To see the figure, please go to
the Adobe PDF version of the report on the TIGTA Public Web Page.
The taxpayer is instructed to fill in the information
requested and to sign and return the notice within the next few days. When the IRS receives the notice with the new address
information, it updates the taxpayer’s address and reissues the refund check. During Calendar Year 2007, there were 334,745
individual and 54,340 business refund checks returned by the USPS as undeliverable.
Employees at the IRS Campus[7] in Ogden, Utah, advised us that some large-dollar refund checks (in excess of $1 million) returned to the IRS as undeliverable appeared to have been subsequently reissued to taxpayers at the same addresses from which the checks had been originally returned as undeliverable. This seemed to indicate that some checks were being unnecessarily returned as undeliverable by the USPS.
We conducted our review at the Ogden Campus during the
period November 2006 through April 2008.
This review included analysis of undelivered refund check notice cases
worked in the Wage and Investment Division Accounts Management offices in
Some Taxpayers Are Receiving Unnecessary Notices
and Delayed Refund Checks
We reviewed 2 judgmental samples of IRS notices sent to and
returned by taxpayers whose refunds were returned as undeliverable (400 notices
returned by individuals and 485 notices returned by business taxpayers). We found that 42 (10.5 percent) of the 400 individuals
and 145 (30 percent) of the 485 business taxpayers indicated that the addresses
to which the notices had been mailed were, in fact, their current addresses.
Because these
taxpayers were indicating that their correct addresses were the same as the
addresses to which the notices were sent, our initial assumption was that the USPS
had returned the refund checks as undeliverable by mistake. However, working with the IRS, we determined that
134 of these notices (15 percent of our total sample size of 885) were not sent
to the same addresses as the original undelivered refund checks.
IRS employees
researching these cases on the FMS Treasury Check Information System[8] found that many of the taxpayers had
address changes posted to their accounts between the date on which the original
refund check was issued and the date on which the check was returned as
undeliverable.[9] Thus,
the notice had been sent to the newer address.
We verified and agreed with the IRS’ analysis of these cases. Therefore, although these taxpayers had
informed the IRS of their new addresses, the IRS did not reissue their refund
checks to their new addresses. Instead, the
IRS sent notices to their new addresses, asking them for a new address. These taxpayers received unnecessary notices
and experienced avoidable delays in receiving their refunds.
To determine how
often this condition was occurring, we developed a computer program to identify
all individual and business accounts on the IRS Master File[10] that met the following criteria: 1) a refund check was returned as
undeliverable for an account in Calendar Year 2007 and 2) an address change
occurred between the date on which the original refund check was issued and the
date on which it was returned as undeliverable.
We identified 8,134 individual and 6,625 business accounts that met
these criteria. The undelivered refund
checks on these accounts averaged $1,829 for individual taxpayers and $5,093
for business taxpayers. They totaled almost
$15 million for individuals and $34 million for businesses.
Unnecessary notices
As discussed
earlier, the IRS currently sends a notice to each taxpayer whose refund check
has been returned by the USPS as undeliverable.
The notice tells the taxpayer that a refund check mailed to the address
on the notice was returned by the USPS as undeliverable and asks the taxpayer
to furnish the IRS with a current address.
The 8,134 individual taxpayers and 6,625 business taxpayers
identified by our computer extract had already provided the IRS with updated
address information. In addition, the
information on the notice sent to each of these taxpayers was incorrect because
the refund check in question had never been sent to the address on the notice. Instead, it had been sent to the taxpayer’s old
address.
Taxpayers are
incurring burden by being asked to provide information the IRS already has, and
the IRS is incurring additional expenses to mail the notices. The IRS spends approximately 49 cents to
mail each notice. Based on the results
of our computer extracts, 14,759 taxpayers experienced increased burden responding
to unnecessary notices and the IRS spent just over $7,200 unnecessarily to
issue these notices in Calendar Year 2007.[11]
Delayed refund checks
Sending notices to taxpayers asking for address information that the IRS already has on record creates financial burden on the taxpayers by delaying receipt of their refunds. In addition, these taxpayers are not compensated for the additional time the Federal Government has use of their monies. While the IRS was not responsible for the original refund checks being sent to the wrong addresses, it did have the information necessary to reissue the checks without sending notices to the taxpayers. Therefore, the IRS was responsible for at least part of the delay the taxpayers experienced in receiving their refunds. Based on our computer extract, issuance of notices to these taxpayers unnecessarily added an average of 45 calendar days for individual taxpayers and an average of 66 calendar days for business taxpayers to receive their refunds.
Unnecessary notices are being sent and receipt of refund checks is being delayed because the IRS has not properly programmed its computer system to reissue undelivered refund checks when it has new addresses on record for the affected taxpayers. This issue was brought to the attention of the IRS in a prior Treasury Inspector General for Tax Administration report,[12] and the IRS implemented computer programming changes to correct the situation.
However, the programming changes did not fully correct the problem. A taxpayer can change his or her address with the IRS in a variety of ways, each of which is recorded on the taxpayer’s account with a specific transaction code.[13] For example, an address change resulting from the filing of a tax return with a new address is recorded on a taxpayer’s account with a Transaction Code 152. Several such transaction codes (including Transaction Code 152) were not included in the programming changes made by the IRS to correct the problem when it was originally reported. In addition, the IRS implemented no programming corrections for business accounts.
The Internal Revenue Manual states that taxpayers should receive interest in cases in which a refund check is undeliverable through the fault of the Government. In the cases we identified, the IRS was not notified of the address changes until after the initial refunds were processed, and was therefore not at fault for the undelivered refund checks. However, the IRS was at fault for the delay in reissuing the refunds caused by unnecessarily corresponding with taxpayers for new addresses. If the IRS revised its computer programs to automatically reissue these undelivered refund checks when an address change is reflected on a taxpayer’s account, the taxpayers would realize the earnings benefit of having received their refunds from 45 to 66 days sooner. Based on the number of cases identified from our computer extract and the published risk-free rates of return for 2007,[14] we estimate that these benefits total almost $79,000 for the individual taxpayers experiencing delays and approximately $262,000 for the business taxpayers experiencing delays in 2007.[15] Foregoing these benefits further adds to the burden on the 14,759 taxpayers identified by our computer extracts.
Recommendation
Recommendation 1: The Commissioner, Wage and Investment Division, should revise computer programming to automatically reissue an undelivered refund check when an address change is reflected on a taxpayer’s account between the date on which the refund check was issued and the date on which it was returned as undeliverable. The programming should be implemented on both individual and business accounts.
Management’s Response: IRS management agreed with this recommendation. A programming change to implement the recommendation was submitted on June 27, 2008, with a requested operational date of January 15, 2010.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to determine the
frequency of occurrence and the reasons why tax refund checks returned as
undeliverable were later reissued to the same addresses to which notices were
delivered to taxpayers asking for updated address information.[16] To accomplish our objective, we:
I.
Determined the procedures used by the IRS for reissuing undelivered
refund checks by reviewing applicable Internal Revenue Manual guidelines and
procedures and by interviewing IRS personnel associated with processing the undelivered
checks.
II.
Determined whether undelivered refund checks were being reissued
to taxpayers whose addresses had not changed.
A.
Obtained a sample of actual Business and Individual
Undelivered Refund Check notices that were being worked at the IRS campuses
starting in January 2007. We obtained[17] a
judgmental sample of 485 Business Undelivered Refund Check notices (CP 231) from
the
B.
Analyzed the notices to identify each taxpayer account for
which the undelivered refund check was reissued to the address on the notice.
C.
Provided the IRS with results from our analyses. Based on results from the IRS analysis, we also
analyzed the sample cases to identify those accounts on which an address change
had occurred between the date of the original refund check and the date on
which the check was returned as undeliverable.
III.
Determined the significance of taxpayer addresses being
changed between the date of the original refund check and the date on which the
check was returned as undeliverable.
A.
Used computer programs to identify all individual and
business accounts on the IRS Master File[20] for
which an address change occurred between the date of the original refund check and
the date on which the check was returned as undeliverable (refunds issued in Calendar
Year 2007).
B.
Validated, verified, and assessed the reliability of
computer-processed data received in the Step III.A. by comparing the relevant data
(refund dates and amounts, undelivered check dates and amounts, and address change
dates and transactions) from the computer request to information on the IRS
Master File.
C.
From the accounts identified by our computer programs,
determined the number of individual and business accounts affected, the average
refund amounts, and the average time required to reissue the refunds for the
accounts.
D.
Determined the cost to send notices to the affected
taxpayers.
E.
Determined the cost to taxpayers resulting from having
their refunds delayed.
Appendix II
Major Contributors to This Report
Margaret
E. Begg, Acting Assistant Inspector General for Audit (Small Business and
Corporate Programs)
Kyle
R. Andersen, Director
Larry
Madsen, Audit Manager
Annette
Bates, Lead Auditor
L. Jeff Anderson, Senior Auditor
Judith Harrald, Information Technology
Specialist
Richard Hilleson, Information Technology
Specialist
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Commissioner, Small Business/Self-Employed Division SE:S
Deputy Commissioner, Small Business/Self-Employed Division SE:S
Deputy Commissioner, Wage and Investment Division SE:W
Director, Customer Account Services, Wage and Investment Division SE:W:CAS
Director, Accounts Management, Wage and Investment Division SE:W:CAS:AM
Director, Submission Processing, Wage and Investment Division SE:W:CAS:SP
Director, Office of Legislative Affairs CL:LA
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 Liaisons:
Commissioner, Small Business/Self-Employed Division SE:S
Commissioner, Wage and Investment Division SE:W
Appendix IV
This appendix presents detailed information on the measurable impact our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to Congress.
Type and Value of Outcome Measure:
· Cost Savings – Potential; $36,160 (over 5 years) in undelivered refund check notices for 14,759 taxpayer accounts (see page 3).
Methodology Used to Measure the Reported Benefit:
The IRS currently
sends a notice to each taxpayer whose refund check has been returned by the
USPS as undeliverable. The notice asks the
taxpayer to furnish the IRS with a current address. We identified 14,759 taxpayer accounts (8,134
individual and 6,625 business) for which the IRS already had updated address
information prior to issuance of the notice.
These addresses had been changed between the date on which the original
refund check was issued and the date on which the check was returned as
undeliverable.
Because the IRS
already had current addresses for the 14,759 taxpayers, notices were sent to
these taxpayers unnecessarily. Based on IRS figures, we found that the estimated
cost to send each notice was $.49. The
total cost to send the 14,759 notices was $7,232 (14,759 x $.49). We projected this amount over 5 years.
Type and Value of Outcome Measure:
· Taxpayer Burden – Potential; 73,795 taxpayers (over 5 years) (see page 3).
Methodology Used to Measure the Reported Benefit:
As discussed above,
the IRS unnecessarily sent 8,134 individual and 6,625 business notices to
taxpayers, delaying the refunds of individual taxpayers an average of 45
calendar days and business taxpayers an average of 66 calendar days.
Appendix V
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 bureau in the Department of the Treasury that acts as the Federal Government’s money manager.
[2] According to the IRS web site (IRS.gov), some post offices do not forward Federal Government checks. When a taxpayer changes his or her address, providing notification to the post office that services the old address ensures that the taxpayer’s mail will be forwarded. However, this notification might not affect delivery of the taxpayer’s refund check(s). The IRS sends a notice to the address it has on record because the notice will be forwarded to the taxpayer’s new address.
[3] The Master File is the IRS database that stores various types of taxpayer account information. This database contains individual, business, and employee plans and exempt organizations data.
[4] Advance Refunds Were Accurately Calculated and Issued to Eligible Taxpayers, But Some Undelivered Refunds Were Unnecessarily Delayed (Reference Number 2002-40-116, dated June 2002).
[5] Individual Undelivered Refund Check notice (CP 31); Business Undelivered Refund Check notice (CP 231). CP = Computer Paragraph.
[6] According to the IRS web site (IRS.gov), some post offices do not forward Federal Government checks. When a taxpayer changes his or her address, providing notification to the post office that services the old address ensures that the taxpayer’s mail will be forwarded. However, this notification might not affect delivery of the taxpayer’s refund check(s). The IRS sends a notice to the address it has on record because the notice will be forwarded to the taxpayer’s new address.
[7] Campuses are the data processing arm of the IRS. The campuses process paper and electronic submissions, correct errors, and forward data to the Computing Centers for analysis and posting to taxpayer accounts.
[8] The Treasury Check Information System records and reconciles the worldwide issuance and payment of Department of the Treasury checks.
[9] This is generally the result of a taxpayer moving and notifying the IRS of the move, or the result of a taxpayer filing a tax return that contains an updated address.
[10] The Master File is the IRS database that stores various types of taxpayer account information. This database contains individual, business, and employee plans and exempt organization data.
[11] See Appendix IV for details.
[12] Advance Refunds Were Accurately Calculated and Issued to Eligible Taxpayers, But Some Undelivered Refunds Were Unnecessarily Delayed (Reference Number 2002-40-116, dated June 2002).
[13] Transaction code is a three-digit code used to identify actions being taken on the taxpayer’s account.
[14] The risk-free rate of return is defined as the rate of return an individual could realize on investments in 3-month United States Treasury bonds.
[15] Interest was computed from the date on which the IRS generated the notices to the taxpayers to the date on which the refund checks were reissued.
[16] Our original objective was to determine how often and why undelivered refund checks were reissued to the same addresses as the ones to which the original checks were sent. Based on initial findings, our objective changed slightly.
[17] The
sample of business notice cases was selected from notices worked by
[18] We selected judgmental samples for business and individual computer paragraph (CP) notices because statistical samples would have required that all items in the population have an equal chance of being selected. The notice cases from our sample are worked by IRS Campus employees on an ongoing basis throughout the year. After a case is worked, it is destroyed. At the time our samples were taken, the populations of cases were unknown, and some cases were unavailable for sample selection. Campuses are the data processing arm of the IRS. They process paper and electronic submissions, correct errors, and forward data to the Computing Centers for analysis and posting to taxpayer accounts.
[19] The
sample of individual notice cases was selected from notices worked by
[20] The Master File is the IRS database that stores various types of taxpayer account information. This database contains individual, business, and employee plans and exempt organizations data.