Analyzing Taxpayer Errors Can Help to Improve Forms and Instructions
June 11, 2009
Reference Number: 2009-30-083
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.
Redaction Legend:
1 = Tax Return/Return Information
Phone Number |
202-622-6500
Email Address | inquiries@tigta.treas.gov
Web Site |
http://www.tigta.gov
June 11, 2009
MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Analyzing Taxpayer Errors Can Help to Improve Forms and Instructions (Audit # 200830011)
This report presents the results of our review to determine
whether an analysis of Individual Master
File[1] math error notices[2] could help the Internal Revenue Service (IRS)
identify areas on its individual income tax forms and instructions that need
improvement and/or clarity. This
review was included in the Treasury Inspector General for Tax Administration
Fiscal Year 2009 Annual Audit Plan under the major management challenge of
Processing Returns and Implementing Tax Law Changes.
Impact on the Taxpayer
Past estimates indicate that the IRS annually sends more than 7 million math error notices to
taxpayers informing them that changes were made to their tax returns as a
result of mathematical or clerical errors they made on their returns. Many of the errors are due to complex
calculations and others are just simple mistakes. However, some errors could result from
unclear or inadequate forms and instructions and could signal specific areas
where the IRS could make improvements. Changes
to tax forms and instructions could reduce some of the errors made by taxpayers
on their individual income tax returns. Moreover, simplifying the filing process of
taxpayers by clarifying forms and instructions increases compliance and reduces
burden.
Synopsis
The Tax Forms
and Publications function has not effectively used an analysis of math errors made
by taxpayers to help identify improvements or needed changes to forms and
instructions. Math errors are
mathematical or clerical errors (e.g., error on exemption computation, refund
amount incorrectly computed) made by taxpayers on their returns and are
identified by the IRS when the returns are processed. The IRS sends math error notices to taxpayers
to inform them that changes were made to their tax returns as a result of such errors.
To assess whether an analysis of math errors made on individual income tax
returns could identify areas on specific forms and instructions that need improvement,
we identified the 10 most commonly issued math error notices related to 2005 U.S.
Individual Income Tax Returns (Form 1040) filed and processed during 2006.[3] We
statistically sampled and reviewed tax returns associated with those math error
notices to attempt to identify the specific mistakes the taxpayers had made. We then reviewed the forms and instructions
related to those errors in an attempt to determine what improvements could be
made that might decrease the likelihood of another taxpayer making the same
mistake.
For some of the tax returns reviewed, we were unable to identify any changes or improvements that could be made to either the forms or instructions that might reduce the number of taxpayer errors. Some of the errors were made doing complex calculations, while others were just simple mistakes. In those cases, the related forms and instructions appeared clear and informative. However, based on the remaining tax returns reviewed, we found the opposite is often true. For example, we identified a specific instance where a wording change made on the exemption line of the 2005 Form 1040 contributed to a 123 percent spike in errors made by taxpayers. Then, a subsequent change back to the original wording on the 2007 Form 1040 led to a corresponding drop in errors.
By analyzing taxpayer errors, we
identified three areas where modifying Form 1040 and its associated
instructions could reduce such errors.
They included: 1) errors made computing
the exemption amount; 2) the omission of dependent Social Security Numbers or
Individual Taxpayer Identification Numbers; and 3) children claimed for the
Child Tax Credit exceeding the age limit.
In addition, we believe that an indepth analysis of taxpayer errors
could be an effective method of improving forms and instructions and would also
help determine what effect changes made to forms and instructions have upon the
taxpayers using them. For each of these issues, we developed
illustrations showing proposed changes to the Form 1040 that we believe would
reduce the errors in these areas. We
presented our ideas to professional tax preparers in a focus group
setting. They provided us with their
opinions and viewpoints as well as additional ideas they had for
improvements. Overall, the focus groups’
reactions to our proposals were positive and in some cases we incorporated
their feedback into our recommended changes.
Recommendations
We recommended that the Director, Tax Forms and Publications, Wage and Investment Division, consider additional analyses of the types and volumes of errors made by taxpayers as part of the function’s obligation to improve forms and instructions. In addition, the Director, Tax Forms and Publications, Wage and Investment Division, should take steps to improve current individual income tax forms and reduce taxpayer errors by clearly denoting on the Form 1040 the purpose and description of the exemption line, that a Social Security Number or Individual Taxpayer Identification Number is required for each dependent claimed as an exemption, and the qualifying age requirement necessary to claim the Child Tax Credit.
Legislative Recommendation
Legislation is needed to allow for the judicious use of
additional colors on tax returns and instructions to highlight important warnings
and information.
Response
IRS management agreed with three of the four recommendations addressed to the IRS. The Tax Forms and Publications function intends to continue to analyze reports provided by the Wage and Investment Division Research Office as part of its annual revision process. The function plans to consider revisions to the exemption line and plans to modify the Child Tax Credit column in the Exemptions section of Form 1040. The IRS disagreed with our specific recommendation to add a statement that a Social Security Number or Individual Taxpayer Identification Number is required for each dependent claimed as an exemption because there are certain groups of taxpayers that are not required to provide these numbers. However, management agreed to review the suggestions presented in our report to determine whether there are other ways to highlight the need for these numbers on the tax returns. We agree with the IRS’ approach.
Although the IRS did not comment on our legislative recommendation because it was outside of the IRS’ jurisdiction, management agreed to conduct a review of the Forms 1040 to determine where the IRS can more effectively use shading, bolding, and other changes, such as font sizes, to highlight the most important areas of the tax forms. We will provide a copy of our report to the Department of the Treasury, Office of Tax Policy for consideration. Management’s complete response to the draft report is included as Appendix IV.
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 (Returns Processing and Account Services), at (202) 622-5916.
Changes to Tax Forms and Instructions Could Reduce
Some of the Errors Made by Taxpayers
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix IV –
Management’s Response to the Draft Report
Abbreviations
|
IRS |
Internal Revenue Service |
|
ITIN |
Individual Taxpayer Identification Number |
|
SSN |
Social Security Number |
|
TIGTA |
Treasury Inspector General for Tax
Administration |
|
TY |
Tax Year |
We initiated this audit
to assess whether an analysis of math error notices issued to individual
taxpayers could identify areas on specific forms and instructions that need
improvement.
When the Internal Revenue Service (IRS) identifies errors made by taxpayers on their individual income tax returns, it sends math error notices[4] to the taxpayers to inform them that the IRS made changes to their tax returns as a result of mathematical or clerical error(s) they made on their returns. These notices explain the specific nature of the changes (e.g., error on exemption computation, refund amount incorrectly computed) and include account statements showing how the changes affect the returns. Each math error notice is coded with a number, and the IRS tracks and compiles the total numbers of notices it sends to taxpayers each year.
Past estimates from the IRS indicate that it sends more than 100 million notices to taxpayers annually at a cost of $472 million, with about 60 percent of these costs attributable to the downstream impact of issued notices (i.e., handling subsequent correspondence, telephone calls, and remittances from taxpayers). More than 7 million of the notices issued by the IRS are math error notices.
We initiated this audit to assess whether an analysis of math error
notices issued to individual taxpayers could identify areas on specific forms
and instructions that need improvement.
We identified the 10 most commonly issued math error notices related to 2005
U.S. Individual Income Tax Returns (Form 1040) filed and processed during Processing Year 2006[5] (the 10 most common notices accounted for more
than 2.3 million errors) and analyzed a statistically valid sample of the
associated tax returns.
As part of this review, we developed illustrations showing possible
changes to the forms that we believed would reduce the taxpayers’ errors in
these areas. We then presented our ideas
to professional preparers in a focus group setting. They provided us with their opinions and
viewpoints as well as additional ideas they had for improvements.
This audit was performed at the IRS Campus[6] in
Changes to Tax Forms and Instructions Could Reduce Some of the Errors Made by Taxpayers
The IRS’ Tax Forms and Publications function is responsible for creating,
updating, and improving all Federal tax forms and publications. The tax forms and their instructions should
inform individual taxpayers of their Federal tax obligations and enhance
voluntary compliance by making it as easy as possible for taxpayers to
accurately complete the tax forms.
The Tax Forms and Publications function revises and improves forms and
instructions based upon customer satisfaction data, internal and external
suggestions, and other information resulting from information and data
gathering efforts. It also maintains
open communication with other IRS functions to ensure that their needs
pertaining to the tax forms and publications programs are met. Although representatives from this function
indicated they did consider taxpayer errors and error volumes to help identify
needed improvements or revisions to forms and instructions, they acknowledged that
they did not perform analyses similar to the analyses discussed in this report.
For some of the tax returns reviewed, we were unable to identify any
changes or improvements that could be made to either the forms or instructions
that might reduce the number of taxpayer errors. Some of the errors were made doing complex
calculations, while others were just simple mistakes. In those cases, the related forms and
instructions appeared clear and informative.
However, based on the remaining tax returns reviewed, we found the opposite is often true. For example, we identified a specific instance where a wording change made on the exemption line of the 2005 Form 1040 contributed to a 123 percent spike in errors made by taxpayers. Then, a subsequent change back to the original wording on the 2007 Form 1040 led to a corresponding drop in errors.
The exemption line on the 2004 Form 1040, line 41, reads “If line 37 is $107,025 or less, multiply $3,100 by the total number of exemptions claimed on line 6d. If line 37 is over $107,025, see the worksheet on page 33.” On the 2005 Form 1040, the exemption line (now line 42) was changed to read “If line 38 is over $109,475, or you provided housing to a person displaced by Hurricane Katrina,[7] see page 37. Otherwise, multiply $3,200 by the total number of exemptions claimed on line 6d.” The errors made on this line jumped from 94,432 errors in Tax Year (TY) 2004 to 210,845 errors in TY 2005. The wording remained essentially the same on the 2006 Form 1040 and the error volumes increased slightly. However, as shown in Figure 1, it was not until the wording was changed back in TY 2007 to similar wording used in TY 2004 that the volume of errors dropped back to TY 2004 rates.
Figure 1: Exemption Computation Errors by Tax Year[8]
Figure 1 was removed due to its size. To see Figure 1, please go to the Adobe PDF
version of the report on the TIGTA Public Web Page.[9]
The correlation above indicates that changes made to the wording of this line contributed to taxpayer confusion and resulted in additional errors. Further analysis of this issue and recommendations are presented later in this report.
If the IRS had been monitoring
error rates and evaluating potential causes such as the modifications it made,
the IRS could have identified this problem, corrected it, and avoided wording
that results in mistakes in the future.
As it is, the same wording that appears to have contributed to the high
error rates on the 2005 and 2006 Forms 1040 is included on the 2008 Form
1040. [The 2008 Form 1040 is the return
taxpayers will file for their individual taxes during the current processing year[10]
(2009).] Due to the flooding that
occurred in the
We identified three areas where modifying Form 1040 and its associated instructions could reduce taxpayer errors. They included: 1) errors made computing the exemption amount; 2) the omission of dependent Social Security Numbers (SSN) or Individual Taxpayer Identification Numbers (ITIN); and 3) children claimed for the Child Tax Credit exceeding the age limit. In addition, we believe that a regular analysis of taxpayer errors could be an effective method of improving forms and instructions and would also help determine what effect changes made to forms and instructions have upon the taxpayers using them.
The exemption line on the Form 1040 is not clearly labeled
Personal tax exemptions reduce taxable income on tax returns. For example, each personal tax exemption that was claimed on the 2005 tax return was the equivalent of a $3,200 tax deduction. Generally, a taxpayer is allowed one tax exemption for themselves, one for their spouse if married, and one for each of their dependents.
As discussed previously, during Processing Year 2006 taxpayers made more than 210,000 errors computing their exemption amounts on their Forms 1040.[11] A sample of these returns showed that 68 percent of the taxpayers who made this error failed to claim any qualifying exemption amount. That is, they left the exemption line blank even though they clearly qualified for an exemption amount. We identified two possible explanations for this: 1) the purpose of this line is not well identified; and, 2) the description of the line may obscure the line’s main purpose with secondary information.
The exemption line on the Form 1040 has not been clearly labeled in the same manner as other line items on the Form 1040 such as “Itemized deductions,” “Tax,” and “total tax.” These line items are labeled using bold print and the purposes of the lines are clearly marked within the descriptions. A similar label is not included for the exemption line.
We also believe that the purpose of the exemption line is made unclear with the way the secondary information is presented, which may have caused taxpayers to believe it did not apply to them. For TY 2005, the Form 1040 exemption line reads “If line 38 is over $109,475, or you provided housing to a person displaced by Hurricane Katrina, see page 37. Otherwise, multiply $3,200 by the total number of exemptions claimed on line 6d.”
Taxpayers who did not have adjusted gross income (line 38) over $109,475 or did not provide housing to a person displaced by Hurricane Katrina, may have assumed, after reading the first sentence, that this line did not apply to their tax situation and moved on to the next line. It is not until the second sentence that taxpayers are told to multiply the number of exemptions by $3,200 (which is the main purpose of that line).
We believe the description used prior to TY 2005 and then again in TY 2007 provided a more direct and, hence, a clearer explanation of the purpose of that line. In TY 2007, the line reads, “If line 38 is $117,300 or less, multiply $3,400 by the total number of exemptions claimed on line 6d. If line 38 is over $117,300, see the worksheet on page 33.” (Wording used prior to TY 2005 was not exact but very similar). Also, in the future, when the exemption amount is affected by a single incidence such as a natural disaster, we believe the explanation should be provided as secondary information on that line.
To illustrate our point and provide a discussion item at our focus groups, we modified the exemption line on the 2005 Form 1040 to reflect the issues discussed above. We recognize that it would be of little value to correct the 2005 Form 1040 at this point but the illustration is provided as an example. Figure 2 shows the exemption line as it appears on the 2005 Form 1040. Figure 3 represents TIGTA’s modification.
Figure 2: 2005 Exemption Line
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.
Figure 3: 2005 Exemption Line - Modified
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.
Focus group participants generally agreed the line should be clarified to include the “Exemptions” title. They also agreed that when additional criteria are added to the exemption line, the additional criteria should be provided as secondary information on that line.
The Form 1040 does not include a statement indicating that an SSN
or ITIN is required for each dependent being claimed as an exemption
During Processing Year 2006, more than 170,000 taxpayers failed to include their dependent’s SSN or ITIN on their Forms 1040.[12] In our sample, all taxpayers, ****(1)****, either failed to provide any SSN/ITIN or improperly wrote in the words “applied for” in place of the dependent’s SSN/ITIN.[13] ****(1)****
The IRS requires that an SSN/ITIN be entered for each dependent claimed and that the name and SSN/ITIN entered agree with the number assigned to that individual by the IRS or the Social Security Administration. We found the Form 1040 instructions regarding this requirement are clear and easily accessible on both the 2005 Form 1040 instructions as well as the current 2008 Form 1040 instructions. However, there is no indication on the Form 1040 itself that the dependent’s SSN/ITIN is required to claim the exemption amount.
Many taxpayers may not refer to the separate instructions for the Form 1040 when entering the identifying data for their dependents. Therefore, a caution should be added to the Form 1040 itself to ensure that taxpayers are clearly informed of the requirement, particularly since the SSN/ITIN has not always been required in the past. Printing a statement on the left margin of the Form 1040 in the Exemptions section would alert and remind taxpayers of the requirement to include an SSN/ITIN for each dependent claimed. In Figure 4, we illustrate our point by modifying the Exemptions section of the 2008 Form 1040 and added the statement “Valid SSN(s)/ITIN(s) required to receive credit for exemption(s)” in red ink.
Figure 4: Potential Change to Exemptions Section
Figure 4 was removed due to its size.
To see Figure 4, please go to the Adobe PDF version of the report on the
TIGTA Public Web Page.
We presented this issue and a similar illustration to the
focus groups. The responding participants
agreed that additional emphasis should be placed on the Form 1040 to help
ensure that taxpayers are aware of the requirement. In addition, as shown in Figure 5, they offered
their own suggestions which included placing the word “REQUIRED” in bold or in red
ink in the column where it requests the Dependant’s SSN/ITIN. They also suggested placing a watermark image
over the entry field stating “Valid SSN/ITIN Required to Claim Exemption.” We believe that any of these proposals would
help taxpayers understand that they are required to provide a valid SSN/ITIN.
Figure 5: Paid Preparers’ Suggested Changes to
Exemptions Section
Figure 5 was removed due to its size. To see Figure 5, please go to the Adobe PDF
version of the report on the TIGTA Public Web Page.
We also discussed with the focus groups whether they believe the use of color is an effective and beneficial method of calling attention to specific issues or areas of the tax forms that need extra awareness. Currently, the IRS does not use different colors on their forms or in their instructions as a means of calling attention to or highlighting specific issues. In a previous TIGTA report,[14] we noted that industry literature suggests using color to emphasize information on a document. It suggests that red be used for warnings and critical items. The IRS currently uses two colors of ink for each of the Individual Income Tax Return packages (1040 – blue/black, 1040A – red/black, 1040EZ – green/black). Subsequent to negative publicity received when the IRS used multiple colors on the 1995 tax packages to enhance the artwork on the package covers, Congress provided in the Treasury Department Appropriations Act of 1997 that the IRS may use only two colors of ink on tax packages. As a result, the IRS has not subsequently pursued the use of an additional color to issue warnings and draw taxpayers’ attention to important issues on the tax returns and instructions. The majority of participants in the focus groups agreed with our proposal to use color, while others suggested using different fonts, uppercase lettering, bold letters, etc., to get taxpayers’ attention.
As part of this audit, we reviewed a sample of State tax returns to determine whether States use color on their tax forms to draw attention to critical items. Overall, we found that 11 (55 percent) of the 20 States’ tax returns reviewed used color to draw attention or highlight an area of importance on their tax forms and/or instructions. In most cases, the use of color appeared to be an effective method of directing taxpayers to important areas of the tax forms or providing a caution or a warning.
The Child Tax Credit age restrictions are not identified on the
Form 1040
During Processing Year 2006, approximately 137,000 taxpayers were denied the Child Tax Credit on their Forms 1040[15] because the child claimed for the Credit exceeded the age requirement. The Child Tax Credit is a $1,000 Credit available to taxpayers for each of their qualifying children. The child must first be considered a dependent and then meet other qualifying criteria. One of the qualifying criteria is that the child must be under age 17 at the end of the tax year.
In our sample, we found that almost 79 percent of those taxpayers that were denied the Credit claimed a child that was 17 or 18 years old (61 percent claimed a child that was 17 years old). This is an indicator that taxpayers may be unaware or confused as to when, or at what age, the child no longer qualifies for the Credit.
The section on Form 1040 where taxpayers indicate that their children qualify for the Credit is located in the “Exemptions” section. Likewise, the section of the Form 1040 instructions for determining whether their child qualifies for the Credit is also located in the “Exemptions” section under the subtitle “Line 6c-Dependents.” Since the maximum age for a child to qualify for an Exemption is generally 18 years of age, and because these 2 issues have been combined on both the Form and in the instructions, taxpayers may incorrectly assume the maximum age for the Child Tax Credit is also 18.
To help taxpayers and to avoid confusing them, we believe that the qualifying birth dates for the Child Tax Credit should be clearly identified on the Form 1040 itself near the column containing the boxes to check whether the dependent(s) qualified for the Credit. We believe this would serve as an effective notice or reminder of the age requirement.
We developed two illustrations showing possible solutions that we presented to the focus groups we met with. One proposal included a watermark image on the column for the qualifying Child Tax Credit stating that the child must be “born after” a certain year. We believe that using a “born after” date, rather than just stating “must be under age 17,” is a quicker and clearer method for taxpayers to determine whether their child qualifies for the Credit. (For the 2005 Form 1040, the “born after” date would be 1988. The date would need to be changed each year. For example, TY 2008 would read “born after 1991.”) The other illustration presented to the focus groups suggests including a “born after” date in the description and using red ink. A third illustration was developed after the focus group discussions. See Figure 6 for all three illustrations.
Figure 6: Potential Changes to Exemptions Section –
Child Tax Credit
Figure 6 was
removed due to its size. To see Figure 6,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
The focus groups’ reactions to these options were positive overall and they believed that including the age requirement on the Form itself would be beneficial. However, their most common suggestion was to move the Child Tax Credit issue completely off page 1 of the Form 1040 and move it to page 2 where the Credit is actually claimed. They believed that combining the Child Tax Credit with the Exemptions amount causes confusion.
As previously mentioned, these two issues—the qualifications for Exemptions and the Child Tax Credit—have been combined on both the Form 1040 and in the instructions. More specifically, the Form 1040 has a separate line on page 2 to claim the Child Tax Credit amount, but the boxes used to indicate whether the taxpayer qualifies for the Credit are located on page 1 within the Exemptions section of the Form.
Similarly, the Form 1040 instructions for determining whether a child qualifies for the Child Tax Credit and the qualifying amount are in two separate areas of the instructions. One section is specifically designated for computing the Child Tax Credit. The other is combined with the Exemptions section and is included in the table used to determine if the child qualifies as a dependent. The determination of whether a child qualifies is made in this section under the heading “Does Your Qualifying Child Qualify You for the Child Tax Credit?”
We recognize that the amount of space on the Form 1040 is very limited and that moving the Child Tax Credit area from page 1 of the Form 1040 to page 2 may not be feasible at this time. However, combining the two issues that have differing requirements could be confusing to taxpayers. Therefore, if or when the IRS develops an additional form to reduce the information provided on the Form 1040, it should consider separating the two issues into their own sections on both the Form and the instructions.
Recommendations
The Director, Tax Forms and Publications, Wage and Investment Division,
should:
Recommendation 1: Consider additional analyses of the types and volumes of errors made by taxpayers as part of the function’s obligation to improve forms and instructions. This could help identify areas of potential improvement and help to ensure that changes to the forms and instructions do not contribute to additional errors.
Management’s Response: The IRS agreed that it will
need to continuously consider how additional analyses of these math errors can
improve forms and instructions. The Wage
and Investment Division Research Office already conducts these types of
analyses and will continue to do so. The
Tax Forms and Publications function plans to continue to analyze the reports
provided by the Research Office, as well as customer feedback and other
internal and external data, as part of its annual revision process.
Recommendation 2: Modify the exemption line on the Form 1040 and ensure that the purpose of the line is clearly labeled and the description of the line is clear and unambiguous.
Management’s Response: IRS management plans to consider revisions to the exemption
line after they review the error reports for TY 2008. They plan to analyze the reports to determine
if the error rate for the exemption line has improved from that of TYs 2005 and
2006. If their analysis justifies it,
they plan to consider making changes to the labeling and description of the
exemption line.
Recommendation 3: Add a statement or notice to page 1 of the Form 1040, within the “Exemptions” section, indicating that an SSN/ITIN is required for each dependent claimed as an exemption.
Management’s Response: IRS management disagreed with this
recommendation because there are certain groups, such as the Amish, that are
not required by law to provide an SSN or ITIN.
However, they plan to review the suggestions presented in this report
and the error reports for the 2008 tax returns to determine whether there are
other ways to highlight the need for an SSN/ITIN for those required to provide
one.
Office of Audit Comment: We agree with the IRS’ approach to addressing this issue.
Recommendation 4: Add a statement or notice to page 1 of the Form 1040, near the column used to mark whether the dependent(s) qualified for the Child Tax Credit, which clearly denotes the qualifying age requirement for the Credit.
Management’s Response: IRS management agreed with this recommendation. They plan to review the suggestions presented
in the report and determine the best way to modify the Child Tax Credit column
in the Exemptions section of Form 1040, so that it more clearly denotes the
qualifying age requirement for the Credit.
Legislative Recommendation
Recommendation 5: Legislation is needed to allow for the judicious use of additional colors on tax returns and instructions to highlight important warnings and information.
Management’s Response: The IRS is not commenting on this recommendation. Matters of tax policy are within the
jurisdiction of the Office of Tax Policy at the Department of the Treasury. However, management agreed to conduct a
review of the Forms 1040 to determine where the IRS can more effectively use
shading, bolding, and other changes, such as font sizes, to highlight the most
important areas of the tax forms.
Office of Audit Comment: We will provide a copy of our report to the Department of the Treasury, Office of Tax Policy for consideration of this legislative recommendation.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this audit was to determine whether
an analysis of Individual Master File[16] math error notices[17] could help the IRS identify areas on its individual
income tax forms and instructions that need improvement and/or clarity. To accomplish the objective, we:
I. Determined whether the IRS has any procedures in place to evaluate whether notices being sent to taxpayers can be reduced by actions that can be taken by the IRS.
A. Contacted IRS management to determine what procedures are currently in place to evaluate improvements that can be made to reduce the number of notices being sent to taxpayers.
B. Discussed with IRS personnel what steps had been taken to evaluate simplification or clarification of current forms and publications.
C. Contacted the Tax Forms and Publications function to determine the procedures it uses to determine which forms need updating for simplification.
D. Determined whether there was an evaluation of math error notices to determine why they have a high occurrence rate.
E. Determined whether any additional procedures should be performed by the IRS on a regular basis to improve this process.
II. Determined the top 10 math error notices received by taxpayers on their tax returns.
A.
Obtained and evaluated IRS data regarding the math
error codes[18]
that result in a notice being sent to taxpayers. To determine the accuracy of the IRS data, we
compared IRS statistics to the data available on TIGTA’s Data Center Warehouse.[19]
B.
Identified from the Data Center Warehouse the total
number of each math error code that resulted in a notice that was sent to
taxpayers for Processing Years 2003 through 2006.
C.
Identified
the top 10 Individual Master File math
error notices sent to taxpayers in Processing Year 2006 and downloaded a
database of those taxpayers that received these notices.
D.
From the top 10 Individual
Master File math error notices, evaluated those that we believed the IRS
could reduce or avoid as a result of changes or improvements to forms and/or
instructions. From the tax returns with
math error notices identified in Step II.C., we selected a statistical sample[20]
of 385 returns from a population 2,321,120.
In selecting our sample, we used a confidence level of 95 percent, a
precision rate of + 5 percent, and an expected error rate of 50 percent.
E.
Validated, verified, and assessed the reliability of
the computer-processed data in Step II.C. by comparing the data from the
database to information from the IRS Master File[21]
and found the data to be valid and reliable.
F.
Analyzed 370 of the tax returns in the sample to
determine the specific reason the taxpayer received the math error notice and
evaluated whether there were improvements in education, forms, or instructions
that could have been made to avoid a notice being mailed to the taxpayer.
III.
Determined whether State forms or instructions use of color could be
used to reduce errors caused by a lack of clarity on the U.S. Individual Income
Tax Return (Form 1040) by randomly selecting 20 States and reviewing the income
tax forms and instructions for uses of color.
IV.
Obtained feedback from tax preparers regarding our
proposed changes to Form 1040 that we believe would eliminate a significant number of errors many taxpayers
make when completing their income tax returns by conducting focus group sessions
at two of the six 2008 IRS Nationwide Tax Forum locations (Las Vegas, Nevada,
and Manhattan, New York).
Appendix II
Major Contributors to This Report
Michael
E. McKenney, Assistant Inspector General for Audit (Returns Processing and
Account Services)
Margaret
E. Begg, Assistant Inspector General for Audit (Compliance and Enforcement
Operations)
Kyle
R. Andersen, Director
Larry
Madsen, Audit Manager
Bill
R. Russell, Audit Manager
L.
Jeff Anderson, Lead Auditor
W.
George Burleigh, Auditor
Laura
Paulsen, Auditor
Roy
E. Thompson, Auditor
James M. Allen, Information Technology
Specialist
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and
Enforcement SE
Deputy Commissioner, Wage and Investment
Division SE:W
Director, Customer Assistance, Relationships,
and Education, Wage and Investment Division
SE:W:CAR
Director, Media and Publications, Wage and
Investment Division SE:W:CAR:MP
Director, Tax Forms and Publications, Wage
and Investment Division SE:W:CAR:MP:T
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: Commissioner,
Wage and Investment Division SE:W:S
Appendix IV
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 Individual Master File is the IRS database that maintains transactions or records of individual tax accounts.
[2] A math error notice is sent to a taxpayer when the IRS makes a correction to a tax return to explain the changes to the taxpayer who filed the return. The notice explains the nature of the changes and how the changes affected the tax return.
[3] Processing year is the calendar year in which the tax return and other tax data are processed. Processing Year 2006 is comprised primarily of Tax Year 2005 returns; however, it may also consist of prior year returns.
[4] A math error notice is sent to a taxpayer when the IRS makes a correction to a tax return to explain the changes to the taxpayer who filed the return. The notice explains the nature of the changes and how the changes affected the tax return. The ability to simply correct certain errors made by taxpayers originated out of the recognition that some errors on tax returns did not justify the expense of an audit. Congress authorized the IRS to correct certain math errors that appeared on the face of a tax return without opening an audit on the taxpayer.
[5] Processing year is the calendar year in which the tax return and other tax data are processed. Processing Year 2006 is comprised primarily of Tax Year 2005 returns; however, it may also consist of prior year income tax returns.
[6] 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.
[7] Congress acted to provide tax relief for victims of Hurricane Katrina with the Katrina Emergency Tax Relief Act of 2005 [Pub. L. No. 109-73, 119 Stat. 2016 (to be codified in scattered sections of 26 U.S.C.)]. Section 302 of this Act allows taxpayers to claim an additional exemption amount for housing Hurricane Katrina victims.
[8] A tax return is typically processed the year following the tax year of the return (i.e., a 2005 tax return is processed in 2006). Therefore, a processing year will also include an insignificant number of other prior year income tax returns. The tax year volumes in this figure consist primarily of the tax year shown; however, they will also include a small percentage of prior tax year returns.
[9] The Data Center Warehouse is a collection of IRS databases containing various types of taxpayer account information that is maintained by the TIGTA for the purpose of analyzing data for ongoing audits.
[10] Most taxpayers file their 2008 Forms 1040 during Calendar Year 2009.
[11] A vast majority of these were TY 2005 returns. An insignificant number may have been from prior tax years.
[12] A vast majority of these were TY 2005 returns. An insignificant number may have been from prior tax years.
[13] In some instances prior to TY 1998, if taxpayers did not have a dependent’s SSN by the time they were ready to file their tax returns, the IRS instructed them to write “Applied for” in the appropriate column. Since TY 1998, an SSN has been required for each dependent. Since the introduction of ITIN’s in TY 1996, taxpayers have been required to follow the same procedures.
[14] The Internal Revenue Service Could Enhance the Process for Implementing New Tax Legislation (Reference Number 2000-40-029, dated March 6, 2000).
[15] A vast majority of these were TY 2005 returns. An insignificant number may have been from prior tax years.
[16] The Individual Master File is the IRS database that maintains transactions or records of individual tax accounts.
[17] A math error notice is sent to a taxpayer when the IRS makes a correction to a tax return to explain the changes to the taxpayer who filed the return. The notice explains the nature of the changes and how the changes affected the tax return.
[18]The math error code is a three-digit code assigned to a short description of the changes contained in the math error notice.
[19] The Data Center Warehouse is a collection of IRS databases containing various types of taxpayer account information that is maintained by the TIGTA for the purpose of analyzing data for ongoing audits.
[20] We selected a statistically valid sample because we wanted to project our results over the entire population of accounts.
[21] The IRS database that stores various types of taxpayer account information. This database includes individual, business, and employee plans and exempt organizations data.