Tax Administration: IRS Can Help Taxpayers Reduce the Need for	 
Tax Abatements (30-MAR-01, GAO-01-328). 			 
								 
Approximately one million taxpayers per year, as well as the	 
Internal Revenue Service (IRS), incur costs to abate tax	 
assessments created due to tax exemption errors.  Avoiding the	 
errors, or correcting them earlier, could reduce the burden on	 
taxpayers of complying with tax laws. IRS has taken one step	 
intended to help taxpayers avoid these errors--revising 	 
instructions for claiming exemptions. In another step, aimed at  
correcting some exemption errors that continue to be made, IRS	 
decided to do checks of name and social security number errors	 
for spousal exemption claims during returns processing. In	 
addition, IRS is considering implementing earlier--during returns
processing--checks for dependent exemption errors and taxpayer	 
contacts if the checks do not correct exemption errors. 	 
Considering doing such checks and contacts earlier is worthwhile.
While the cost savings to IRS are not known, a large number of	 
taxpayers would benefit. However, IRS did not provide GAO with	 
any details or documentation about how or when decisions would be
made. Little is known about how to reduce nonexemption errors	 
that lead to assessments being abated. Because over one million  
taxpayers were burdened by such assessments, research to reduce  
the errors is worth considering.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-328 					        
    ACCNO:   A00728						        
    TITLE:   Tax Administration: IRS Can Help Taxpayers Reduce the    
             Need for Tax Abatements                                          
     DATE:   03/30/2001 
  SUBJECT:   Income taxes					 
	     Social security number				 
	     Tax exempt status					 
	     Taxpayers						 
	     Internal controls					 
	     Tax returns					 
	     IRS Automated Collection System			 

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GAO-01-328

Report to Congressional Requesters

United States General Accounting Office

GAO

March 2001 TAX ADMINISTRATION IRS Can Help Taxpayers Reduce the Need for Tax
Abatements

Page i GAO- 01- 328 Reducing Tax Abatements Letter 1

Results in Brief 2 Background 3 Scope and Methodology 4 Abated Assessments
Usually Resulted From Taxpayer Errors on

Exemption Claims 6 IRS Costs for Abating Tax Assessments Could Be
Substantial 7 Taxpayer Costs Are Not Known, and the Types of Costs Can Vary
10 IRS Has Taken Steps to Reduce Some Exemption Errors but Could

Take Other Steps 11 Conclusions 15 Recommendations 15 Agency Comments 16

Appendix I GAO Contacts and Staff Acknowledgements 17

Tables

Table 1: IRS Activities Associated With Individual Income Tax Assessments
Abated in Fiscal Year 1998 Due to Errors by Taxpayers, IRS, or Third Parties
8 Contents

Page 1 GAO- 01- 328 Reducing Tax Abatements

March 30, 2001 The Honorable William M. Thomas Chairman, Committee on Ways
and Means House of Representatives

The Honorable Amo Houghton Chairman, Subcommittee on Oversight Committee on
Ways and Means House of Representatives

In fiscal year 1998, the Internal Revenue Service (IRS) abated- or, reduced-
2. 3 million tax assessments (totaling $3. 6 billion) on individual income
tax returns because of an error made by the taxpayer, IRS, or third party in
determining the tax to be assessed. 1 Making and then abating tax
assessments imposes costs on taxpayers as well as on IRS. Avoiding the
errors that led to the assessments would also avoid the need for abatements,
reducing costs in time and money for taxpayers and IRS.

Given your interest in reducing these costs to individual taxpayers and IRS,
you asked us to (1) describe the nature of the errors that led to the abated
income tax assessments, such as who made the error and what the error
involved; (2) quantify the costs to IRS; (3) describe the costs incurred by
taxpayers to correct these errors; and (4) determine what IRS could do to
reduce the errors that led to these abated tax assessments. To answer these
questions, we analyzed IRS data from a random sample of 486 abatements made
in fiscal year 1998 because of errors made in the tax assessed against
individual taxpayers. We analyzed IRS data on the costs and consulted with
IRS officials about options for avoiding the errors.

1 IRS made 2. 5 million tax abatements to individual tax returns in fiscal
year 1998, totaling $5.5 billion. Not all abatements arise from errors with
tax assessments. For example, a taxpayer can carry back a net operating loss
to an earlier tax year to abate a correct assessment. Because we focused on
abatements of tax assessments created from errors, we excluded abatements
due to these carry backs as well as for substitute returns IRS prepares
using income information from third parties and debt discharges, such as
bankruptcy, that are used to offset correct assessments for the tax year in
question.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 328 Reducing Tax Abatements

The errors that led to 2. 3 million individual income tax assessments being
abated in fiscal year 1998 had two features that stood out. 2 First,
taxpayers made the errors in an estimated 86 percent of the abated
assessments. Second, the errors for about half of the abated assessments
involved exemption claims, usually in reporting names and Social Security
numbers (SSN) for dependent exemptions.

Abating tax assessments can be costly. According to IRS officials, IRS'
costs to record, collect, and abate the 2.3 million income tax assessments
are in the tens of millions of dollars each year. IRS was unable to provide
data on which to develop more reliable cost estimates in time for this
report. Individual taxpayers also incur costs to get assessments abated, but
the amount is unknown. The types of taxpayer costs can also vary with the
number of IRS contacts and degree of documentation provided to get the
abatement.

IRS has taken two steps intended to reduce exemption errors leading to the
abated tax assessments but could take additional steps. In one step, IRS
revised tax return instructions on claiming exemptions for tax year 2000.
For example, IRS added a statement that the names and SSNs used on tax
returns had to match those recorded at the Social Security Administration.
For name and SSN errors that continue to be made, IRS changed its procedures
in January 2001 to try to correct some of the errors during returns
processing before taxes are assessed. However, IRS has not changed its
procedures for correcting the most common type of exemption error- errors in
claiming dependent exemptions.

Under current procedures, IRS corrects dependent exemption errors after the
tax assessment through its abatement process. IRS verifies these corrections
by checking the names and SSNs used on previous tax returns as well as
contacting taxpayers for additional information if necessary. IRS could do
these checks and contacts earlier during returns processing. Doing so would
eliminate some steps currently used to assess and abate taxes, reducing
burden on taxpayers. The effects of earlier checks and contacts on IRS'
overall costs are not known.

2 Over a hundred million assessments of individual income taxes are recorded
for each tax year. Because abatements made in a fiscal year involve
assessments from various tax years, which IRS does not track, we do not know
the percent of all tax assessments made in a given tax year that are abated.
Results in Brief

Page 3 GAO- 01- 328 Reducing Tax Abatements

After our audit work was completed, an IRS official told us that IRS was
considering doing checks for dependent exemption errors and taxpayer
contacts during returns processing in order to avoid assessing additional
taxes. Considering these checks and contacts is worthwhile because a large
number of taxpayers could potentially benefit. However, as noted above, the
effects on IRS' overall costs are not known. Because IRS did not provide us
with details or documentation on how or when decisions would be made, we are
recommending that IRS determine whether the costs and benefits justify
implementing these checks and taxpayer contacts during returns processing.

Finding ways to reduce the remaining 1.1 million assessments that are abated
due to nonexemption errors will be challenging. These remaining abated
assessments involve a variety of errors that occur infrequently. Because
little is known about these errors and because of the potential benefits to
a large number of taxpayers, we are recommending that IRS determine whether
research to identify the causes of the errors and possible solutions is
justified.

An assessment is a formal bookkeeping entry in which IRS records the amount
of tax, penalty, or interest charged to a taxpayer's account each tax year.
An assessment establishes the taxpayer's liability and IRS' right to
collect. Taxpayers essentially assess themselves when they report these
taxes on their tax returns. IRS may add to or subtract from tax amounts
reported when its returns processing or enforcement programs identify
errors. Taxpayers also may file an amended return or otherwise notify IRS of
errors, which can change the amount assessed.

An abatement is a formal bookkeeping entry to record a reduction of tax,
penalty, or interest assessments on a taxpayer's account. Abatements reduce
the amounts that taxpayers owe and that IRS has a right to collect. Section
6404 of the Internal Revenue Code authorizes IRS to abate an assessment
under certain conditions. For example, IRS can abate an assessment because
of errors made. A taxpayer can make an error on the original tax return,
such as not claiming a deduction. Or, IRS may assess incorrect tax amounts
when auditing a return or matching income reported by taxpayers with income
reported by third parties (such as employers) on payments made to the
taxpayers.

Both taxpayers and IRS can initiate abatements. Taxpayers can request an
abatement by filing an amended tax return (e. g., Form 1040X), by filing an
IRS Form 843 (Claim for Refund and Request for Abatement), or by calling
Background

Page 4 GAO- 01- 328 Reducing Tax Abatements

or writing to IRS. IRS can also initiate abatements. When, for example, an
IRS auditor finds evidence that a taxpayer overstated the tax liability on a
return, this evidence could lead to an abatement, depending on the results
from the rest of the audit.

To fulfill our objectives, we reviewed a stratified, random sample of 486
individual taxpayer abatements made in fiscal year 1998 due to errors by
taxpayers, IRS, or third parties. 3 Our sample includes abatements in which
taxpayers elected to change their filing status or basis for deductions when
the original assessment also changed. If a taxpayer had multiple abatements,
we studied only the abatement that was drawn into our sample.

We obtained the final sample of 486 abatements by first drawing a stratified
sample of 500 abatements from a population of 2,351, 194 abatements for
individual taxpayers who had at least one abatement in 1998 associated with
an error in the assessment. After reviewing the 500 IRS case files, we
removed 14 sampled abatements that did not contain these errors, such as
abatements due to net operating loss carry backs, debt discharges, and
substitute returns. On the basis of our final sample, we estimated that the
total population of 1998 abatements based on errors was about 2.3 million
with a value of about $3.6 billion.

Each abatement could be associated with more than one error. For each error,
we collected information on which line item on the return was in error. For
example, an error could involve lines for the primary taxpayer's SSN, a tax
exemption, or a tax deduction. To the extent possible, we also collected
information on whether taxpayer, IRS, or third- party actions led to an
error. Because so many of the errors related to exemptions, we collected
more information, such as whose exemption (taxpayer, spouse, dependent) was
in error and what information was missing or incorrect.

To develop data about IRS' costs to abate tax assessments made due to errors
by taxpayers, IRS, or third parties, we used IRS' abatement files to
identify the type and frequency of IRS activities associated with the
recording, collecting, and abating of these assessments. We then talked to

3 We focused on fiscal year 1998 because more recent data were not available
when we began our work, and we had fiscal year 1998 data from our previous
work. See Tax Administration: IRS' Abatement of Assessments in Fiscal Years
1995- 1998 (GAO/ GGD- 9977,

June 4, 1999). Scope and

Methodology

Page 5 GAO- 01- 328 Reducing Tax Abatements

IRS officials about the unit costs of these activities and the magnitude of
the overall costs for all activities. These officials represented IRS' Wage
and Investment Division, IRS' Chief of Operations and IRS units that record,
collect, or abate assessments, such as those that process or examine tax
returns. We attempted to develop more reliable cost estimates but IRS was
unable to provide sufficient data in time for including in this report.

To describe the types of taxpayer costs, we recorded the types of activities
associated with each sampled abatement case. We discussed these activities
with IRS officials to understand the potential impacts on costs. On the
basis of this work, we summarized the range of activities and of time (in
calendar days) that taxpayers faced to get the tax assessments abated. We
did not have enough information to compute taxpayers' costs.

After our analysis, we sought feedback from IRS officials at the National
Office on our sample results and the costs. We sought IRS documentation and
views on options for reducing the number of assessments that involved
exemptions and that were abated due to errors. We also sought views on these
options from officials of four professional associations- the American
Institute of Certified Public Accountants, National Association of Enrolled
Agents, National Association of Tax Practitioners, and National Society of
Accountants.

Because we selected the probability sample following random selection
procedures, each estimate is surrounded by a 95- percent confidence
interval. For example, the estimate that 86 percent of the abatements is due
to taxpayer errors is surrounded by a 95- percent confidence interval of +/-
3 percentage points. This shows that we are 95- percent confident that the
percentage of taxpayer errors in the actual population is between 82 and 89
percent. All percentage estimates have sampling errors of +/- 6 percentage
points or less, unless otherwise noted. Estimates on numbers of abatements
have sampling errors of +/- 6 percent or less of their values unless
otherwise noted.

We did work at IRS offices in Washington, D. C., and New Carrollton, MD, as
well as IRS' Kansas City Service Center because of our staff's proximity. We
did our work from November 1999 through December 2000 in accordance with
generally accepted government auditing standards. We discussed our draft
report with representatives of the IRS Commissioner on March 23, 2001. IRS
officials agreed that our recommendations had merit and said they would
review ways to implement them. Their written comments arrived too late to be
reprinted in this report.

Page 6 GAO- 01- 328 Reducing Tax Abatements

We traced most abated income tax assessments in fiscal year 1998 to
individual taxpayer errors. These errors usually involved claims for tax
exemptions for the taxpayers, spouses, or dependents. Taxpayers usually
erred by not providing any information or by providing inaccurate
information. With exemption claims, these errors usually involved SSNs for
dependent exemptions.

We estimated that 86 percent 4 of the 2.3 million abated assessments arose
from taxpayer errors, and 6 percent arose from IRS errors. Sources for the
remaining errors were third parties or could not be determined due to
insufficient data in IRS' abatement case files.

We further analyzed how the errors were made. For taxpayer errors, about 74
percent of the abated tax assessments were associated with taxpayers not
correctly reporting an item on the tax return; and about 22 percent were
associated with taxpayers omitting the item from the return.

For IRS errors associated with abated tax assessments, most of the errors
occurred when the IRS unit that processes tax returns did not accept valid
information from these returns. Third- party errors 5 generally arose due to
errors in the Social Security Administration database used by IRS to
validate names and SSNs related to the exemption claims.

For fiscal year 1998, an estimated 50 percent of errors that led to the 2. 3
million abated tax assessments involved exemptions claimed on income tax
returns for taxpayers, spouses, or dependents. The remaining abated
assessments involved errors with many other types of claims at much lower
percentages. The next two most frequent errors- Schedule A deductions (e.
g., real estate taxes) and the other income line on the tax return- each
accounted for around 10 percent.

Of the exemption errors, we estimated that about 96 percent involved
dependent exemptions; and the rest involved exemptions for the spouse of

4 Since we used a random, probability sample, all results are subject to
sampling error. Unless otherwise indicated, all sample estimates are
surrounded by 95- percent confidence intervals of less than +/- 6 percentage
points. 5 We only attributed errors to third parties when we found
conclusive evidence of their

mistakes. Abated Assessments

Usually Resulted From Taxpayer Errors on Exemption Claims

Taxpayers Made Most of the Errors When Reporting Tax Return Data

Tax Exemption Errors Accounted for Half of the Abated Assessments

Page 7 GAO- 01- 328 Reducing Tax Abatements

the primary taxpayer filing the tax return. 6 For dependent exemptions,
about 32 percent of the errors were missing SSNs; and about 50 percent were
incorrect SSNs. 7 The remaining errors involved the names of the dependents
or could not be determined due to insufficient data.

These errors in names and SSNs occurred in many ways. For example, in one
instance, an exemption for a dependent was disallowed because the taxpayer
used the spouse's SSN instead of the dependent's. Other dependent exemption
errors either occurred because no SSN was reported, SSNs were transposed, or
an SSN was reported as a progression of numbers (i. e., 123- 456- 789).
Examples also included a taxpayer who used the same SSN for two different
dependents and a taxpayer who used the last four digits of an SSN for two
dependents. Other errors related to the dependent's last name not matching
SSA records and a spousal exemption disallowed because the spouse's last
name did not match SSA data.

The exemption errors were not limited to a type of taxpayer. An estimated
256,000 or more taxpayers with incomes below $25,000 made such errors as
well as about 107, 000 taxpayers with incomes over $100,000. Most exemption
errors came from individuals who had no business income, but about 47, 000
taxpayers who had business income made exemption errors. 8

IRS did not track its costs to record, collect, and then abate the 2.3
million tax assessments that were made due to errors by taxpayers, IRS, or
third parties. IRS agreed that these overall costs could be substantial,
totaling at least tens of millions of dollars annually. IRS was unable to
provide accurate cost data for developing more reliable estimates in time
for this report. However, IRS agreed that having such accurate cost
information is important and plans to develop it.

6 Our sample did not include any abated tax assessments with exemption
errors for the primary taxpayer. IRS has procedures to find and correct
these types of errors. 7 The estimate of 32 percent is surrounded by a 95-
percent confidence interval of +/- 8 percentage points. The estimate of 50
percent is surrounded by a 95- percent confidence interval of +/- 9 percent.
8 The estimate of 256,000 is surrounded by a 95- percent confidence interval
of +/- 78, 000; the

estimate of 107, 000 taxpayers by an interval of +/- 52, 000; and the
estimate of 47, 000 taxpayers by an interval of +/- 17, 000. IRS Costs for
Abating

Tax Assessments Could Be Substantial

Page 8 GAO- 01- 328 Reducing Tax Abatements

We identified three broad activities- recording, collecting, and abating the
tax assessments- associated with IRS' costs. Table 1 shows the frequencies
of these broad activities.

Table 1: IRS Activities Associated With Individual Income Tax Assessments
Abated in Fiscal Year 1998 Due to Errors by Taxpayers, IRS, or Third Parties

Numbers in thousands

Activity Frequency of abated assessments Percent of abated

assessments

Record 1,304 56 Collect 609 a 26 Abate 2, 308 100 Total b b

Note: The sample percentage estimates in this table are surrounded by 95-
percent confidence intervals of less than +/- 6 percentage points. The
frequency intervals are surrounded by these 95percent confidence intervals:
1,304 +/- 122; 609 +/- 72; and 2, 308 +/- 30. a Only includes collection
actions that are attributable solely to the abated tax assessment.

b Column is not totaled because some abated assessments had more than one
type of action. Source: GAO analysis of IRS activities in our sample cases.

IRS incurred additional costs to record an estimated 1. 3 million of the 2.3
million tax assessments abated due to errors. In such cases, IRS did more
work to make additional tax assessments. IRS' usual costs include those to
record the tax assessment originally reported on the tax returns. The
additional costs would have been avoided if the errors and additional
assessments had not been made. The other 1 million tax assessments did not
incur additional recording costs.

Various IRS units can be involved in recording increases or decreases to the
original tax assessment reported on the tax return. IRS' processing units
can increase the original assessment because of more obvious errors, such as
invalid SSNs. IRS post- processing units also can make additional tax
assessments that will be recorded. For example, when the taxpayer files an
amended tax return or third- party reports indicate that a taxpayer did not
report all income, IRS' adjustment units can increase the assessment. IRS'
examination units can increase assessments during audits when taxpayers do
not provide documents to support their tax return.

The cost to record tax assessments is higher when a post- processing unit
does the work to create an assessment. The greatest cost is associated with
examination units because their auditors have higher pay grades, IRS'
Recording Costs

Page 9 GAO- 01- 328 Reducing Tax Abatements

audit more complex cases, and need more time to work cases compared to
nonaudit staff.

IRS attempted to collect an estimated 609, 000 of the 2. 3 million abated
tax assessments. IRS could have avoided the associated collection costs if
the tax assessment, which was abated because of errors, had not been made.
For the portion that was abated of the other 1. 7 million tax assessments,
IRS did not take collection action.

The process for collecting any unpaid assessment has three steps. The
process starts with a series of computer- generated notices demanding
payment or information to otherwise resolve the unpaid assessment. If the
unpaid assessment is not resolved, IRS might try to call the taxpayer
through its Automated Collection System. If still unresolved, IRS might
assign a field collector to visit the taxpayer. The costs of the collection
activity increase substantially with each step. For example, each notice
costs a fraction of what a field collector visit costs.

IRS also incurred additional costs to abate the 2.3 million tax assessments.
Abatements involve three types of costs, as described below.

First, IRS incurs costs to process abatement requests. These costs are
relatively low compared to later steps. Abatement requests include formal
claims (Form 1040X or Form 843) and informal requests when taxpayers call or
write IRS requesting abatements. Compared with informal requests, formal
claims are more costly because of the extra costs to record them on IRS'
masterfile of taxpayer accounts to show the pending formal request.

Second, IRS incurs costs to make and record the abatement decision. Some
abatement decisions are made in IRS examination units while the bulk are
done in nonexamination units. The unit cost of abatements made in
examination units is higher because, among other reasons, they use higher-
graded (or paid) staff.

Third, IRS incurs costs for some abatements when issuing a refund check that
otherwise would have been unnecessary. This check is for tax amounts
overpaid by individuals because of the assessment made in error. IRS'
Collection Costs

IRS' Abatement Costs

Page 10 GAO- 01- 328 Reducing Tax Abatements

Taxpayers also incurred costs when tax assessments were made and then
abated. However, the amount is currently unknown. IRS' abatement files
lacked sufficient information on taxpayers' activities, efforts to contact
IRS, and time spent in order to estimate taxpayer costs. Further, taxpayers
usually do not record and maintain such information. As part of its
multiyear effort to estimate taxpayer compliance burdens, IRS is designing a
methodology intended to estimate taxpayer costs for abatements and other
post- filing activities. 9

Although we could not measure the costs to taxpayers, we were able to
estimate the number of taxpayers involved in two actions that imposed some
level of burden. 10 For both types of actions, taxpayers incurred costs in
time and money, especially if they used a paid preparer. Of the 2. 3 million
abated assessments,

? an estimated 609, 000 involved IRS contacts with taxpayers to collect an
assessment before it was abated, of which the vast majority were IRS
notices; and

? an estimated 575, 000 involved amended tax returns that taxpayers filed to
correct errors and request the tax abatements.

The amount of variation in taxpayer costs also cannot be quantified
currently. Taxpayer costs can vary, depending on the actions and time
required to correct the error and abate the tax assessment. Taxpayer actions
could include finding the error, gathering documents to support the
abatement, communicating with IRS, providing any requested documentation,
and responding to IRS notices. Contacts with IRS could be as inexpensive as
a toll- free telephone call or as costly as paying the fees of tax
professionals to work with IRS.

In terms of calendar time required, most abatements we reviewed took 3
months or less to be approved, but some took much longer. At one extreme in
our sample, IRS notified a taxpayer through a collection notice that it had
assessed additional taxes after disallowing a dependent exemption while
processing the tax return. The taxpayer called IRS to provide the
dependent's correct SSN. After verifying the SSN, IRS made

9 Tax Administration: IRS Is Working to Improve Its Estimates of Compliance
Burden (GAO/ GGD- 00- 11, May 22, 2000). 10 A taxpayer could have been
involved in just one or both of these actions. Taxpayer Costs Are

Not Known, and the Types of Costs Can Vary

Page 11 GAO- 01- 328 Reducing Tax Abatements

the abatement 21 days after the date of the collection notice. At the other
extreme in our sample, IRS disallowed two dependent exemptions, assessed
additional tax, and sent a collection notice. The taxpayer eventually
provided sufficient documents to support the exemptions and justify the
abatement. However, the abatement took 493 days from the date of the first
collection notice. During this time, IRS sent multiple correspondence and
collection notices to the taxpayer about the unpaid assessment and abatement
request.

IRS files also showed variation in the amount of taxpayer documentation and
number of IRS contacts required for abatements. In another case from our
sample, multiple exchanges between IRS and a taxpayer took 245 days from the
first collection notice to the abatement. IRS had notified the taxpayer that
an additional tax form was needed, and the taxpayer's representative
returned the completed form to IRS showing no additional tax due. About 1
month later, IRS sent its version of the form showing additional tax due
followed by four subsequent bills. The taxpayer hired a second
representative who wrote IRS, sent documents, and faxed a form showing no
additional tax due. IRS assigned the case to an IRS office that resolves
difficult cases. The second representative faxed another copy of the form to
this office to get the tax assessment abated.

IRS has taken steps to avoid exemption errors or correct certain types of
exemption errors earlier during returns processing rather than through the
abatement process. However, IRS has not taken other steps that could
potentially correct more errors earlier. If the errors were not made or were
corrected earlier, IRS would not create tax assessments that need to be
abated, which could reduce taxpayer and IRS costs. We focused on reducing
exemption errors because, as discussed earlier, they accounted for half of
the 2.3 million assessments that were abated in fiscal year 1998.

After reviewing our data on the number of exemption errors that lead to
abatements, IRS took a step intended to prevent some of the errors. For tax
year 2000 returns, IRS revised tax return instructions to state that (1) the
name and SSN entered on the tax return should agree with the Social Security
card to avoid losing the exemption as well as tax benefits, such as the
Earned Income Credit and (2) taxpayers should call the Social Security
Administration to resolve any discrepancy. IRS made the revisions because a
test of expanded SSN matching for spouse exemptions claimed on joint tax
returns revealed errors with the names and SSNs of the spouses. IRS
officials believe that these revisions will help reduce such IRS Has Taken
Steps

to Reduce Some Exemption Errors but Could Take Other Steps

Avoiding Exemption Errors

Page 12 GAO- 01- 328 Reducing Tax Abatements

errors, but the actual effects will not be known until after tax year 2000
returns are processed.

IRS recently decided to revise its procedures during returns processing in
an effort to correct some of the remaining exemption errors earlier.
However, the largest category of exemption errors, errors with the dependent
exemption, will not be corrected by the revisions.

These revised procedures involve IRS' math- error program. About one million
of the exemption- related tax assessments were created during returns
processing through IRS' math- error program. In this program, IRS uses
computers to find arithmetic errors on tax returns as well as errors in
reporting SSNs, exemptions, and certain other items. When it finds math
errors on paper returns, IRS processes the return, 11 assesses the tax, and
contacts the taxpayer to disclose the reason for the additional tax
assessment and to request payment. Afterward, IRS uses its abatement process
to correct any errors and eliminate the tax assessments.

Further changes to the math- error program could help to correct errors
earlier and avoid assessing taxes that will be abated. Specifically, after
IRS' computerized processing detects exemption errors, computerized checks
of previous tax returns could help to correct simple errors, such as
transposed SSNs or misspelled or changed names. IRS now does these checks
after returns processing when abatements are requested. To notify taxpayers
of the corrections and need to avoid such errors, IRS could send so- called
“soft notices”- notices that do not ask taxpayers to provide
information or pay additional taxes. If the name or SSN were changed or
missing, IRS could suspend processing and contact taxpayers. In effect, this
would treat paper returns the same as electronic returns. As noted earlier,
IRS does not accept electronic returns with math errors. If the contacts do
not resolve the errors or if more effort is required, IRS could

11 For electronically filed tax returns, IRS has chosen to reject the
returns rather than process them and assess taxes for errors. IRS officials
said taxpayers could refile the return electronically after correcting the
error or file a paper return with or without the correction. Correcting
Remaining

Exemption Errors Earlier

Page 13 GAO- 01- 328 Reducing Tax Abatements

continue its practice of disallowing the exemptions and assessing additional
taxes. 12

After we shared the results of our work with IRS, IRS decided to change its
procedures, effective January 28, 2001, to correct name and SSN errors with
claims for spousal exemptions earlier. IRS officials decided to do the
checks for correcting these errors during returns processing. Before
disallowing exemptions and assessing additional taxes, IRS staff are to
check spouses' names and SSNs on tax returns against IRS and Social Security
Administration computer data in an attempt to correct the errors.

Recently, an IRS official told us that IRS is considering taking two other
steps to correct exemption errors during returns processing. The first step
would be doing earlier checks for erroneous dependent exemptions. The second
step would be to contact taxpayers for any type of exemption error that had
not been corrected by the checks. This same official said that IRS had
concerns about the time and costs to contact taxpayers during returns
processing in order to correct exemption errors. However, IRS did not
provide any documentation or details on how or when decisions about these
earlier checks and contacts would be made.

Considering steps to correct exemption errors earlier is worthwhile because
of the potential benefits to a large number of taxpayers. While neither the
benefits to taxpayers nor the costs to IRS can be quantified, some
information is known. First, IRS already abates almost all tax assessments
created through the math- error program for exemption errors in missing or
inaccurate names or SSNs. According to our analysis, IRS abated at least 87
percent of the additional tax assessments for name or SSN errors in
exemptions claimed on tax year 1997 returns. 13 In deciding whether to
approve abatements requested by taxpayers, IRS checks previous tax returns
and contacts taxpayers, as needed. Since abatements are requested for almost
all of these assessments, IRS is already doing the checks and contacts.

12 IRS does checks and contacts in other enforcement programs before
assessing additional tax. For example, audits of tax returns entail checks
of documentation and written or faceto- face contacts with taxpayers about
errors before assessing any additional taxes. 13 Our analysis of the math-
error program for tax year 1997 showed that during fiscal year 1998, IRS
abated 71 percent of the 983, 000 assessments related to disallowed
dependent exemptions. By analyzing previous math- error programs, we
calculated that another 16 percent of these assessments was abated during
fiscal year 1999; and a smaller percentage was likely abated in fiscal year
2000.

Page 14 GAO- 01- 328 Reducing Tax Abatements

Second, although taxpayers' costs have not been quantified, correcting the
exemption errors earlier could reduce the costs that taxpayers incur to
correct errors through abatements. To the extent that the earlier checks
correct the errors, fewer taxpayers would be contacted. Even if contacted,
taxpayers would likely have an easier time finding or compiling records or
working with tax representatives because the errors would be found sooner.
Some taxpayers (about 26 percent of the cases we reviewed) would no longer
face IRS collection actions. The extent to which taxpayer costs would be
reduced could be influenced by, among other factors, how many exemption
errors continue to be made after IRS clarified its instructions for claiming
exemptions.

In discussing taxpayer burdens, representatives we interviewed from four
groups of tax professionals generally favored the idea of doing the checks
and contacts earlier to avoid tax assessments that have to be abated. They
said that taking care of the errors earlier would reduce taxpayer burden,
particularly when the errors lead to a series of written and telephone
contacts to get the taxes abated.

Third, IRS could reduce annual operating costs by correcting exemption
errors earlier rather than later through abatements. We could not estimate
the amount of operating cost savings because available data did not allow us
to quantify the costs associated with exemption errors separately from the
costs for other types of errors. Even so, by correcting errors earlier, IRS
would no longer incur costs to record and collect the tax assessments that
would be abated. Nor would IRS incur some of the costs of making abatements,
including the costs of processing abatement requests or issuing refunds
after abatements are granted. Other costs savings could occur from using
lower paid staff, rather than audit staff, to make the checks and contacts
earlier.

Whether IRS would have overall cost savings depends on the costs to
implement the earlier checks and contacts. These one- time costs would
offset IRS' operating cost savings to some extent. Implementation costs
could include, if needed, new equipment, computer programming, moving
equipment or staff, and training. IRS did not have data on the magnitude of
these one- time costs.

Finding ways to reduce the remaining 1.1 million assessments that are abated
due to nonexemption errors will be challenging. As discussed earlier, these
remaining abated assessments involve a variety of errors that occur
infrequently. Since little is known about these errors or their causes,
Researching

Nonexemption Errors

Page 15 GAO- 01- 328 Reducing Tax Abatements

a promising first step towards reducing the errors would be to do research
on their causes and on ways to avoid the errors.

Doing research on the nonexemption errors has the potential to benefit a
large number of taxpayers. However, research also incurs costs, which we did
not attempt to estimate. Such costs would depend on the design, scope, and
depth of the studies.

Approximately one million taxpayers per year, as well as IRS, incur costs to
abate tax assessments created due to exemption errors. Avoiding the errors,
or correcting them earlier, could reduce the burden on taxpayers of
complying with tax laws.

IRS has taken one step intended to help taxpayers avoid these errors-
revising instructions for claiming exemptions. In another step, aimed at
correcting some exemption errors that continue to be made, IRS decided to do
checks of name and SSN errors for spousal exemption claims during returns
processing.

In addition, IRS is considering implementing earlier- during returns
processing- checks for dependent exemption errors and taxpayer contacts if
the checks do not correct exemption errors. Considering doing such checks
and contacts earlier is worthwhile. While the cost savings to IRS are not
known, a large number of taxpayers could benefit. However, IRS did not
provide us with any details or documentation about how or when decisions
would be made.

Little is known about how to reduce nonexemption errors that lead to
assessments being abated. Because over one million taxpayers were burdened
by such assessments, research to reduce the errors is worth considering.

Regarding name and SSN errors, we recommend that the Commissioner of
Internal Revenue make a determination on whether the costs and benefits
justify implementing earlier- during returns processing-( 1) checks for
dependent exemption errors and (2) taxpayer contacts, as needed, for the
remaining errors in any type of exemption claim.

Regarding the nonexemption errors that lead to assessments that are later
abated, we recommend that the Commissioner of Internal Revenue determine
whether research to identify causes and solutions is justified. Conclusions

Recommendations

Page 16 GAO- 01- 328 Reducing Tax Abatements

We discussed our draft report on March 23, 2001, with IRS officials from
Wage and Investment who were representing the IRS Commissioner. They agreed
to implement both of our recommendations. First, they said that IRS would
review the costs and benefits of doing checks and contacts during returns
processing for dependent exemption errors. Second, they said that IRS would
review available data on nonexemption errors to determine the merits of
researching their causes, and solutions. IRS was unable to provide written
comments in time for inclusion in this report.

We are sending copies of this report to Representative Charles B. Rangel,
Ranking Minority Member, House Committee on Ways and Means; Representative
William J. Coyne, Ranking Minority Member, Subcommittee on Oversight, House
Committee on Ways and Means; and Senator Charles E. Grassley, Chairman, and
Senator Max S. Baucus, Ranking Member, Senate Committee on Finance. We also
are sending copies to the Honorable Paul H. O'Neill, Secretary of the
Treasury; the Honorable Charles O. Rossotti, Commissioner of Internal
Revenue; the Honorable Mitchell E. Daniels, Jr., Director, Office of
Management and Budget; and other interested parties. Copies of this report
will be made available to others upon request.

If you have any questions concerning this report, please contact Tom Short
or me at (202) 512- 9110. Key contributors to this work are listed in
appendix I.

James R. White Director, Tax Issues Agency Comments

Appendix I: GAO Contacts and Staff Acknowledgements

Page 17 GAO- 01- 328 Reducing Tax Abatements

James R. White (202) 512- 9110 Tom Short (202) 512- 9110

In addition, Royce Baker, Larry Dandridge, Thomas Venezia, James Fields,
Anne Rhodes- Kline, Sam Scrutchins, Thomas Bloom, and Rodney Hobbs
contributed to this report. Appendix I: GAO Contacts and Staff

Acknowledgements GAO Contacts Acknowledgements

(268894)

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