2009 Tax Filing Season:

IRS Met Many 2009 Goals, but Telephone Access Remained Low, and Taxpayer Service and Enforcement Could Be Improved

GAO-10-225: Published: Dec 10, 2009. Publicly Released: Jan 11, 2010.

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The Internal Revenue Service's (IRS) filing season is an enormous undertaking that includes processing tax returns, issuing refunds, and responding to taxpayer questions. IRS's efforts to ensure compliance begin during the filing season. GAO was asked to assess IRS's 2009 filing season performance, identify ways to reduce taxpayers' use of short-term, high-interest refund anticipation loans (RAL) offered by paid preparers or banks, and identify ways to enhance compliance during processing. GAO analyzed IRS performance data, reviewed IRS operations, interviewed IRS officials, and reviewed its compliance programs and relevant statutes.

IRS processed 139 million returns and issued $298 billion in refunds as of October 2, 2009. Electronic filing, which provides IRS with significant cost savings and taxpayers with faster refunds, increased to 68 percent of all returns filed. While taxpayers' access to telephone assistors was better than last year, it remained lower than in 2007 in part because of calls about tax law changes. Compared to 2005 through 2007, IRS reduced its goal for assistor answered calls in 2009 and set its 2010 goal at 71 percent. Despite heavy call volume, the accuracy of IRS responses to taxpayers' questions remained above 90 percent. IRS started a major data collection effort on why taxpayers call, but lacks a plan to analyze the data and improve telephone service. According to IRS, issuing refunds faster reduces taxpayers' use of RALs, high-interest loans made by paid tax preparers or banks in anticipation of a refund. Issuing refunds is a joint effort by IRS, Treasury's Financial Management Service, which checks for non-tax debt owed to the federal government, and the Automated Clearing House, which distributes funds. However, IRS has not coordinated extensively with them to expedite refunds. Further, IRS has not studied the use of debit cards for unbanked taxpayers, which could also reduce taxpayers' use of RALs by providing faster and more secure refunds. IRS automatically identifies and corrects select types of errors while processing tax returns. It could also correct tax returns that claim the Hope credit, a tax credit to help offset qualified education expenses, for longer than the number of years allowed. However, IRS lacks the authority to use prior years' tax return information for this purpose. Also, information reported by education institutions to taxpayers and IRS about qualifying educational expenses on the Form 1098-T is confusing for taxpayers and not useful for IRS. Many institutions report the total amount billed to students, but not what is actually paid after taking into account scholarships and grants. This results in some taxpayers under-claiming benefits, while others over-claim. Finally, because Form 1098-T can show the amount billed, which may not be the amount paid, IRS is unable to use the information to automatically verify taxpayers' claims for the credit through its computerized matching program.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To reduce taxpayer confusion and enhance compliance with the eligibility requirements for higher education benefits, IRS should revise Form 1098-T to improve the usefulness of information on qualifying education expenses.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Open

    Comments: IRS has not revised the Form 1098-T to improve the usefulness of the information being reported as GAO recommended in December 2009, but it has taken other steps towards improving information from educational institutions and tax filers. IRS identified problems with the accuracy of information reported by educational institutions on Form 1098-T; it is addressing these accuracy issues through outreach to educational institutions before it proceeds with making changes to the form. IRS also has changed Form 8863, which is used by taxpayers to claim higher education tax credits. The new version of Form 8863 for tax year 2012 requires taxpayers to provide additional information, such as the name and address of the educational institutions attended, and the student's year of school. IRS maintains that these changes will provide more flexibility in addressing discrepancies in a timely manner than would be afforded by matching Form 1098-T data to a taxpayer's return. However, changes are still needed to make the cost of attendance reported on Form 1098-T more useful to taxpayers and IRS. This can be accomplished by requiring that it reflect the amount actually paid to the educational institution after accounting for scholarships and grants, rather than give educational institutions the option of reporting either the amount billed or the amount paid.

    Recommendation: To reduce taxpayer confusion and enhance compliance with the eligibility requirements for higher education benefits, IRS should determine the feasibility of using current information reported on Form 1098-T, such as school location and taxpayer identification number or social security number (SSN), in IRS's compliance programs.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: In October 2012, IRS conducted reviews to determine the feasibility of using information reported on the Form 1098-T to better evaluate qualifying educational expenses, as GAO recommended in December 2009. Educational institutions use Form 1098-T to report information about qualifying education expenses to taxpayers and IRS. Based on its internal reviews, in October 2012, IRS determined that it was not feasible to use current information reported on the Form 1098-T in its compliance programs.

    Recommendation: To further improve refund timeliness and reduce reliance on RALs and RACs, IRS should determine the feasibility of offering debit cards for refunds.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS provided GAO with an update to the report's recommendations on 12/08/2010, stating it was exploring a range of alternatives to deliver refunds to unbaked taxpayers. On January 13, 2011, IRS announced a pilot program to provide low-and moderate-income taxpayers to receive federal tax refunds electronically through a Visa prepaid debit card for the 2011 Filing Season.

    Recommendation: To further improve refund timeliness and reduce reliance on RALs and RACs, IRS should work more proactively with Financial Management Service (FMS) and Automated Clearing House (ACH) to help improve refund timeliness.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Open

    Comments: As of February 2013, IRS had not reported any additional action since saying that the agency, Financial Management Service (FMS), and the Automated Clearing House (ACH) already maintain a constant dialogue on issues, including refund timeliness. However, we still believe that more can be done with with FMS and ACH to improve refund timeliness.

    Recommendation: To further improve refund timeliness and reduce reliance on RALs and refund anticipation checks (RACs), IRS should update and publicly release a report on RAL and RAC use.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: Although IRS did not update its 2006 RAL report to Congress, Treasury contracted with the Urban Institute for a report on RAL and RAC use which was issued in November 2010 and released to the public in February 2011. Furthermore, IRS reported that, consistent with the principle of this recommendation, it would assess the effectiveness of the debt indicator program and consider changes including its possible elimination. In August 2010, IRS announced it would no longer provide the debt indicator to return preparation companies. As a result, most banks stopped funding RALs in the 2011 filing season.

    Recommendation: Related to improving IRS's performance during the filing season, the Commissioner of Internal Revenue should explicitly integrate the Taxpayer Assistance Blueprint (TAB) in strategic planning documents.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Open

    Comments: As of June 2013, IRS officials reported that they do not plan to update IRS's 2009 - 2013 strategic plan until a new Commissioner is appointed. IRS had previously stated that though not repeated verbatim in its current Strategic Plan, the TAB guiding principles resonate throughout the document. IRS noted that insofar as the Strategic Plan embodies the goals and objectives of the TAB, these documents maintain reference to taxpayer-centric understanding and administration of taxpayer service first explored by the TAB and adopted in its Strategic Plan. In addition, IRS expressed that beyond the Plan, it maintains linkages to improving service from the taxpayer perspective, including through internal planning documents and budget proposals. However, we continue to believe that Congress and others would benefit from more explicitly linking the TAB guiding principles into key IRS documents.

    Recommendation: Related to improving IRS's performance during the filing season, the Commissioner of Internal Revenue should develop as soon as possible an analysis plan for using the data IRS captures through Contact Analytics.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS updated its contact analytics analysis plan in February 2011 to include information on the analysis process, the elements of contact analytics analysis, and analysis methods to be used.

    Recommendation: Congress may wish to consider providing IRS with math error authority (MEA) to use prior years' tax return information to automatically verify taxpayers' compliance with the limit on the number of years the Hope credit can be claimed.

    Agency Affected: Congress

    Status: Open

    Comments: Legislative searches show that, as of May 15, 2013, Congress has not extended IRS with math error authority (MEA) to use prior years' tax return information to automatically verify taxpayers' compliance with the limit on the number of years the Hope credit can be claimed. The Hope Credit was replaced by the American Opportunity Tax Credit, which has been extended through December 31, 2017. Even with the change, Congress did not grant the additional MEA. However, GAO has provided technical assistance to the House Solutions Caucus in drafting legislative language for a bill on extending MEA to use prior years' returns for verify compliance with limits on the credit.

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