Summary
Individual taxpayers used commercial tax software to prepare over 39 million tax returns in 2007, making it critical to the tax administration system. The majority were then filed electronically, resulting in fewer errors and reduced processing costs compared to paper returns. GAO was asked to assess what is known about how pricing of tax software influences electronic filing, the extent to which the Internal Revenue Service (IRS) provides oversight of the software industry, and the risks to tax administration from using tax software. To do so, GAO analyzed software prices, met with IRS and software company officials, examined IRS policies, and reviewed what is known about the accuracy, security, and reliability of tax software.
IRS has little information about how the pricing of tax software affects taxpayers' willingness to file tax returns electronically. In 2009, the two largest tax software companies eliminated separate fees to file federal tax returns electronically when using software purchased from retail locations or downloaded from a Web site. As a result, IRS has an opportunity to study whether this and other changes are effective in increasing electronic filing. Additionally, IRS would benefit from being able to identify which software package the taxpayer used to better target research and efforts to increase software use and electronic filing. IRS provides some oversight of the tax software industry but does not fully monitor compliance with established security and privacy standards. Further, IRS has not developed a plan to monitor compliance with new standards, which are optional in 2009 but may be mandatory in 2010. Without appropriate monitoring, IRS has limited assurance that the standards are being implemented or complied with. IRS has not conducted an assessment to determine whether taxpayers' use of tax software poses any risks to tax administration. Risks include that IRS may be missing opportunities to systemically identify areas to improve software guidance and enhance information security. IRS officials said the likely benefits of an assessment would not warrant the costs but have not determined either the benefits or costs of such an assessment. Moreover, IRS has also said that it is in the agency's best interest to ensure that taxpayers can rely on commercial software to make electronic filing accurate, easy, and efficient. Further, if even small improvements in the accuracy of tax returns could be made by clarifying the guidance in tax software, the effect on revenue could be substantial. Without a risk assessment, IRS does not know whether its existing oversight of the tax software industry is sufficient or needs to be expanded.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
| Director: |
James R. White |
| Team: |
Government Accountability Office: Strategic Issues |
| Phone: |
(202) 512-5594 |
Recommendations for Executive Action
Recommendation: To help increase electronic filing and allow IRS to better target its efforts, the Commissioner of Internal Revenue should direct the appropriate officials to require tax software companies, as soon as practical, to include a software identification number that specifically identifies the software package used to prepare tax returns, which can be used in IRS research efforts.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: The Internal Revenue Service contends that procedures are currently in place to require Software Identification Numbers on all individual electronically filed (e-filed) returns. IRS states the number is assigned to all tax packages during testing to identify different version of software products and consists of eight digits, with the first two representing the tax year. IRS will add requirements to Publication 1167 (General Rules and Specifications for Substitute Forms and Schedules) to require paper substitute forms created by e-file software to include the Software Identification Number. IRS will request this change for the 2010 filing season by the end of the current fiscal year.
Recommendation: To help increase electronic filing and allow IRS to better target its efforts, the Commissioner of Internal Revenue should direct the appropriate officials to ensure that, as part of the second phase of IRS's Advancing E-file Study, surveys ask taxpayers the effect of tax software pricing changes and the opportunity to file for free using online tax forms on IRS's Web site on their decision to either file or not file tax returns electronically.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: The Internal Revenue Service agreed with this recommendation but states it is challenging to isolate the specific factors that cause a taxpayer to eventually choose to electronically file (e-file). As part of the Advancing E-file Study Phase 2, IRS is working with the MITRE Corporation in trying to address this challenge by conducting a conjoint analysis of factors driving taxpayers' e-file decisions. This analysis will include monetary disincentives associated with filing method as a choice factor.
Recommendation: To help increase electronic filing and allow IRS to better target its efforts, the Commissioner of Internal Revenue should direct the appropriate officials to the extent possible, study the effect of the 2009 pricing changes and the opportunity to file for free using online tax forms on IRS's Web site on taxpayers' use of tax software and electronic filing rates.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: The Internal Revenue Service agreed with this recommendation. IRS reported it will study the impact of cost on mitigation between filing methods and complete the study by December 31, 2009.
Recommendation: To help increase electronic filing and allow IRS to better target its efforts, the Commissioner of Internal Revenue should direct the appropriate officials to determine if tax software companies that are authorized to participate in online filing are adhering to advisory security and privacy standards for the 2009 filing season.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: The Internal Revenue Service agreed with this recommendation and agreed to determine the impact of the advisory standards on provider behavior. IRS agreed to incorporate its findings in its decision-making about whether to make the advisory standards official policy. Additionally, the agency will sample and observe online providers' web sites throughout the 2009 filing season to determine if they have adopted the advisory rules. The implementation date for this recommendation is October 15, 2009.
Recommendation: To help increase electronic filing and allow IRS to better target its efforts, the Commissioner of Internal Revenue should direct the appropriate officials to develop and implement a plan for effectively monitoring compliance with recommended security and privacy standards for the 2010 filing season.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: The Internal Revenue Service agreed with this recommendation stating it would make a decision by September 30, 2009 on whether to make the advisory standards mandatory. In the interim, IRS will monitor and assess self-compliance with the security advisories issued in 2008 and seek public comment on making these standards mandatory. If, based on all findings, IRS decides to make these advisory standards official policy, the agency will publish the new rules, develop a monitoring and enforcement plan, and identify resources to carry out monitoring and enforcement activities.
Recommendation: To help increase electronic filing and allow IRS to better target its efforts, the Commissioner of Internal Revenue should direct the appropriate officials to assess the extent to which the reliance on tax software creates significant risks to tax administration, particularly in the areas of tax return accuracy, the security and privacy of taxpayer information, and the reliability of electronic filing.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: The Internal Revenue Service agreed with this recommendation in principle but also stated that testing and certifying accuracy will pose a significant challenge because of the many scenarios that are present due to a complex tax code. Therefore, IRS believes its current approach of identifying cases of non-compliance by actual groups of users is effective because it does not deal with hypothetical cases and identifies both real weaknesses in software and user behavior. However, IRS acknowledged in its response that it may be possible to do more and will look into ways of identifying areas of non-compliance in real settings. IRS stated it addressed security and privacy in the response to the previous two recommendations. IRS will also consult with Chief Counsel and develop a document summarizing whether, and to what extent, IRS is authorized to involve itself in the software industry's development of tax preparation software, what actions IRS could take to drive software companies to make changes and under what circumstances, the sanctions IRS could impose on software companies that refuse to make requested changes, and what additional authority IRS would need to do all the above. Based on this information, IRS will determine its subsequent course of action.
