The Internal Revenue Service's (IRS) Electronic Federal Tax Payment System (EFTPS) is a system designed to process electronic tax payment information. It receives payment information electronically from two banks, which have been designated as Treasury Financial Agents (FA), and posts the payments to the taxpayers’ accounts on the IRS Master Files. During the first nine months of Fiscal Year 1998, almost 34 million payments (totaling about $859 billion) had been submitted and processed through EFTPS.

This audit is the fourth in a series of development and implementation reviews of EFTPS. In this audit, we reviewed EFTPS controls and procedures to determine whether IRS management took effective corrective action on selected, previously reported control and processing weaknesses and developed an effective strategy to increase the number of taxpayers who voluntarily pay taxes through EFTPS.

Information Systems (IS) management corrected several weaknesses reported in previous EFTPS audits, including revising and retesting the EFTPS Business Resumption Plan for disaster recovery and scheduling programming changes to strengthen controls over sensitive payment record changes (i.e., taxpayer name and identification number changes). continued management emphasis is still needed in the following areas:

• EFTPS processing capacity may not be sufficient to handle the anticipated growth in electronic payments in the future. This issue was reported in two previous audit reports.
• Electronic Tax Administration (ETA) management does not have a process to ensure EFTPS problems reported by the FAs are resolved.
• The IRS can increase the number of small businesses who voluntarily use EFTPS.

To address previously reported issues, IS management planned to implement a redesigned process that should mitigate short-term processing capacity risks. However, the IRS business process owners have not developed peak volume estimates to account for both the growth of current EFTPS use and new electronic payment initiatives that will increase the payment volume through EFTPS. The current system was sized to process the expected volume of Federal Tax Deposits (FTD). FTDs are primarily employers’ payments to the IRS for the Social Security, Medicare, and federal income taxes they withhold from employees’ wages. Although FTDs should remain the largest segment of EFTPS use, new electronic payment applications, along with increased marketing to potential users, could substantially add to EFTPS volumes.

currently, there are no procedures in place to ensure that problems reported by the FAs are corrected. Two-thirds (82 of 124) of the incident reports reviewed showed that the problems were caused by programming errors, control weaknesses, or continuing system problems. Many of these reports acknowledged that problems were recurring, but did not address how they would be corrected. The reported problems caused some taxpayers to initiate their payments late and delayed others’ receipt of their payment acknowledgements.

IRS business taxpayer records indicate that approximately 5.7 million small business taxpayers are not required to pay taxes electronically. Increasing voluntary EFTPS participation by these taxpayers is necessary for the IRS to achieve the legislated goal to process 80 percent of all returns and payments electronically by 2007. To facilitate this effort, we provided ETA management with information about voluntary EFTPS use, by geographic area.

The following summarizes the specific recommendations contained in the report.

• Develop estimates for the anticipated volume of payments resulting from the future growth of EFTPS and identify short-term and long-term efforts that will ensure the system can handle the increased volume of payments.
• Require the FAs to submit documentation showing how reported problems were resolved and follow up on items that have not been completed.
• Analyze data on small business voluntary use of EFTPS and use the results to focus marketing and communication efforts on potential users.

Management’s Response: IRS management responded to each of these recommendations, stating they:

• Will initiate appropriate actions to ensure the system can handle the expected volume of payments.
• Will improve procedures to identify and monitor trends and actions taken to resolve problems.
• Initiated actions to develop additional marketing and communication strategies directed towards voluntary users.

Management’s complete response, including a subsequent addendum, is included in Appendix V.