2a = Law Enforcement Criteria
2c = Law Enforcement Tolerance(s)
2d = Law Enforcement Technique(s)
2e = Law Enforcement Procedure(s)

Executive Summary

Objectives and Scope

Background

Results

The Internal Revenue Service Unnecessarily Burdened Taxpayers Who Obviously Entered the Child Tax Credit on the Wrong Line

Conclusion

Appendix I – Detailed Objectives, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Outcome Measures

Appendix V – Legislative Provisions for Which Necessary Computer Programming was not Completed

Appendix VI – Taxpayer Notices Needing Improvement

Appendix VII – Key Legislative Provisions Affecting Individual Returns Processing for the 1999 Filing Season Included in this Review

Appendix VIII – Memorandum #1: Taxpayers Who Have Had the Earned Income Tax Credit Denied Through Math Error Procedures May Unnecessarily File for Recertification

Appendix IX – Management’s Response to Memorandum #1

Appendix X – Memorandum #2: Refunds Are Not Being Frozen on Returns Requiring Recertification for the Earned Income Credit

Appendix XI – Management’s Response to Memorandum #2

Appendix XII – Memorandum #3: The Internal Revenue Service is Unnecessarily Burdening Some Taxpayers Who Claim the Child Tax Credit on the Wrong Line of Their Tax Return

Appendix XIII – Management’s Response to Memorandum #3

Appendix XIV – Memorandum #4: The Internal Revenue Service is Incorrectly Recomputing the Tax Liability of Taxpayers Who Use Schedule J, Farm Income Averaging, to Figure Their Tax

Appendix XV – Management’s Response to Memorandum #4

Appendix XVI – Management’s Response to the Draft Report

Executive Summary

In 1997, the Congress enacted legislation that was considered the most extensive and complicated the Internal Revenue Service (IRS) faced since 1986. Close to half of the 300 new provisions of the Taxpayer Relief Act of 1997 were effective for Tax Year 1998. Taxpayers experienced problems preparing 1998 individual income tax returns, and the IRS experienced problems processing tax returns impacted by some of these new provisions.

The objectives of this audit were to evaluate the effectiveness of the IRS’ implementation efforts as well as to evaluate actions taken during the filing season to ensure that tax returns affected by significant new legislative provisions were processed correctly.

The IRS put forth significant effort to prepare for the filing season, and has established processes such as the testing of some newly developed forms, by taxpayer focus groups, to ensure that new legislation was effectively implemented. The IRS also conducted functional reviews of Internal Revenue Manual instructions, systems acceptability testing of new computer programs, and training of IRS employees. Overall, these efforts resulted in taxpayers receiving information regarding new tax law provisions necessary to properly file tax returns. The IRS properly processed most tax returns affected by these provisions. However, taxpayers experienced problems understanding some of the new legislative provisions and related forms and instructions. The IRS also experienced problems processing tax returns impacted by some new legislative provisions. This report discusses steps the IRS should take to timely identify and resolve these problems in the future. Recommendations in this report could result in the following:

• The IRS could avoid losing over $7 million of revenue each year to taxpayers claiming dependent exemptions to which they were not entitled.
• The IRS could also avoid losing over $33 million of revenue each year to taxpayers receiving tax credits to which they were not entitled.
• The IRS could avoid improperly denying deductions totaling over $32 million per year for contributions taxpayers made to Individual Retirement Accounts (IRA).
• Burden could be reduced on approximately 900,000 taxpayers if the IRS clarified tax forms and instructions or notices issued to these taxpayers regarding new tax provisions.
• Burden could be reduced on another 239,000 taxpayers if the IRS corrected inaccurate names and taxpayer identification numbers (TIN) on taxpayers’ returns rather than disallowing taxpayers’ credits and exemptions.
• The IRS could avoid improperly denying the Child Tax Credit to significant numbers of taxpayers, and could avoid improperly allowing the Child Tax Credit to other taxpayers.

As taxpayers’ income tax returns are processed by the IRS, computers analyze and recompute information on the returns to identify potential errors. These potential errors are resolved by employees in the Error Resolution function. If the IRS makes changes to figures the taxpayers entered on their returns, employees send taxpayers notices informing them of the changes.

Many changes the IRS made to taxpayers’ returns involving four new legislative provisions were incorrect. These errors resulted in significant losses of funds to both the Government and to taxpayers. The IRS did not timely identify and take action to address significant error rates involving the following four new legislative provisions:

• Child Tax and Additional Child Tax Credit
• Farmers Income Averaging
• Changes to the Calculation of Modified Adjusted Gross Income Used to Determine the Earned Income Tax Credit (EITC)
• Increased Adjusted Gross Income Limits for Contributions to an IRA

If reviews had been performed and trended by tax provision, they may also have revealed needed clarifications to tax forms and instructions.

Because of limited programming resources and extensive priority programming requirements, the IRS postponed or cancelled programming to identify potential taxpayer errors relating to two new tax law provisions. (See Appendix V for a detailed discussion of these missing programs.) As a result of these programs not being written, taxpayers mistakenly received the benefit from provisions in the tax law or received tax credits that they were not entitled to.

These taxpayers were not informed of their errors and are likely to repeat them. Also, these errors, if later identified by the IRS, could result in significant burden to taxpayers as they could be subject to penalties and interest in addition to any underpaid taxes.

Notices for the following four new tax provisions did not clearly or adequately explain the taxpayers’ errors, or the actions necessary:

• Child Tax and Additional Child Tax Credit
• EITC Recertification
• Changes to the Calculation of Modified Adjusted Gross Income for Purposes of Determining the EITC
• Increased Adjusted Gross Income Limits for Contributions to an IRA

If taxpayers do not receive complete, clear notices, they are likely to repeat errors in subsequent years, or to contact the IRS for clarification.

In over 31 percent of 403 notices sampled, the IRS had the correct information elsewhere on its computer system when it sent notices telling taxpayers their Child Tax Credit was disallowed because the name or TIN (usually a social security number) for their child on their 1998 tax return did not match IRS or Social Security Administration records.

If IRS employees performed computer research, the IRS could have prevented significant numbers of notices from being issued, and reduced the related burden to taxpayers. The IRS would experience additional returns processing costs to provide this service. However, some costs would be recovered because fewer taxpayers would need to contact the IRS to resolve their incorrect name or TINs.

Taxpayers who have been denied the EITC as a result of an IRS audit are not eligible to claim the credit in subsequent years unless they provide information to demonstrate their eligibility on Information to Claim Earned Income Credit After Disallowance (Form 8862).

Based on the tax return instructions, we anticipated that taxpayers would be confused about when to file Form 8862. The computer programs prepared by the IRS did not take into consideration that some taxpayers would file the form unnecessarily, and would have caused these taxpayers’ refunds to be delayed. We reported this issue to the IRS, and it immediately revised its programs. During the filing season, approximately 6,500 taxpayers unnecessarily filed Form 8862. Left uncorrected, the incorrect computer programs would have caused refunds for these taxpayers, totaling approximately $12.8 million ($8.8 million of which was the EITC) to be delayed unnecessarily. (See Appendices VIII and IX.)

Early in the filing season, refunds totaling over $218,000 ($143,000 of which was the EITC) were issued to 74 taxpayers whose refunds should have been stopped because they were required to recertify with the IRS before they could receive the EITC. Computer programs to stop these refunds were not functioning as intended.

We brought this problem to the IRS’ attention in a memorandum and the IRS took immediate corrective action. (See Appendices X and XI.) Left uncorrected throughout the filing season, this programming error would have resulted in approximately 29,000 disqualified taxpayers receiving the EITC totaling over $50 million.

Taxpayers claimed amounts consistent with the Child Tax Credit on the Child Care Credit or Education Credit line of their tax returns, and did not attach the required schedules for these credits. Although these were obviously misplaced Child Tax Credit entries, the IRS sent these returns back to, or corresponded with, taxpayers and requested that they supply additional schedules.

Taxpayers could have been confused and frustrated when they received their tax returns back or received correspondence requesting additional information to support credits they did not intend to claim.

We brought this issue to the IRS’ attention in a memorandum and the IRS took corrective action. (See Appendices XII and XIII.)

The IRS should take several steps to ensure that legislative changes are properly implemented. Included among these are: initiating a post review of Error Resolution cases impacted by specific legislative provisions; ensuring that computer programming necessary to identify taxpayer errors related to two new tax law provisions (detailed in Appendix V) are completed by the 2001 filing season; and ensuring that notices issued to taxpayers are technically accurate, clearly address the taxpayers’ errors, and clearly inform taxpayers what to do.

The IRS should also consider the feasibility and cost effectiveness of conducting limited computer research to correct inaccurate names and TINs entered on tax returns.

Management’s Response: IRS management agreed to implement our recommended actions to ensure that legislative changes are properly implemented. The Assistant Commissioner (Forms and Submission Processing) has initiated a post review of Error Resolution cases impacted by specific legislative provisions. The results of these reviews will be used to identify needed changes to tax forms and instructions. Submission Processing has prepared and will submit requests for computer programming to identify potential errors made by taxpayers relating to two new tax provisions. Submission Processing and Customer Service will establish a formal clearance process to ensure that notices issued to taxpayers are effective, technically accurate, and clearly address taxpayers’ errors.

IRS management did not implement our recommendation to correct inaccurate names and TINs on returns rather than disallowing related exemptions and credits. They expressed concern that such action would not benefit taxpayers in the long run. Since taxpayers would not be informed of the changes made on their returns, they would continue to use the wrong TINs in the future. The returns would be directed to the Error Resolution function year after year, thus steadily increasing the volume of returns requiring research, and unnecessarily delaying the processing of all returns.

Office of Audit Comment: We disagree with the IRS’ response regarding correcting names and TINs on returns rather than disallowing related exemptions and credits. Correcting a taxpayer’s return does not preclude the IRS from issuing a notice to the taxpayer (when applicable) explaining the taxpayer’s mistake and encouraging the taxpayer to ensure that the TINs they enter on their tax returns are correct in succeeding years. Issuing such a notice would address IRS’ concern of a steadily increasing volume of returns requiring research and correction.

The IRS has spent a significant amount of taxpayer dollars developing computer systems which can provide instant access to taxpayers’ accounts in the name of providing "one-stop" service to taxpayers. The ability to perform the research we have recommended (which only takes a matter of seconds) resulted from these efforts. Some of the invalid names and TINs identified are the result of mistakes by IRS employees when entering the numbers into IRS computers. Performing the recommended research would allow the IRS to avoid sending erroneous notices to the taxpayers affected by these IRS errors, and would demonstrate the IRS’ commitment to "one-stop" service and taxpayer education.

Objectives and Scope

This review was conducted as part of the Inspection Service’s (now the Treasury Inspector General for Tax Administration) Fiscal Year 1999 audit plan. Prior to this report, we issued a draft report, The Internal Revenue Service Could Enhance the Process for Implementing New Tax Legislation (Audit Number 19990068), recommending that the Internal Revenue Service (IRS) increase emphasis on significant legislative provisions to ensure that actions necessary to implement those provisions are taken.

This audit was conducted from January through October 1999 at the Ogden and Fresno Service Centers and the National Office. The audit was conducted in accordance with Government Auditing Standards.

The objectives of this audit were to evaluate the effectiveness of the IRS’ implementation efforts as well as to evaluate actions taken during the filing season¹ to ensure that tax returns affected by significant new legislative provisions were processed correctly.

To accomplish our objectives, we analyzed tax legislation to identify provisions affecting returns processing for Tax Year (TY) 1998. We identified nine individual income tax provisions which we considered to be significant to this review based on: 1) the number of taxpayers affected, 2) the anticipated revenue impact, 3) the sensitivity of the provision, 4) the complexity of the provision, and 5) the results of the IRS’ implementation activities discussed in our prior report. (Appendix VII contains a list, and brief explanation, of these nine legislative provisions.) At the two service centers we tested, we identified 1998 individual income tax returns impacted by the applicable new tax provisions and conducted computer analyses of data on the returns.

We sampled and reviewed these tax returns to determine whether:

1. The IRS processed the returns correctly.
2. Any errors on the returns related to the new tax provisions were corrected properly, and whether the IRS trended taxpayer errors to identify needed improvements to tax forms and instructions.
3. Notices sent to taxpayers by the IRS regarding new tax provisions were correct, clear and courteous.

We reviewed processes the IRS had in place for identifying filing season processing problems related to new tax provisions.

Where possible, when we identified tax return processing problems or recurring taxpayer errors, we determined the number of taxpayers impacted nationwide. We did this by obtaining nationwide computer data from the IRS’ Individual Masterfile (IMF).²

Details of our audit objectives, scope, and methodology are presented in Appendix I. Major contributors to this report are listed in Appendix II.

Background

Three laws were enacted in 1997 that were considered the most extensive and complicated legislation the IRS faced since the Tax Reform Act of 1986. The new legislation included the Taxpayer Relief Act,³ the Balanced Budget Act,⁴ and the Taxpayer Browsing Protection Act of 1997.⁵ The Taxpayer Relief Act of 1997 contained nearly 300 new provisions, many of which affected returns processing activities. Close to half of the provisions were effective for TY 1998 and were considered the most complex. Many of these provisions received considerable political attention, indicating the Congress would be interested in ensuring they were implemented by the IRS as intended.

The mission of the IRS is to provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. One step the IRS takes to accomplish this is identifying and correcting errors on taxpayers’ individual income tax returns. In addition, in an effort to lessen the burden on taxpayers, the IRS has committed to take efforts sooner to promote taxpayer compliance. This includes improving returns processing, identifying issues early and adjusting refunds, telling taxpayers about recurring problems, and improving forms and publications.

Results

The IRS put forth significant effort to prepare for the filing season, and has established processes such as testing of some newly developed forms, by taxpayer focus groups, to ensure that new legislation was effectively implemented. The IRS also conducted functional reviews of Internal Revenue Manual instructions, systems acceptability testing of new computer programs, and training of IRS employees. Overall, these efforts resulted in taxpayers receiving information regarding new tax law provisions necessary to properly file tax returns. The IRS properly processed most tax returns affected by these provisions. However, taxpayers and the IRS did experience problems related to preparing and processing tax returns impacted by some new legislative provisions. This report discusses steps the IRS should take to timely identify and resolve these problems in the future. Recommendations in this report could result in the following:

• The IRS could avoid losing over $7 million of revenue each year to taxpayers claiming dependent exemptions to which they were not entitled.
• The IRS could also avoid losing over $33 million of revenue each year to taxpayers receiving tax credits to which they were not entitled.
• The IRS could avoid improperly denying deductions totaling over $32 million per year for contributions taxpayers made to Individual Retirement Accounts (IRA).
• Burden could be reduced on approximately 900,000 taxpayers if the IRS clarified tax forms and instructions or notices issued to these taxpayers regarding new tax provisions.
• Burden could be reduced on another 239,000 taxpayers if the IRS corrected inaccurate names and taxpayer identification numbers (TIN) on taxpayers’ returns rather than disallowing taxpayers’ credits and exemptions.
• The IRS could avoid improperly denying the Child Tax Credit to significant numbers of taxpayers, and could avoid improperly allowing the Child Tax Credit to other taxpayers.

During this review, we also identified issues requiring the IRS’ immediate attention, and reported these issues to IRS management through memoranda. The IRS took corrective action on these issues. Where applicable, we have included the IRS’ responses in this report, and where possible, we have provided additional data regarding the volumes of returns affected by these issues.

Within Its Error Resolution Function, the Internal Revenue Service Performs No Regular Post Review of Tax Returns Impacted by Tax Provisions

As taxpayers’ income tax returns are processed by the IRS, computers analyze and recompute information on the returns to identify potential errors. Discrepancies are resolved by employees in the Error Resolution function. If the IRS makes changes to figures the taxpayers have entered on their tax returns, employees send the taxpayers notices informing them of the changes. To evaluate the accuracy of employees’ work, the IRS reviews samples of returns worked by individual employees. The samples are pulled based on the number of returns completed by the employee.

Many of the changes the IRS made to taxpayers’ returns impacted by four new legislative provisions were incorrect. These incorrect changes were not identified by the IRS. The IRS has the capability to select for review, tax returns worked by Error Resolution employees based on specific tax provisions. However, it has not implemented such a review on a regular basis. If the IRS’ Error Resolution function had performed regular post reviews of tax returns by tax provision, and trended the results, they could have identified and taken action to solve processing problems related to these returns. Trend analyses could also have been used to identify recurring taxpayer errors, which might be reduced by changes or improvements to tax forms and instructions.

The IRS did not timely identify and take action to address significant error rates involving the following new legislative provisions included in our review:

1. Child Tax and Additional Child Tax Credit

For the returns of taxpayers receiving notices that we tested, many taxpayers were improperly denied, or improperly received, the Child Tax and/or Additional Child Tax Credit. The IRS miscalculated the Child Tax Credit on approximately 18 percent (39 of 214) of the cases in our samples. It miscalculated the Additional Child Tax Credit on approximately 36 percent (57 of 159) of the cases we reviewed. Taxpayers were denied credits totaling over $32,000, and were given credits to which they were not entitled totaling over $15,000 in these 96 instances. Through August 1, 1999, the IRS had issued 492,106 notices informing taxpayers they had miscalculated their Child Tax Credit and 47,175 notices informing taxpayers they had miscalculated their Additional Child Tax Credit.

Also, as of July 3, 1999, approximately 90,000 taxpayers nationwide who claimed the Child Tax Credit but did not provide a valid TIN for their child, received dependency exemptions to which they were not entitled. They received this exemption even though the IRS did not allow their related Child Tax Credit. This incorrect exemption generally resulted in these taxpayers’ tax liabilities being understated by $405 each. This condition occurred due to a combination of employee errors and a computer programming oversight. We informed the IRS of this problem in a memorandum dated March 17, 1999. The IRS took immediate action to address the employee errors and agreed to correct the computer programming for the 2000 filing season.

2. Farmers Income Averaging

For the returns of taxpayers receiving notices that we tested, farmers who computed their income tax using the Farmers Income Averaging (Schedule J), were improperly assessed additional tax 99 percent of the time (183 of 184 notices). These taxpayers were assessed approximately $224,000 more than they reported on their tax returns. The IRS’ computers were not programmed to accept information from Schedule J. These taxpayers’ returns went to the Error Resolution function because the tax calculated by the IRS’ computer program was different than the tax calculated by the taxpayers on Schedules J. Schedules J were filed infrequently, and IRS employees were not accustomed to them. As a result, they overlooked instructions to search for a Schedule J before rejecting the taxpayer’s tax calculation and accepting the calculation made by the IRS’ computer. We informed the IRS of this problem in a memorandum dated May 28, 1999, and it took immediate corrective action. (See Appendices XIV and XV.)

As of August 1, 1999, the IRS issued approximately 625,600 notices informing taxpayers they had miscalculated their tax. Because Schedule J is not entered in the IRS’ computers, we could not determine how many of these notices resulted from taxpayers filing a Schedule J. However, we believe the number would be low.

3. Changes to the Calculation of Modified Adjusted Gross Income for Purposes of Determining the Earned Income Tax Credit

For the returns of taxpayers receiving notices that we tested, the Earned Income Tax Credit (EITC) of taxpayers also reporting distributions from Individual Retirement Accounts (IRA) or pensions was improperly reduced approximately 48 percent of the time (60 of 124). These taxpayers were denied approximately $38,000 of the EITC. As of August 1, 1999, the IRS had issued 63,279 notices informing taxpayers they had made a mistake when determining their modified adjusted gross income for the EITC. Based on volumes in the two service centers included in our review, we estimate that close to half of these notices resulted from modifications to adjusted gross income for determining the EITC when taxpayers reported distributions from IRAs or pensions.

4. Increased Adjusted Gross Income Limits for Contributions to an Individual Retirement Account

Married taxpayers who filed jointly, whose modified adjusted gross income was between $60,000 and $160,000, and who claimed deductions for IRAs and Keogh retirement plans, were improperly denied their IRA deductions. Computer programs for the Error Resolution program did not take into consideration the increased modified adjusted gross income limits for married taxpayers. The IRS did not properly implement manual procedures to make up for the programming error. We performed a computer analysis of data from the IRS’ IMF and found that through the end of July 1999, approximately 17,000 taxpayers meeting the criteria referred to above were denied IRA deductions. The deductions disallowed in error averaged $1,918.

Besides identifying processing errors, trend analyses of quality review results could be used to identify recurring taxpayer errors which might be reduced by changes or improvements to tax forms and instructions. For example:

• Many taxpayers claimed the Additional Child Tax Credit even though they did not have three or more children as required. In our samples, approximately 26 percent of the taxpayers (22 of 83) who made mistakes when calculating their Additional Child Tax Credit had claimed fewer than three dependents. As of August 1, 1999, the IRS had issued notices to 47,175 taxpayers informing them that they had made mistakes when calculating their Additional Child Tax Credit. The Additional Child Tax Credit (Form 8812) and its accompanying instructions, as well as instructions for the U.S. Individual Income Tax Return (Forms 1040 and 1040A), do not clearly explain that taxpayers must have at least three qualifying children to be eligible for the Additional Child Tax Credit.
• Taxpayers entered names for dependents they were claiming which did not match the records of the IRS or the Social Security Administration (SSA). When this occurs, IRS employees are instructed to disallow the exemption claimed for the dependent as well as any related credits such as the Child Tax Credit.

• Taxpayers were having difficulty calculating their modified adjusted gross income for the purpose of determining their EITC. As of August 1, 1999, the IRS had issued notices to 63,279 taxpayers informing them that they had miscalculated their modified adjusted gross income for purposes of determining their EITC. In our samples, approximately half of these notices related to adjustments made necessary by the new tax law provision. The modified adjusted gross income computation is relatively complex. The IRS’ instructions for computing it are in a detailed narrative with no worksheet or examples to help simplify the computation.
• Taxpayers were claiming more than the $1,000 deduction for interest on education loans allowed by the law. In our samples, over 56 percent of the taxpayers who made mistakes when claiming a deduction for interest on education loans claimed deductions of over $1,000. As of August 1, 1999, the IRS had issued notices to 43,638 taxpayers informing them that they had miscalculated their student loan interest deductions. Forms 1040 and 1040A and the instructions related to the deduction for interest on education loans do not specifically inform taxpayers that they cannot claim a deduction of more than $1,000. Taxpayers compute the deduction using a worksheet that includes the maximum $1,000 as part of the computation.

1. The National Director, Submission Processing, should initiate a post review of Error Resolution cases impacted by specific legislative provisions, with special emphasis on new tax provisions. The Computer Assisted Review of the Error Resolution System (CARE) could facilitate such a review. The results of this post review should be trended to identify processing problems, recurring taxpayer errors, and needed changes or improvements to tax forms and instructions.
2. The National Director, Tax Forms and Publications Division, should receive and review the results of this trend analysis annually to help identify needed changes or improvements to tax forms and instructions.

Management’s Response: The Assistant Commissioner (Forms and Submission Processing) has initiated a weekly post review of Error Resolution cases impacted by specific legislative provisions utilizing the CARE system.

The results of this review will be provided to the Tax Forms and Publications function to identify trends and target specific areas for additional research.

The Internal Revenue Service did not Program Computer Checks for Two New Legislative Provisions

As discussed earlier, the IRS assists taxpayers in understanding and meeting their tax responsibilities by using computer programs to identify errors on taxpayers’ individual income tax returns. IRS employees issue notices to taxpayers explaining the taxpayers’ errors and the adjustments made by the IRS to correct the errors. These computer programs are also used to ensure that certain limitations and requirements specified by the Congress are met. Often when the Congress passes tax legislation, it is intended to impact specific taxpayers. For example, many tax credits and deductions are available to taxpayers with lower income, but decrease as the taxpayers’ income increases. The IRS is responsible for implementing the tax law in accordance with the specifications set by the Congress.

Because of limited programming resources and extensive priority programming requirements, the IRS postponed or cancelled computer programming to identify potential errors made by taxpayers relating to two new tax law provisions. (Because providing the specific details of the missing computer programs could have a negative effect on tax administration, they will not be discussed in the body of this report. See Appendix V for details.)

As a result of these programs not being written, taxpayers mistakenly received the benefit of provisions in the tax law or received tax credits that they were not entitled to. These taxpayers were not informed of their errors, and are thus likely to repeat them. Also, these errors, if later identified by the IRS, could result in significant burden to taxpayers, as they could be subject to penalties and interest in addition to any underpaid taxes.

3. The Chief Operations Officer should ensure that computer programming necessary to identify taxpayer errors related to these two tax law provisions is completed by the 2001 filing season.

Management’s Response: Submission Processing has prepared and will submit two computer programming requests to identify potential taxpayer errors related to the two tax law provisions.

The Internal Revenue Service Could Improve Several Taxpayer Notices Related to New Legislative Provisions

If the IRS makes changes to figures taxpayers have entered on their tax returns, employees send the taxpayers notices to inform them of the changes. To implement new legislation, the IRS must develop or amend notices to address taxpayer errors related to the new legislative provisions. These notices should clearly communicate to taxpayers what their errors were, and what, if any, actions are required of the taxpayers.

Notices for the following four new tax provisions did not clearly or adequately explain the taxpayers’ errors, did not inform taxpayers of actions they needed to take, or were not technically accurate.

• Child Tax and Additional Child Tax Credit
• EITC Recertification
• Changes to the Calculation of Modified Adjusted Gross Income for Purposes of Determining the EITC
• Increased Adjusted Gross Income Limits for Contributions to an IRA

For example, to claim the Additional Child Tax Credit, taxpayers must have three or more qualifying children. Taxpayers who claimed this credit, but had less than three qualifying children were often sent notices which stated, "You incorrectly figured your Additional Child Tax Credit on Form 8812. We adjusted your credit accordingly." Taxpayers receiving this notice would not know they did not have enough qualifying children to claim the Additional Child Tax Credit. (For more information regarding these notices, see Appendix VI.)

The IRS relies on employees that develop notices to review them for technical accuracy. The IRS’ Notice Clarity function reviews all new and revised notices to ensure the notices are clearly written, and inform taxpayers what they need to know, and what, if anything they need to do. These review processes were not effective for the notices referred to above. In addition, there was no review process to compare available notices to actual errors made by taxpayers during the filing season.

As of August 1, 1999, the IRS had sent 661,805 of the notices discussed above. If taxpayers do not receive complete, clear notices, they are likely to repeat errors in subsequent years, or to contact the IRS for clarification.

4. The Chief Operations Officer should ensure that reviews of notices issued to taxpayers are effective in ensuring the notices are technically accurate, clearly address the taxpayers’ errors, and clearly inform taxpayers what steps they need to take.

Management’s Response: Submission Processing and Customer Service will establish a formal clearance process to ensure that notices issued to taxpayers are effective, technically accurate, and clearly address the errors.

The Internal Revenue Service Could Correct Inaccurate Names and Taxpayer Identification Numbers on Returns Rather than Disallowing Credits and Exemptions

Taxpayers must provide the name and TIN (usually a social security number) of each person they claim as an exemption on their individual income tax return. This same information is necessary to claim several credits on a tax return including the Child Tax and Additional Child Tax Credits. When either the name or TIN entered on a tax return does not match the IRS’ or the SSA’s records, the IRS’ procedures instruct the employee to disallow the exemption and any related credits without performing computer research to correct the invalid information. Then, the IRS adjusts the taxpayer’s refund or balance due accordingly.

Dependent children are generally claimed year after year and accurate names and social security numbers are, accordingly, often on prior year IRS records. In approximately 31 percent of 403 cases sampled (125 of 403), the IRS had the correct information elsewhere on its computer system when it sent notices informing taxpayers their Child Tax Credit was disallowed because the name or TIN for their child on their 1998 tax return did not match IRS or SSA records.

When the IRS disallows a dependency exemption and related Child Tax Credit, taxpayers may be understandably confused or angry because these exemptions were often allowed in prior years. Occasionally the names or TINs provided by the taxpayers were correct, and incorrect information was entered onto the IRS’ computers by IRS employees. This occurred in 11 of the 403 cases we reviewed. In order to reclaim the disallowed credits and exemptions, taxpayers must contact the IRS to provide them with the correct information.

By performing the same basic research we did for our sample, the IRS could prevent significant numbers of notices from being issued and reduce the related burden on taxpayers. As of August 1, 1999, the IRS had issued 773,672 notices to taxpayers informing them that their Child Tax or Additional Child Tax Credit had been disallowed because of an invalid name or TIN.

The IRS would experience additional returns processing costs to provide this service to taxpayers. However, some of these costs would be recovered because fewer taxpayers would need to contact the IRS to resolve the incorrect name or TIN. Currently, approximately 75 percent of the taxpayers nationwide who receive these notices, subsequently contact the IRS with corrected information. As a result, the IRS has to adjust these taxpayers’ tax accounts.

5. We agree that the IRS needs to ensure that taxpayers’ dependents are valid before allowing related exemptions and credits. However, since most of the taxpayers who provided inaccurate names and/or social security numbers for their dependents contact the IRS with correct information, the Chief Operations Officer should consider the feasibility and cost effectiveness of conducting limited computer research to find the correct information before burdening the taxpayer.

Management’s Response: IRS management did not implement our recommendation to correct inaccurate names and TINs on returns rather than disallowing related exemptions and credits. They expressed concern that such action would not benefit taxpayers in the long run. Since taxpayers would not be informed of the changes made on their returns, they would probably use the same names and TINs in the future. The returns would be directed to the Error Resolution function year after year, thus unnecessarily delaying the processing of the returns.

They also expressed concern about the impact on the Error Resolution function in the Submission Processing centers. When the requirement for this type of research increases, the correction of returns is slowed, delaying processing of all returns. Returns would be received with the same errors each year, thus steadily increasing the volume of returns requiring research and a correction. The steadily increasing volume and increased requirements could limit systemic and staffing resources available for correcting other returns.

Office of Audit Comment: We disagree with the IRS’ response regarding correcting names and TINs on returns rather than disallowing related exemptions and credits. Correcting a taxpayer’s return does not preclude the IRS from issuing a notice to the taxpayer (when applicable) explaining the taxpayer’s mistake and encouraging the taxpayer to ensure that the TINs they enter on their tax returns are correct in succeeding years. Issuing such a notice would address the IRS’ concern of a steadily increasing volume of returns requiring research and correction.

The IRS has spent a significant amount of taxpayer dollars developing computer systems which can provide instant access to taxpayers’ accounts in the name of providing "one-stop" service to taxpayers. The ability to perform the research we have recommended resulted from these efforts. We observed Error Resolution employees taking the steps necessary to perform this research. The entire process was completed in a matter of seconds. Some of the invalid names and TINs identified are the result of mistakes by IRS employees when entering the numbers into IRS computers. Performing the recommended research would allow the IRS to avoid sending erroneous notices to the taxpayers affected by these IRS errors, and would demonstrate the IRS’ commitment to "one-stop" service and taxpayer education.

The Internal Revenue Service Experienced Problems with Its Computer Programs to Implement Earned Income Tax Credit Recertification

Taxpayers who have been denied the EITC as a result of an IRS audit are not eligible to claim the EITC in subsequent years unless they provide information to demonstrate their eligibility. They provide this on the Information to Claim Earned Income Credit After Disallowance (Form 8862).

The IRS prepared computer programs to identify the tax returns of taxpayers who were required to file this form. These taxpayers’ refunds were to be stopped until IRS employees could review the information on the forms and determine if the taxpayers qualified for the EITC. The IRS’ computer programs designed to implement this process had errors that would have delayed some refunds that should not have been delayed, and allowed other refunds to be issued which should not have been issued.

Based on the instructions for Forms 1040 and 1040A, we anticipated that taxpayers would be confused about when to file Form 8862, and some taxpayers would file the form unnecessarily. The computer programs prepared by the IRS did not take this situation into consideration, and would have caused these taxpayers’ refunds to be delayed. We reported this issue to the IRS, and it immediately revised its programs to ensure that taxpayer refunds would only be delayed when necessary. (See Appendices VIII and IX.)

During the filing season, approximately 6,500 taxpayers unnecessarily filed Form 8862. Left uncorrected, the incorrect computer programs would have caused refunds for these taxpayers, totaling approximately $12.8 million ($8.8 million of which was the EITC) to be delayed unnecessarily.

Early in the filing season, refunds totaling approximately $218,000 ($143,000 of which was the EITC) were issued to 74 taxpayers who met the criteria to have their refunds stopped. Computer programs to stop these refunds were not functioning as intended.

We brought this problem to the IRS’ attention in a memorandum dated February 10, 1999. The IRS took immediate action to correct the problem. (See Appendices X and XI.) Left uncorrected throughout the filing season, this programming error would have resulted in approximately 29,000 disqualified taxpayers receiving the EITC, totaling approximately $50 million. Although IRS employees had not identified this programming error as of the date of our memorandum, we estimate they would have discovered the programming error in approximately six weeks. (Our estimate is based on the amount of time it would take for the affected returns to post to IRS’ IMF, related cases to be generated for review by IRS employees, and these employees to identify that refunds had already been issued for the returns.) Therefore, we estimate the amount of the EITC that would have been incorrectly refunded would have been approximately $30.6 million refunded to nearly 17,000 taxpayers.

Besides the potential lost revenue to the Government, the programming error could have wasted IRS resources to collect the EITC incorrectly refunded.

The Internal Revenue Service Unnecessarily Burdened Taxpayers Who Obviously Entered the Child Tax Credit on the Wrong Line

Taxpayers claimed amounts consistent with the Child Tax Credit on the Child Care Credit or Education Credit lines of their tax returns, but did not attach the required schedules for these credits. Although these were obviously misplaced Child Tax Credit entries, the IRS sent these returns back to, or corresponded with, taxpayers and requested that they supply the schedules necessary to claim the Child Care or Education Credits.

Taxpayers claiming the Child Tax Credit could have been confused and frustrated when they received their tax returns back with requests for additional information to support credits they did not intend to claim.

We brought this issue to the IRS’ attention in a memorandum dated March 25, 1999. The IRS took corrective action which included issuing an information alert to its employees to look for misplaced entries before corresponding with taxpayers for missing schedules. (See Appendices XII and XIII.)

Conclusion

The IRS properly processed most tax returns impacted by new legislative provisions. However, it needs to take steps to timely identify and resolve processing problems and recurring taxpayer errors. Taking the actions recommended in this report could significantly reduce taxpayer burden as well as protect or increase the Government’s revenue.

Appendix I

The objectives of this audit were to evaluate the effectiveness of the Internal Revenue Service’s (IRS) implementation efforts as well as to evaluate actions taken during the filing season¹ to ensure that tax returns affected by significant new legislative provisions were processed correctly.

To accomplish our objectives, we analyzed tax legislation to identify provisions affecting returns processing for Tax Year 1998. We identified nine individual income tax provisions which we considered to be significant to this review based on: 1) the number of taxpayers affected, 2) the anticipated revenue impact, 3) the sensitivity of the provision, 4) the complexity of the provision, and 5) the results of the IRS’ implementation activities discussed in our prior report. (Appendix VII contains a list, and brief explanation, of these nine legislative provisions.)

Where possible, when we identified tax return processing problems or recurring taxpayer errors, we determined the number of taxpayers impacted nationwide. We did this by obtaining nationwide computer data from the IRS’ Individual Masterfile (IMF).²

Specifically, we performed the following audit tests. Unless specified otherwise, these tests were completed in the Ogden and Fresno Service Centers.

1. Child Tax Credit/Additional Child Tax Credit

1. Reviewed 45 judgmentally selected 1998 individual income tax returns, paper and electronic, processed from January 4, 1999, through January 29, 1999, to determine if the IRS correctly computed and validated the amount of the Child Tax Credit for returns claiming the credit for four or fewer children.
2. Reviewed 20 judgmentally selected 1998 paper individual income tax returns, processed from January 22, 1999, to February 5, 1999, in the Fresno Service Center to determine if the IRS correctly computed and validated the amount of the Child Tax Credit for returns claiming the credit for more than four children.
3. Reviewed 69 judgmentally selected 1998 individual income tax returns, paper and electronic, processed during five various weeks from January 29, 1999, through April 9, 1999, to determine if the IRS correctly computed and validated the amount of the Child Tax Credit for taxpayers with adjusted gross income above the beginning phase-out level. (The phase-out level is the income level at which the law calls for the credit to begin being reduced.)
4. Reviewed 53 judgmentally selected 1998 paper individual income tax returns processed from January 29, 1999, through February 5, 1999, in the Fresno Service Center to determine if the IRS accurately identified and corrected Child Tax Credit errors found on the returns.
5. Based upon the problems found in step D above, we expanded the scope of this particular test to include those returns where Taxpayer Notice³ number 692 (dealing with Child Tax Credit problems) or number 697 (dealing with Additional Child Tax Credit problems) were issued. We reviewed an additional 369 individual income tax returns (containing a total of 214 Taxpayer Notices number 692 and a total of 159 Taxpayer Notices number 697), processed from February 5, 1999, through February 18, 1999, to determine if adjustments made to the taxpayers’ returns were accurate.
6. Performed a computer analysis to identify 1998 individual income tax returns, paper and electronic, processed from February 5, 1999, through February 18, 1999, claiming the Child Tax Credit and receiving a Taxpayer Notice number 691 (indicating the taxpayer had provided an invalid dependent Social Security Number (SSN)). We analyzed the records to determine whether the taxpayer’s exemption amount was properly reduced.
7. Performed a computer analysis of the IRS’ IMF to identify all 1998 tax returns processed through July 3, 1998, on which taxpayers claimed the Child Tax or Additional Child Tax Credit and received a Taxpayer Notice number 691 (indicating the taxpayer had provided an invalid dependent SSN), but did not receive a Taxpayer Notice number 605 (which would have indicated the taxpayer’s exemption amount was reduced).
8. Researched 403 judgmentally selected 1998 individual income tax returns on the IRS’ Integrated Data Retrieval System (IDRS)⁴ using command code RTVUE,⁵ to determine if there was a valid name or SSN located on the prior year (1997) individual income tax return which could have been used to correct an invalid name or SSN provided by the taxpayer on their 1998 tax return. Of those 125 cases for which prior year information was obtainable, we determined whether taxpayers had entered an incorrect name or an incorrect SSN.
9. Performed a computer analysis of 604,382 records of 1998 individual income tax returns processed from February 12, 1999, through March 19, 1999, and for a one week period ending April 9, 1999, to determine if excessive Child Tax Credit amounts were allowed based on the number of qualifying children and the taxpayers’ adjusted gross income.
10. Evaluated the error explanations used for the Taxpayer Notice numbers 690, 691, 692, 697, and 698 (all related to Child Tax or Additional Child Tax Credit problems) since some of these taxpayer notices can be appropriately used for both Child Tax Credit and Additional Child Tax Credit to determine if the notice wording represented the actual error occurring on the return and the issues were clearly explained to the taxpayer.
11. Reviewed 60 judgmentally selected 1998 individual income tax returns, paper and electronic, processed from January 8, 1999, through February 26, 1999, to determine if Additional Child Tax Credits were accurately computed and validated by the IRS for returns claiming the credit.
12. See steps D and E above. The same random sample of 1998 individual income tax returns used for the Error Return Sample step for Child Tax Credit was used to test how accurately the IRS identified and corrected Additional Child Tax Credit errors found on the returns.
13. Performed computer analyses of 72,430 records of 1998 paper and electronic individual income tax returns filed from January 18, 1999, through March 18, 1999, to determine if processes were in place to:

1. Determine if Additional Child Tax Credits were allowed for returns that did not have three or more qualifying children.
2. Determine if excessive total Child Tax Credit and Additional Child Tax Credit was allowed for the number of qualifying children.
3. Determine if excessive total Child Tax Credit and Additional Child Tax Credit was allowed for returns with adjusted gross income above the beginning phase-out level, considering the filing status and number of qualifying children.

2. Credits for Higher Education (Hope Scholarship and Lifetime Learning Credits)

1. Reviewed 90 judgmentally selected 1998 individual income tax returns, paper and electronic, filed through February 12, 1999, on which taxpayers claimed Education Credits, to determine if the IRS and taxpayers accurately computed Education Credits on returns falling below the beginning adjusted gross income phase-out levels.

1. Reviewed 90 judgmentally selected 1998 individual income tax returns, paper and electronic, filed through February 12, 1999, on which taxpayers claimed Education Credits, to determine if the IRS and taxpayers accurately computed Education Credits on returns within the adjusted gross income phase-out ranges.
2. Reviewed 89 judgmentally selected 1998 individual income tax returns, paper and electronic, filed through February 12, 1999, where the Education Credit claimed by the taxpayer was different from the amount allowed by the IRS, to determine if processes were in place to ensure the IRS accurately identified and corrected return errors for Education Credits.
3. Performed computer analyses of 1998 individual income tax returns filed through April 30, 1999, to determine if Education Credits were allowed when the adjusted gross income level was above the maximum phase-out level, or when taxpayers were claimed as a dependent on another return.
4. Performed a computer analysis of the IRS’ IMF to identify all 1998 tax returns processed through October 1, 1999, receiving Education Credits that: (1) exceeded the adjusted gross income limit (based on filing status), (2) used married filing separate filing status, or (3) indicated the taxpayer was claimed as a dependent by another taxpayer.
5. Evaluated the error explanations used for the Taxpayer Notice numbers 693, 695, and 699 (related to Education Credit problems) to determine if the errors were clearly explained to the taxpayers on the notices they received.
6. Reviewed the Internal Revenue Manual for both the Error Resolution function and the Code and Edit function to determine if the instructions given were accurate.

3. Changes to the Calculation of Modified Adjusted Gross Income for Purposes of Determining the Earned Income Tax Credit (EITC)

1. Reviewed 91 judgmentally selected 1998 individual income tax returns, paper and electronic, filed from January 8, 1999, through April 16, 1999, on which taxpayers claimed the EITC and reported one or more of the following: tax exempt interest, nontaxable distributions from annuities/pensions/Individual Retirement Accounts (IRA), net losses from a business or farm, or gains from the sale of business property, to determine if taxpayers calculated their modified adjusted gross income correctly.
2. Reviewed 89 judgmentally selected 1998 individual income tax returns, paper and electronic, filed from January 29, 1999, through February 19, 1999, on which taxpayers claimed the EITC and reported one or more of the following: tax exempt interest, nontaxable distributions from annuities/pensions/IRAs, net losses from a business or farm, or gains from the sale of business property, and where the amount claimed by the taxpayer was different than the amount allowed by the IRS. This review was to determine if the IRS corrected any taxpayer errors.
3. Based on the high employee error rate found in step B above for returns reporting nontaxable distributions from annuities, pensions or IRAs, reviewed an additional 124 judgmentally selected 1998 individual income tax returns, paper and electronic, filed from January 8, 1999, through April 23, 1999, on which taxpayers claimed the EITC and reported one or more of these types of income, to determine the extent these errors were occurring.
4. Evaluated the error explanations used for the Taxpayer Notice numbers 649 and 654 (related to problems in calculating modified adjusted gross income for determining the EITC) to determine if the errors were clearly explained to the taxpayers on the notice they received.

4. Interest on Education Loans

1. Reviewed 90 judgmentally selected 1998 individual income tax returns, paper and electronic, filed through February 12, 1999, where taxpayers deducted interest for education loans and their adjusted gross income was above the beginning phase-out level to determine if taxpayers accurately computed the amount of the deduction.
2. Reviewed 88 judgmentally selected individual income tax returns, paper and electronic, filed through February 26, 1999, where the amount of the education interest deduction claimed by the taxpayer was different from the amount allowed by the IRS to determine if the IRS accurately calculated the deduction.
3. Performed computer analyses of 1998 individual income tax returns filed through April 30, 1999, to determine if deductions for interest on education loans were allowed when:

• The deduction exceeded the $1,000 limitation.
• Modified adjusted gross income exceeded the maximum phase-out level.
• Taxpayers filed claiming married filing separately status.
• Taxpayers were claimed as dependents on another return.

1. Evaluated the error explanations used for the Taxpayer Notice numbers 140 and 699 (related to problems with interest on education loans) to determine if the errors were clearly explained to the taxpayer on the notice they received.

5. Farmers Income Averaging

1. Reviewed 184 judgmentally selected 1998 paper individual income tax returns, processed from March 5, 1999, through April 30, 1999, on which taxpayers used the Farm Income Averaging (Schedule J) to compute their tax liability, to determine if the IRS properly allowed the Schedule J tax liability as computed by the taxpayer.
2. Evaluated the error explanations used for the Taxpayer Notice number 100(62) (related to Farm Income Averaging), to determine if the notice wording represented the actual error occurring on the return and the issues were clearly explained to the taxpayer. Since Taxpayer Notice number 100 can be used for generic, non-specific error explanations, IRS personnel devised a pre-printed small label (62) which was affixed to the taxpayer notice when a taxpayer made a mistake in transferring the tax liability amount from Schedule J to the appropriate line on the Form 1040. The explanation states "an error was made transferring your Schedule J amount to page 2 of your Form 1040."

5. Filing Threshold for Individuals for Underpayment of Estimated Tax

1. Reviewed 80 judgmentally selected 1998 individual income tax returns, paper and electronic, filed through March 26, 1999, where the de minimis thresholds fell between the former $500 and revised $1,000 limits, and there was an Estimated Tax Penalty amount computed by the taxpayer, to determine if the IRS was assessing the penalty only when applicable.
2. Performed computer analyses of 1998 individual income tax returns filed through March 26, 1999, and again for a one week period ending
   April 16, 1999, to determine how many individual income tax returns had penalty threshold amounts between $500 and the revised limit of $1,000; and had taxpayer computed penalties.
3. Discussed the procedures used in determining the penalty tolerance computation with an analyst in the National Office and determined the dollar tolerance used by the IRS for assessing the Estimated Tax Penalty.

5. Estimated Tax Safe Harbor

1. Performed computer analyses of 1998 individual income tax returns filed from January 8, 1999, through March 19, 1999, to identify tax returns with adjusted gross income over $150,000, and 90 percent of the total tax less earned income tax credit minus withholding and estimated tax payment credits was greater than $2,000. These analyses were used to select samples for steps B and C below.
2. Reviewed 72 judgmentally selected 1998 individual income tax returns, paper and electronic, filed through March 19, 1999, that met the estimated tax safe harbor criteria where the required annual payment was based on the prior year’s tax, and there was no estimated tax penalty computed by the taxpayer. This review was performed to determine if the IRS properly computed the penalty.
3. Reviewed 29 judgmentally selected individual income tax returns, paper and electronic, filed through March 19, 1999, that met the estimated tax safe harbor criteria where the required annual payment was based on the prior year’s tax, and there was an estimated tax penalty computed by the taxpayer. This review was performed to determine if taxpayers properly computed the penalty.
4. Researched and evaluated tax forms, instructions, IRS processing instructions, and taxpayer errors notated in steps B and C above for problems or areas that could be improved.

5. EITC Recertification

1. Reviewed 214 judgmentally selected 1998 individual income tax returns, paper and electronic, filed from January 22, 1999, through March 5, 1999, on which the taxpayer had claimed the EITC and the IRS had input an Audit Code "U," indicating the Information to Claim Earned Income Credit After Disallowance (Form 8862) was attached, to determine if these tax returns were processed properly.
2. Reviewed 90 judgmentally selected 1998 individual income tax returns, paper and electronic, filed from January 30, 1999, through February 20, 1999, to determine if returns identified by the IRS as needing recertification, but with no Form 8862 attached, were properly processed.
3. Reviewed the Taxpayer Notice number 653 (the only taxpayer notice used to explain errors related to the EITC Recertification to taxpayers) to determine if the notice clearly explained the error.
4. Performed a computer analysis of the IRS’ IMF as of

1. Performed a computer analysis of the IRS’ IMF as of March 26, 1999, to identify all 1998 tax returns with an Audit Code "U" (indicating taxpayers filed Form 8862) and with a recertification indicator on their account.

5. IRAs / Roth IRAs

1. Reviewed 32 judgmentally selected paper 1998 individual income tax returns filed from February 12, 1999, to April 9, 1999, to determine if the IRS accurately identified and corrected return errors for the IRA deduction when a Keogh deduction was also present and a Taxpayer Notice indicating the IRA adjustment was made based upon adjusted gross income limitations.
2. Performed a computer analysis of the IRS’ IMF as of July 31, 1999, to identify all taxpayers who received a Taxpayer Notice number 142 or 141 (related to problems with the IRA deduction on joint returns that also had claimed a Keogh deduction) and had modified adjusted gross income between $60,000 and $160,000. From this, we applied certain dollar criteria to exclude notices which we determined could have been correct in partial disallowance situations.
3. Evaluated the error explanations used for Taxpayer Notice number to determine if the IRS clearly explained the errors to the taxpayers on the notice they received.
4. Reviewed 30 judgmentally selected paper 1998 individual income tax returns, filed from January 8, 1999, to February 19, 1999, to determine if taxpayers converting amounts from traditional IRAs to Roth IRAs qualified for the conversion and accurately computed the taxable amount. We also reviewed these cases to determine if the IRS correctly implemented the new Roth IRA provisions for the conversions.
5. Performed a computer analysis of the IRS’ IMF as of July 3, 1999, to identify all taxpayers converting their traditional IRAs to Roth IRAs who exceeded the limitations for making these conversions.
6. Reviewed applicable manuals, forms, and instructions for the Roth IRA to determine if the process planned for generating Roth reminder notices ensured the notices were issued to the appropriate taxpayers.

10. Capital Gains Holding Period

1. Reviewed 87 judgmentally selected 1998 individual income tax returns, paper and electronic, filed through February 12, 1999, to determine if taxpayers accurately split long-term capital gains, using the benefit of the Schedule D tax calculation, and if the IRS effectively and correctly implemented the change to long-term capital gains with a minimum of burden to taxpayers.
2. Reviewed 59 judgmentally selected 1998 individual income tax returns, paper and electronic, filed through February 19, 1999, where the amount of tax claimed by the taxpayer was different than the amount calculated by the IRS to determine if the IRS accurately identified and corrected return errors when tax was computed based on long-term capital gains; and if changes to forms, instructions, or the IRS’ correction processes could be made to reduce taxpayer burden.
3. Reviewed Taxpayer Notice numbers 181, 185, and 186 (related to problems with the revised Capital Gains provisions) to determine if they clearly explained the error to the taxpayer.

Appendix II

Walter E. Arrison, Associate Inspector General for Audit (Wage and Investment Income Programs)

Mary Baker, Deputy Director

Kyle Andersen, Audit Manager

Scott Critchlow, Senior Auditor

Jeff Anderson, Auditor

Kyle Bambrough, Auditor

George Burleigh, Auditor

Jennie Choo, Auditor

Carola Gaylord, Auditor

Glory Jampetero, Auditor

John Kirschner, Auditor

Larry Madsen, Auditor

John Phillips, Auditor

Bill Russell, Auditor

Greg Schmidt, Auditor

Eric Guthrie, EDP Specialist

Don Meyer, EDP Specialist

Kevin O’Gallagher, EDP Specialist

Layne Powell, EDP Specialist

Appendix III

Chief Operations Officer OP

Assistant Commissioner (Customer Service) OP:C

Assistant Commissioner (Electronic Tax Administration) OP:ETA

Assistant Commissioner (Forms and Submission Processing) OP:FS

National Director, Customer Service Compliance, Accounts and Quality OP:C:A

National Director, Customer Service Telephone Operations and Systems OP:C:T

National Director, Electronic Program Operations OP:ETA:E

National Director, Multimedia Production OP:FS:M

National Director, Submission Processing OP:FS:S

National Director, Tax Forms and Publications OP:FS:FP

National Director for Legislative Affairs CL:LA

Director, Office of Program Evaluation and Risk Analysis M:O

Office of Management Controls M:CFO:A:M

Office of the Chief Counsel CC

Audit Liaisons:

Chief Operations Officer OP

Assistant Commissioner (Customer Service) OP:C

Assistant Commissioner (Electronic Tax Administration) OP:ETA

Assistant Commissioner (Forms and Submission Processing) OP:FS

Appendix IV

Outcome Measures

This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to the Congress.

Many of the changes the Internal Revenue Service (IRS) made to taxpayers’ returns impacted by four new legislative provisions were incorrect. These incorrect changes were not identified by the IRS. The IRS has the capability to select for review, tax returns worked by Error Resolution employees based on specific tax provisions. However, it has not implemented such a review on a regular basis. As a result, it did not timely identify and take action to address significant error rates involving new legislative provisions included in our review. This resulted in loss of funds to both the Government and taxpayers.

Taxpayers were improperly denied, or improperly received, the Child Tax and/or Additional Child Tax Credit. The IRS miscalculated the Child Tax Credit on approximately 18 percent (39 of 214) of the cases in our samples. They miscalculated the Additional Child Tax Credit on approximately 36 percent (57 of 159) of the cases in our samples. Taxpayers were denied credits totaling over $32,000, and were given credits to which they were not entitled totaling over $15,000 in the 96 instances. Through
August 1, 1999, the IRS had issued 492,106 notices informing taxpayers they had miscalculated their Child Tax Credit and 47,175 notices informing taxpayers they had miscalculated their Additional Child Tax Credit.

The National Director, Submission Processing, should initiate a post review of Error Resolution cases impacted by specific legislative provisions with emphasis on new tax provisions. The Computer Assisted Review of the Error Resolution System (CARE) could facilitate such a review. The results of this post review should be trended to identify processing problems, recurring taxpayer errors, and needed changes or improvements to tax forms and instructions.

Taxpayer rights and entitlements/Revenue protection

While not statistically valid, if the percentages of errors and average dollars of the samples from the Ogden and Fresno Service Centers were applied nationwide, taxpayers would have received over $20 million in Child Tax and Additional Child Tax Credits that they were not entitled to. Similarly, they would have been denied over $33 million that they were entitled to.

We sampled and reviewed 214 returns that were issued an IRS’ Taxpayer Notice¹ number 692 (dealing with Child Tax Credit problems), and we sampled and reviewed 159 returns that were issued the Taxpayer Notice number 697 (dealing with Additional Child Tax Credit problems). The Ogden and Fresno Service Center error rates and average dollars were projected to the 492,106 Taxpayer Notices number 692 and the 47,175 Taxpayer Notices number 697 issued nationwide. We used the IRS’ Individual Masterfile (IMF)² Error Code Report (480-62-11), dated August 1, 1999, to determine the number of notices issued to taxpayers.

Many of the changes the IRS made to taxpayers’ returns impacted by four new legislative provisions were incorrect. These incorrect changes were not identified by the IRS. The IRS has the capability to select for review, tax returns worked by Error Resolution employees based on specific tax provisions. However, it has not implemented such a review on a regular basis. As a result, it did not timely identify and take action to address significant error rates involving new legislative provisions included in our review. This resulted in loss of funds to both the Government and taxpayers.

Employees disallowing all or part of a taxpayer’s claimed Child Tax Credit because the taxpayer did not provide a valid taxpayer identification number (TIN) for their child, did not properly disallow the related dependency exemption on 90,160 cases nationwide. This condition occurred due to a combination of employees’ errors and a computer programming oversight. Not disallowing the exemption resulted in the tax liability being understated, generally by $405.

The National Director, Submission Processing, should initiate a post review of Error Resolution cases impacted by specific legislative provisions with emphasis on new tax provisions. The CARE system could facilitate such a review. The results of this post review should be trended to identify processing problems, recurring taxpayer errors, and needed changes or improvements to tax forms and instructions.

Increased revenue/Revenue protection

Additional revenue of $7.43 million

We performed a computer analysis of all 1998 individual income tax returns posted to the IRS’ IMF as of July 3, 1999. We selected all returns (727,586) with the Taxpayer Notice number 691 (where employees disallowed the Child Tax Credit because the taxpayer did not provide a valid TIN for their child). Of these, we identified 90,160 that did not have a corresponding Taxpayer Notice number 605 or 604 (disallowing the related dependency exemption).

We reviewed a statistically valid sample (90 percent confidence +/- 5 percent) of these cases to determine how often taxpayers subsequently provide the necessary information to the IRS. Based on this sample, we determined that 23.4 percent of the cases were not reversed. We used an average of $405 per case to estimate taxes lost based on a 15 percent tax bracket multiplied by the $2,700 dependency exemption that was not disallowed. We eliminated 11,756 cases with a tax liability of less than $405. Therefore, 90,160 cases less 11,756 multiplied by 23.4 percent multiplied by $405 results in $7.43 million of additional revenue.

Many of the changes the IRS made to taxpayers’ returns impacted by four new legislative provisions were incorrect. These incorrect changes were not identified by the IRS. The IRS has the capability to select for review, tax returns worked by Error Resolution employees based on specific tax provisions. However, it has not implemented such a review on a regular basis. As a result, it did not timely identify and take action to address significant error rates involving new legislative provisions included in our review. This resulted in loss of funds to both the Government and taxpayers.

For the returns of taxpayers receiving Taxpayer Notice 649 (related to problems in calculating modified adjusted gross income for determining the Earned Income Tax Credit (EITC)) that we tested, the EITC of taxpayers also reporting distributions from Individual Retirement Accounts (IRA) or pensions was improperly reduced approximately 48 percent of the time (60 of 124). These taxpayers were denied approximately $38,000 of the EITC. As of August 1, 1999, the IRS had issued 63,279 of these notices informing taxpayers they had made mistakes when determining their modified adjusted gross income for the EITC. Based on volumes in the Ogden and Fresno Service Centers, we estimate that close to half of these notices resulted from modifications to adjusted gross income for determining the EITC when taxpayers reported distributions from IRAs or pensions.

The National Director, Submission Processing should initiate a post review of Error Resolution cases impacted by specific legislative provisions with emphasis on new tax provisions. The CARE system could facilitate such a review. The results of this post review should be trended to identify processing problems, recurring taxpayer errors, and needed changes or improvements to tax forms and instructions.

Taxpayer rights and entitlements/Revenue protection

While not statistically valid, if the percentages of errors and average dollars of the samples from the Ogden and Fresno Service Centers were applied nationwide, taxpayers would have been denied approximately $9.5 million of the EITC that they were entitled to.

We performed a computer analysis of returns filed at the Ogden and Fresno Service Centers and determined that approximately 49 percent of taxpayers receiving Taxpayer Notice number 649 had filed returns reporting distributions from IRAs or pensions. We sampled and reviewed 124 returns that were issued IRS’ Taxpayer Notice number 649 and had these distributions from IRAs or pensions and found a 48 percent error rate and average dollar error of $635. We projected these percentages and average dollars to the 63,279 Taxpayer Notices number 649 issued nationwide. We used the IRS’ IMF Error Code Report (480-62-11), dated August 1, 1999, to determine the total number of notices issued to taxpayers.

Many of the changes the IRS made to taxpayers’ returns impacted by four new legislative provisions were incorrect. These incorrect changes were not identified by the IRS. The IRS has the capability to select for review, tax returns worked by Error Resolution employees based on specific tax provisions. However, it has not implemented such a review on a regular basis. As a result, it did not timely identify and take action to address significant error rates involving new legislative provisions included in our review. This resulted in loss of funds to both the Government and taxpayers.

Employees incorrectly disallowed deductions for IRAs on approximately 17,000 returns nationwide when taxpayers’ filing joint returns and having Keogh deductions also had modified adjusted gross income between $60,000 and $160,000. The deductions disallowed in error averaged $1,918 per return and totaled $32 million.

The National Director, Submission Processing, should initiate a post review of Error Resolution cases impacted by specific legislative provisions with emphasis on new tax provisions. The CARE system could facilitate such a review. The results of this post review should be trended to identify processing problems, recurring taxpayer errors, and needed changes or improvements to tax forms and instructions.

Taxpayer burden/Taxpayer rights and entitlements

This recommendation could reduce taxpayer burden for those 17,000 taxpayers whose IRA deductions were incorrectly disallowed. Without this, these taxpayers would either be denied the right to deductions of approximately $32 million or incur additional burden filing an amended return or contacting Customer Service to correct the inappropriate disallowance. At the lowest tax rate of 15 percent, this $32 million dollars in deductions would equate to $4.8 million in tax.

We performed a computer analysis of all 1998 individual income tax returns posted to the IRS’ IMF as of July 31, 1999. We selected all returns with a Taxpayer Notice number 142 or number 141 (related to problems with the IRA deduction on joint returns that also had claimed a Keogh deduction) and had modified adjusted gross income between $60,000 and $160,000. From this, we applied certain dollar criteria to exclude notices which we determined could have been correct in partial disallowance situations.

Finding and Recommendation:

Within the Error Resolution function, the IRS performs no regular post review of returns impacted by specific tax provisions. If the IRS’ Error Resolution function had performed regular post reviews of tax returns by tax provision, and trended the results, they could have identified and taken action to solve processing problems related to these returns. Trend analyses could have also been used to identify recurring taxpayer errors that might be reduced by changes or improvements to tax forms and instructions.

The National Director, Submission Processing, should initiate a post review of Error Resolution cases impacted by specific legislative provisions with emphasis on new tax provisions. The CARE system could facilitate such a review. The results of this post review should be trended to identify processing problems, recurring taxpayer errors, and needed changes or improvements to tax forms and instructions. The National Director, Tax Forms and Publications, should receive and review the results of this trend analysis.

Cost savings and reduced taxpayer burden for the following four outcome measures related to this finding.

If instructions were improved to clearly explain that taxpayers must have at least three qualifying children to be eligible for the Additional Child Tax Credit, a significant portion of the 47,175 notices sent to taxpayers (and related processing delays) informing them that their credit was either incorrectly claimed or incorrectly computed, could be eliminated.

We sampled 83 returns filed in the Ogden Service Center for which taxpayers received Additional Child Tax Credit error notices and found that approximately 26 percent of the taxpayers (22 of 83) claimed less than the three dependents required to claim the additional credit. We used the IRS’ IMF Error Code Report (480-62-11), dated August 1, 1999, to determine the number of notices related to Additional Child Tax Credit issued to taxpayers.

If instructions for the U.S. Individual Income Tax Return (Forms 1040 and 1040A) had emphasized that a dependent’s name entered on a tax return must exactly match the name on the dependent’s card issued by the Social Security Administration (SSA), a significant portion of the 773,672 notices sent to taxpayers (and related processing delays) could have been avoided. We reviewed available IRS data for 125 taxpayers receiving notices informing them that their Child Tax and/or Additional Child Tax Credit was not allowed because the TIN and/or name they entered for their child did not match the records of either the IRS or the SSA. Over 22 percent (28 of 125) of these taxpayers had entered surnames for their children that did not match IRS or SSA records. Instructions for Forms 1040 and 1040A do not explain to taxpayers that the names of their dependents must match IRS or SSA records.

We reviewed 125 cases in the Ogden and Fresno Service Centers where the Child Tax Credit was reduced or denied because the name or social security number of the taxpayer’s child did not match the records of the IRS or the SSA. We used the IRS’ IMF Error Code Report (480-62-11), dated August 1, 1999, to determine the number of these notices issued to taxpayers.

Improving the instructions for computing modified adjusted gross income for the purpose of determining the EITC could reduce a significant portion of the 63,279 notices issued to taxpayers informing them that they miscalculated this figure. Otherwise, each of these returns would have to be sent to Error Resolution for corrections. The modified adjusted gross income computation is relatively complex. The IRS’ instructions for computing it are in a detailed narrative, but could be improved with a worksheet or examples to help simplify the computation.

To determine the number of notices nationwide that could have the same problem, we computer analyzed the Ogden and Fresno notices and returns processed as of April 23, 1999, and determined that approximately 49 percent of returns with Taxpayer Notice number 649 (related to problems in calculating modified adjusted gross income for determining the EITC) had taxable IRA or pension distributions. These are new provisions affecting the computation of modified adjusted gross income. (The notice also applies to the EITC cases with business losses.) We used the IRS’ IMF Error Code Report (480-62-11), dated August 1, 1999, to determine the number of these notices issued to taxpayers.

By specifically providing a statement on Forms 1040 and 1040A and their related instructions explaining that the maximum interest deduction for education loans is $1,000, the IRS could reduce a significant portion of the 43,638 notices issued to taxpayers informing them that they miscalculated their student loan interest deduction. Although taxpayers compute the deduction using a worksheet that includes the maximum $1,000 as part of the computation, there are no specific warnings on the tax forms or instructions that indicate the deduction is limited to $1,000. In a sample of 88 returns where the interest deduction computed by the taxpayer did not match the amount computed by the IRS, we found approximately 56 percent of the returns (49 of 88) claimed a deduction greater than $1,000.

We sampled 88 returns at the Ogden and Fresno Service Centers where the interest deduction computed by the taxpayer did not match the amount computed by the IRS. We used the IRS’ IMF Error code Report (480-62-11), dated August 1, 1999, to identify the 43,638 notices issued between January 1, 1999, and August 1, 1999, informing taxpayers that they had miscalculated their student loan interest deduction.

Because of limited programming resources and extensive priority programming requirements, the IRS postponed, or cancelled, computer programming to identify potential errors made by taxpayers relating to two new tax law provisions.

The Chief Operations Officer should ensure that computer programming necessary to identify taxpayer errors related to the tax law provision is completed by the 2001 filing season.

Taxpayer burden

We brought this issue to IRS’ attention, and they took steps to reduce the significant tax consequences to these taxpayers.

Because of limited programming resources and extensive priority programming requirements, the IRS postponed, or cancelled, computer programming to identify potential errors made by taxpayers relating to two new tax law provisions.

The Chief Operations Officer should ensure that computer programming necessary to identify taxpayer errors related to the tax law provision is completed by the 2001 filing season.

Increased revenue/Revenue protection

To implement new legislation, the IRS must develop, or amend, notices to address taxpayer errors related to the new legislative provisions. These notices should clearly communicate to taxpayers what their errors were, and what, if any, actions are required of the taxpayers.

Notices for the following four new tax provisions did not clearly or adequately explain the taxpayers’ errors, did not inform taxpayers of actions they needed to take, or were not technically accurate:

• Child Tax and Additional Child Tax Credit
• Changes to the Calculation of Modified Adjusted Gross Income for Purposes of Determining the EITC
• The EITC Recertification
• Increased Adjusted Gross Income Limits for Contributions to an IRA

The Chief Operations Officer should ensure that reviews of notices issued to taxpayers are effective in ensuring the notices are technically accurate, clearly address the taxpayers’ errors, and clearly tell taxpayers what steps they need to take.

Taxpayer burden

If taxpayers do not receive complete, clear notices, they are likely to repeat errors in subsequent years, or to contact the IRS for clarification. We determined there were 661,805 of these notices issued as of August 1, 1999.

We used the IRS’ IMF Error Code Report (480-62-11), dated August 1, 1999, to determine the number of these notices issued to taxpayers.

The IRS could correct inaccurate names and TINs on many taxpayers’ returns rather than disallowing taxpayers’ credits and exemptions. In over 31 percent of 403 notices sampled (125 of 403), the IRS had the correct information elsewhere on its computer system when it sent notices informing taxpayers their Child Tax Credit was disallowed because the name or TIN for their child on their 1998 tax return did not match IRS or SSA records.

Approximately 75 percent of the taxpayers nationwide, who received these notices subsequently contacted the IRS with corrected information.

Since most of the taxpayers who provided inaccurate names and/or social security numbers for their dependents contact the IRS with correcting information, the Chief Operations Officer should consider the feasibility and cost effectiveness of conducting limited computer research to find the correct information before burdening the taxpayer.

Taxpayer burden

This would reduce burden for approximately 239,838 taxpayers by avoiding unnecessary notices and subsequent contact by the taxpayers to correct the errors.

We sampled 403 cases where taxpayers had received notices disallowing Child Tax Credits due to invalid TINs and reviewed their 1997 tax returns using the IRS’ computer command code RTVUE³ to see if a similar, but valid, TIN was on record. Over 31 percent of the time, (125 of 403) the correct name or TIN could have been determined and burden to the taxpayer avoided. We used the IRS’ IMF Error Code Report (480-62-11) dated August 1, 1999, to determine that 773,672 of these notices were issued nationwide. Although our sample was limited to returns at the Ogden and Fresno service centers, if it were representative of the national population, it would translate to reduced burden for 239,838 taxpayers (31 percent of 773,672 taxpayers receiving notices).

The IRS experienced problems with its computer programs to implement the EITC recertification. Based on the instructions for Forms 1040 and 1040A, we anticipated that taxpayers would be confused about when to file the Information to Claim Earned Income Credit After Disallowance (Form 8862), and some taxpayers would file the form unnecessarily. The computer programs prepared by the IRS did not take this situation into consideration, and would have caused these taxpayers’ refunds to be delayed. We reported this issue to the IRS and they immediately revised their programs to ensure that taxpayer refunds would only be delayed when necessary. (See Appendices VIII and IX.) During the filing season, approximately 6,500 taxpayers unnecessarily filed Form 8862.

Cost savings/Taxpayer burden

Refunds totaling over $12.8 million ($8.8 million of which was the EITC) were not unnecessarily delayed and related taxpayer burden for approximately 6,500 taxpayers (and costs to release these refunds) were avoided.

We performed a computer analysis of the IRS’ IMF as of

August 27, 1999. We identified all returns with an Audit Code "U" (indicating they filed Form 8862) but no recertification indicator on their account.

Early in the filing season, we found that refunds of taxpayers requiring recertification for the EITC were not being stopped as intended. In a memorandum issued February 10, 1999, we notified the IRS of this problem. The IRS took immediate action to correct their computer programming to stop these refunds. (See Appendices X and XI.) As a result, only 74 incorrect refunds with the EITC totaling over $143,000 were issued.

Revenue protection/cost savings

Although IRS employees had not identified this programming error as of the date of our memorandum, we estimate they would have discovered the programming error in approximately six weeks. (Our estimate is based on the amount of time it would take for the affected returns to post to IRS’ IMF, related cases to be generated for review by IRS employees, and these employees to identify that refunds had already been issued for the returns.) Therefore, we estimate that approximately 17,000 taxpayers would have received incorrect refunds of the EITC totaling approximately $30.6 million.

Besides the potential lost revenue to the Government, the programming error could have wasted IRS resources to collect the EITC incorrectly refunded.

We performed a computer analysis of the IRS’ IMF as of March 27, 1999. We identified all returns with an Audit Code "U" (indicating they filed Form 8862) and with a recertification indicator on the account.

Appendix V

 Legislative Provisions for Which Necessary Computer
Programming was not Completed

As discussed in the body of this report, the Internal Revenue Service (IRS) assists taxpayers in understanding and meeting their tax responsibilities by using computer programs to identify errors on taxpayers’ individual income tax returns. They issue notices to taxpayers explaining the taxpayers’ errors and the adjustments made by the IRS to correct the errors. These computer programs are also used to ensure that certain limitations and requirements specified by the Congress are met. Often when the Congress passes tax legislation, it is intended to impact specific taxpayers. For example, many tax credits and deductions are available to taxpayers with lower incomes, but decrease as the taxpayers’ incomes increase. The IRS is responsible for implementing the tax laws in accordance with the specifications set by the Congress.

Computer programming was not completed to identify significant errors made by taxpayers relating to the following two new tax law provisions:

1. ****2(d),2(e)****

****2(d),2(e)****

2. ****2(d),2(e)****

As a result of these computer programs not being written, taxpayers were not informed of errors on their returns.

• ****2(d),2(e)****
• ****2(d),2(e)****

Appendix VI

Taxpayer Notices Needing Improvement

Notices developed for the following four new tax provisions did not clearly or adequately explain the taxpayers’ errors, did not inform taxpayers of actions they needed to take, or were not technically accurate.

• Taxpayers often claimed the Child Tax and Additional Child Tax Credits for children who were too old to qualify for the credits. The Internal Revenue Service (IRS) does not currently have a computer program to identify these errors. However, Error Resolution employees were required to research the birthdates of children for whom the Child Tax Credit was claimed if the taxpayer forgot to check the applicable box on the front of his/her tax return. Often when performing this research, the employee would find that the child was too old to qualify for the credit. The IRS has no specific notice to explain this to a taxpayer. The notices available to Error Resolution employees relate to all types of Child Tax and Additional Child Tax Credit errors. The IRS’ Taxpayer Notice¹ 692 states, "You incorrectly figured your Child Tax Credit. We adjusted your credit accordingly." Taxpayer Notice 697 states, "You incorrectly figured your additional Child Tax Credit on Form 8812. We adjusted your credit accordingly." As of August 1, 1999, the IRS had issued 539,281 of these notices.
• Taxpayers often claimed the Additional Child Tax Credit when they did not have three qualifying children as required by the law. The IRS has no specific notice to explain this to a taxpayer. Employees would either send Taxpayer Notice 697 referred to above, or would request manually typed notices be sent to the taxpayer. In our samples, approximately 25 percent (22 of 83) of the taxpayers who made mistakes when calculating their Additional Child Tax Credit had claimed fewer than three dependents.
• Because of a very complicated computer programming problem, some taxpayers received notices explaining that they made a mistake when figuring their Additional Child Tax Credit when their error was actually elsewhere on the return.

The IRS’ Taxpayer Notice number 653 states, "We cannot allow your Earned Income Credit. You have not recertified that you are eligible for the credit." While this notice properly explains why the credit was disallowed, it does not inform the taxpayer what to do to recertify that they are eligible for the Earned Income Tax Credit (EITC).

Beginning with the 1998 tax year, required modifications to adjusted gross income (used to determine the amount of the EITC) were expanded to include tax exempt interest and nontaxable distributions from pensions, annuities and Individual Retirement Accounts (IRA). The IRS’ Taxpayer Notice number 649 advises taxpayers that they made an error when determining their modified adjusted gross income for determining their EITC. The notice refers to nontaxable distributions from pensions, annuities and IRAs, but does not refer to tax exempt interest.

The IRS’ Taxpayer Notice number 142 is sent to taxpayers whose IRA deduction is disallowed because they are also claiming a Keogh deduction and have modified adjusted gross income which exceeds the limitations in the tax law. However, this notice does not clearly explain that modified adjusted gross income exceeds limitations. The notice does not clearly state that active participants in a Keogh plan are considered to be covered by a retirement plan. The notice also refers taxpayers to General Rules for Individual Retirement Accounts Under the Tax Reform Act of 1986, (Publication 1602) which contains outdated, inaccurate information.

Appendix VII

Key Legislative Provisions Affecting Individual
Returns Processing for the 1999 Filing Season Included in this Review

Appendix VIII

 Memorandum #1: Taxpayers Who Have Had the Earned Income Tax Credit Denied Through Math Error Procedures May Unnecessarily File for Recertification

Memorandum has been removed due to its size. To see the complete Memorandum, please go to the Adobe PDF version of this report.

Appendix IX

Management’s Response to Memorandum #1

Response has been removed due to its size. To see the complete Response, please go to the Adobe PDF version of this report.

Appendix X

Memorandum #2: Refunds Are Not Being Frozen on Returns Requiring Recertification for the Earned Income Credit

Memorandum has been removed due to its size. To see the complete Memorandum, please go to the Adobe PDF version of this report.

Appendix XI

Management’s Response to Memorandum #2

Response has been removed due to its size. To see the complete Response, please go to the Adobe PDF version of this report.

Appendix XII

Memorandum #3: The Internal Revenue Service is Unnecessarily
Burdening Some Taxpayers Who Claim the Child Tax Credit on the Wrong Line of Their Tax Return

Memorandum has been removed due to its size. To see the complete Memorandum, please go to the Adobe PDF version of this report.

Appendix XIII

Management’s Response to Memorandum #3

Response has been removed due to its size. To see the complete Response, please go to the Adobe PDF version of this report.

Appendix XIV

Memorandum #4: The Internal Revenue Service is Incorrectly Recomputing the Tax Liability of Taxpayers Who Use Schedule J, Farm Income Averaging, to Figure Their Tax

Memorandum has been removed due to its size. To see the complete Memorandum, please go to the Adobe PDF version of this report.

Appendix XV

 Management’s Response to Memorandum #4

Response has been removed due to its size. To see the complete Response, please go to the Adobe PDF version of this report.

Appendix XVI

Management’s Response to the Draft Report

Response has been removed due to its size. To see the complete Response, please go to the Adobe PDF version of this report.