As part of the Internal Revenue Service’s (IRS) Fiscal Year (FY) 1998 Revenue Protection Strategy, two service centers conducted correspondence examinations of 140,000 taxpayers involving 350,000 tax periods. These taxpayers all filed income tax returns (1995 and/or 1996) claiming the Earned Income Tax Credit (EITC). The EITC qualifying child’s Social Security Number (SSN) was also used by another taxpayer to claim the EITC. Taxpayers selected for the Duplicate SSN EITC Repeater Project were subjected to the normal notice and examination processes. The only exception was that their Tax Year 1997 refunds were systemically frozen from refunding.

The objective of this review was to determine the effectiveness of the Duplicate SSN EITC Repeater Project in reducing the abusive use of dependent SSNs by multiple taxpayers claiming the EITC.

The IRS made significant strides in preventing erroneous refunds and claims for the EITC from going to non-qualified taxpayers. By September 1998, approximately 89,000 Duplicate SSN EITC Repeater cases were examined, resulting in an estimated $71 million in potential assessments. Over 35,900 taxpayers that were not entitled to use the abused SSN for EITC purposes did not claim the SSN again on their 1997 returns.

However, the service centers experienced difficulty managing the huge amount of taxpayer correspondence generated by this Project. During the early stages of our review, we advised Customer Service management to release the current year (1997) refunds of taxpayers who responded to Initial Contact Letters and/or filed 1997 returns without claiming the abused SSNs again. The IRS released current year refunds to both groups of taxpayers.

As of September 1998, there were still over 24,000 taxpayers waiting for their correspondence to be reviewed by tax examiners, and approximately 17,000 cases in Initial Contact Letter Status at one service center. The IRS needed to address the following areas to improve the operation of this Project, reduce taxpayer burden, and improve customer service:

Due to the large inventory selected for the Project, tax examiners could not keep up with the volume of taxpayer correspondence. Inventories at both service centers soon became unmanageable.

Since the general inventory of cases was not being worked timely, the number of cases meeting Problem Resolution Program (PRP) and Applications for Taxpayer Assistance Orders criteria grew rapidly. As of March 24, 1998, 1,354 taxpayers required PRP assistance, which was 93 percent above the norm for the number of taxpayers examined.

The two service centers did not work the cases in a consistent manner. Some taxpayers received more time and opportunities to produce sufficient documentation. This inconsistent treatment potentially increased the burden placed on taxpayers handled at one service center, while putting program completion goals in jeopardy at the other service center.

One service center did not always close non-examined 1997 returns off the Audit Information Management System properly. This resulted in distorted reports, duplication of effort, and impaired management’s ability to determine required resources.

The Project guidelines directed tax examiners to put a case into a specific holding status when additional information was requested from a taxpayer. However, there was no provision to distinguish between a case in which the taxpayer had already been issued a report of proposed tax changes and a case with merely a request for additional information. This increased the risk of missed assessments and loss of case control at one service center.

We advised the National Director, Customer Service, Compliance, Accounts and Quality Division, that insufficient resources were allocated to handle the magnitude of taxpayer correspondence generated by the Duplicate SSN EITC Repeater Project. We recommended that adequate PRP resources be allocated to handle the fallout of cases from the Project. We also recommended that Project guidelines be revised to ensure that cases were worked consistently and the risk of missed assessments was reduced. In addition, we recommended that tax examiners close non-examined returns off the control system properly when refunds were released.

Management’s Response: Management responded that for the FY 1999 initiative they decreased the level of inventory selected, changed monitoring procedures, and developed contingency plans for shifting inventory if levels became unmanageable. A task force consisting of representatives from PRP, Counsel, the EITC Program Office, and the National Office Service Center Examination Branch revised all EITC letters.

In addition, changes were made to the Project guidelines. Management also agreed that it would be more efficient for tax examiners to close non-examined returns off the control system properly. Management directed that cases with reports of proposed tax changes be placed into a different status on the control system to reduce the risk of missed assessments.

Management’s complete response to the draft report is included as Appendix IV.