By Anne Rosivach
The Treasury Inspector General for Tax Administration's (TIGTA) recent Semiannual Report to Congress summarizing the audits, investigations, and inspections of the Internal Revenue Service (IRS) for the reporting period ending March 31, found that the Agency has failed to make significant progress solving long standing problems and faces huge challenges in implementing new law. The report also describes an agency that has not developed sufficient analysis capability.
TIGTA provides independent oversight of the Department of the Treasury matters involving IRS activities, the IRS Oversight Board, and the IRS Office of Chief Counsel. TIGTA's performance and financial audits of the IRS's programs and operations primarily address mandated reviews and high-risk challenges facing the IRS.
The report noted that the IRS has had difficulty implementing new laws, citing problems with the implementation of the First-Time Homebuyer Credit as an example, and cautioned that",Implementation of the Patient Protection and Affordable Care Act presents an even greater challenge as it represents a totally new area of activity and enforcement for an agency whose work has historically been devoted almost entirely to tax collection."
The report highlighted the Tax Gap and improper payments of Earned Income Tax Credits (EITC) as two areas where the IRS has not made progress or failed to act on previous TIGTA recommendations.
The IRS must increase its efforts to protect taxpayer data, the report states, citing phishing scandals and problems with the IRS Secure Email program and unauthorized use of electronic filing identification numbers. The TIGTA report also recommended that the Agency make greater efforts to use and analyze data.
Compliance initiatives -- The Tax Gap
The TIGTA report emphasized the IRS's responsibility to reduce the tax gap, particularly during the current period of economic challenges for the government. The Tax Gap is the $345 billion difference between what taxpayers owe and what they pay on a timely basis. Underreporting of taxes constitutes over 70 percent of the Tax Gap.
To reduce the Tax Gap, TIGTA recommended that the IRS do a better job of obtaining complete and timely compliance data and develop methods to correctly interpret the data to determine what actions are most effective in addressing taxpayer noncompliance.
The report recommended that the IRS should
· No longer allow its contractors to receive payments while owing delinquent taxes;
· Increase its actions to identify, select, and examine individual tax returns with rental real estate activity;
· Reduce the number of inaccurate information returns submitted. If the IRS will take the necessary actions, the end results will improve compliance and reduce the Tax Gap.
The American Recovery and Reinvestment Act of 2009
TIGTA monitored and continues to monitor the IRS' implementation of the American Recovery and Reinvestment Act of 2009.
The report concluded that
- Overall, the Making Work Pay Credit was implemented as intended by Congress, but resulted in many taxpayers owing taxes with their returns.
- Individuals received millions of dollars in erroneous Plug-In Electric and Alternative Motor Vehicle Credits.
- Administration of the First-Time Homebuyer Credit indicates a need for improved controls over refundable Credits.
The report noted that correctly implementing late tax law changes by Congress remains a significant challenge.
Providing quality taxpayer service operations
TIGTA investigations found that the Taxpayer Assistance Centers (TACs) are not located to effectively serve the maximum number of taxpayers. The IRS acknowledges that the locations of most TACs have not changed significantly since FY 2000, and that it has not kept pace with shifts in population and demographics.
TIGTA also found that research is needed to identify the needs and preferences of the 57 million small business taxpayers. The IRS is conducting research on individual taxpayers to incorporate taxpayer needs in making service improvement decisions, but it has only begun to conduct comparable research to determine the needs of small-business taxpayers.
Erroneous and improper payments and credits
The TIGTA report referred to a separate report by the Government Accountability Office which stated that the Earned Income Tax Credit (EITC) Program had the second highest dollar amount of improper payments of all Federal programs. The Inspector General's report stated that the IRS has made little improvement in reducing EITC improper payments since 2002, the year it was first required to report estimates of these payments to Congress.
Through 2009, the IRS continued to report that 23 to 28 percent of EITC payments are issued improperly each year. In FY 2009, this equated to $11 to $13 billion in EITC improper payments.
The IRS has not met the mandated requirements of the Improper Payments Elimination and Recovery Act of 2010, which placed additional requirements on Federal agencies to reduce improper payments or the President's Executive Order 13520, the report states. Executive Order 13520 requires that the IRS intensify its efforts and sets targets to reduce EITC improper payments.
TIGTA has provided the IRS with specific actions that could be taken to reduce improper payments. While the IRS has implemented some of TIGTA's recommendations, it has not taken actions to address key recommendations aimed at preventing or reducing EITC improper payments.
The TIGTA report recommended that the IRS:
- Establish quantifiable reduction targets and strategies to meet those targets as required by Executive Order 13520; and
- Use the National Research Program sample to estimate instances in which the IRS incorrectly pays less of the EITC than the taxpayer claims (underpayments).
The IRS responded that its focus on tax return preparers would serve to improve EITC tax returns and further reduce EITC errors, although as of March 31, it did not have any data to prove this.
Significant problems still exist with the IRS's efforts to identify prisoner tax refund fraud in part due to interagency requirements. TIGTA's review identified that, as of October 2010, the IRS had not completed required agreements to allow it to disclose prisoner tax return information to prison officials. As a result, no information had been disclosed to either the Federal Bureau of Prisons or State Departments of Corrections.
Taxpayer data protection
Responding to and preventing threats to the tax system posed by the cyber-environment has become an increasingly important part of TIGTA's mission. The increased reliance on computers has also created an elevated risk of phishing scams investigated by the TIGTA's Office of Investigations. Since 2008, law enforcement officials have identified more than 12,416 IRS phishing sites.
One area where taxpayer data is clearly at risk that was identified in TIGTA inspections is through the Income Verification Express Services (IVES) Program used by lenders to verify income for loans. "Personally Identifiable Information is at risk of theft or misuse when taxpayers submit IVES Program requests for tax return information through third parties because controls are insufficient to ensure taxpayer information that the IRS provides to IVES Program participants is protected."
Progress in modernization of the IRS and continued efforts to protect personnel
The Inspector General reported that the IRS Modernization Program has continued to help improve operations and is refocusing its efforts to improve business practices with new information technology solutions.
Threats to IRS personnel increased during the reporting period. "We will continue to place a priority on our oversight of IRS employee safety and physical security", the report stated.
The TIGTA report contains statistical data obtained through its audits of IRS procedures and performance and investigation of complaints against IRS personnel. It also makes recommendations to the IRS regarding human capital.