Tax Administration: IRS' Low-Dollar Notices Sent to Individual Taxpayers
(Letter Report, 04/14/2000, GAO/GGD-00-84).
Pursuant to a congressional request, GAO provided information on the
Internal Revenue Service's (IRS) computer-generated low-dollar notices,
focusing on notices involving: (1) amounts due of less than $5; and (2)
refunds of less than $1.
GAO noted that: (1) of the over 31 million computer-generated notices
IRS sent to individual taxpayers in 1999, about 1.5 million were
low-dollar notices; (2) 82 percent of these (about 1.3 million)
reflected adjustments IRS had made to correct discrepancies such as
those between information reported to IRS by a third party and
information reported on the taxpayer's original return; (3) most notices
had zero balances, requiring no additional action or response by the
taxpayer; (4) however, in considering taxpayer burden issues related to
low-dollar notices, it is important to note that in the vast majority of
cases, while the final dollar amounts reported on the notices were small
or zero, they represented "net" amounts; (5) that is, they were the net
result of changes to the taxpayer's account involving larger amounts;
(6) according to IRS estimates, the agency cost to prepare and send a
low-dollar notice is about $0.42; (7) the cost would rise by about an
additional $1.30 if IRS needed to process a payment received from a
taxpayer because of the original notice, and by another $14.32 if it
needed to respond to a taxpayer inquiry related to the notice; (8) IRS
sends low-dollar notices to taxpayers pursuant to statutory
requirements, such as to correct a math error or to issue a notice of
deficiency, or in accordance with the Internal Revenue Manual; (9) the
notices, which inform taxpayers of any change to their account, are sent
regardless of the dollar amounts involved; and (10) IRS is aware of the
potential burden placed on taxpayers in dealing with low-dollar notices
and has formed an internal task team to examine the issue and identify
potential improvements.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-00-84
TITLE: Tax Administration: IRS' Low-Dollar Notices Sent to
Individual Taxpayers
DATE: 04/14/2000
SUBJECT: Tax administration systems
Tax returns
Tax nonpayment
Tax refunds
Tax violations
Taxpayers
Written communication
Cost analysis
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United States General Accounting Office
GAO
Report to Congressional Requesters
April 2000
GAO/GGD-00-84
TAX ADMINISTRATION
IRS' Low-Dollar Notices Sent to Individual
Taxpayers
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GAO
Permit No. G100
(268901)
B-284264
Page 7 GAO/GGD-00-84 IRS' Low-Dollar Notices
B-284264
April 14, 2000
The Honorable Bill Archer
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
IRS begins the process of checking whether
taxpayers have reported the correct tax liability
on their tax returns as the returns are being
processed at IRS Service Centers. An example of
such checking is when returns are reviewed for
computational errors. IRS' checking process also
includes computer matching of information reported
by taxpayers on their returns with information
reported to IRS by third parties (e.g., a bank
report of interest earnings). Based on the results
of such checks, IRS sends computer-generated
notices to communicate with taxpayers about
discrepancies it has found and adjustments it has
made to their tax returns.1 In 1999, IRS sent 31
million such notices to individual taxpayers.
The notices IRS sends have long been a source of
taxpayer complaint and misunderstanding,
especially those that involve relatively small
amounts of money. Recognizing that taxpayers spend
time and resources to deal with these notices,
even when small amounts of money are involved, you
asked us to develop information about computer-
generated notices involving (1) amounts due of
less than $5 or (2) refunds of less than $1. As
agreed with your office, we met with IRS officials
and used IRS data on notices sent during tax year
1999 to determine
� the number and type of computer-generated low-
dollar notices IRS sends to individual taxpayers;
� IRS' cost to prepare and send these notices,
respond to taxpayer inquiries related to them, and
process any resulting payments; and
� the reasons IRS sends these notices and any
plans it might have regarding them.
Results in Brief
Of the over 31 million computer-generated notices
IRS sent to individual taxpayers in 1999, about
1.5 million were low-dollar notices. Eighty-two
percent of these (about 1.3 million) reflected
adjustments IRS had made to correct discrepancies
such as those between information reported to IRS
by a third party and information reported on the
taxpayer's original return. Most notices had zero
balances, requiring no additional action or
response by the taxpayer. However, in considering
taxpayer burden issues related to low-dollar
notices, it is important to note that in the vast
majority of cases, while the final dollar amounts
reported on the notices were small or zero, they
represented "net" amounts. That is, they were the
net result of changes to the taxpayer's account
involving larger amounts.
According to IRS estimates, the agency cost to
prepare and send a low-dollar notice is about
$0.42. The cost would rise by about an additional
$1.30 if IRS needed to process a payment received
from a taxpayer because of the original notice,
and by another $14.32 if it needed to respond to a
taxpayer inquiry related to the notice.
IRS sends low-dollar notices to taxpayers pursuant
to statutory requirements, such as to correct a
math error (Internal Revenue Code section 6213(b))
or to issue a notice of deficiency (Internal
Revenue Code section 6212), or in accordance with
the IRS Internal Revenue Manual. The notices,
which inform taxpayers of any change to their
account, are sent regardless of the dollar amounts
involved. IRS is aware of the potential burden
placed on taxpayers in dealing with low-dollar
notices and has formed an internal task team to
examine the issue and identify potential
improvements.
Background
In 1998, over 123 million individual taxpayers
filed income tax returns. For most, this ended
their interaction with IRS for the year, aside
from any refund they might receive. IRS audits
about 1 percent of individual taxpayers and has
nonaudit contacts with millions of other taxpayers
about mistakes (e.g., computational or "math"
errors) they might have made. Computer-generated
notices are an important type of nonaudit contact
and a major means through which IRS communicates
with taxpayers about such mistakes on their
returns.
Although they are sent to advise taxpayers of
changes IRS has made to their accounts, notices
differ in purpose and content. One type of notice
explains changes IRS makes to a taxpayer's account
because it has found discrepancies between a tax
return and information it has received from one or
more third parties. These discrepancies are
detected when IRS performs computer matches of the
information it receives from banks and other third
parties with that reported on the taxpayers'
original returns. When discrepancies are found,
IRS adjusts the taxpayers' account and sends a
notice explaining what it has done and the effect
on their tax liability. IRS uses a second type of
notice to inform taxpayers of computational errors
in their returns, the corrections it has made, and
any resulting change in their tax liability. A
third type of notice concerns instances in which
taxpayers have requested an IRS computation of
their return, and it is sent to inform the
taxpayers of IRS' results. Finally, IRS uses
notices to inform taxpayers when the total
estimated tax payments that they have reported do
not agree with IRS' information.
Scope and Methodology
To determine the number and types of computer-
generated low-dollar notices IRS sent in 1999, we
obtained data from IRS on the over 31 million
notices the agency sent to taxpayers notifying
them of changes to their accounts, including those
that involved low-dollar amounts. We reviewed the
data in terms of the dollar amounts of the
notices, the reasons for sending them, and the
dollar amounts of the underlying account
adjustments causing the notices to be sent.
We obtained data from IRS personnel working in the
Taxpayer Correspondence and Submission Processing
areas regarding the cost involved in preparing and
sending notices to taxpayers and other data
reflecting the cost to respond to subsequent
taxpayer inquiries or to process payments made by
taxpayers.
To identify the reasons that IRS sends low-dollar
notices to taxpayers, we met with Customer Service
officials at IRS' National Office and Notice
Review officials at the Kansas City Service Center
and reviewed relevant information they provided to
us.
We also obtained examples of low-dollar notices
sent to taxpayers and discussed with IRS program
staff the causes, reasons, and other issues
related to these and other notices.
We conducted our work from November 1999 to
February 2000 in accordance with generally
accepted government auditing standards. We
performed work at the IRS National Office in
Washington, D.C., and at the IRS Kansas City
Service Center. We did not assess the internal
controls, completeness, or accuracy of IRS notice
records.
On March 13, 2000, we requested comments on a
draft of this report from the Commissioner of
Internal Revenue. The comments are discussed at
the end of this letter and reprinted in the
appendix.
Number and Type of Low-Dollar Notices Sent
Of the over 31 million computer-generated notices
IRS sent to individual taxpayers in 1999, about
1.5 million were low-dollar notices. As table 1
shows, about 1.3 million, or 82 percent, were to
inform taxpayers about adjustments IRS made to
their accounts because of discrepancies it
detected. There were many fewer notices about
taxpayer computational errors, IRS computations
made at the request of taxpayers, and mistakes in
estimated tax credits-7, 5, and 4 percent,
respectively.
Table 1: Low-Dollar Notices Sent by IRS in
Calendar Year 1999
Type of notice Number of notices
Zero Refun Paymen Total
balanc d due t due
e
IRS adjustments 931,84 69,26 260,78 1,261,
5 9 1 895
Taxpayer error 93,324 4,492 11,390 109,20
6
IRS computation of tax 78,721 567 145 79,433
or refund due
Estimated tax credit 43,243 1,022 21,197 65,462
discrepancy
Others 14,105 680 1,493 16,278
Total 1,161, 76,03 295,00 1,532,
238 0 6 274
Source: GAO compilation of IRS data.
Table 1 also shows that most notices did not
involve refunds or payments due. About 1.2
million, or 76 percent, had zero balances, meaning
no further action was required on the part of the
taxpayer.
However, in considering the potential effects of
low-dollar notices on taxpayers, it is important
to note that while the final dollar amounts shown
on the notices were small or zero, many notices
reflected changes involving larger dollar amounts.
To illustrate, a taxpayer may be expecting to
receive a refund of $315 based on the tax return
he or she filed (see fig. 1). However, due to an
adjustment that IRS made to the tax return, the
taxpayer may now owe $3.92, and IRS would send a
notice reflecting the adjustment.
Figure 1: Illustration of a Low-Dollar Notice
Note: This is an illustration of page 1 of a
multipage notice. The additional pages include
information explaining penalty and interest
charges.
Table 2 shows that, for the previously mentioned
1.3 million notices with discrepancies that IRS
detected, a majority (78 percent) involved
underlying adjustments from $150 to $14,999.
Table 2: IRS Adjustment Notices and Corresponding
Adjustments to Taxpayers' Accounts
Type of Number of notices by corresponding
notice adjustments
$0 to $15 $150 $1,500 More Total
$14.9 to to to than
9 $149 $1,49 $14,99 $15,00
9 9 0
Zero 27,17 143,9 566,1 185,40 9,143 931,84
balance 1 55 68 8 5
Refund due 2,638 11,42 48,24 6,736 224 69,269
8 3
Payment due 17,32 65,55 157,0 20,201 692 260,78
0 3 15 1
Total 47,12 220,9 771,4 212,34 10,059 1,261,
9 36 26 5 895
Source: GAO compilation of IRS data.
IRS' Cost to Prepare and Send Notices
IRS estimates that, in most cases, it costs about
$0.42 to prepare and send a notice, an amount that
includes labor, supplies, and postage. This cost
reflects the fact that, for the most part, IRS'
process to prepare and send notices is
computerized. The notices are automatically
printed and sent to taxpayers. In a small
percentage of cases, when IRS randomly selects a
low-dollar notice for a quality review, the cost
rises to $0.70.
There are other instances when the cost is higher,
however. For example, in some cases, IRS notices
result in taxpayers submitting payments to IRS.
These payments generally pass through up to 10
separate processing steps, such as mail sorting,
computer data input, data verification, account
resolution, and deposit. Further, depending on the
volume of payments to be processed, the time
involved can range from 1 to 15 days. According to
IRS estimates, the cost to process each such
taxpayer payment is about $1.30.
Another instance where the cost is higher is when
the receipt of the original notice by the taxpayer
generates further correspondence between the
taxpayer and IRS. In these cases, an IRS staff
member would generally respond directly to the
taxpayer regarding the correspondence or the
information provided. IRS estimates the cost for
these cases to be about $14.32 because of the
additional amount of labor required.
Why IRS Sends Low-Dollar Notices
The fact that most low-dollar notices do not
require any taxpayer action raises a question as
to why IRS sends them, particularly those having a
zero balance. The answer is that IRS notifies
taxpayers, pursuant to a statutory provision or in
accordance with the IRS Internal Revenue Manual,
of any changes it makes to their account,
regardless of the dollar amounts involved.
IRS' Internal Task Team Evaluating Low-Dollar
Notices
IRS recognizes the possible burden placed on
taxpayers as a result of low-dollar notices and
has formed an internal task team to examine the
issue. The team, formed in early 1999 and
comprised of staff from various IRS functional
disciplines, is obtaining information and
developing possible solutions. In that regard, the
team has been analyzing different aspects of the
issue, including computer programming, legal
requirements, and impact on taxpayers.
One possible proposal identified by the team is
for IRS to add specific language to all low-dollar
notices informing taxpayers that the notice is not
a bill and that payment by the taxpayer is not
required. This would allow IRS to meet its
requirements for advising taxpayers of changes
made to their accounts but reduce the burden on
the taxpayers in terms of responding to IRS.
Another idea being considered is the possibility
of reprogramming IRS' computers so that low-dollar
payments due are changed to zero balances, and the
notices sent to taxpayers would explain the
adjustment.
The task team expects to complete its work over
the next several months and send its final report
to the IRS Commissioner by the end of calendar
year 2000.
Agency Comments
The Commissioner of Internal Revenue provided
written comments on a draft of this report in an
April 5, 2000, letter, which is reprinted in the
appendix.
IRS said that it was pleased that we cited its
efforts to recognize and reduce the possible
burden placed on taxpayers as a result of low-
dollar notices. IRS also highlighted several
examples of recommendations being considered by
its internal task team studying the issue.
We are sending copies of this report to Senators
William V. Roth, Jr., and Daniel P. Moynihan, the
Chairman and Ranking Minority Member of the Senate
Finance Committee; Representatives Charles B.
Rangel and William J. Coyne, Ranking Minority
Members of the House Committee on Ways and Means
and Subcommittee on Oversight, respectively; the
Honorable Lawrence H. Summers, Secretary of the
Treasury; and the Honorable Charles O. Rossotti,
Commissioner of Internal Revenue. We will also
make copies available to others upon request.
If you have any questions, please call me or
Joseph E. Jozefczyk at (202) 512-9110. A key
contributor to this report was Julie A. Cahalan.
Margaret T. Wrightson
Director, Tax Policy and
Administration Issues
_______________________________
1IRS does not consider such checking activities to
be audits, and the notices taxpayers receive as a
result of them are not considered audit contacts.
Further, these are not the only notices that IRS
may send to taxpayers. Other notices can result
from subsequent IRS processes, such as audits and
collections.
Comments From the Internal Revenue Service
Page 11 GAO/GGD-00-84 IRS' Low-Dollar Notices
*** End of Document ***