E-Filing Tax Returns: Penalty Authority and Digitizing More Paper Return Data Could Increase Benefits
Highlights
The Internal Revenue Service's (IRS) goal is to receive 80 percent of all major types of tax returns electronically by 2012. Legislation passed in November 2009 supports the 80 percent goal for individual income tax returns by requiring tax return preparers who file more than 10 individual returns per year to file them electronically, or e-file. GAO was asked to review IRS's implementation of this e-file mandate. Specifically, GAO (1) described e-file rates and preparers' experiences implementing the mandate, (2) assessed IRS's plans to enforce the mandate, (3) assessed IRS's analysis of options for digitizing more data from paper returns, and (4) determined whether there are any tax forms IRS cannot accept electronically and assessed IRS's plans for adding them to the e-file system. To conduct these analyses, GAO reviewed IRS processing data and e-file planning documents, and interviewed IRS officials and 26 members of national preparer organizations.
In 2011, 79 percent of all individual tax returns were e-filed, a noticeable increase over prior years. Both preparer and self-prepared e-file rates increased, which IRS officials attributed to different factors. They said the e-file mandate was one key factor in the growth of preparer e-filing. Preparers GAO interviewed who were new to e-filing said they experienced increased costs and administrative burdens due to the mandate. Several preparers who had been e-filing prior to the mandate said they experienced some of these same problems when they first e-filed, but they now find that e-filing helps their business--for example, by reducing the time needed to file returns. IRS's plans to identify preparers who are not complying with the mandate are not fully developed because IRS does not know the extent of noncompliance and it may be low. Nonetheless, officials stated some noncompliance likely exists and may increase in 2012 when the mandate applies to more preparers. Regardless of the extent, IRS does not have authority under the IRC to assess penalties on preparers who fail to comply. IRS may be able to impose sanctions under Department of Treasury regulations that govern practice before IRS. However, the process is costly and the penalties, which could include suspension of practice, may be harsher than needed. IRS is considering pursuing two options to digitize more data--bar coding and additional transcription. IRS does not transcribe all lines from paper returns. IRS's policy is to post the same information from electronic and paper returns to its databases, so that similar paper and electronic returns have equal chances of being audited. IRS has not analyzed the costs and benefits of these options, which could support informed funding decisions. Some forms cannot be e-filed, including two relatively high-volume forms for amended returns and nonresident aliens. IRS has not developed a complete list of forms that cannot currently be e-filed nor does it have a time line for adding them to the e-file system. Without adding forms such as these to the system, IRS will limit e-filing's growth potential. Congress should consider amending the Internal Revenue Code (IRC) to provide IRS with penalty authority for preparer noncompliance with the mandate. GAO also recommends, among other things, that IRS conduct analyses on the costs and benefits of implementing bar coding and additional transcription and create a time line and list of forms to be added to the e-file system. IRS agreed with the recommendations.
Recommendations
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| Congressmay wish to consider amending the Internal Revenue Code to authorize IRS to assess penalties on preparers for failure to comply with section 6011(e)(3). | A bill was introduced on June 28, 2011, which would have amended electronic filing requirements for paid preparers. This included language amending section 6695 of the Internal Revenue Code to include a penalty of $50 for failure to electronically file returns under section 6011 (e)(3). However, this bill was never enacted. As of March 2024, there are no bills pending that would provide IRS with authority to penalize paid preparers for failure to electronically file returns as GAO recommended. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | To help increase electronic filing and to better target IRS's efforts, the Commissioner of Internal Revenue should direct the appropriate officials to develop a plan for and schedule to conduct a study that identifies and documents lessons learned from the implementation of the e-file mandate. |
In response to our recommendation IRS developed a lessons learned review that documented how the mandate affected several stakeholder groups and some paid preparers. As a result, IRS determined five areas that may assist with the implementation of any future e-file mandates. For example, IRS determined that with future mandates, the service may want to consult with state tax administrators if the states have similar mandates, as obtaining lessons learned from state e-file mandates offered valuable insights into the process.
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| Internal Revenue Service | To help increase electronic filing and to better target IRS's efforts, the Commissioner of Internal Revenue should direct the appropriate officials to determine whether and to what extent the benefits of bar-coding would outweigh the costs. |
In response to our recommendation, IRS performed a detailed cost/ benefit analysis on implementing a 2-D barcoding program for implementation dates in fiscal year 2013, 2014 and 2015. If a 2-D barcoding program was implemented in fiscal year 2015, IRS estimates it would cost $6.3 million in non-reoccurring costs for the 3 year implementation period and $700,000 each year for operations and maintenance. Over a 10-year period, this would cost IRS a total of $13 million. IRS estimated the benefits by determining the estimated cost savings for implementing the 2-D barcoding program, which was determined by an estimation of how many staff hours would decrease for the code and edit, transcription and error resolution functions of the paper processing pipeline. The cost saving benefits during the ten year timeframe (fiscal years 2015-2025) would be approximately $109 million. Therefore, the benefits of implementing this system would greatly outweigh the costs. IRS plans to pursue funding for this project, and plans to update this analysis yearly until funding is received to initiate the project.
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| Internal Revenue Service | To help increase electronic filing and to better target IRS's efforts, the Commissioner of Internal Revenue should direct the appropriate officials to determine the relative costs and benefits of transcribing different individual lines of tax return data. |
During the course of our audit, IRS developed the relative costs to transcribe individual lines on tax forms and schedules. IRS officials noted that due to budgetary constraints, they did not plan on continuing analysis to determine the benefits of transcribing different lines of tax return data. However, in August 2012, IRS officials stated they have reconsidered the recommendation because it has agency wide implications, and now plan to survey the various business units in IRS to determine the benefits of transcribing different lines of tax return data. As of September 2013, the Return Preparer Office reported that the study assessing the benefits of transcribing additional lines of tax return data was canceled because due to budgetary constraints as the study was going to be resource intensive and it was not clear that the benefits of the study would outweigh the costs. In May 2014, officials confirmed they have no plans to pursue this recomendation further.
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| Internal Revenue Service | To help increase electronic filing and to better target IRS's efforts, the Commissioner of Internal Revenue should direct the appropriate officials to develop and prioritize a list of forms that still need to be added to the Modernized e-File system. |
In response to our recommendation, IRS officials developed a prioritized list of forms that need to be added to the Modernized e-File system (MeF). The list is developed using a number of factors such as Commissioner priorities, business unit priorities, volume, budget and other legislative factors, such as implementing requirement for the Affordable Care Act. IRS prioritized the list of forms to be added over fiscal years 2012, 2013, 2014, and 2015, and developed a list of forms that still need to be added to the MeF.
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| Internal Revenue Service | To help increase electronic filing and to better target IRS's efforts, the Commissioner of Internal Revenue should direct the appropriate officials to create a timetable to add additional forms to the Modernized e-File system, particularly for high-volume forms, such as the 1040-X and 1040-NR. |
In response to our recommendation, IRS officials created a timetable to add additional forms to the Modernized e-Filing (MeF) system. The list was developed using a number of factors such as Commissioner priorities, business unit priorities, volume, budget and other factors, such as implementing requirement for the Patient Protection and Affordable Care Act. The timetable outlines the forms to be added in fiscal years 2012 through 2020. For example, the Form 1040NR was added to MeF for tax year 2016. The Form 1040-X MeF implementation status changed from being scheduled for 2015 to strategically paused. According to IRS officials, this is because of skills and staffing shortfalls within IT. As such, IRS's digital subcommittee decided to focus its resources on fewer projects and determined that an online 1040X form would not be one of the immediate projects. IRS officials further noted that the 1040X online return remains a desired capability, but it is not slated for work in the near future. As a result, IRS better informed its resources allocation decisions by developing a prioritized listed of forms to add to the e-filing system.
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