HEARING BEFORE THE
COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
J. Russell George
Treasury Inspector General
for Tax Administration
STATEMENT FOR THE RECORD OF
THE HONORABLE J. RUSSELL GEORGE
TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
“The 2007 Filing Season”
Chairman Lewis, Ranking Member Ramstad, and Members of the Subcommittee, I thank you for the opportunity to provide written comments on the 2007 Filing Season. My comments focus on the processing of tax returns, customer service, telephone excise tax refunds, the Customer Account Data Engine, and the Electronic Fraud Detection System. Each of these areas is important to a successful 2007 Filing Season.
Processing Tax Returns
As of March 3, 2007, the Internal Revenue Service (IRS) reported that it had received 54 million individual tax returns. Of the 54 million, 41.2 million (76.3 percent) were filed electronically. The number of electronically filed tax returns is 4.3 percent higher than at the same time last year. The IRS has issued 45.4 million refunds for a total of $117.1 billion.
While the IRS has seen a growth in the number of electronically filed tax returns so far this filing season, the number of Free File returns is down slightly. As of March 3, 2007, the IRS received approximately 2.3 million tax returns through the Free File Program, compared to approximately 2.4 million returns at the same time last year.
Free File Program provides taxpayers with access to free online tax preparation
and e-filing services made possible through a partnership agreement between the
IRS and the tax software industry. The IRS Restructuring and Reform Act of 1998 (RRA 98) required the IRS to work with private industry to increase
electronic filing. In response to this
requirement, in 2003 the Department of the Treasury (Treasury), OMB and the IRS
launched the Free File Program featuring private-sector partners that allow
qualifying taxpayers to prepare and file their taxes online for free. The Treasury, OMB and IRS made this possible
through a public-private partnership with a consortium of tax software
companies, the Free File Alliance, LLC (
The RRA 98 established a goal for the IRS to have 80 percent of Federal tax and information returns filed electronically by 2007. Recognizing that the IRS will not meet this goal, the IRS Oversight Board recommended an extension of the goal to 2012. The IRS Oversight Board has consistently stated that the 80 percent e-file goal has been a major contributing factor to the growth of electronic filing. Based on existing trends through 2006, it is indeed unlikely that a sufficient number of taxpayers will shift to e-file in 2007 to overcome the IRS’ 26 percent shortfall. Nevertheless, because the goal has had such a positive effect, the IRS Oversight Board recommended that Congress extend it to 2012 and expand its scope. According to IRS Oversight Board Chairman Paul B. Jones, “While it is clear that the IRS will not achieve the ambitious 80 percent goal this year, we do not view this as a failure. Rather, the IRS and its private sector partners have achieved continuous and significant progress in all parts of electronic tax administration very much in keeping with RRA 98’s intent.”
Providing Quality Customer Service
While the IRS continues to face longstanding challenges, it deserves recognition for making progress in an area that will always be a challenge: providing quality customer service to the American taxpayer. Quality customer service is the first component of Commissioner Everson’s principle for the IRS: Service + Enforcement = Compliance. Over the past few years, TIGTA audits have shown that the IRS has improved customer assistance in its face-to-face, toll-free telephone, tax return processing, and electronic services, including the IRS public Internet site (www.IRS.gov).
IRS.gov continues to be one of the most visited Web sites in the world, especially during filing seasons. The IRS now provides practitioners with online tools to provide better service to their customers such as electronic account resolution, transcript delivery, and disclosure authorization.
Taxpayer Assistance Centers
Taxpayer Assistance Centers (TAC) are walk-in sites where taxpayers can receive answers to both account and tax law questions, as well as receive assistance in preparing their returns. TIGTA is currently in the process of making anonymous visits to TACs to determine if taxpayers are receiving quality service, including correct answers to their questions. As of March 3, 2007, there were 1.5 percent fewer walk-in contacts than for the same period last year.
Volunteer Income Tax Assistance (VITA) Program
The VITA Program plays an increasingly important role in IRS’ efforts to improve taxpayer service and facilitate participation in the tax system. The VITA Program provides no-cost Federal tax return preparation and electronic filing to underserved taxpayer segments, including low-income, elderly, disabled, and limited-English-proficient taxpayers. These taxpayers are frequently involved in complex family situations that make it difficult to correctly understand and apply tax law.
According to the IRS, as of March 3, 2007, volunteer tax return preparation is 8.6 percent above last year’s performance, and volunteer e-file is slightly down by approximately 0.7 percent compared to this time last year. However, as of January 31, 2007, outreach contacts had significantly increased by over 90 percent compared to the same time last year. This increase is due to special emphasis on telephone excise tax refunds and unplanned outreach activities occurring during the month of January.
TIGTA is currently in the process of visiting VITA sites to determine if taxpayers are receiving quality service, including the accurate preparation of their individual income tax returns. TIGTA developed scenarios that are designed to present volunteers with a wide range of tax law topics and include the characteristics (e.g., income level, credits claimed, etc.) of tax returns typically prepared by the VITA Program volunteers.
Telephone Excise Tax Refunds
The telephone excise tax refund is the most wide-reaching refund in the history of the IRS. It is a one-time refund that the IRS estimated would affect between 151 million and 189 million people, including many without a filing requirement. The IRS developed a process to refund these monies on a timely basis and made the refund request process relatively easy for most taxpayers. At the same time, the IRS wanted to minimize refunds in excess of taxes collected and discourage overstated refund requests.
To minimize the number of overstated refund requests and the administrative burden on individual taxpayers, the IRS decided to offer individuals a standard refund amount. Use of the standard amounts should significantly reduce taxpayer burden since no records are needed to support taxpayers’ requests. Individuals do not have to assemble 41 months of telephone bills to determine their refund amounts. Requesting the standard amount requires the completion of only one additional line on the tax return.
However, taxpayers are not required to request the standard amount. If taxpayers do not choose to claim the standard amount, they must file Form 8913, Credit for Federal Telephone Excise Tax Paid, with their U.S. Individual Income Tax Return (Form 1040 series). Taxpayers must attach Forms 8913 to their Forms 1040 to support any claims for more than the standard amount.
The IRS also developed a compliance strategy to address egregious claims. The strategy includes identifying tax returns with claims for telephone excise tax refunds exceeding certain dollar thresholds and freezing the telephone excise tax portion of the refunds associated with those returns until the claims could be audited.
standard amount developed by the IRS has proved to be very effective. Through the week ending
TIGTA has raised the following concerns to the IRS regarding the processing of returns claiming telephone excise tax refunds for non-standard amounts:
When TIGTA reported these issues, the IRS took immediate steps to address the problems.
TIGTA has also raised concerns with the
IRS’ implementation of its compliance strategy related to these claims. In TIGTA’s opinion, the dollar threshold used
to identify potentially egregious claims is again set too high. TIGTA first raised this concern to the IRS on
TIGTA reviewed a sample of 30 of these claims and found the following among the cases in the sample:
The IRS set its threshold high because its examination resources are limited and because it believes that examinations of Earned Income Tax Credit cases and other discretionary examination cases will result in higher assessment rates than examinations of the telephone excise tax refund claims. However, others factors may need to be considered. For example:
Taking into consideration the factors listed above, TIGTA recommended that the IRS re-examine all options at its disposal to address significantly more inappropriate telephone excise tax refund claims, including offering taxpayers the opportunity to self-correct their returns, postponing some examination work, and having non-examination employees work (or partially work) some of the simpler cases.
The IRS responded to TIGTA’s concerns, stating that it does not plan to make adjustments to the threshold amounts. The IRS’ written response did not address TIGTA’s recommendation to allow taxpayers to self-correct their returns; however, in discussions IRS officials stated that they had no plans to issue notices to taxpayers and allow them to self-correct their errors because IRS officials believe that such notices would be ineffective, the IRS has limited resources to work the responses, and there would be many “no response” cases, which they would be required to work.
Customer Account Data Engine
The Customer Account Data Engine (CADE) project will provide the foundation for managing taxpayer accounts to achieve the IRS’ modernization vision. The CADE consists of databases and related applications that will replace the IRS’ existing Master File processing systems, which are the IRS’ official repository of taxpayer information.
Congress authorized $54 million in Fiscal
Year (FY) 2005 and $60 million in
FY 2006 for the CADE. Additionally, the IRS requested $85 million in FY 2007 for the CADE, but this amount has been reduced to about $58 million. Through FY 2007, CADE project release costs total about $233.9 million. The IRS initiated the CADE project in September 1999 and began delivering releases in August 2004.
During Calendar Year (CY) 2006, the CADE processed over 7.3 million tax returns and generated more than $3.4 billon in refunds. This is a significant increase over the 1.4 million tax returns processed in CY 2005 that generated refunds totaling more than $427 million. The CADE is now in the process of completing delivery of Release 2.2. Release 2.2 will process 2007 Filing Season tax law revisions (Tax Year 2006) and additional tax forms.
On February 27, 2007, the IRS and the PRIME
contractor put Release 2.2 into production, but because computer reports on the
number of returns received did not match the number of returns processed, the
CADE was turned off and tax returns were sent back to the current IRS
processing system. The IRS reports that
a major portion of Release 2.2 was successfully put into production on March 6,
(seven weeks late). On the first day, it processed over 571,000 tax returns of which 566,332 contained refunds. Because of the late start into production, the IRS goal of using the CADE to process 33 million tax returns will not be met. According to IRS officials, the latest estimate is that the IRS will complete the deployment of Release 2.2 in April 2007, and it will process between 15 million to 20 million returns.
Electronic Fraud Detection System
The Electronic Fraud Detection System (EFDS) is the primary information system used to support the Criminal Investigation Division’s Questionable Refund Program, which is a nationwide program established in January 1997 to detect and stop fraudulent and fictitious claims for refunds on income tax returns. During Processing Year (PY) 2006, the EFDS was not operational because the IRS and its contractors were unable to launch a Web-based version of the EFDS application (Web EFDS), resulting in an estimated $318.3 million in fraudulent refunds being issued as of May 19, 2006.
On April 19, 2006, all system development activities for the Web EFDS were stopped, and all efforts were focused on restoring the client-server EFDS for use on January 16, 2007. The restoration effort required the contractors to prepare the EFDS and the related databases for PY 2007 by starting with the PY 2005 EFDS and updating it with the 2006 and 2007 tax law changes.
In October 2006, TIGTA initiated an audit to determine whether the IRS was adequately monitoring the contractor’s development efforts in 2006 to ensure that a system was delivered in time for the 2007 Filing Season. TIGTA found that the IRS improved controls over the EFDS restoration activities including executive governance and project management. As a result, project risks were being identified and mitigation actions were being taken to ensure that the EFDS was implemented and fraudulent refunds stopped during PY 2007.
On January 16, 2007, the IRS and its contractors put the EFDS into production. The IRS reported the telephone excise tax refund, split refund, and extender legislation requirements were implemented as scheduled on January 29, 2007. The IRS also reported that the EFDS continues to operate without critical problems.
While the 2007 Filing Season appears to be progressing without major problems, I am concerned that changes in the Free File Agreement as well as the elimination of Telefile Program in 2005 may contribute to a significant slowing of the growth in electronic filing this year. This slowed growth comes at a time when the IRS is still far from reaching Congress’ goal of 80 percent electronic filing by 2007. Slower growth in electronic filing will defer the efficiency gains for the IRS that result from electronic filing.
Additionally, I am concerned about the IRS’ telephone excise tax refund program. While the IRS took corrective actions to address concerns about processing thresholds, the IRS declined to re-examine all options at its disposal to address significantly more inappropriate telephone excise tax refund claims, including offering taxpayers the opportunity to self-correct their returns, the postponement of some examination work, and the working (or partial working) of some of the simpler cases by non-examination employees.
I hope my discussion of some of the 2007 Filing Season issues will assist you with your oversight of the IRS’ filing season operations. Mr. Chairman and Members of the Subcommittee, thank you for the opportunity to share my views.
 Pub. L. No. 105-206, 112 Stat. 685 (codified as amended in scattered sections of 2 U.S.C., 5 U.S.C. app., 16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.).
 Assistor level of service is the primary measure of providing service to taxpayers. It is the relative success rate of taxpayers who call for services on the IRS’ toll-free telephone lines.
Examinations of High-Income Taxpayers Have Increased, the Impact on Compliance
May Be Limited (TIGTA Reference Number 2006-30-105, dated