TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
Accuracy of Volunteer Tax Returns Is Improving, but Procedures Are Often Not Followed
August 29, 2007
Reference Number: 2007-40-137
This
report has cleared the Treasury Inspector General for Tax Administration
disclosure review process and information determined to be restricted from
public release has been redacted from this document.
Phone Number |
202-927-7037
Email Address | Bonnie.Heald@tigta.treas.gov
Web Site |
http://www.tigta.gov
August 29, 2007
MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Accuracy of Volunteer Tax Returns Is Improving, but Procedures Are Often Not Followed (Audit # 200740019)
This report presents the results of our review to determine
whether taxpayers receive quality service, including the accurate preparation
of their income tax returns, when visiting Internal Revenue Service (IRS) Volunteer
Program[1]
sites. This audit is a followup to prior
Treasury Inspector General for Tax Administration reviews.[2]
Impact on the Taxpayer
The Volunteer Program plays an increasingly important role in achieving the IRS’ goal of improving taxpayer service and facilitating participation in the tax system. Although accuracy rates have been increasing, volunteers continue to not follow procedures that assist in the accurate preparation of tax returns. To ensure the continued success of the Volunteer Program, the IRS must focus its oversight on holding volunteers accountable. Incorrectly prepared tax returns increase the risk of taxpayers receiving erroneous payments or not receiving credits to which they are entitled.
Synopsis
Our reviews over the last four filing seasons[3] have determined accuracy rates for tax returns prepared at Volunteer Program sites continue to increase.[4] In addition, improvements have been made to the oversight of the Volunteer Program. However, to ensure continued success in the Volunteer Program, the IRS must focus its oversight on holding accountable those volunteers who do not follow required procedures.
Accuracy
rates increased from 0 percent in the 2004 Filing Season to 56 percent in the
2007 Filing Season.
Of the 39 tax returns prepared for our auditors by Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly sites for the 2007 Filing Season, 17 (44 percent) were prepared incorrectly. If 10 (59 percent) of these incorrectly prepared tax returns had been filed, the taxpayers would not have received $2,803 in tax refunds to which they were entitled. Alternatively, if the remaining 7 (41 percent) of the incorrectly prepared tax returns had been filed, the IRS would have refunded $15,475 incorrectly.
Since the 2004 Filing Season, we have reported that volunteers are not following required procedures designed to assist in the accurate preparation of tax returns. During the 2007 Filing Season, volunteers again did not consistently use intake sheets, including the IRS Intake and Interview Sheet (Form 13614). In addition, volunteers did not perform the required interview that assists in the preparation of page two of the intake sheet. Further, Volunteer Program sites either did not always have a quality review process or the quality review process did not always include the required elements (e.g., use of a checklist, use of the intake sheet).
For each of the 17 tax returns incorrectly prepared, 1 or more requirements were not followed. For example:
Although steps are being taken to protect taxpayer
information, encryption software was not included on all computers containing
prior year electronically filed (e‑filed)
tax information. Protecting taxpayer
information includes using passwords on computers (to prevent unauthorized
access to the computers), using tax preparation software that encrypts[5]
current year e-filed tax information,
and notifying taxpayers whose information will be retained longer than the
current tax year. Two (33 percent) of the 6 sites we visited that retained
prior year e-filed tax information did
not have encryption software loaded on the 2 computers to protect the prior
year e-filed tax information. These two computers were provided by the
partner organizations, not the IRS.
Partner organizations and their volunteers play a significant role in the IRS’ tax return preparation program. The IRS continues to move away from providing tax preparation assistance at its local walk-in offices (Taxpayer Assistance Centers) and is relying more on the Volunteer Program to provide the service. This presents significant challenges to the IRS. The strengths of the Volunteer Program lie with the partner organizations and their volunteers. The IRS has shown a commitment to holding them accountable for following the direction, guidelines, and required processes that have been put in place. This commitment to holding volunteers accountable should be at the forefront to ensure Program success.
Recommendations
We recommended the Commissioner, Wage and Investment Division, (1) require all Volunteer Program sites to use the IRS-developed Form 13614; (2) provide training to site coordinators, focusing on the specific responsibilities for ensuring volunteer compliance with established requirements; (3) strengthen the policy on actions to be taken when a site is not in compliance with requirements; and (4) ensure taxpayers receive required notification if prior year tax information is maintained and encryption software is loaded on all computers on which prior year e-filed tax information is retained.
Response
Management agreed with Recommendations 2 and 3 but disagreed with Recommendations 1 and 4. For Fiscal Year 2008, the IRS will develop a consistent plan and process for volunteer site coordinator training and will review, revise, and strengthen policies to address the consequences for noncompliant sites.
Management did not agree with Recommendation 1 requiring use of the IRS-developed Form 13614. Management noted they will continue to require the use of an intake and interview process and the Quality Assurance Staff will ensure partner organization compliance with partner organization-developed intake sheets. For Recommendation 4, management stated the electronic tax preparation software provided in Fiscal Year 2008 will encrypt all current and prior year e-filed data; however, requirements for taxpayer notification are sufficiently addressed in Privacy and Confidentiality-A Public Trust (Publication 4299). Management’s complete response to the draft report is included as Appendix IX.
Office of Audit Comment
IRS management disagreed with Recommendation 1 requiring all Volunteer Program sites to use the IRS-developed Form 13614 with the option of the site including additional locally developed information. We have repeatedly reported that sites are not including all required questions on their intake sheets. The IRS allows a site to create its own intake sheet, which must include those questions it requires. However, required questions continue to not be included. In addition, in response to our last report, the IRS had developed a process to ensure intake sheets contained all required questions. This process failed to ensure partner organization compliance; we determined 38 percent of the intake sheets reviewed did not include required questions.
Concerning Recommendation 4, while management stated they disagreed with the recommendation, their planned actions together with Publication 4299 address the intent of the recommendation. We did not take exception to the adequacy of Publication 4299. We reported concerns that the Publication is not always being provided to taxpayers. However, management responded that they would continue to stress that partner organizations obtain permission from taxpayers for any data retained beyond December 31 of each year.
Copies of this report are also being sent to the IRS managers affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Michael E. McKenney, Assistant Inspector General for Audit (Wage and Investment Income Programs), at (202) 622-5916.
Accuracy
Rates Continue to Increase; However, Quality Site Requirements Are Not Being
Followed
Steps Are
Taken to Protect Taxpayer Information at Volunteer Program Sites
Appendices
Appendix
I – Detailed Objectives, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – General Characteristics of Tax Year 2005 Tax Returns Prepared by the
Volunteer Program
Appendix V – List
of Cities and States Visited to Have Tax Returns Prepared
Appendix VI – Results
of Tax Returns Incorrectly Prepared at Volunteer Program Sites
Appendix
VII – Accuracy of Eligibility Determinations
Appendix IX
– Management’s Response to the Draft Report
Abbreviations
|
AARP |
American Association of Retired Persons |
|
e-file; e-filed |
Electronic Filing; Electronically Filed |
|
IRS |
Internal Revenue Service |
|
MQSR |
Minimum Quality Site Requirement |
|
SPEC |
Stakeholder Partnerships,
Education, and Communication |
|
VITA |
Volunteer Income Tax Assistance |
|
VRPP-QIP |
Volunteer Return Preparation Program-Quality
Improvement Process |
The Internal Revenue Service (IRS) Volunteer Income Tax Assistance (VITA) Program originated in 1969 due to enactment of the Tax Reform Act of 1969[6] and an increased emphasis on taxpayer education programs. Emphasis has focused continually on expanding the VITA Program through increased recruitment of social service, nonprofit, corporate, financial, educational, and government organizations; involvement of the military on a national level; and expansion of assistance provided to the limited-English-proficient community.
Accurately
prepared tax returns establish credibility in and the integrity of the
Volunteer Program.
The Tax Counseling for the Elderly Program provides free tax help to people age 60 and older. The Revenue Act of 1978[7] authorized the IRS to enter into agreements with private or nongovernmental, public, nonprofit agencies and organizations to provide training and technical assistance to volunteers who provide free tax counseling and assistance to elderly individuals in the preparation of their Federal income tax returns. The law authorizes an appropriation of special funds, in the form of grants, to provide tax assistance to persons age 60 or older. The IRS receives the funds as a line item in the budget appropriation. The total funds are distributed to the sponsors[8] for their expenses.
The IRS Volunteer Program includes VITA sites operated in partnership with the military and with various community-based organizations,[9] as well as sites operated by the Tax Counseling for the Elderly Program and the American Association of Retired Persons (AARP). This audit included an assessment of tax returns prepared at community-based VITA sites and Tax Counseling for the Elderly sites sponsored by the AARP. During the 2006 Filing Season,[10] these sites were involved in the preparation of 1,735,231[11] tax returns. Figure 1 provides a breakdown of the Volunteer Program and the volumes of tax returns prepared during the 2006 Filing Season.
Figure
1: Tax Year 2005 Tax Returns Prepared
by the Volunteer Program
|
Volunteer Program |
Volume of Tax Returns Prepared
|
Percentage |
|
VITA |
645,117 |
30.88% |
|
Military VITA |
295,583 |
14.15% |
|
Colocated VITA* |
31,534 |
1.51% |
|
Tax Counseling for the Elderly (Non-AARP) |
39,287 |
1.88% |
|
Tax Counseling for the Elderly (AARP) |
1,058,580 |
50.66% |
|
Other |
19,299 |
0.92% |
|
Totals: |
2,089,400 |
100.00% |
Source: Treasury
Inspector General for Tax Administration analysis of data retrieved from the IRS
management information system containing Tax Year 2005 filing information.
* = Community-based
VITA sites that are located in buildings occupied by one or more IRS offices.
The Volunteer
Program plays an increasingly important role in achieving the IRS’ goal of
improving taxpayer service and facilitating participation in the tax
system. It provides no-cost Federal tax
return preparation and electronic filing (e‑filing) directed toward underserved segments
of individual taxpayers, including low- to moderate-income, elderly, disabled
and limited‑English‑proficient taxpayers. These taxpayers frequently are involved in
complex family situations that make it difficult to correctly understand and
apply the tax law.
The IRS Stakeholder Partnerships, Education, and Communication (SPEC) function is responsible for providing oversight of the Volunteer Program, which includes determining policies and procedures, developing products and training material, and monitoring and managing Volunteer Program activity. The SPEC function’s business objectives include increasing access to tax preparation services for low‑income taxpayers, increasing e-filing, and enhancing tax return accuracy.
Tax scenarios
used by auditors reflected characteristics of taxpayers who seek assistance
from the Volunteer Program
To ensure the 2 tax scenarios
used in this review reflected the characteristics of taxpayers who seek
assistance from the Volunteer Program, we developed the scenarios based on tax
filing characteristics of the 1,735,231 individuals that used community-based VITA
sites and AARP sites to have their Tax Year 2005 tax returns
prepared. These taxpayers had average
earnings of $17,872 (community-based VITA sites) and $23,469 (AARP-sponsored
sites). Appendix IV provides additional
key characteristics of these individuals.
Further, we designed
the scenarios to include tax law topics that assessed the volunteers’ use of
the tools the SPEC function had created to ensure accurate tax returns are
prepared. The two scenarios included tax
topics related to five of the six credits taxpayers most often claimed on the
Tax Year 2005 returns prepared by community-based VITA and AARP sites. The dollar amount of these 5 credits
represented more than 49 percent (approximately $779 million) of the more than 1.5 billion in
refunds shown on the tax returns for these taxpayers. Taxpayers whose tax returns include 1 or more
of the 5 credits in our scenarios accounted for 779,122 (45 percent) of the 1,735,231
tax returns prepared, based on our analysis of all Tax Year 2005 volunteer-prepared
tax returns. The two scenarios developed
for this review were:
Scenario 1 – The taxpayer was divorced and lived with his or her 8-year-old child. The taxpayer had the same job working as a clerk throughout 2006. Wages reported on the Wage and Tax Statement (Form W-2) totaled $26,542. The taxpayer was paid biweekly and contributed to a 401(k) plan. The taxpayer received a statement of Interest Income (Form 1099-INT) totaling $56.14. The taxpayer received $325 a month for child support. The taxpayer had dependent care expenses totaling $1,112.
An accurately prepared tax return would result in the taxpayer receiving a refund of $2,327. The tax return preparer would have correctly determined the taxpayer’s filing status was Head of Household and the dependency exemption could be claimed. Additionally, the taxpayer qualified for an Earned Income Tax Credit of $867, a Child Tax Credit of $910, and an Additional Child Tax Credit of $90. The taxpayer would also qualify for a Child and Dependent Care Credit of $322, a Retirement Savings Contribution Credit of $94, and a Telephone Excise Tax Refund of $40.
Scenario 2 – The taxpayer was single, had never been married, and lived with his or her sister. The taxpayer had 2 children, ages 6 and 8, that lived with the taxpayer in the home of the taxpayer’s sister during school vacations, including the months of June, July, and August (summer). The children lived with the other parent during the school year. The taxpayer worked a part-time evening job as a clerk and was paid $14,364. The taxpayer’s sister earned $48,000 in 2006. The taxpayer attended college part time, and the cost was paid for by the taxpayer’s sister.
An accurately
prepared tax return would result in the taxpayer receiving a refund of $31. The preparer would have correctly determined
the taxpayer’s filing status was Single.
Additionally, because the taxpayer did not provide more than one-half of
the support for the children, they could not be claimed as dependents by the
taxpayer for Child Tax Credit purposes.
The Earned Income Tax Credit would not be available to the taxpayer because
earned income exceeded the maximum allowable amount and because the children
did not live with the taxpayer for more than one-half of the year. The taxpayer would qualify for a Telephone
Excise Tax Refund of $30.
This review was performed at the IRS Customer Assistance, Relationships,
and Education function in the Wage and Investment Division Headquarters in
Accuracy Rates Continue to Increase; However, Quality Site Requirements Are Not Being Followed
Accuracy rates for tax returns prepared at Volunteer Program sites have continued to increase over the last four filing seasons.[13]