The Internal Revenue Service delayed tax refunds early this filing season for 7.8 million tax returns, according to a report by the Treasury Inspector General for Tax Administration, which also described steep cutbacks in customer service at the IRS.

The report, which provided interim results of the 2012 filing season, noted that taxpayers who e-filed their tax returns early in the 2012 filing season experienced delays in receiving their tax refunds due to fraud detection efforts and problems with the IRS’s Modernized e-File system. The number of tax refunds delayed had most recently been estimated at 6 million (see IRS Commissioner Shulman Address Tax Delays).

“The IRS indicated that it had experienced problems with its filters established to identify fraud and with the program used by the MeF system to create output files using the accepted e-file tax return data format that other IRS systems need to continue with the processing of the tax return,” said the report. “Filters established to identify fraud were initially identifying taxpayers as having indicators of possible fraud, which resulted in the tax return being held for additional screening. However, the IRS identified that these filters were incorrectly identifying some taxpayers. The IRS indicated that once they made necessary adjustments to these filters, the problem was corrected.”

The report noted that the programming problems in the MeF system resulted in tax return processing delays for 7.8 million tax returns early in the filing season.

“The IRS explained that the MeF system programming problems resulted in the creation of incomplete and/or duplicate output files using the accepted e-file data,” said the report. “This then resulted in delays in sending the output files to downstream processing systems. The programming problems delayed the processing of approximately 7.8 million tax returns.”

The majority of the delayed tax returns were processed through the MeF system from Feb. 2 through 11, 2012. The IRS indicated that all of these delayed accepted tax returns were sent to downstream systems for processing by Feb. 18, 2012.

The report acknowledged that there were also problems with the “Where’s My Refund” tool on IRS.gov (see IRS Warns of Tax Refund Delays).

“In addition, the MeF system programming problems have resulted in accepted tax return information not always being timely available for use in its customer service operations, including ‘Where’s My Refund,’” said the report. “The IRS has informed us that these problems were addressed and processes were established to account for all tax returns accepted via the MeF system during the time frame the processing problem existed.  The IRS noted that it is developing an end-to-end balancing process to track MeF system tax returns from acceptance to the posting of the tax return on the Master File.”

The IRS received more than 63 million tax returns as of March 3, 2012, according to the report.  Of those, 57 million, or 90 percent, were electronically filed, while nearly 6.3 million, or 10 percent, were filed on paper, a decrease of 5.8 percent from this time last year.  In addition, nearly 52.4 million refunds totaling approximately $157.6 billion were issued.

Tax Fraud Problems Persist
The IRS has improved its processing of Homebuyer Credit installment repayments, according to the report, although some were still not processed accurately. 

TIGTA also found that some paid tax return preparers are not complying with Earned Income Tax Credit due diligence requirements. As of March 3, 2012, the IRS has identified 441,462 tax returns with $2.7 billion claimed in fraudulent refunds and prevented the issuance of $2.6 billion (97 percent) of those fraudulent refunds. 

The IRS also selected 134,509 tax returns filed by prisoners for fraud screening, representing a 112 percent increase compared to last filing season.

"The filing season is critical for the IRS since it is during this time that most individuals file their income tax returns and contact the IRS if they have questions about specific tax laws or filing procedures," said TIGTA Inspector General J. Russell George in a statement. "Our report found that the IRS is catching and preventing more fraudulent refunds and screening more prisoner tax returns; however, programming problems associated with Modernized e-File delayed some refunds, which may have contributed to a doubling of visits to the 'Where's My Refund' feature at IRS.gov over the previous year."

Decreases in Customer Service
As a result of budget constraints, the IRS expects to be able to serve fewer taxpayers at its walk-in offices, called Taxpayer Assistance Centers, and answer fewer taxpayer telephone calls, according to the report.

“The IRS anticipates it will have increased wait times, earlier cutoffs of assistance to avoid end-of-day overtime, and frequent unexpected closures of small Taxpayer Assistance Centers due to unscheduled employee absences,” said the report. “Tax return preparation will only be provided on a limited number of days per week and only on a first come, first served basis.”

The IRS also did not provide extended hours for the centers during the 2012 filing season.  It had planned to extend hours of operation in approximately 47 Taxpayer Assistance Centers—before 8:30 a.m. and after 4:30 p.m. during the week and on some Saturdays.  However, with budget cuts and continuing staffing shortages, Taxpayer Assistance Center hours were not extended. 

The IRS is also planning on providing only a 61 percent level of service on its toll-free lines.  As of March 3, 2012, IRS assistors have answered 7.4 million calls and have achieved a 66 percent level of service and a 975 second (16.3 minutes) average speed of answer.

Finally, during visits to volunteer program sites as of March 3, 2012, TIGTA has had nine tax returns prepared with a 44 percent accuracy rate. It said that number was lower than the 60 percent accuracy rate TIGTA had reported during the same time period for the 2011 filing season.