Repeated Efforts to Modernize Paper Tax Return Processing Have Been Unsuccessful; However, Actions Can Be Taken to Increase Electronic Filing and Reduce Processing Costs
September 10, 2009
Reference Number: 2009-40-130
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
September 10, 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 – Repeated Efforts to Modernize Paper Tax Return Processing Have Been Unsuccessful; However, Actions Can Be Taken to Increase Electronic Filing and Reduce Processing Costs (Audit # 200940010)
This report presents the results of our review to assess the
Internal Revenue Service’s (IRS) strategy to convert paper-filed individual
income tax returns into an electronic format.
This audit was included as part of our Fiscal Year 2009 Annual Audit
Plan under the major management challenge of Modernization of the IRS.
Impact on the Taxpayer
In Calendar Year 2008, the IRS received 156.3 million
individual income tax returns, of which 66.4 million (42.5 percent) were paper-filed. The IRS has devoted significant resources to
identify ways it could modernize its method for processing paper tax returns
but has had no success. Actions can be
taken including mandating electronic filing (e-filing) for paid preparers and developing processes to convert
paper returns into an electronic format which would significantly reduce paper
filings, processing costs, and error
rates, with the added benefit of faster tax refunds and more accurate tax
returns for taxpayers.
Synopsis
The IRS continues to receive large numbers of paper-filed individual income tax returns despite a continued growth in e-filing. Processing of paper-filed tax returns costs the IRS approximately $190.6 million. Error rates are considerably higher for paper-filed tax returns. Many errors are due to IRS employee keypunch errors when inputting information from the paper tax returns into IRS computers. In contrast, e-filed tax returns are sent through a number of validations before the IRS accepts them. Unlike a paper tax return, an e-filed tax return is not accepted until the validity check confirms the tax return is free of errors. Once notified of an error, the taxpayer or preparer has to correct the tax return and resubmit it through e-filing or by paper. In some instances, rejected returns are not resubmitted.
Because the
IRS has not been able to implement a modernized submission processing system to
convert paper tax returns into an electronic format, it has to continue to use
a labor intensive, costly, and error-prone system.
Repeated efforts have been initiated to modernize paper tax return processing
with no success. Significant resources
have been expended on developing modernization concepts. Since at least as far back as 1988, the IRS
has attempted to develop a system to replace its current paper tax return
processing. However, these efforts have resulted
in little more than conceptual visions.
While the IRS has not been able to move beyond the conceptual stage for modernizing paper processing, there are actions that would reduce paper filings and/or convert paper tax returns into an electronic format. These options could result in a significant increase in e-filing as well as significant processing cost savings to the IRS. The options are:
Implementation of these 2 options could result in a 26.9 percent increase in e-filing, with cost savings of $66.6 million annually ($333 million over 5 years), and provide the ability to convert 13.2 million paper tax returns into an electronic format.
Recommendations
We recommended that the Commissioner, Wage and Investment Division, pursue implementing successful processes followed by States that use scanning technology (Optical Character Recognition and Two-Dimensional Bar Codes) to convert paper-filed tax returns prepared by individuals using a tax preparation software package into an electronic format.
Legislative Recommendation
Consider mandating e-filing for all paid preparers.
Response
IRS
management agreed with the two recommendations.
The Wage and Investment Division will pursue the implementation of
processes that use scanning technology (Optical Character Recognition and
Two-Dimensional Bar Codes).
Two-Dimensional Bar Codes will be a project proposal for the 2012
Modernization Vision and Strategy planning cycle. In the meantime, a new proposal will be
submitted to enhance legacy systems with Two-Dimensional Bar Code capabilities. The legislative recommendation is currently
under consideration by the Department of the Treasury and included in the
President’s Fiscal Year 2010 budget request.
Management’s complete response to the draft report is included as Appendix
V.
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.
Repeated Efforts Have
Been Initiated to Modernize Paper Submission Processing With No Success
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix V
– Management’s Response to the Draft Report
Abbreviations
|
e-file(d); e-filing |
Electronically file(d); electronic filing |
|
|
ETAAC |
Electronic Tax Administration Advisory Committee |
|
|
FY |
Fiscal Year |
|
|
IRS |
Internal Revenue Service |
|
|
2-D Barcode |
Two-Dimensional Bar Code |
|
Paper-filed
individual tax returns accounted for 42.5 percent of tax returns received in Calendar
Year 2008. Processing of these returns
cost the IRS approximately $190.6 million.
The Internal Revenue Service (IRS) continues to receive large numbers of paper-filed individual income tax returns despite a continued growth in electronic filing (e-file). In Calendar Year 2008, the IRS received 156.3 million individual income tax returns of which 66.4 million (42.5 percent) were paper-filed. As of May 1, 2009, the IRS had received 40.6 million paper-filed tax returns, representing 30.9 percent of the 131.6 million individual income tax returns received. The IRS recognizes that even though it is getting closer to meeting its 80 percent e-file goal,[2] paper‑filed tax returns will continue to present a challenge in the foreseeable future. Figure 1 provides IRS projections on the volume of individual paper-filed tax returns for Calendar Years 2010 through 2015.
Figure 1: Projected
Filing Volumes of Individual Tax Returns
(as of October 2008)
|
Year |
Total Returns |
Number of |
E-File Percentage |
Number of |
Paper-Filed Percentage |
|
2010 |
140,903,300 |
98,310,400 |
70% |
42,592,900 |
30% |
|
2011 |
141,565,500 |
103,357,600 |
73% |
38,207,900 |
27% |
|
2012 |
143,096,300 |
106,771,700 |
75% |
36,324,600 |
25% |
|
2013 |
144,218,200 |
109,552,500 |
76% |
34,665,700 |
24% |
|
2014 |
144,921,000 |
112,223,300 |
77% |
32,697,700 |
23% |
|
2015 |
145,599,200 |
114,486,800 |
79% |
31,112,400 |
21% |
Source: IRS’ 2008 Calendar Year Return Projections for
the
E-filing provides processing
and error resolution savings
E-filed tax returns provide the IRS with significant processing cost savings
and low error rates:
·
IRS processing
costs: $0.35 for an e-filed tax return versus $2.87 for a paper-filed tax return.[4]
·
Error rates:[5] historically, less than 2.5
percent for e-filed tax returns
versus more than 25 percent for paper-filed returns.[6]
Error rates are considerably higher for paper-filed tax returns largely because of IRS employee keypunch errors when inputting information from the paper tax returns into IRS computers. In contrast, e-filed tax returns are sent through a number of validations which check for more than 600 possible errors before the IRS accepts the tax return. E-filed tax returns that do not pass the validation checks are rejected and sent back to the taxpayer or preparer for correction. For example, validity checks are performed on the taxpayer name, address, Social Security Number, and year of birth. Errors include incorrect Social Security Numbers of dependents, incorrect birthdates, numbers in an alphabetic field, and invalid zip codes. Unlike a paper tax return, an e-filed return is not accepted as filed until the validity checks confirm the tax return is free of these types of errors. Once notified of an error, the customer has to correct the tax return and resubmit it through e-file or by paper tax return. In some instances, rejected returns are not resubmitted.
Taxpayers
benefit when e-filing
Taxpayer e-file benefits include:
Taxpayers can also receive no-cost e-filing by using the IRS’ Free File program. The Free File program is a free Federal online
tax preparation and e-filing program
for eligible taxpayers developed through a partnership between the IRS and the
Free File Alliance, LLC, a group of private-sector tax preparation companies. The program enables eligible taxpayers to use
commercial tax software for free. Taxpayers
with adjusted gross incomes up to $56,000 can use the standard Free File
options in Calendar Year 2009—that is approximately 98 million
In addition, there is an option that opens up the Free File program to nearly everyone, even those with incomes exceeding $56,000. This option is Free File Fillable Forms. These Fillable Forms allow taxpayers to fill out their tax forms and e-file them with the IRS at no cost. These forms are only available through the Free File program link on IRS.gov (the public IRS Internet web site). This option does not include the step-by-step question and probe process, but it does allow taxpayers to enter their tax data, perform basic math calculations, sign their tax returns electronically, print their returns for recordkeeping, and e-file their returns. This option may be right for those who are familiar with the tax law, know what forms they want to use, and do not need assistance.
The
IRS initiated an Advancing E-File Study in an effort to meet the e-file goal
set by Congress
The goal of the IRS’ Advancing E-file Study is to help the IRS validate and launch future studies, research, and other activities to meet the goal of an 80 percent e-file rate set by Congress. Specifically, the IRS initiated a major effort to collect, synthesize, and analyze all substantial data on the IRS e-file program in one document called the Advancing E-file Study Phase 1 Report, dated August 14, 2008. The report includes the program’s history, stakeholders, taxpayer and preparer behaviors, related programs and efforts, and options for expansion. The Phase 1 report does not include recommendations on selecting or implementing specific options for advancing e-file, but lays the foundation for doing so in future phases.
Phase 2 of the Advancing E-file Study is underway and was planned for completion in spring/summer 2009; however, it has been pushed back until the fall of 2009. Phase 2 will include a cost/benefit analysis of the options to increase e-file based on original research of taxpayer and preparer motivators and analysis of the business and engineering/costing studies of those options.
This review was performed at the Wage and Investment
Division Submission Processing function offices in
The IRS
process to receive and input paper-filed tax returns is extremely labor
intensive, costly, and prone to errors.
The IRS has devoted significant resources to initiate studies to identify ways the IRS could modernize its method for processing paper tax returns. In order to process paper tax returns, information on the tax return must be entered by hand into a computer by an IRS employee. This manual process of inputting information into a computer system converts the information into an electronic format, which then can be processed electronically. The IRS has studied different ways to automate this labor-intensive and costly process.
However, none of these studies have moved beyond the concept stage, which leaves the IRS expending significant resources ($190.6 million annually) to process paper-filed tax returns. Current processing methods require the IRS to employ more than 5,000 data transcribers during peak processing. For decades, the IRS has used an elaborate manual system to process its U. S. Individual Income Tax Return (Form 1040) series of paper tax returns. Paper returns are:
Without a modernized paper submission processing system that converts paper tax returns into an electronic format, the IRS will continue to have to use its labor-intensive, error-prone, and costly system to process paper-filed tax returns. In addition, the manual transcription of information from paper-filed tax returns into IRS computers has historically high error rates, which causes costly rework in order to ensure returns are correctly processed and cause no harm to taxpayers.
Significant resources
have been expended developing modernization concepts
Since at least as far back as 1988, the IRS has attempted to develop a system to replace its current paper tax return processing. However, none of these efforts have resulted in more than conceptual visions. Figure 2 provides the progression of efforts conducted to modernize paper submission processing.
Figure 2: Efforts Initiated to Modernize Paper Submission Processing
|
1988 |
Document
Processing System – Developed to replace the IRS’ labor-intensive, paper-based
tax return processing system using imaging technology and Optical Character
Recognition. |
Cancelled due to cost overruns. |
|
2003 |
Submission
Processing Visioning Taskforce – Established to develop a 2–6 year
overarching vision for the future submission processing organization,
processes, and systems. |
Concept was approved to pursue funding and then the concept
was rolled into the next proposal. |
|
2004 |
Modernized Paper Pipeline Processing Proposal – Proposal for a
system capable of processing all IRS form types using the latest Optical
Character Recognition, Intelligent Character Recognition, and Two-Dimensional
Bar Code (2-D Barcode) recognition technology to capture information from the
different submissions and convert that information into an electronic format. |
Funding
was pursued but not approved. |
|
2007 |
Modernized
Submission Processing Proposal – Current conceptual approach for an
investment proposal to modernize paper submission processing. |
Funding request was delayed. |
Source: Treasury Inspector General for Tax Administration research and interviews with IRS officials.
Modernized
Submission Processing is the IRS’ latest concept
The IRS has completed work on the Modernized Submission Processing concept, its latest effort for modernizing paper tax return processing. This concept provides for a system that will automate the extraction of paper tax return information. The IRS projects that the system would cost an estimated $66.2 million in development costs. After the system is fully implemented, the recurring operation and maintenance costs are estimated to be $10.7 million per year. The IRS had planned to request funding for the concept in Fiscal Year (FY) 2010; however, no funding was ultimately requested.
The concept provides for a paper processing system that will
use optical scanning, automated data extraction through Optical Character Recognition
and 2-D Barcodes, modernized and legacy data export, and return-of-record image
archive for the Form 1040 series of returns. The initial deployment was
proposed for August 2011 at one of the three campuses that process paper-filed
individual income tax returns with deployment to the remaining campuses in
August 2012.[8] The IRS anticipated that numerous benefits would
be realized once fully implemented and estimated that $67 million per year
would be saved.
The Modernized
Submission Processing Solution Concept[10] has been completed and was previously ranked
by IRS senior executives as one of the top new modernization priorities for the
FY 2010 investment portfolio. However,
no funding was ultimately requested for FY 2010, and it is no longer on the
IRS’ Enterprise Prioritization list for funding in FY 2010 or FY 2011.
Actions Are Needed to Reduce Paper-Filed Tax Returns and/or Convert Paper Tax Returns to an Electronic Format
While the IRS has not been able to move beyond the conceptual stage for modernizing paper submission processing, there are actions that would reduce paper filings and/or convert paper tax returns into an electronic format. These options can result in a significant increase in e-filing as well as significant processing cost savings to the IRS. The options are:
Implementation of these options could result in a 26.9 percent increase in e-filing with processing cost savings of $66.6 million annually as well as the ability to convert 13.2 million tax returns[12] into an electronic format.
Mandating e-file for paid preparers
A Federal mandate for paid preparers to e-file individual income tax returns would result in an increase of 26.9 percent[13] in e-filed tax returns and reduce IRS paper tax return processing costs by $66.6 million annually.[14] The majority of paid preparers are already familiar with operating in an electronic environment. Most paid preparers who filed paper tax returns actually used an electronic tax software preparation package and 70 percent also e-filed at least 1 tax return, which indicates a familiarity with the electronic preparation and e-filing process. However, while paid preparers are willing to e-file returns, some taxpayers are reluctant to do so, according to IRS management. Analysis of IRS return processing data for Processing Year 2008 showed that:
Figure 3 illustrates the methods used by paid preparers for paper return submissions.
Figure
3: Methods Used by Paid Preparers to
Prepare Paper Returns
(Processing Year 2008)
|
Returns |
Percent |
|
|
Handwritten |
4,882,074 |
18.5% |
|
Computer |
21,565,688 |
81.5% |
|
Total |
26,447,762 |
100.0% |
Source: Treasury Inspector
General for Tax Administration analysis of the IRS’ Individual Return
Transaction File[16] for
Processing Year 2008.
Federal law currently
prohibits the IRS from mandating e-filing
Federal law currently prohibits the IRS from requiring e-filing of individual income tax returns. In order for a Federal mandate of individual e-filing to be implemented, the law would have to be changed. Advisory Groups and the Government Accountability Office have reported to Congress the benefits that could be achieved by mandating e-filing:
· The Electronic Tax Administration Advisory Committee (ETAAC) has advocated a Federal e-file mandate for several years. In its June 19, 2008, Annual Report to Congress,[17] the ETAAC reported, “At this time, [the] ETAAC believes that all reasonable voluntary means have been exhausted with respect to encouraging preparers to e-file Individual Tax Returns, and it is time to take a stance by announcing an e-file mandate for tax return preparers.”
· The IRS Oversight Board agreed with the ETAAC’s recommendation in its Electronic Filing 2008 Annual Report to Congress.[18] The Board supports the concept that Congress should lift the statutory prohibition on e-filing mandates for individual returns and give the IRS the discretion to implement such e-file mandates in the future as might be appropriate.
· The Government Accountability Office has also suggested an e-file mandate. Its 2006 Filing Season report[19] suggested that Congress should mandate e-filing by paid tax preparers meeting criteria such as filing a certain number of tax returns. The Government Accountability Office stated, “With the slowing growth rate in electronic filing, [the] IRS is missing an opportunity to generate additional savings. Federal and [S]tate mandates for electronic filing have demonstrated success in increasing electronic filing; however, [the] IRS currently lacks the authority to mandate electronic filing for certain income tax returns such as individual returns filed by paid tax preparers. Using IRS estimates, savings from such a mandate could be on the order of $60 million per year.”
It should also be noted that the President’s FY 2010 budget request for the IRS contains a legislative proposal to expand e-filing requirements for paid preparers. This proposal would allow regulations to require that tax return preparers who file more than 100 returns (or any other person who files more than 250 returns) e-file tax returns for individuals, estates, and trusts.
Many States are already mandating e-filing for paid preparers
In
recent years, a number of States have adopted requirements mandating that
certain paid preparers must e-file all
tax returns they prepare. As of November
2008, 20 (47 percent) of the 43 States that have a personal State income tax
[20]
have adopted some type of mandate that paid preparers e-file State individual income tax returns. Some of these States have included volumes of
tax returns prepared when determining which specific preparers have to e-file.
For example, in 2004, the State of
Figure 4: Map of States With E-file Mandates for Paid Preparers
The map was removed due to its size.
To see the map, please go to the Adobe PDF version of the report on the
TIGTA Public Web Page.
A Federal mandate
requiring paid preparers to e-file would
provide significant processing cost savings to the IRS and would accelerate the
time it will take for the IRS to meet its 80 percent e-filing goal. In addition,
this would significantly reduce the volume of tax returns with keypunch errors
that would require correction. Figure 5
shows the expected e-filing increase
of an e-file mandate.
Figure 5: Projected E-Filing Increase From an E-file Mandate
|
Projected Return Filings |
Current Projection 2010 |
Percentage |
With Mandate 2010 |
Percentage |
|
Total Individual
Returns Forms 1040/A/EZ |
140,903,300 |
|
140,903,300 |
|
|
Total Paper
Individual Returns |
42,592,900 |
30% |
16,145,138 |
11% |
|
Total Electronic
Individual Returns |
98,310,400 |
70% |
124,758,162 |
89% |
Source: IRS’ 2008 Calendar Year Return Projections for
the
(Document 6186) and Treasury Inspector General for Tax Administration analysis
of the IRS’ Individual Return Transaction File for Processing Year 2008.
Mandating e-filing for paid preparers[21]
for individual income tax returns
would result in a 26.9 percent increase[22]
in the number of e-filed tax returns
and would reduce IRS paper tax return processing costs by $66.6 million annually. Over 5 years, potential processing cost
savings could total approximately $333 million.
Legislative Recommendation
Recommendation 1: Consider mandating e-filing for all paid preparers.
Management’s Response: The IRS agreed with this recommendation, which is currently
under consideration by the Department of the Treasury and included in the
President’s FY 2010 budget request. The
initiative will require e-filing by
tax preparers who file more than 100 tax returns in a calendar year. The proposal would be effective for tax
returns required to be filed after December 31, 2010. Since the Department of the Treasury and the
Administration have already considered the subject, the IRS does not plan to
take further action with regard to this recommendation.
Converting residual paper returns into an electronic format
Electronic tax
preparation software companies currently provide tax software packages that enable
State tax agencies to optically convert paper-filed tax returns into an
electronic format using Optical Character Recognition and 2-D Barcodes. While mandating e-filing for paid preparers will significantly reduce the number of
paper returns received by the IRS, it will not eliminate them. In Calendar Year 2008, taxpayers submitted
36.5 million paper returns of which 13.2 million, or 36.2 percent, were
prepared using an electronic tax preparation software package. Yet these returns were mailed to the IRS as a
paper tax return. The IRS will still need
to develop a process to convert these residual paper returns into an electronic
format.
Updating the Modernized Submission Processing concept to include pursuing successful processes followed by States that use scanning technology, including the use of Optical Character Recognition and 2-D Barcodes, could provide the IRS with an option to convert paper-filed tax returns into an electronic format, thereby reducing processing costs associated with paper-filed tax returns.
Representatives from
the State of
Figure 6: Map of States Using Scanband and/or 2-D Barcodes
The
map was removed due to its size. To see
the map, please go to the Adobe PDF version of the report on the TIGTA Public
Web Page.
The
State of
Figure 7:
Figure
7 was removed due to its size. To see
Figure 7, please go to the Adobe PDF version of the report on the TIGTA Public
Web Page.
In another example,
the New York State Department of Taxation and Finance captures tax return data using
2-D Barcodes. This is a preferred option
based on conversations we had with one large e-file provider because it is less confusing to the taxpayer since
it looks like a regular tax return with a single cover sheet. A 2-D Barcode is a machine readable
representation of information encoded in a pattern of two dimensions. Returns that are prepared on a computer and
filed on paper have the data captured and printed in a 2-D Barcode capable of
being read by either hand-held or high-speed scanners. As of June 2009, the State of
Figure 8:
Figure
8 was removed due to its size. To see
Figure 8, please go to the Adobe PDF version of the report on the TIGTA Public
Web Page.
These scanning
technologies could be used in a rescaled version of the Modernized Submission
Processing concept to provide the IRS with options to further reduce processing
costs associated with residual paper-filed tax returns subsequent to an e-file mandate. In addition, to further reduce implementation
and equipment costs, the IRS should consider directing these taxpayers to
submit returns to a single return processing site. Implementing a process to convert paper-filed
tax returns that were prepared using a tax software package into an electronic
format could result in further reductions in paper-filed tax return processing
costs.
Recommendation
The Commissioner,
Wage and Investment Division, should:
Recommendation
2: Pursue the implementation of successful
processes followed by States that use scanning technology (Optical Character
Recognition and 2-D Barcodes) to convert
paper-filed tax returns prepared by individuals using a tax preparation
software package into an electronic format.
Management’s Response: The IRS agreed with this recommendation. The Wage and Investment Division will pursue
the implementation of processes that use scanning technology (Optical Character
Recognition and 2-D Barcodes). 2-D
Barcodes will be a project proposal for the 2012 Modernization Vision and Strategy
planning cycle. In the meantime, a new
proposal will be submitted to enhance legacy systems with 2-D Barcode capabilities. Detailed requirements and timetables for that
proposal are being developed, with a targeted implementation date of January
2011. It should be noted that there are
budget and information systems prioritization constraints that may impact the IRS’
ability to implement this recommendation.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of our review was to assess the IRS’ strategy to convert paper-filed individual income tax returns into an electronic format. To accomplish our objective, we:
I. Identified the process used to develop the strategy to convert paper-filed individual income tax returns into an electronic format.
II. Identified the options the IRS considered and determined adequacy of testing of the various options, the accuracy of cost information included, and the method used to determine the potential benefits to be realized.
III. Identified potential obstacles that could impact on the timely implementation of the strategy as well as IRS efforts to address the potential obstacles.
IV. Identified processes used by State tax agencies to process paper-filed tax returns that could be used as a Best Practice.
V. Determined the effect of an e-file mandate for paid preparers by analyzing 90,472,107 individual income tax return records[23] for Processing Year 2008 on the Individual Return Transaction File[24] and identified 26,447,762 paper individual income tax returns prepared by paid preparers.
Appendix II
Major Contributors to This Report
Michael
E. McKenney, Assistant Inspector General for Audit (Returns
Processing and Account Services)
Russell
Martin, Director
Tina
Parmer, Audit Manager
Steven
Vandigriff, Lead Auditor
Karen
Fulte, Senior Auditor
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Chief Technology Officer OS:CTO
Deputy Commissioner, Wage and Investment Division SE:W
Director, Customer Account Services, Wage and Investment Division SE:W:CAS
Director, Electronic Tax Administration and
Refundable Credits, Wage and Investment Division SE:W:ETARC
Director, Strategy and Finance, Wage and Investment Division SE:W:S
Director, Submission Processing, Wage and Investment Division SE:W:CAS:SP
Chief, Program
Evaluation and Improvement, Wage and Investment Division SE:W:S:PRA:
Senior Operations Advisor, Wage and Investment Division SE:W:S
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: Chief, Program Evaluation and
Improvement, Wage and Investment Division
SE:W:S:PRA:
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective action will have on tax administration. This benefit will be incorporated into our Semiannual Report to Congress.
Type and Value of Outcome Measure:
·
Inefficient Use of Resources – Potential; return processing costs
of $66.6 million on 26,447,762 individual tax returns; $333 million in return
processing costs over 5 years (see page 7). It should be noted that realization of this
outcome measure is contingent upon enactment of legislation.
Methodology Used to Measure the Reported Benefit:
We used computer analysis to identify from the IRS Individual Return Transaction File[25] a universe of 26,447,762 paper individual income tax returns filed by paid preparers in Processing Year 2008. Paid preparer returns were identified as those that included a preparer Social Security Number, Preparer Tax Identification Number, or Employer Identification Number. It excluded returns prepared by volunteer preparers, and we further limited paid preparers to those that prepared six or more returns. IRS return processing costs $0.35 for an e-filed tax return versus $2.87 for a paper-filed tax return. If the tax law is changed to mandate e-file for paid preparers, processing cost savings of $333 million over 5 years could be put to better use.
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] For the purpose of this report, we defined paid preparers as those that included a preparer Social Security Number, Preparer Tax Identification Number, or Employer Identification Number and prepared six or more tax returns. It excluded returns prepared by volunteer preparers.
[2]
The IRS Restructuring and Reform Act of 1998
required that paperless filing should be the preferred and most convenient
means of filing Federal tax and information returns. It should be the goal of the IRS to have at least
80 percent of all returns filed electronically.
[3] 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.
[4] Advancing E-file Study Phase 1 Report, dated August 14, 2008.
[5] The error rate is the percentage of returns that are identified by the Error Resolution System with a transcription, math, or other error.
[6] IRS’ Miscellaneous Monitoring Reports.
[7] For credit and debit card transactions, there is a fee charged by the service providers. Fees are based on the amount of the payment and may vary by service provider.
[8] Processing of certain business returns was proposed for July 2013.
[9] A measure of labor hours in which 1 Full-Time Equivalent is equal to 8 hours multiplied by the number of compensable days in a particular fiscal year. For FY 2008, 1 Full-Time Equivalent is equal to 2,096 staff hours. For FY 2009, 1 Full-Time Equivalent is equal to 2,088 staff hours.
[10] A Solution Concept is the first step toward the development of a modernization investment proposal and documents the project scope, assumptions, timeline, risks, and the technical solution envisioned.
[11] For the purpose of this report, we defined a paid preparer as those who included a preparer Social Security Number, Preparer Tax Identification Number, or Employer Identification Number and prepared six or more tax returns. We excluded returns prepared by volunteer preparers.
[12] Prepared by taxpayers using tax preparation software then printed and mailed.
[13] Based on current IRS projections for Processing Year 2010.
[14] Processing cost savings are based on a 26.4 million increase in e-filing by paid preparers and the $2.52 difference in the cost of processing a paper return and an e-filed return.
[15] Totals may not compute to those presented due to rounding.
[16] The Return Transaction File contains all edited, transcribed, and error-corrected data from the Form 1040 series and related forms for the current processing year and 2 prior years.
[17] Electronic Tax Administration Advisory Committee: Annual Report to Congress, dated June 19, 2008.
[18] IRS Oversight Board: Electronic Filing 2008 Annual Report to Congress, dated January 2009.
[19]
Tax Administration: Most Filing Season Services Continue to
Improve, but Opportunities Exist for Additional Savings (GAO-07-27,
dated November 2006).
[20]
[21] The IRS requires paid preparers to sign the tax returns they prepare and to identify themselves using either their Social Security Numbers or Preparer Tax Identification Numbers. If the preparer is self-employed or a member of a firm, they are also to provide their Employer Identification Numbers. Our analysis identified returns that included a preparer Social Security Number, Preparer Tax Identification Number, or Employer Identification Number and excluded returns prepared by volunteer preparers. The analysis further limited paid preparers to those that prepared six or more returns. This criterion was based on preparer identification issues reported in our report entitled Inadequate Data on Paid Preparers Impedes Effective Oversight (Reference Number 2009-40-098, dated July 14, 2009).
[22] Based on current IRS projections for Processing Year 2010.
[23] To assess the reliability of computer-processed data, programmers in the Treasury Inspector General for Tax Administration Office of Information Technology validated the extracted data, and we verified the appropriate documentation. In addition, run-to run balancing was performed and the data in the selected fields were analyzed to verify the validity of the data.
[24] The Return Transaction File contains all edited, transcribed, and error-corrected data from the U.S. Individual Income Tax Returns (Form 1040 series) and related forms for the current processing year and 2 prior years.
[25] The Return Transaction File contains all edited, transcribed, and error-corrected data from the U.S. Individual Income Tax Returns (Form 1040 series) and related forms for the current processing year and 2 prior years.