This review was conducted as part of Internal Audit’s Fiscal Year 1997 Business Taxpayer Audit Strategy. Under the strategy, Internal Audit initiated a series of national reviews which were designed to identify opportunities to improve customer service and reduce burden for the business taxpayer. This review focused on those business taxpayer accounts where more than one Form 941, Employer’s Quarterly Federal Tax Return, was processed which resulted in a duplicate filing condition.

During tax year 1996, approximately 250,000 business taxpayers (3.5% of total business taxpayers) filed more than one Form 941 return for at least one quarter. Because of the relatively low volume, we focused our objective on profiling these modules and determining if there were any cost-effective solutions to reduce the volume, expedite processing, and improve service to business taxpayers. We performed the review in accordance with generally accepted government auditing standards.

Although duplicate Form 941 returns do not create a significant burden to the Service, we did identify two processes which the Service may be able to cost-effectively improve. These changes will improve the efficiency of processing duplicate returns and should also improve service to the taxpayer. Management acknowledged that the Service could expedite processing in these two areas.

We also discussed with management our profiling of Tax Year 1995 and 1996 duplicate Form 941 return accounts. Based on the low number of taxpayers in the various profile characteristics, we jointly determined that there were no cost-effective solutions to reduce the volume of duplicate returns.

Implementation of a Prescreening Process for Amended/corrected Returns. Four of the six service centers we visited had already implemented an upfront prescreening process to identify amended or corrected returns. The prescreened returns were then sent directly to Adjustments rather than continuing through regular return processing before being routed to Adjustments. Our EDP analysis showed that three of these four service centers had fewer duplicate returns processed for amended or corrected returns. Prescreening has been shown to be a cost-effective method to prevent duplicate return postings, streamline processing, and resolve taxpayer accounts quicker.

Elimination of cP 193A Notice. We determined that at all six service centers reviewed, management was not using the cP 193A notices (used to request the original return be pulled and forwarded to Adjustments), but were instead using cFOL commands to view the original return online. Management agreed to eliminate the cP 193A notices.

Because of the prescreening efforts ongoing in some of the service centers, the following numbers do not represent the total number of duplicate returns filed by the taxpayers, only those duplicate returns that posted to the master file. However, the numbers do provide a high level indication of the different characteristics of duplicate returns. We did not perform further audit work beyond these analyses.

• 83% of the taxpayers had a duplicate return post to only one of the eight quarters in the two-year period, indicating that taxpayers do not repeatedly file duplicate returns.
• 49% of the businesses were less than six years old, indicating that taxpayers may not understand filing requirements during the first few years of being in business.
• 64% of the original returns had under $5,000 tax liability, indicating that the smaller businesses may not understand the filing requirements.
• In 21% of the duplicate postings, the taxpayer wrote "amended or corrected" on the return, indicating that taxpayers may not understand how corrections should be reported (included on the current Form 941 return).
• The volume of duplicate returns was almost evenly distributed among the four quarters (23% - 29%), indicating that taxpayers do not understand when corrections should be reported (in the fourth quarter only).

Directions for correcting Form 941 returns are provided in both the Form 941 Instructions and the Employer’s Tax Guide (Publication 15, circular E).

• consider expanding to all service centers a prescreening process for amended or corrected Form 941 returns.

Management agreed with our recommendation and is taking appropriate corrective action. The complete response is shown as Attachment II.