US Government Watchdog Reviews 2008 Tax Filing Season

by Glen Shapiro, LawAndTax-News.com, New York

14 January 2009

The United States Government Accountability Office (GAO) has suggested that Congress give the Internal Revenue Service additional powers to automatically correct errors on tax returns in an attempt to drive up rates of compliance and boost tax collection.

The recommendation was made in a report into the 2008 filing season, when the IRS was tasked with sending out 116 million stimulus payments, in addition to its usual job of processing tax returns, which last year totalled 150 million.

While the agency has generally come in for praise for the way it administered the distribution of stimulus payments on top of its usual workload, the GAO report noted that a significant number of IRS employees had to be transferred away from compliance activities to more mundane administrative functions to ensure that tax returns and stimulus payments were dealt with on a timely basis. As a result, it is expected that the costs and foregone revenue associated with issuing the economic stimulus package payments will reach about USD960m, of which USD655m is revenue foregone due to the shift of collections staff to telephone service. However, if the service had more authority to use 'math error checks' to weed out mistakes on tax returns, this figure could have been considerably reduced, the GAO report concluded.

"Given the potential for improving compliance now and in the future, Congress may wish to provide IRS with the authority to use math error checks to identify and correct returns with: ineligible IRA "catch-up" contributions; and contributions to traditional IRAs from taxpayers over age 70-1/2," the report recommended.

Another area where the IRS does not use its current legal authority to automatically correct errors when processing tax returns involves eligibility for the child and dependent care credit by taxpayers who are "Married Filing Separately." Taxpayers in this filing status are not eligible for the credit, but the IRS allows the credit to be claimed, issues refunds, and then audits taxpayers to try to recover the money. The IRS also does not use its existing legislative authority to verify earned income tax credit claims by non-custodial parents, and in 2006, USD91m of claims were unverified.

Senator Chuck Grassley, the ranking Republican on the Senate Finance Committee, agreed with the conclusions of the report and argued that the IRS should also have made use of private contractors to collect back taxes.

“The IRS did a lot things right in the filing season, even with the added challenge of getting out stimulus payments. However, there are some lessons to be learned and applied to the next filing season. The agency didn’t collect USD655m because it pulled personnel from collections to staff phones to answer stimulus calls," Grassley noted.

"Because of the quick timing of stimulus, the IRS couldn’t hire and train phone people quickly enough. However, the IRS could have made more use of the private contractors that exist just to make calls to taxpayers who owe money. This would have reduced the cost of using IRS collections staff to take stimulus calls," he added

"Taxpayers should pay exactly what they owe, not a penny more or penny less. The IRS needs to help taxpayers get it right. If the IRS needs legislation to use additional Math Error Authority as recommended by the GAO or to improve its guidance to taxpayers and tax return accuracy, the agency should make the case for that. I’ll listen and if legislation is needed, will work to make it happen," Grassley concluded.

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