Lessons-learned TIGTA report points to changes in 2017 filing season

The Treasury Inspector General for Tax Administration (TIGTA), in its recently released final report for the 2016 filing season, highlighted the IRS’s response to what was good and what was bad about its performance. It signals what the IRS is doing during the 2017 filing season currently underway to improve things (TIGTA, Ref. No. 2017-40-014). Nevertheless, although the IRS had improved in a number of areas with respect to the 2016 filing season, TIGTA reports that the agency continues to be plagued by numerous challenges.

The overarching objective of TIGTA’s review of the previous filing season is to assess whether the IRS timely and accurately processed individual paper and e-filed tax returns during the 2016 filing season. Although the IRS agreed with TIGTA’s recommendations for addressing its shortcomings, budget cuts and a shrinking workforce will arguably limit the IRS’s success with respect to the immediate 2017 filing season.

Tax returns

TIGTA reported that of the nearly 140 million individual tax returns that the IRS received, over 123 million returns were filed electronically. This showed a continuation of the trend in increased eFiling from year to year. There was a 2.62 percent increase in electronically filed returns and a 4.92 percent decrease as for paper returns filed.

In addition, the IRS is reported to have issued over 101 million refunds in an amount of $276.5 billion. The average return was said to be $2,731. Over 83.6 million refunds were issued via direct deposit, which marked a 2 percent increase over the previous year.

Fraud detection

The TIGTA report suggests that the IRS is seeing continued success in detecting and preventing tax refund fraud. There has been a continued decreasing trend in the number of fraudulent tax refund that the IRS detects and stops, which is attributable to the IRS’s expansion of its processes to prevent fraudulent tax returns from entering the tax processing system.

The IRS continues to implement ways to combat taxpayer fraud. In fall 2016, the IRS entered a partnership with industry professionals and state revenue agencies—the Security Summit—to focus on fighting fraud. In addition, a change in the law to require all wage statements to be submitted to the IRS by January 31, were implemented with the intent to combat fraudulent filings in the 2017 filing season.

Challenges

TIGTA has consistently reported, from year to year, that a challenge that the IRS faced each year in processing tax returns was the implementation of new tax law changes and the extension of expired tax provisions. The 2016 tax season proved no differ, as the Service failed to establish or update key processes, and made numerous processing errors.

With fewer of these changes for the 2016 tax year to be faced during the current 2017 filing season, the IRS is guardedly optimistic for a smoother overall track record.

HCTC. TIGTA found that the IRS did not establish adequate processes to ensure that documentation required to support a claim for the health coverage tax credit (HCTC) was associated and reviewed before processing claims and allowing the credit. As the HCTC claims from processed manually, employee errors led to delays in refund issuance. This is significant, as the IRS received 20,437 e-filed returns claiming HCTCs that totaled approximately $40.8 million. However, as of the time that TIGTA conducted its review, the IRS had completed processing of only 5,481 of the returns claiming HCTCs, which amounts to only 27 percent of all such returns.

TIGTA reported that it notified IRS management throughout the filing season of its concerns regarding the inaccurate processing of HCTC claims, resulting in IRS management making a number of changes during the filing season to alleviate some of the issues. TIGTA plans to issue additional reports on the IRS’s progress in implementing the HCTC during CY 2017.

PATH Act. TIGTA found that the IRS has not taken actions to implement key provisions of the Protecting Americans From Tax Hikes Act of 2015, as the agency had not developed processes to systemically identify and disallow EITC, CTC/ACTC, and AOTC claims without the data needed to determine the issuance date of SSNs and ITINs.

With the start of the new year, the IRS has begun expiring ITINs not used for three consecutive tax years and those issued between CY 1996 and 2000. The IRS will continue these actions on ITINs issued prior to CY 2013. TIGTA will report on the IRS’s expiration of ITINs during fiscal year (FY) 2017.

Credits. TIGTA found that the IRS had not implemented computer programming changes to correct residential energy efficient property credit processing errors identified during the 2015 filing season.

Further exacerbating issues, TIGTA also found that IRS employees continued to incorrectly work residential energy efficient property credit claims. As a result, the IRS incorrectly limited the credit on 731 tax returns, amounting to $1.2 million less in credits for taxpayers than they were entitled to receive. IRS management has stated that the agency has requested revisions to computer programming for the 2017 filing season. However, at the time of the report, the IRS could not provide an implementation date, citing limited resources and competing priorities as challenges affecting completion of the work.

Taxpayer assistance. TIGTA reported that the IRS had answered 14.1 million calls and provided a 69 percent level of service during the 2016 filing season. Although this call-service data represents a significant uptick from the prior year, the IRS continued to decrease the number of taxpayers it assisted at its Taxpayer Assistance Centers (TACs), only assisting 4.5 million taxpayers in FY 2016. The IRS attributed this 20 percent decrease from FY 2015 to budget cuts and its strategy of appointment service at certain TACs, in conjunction with the agency’s push of alternative service options.

On taking office, President Trump ordered a federal government hiring freeze. Traditionally, the IRS hires temporary workers during the filing season to assist with increased call volumes. Although the hiring of temporary workers is excluded from the President’s hiring freeze mandate, it remains to be seen how budget restrictions will affect the level of in-person and phone service available to taxpayers.