	Current Prerefund Checks Provide Significant Benefits

Prerefund compliance checks enable IRS to help confirm taxpayers’  identities and ensure that returns have required information, quickly and  efficiently correct certain errors with a virtual certainty of being right,  identify and audit some returns even before refunds are completed, and  help detect possible fraud. Fraud Investigations

Based on IRS’s computer filters, IRS identifies some refund claims that  may be fraudulent. Math error checks are among the most beneficial of the prerefund checks  for both taxpayers and IRS. These checks have the potential to protect  billions of dollars in federal revenue from being erroneously refunded to  taxpayers, especially for refundable tax credits that have been increasingly  enacted in recent years, as significant overclaimed refund amounts result,  sometimes through fraudulent claims. We calculated that  IRS prevented about $95 million in erroneous refunds in fiscal year 2010  using this new authority. For  example, last year we reported that from January 1 through September 30,  2010, IRS corrected about 7.7 million errors associated with the Making  Work Pay credit, including about 60 percent in the taxpayers’ favor. These  corrections meant that taxpayers received larger refunds (or had lower  taxes due) than they had anticipated. Prerefund Checks Can Be Enhanced

For almost a century, Congress has been expanding IRS’s MEA on a case- by-case basis. We  suggested in 2010 that authorizing the use of MEA on a broader basis  rather than on a case-by-case basis, with appropriate controls to protect  taxpayer rights, could minimize the danger of that happening in the  future. I already mentioned some of these earlier, but, to  summarize, broader MEA could    enable IRS to correct all or nearly all returns where IRS identifies the  noncompliance and the needed correction with virtual certainty, not just  those it can address through other enforcement means;    be low cost and less intrusive and burdensome to taxpayers than audits;    ensure that taxpayers who are noncompliant on a particular issue are  similarly treated, that is, that a greater portion of them are brought into  compliance, not just those that IRS could otherwise address through other  enforcement means;    enhance equity between compliant and noncompliant taxpayers because a  greater portion of the noncompliant taxpayers would be brought into  compliance;    provide a taxpayer service as it would generally allow noncompliant  taxpayers to receive their refunds faster than if IRS had to address the  error through some other compliance mechanism, have their returns  corrected without penalty and before interest is accrued, and avoid time- consuming interaction with IRS under its other programs for resolving  noncompliance;    help ensure that taxpayers receive the tax benefits for which they are  eligible by identifying taxpayers who underclaim a tax benefit;  free up IRS resources to pursue other forms of noncompliance; and    allow IRS to quickly address provisions arising from new and quickly  moving initiatives like the American Recovery and Reinvestment Act of  2009 (Pub. While providing broad MEA is ideal, we have also suggested that Congress  expand MEA for more limited purposes. IRS currently matches data provided on over 2 billion  information returns to tax returns only after the normal filing season. One prerequisite would be a major reworking of some  fundamental IRS computer systems. Other IRS initiatives should also enhance compliance before refunds are  issued. For instance, IRS could leverage new paid tax return preparer  requirements to improve taxpayer compliance before tax returns are filed. The new requirements may also help IRS  address compliance problems that arise during filing seasons. Appendix I: IRS Math Error Authorities

Table 2 summarizes the Internal Revenue Service’s (IRS) 13 areas of  existing math error authority (MEA).
Why GAO Did This Study

In 2010, the Internal Revenue Service (IRS) processed about 137 million individual income tax returns and issued 107 million refunds totaling over $312 billion. The compliance checks it performs before refunds are issued thus could affect millions of taxpayers and billions of dollars of refunds by identifying taxpayers who overclaim or underclaim tax benefits to which they are entitled. Math error authority (MEA) is just one example of the prerefund compliance checks that IRS uses. During 2010, IRS sent taxpayers 8.4 million notices for almost 10.6 million math errors identified on their 2009 individual tax returns. GAO's statement today will focus on three key areas: (1) prerefund checks and their benefits, (2) how those checks can be enhanced immediately, and (3) how they may be enhanced in the future. It is mostly based on GAO's previous work issued from 2008 through 2011, including an interim report on IRS's 2011 tax filing season, and our ongoing analysis of the 2011 filing season.

What GAO Found

Prerefund compliance checks enable IRS to help confirm taxpayers' identity, quickly and efficiently correct some errors with virtual certainty, and identify and audit some returns before refunds are issued. Math error checks are among the most beneficial of these checks for both IRS and taxpayers. For example, they have the potential to deter billions of dollars in erroneous refunds, especially for refundable tax credits that have increasingly been enacted and that have resulted in significant overclaimed refunds and fraudulent claims. Taxpayers benefit from prerefund checks in several ways, including that IRS identifies those underclaiming benefits. Last year GAO reported that IRS corrected about 7.7 million errors associated with the Making Work Pay credit, including about 60 percent in the taxpayers' favor, meaning that taxpayers received larger refunds (or had lower taxes due) than they had anticipated. For almost a century, Congress has been expanding IRS's MEA on a case-by-case basis. In 2010, GAO suggested that authorizing the use of MEA on a broader basis with appropriate controls to protect taxpayer rights could help IRS immediately address compliance problems with newly created tax credits. In the absence of broader MEA, from 2008 through 2011, GAO also suggested that Congress expand MEA for more limited purposes. Longer term, other IRS initiatives, such as matching information returns to tax returns during the filing season and leveraging new paid preparer requirements, could enhance compliance before refunds are issued. One prerequisite would be a major reworking of some fundamental IRS computer systems.