Technology glitches with new software at the Internal Revenue Service caused it to initially reject nearly a quarter of the 127,105 tax returns it processed during its first three weeks of operation in February.

A new report by the Treasury Inspector General for Tax Administration also found that the IRS has not addressed many of the security vulnerabilities identified last December in the software. Information provided by the IRS in December showed that 10 of the 13 security vulnerabilities were resolved. However, a security test and evaluation in January found that only two of the 13 vulnerabilities had been resolved.

The IRS’s Modernized e-File system is replacing the IRS's current tax-return filing technology with modern Internet-based electronic filing software, at an estimated cost of $574 million. The MeF is supposed to streamline tax return filing processes and reduce the costs associated with paper tax returns. Since its initial release in 2004, the MeF system has processed U.S. corporate, exempt-organization and partnership returns.

MeF Release 6.1, which was estimated to cost $78 million, was deployed in February 2010, and includes the Form 1040 and 21 other forms and schedules. Future releases will include the remaining 120 IRS tax forms.

However, the TIGTA report found that the MeF project development team did not adequately manage the testing of MeF Release 6.1 prior to deploying the system. While the IRS’s own test report showed that all the requirements were tested and passed, TIGTA auditors found documents showing that many of the requirements were not tested, many more failed the tests, and no indication was provided to show the defects were corrected.

Subsequently, the MeF system rejected 23 percent of the 127,105 individual tax returns electronically filed during the system’s initial three weeks of operation. The system was expected to be able to process 10.9 million forms, based on 2009 volumes, but it was able to handle only 127,105.

“The purpose of the Modernized e-File system is to enable more individual taxpayers to take advantage of the benefits of electronic filing, while reducing the costs associated with paper tax returns,” said TIGTA Inspector General J. Russell George in a statement. “Since two out of three taxpayers now file their returns electronically, it is critical that the IRS ensure that the Modernized e-File system is delivering expected results.”

TIGTA recommended that the IRS ensure that project releases are deployed only after verifying that all system requirements have been tested; consider lessons learned from prior deployment experiences in planning future releases; and ensure that the MeF team enter and track all MeF system security weaknesses in IRS control systems.

The IRS agreed with most of TIGTA's recommendations and stated that corrective actions have been taken or started.

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