US E-File Under Scrutiny

by Leroy Baker, Tax-News.com, New York

21 July 2010

The US Internal Revenue Service's (IRS) Modernized E-file (MeF) system did not process electronically filed individual tax returns as effectively as it should have during the 2010 filing season, according to a report released on July 19 by the Treasury Department watchdog.

According to the Treasury Inspector General for Tax Administration's (TIGTA) report, the MeF project development team did not adequately manage the MeF 'Release 6.1' testing prior to deployment. While the IRS's test report showed all requirements were tested and passed, TIGTA auditors found supporting test documents showed 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% of the 127,105 individual tax returns that were e-filed during the system's initial three weeks of operation.

TIGTA also found that the IRS has not addressed many of the security vulnerabilities with the MeF system identified in a December 2009 TIGTA report.

"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 J. Russell George, the Treasury Inspector General for Tax Administration. "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."

The estimated USD574m MeF system is replacing the IRS's current tax-return filing technology with a modernized, internet-based electronic filing platform with the intention of streamlining tax return filing processes and reducing the costs associated with paper tax returns. Since its initial release in 2004, the MeF system has processed US corporate, exempt-organization and partnership returns. The MeF 'Release 6.1,' which was estimated to cost USD78m, was deployed in February 2010, and includes the US Individual Income Tax Return (Form 1040) and 21 forms and schedules. Future releases will include the remaining 120 IRS tax forms.

TIGTA has recommended that the IRS ensure that project releases are deployed only after verifying that all system requirements have been tested, and consider lessons learned from prior deployment experiences in planning future releases.

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

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