A pair of new government reports highlighted some of the challenges the Internal Revenue Service needed to overcome last tax season as it struggles to help taxpayers and identity theft victims despite constrained resources.

IRS building sign

One report, released Friday by the Treasury Inspector General for Tax Administration, found the IRS was challenged by the late passage of legislation by Congress that extended a number of expired tax provisions. To reduce the impact of the late legislation on filing season, the IRS monitored the status of the pending legislation and took steps to implement the extension of those provisions prior to their enactment by Congress. Those efforts allowed the IRS to begin accepting and processing individual tax returns on the scheduled date of Jan. 19, 2016.

TIGTA found the IRS updated its various tax publications, forms and information on the IRS website and accurately processed individual tax returns that involved some of the key extender tax provisions.

However, TIGTA discovered some problems with the processes the IRS used to make sure taxpayers were providing the documentation needed to support their claims for the Health Coverage Tax Credit and reviewing it before processing the claims and allowing the tax credits. TIGTA also detected some employee errors from manual processing of these claims that further delayed some taxpayer refunds. TIGTA reviewed 6,300 electronically filed tax returns and 356 paper tax returns with Health Coverage Tax Credit claims totaling more than $20.8 million, and it identified 450 returns (or 6.8 percent) that had a processing error.

In addition, TIGTA found the IRS has not implemented computer programming changes to correct processing errors for the Residential Energy Efficient Property Credit that it identified during the prior year’s filing season. As a result, the IRS incorrectly limited the Residential Energy Efficient Property Credit on 731 tax returns processed as of April 28, 2016, causing those taxpayers to receive approximately $1.2 million less in credits than they were entitled to receive.

TIGTA also found that computer programming errors are still causing some direct deposits to not be converted into a paper check as required. An analysis of the 86 million deposit requests found 5,605 deposit attempts totaling approximately $9.2 million that did not convert into a paper check.

Declining Taxpayer Assistance

There were also problems with taxpayer service, despite extra money in the IRS budget last year for that purpose. The number of taxpayers whom the IRS helped at its Taxpayer Assistance Centers continued to decrease. The IRS assisted 5.6 million taxpayers in fiscal year 2015, but only 4.5 million taxpayers in fiscal year 2016, a 20 percent decrease. In terms of telephone assistance, as of May 7, 2016, the IRS reported that its telephone assistors answered 14.1 million calls and provided a 69 percent level of service with a 12.2 minute average wait time. That was an improvement over the level of service for the 2015 filing season, which was 37.7 percent.

In response to the report, Debra Holland, commissioner of the IRS’s Wage and Investment Division, acknowledged that the IRS received a supplemental budget appropriation of $290 million. “Of that amount, approximately $178 million was used to make measurable improvements in the toll-free telephone level of service,” she wrote. “Systemic enhancements that increased capacity and resulted in significantly fewer incomplete calls due to system overloads, and the ability to employ additional staff, directly contributed to the improved service level.”

Identity Theft Problems Continue

Earlier this week, the Government Accountability Office also issued a report on IRS taxpayer service. The GAO found the IRS had improved its telephone service during the 2016 filing season compared to 2015, but it still needed to do a better job of helping identity theft victims and preventing the release of fraudulent tax refunds. Its performance during the full fiscal year remained low, according to the GAO. The IRS has improved some aspects of its service for victims of identity theft refund fraud, the GAO acknowledged, but inefficiencies contributed to delays and potentially weak internal controls could lead to the release of fraudulent tax refunds.

While the IRS has reduced its backlog of identity theft cases and formed a team to improve its handling of such cases, the GAO has identified several areas for potential improvement. Specifically, the IRS’s file retrieval and scanning processes contributed to delays and unnecessary requests for documents. In two of the 16 cases examined by the GAO, resolution of the case was delayed for at least a month while an assistor waited for another unit to retrieve and scan documents into the IRS’s systems.

In addition, potential weaknesses in the IRS’s internal control processes could lead to the IRS paying refunds to fraudsters. IRS assistors and managers told the GAO a series of focus groups that some assistors can release the tax refunds even if the indicators on the account show the tax return is under review for identity theft, or two returns have been filed for that taxpayer. Some participants told the GAO that the assistors who answer telephone calls can release these holds because they do not understand the codes on the taxpayer’s account. IRS officials told the GAO these errors are not widespread and provided data to support their position. However, the GAO identified weaknesses in the data provided by the IRS officials, which they later acknowledged.

In response to the report, in January 2017 IRS officials provided another analysis of IRS data that they said showed this type of error does occur but may not be as widespread as staff and managers suggested. The GAO said it would continue to work with the IRS to determine if the additional data addresses its recommendation.

The IRS defended its help for identity theft victims. “The GAO concluded, after speaking with three focus groups of IRS employees and managers, that frozen refunds were being erroneously released to fraudsters by customer service employees, while the accounts were under the control of other employees and/or units,” wrote IRS deputy commissioner for services and enforcement John M. Dalrymple in response to the report. “The focus group participants claimed this was a common occurrence; however, these claims were not supported by any of the case reviews performed during GAO’s testing. While oral testimony can be helpful in identifying potential areas of concern, it should be corroborated by supporting evidence. Without an objective evaluation and corroboration of the testimony, we consider the finding to be speculative. Furthermore, when documentary evidence was provided of the reviews and monitoring activities that refuted the testimony, it was dismissed as insufficient.”

The GAO also found the IRS also does not notify taxpayers when a dependent’s identity appears on a fraudulent tax return. According to IRS officials, the agency does not consider a dependent to be a victim if his or her Social Security number had been used as a dependent on a fraudulent return. However, the GAO pointed out, the IRS has previously provided guidance to taxpayers when a dependent was a victim of identity theft. After one data breach in 2015, the IRS notified taxpayers and provided information on actions that parents could take to protect a minor’s identity when their dependents were also victims. By not notifying tax payers that their dependents’ information may have been used to commit fraud, the IRS is limiting the ability of taxpayers to take action to protect their dependents’ identity, the GAO noted.

“Dependents can also be victims of identity theft fraud; however, in many instances it is not clearly apparent which taxpayer can claim the dependent until a review has been completed,” Dalrymple responded. “Dependents are considered to be victims of tax-related identity theft if the dependent’s SSN has been misused as a primary or secondary taxpayer on a fraudulently filed return.”

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Michael Cohn

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.