Taxpayer Information: Increased Sharing and Verifying of
Information Could Improve Education's Award Decisions (18-JUL-03,
GAO-03-821).
Data sharing can be a valuable tool for federal agencies in
determining applicants' eligibility for benefit and loan
programs. Congress has authorized the Department of Education,
among others, to have limited access to federal taxpayer
information collected by the Internal Revenue Service (IRS).
Likewise, IRS is able to use personal information collected by
outside sources to better ensure that taxpayers are meeting their
tax obligations. GAO was asked to determine whether Education
uses taxpayer information to verify information provided by
student aid applicants, and the benefits of increasing data
verification activities, and whether IRS uses personal
information maintained by Education to ensure that taxpayers meet
their tax obligations, and the benefits of increasing these
activities.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-821
ACCNO: A07592
TITLE: Taxpayer Information: Increased Sharing and Verifying of
Information Could Improve Education's Award Decisions
DATE: 07/18/2003
SUBJECT: Student financial aid
Taxpayers
Computer matching
Interagency relations
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GAO-03-821
A
Report to the Committee on Finance, U. S. Senate
July 2003 TAXPAYER INFORMATION Increased Sharing and Verifying of
Information Could Improve Education*s Award Decisions
GAO- 03- 821
a
GAO United States General Accounting Office
Education uses taxpayer information for several purposes, such as locating
loan defaulters; researching and computing statistical data on overall
borrower debt; and, upon taxpayers* consent, determining loan repayment
amounts. However, Education is not authorized to directly receive taxpayer
information from IRS to verify eligibility for student financial aid
provided under Title IV of the Higher Education Act of 1965 (HEA). In
academic year 2001- 02, 11. 4 million students applied for $54 billion in
aid.
Total Title IV Federal Student Aid Dollars from Academic Years 1991- 92 to
2001- 02 (in Constant Dollars)
0 10
20 30
40 50
60 Dollars in billions Academic year
1991- 1992
1993- 1994
1995- 1996
1997- 1998
1999- 2000
2001- 2002
Source: The College Board, Trends in Student Aid 2002, Washington, D. C.
1992- 1993
1994- 1995
1996- 1997
1998- 1999
2000- 2001
A 1998 amendment to HEA was intended to authorize the matching of student
aid applicant information with several elements of federal income tax
return information. However, HEA could not be used as intended because
Internal Revenue Code Section 6103 was not specifically amended so that
Education and its contractors, which assist Education in administering the
various financial aid programs, could have access to taxpayer information.
Based on a study that
matched Education data and IRS income information, Education estimates
that it made approximately $602 million in grant overpayments during
fiscal years 2001 and 2002. IRS does not use personal information
collected from applicants and maintained by Education to ensure that
taxpayers meet their tax obligations because IRS officials believe the
taxpayer information IRS receives is more accurate. In general, IRS
officials* views are supported by IRS*s past estimates of taxpayers*
levels of compliance and by the results of Education*s studies and
investigations. For example, in the mid- 1990s, IRS estimated that
taxpayers with only wage income had a 99 percent voluntary compliance rate
and taxpayers with interest
and dividend income were 95 percent compliant in reporting this income.
However, Education*s student aid application data are not suited to IRS*s
tax administration purposes because the applications ask students and/ or
their parents to report data that come directly from their tax returns.
Data sharing can be a valuable tool for federal agencies in determining
applicants* eligibility for benefit and loan programs. Congress has
authorized the Department of Education, among others, to have limited
access to federal taxpayer information collected by the Internal Revenue
Service (IRS). Likewise, IRS is able to use
personal information collected by outside sources to better ensure that
taxpayers are meeting their tax obligations. GAO was asked to determine
whether Education uses taxpayer information to verify information provided
by student aid applicants, and the benefits of increasing data
verification activities, and whether IRS uses personal information
maintained by Education to ensure that taxpayers meet their tax
obligations, and the benefits of increasing these activities.
GAO is not making any recommendations. However, earlier this year GAO
recommended that Congress
consider legislation to authorize IRS to release individual income data to
Education so that
Education could verify income on student aid applications. The IRS
Commissioner and Education*s Chief Operating Officer of Federal Student
Aid raised no concerns in commenting on a draft of this report. The Chief
Operating Officer
said Education would continue to support a legislative change.
www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 821. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Michael Brostek at (202) 512- 9039 or brostekm@ gao.
gov. Highlights of GAO- 03- 821, a report to the
Committee on Finance, U. S. Senate
July 2003
TAXPAYER INFORMATION
Increased Sharing and Verifying of Information Could Improve Education*s
Award Decisions
Page i GAO- 03- 821 Sharing and Verifying Taxpayer Information Letter 1
Results in Brief 2 Background 4 Education Could Benefit from Access to
Taxpayer Information to Verify Student Eligibility for Financial Aid
Programs 7 IRS Does Not Use Education*s Student Aid Data and the Potential
Benefit of Doing So Appears to Be Limited 15 Concluding Observations 17
Agency Comments and Our Evaluation 18 Appendix I Objectives, Scope, and
Methodology 20
Appendix II Comments from the Internal Revenue Service 22
Appendix III Comments from the Department of Education 23
Table
Table 1: Selected Examples of Federal Student Aid Fraud Identified by
Education*s OIG 14 Figures
Figure 1: Title IV Federal Student Aid by Source for Academic Year 2001-
02 (Constant Dollars) 6 Figure 2: Total Title IV Federal Student Aid
Dollars from Academic
Years 1991- 92 to 2001- 02 (in Constant Dollars) 10 Contents
This is a work of the U. S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.
Page 1 GAO- 03- 821 Sharing and Verifying Taxpayer Information July 18,
2003 The Honorable Charles E. Grassley Chairman The Honorable Max Baucus
Ranking Minority Member Committee on Finance United States Senate Each
year, federal agencies make billions of dollars of improper payments under
various federal programs. Over the years, Congress has authorized a number
of federal agencies to have access to federal taxpayer information 1
collected by the Internal Revenue Service (IRS) to improve the accuracy of
eligibility determinations made by those agencies. The authorized agencies
are able to verify (i. e., match or cross- check) some personal
information 2 provided by applicants against corresponding information
reported to IRS. Similarly, IRS is able to use some of the personal
information obtained from federal and state agencies to better ensure that
taxpayers are meeting their tax obligations. Various federal laws and
agency policies regulate agencies* use and disclosure of taxpayer and
personal information. Section 6103 of the Internal Revenue Code (IRC)
allows IRS to disclose taxpayer information to federal agencies and
authorized employees of those agencies, but only under specific
conditions. Such privacy protection is an important component of continued
voluntary compliance with the internal revenue laws.
Because of continued concerns about balancing taxpayer privacy interests
with potential increased benefits from the sharing of taxpayer information
among agencies administering federal benefit and loan programs, you asked
us to assess whether IRS and selected federal agencies* the Bureau
1 Taxpayer information includes all federal tax returns and return
information. This may consist of an individual*s name, Social Security
number, address, wages, self- reported earnings, unearned income from
interest and dividends, tax returns, and miscellaneous income statements.
2 Personal information is defined as all information associated with an
individual and includes both identifying information (e. g., name, Social
Security number, and E- mail address) and nonidentifying information (e.
g., financial information, education, age, gender, and physical
attributes).
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 03- 821 Sharing and Verifying Taxpayer Information of
Citizenship and Immigration Services (formerly the Immigration and
Naturalization Service), the Social Security Administration, and the
Department of Education* are making use of opportunities to use taxpayer
information and personal applicant information to improve eligibility
determinations and tax administration.
During the course of this work, you asked us to report separately on the
data sharing and verifying activities between IRS and Education and
provide information that can be used as Congress considers legislative
changes to IRC Section 6103. As agreed with your offices, our objectives
were to determine whether (1) Education uses IRS taxpayer information
to verify information provided by applicants for federal student financial
aid and the benefits, if any, of increasing verification activities and
(2) IRS uses personal information maintained by Education to ensure that
taxpayers meet their tax obligations and the benefits, if any, of
increasing these activities.
To respond to your request, we performed our work at various IRS offices,
including compliance and research offices, and various program offices at
Education. As used in this report, *data sharing* means obtaining and
disclosing information on individuals between Education and IRS to
determine eligibility for student financial aid and to ensure that
taxpayers have met their obligations. We collected and analyzed
information on data sharing and verifying activities between IRS and
Education, including the
type of information received and how the information is used. We reviewed
federal laws and agency guidance regarding the collection, disclosure, and
use of taxpayer and other personal information. We also interviewed IRS
and Education officials to obtain views on possible impediments or missed
opportunities to share and verify taxpayer and other personal information,
as well as the potential benefits of increasing
these activities. We conducted our work from August 2002 through June 2003
in accordance with generally accepted government auditing standards. For
details on our scope and methodology, see appendix I.
Education is not authorized to directly receive taxpayer information from
IRS to verify eligibility for its student financial aid programs, for
which Education estimates it made hundreds of millions in Pell Grant
overpayments in fiscal years 2001 and 2002. Education uses taxpayer
information for several purposes, such as locating loan defaulters;
researching and computing statistical data on overall borrower debt; and,
upon taxpayers* consent, determining loan repayment amounts. However,
Education is not authorized to directly receive taxpayer information from
Results in Brief
Page 3 GAO- 03- 821 Sharing and Verifying Taxpayer Information IRS to
verify eligibility for student financial aid provided under Title IV of
the Higher Education Act of 1965 (HEA).
In 1998, HEA was amended to allow increased data sharing. However, the
provision could not be used as intended because IRC Section 6103 was not
specifically amended so that Education and its contractors could have
access to taxpayer information. In academic year 2001- 02, 11.4 million
students applied for $54 billion in aid under these programs. Education
demonstrated the benefits of using taxpayer information to verify the
personal information that is used to determine student aid applicants*
need for assistance. Based on a study that matched Education data and IRS
income information, Education estimates that it made approximately
$602 million in Pell Grant overpayments during fiscal years 2001 and 2002.
IRS does not use personal information collected from applicants and
maintained by Education to ensure that taxpayers meet their tax
obligations because IRS officials believe the taxpayer information they
already receive is more accurate. In general, IRS officials* views are
supported by IRS*s own data and by the results of Education studies and
investigations. For example, in the mid- 1990s, IRS estimated that
taxpayers with only wage income had a 99 percent voluntary compliance rate
and taxpayers with interest and dividend income were 95 percent compliant
in reporting this income. Taxpayers with certain other sources of income
are much less compliant. However, Education*s student aid application data
are not suited to aiding IRS*s efforts because the applications ask
students and/ or their parents to report data that come directly from
their tax returns.
We are not making any recommendations. However, in September 2000 we
recommended that Congress consider amending IRC Section 6103 to authorize
IRS to disclose certain taxpayer information to Education for the purpose
of verifying information reported on federal student aid applications.
Earlier this year, we also reported that Education could benefit from
receiving taxpayer information for this purpose.
On July 15, 2003, the Commissioner of Internal Revenue and the Chief
Operating Officer of Education*s Office of Federal Student Aid raised no
concerns in responding to a draft of this report. (See the Agency Comments
and Our Evaluation section and apps. II and III.) Officials representing
the Office of Federal Student Aid provided technical comments, which we
have incorporated into the report where appropriate.
Page 4 GAO- 03- 821 Sharing and Verifying Taxpayer Information IRC Section
6103 allows IRS to disclose taxpayer information to federal agencies and
to authorized employees of those agencies for specified
purposes. It was enacted, in part, to control whether and how tax
information submitted to IRS on federal tax returns could be shared. IRC
Section 6103 specifies which agencies (or other entities) may have access
to certain types of tax return information, for what purposes such access
may be granted, and under what conditions the information will be
received. For example, before receiving taxpayer information, agencies are
required to advise IRS how they intend to use the information and to
establish detailed plans that ensure the confidentiality and safeguarding
of the information.
Similar to IRC Section 6103, the Privacy Act of 1974 regulates the federal
government*s use of personal information by limiting the collection,
disclosure, and use of personal information maintained in an agency*s
system of records. Personal information is further protected by the
Computer Matching and Privacy Protection Act of 1988 (Privacy Act). It
requires that agencies enter into written agreements, referred to as
matching agreements, when they share information that is protected by the
Privacy Act for the purpose of conducting computer matches.
IRS receives tax returns from about 88 million individual taxpayers who
have wage and investment income, and approximately 45 million small
business and self- employed taxpayers. IRS performs a variety of checks to
ensure the accuracy of information these taxpayers report on their tax
returns. These checks include verifying computations on returns,
requesting more information about items on tax returns, and matching
information reported by third parties to income reported by taxpayers on
returns (e. g., document matching). IRS*s document matching program has
proven to be a highly cost- effective way of identifying underreported
income, thereby bringing in billions of dollars of tax revenue while at
the same time boosting voluntary compliance.
Approximately 11 million individuals applied for over $50 billion in
federal student financial aid in academic year 2001- 02. Title IV of HEA
authorized several student aid programs, including the following:
Pell Grants* grants to undergraduate students who are enrolled in degree
or certificate programs and have federally defined financial need;
Background
Page 5 GAO- 03- 821 Sharing and Verifying Taxpayer Information
Supplemental Educational Opportunity Grants (SEOG)* grants for
undergraduate students with federally defined financial need; Stafford 3
and Parent Loans for Undergraduate Students (PLUS) loans 4 *
loans that are made by private lenders and guaranteed by the federal
government (guaranteed loans) or made directly by the federal government
through a student*s school (Direct Loans);
Perkins loans* low- interest loans to undergraduate and graduate
students for which interest does not accrue while the students are
enrolled at least half- time in eligible programs; and Work- study* on-
or off- campus jobs for which students who have
federally defined need earn at least the current federal minimum wage and
for which institutions or off- campus employers pay a portion of their
wages.
As shown in figure 1, for academic year 2001- 02, 78 percent of federal
student aid came from loans, 20 percent came from grants, and 2 percent
came from federal work- study programs.
3 Stafford loans consist of subsidized and unsubsidized loans. Subsidized
loans are loans for which the federal government pays the interest costs
while the student is in school. Unsubsidized loans are loans for which the
student is responsible for paying all interest costs. 4 Both graduate and
undergraduate students receive Stafford loans while parents of dependent
students receive PLUS loans.
Page 6 GAO- 03- 821 Sharing and Verifying Taxpayer Information Figure 1:
Title IV Federal Student Aid by Source for Academic Year 2001- 02
(Constant Dollars)
Notes: Percentages based on estimated dollar amounts for academic year
2001- 02. Percentage of grants includes both Pell Grants and SEOGs.
Percentage of loans includes Stafford loans, PLUS loans, and Perkins
loans. Current year dollars adjusted for inflation using the Consumer
Price Index as calculated by the Bureau of Labor Statistics, U. S.
Department of Labor.
Education has created many information systems to support the various
student financial aid programs it administers. In many cases, these
systems are maintained and operated by contractors, which are responsible
for processing the student financial aid application data and providing
such data to the schools, as well as to Education to use in managing and
overseeing the programs. As such, a student*s financial aid process begins
when he or she submits the Free Application for Federal Student Aid
(FAFSA). The student (and parents of a dependent student) submits the
FAFSA to the contractor that enters the data from the application. On
behalf of Education, the contractor calculates the expected family
contribution figure and performs database matches and edits to ensure that
all needed information is included and that the student
meets eligibility requirements, including not having defaulted on a prior
student loan. The contractor then sends the results of the matches and
other processing results to the student and the school( s). The school( s)
request any supporting documents needed to verify application data and
determine the student*s eligibility for aid, and construct an award
package of available types of aid. Funds are then disbursed to the school(
s) according to the student financial aid program requirements.
2%
Grants Loans Federal work- study
20% 78%
Source: The College Board, Trends in Student Aid 2002, Washington, D. C.
Page 7 GAO- 03- 821 Sharing and Verifying Taxpayer Information Education
uses taxpayer information for some eligibility determinations and other
purposes, but is not authorized to directly receive taxpayer
information from IRS to verify student financial aid eligibility or
determine payment amounts for its federal student aid programs* due to IRC
Section 6103 restrictions. During fiscal years 2001 and 2002, Education
could have benefited from using taxpayer information to verify personal
information
from student aid applicants. Using aggregate IRS income information,
Education estimates that $602 million in grant overpayments occurred
during this time.
Education uses the taxpayer information it receives from IRS to determine
approximately 100,000 borrowers* monthly loan repayment amounts, to
determine the addresses for approximately 4.6 million records of borrowers
who may have defaulted on their student loans, and to develop aggregate
borrower debt statistics.
In order to determine the monthly repayment amount for borrowers
participating in the income contingent repayment (ICR) plan, Education,
under IRC Section 6103( l)( 13), receives income information on the
borrower from IRS. The ICR plan allows Federal Direct Loan Program
borrowers to repay loans as a percentage of their income. To participate
in this program, the borrower must authorize IRS (i. e., give his or her
consent) to share income information with Education. 5 Approximately
100,000 consents are processed under the ICR plan for repayment each year.
Under the Taxpayer Address Request (TAR) program, as authorized by IRC
Section 6103( m)( 4), IRS provides the mailing addresses of taxpayers to
Education to be used in collecting debt from student loan defaulters. 6
Specifically, Education furnishes the name and Social Security number
5 IRC Section 6103 (l)( 13) temporarily permits IRS to disclose the
taxpayer*s identity information, filing status, and adjusted gross income
to Education employees for use in establishing the appropriate ICR amount
for an applicable student loan. In practice, disclosures for these
purposes are only made with the taxpayer*s consent under IRC Section 6103(
c) because Education uses contractors to administer its ICR program and
6103( l)( 13) prevents disclosure to contractors. The 6103( l)( 13)
provision has an expiration date of September 30, 2003. 6 Unlike IRC
Section 6103 (l)( 13) disclosures, which may only be made to Education
employees, IRC Section 6103( m)( 4) disclosures can be made to
contractors. Education Could
Benefit from Access to Taxpayer Information to Verify Student Eligibility
for Financial Aid Programs
Education Uses Taxpayer Information for Several Purposes
Page 8 GAO- 03- 821 Sharing and Verifying Taxpayer Information (SSN) to
the IRS for each defaulted student. IRS then conducts a match of the
information and provides Education the most recent address for the
taxpayer. Education sends about 4.6 million records annually to IRS for
matching under the TAR program.
Additionally, as part of its research activities, Education receives
aggregate taxpayer income information from IRS in the form of tables that
it uses in establishing performance measures and selection criteria for
its
student aid application verification process. Education also uses these
data in researching and computing statistical data on overall borrower
debt, such as determining the average and median debt burden ratios for
any given year.
As part of the federal student aid application process, every year since
the mid- 1980s, Education selects approximately 30 percent of its student
aid applicants for verification purposes. 7 When a student is selected for
verification, he or she is required to provide copies of his or her (or
parents*) tax returns to the school. 8 If the student refuses to do so, he
or she will not receive federal aid. The school then compares the
information on the tax return to information on the FAFSA and corrects any
inconsistencies on the FAFSA to match the information on the tax return. 9
This current verification process has at least two drawbacks. The process
is time consuming and paper intensive because it involves approximately
3.6 million paper copies of tax returns that schools match. In addition,
the process relies on applicants providing copies of their tax returns,
which may not be the same as those submitted to IRS.
Beginning in October 2002, Education began an electronic verification
pilot project involving 148 of these selected students who were asked to
authorize IRS to release their tax information to their academic
institutions via the Internet. The purpose of this pilot was to take the
student and/ or his or her parents out of the middle of the verification
7 Education determines who falls into that sample based on analyses of
past years* data on the characteristics of those individuals who are most
likely to commit errors on their applications. Education primarily focuses
on selecting students who are eligible for federal grants.
8 Not all individuals selected for the 30 percent sample are required to
provide copies of their tax returns. Some of these individuals are
legitimately not required to file tax returns, and instead, provide the
school with statements attesting to their nonfiling status and the amount
and type of their untaxed income. 9 Education has established a $400
tolerance level for the discrepancy amount.
Page 9 GAO- 03- 821 Sharing and Verifying Taxpayer Information process
between the IRS and the school so that the school relies on income
information it obtains directly from IRS, thereby making the
process more efficient. Under this pilot project, once the student,
parent, or spouse authorized the release of his or her tax information,
IRS sent the tax transcripts for that individual to the school, which then
resolved any inconsistencies between information on the tax transcript and
on the FAFSA. This pilot match ended on March 31, 2003, and, according to
an Education official, the initial feedback from the participating schools
and taxpayers was very positive. Education officials are currently
compiling data from the pilot schools and taxpayers and will be issuing a
report in the fall of 2003 on the ease of use, statistical data, and any
needed changes.
Although Education receives some taxpayer information in conjunction with
some of its programs, IRC Section 6103 does not authorize Education to
obtain taxpayer information directly from IRS to verify eligibility or
determine payment amounts for its federal student aid programs.
Approximately 11.4 million individuals applied for over $50 billion in
federal student financial aid in academic year 2001- 02. As shown in
figure 2, over a 10- year academic period, the amount of student aid
awarded grew 92 percent, from approximately $28 billion in academic year
1991- 92 to approximately $54 billion in academic year 2001- 02. Legal
Impediment Hinders
Data Sharing for Education*s Student Financial Aid Programs
Page 10 GAO- 03- 821 Sharing and Verifying Taxpayer Information Figure 2:
Total Title IV Federal Student Aid Dollars from Academic Years 1991- 92 to
2001- 02 (in Constant Dollars)
Note: Percentages based on estimated dollar amounts for academic years
2000- 01 and 2001- 02.
Also, because IRC Section 6103 does not authorize Education to directly
obtain taxpayer information from IRS to establish the repayment amount for
ICR student loans, taxpayer consent is required for IRS to share income
information with Education. IRC Section 6103 was enacted, in part, to
control whether and how tax
information submitted to IRS on federal tax returns could be shared. It
was amended in 1976 in an attempt to balance confidentiality and the need
to disclose returns and return information for legitimate purposes.
Determining the most appropriate way to balance these two considerations
has been an issue that has faced Congress for a number of years. Congress
believed that not only did taxpayers have a right to expect the personal
information they report to IRS to remain private, but that such privacy
protection was also an important component of continued voluntary
compliance. Moreover, many observers and privacy advocates believe that
disclosure of return information may decrease taxpayers* willingness to
comply with the tax law and that tax administration suffers when return
information is disclosed for nontax purposes.
0 10
20 30
40 50
60 Dollars in billions Academic year
1991- 1992
1993- 1994
1995- 1996
1997- 1998
1999- 2000
2001- 2002
Source: The College Board, Trends in Student Aid 2002, Washington, D. C.
1992- 1993
1994- 1995
1996- 1997
1998- 1999
2000- 2001
Page 11 GAO- 03- 821 Sharing and Verifying Taxpayer Information IRC
Section 6103 restrictions were the focus of past legislative action taken
to address limitations on data sharing and matching activities
between IRS and Education in connection with student financial aid
programs. According to Education officials, a 1998 amendment to HEA was
intended to authorize the matching of student aid applicant information
with several elements of federal income tax return information. However,
that provision could not be used as intended because IRC Section 6103 was
not specifically amended so that Education and its contractors, which
assist Education in administering the various financial aid programs,
could have access to taxpayer information.
In an October 2000 report to Congress on taxpayer confidentiality and the
use of taxpayer information, Treasury*s Office of Tax Policy recommended
that IRC Section 6103 be amended to permit disclosure of necessary items
to Education for income verification, and to permit the use of contractors
as contemplated by HEA, if Education could show that such disclosure was
warranted. 10 Further, in August 2002, officials from Treasury, the Office
of Management and Budget, and Education proposed a legislative amendment
to IRC Section 6103 that would allow IRS to match the income reported on
federal student aid applications with income tax return
information and share the results with Education. The language in the
proposed amendment stresses balancing the need for accurate student aid
applicant information with the importance of maintaining the integrity of
IRS taxpayer information. The proposed legislative amendment specifies,
*the tax data would be disclosed only for very limited purposes, only to
the Department of Education and its contractors, and then only after a
series of rigorous safeguards were implemented.* The proposed amendment
was included in the President*s Fiscal Year 2004 Budget, which stated that
IRS matching of student aid application income data with applicant tax
data *is projected to save $638 million in Pell Grant costs over 2003*
2004, significantly reducing existing funding shortfalls.* 11 However, it
does not appear in the Taxpayer
10 U. S. Department of the Treasury, Office of Tax Policy, Report to
Congress on Scope and Use of Taxpayer Confidentiality and Disclosure
Provisions, Vol. I: Study of General Provisions (Washington, D. C.:
October 2000). 11 Office of Management and Budget, Executive Office of the
President of the United States, *Department of Education,* Budget of the
United States Government: Fiscal Year 2004
(Washington, D. C.: U. S. Government Printing Office, 2003), http:// www.
whitehouse. gov/ news/ usbudget/ budget- fy2004/ education. html
(downloaded June 11, 2003).
Page 12 GAO- 03- 821 Sharing and Verifying Taxpayer Information Protection
and IRS Accountability Act of 2003* the most recent tax bill that contains
several other confidentiality and disclosure provisions. 12 Moreover, as
of June 2003, Congress had not acted on the proposed
amendment. Apart from the proposed legislative amendment, Education
officials noted that several operational details remain to be addressed by
IRS and Education, many of which depend ultimately on the final language
in the legislation. For example, because the schools act as agents for
Education in the review, collection, and disbursement of financial aid
awards, the details surrounding how best to make the matching program work
for both the schools and the applicants must be addressed. In addition,
Education officials said careful consideration must be given to the timing
for
matching student aid applications with tax returns. According to the
officials, most students can submit their FAFSAs starting January 1. The
applications provide details on their income, or that of their parents*,
for the previous year. However, taxpayers have until April 15 to file
their tax returns and can request extensions. Therefore, IRS information
may not be available for matching purposes until well after initial
student aid eligibility determinations have been made. In a September 2000
report, we noted that while such a match may not be timely enough for
initial eligibility verification purposes, it may be possible to conduct a
match with IRS using fairly complete taxpayer data because financial aid
payments are typically not made until late August or September. 13
Education officials contend that while the timing of the match would be
less than ideal for helping to make initial student financial aid
decisions, they have established interim steps to address the timing
issue, such as multiple disbursement periods and withholding of payments
until income verification is completed. Even with these interim steps in
place, they acknowledge that the timing of the matching program still
remains a
challenge. Education officials said they are also in the process of
identifying other ways to address all operational details, and are
committed to working with IRS to make the matching program a success.
12 H. R. 1528, The Taxpayer Protection and IRS Accountability Act of 2003,
April 1, 2003. 13 U. S. General Accounting Office, Benefit and Loan
Programs: Improved Data Sharing Could Enhance Program Integrity, GAO/
HEHS- 00- 119 (Washington, D. C.: Sept. 13, 2000).
Page 13 GAO- 03- 821 Sharing and Verifying Taxpayer Information Increased
data sharing and verification between IRS and Education could result in
better decision making when awarding student financial aid and reduced
fraud. Both Education*s Office of the Inspector General (OIG) and
we have reported that increased data sharing can improve Education*s
student financial aid decisions. Additionally, Education is currently
conducting a project that supports the need for increased data sharing.
In a September 2000 report, we recommended that Congress consider amending
IRC Section 6103 to improve the ability of certain federally funded
benefit and loan programs to obtain and share information to make timely
and accurate eligibility determinations, while protecting personal
privacy and the confidentiality of personal information. 14 Specifically,
we said *the Congress should consider amending Section 6103( l) of the
Internal Revenue Code to authorize IRS to disclose certain taxpayer data
to officers, employees, and contractors or other agents (such as schools)
of Education for purposes of verifying information reported on
applications for financial aid.* Additionally, our recent January 2003
Performance and Accountability Series report indicates that Education
could benefit from receiving IRS taxpayer information to verify income
information reported on student aid applications. 15 According to
Education*s OIG, some students report inaccurate
information either through error or fraud on their federal student aid
applications through, for example, underreporting of income. In a
statement before Congress in 2000, the Education*s Inspector General
stated that underreporting of income by student aid applicants costs
federal taxpayers over $100 million annually in overawards of Pell Grants
and awards to ineligible persons. In addition to underreporting,
Education*s OIG found numerous examples of fraud, as shown in table 1.
Applicants* ability to receive student aid fraudulently could be reduced
if Education could verify applicant information using IRS taxpayer data.
14 GAO/ HEHS- 00- 119. 15 U. S. General Accounting Office, Major
Management Challenges and Program Risks: Department of Education, GAO- 03-
99 (Washington, D. C.: January 2003). Increased Data Sharing
Can Improve Student Financial Aid Decisions
Page 14 GAO- 03- 821 Sharing and Verifying Taxpayer Information Table 1:
Selected Examples of Federal Student Aid Fraud Identified by Education*s
OIG
Date Program Description of fraud
1993- 96 Pell Grant Falsification of student eligibility documents
(including false IRS documents) that made ineligible students appear
eligible. Received in excess of $250, 000 in Pell Grant funds.
1994- 2000 Pell Grant Eight admissions representatives charged with three
multicount criminal indictments for procuring students to falsify
financial information to qualify for Pell Grant funds. 1998 Federal
student aid Financial aid consultant lowered clients* incomes
on FAFSA and tax forms to increase students* chances of receiving
financial aid.
1999 Pell Grant Scheme involving program fraud, false statements, and tax
fraud in connection with postsecondary programs the defendants falsely
claimed to be administering.
2001 Federal grants, workstudy, and loans Twenty- six people charged in 23
separate
criminal cases with fraudulently obtaining over $2.6 million in federal
grants, work- study, and loans. 2003 Pell Grant Defendant found guilty of
embezzling $600,000 of
Pell Grant funds through false ownership tactics. Source: Office of
Inspector General, Department of Education. In addition to these examples
of fraud, Education*s research indicates it
may have overpaid an estimated $602 million in Pell Grants over a 2- year
period. As part of its efforts to show the effect of IRC Section 6103
restrictions on eligibility and payment decisions, Education is conducting
the Pell Grant Payment Study by matching information provided on
student aid applications with IRS taxpayer information. The study began in
1999 and measures the extent of underreporting and overreporting of income
based on student aid applicants* characteristics, such as income, tax
filing status, and recipients* schools.
To enable this match, Education provides IRS with a file of student aid
applicants* SSNs. IRS officials match these SSNs with taxpayer income
information and provide the aggregated results to Education. This format
protects the taxpayers* confidentiality, in accordance with IRC Section
6103, which prohibits IRS from revealing the identity of these taxpayers
to Education. Since Education does not know the identity of the taxpayers,
it can estimate the amount of overpayments but cannot associate a specific
Page 15 GAO- 03- 821 Sharing and Verifying Taxpayer Information
overpayment with a particular individual and cannot ascertain when a
mismatch may be legitimate. Thus far, the study has estimated the
percentage of Pell Grant overpayments to be 3.4 percent, or $272 million
dollars, in fiscal year 2001 and 3.3 percent, or $330 million dollars, in
fiscal year 2002, for a total of $602 million. Education has not done a
similar study for its loan programs, which account for approximately 80
percent of federal student aid funds.
Education officials believe amending IRC Section 6103 to enable Education
to match student aid applicant information with several elements of
federal income tax return information *would substantially reduce the risk
of fraud and overpayments* associated with Education*s student financial
aid program, would eliminate the need for taxpayer consent in conjunction
with the ICR program, and would make the program more administratively
efficient. This, in turn, would enhance the integrity of the federal
student aid programs and ensure that students are receiving the amounts of
assistance for which they are eligible.
IRS does not use personal information from applicants that Education
collects and maintains to ensure that taxpayers meet their tax obligations
because IRS officials believe the taxpayer information IRS receives is
more accurate. In general, IRS officials* views are supported by its past
estimates of taxpayers* levels of compliance and by the results of
Education studies and investigations. IRS officials cite a number of
reasons for not using information Education
collects and maintains to ensure that taxpayers meet their tax
obligations. IRS officials said they believe the taxpayer information IRS
collects and maintains on over 100 million individual taxpayers, who file
income tax
returns annually, is more accurate than that collected and maintained by
Education from applicants applying for federal student aid. The officials
noted that because federal student aid is based on income, applicants
seeking financial aid might be inclined to underreport their income to
Education in hopes of securing larger aid awards. The officials said they
believe most taxpayers know that failure to fully disclose income to IRS
could result in an audit or the use of IRS enforcement authorities to
collect IRS Does Not Use
Education*s Student Aid Data and the Potential Benefit of Doing So Appears
to Be Limited
Page 16 GAO- 03- 821 Sharing and Verifying Taxpayer Information delinquent
taxes. 16 Further, the officials also said they believe the requirement to
file a tax return annually helps to ensure that some of the
information IRS maintains, such as taxpayers* addresses, is more current
when compared to similar information maintained by Education.
IRS routinely relies on information from third- party sources (e. g.,
banks) to ensure that taxpayers meet their tax obligations, including both
whether taxpayers correctly report information necessary to determine the
taxes due, if any, and whether any taxpayers who should have filed returns
did not. Through its document matching programs, IRS uses these third-
party documents to verify what taxpayers report on their tax returns. 17
Similarly, IRS identifies individuals who did not file tax returns if it
receives thirdparty documents for these individuals.
Past IRS estimates of taxpayers* compliance have indicated that taxpayers
whose incomes are subject to document matching are among the most
compliant. For example, in the mid- 1990s, IRS estimated that taxpayers
with only wage income had a 99 percent voluntary reporting compliance
rate, and taxpayers with interest and dividend income were 95 percent
compliant in reporting this income. IRS is currently conducting a study
that is intended to update these compliance estimates.
However, although document matching programs work well for taxpayers whose
incomes are subject to third- party reporting to IRS, they do not help
when taxpayers have sources of income that are not subject to such
reporting. Both the Treasury Inspector General for Tax Administration and
we have previously reported that taxpayers whose incomes are not subject
to information reporting, like those who are self- employed, are much less
16 In general, if taxes remain unpaid after IRS gives appropriate notice
and demand for payment, IRS is authorized by the IRC to use its
enforcement authority in the form of a levy, seizure, or lien. The levy of
assets such as bank accounts and wages that are in the possession of third
parties, such as banks and employers, is referred to as a levy, and the
levy of assets in the possession of the taxpayer is referred to as a
seizure. A lien is a legal claim that attaches to property to secure the
payment of a debt. The filing of a lien would prevent the taxpayer from
selling an asset, with clear title, without payment of the tax debt.
17 IRS*s Automated Underreporter Program is designed to identify wage
earners who do not report all of their income on their tax returns. The
program compares the income reported on their tax returns to the income
reported by employers and other third- party sources on Forms W- 2 and
1099.
Page 17 GAO- 03- 821 Sharing and Verifying Taxpayer Information compliant
in fulfilling their tax obligations than those whose incomes are subject
to such reporting. 18 However, the data collected and maintained by
Education are not suited to helping IRS identify taxpayers who are not
covered by existing document
matching programs. The student aid applications ask students and/ or their
parents to report income information directly from their tax returns and
generally do not ask for other corroboration of income.
IRS officials* view that IRS data are likely to be more accurate than
Education*s data is also supported by Education*s studies. As noted
earlier, Education*s Pell Grant Payment Study results have found that some
student aid applicants have underreported income on their applications
compared to the income that they reported to IRS. Although Education
estimates some underpayments to students during these studies, officials
say that these, in their judgment, appear to result from mistakes in
filling out applications. The work of the Education OIG also suggests that
a significant number of student aid applicants falsify copies of tax
returns or other information that they submit to Education to show lower
incomes and thereby claim higher amounts of student aid.
Given that Education data may have limited utility for tax administration,
IRS has not investigated use of the data for tax administration. If
Congress does authorize Education to obtain taxpayer information to verify
students* eligibility for financial aid, the resulting database of
mismatches between data reported to each institution may represent a ready
and lowcost opportunity for IRS to investigate whether there is any
reasonable potential for using Education information for tax
administration purposes. The database mismatches would identify how many,
if any, student aid applicants reported less income to IRS than to
Education and the number of cases in which the applicants may not have
filed tax returns at all.
Education obtains some information from IRS to use in administering its
programs but is unable to obtain information that could help it reduce
financial aid overpayments that it estimated to total $602 million in
fiscal 18 U. S. General Accounting Office, Reducing the Tax Gap: Results
of a GAO- Sponsored Symposium, GAO/ GGD- 95- 157 (Washington, D. C.: June
2, 1995), and Treasury Inspector
General for Tax Administration, Management Advisory Report: Comparing the
Internal Revenue Service*s Verification of Income for Wage Earners and
Business Taxpayers,
Reference No: 2001- 30- 166 (Washington, D. C.: September 2001).
Concluding
Observations
Page 18 GAO- 03- 821 Sharing and Verifying Taxpayer Information years 2001
and 2002. As government agencies continue to seek efficient ways to
improve federal benefit and loan program decisions by reducing
fraud and error, data sharing has been a valuable tool for supporting
integrity in federal programs. However, the need to verify self- reported
information must be balanced with privacy concerns. Existing disclosure
laws help ensure that federal agencies properly handle the personal
information they collect. Modifying the legal constraints in IRC Section
6103 for sharing taxpayer information* with accompanying requirements to
ensure that the data are used only for authorized purposes* is one way to
address student aid program vulnerabilities while retaining protections
for personal privacy. We have previously recommended that Congress
consider such a change.
IRS does not use student aid application data because IRS officials
believe that the data IRS receives are more accurate than student aid
application data. This belief is supported by IRS data and by Education
studies, and
thus there appears to be little benefit to attempting to use the Education
data for tax administration purposes.
We requested comments on a draft of this report from the Commissioner of
Internal Revenue and the Secretary of Education. On July 15, 2003, the
Commissioner of Internal Revenue and the Chief Operating Officer of
Education*s Office of Federal Student Aid each provided written comments
on a draft of this report. (See apps II and III, respectively.) Officials
representing the Office of Federal Student Aid also provided technical
comments to clarify specific sections of the draft report. We have
incorporated these comments into the report where appropriate.
The IRS Commissioner and Education officials raised no concerns. In his
comments, the Commissioner noted that although we did not make any
recommendations, the report provides an accurate and comprehensive review
of the issue, and will be a good source document for policymakers as they
address increased sharing of taxpayer information. Additionally, the Chief
Operating Officer acknowledged the potential for saving hundreds of
millions of dollars annually in overpayments and other benefits through an
effective data matching program with IRS, and said that Education
officials would continue to support necessary legislative changes. Agency
Comments
and Our Evaluation
Page 19 GAO- 03- 821 Sharing and Verifying Taxpayer Information As agreed
with your offices, unless you publicly announce its contents earlier, we
plan no further distribution of this report until 30 days from its
date. At that time we will send copies to the Chairman and Ranking
Minority Member, House Committee on Ways and Means; the Chairman and
Ranking Minority Member, Subcommittee on Oversight, House Committee on
Ways and Means; the Secretary of Education; the Secretary of the Treasury;
and the Commissioner of Internal Revenue. We will also make copies
available to others on request. In addition, the report will be available
at no charge on the GAO Web site at http:// www. gao. gov.
If you or your staffs have any questions about this report, please contact
me at (202) 512- 9110 or on brostekm@ gao. gov, or Signora May at (404)
679- 1920 or on maysj1@ gao. gov. Other staff who made key contributions
to this report were Michelle Bowsky, Michele Fejfar, Jyoti Gupta, Shirley
Jones, Anne Laffoon, and Miltresa McMichael.
Michael Brostek Director, Tax Issues
Appendix I: Objectives, Scope, and Methodology
Page 20 GAO- 03- 821 Sharing and Verifying Taxpayer Information To respond
to your request, we performed our work at various Internal Revenue Service
(IRS) offices, including the Office of Governmental
Liaison; the Office of Safeguards; the Office of Program, Evaluation, and
Risk Analysis; and the Privacy Advocate*s Office. Our work also included
interviews with employees in IRS*s Wage and Investment Operating Division
and IRS*s Small Business/ Self Employed Operating Division, the Department
of the Treasury*s Office of Tax Policy and the Office of the Treasury
Inspector General for Tax Administration, and program offices at the
Department of Education. We collected and analyzed information on data
sharing and matching between IRS and Education during fiscal years 2000
through 2002.
To determine whether Education uses IRS taxpayer information to verify
information provided by applicants for federal student aid and the
benefits of increasing verification activities, we analyzed the student
financial aid application and determined what personal information
Education collects
from applicants. We interviewed Education officials as well as IRS
officials to obtain data on the type of taxpayer information received from
IRS, including how, when, and for what purpose the information is
received. We identified the legislative and regulatory authorities that
govern IRS*s
disclosure of taxpayer information to Education. Additionally, we
determined how Education is using the information received from applicants
and IRS, and whether it is matching/ crosschecking the information to
improve eligibility determinations. To determine the benefits of
increasing verification activities, we collected and analyzed data to
assess how increased disclosure of information
would affect taxpayer confidentiality and privacy interests. We
interviewed IRS and Education officials to obtain views on possible
impediments or missed opportunities to match/ cross- check information to
make better programmatic decisions, and we reviewed existing studies or
reports on data matching/ cross- checking activities. We determined what
personal information Education collects but does not match/ cross- check
with IRS and why not, and whether officials believed matching/
crosschecking would be useful for eligibility determinations.
To determine whether IRS uses personal information maintained by Education
to ensure that taxpayers meet their tax obligations and the benefits of
increasing such activities, we collected data to determine what personal
information IRS obtains from Education. We interviewed IRS and Education
officials to obtain data on the type of personal information that is
received from Education, including how, when, and for what purpose the
information is received. We identified the legislative and regulatory
Appendix I: Objectives, Scope, and
Methodology
Appendix I: Objectives, Scope, and Methodology
Page 21 GAO- 03- 821 Sharing and Verifying Taxpayer Information
authorities that govern Education*s disclosure of personal information to
IRS.
Additionally, we assessed how IRS is using the information received from
Education, and whether it is matching/ cross- checking the information to
better ensure taxpayers are meeting their tax obligations. To determine
the benefits of increasing verification activities, we collected and
analyzed data to determine what personal information IRS receives from
Education
but does not match/ cross- check and why not, and whether officials
believe the information would be useful for tax administration. We
determined what personal information IRS does not receive from Education,
whether IRS is aware of the information, and whether IRS officials believe
receiving it would be useful for tax administration.
As used in this report, *data sharing* means obtaining and disclosing
information on individuals between Education and the IRS to determine
eligibility for student financial aid and to ensure that taxpayers have
met their obligations. Education*s use of taxpayer information to verify
information obtained from applicants refers to the matching or
crosschecking procedures that are conducted, and is covered by interagency
computer matching agreements between IRS and Education. Our review was
subject to some limitations. We did not assess the
reliability or quality of taxpayer and other personal information that is
shared and verified between Education and IRS. We relied on officials to
identify those IRS offices that use personal information because there is
no central, coordinating point within IRS for receipt of this type of
information. Additionally, we relied on IRS and Education officials* views
on possible impediments or missed opportunities to match/ cross- check
information, any additional data sharing and verification needs, and the
benefits and challenges of increased disclosure of taxpayer information.
We conducted our work from August 2002 through June 2003 in accordance
with generally accepted government auditing standards.
Appendix II: Comments from the Internal Revenue Service
Page 22 GAO- 03- 821 Sharing and Verifying Taxpayer Information Appendix
II: Comments from the Internal Revenue Service
Appendix III: Comments from the Department of Education
Page 23 GAO- 03- 821 Sharing and Verifying Taxpayer Information Appendix
III: Comments from the Department of Education
(440151)
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