The report, from the Treasury Inspector General for Tax Administration, found that the IRS managed to function well this past tax season, despite a two-week delay as a result of the government shutdown last fall.
TIGTA found that as of May 2, 2014, the IRS received more than 135.5 million tax returns, up from the more than 133.8 million tax returns that were filed during the same period in 2013. More than 117 million (86.4 percent) were electronically filed, up 2.9 percent from the more than 113.6 million that were e-filed in 2013.
The report noted that the closure of federal government operations between Oct. 1 and Oct. 16, 2013 reduced the time the IRS had available to implement tax law changes and bring tax return processing systems online. As a result, the IRS delayed the start of the filing season from Jan. 21 to Jan. 31, 2014. Nevertheless, the IRS managed to process a greater number of tax returns and tax refunds, as well as deal with various tax law changes.
“The IRS’s performance during the 2014 filing season reflects its ability to process the majority of tax refunds timely, its continuing efforts to combat tax-related identity theft, and its increased emphasis on using the Internet to assist taxpayers,” said TIGTA Inspector General J. Russell George in a statement. “However, more still needs to be done to ensure that all customer self-help tools accurately provide the assistance taxpayers need.”
TIGTA’s review of the tax provisions that created additional taxes or modified existing tax provisions for the 2014 filing season found that these key provisions were correctly implemented, including the Net Investment Income Tax and the Additional Medicare Tax from the Affordable Care Act. Other changes included the new 39.6 percent individual income tax rate and the increased capital gains and dividend rate of 20 percent after the extension of most of the Bush tax cuts at the start of 2013, along with the return of the Pease limitation and the personal exemption phaseout.
The IRS also correctly implemented the increased AGI threshold for the medical expense deduction. Taxpayers under the age of 65 filing individual returns with claims for the medical expense deduction were subject to the new 10 percent rate while those taxpayers age 65 or older filing returns were subject to the old 7.5 percent rule.
The IRS also dealt with federal recognition of the same-sex marriage after the Supreme Court’s 2013 landmark decision in the U.S. v. Windsor case. The IRS accurately implemented computer programming that will allow married couples of the same sex to file as married filing jointly. TIGTA’s analysis of tax returns processed through May 8, 2014, found that married couples of the same sex were successfully able to file as married filing jointly.
However, TIGTA did identify a problem in which some taxpayers’ nonrefundable credit claims were being improperly reduced due to employee error.
Identity Theft
The IRS reported that it identified and confirmed 236,313 fraudulent tax returns involving identity theft as of April 30, 2014. Overall, the IRS identified 268,233 tax returns with more than $1.48 billion claimed in fraudulent refunds and prevented the issuance of more than $1.32 billion (88.9 percent) of the fraudulent refunds it identified. The IRS also identified 63,087 potentially fraudulent tax returns filed with prisoners’ Social Security Numbers for screening.
TIGTA also found that some taxpayers and return preparers continue to misuse the split refund option to direct a portion of a tax refund to a preparer for payment of services. In addition, TIGTA found that some paid tax return preparers continue to be noncompliant with the Earned Income Tax Credit due diligence requirements, but the number has decreased substantially compared to previous filing seasons.
The report found that customer self-service options have continued to expand for taxpayers. The IRS continues to offer more self-assistance options that taxpayers can access 24 hours a day, seven days a week. However, the IRS did not always ensure that the self-help tools were updated with the most current tax information before the start of the filing season.
On the negative side, the availability of toll-free telephone assistance declined this year. The IRS reported answering more than 41.5 million phone calls from taxpayers on its toll-free assistance lines through May 3, a decline from the nearly 55.4 million answered in 2013. Assistance at the IRS’s Taxpayer Assistance Centers was also on the decline. The IRS estimates that the number of taxpayers it will assist at its TACs will decrease this fiscal year. The IRS assisted more than 6.5 million taxpayers in fiscal year 2013 compared to an estimated 5.6 million taxpayers in FY 2014, a 14 percent decline.
TIGTA attributed the elimination and reduction of services provided at the TACs to budget cuts and an increased emphasis of pushing taxpayers to other service channels, such as the IRS’s website.
TIGTA recommended that the IRS review the 308,986 tax returns for which it appears the split refund option was used to inappropriately direct a portion of the tax refund to the tax return preparer. The IRS should also implement computer programming to systemically ensure that taxpayers’ claims for nonrefundable credits are allowed when applicable, TIGTA suggested, and the agency should ensure that Earned Income Tax Credit due diligence penalties are assessed on all paid tax return preparers who do not comply with the due diligence requirements. In addition, TIGTA recommended that the IRS ensure that YouTube videos are updated with the most current tax information.
EITC Due Diligence Penalties
The IRS agreed or partially agreed with three of TIGTA’s four recommendations. The IRS disagreed with TIGTA’s recommendation to pursue due diligence penalties on those tax preparers who provide an incomplete Form 8867, Paid Preparer’s Earned Income Credit Checklist.
“We believe the substantial decrease in the number of paid preparers who failed to attach the required Form 8867, Paid Preparer’s Earned Income Credit Checklist, to client returns was a result of our extensive preparer outreach and collaboration with software developers,” wrote Debra Holland, commissioner of the IRS’s Wage and Investment Division. “We would like to highlight that the number of preparers filing returns without the Form 8867 attached are lower than the numbers shown in the report for tax years 2012 and 2013.”
She noted that for tax year 2012, there were 47,070 return preparers who did not attach Form 8867, compared to TIGTA’s reported number of 122,133, but Holland pointed out that TIGTA’s figure included returns with incomplete forms as well. For tax year 2013, there were 27,745 tax preparers who did not attach the form, compared to the 29,623 reported by TIGTA. The potential preparer penalties associated with the returns for missing Forms 8867 would also differ, she added: $240 million for tax year 2011, $67 million for tax year 2012 and $33 million for tax year 2013, compared to TIGTA’s estimates of $267 million, $354 million and $38 million for those same years.
Tax Preparer Fraud
Holland also disagreed with TIGTA’s estimates of how many tax preparers were improperly diverting their clients’ tax refunds to their own bank accounts. In its report, TIGTA said that tax preparers were continuing to misuse the split refund option after analyzing Form 8888, Allocation of Refund (Including Savings Bond Purchases). Form 8888 instructions state that the form is to be used only for the deposit of a tax refund to an account in the taxpayer’s name, TIGTA noted. But taxpayers are not supposed to use Form 8888 to direct a portion of a tax refund to the tax preparer for payment of services rendered or any other purpose.
As of May 1, 2014, taxpayers filed 564,416 tax returns with a Form 8888 requesting direct deposits totaling more than $260 million into 36,337 bank accounts. Each of the 36,337 bank accounts that TIGTA identified had three or more Form 8888 deposits from different taxpayers into these accounts during this filing season. For example, 16 accounts had more than 1,000 deposits made to them. In addition, TIGTA determined that 308,986 (55 percent) of the 564,416 tax returns were prepared by paid tax return preparers, and 9,626 of the 36,337 bank accounts listed on the Forms 8888 were associated with 7,736 paid tax return preparers.
During the 2013 filing season, TIGTA had earlier reported that it appeared paid preparers were misusing the split refund option. TIGTA provided the IRS with a list of 452 paid preparers associated with 248,027 direct deposits. The IRS reviewed the 452 paid preparers and as of Feb. 13, 2014, determined that 28 of them already had open criminal investigations or had been referred for examination. However, the IRS chose not to pursue the remaining 424 preparers because it determined its resources could be better used elsewhere.
IRS management told TIGTA that the IRS is developing a systemic restriction to limit the number of deposits to three that can be deposited in a single bank account. After three deposits to a single account, including situations in which refunds are split, the entire refund amount will be sent by paper check to the taxpayer at the address of record. TIGTA said the change is expected to reduce the number of preparers who inappropriately divert the client refund or the preparer fee into an account controlled by the preparer. The change is also expected to reduce identity theft and fraud. This systemic restriction was not in place for the 2014 filing season, TIGTA pointed out, but the IRS expects to have the systemic restriction process in place for the 2015 filing season.