Dec 5th 2013
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By Jason Bramwell, Staff Writer
In a report released publicly on December 4, the Treasury Inspector General for Tax Administration (TIGTA) concluded the IRS Modernized e-File (MeF) system has successfully replaced the agency's Legacy e-File system as the primary electronic filing (e-filing) platform for individual tax returns during the 2013 filing season.
The MeF system is an Internet-based, e-filing platform that provides a single method for filing business and individual tax returns, forms, and schedules, according to the TIGTA report, All Individual Tax Returns Filed Electronically in the 2013 Filing Season Were Processed Using the Modernized e-File System. The system provides real-time processing of tax returns and extensions that improves error detection, standardizes business rules, and expedites tax return acknowledgments to taxpayers.
According to the report:
The system uses three levels of validation for processing acceptance. Once a tax return has passed all three levels of validation, it will enter the IRS' tax return processing stream. The three levels of validation include:
Level 1 – Schema Validation – An MeF system tax return is divided into a series of different data structures. Schemas provide the basic definitions for the data elements within each data structure and the interrelationships among the data elements. The MeF system verifies the accuracy of the data format in the tax return by validating each tax return against the individual schemas. If an error is found during the schema validation, the tax return is rejected.
Level 2 – National Account Profile Checks – The taxpayer, spouse, and dependent name controls and Social Security numbers contained on the tax return must match the information on the National Account Profile before the IRS will accept the tax return for processing. The MeF system conducts the same basic verification as the Legacy e-File system. A tax return is rejected if it fails one or more of the National Account Profile validations.
Level 3 – Business Rule Check – The IRS establishes criteria or business rules that each tax return must pass before it can be processed electronically. The business rules are designed to validate basic requirements on a tax return, such as income limits for tax credits and deductions and the need to attach a specific schedule if certain conditions are present on the tax return. A tax return will be rejected if one or more of the business rules are not met.
TIGTA initiated the audit to determine whether the IRS successfully transitioned e-filing of individual tax returns to the MeF system for the 2013 filing season and whether the system received, processed, and posted tax return information timely, accurately, and effectively.
In its report, TIGTA found the transition from the Legacy e-File system to the MeF system at the IRS was successful.
As of May 4, 2013, the IRS received approximately 129 million e-filed tax year 2012 Forms 1040. The IRS accepted approximately 114 million (88 percent) and rejected more than 15 million (12 percent) tax returns.
TIGTA's review of a "statistically valid sample of 560 Forms 1040 received by the IRS from January 30, 2013, through May 4, 2013, found that 558 tax returns (99.6 percent) were processed correctly. TIGTA found that the MeF system did not identify the remaining two tax returns for taxpayers who appeared to have a requirement to pay self-employment tax but did not pay it."
The report states, "Further review of the tax returns with qualifying self-employment income on Schedule C, Profit or Loss From Business, filed from January 27, 2013, through June 29, 2013, for which the taxpayer did not pay self-employment tax, identified 11,700 taxpayers with more than $12 million in self-employment income for whom IRS records showed that they were not exempt from paying self-employment tax."
"The Modernized e-File project has been a labor-intensive effort lasting more than a decade to revolutionize the way taxpayers interact and communicate with the IRS," Treasury Inspector General for Tax Administration J. Russell George said in a written statement. "So the latest fruit of this effort – the successful migration of processing all individual tax returns to this system and retirement of the Legacy e-File system – can certainly be viewed as a significant milestone for the IRS."
TIGTA recommended that Peggy Bogadi, commissioner of the IRS Wage and Investment Division, "identify and correspond with all taxpayers who claim qualifying self-employment income but pay no corresponding self-employment tax when there is no indication that the taxpayer has an exemption from paying the tax to obtain a Schedule SE, Self-Employment Income." The IRS "should also initiate a program to correspond with the 11,700 taxpayers TIGTA identified to obtain a Schedule SE and ensure that the proper amount of self-employment tax is assessed."
The IRS agreed with TIGTA's first recommendation and plans to review existing processes and consider reducing the tolerances to address more taxpayers who claim qualifying self-employment tax with no tax paid and no indication of an exemption. The IRS disagreed with TIGTA's recommendation to correspond with the 11,700 taxpayers TIGTA identified, but the agency stated it would consider cost-effective alternatives to provide for optimal coverage at the time tax returns are processed.
"With the full implementation of MeF for individual returns, taxpayers receive improved levels of service when filing their returns, and the taxpaying public benefits from savings realized by a more cost-effective process," Bogadi wrote in response to the report. "Based on the success of the MeF system during this filing season, the Legacy processing system for individual income tax returns will be retired this year. This will achieve a substantial cost-savings goal for the IRS and the tax return preparation software industry by not having to maintain two systems for processing individual returns."