Making a Case for More Analytics

Apr 29, 2019

While millions of Americans have gathered their tax documents and submitted their tax returns, the IRS is processing millions of tax returns and issuing refunds. But what does the tax season really look like for the IRS?

January 1st through mid-April is a critical time for the IRS to process millions of tax returns and answer questions about specific laws or filing procedures. By early May 2018, the IRS received more than 140.9 million tax returns and issued more than 101.3 million refunds, totaling approximately $282 billion. The Treasury Inspector General for Tax Administration (TIGTA) performed an audit to evaluate whether the IRS timely and accurately processed individual paper and electronically filed tax returns during the 2018 filing season.

Figure 1 presents comparative filing season statistics from 2017 to 2018 data as of May 4th, 2018. Broken out by individual tax returns and refunds, this chart gives a statistical analysis of the percent change between the last two filing seasons.

The TIGTA report also provided information on the Bipartisan Budget Act of 2018, Disaster Relief Act, American Opportunity Tax Credit, and continued challenges with tax-related identity theft. Subsequent to the start of the filing season, on February 9th, Congress enacted the Bipartisan Budget Act of 2018 to retroactively extend several individual tax provisions for Tax Year 2017 and modified disaster relief provisions. The legislation includes 51 provisions, 31 related to deductions and credits that can be claimed. As a result, the IRS was required to update publications, forms, instructions, and computer programming to allow taxpayers to take advantage of these provisions. Further, as the filing season continued, the IRS devoted significant resources to planning and preparation activities to implement major changes associated with the tax reform legislation starting in 2019.

TIGTA identified 1,128 taxpayers who were not able to take advantage of the Disaster Relief Act and Tax Cuts and Jobs Act provisions. These returns claimed the Earned Income Tax Credit using Tax Year 2016 earned income that the IRS incorrectly adjusted based on the taxpayers’ Tax Year 2017 earned income. The IRS agreed that these tax returns were worked incorrectly. IRS management indicated they would review this subset of returns to ensure the taxpayers receive the proper credit.

Although the IRS requires taxpayers provide the educational institution identification numbers (EIN) for charitable contributions, there is no process in place to disallow American Opportunity Tax Credit claims where the EIN is not provided. TIGTA identified 234,053 tax returns, totaling $209 million in refundable American Opportunity Tax Credit filed without an EIN, leaving a loop-hole for potential fraudulent deductions. To close this gap, it was recommended for processes to be put in place to deny all returns where the taxpayer does not provide the institution EIN for each student claimed on the return.

Tax-related identity theft continues to be one of the biggest challenges facing the IRS. As of December 14th, 2017, there were more than 3.8 million tax accounts the IRS considered to be confirmed victims of Identity theft. To provide relief to these victims, the IRS began issuing IP PINs to eligible taxpayers dating back to 2011. An IP PIN is a six-digit number assigned to eligible taxpayers before each billing season that allows their tax returns/refunds to be processed without delay and helps prevent the misuse of their SSN on fraudulent income tax returns. However, for the 37,555 identity theft victims that were Individual Taxpayer Identification Number (ITIN) accounts, they will not receive the same protection measures as Social Security number holders. As a result, TIGTA recommended the IRS revise processes to automatically issue an IP PIN to ITIN holders who are confirmed identity theft victims.

It should be recognized that tax season 2018 was successfully executed despite the implementation of significant legislative changes. By the extension deadline of October 2018, the IRS processed over 153 million individual income tax returns and issued almost 111 million refunds totaling nearly $313 billion. All while providing 45.5 million customers assistance through telephone, correspondence, and face-to-face interactions. There are gaps to close to stop fraudulent returns, as well as corrections to allow tax payers to receive credits they deserve for future filing seasons.

As the IRS strives to operate more efficiently, ensure successful implementation of new tax laws, and provide superior services to taxpayers, advancements in the use of data can help the agency improve operational efficiencies. The further use of data and analytics in the IRS will refine identity theft detection models, assist in detection of refund fraud, and pinpoint noncompliance.

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