	IRS Performed Early W-2 Verification, but Faced Implementation Challenges

		IRS Verified Wages and Withholding for Some Returns but Did Not Receive All W-2 Data before Releasing Refunds

Before the Protecting Americans from Tax Hikes Act was enacted, IRS  did not receive the majority of W-2 data until after most refunds had been  issued. Under this model, rather than holding  refunds until completing all compliance checks, IRS issued refunds after  conducting selected reviews. However, with the Act’s new reporting deadline, as of February 17, 2017,  IRS received over 214 million W-2 forms from SSA, an increase of 125  percent from the same time last year (see fig. For the 2017 filing season, IRS used the W-2 data it had available to  verify wages and withholding reported on all tax returns during initial  processing. Specifically, we found that:
For returns where the taxpayer claimed the EITC or ACTC,  preliminary data show that IRS verified the wage information for over  35 percent of these returns before February 15. Moreover, the refund  hold allowed IRS time to check returns using its systemic verification  when it received more W-2 data. However, IRS was unable to verify wage information for  over 58 percent (7.7 million) of tax returns with refunds claiming the  EITC or ACTC—for a total of $38.1 billion—before February 15. On such returns, while IRS also used available W-2  information, it did not hold refunds solely because W-2 information  was not available. Preliminary data show that using systemic  verification, IRS verified wages of 8.6 million (41 percent) of returns  that did not claim the EITC or ACTC before February 15. However,  IRS was unable to verify wage information reported on over 58  percent (12.3 million) of these tax returns for a total of $28.1 billion, as  not all W-2 data were available and IRS was not required to hold  these returns. For EITC/ACTC returns, the law provided an  approximate 2-week delay between the W-2 due date (January 31)  and the refund release date (February 15), to allow time for IRS to  load the data and verify wage information on the returns before  releasing the refunds. IRS Continues to Analyze Results of Systemic Verification

As of March 29, IRS officials were still assessing the W-2 systemic  verification process and its outcomes. However, as noted  earlier, IRS officials reported that the initial review of the W-2 verification  process for EITC/ACTC returns showed that IRS identified approximately  162,000 returns worth about $863 million as potentially fraudulent that it  would not have identified without the early W-2 data coupled with the  refund hold. IRS officials also reported a decrease in the number of IDT cases this  filing season compared to last year. IRS Improved Telephone Customer Service, Experienced Few Disruptions Processing Returns, and Added an Online Application While Suspending or Discontinuing Others

		Telephone Service Improved in the 2017 Filing Season

While implementing tax law changes, it is important that IRS ensures  timely and quality service. During the filing season, IRS enforces tax laws,  provides service to tens of millions of taxpayers, and processes over 100  million tax returns. In recent years, IRS has experienced declining  resources and an increased workload. The decline in IRS’s budget has contributed to fluctuations in service and  longer telephone wait times. In addition, the average wait time to  speak to an assistor decreased from 9.7 to 6.8 minutes. IRS Experienced Few Processing Disruptions during the 2017 Filing Season

According to IRS officials, return processing during the 2017 filing season  has proceeded as expected with a few minor challenges. In addition to the W-2 systemic verification process, the Protecting  Americans from Tax Hikes Act also required taxpayers that filed a U.S.  federal tax return containing an Individual Taxpayer Identification Number  (ITIN) to renew the number if the ITIN was not used on at least one tax  return in the past 3 years or it was issued prior to 2013 and contained  certain middle digits. IRS Launched a New Online Application, but Others Were Unavailable or Discontinued

IRS established its new online application in November 2016, but other  key applications were unavailable or discontinued. Implementing GAO’s Prior Open Recommendations Could Help IRS Improve Service

IRS is making progress implementing our prior recommendations to  improve its service, particularly in the following areas:
Customer service strategy.
Why GAO Did This Study

IRS processes over 100 million tax returns during the filing season. In the past several years, IRS has been confronted with the ongoing problem of identity theft refund fraud and improper payments. Wage information that employers report on Form W-2 had not been available to IRS until after it issued most refunds. As GAO previously reported, earlier access to W-2 wage data—as now provided in recent legislation—could allow IRS to more timely match this information to taxpayers' returns and identify discrepancies before issuing billions of dollars of fraudulent refunds.
GAO was asked to review the 2017 filing season to-date (January through late March to mid-April). This testimony describes IRS's (1) implementation of W-2 systemic verification, and (2) performance in providing telephone and other customer service and processing individual income tax returns during the 2017 filing season.
GAO reviewed IRS systemic verification data and documents and interviewed IRS officials. To evaluate IRS's performance during the 2017 filing season, GAO compared data and documents to IRS's prior years' performance and interviewed IRS officials.

What GAO Found

To help combat identify theft refund fraud and improper payments, in 2017 the Internal Revenue Service (IRS) implemented provisions of the Protecting Americans from Tax Hikes Act of 2015 (the Act). Consistent with GAO's prior reporting, the Act advanced the deadline for employers filing Form W-2, Wage and Tax Statement (W-2) with the Social Security Administration to January 31, allowing IRS to verify information reported on tax returns (such as wages and withholding) before issuing refunds, a process IRS calls W-2 systemic verification. As of February 17, 2017, IRS received over 214 million W-2 forms (a 125 percent increase over the same time last year). The Act also required IRS to hold refunds until February 15 for taxpayers claiming the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) to provide time to use W-2 data to verify returns. Although IRS applied the verification process to all returns, preliminary data suggest the following:
For returns where the taxpayer claimed the EITC or ACTC, IRS verified the wage information for over 35 percent of these returns before February 15. Moreover, the refund hold allowed IRS time to verify returns when it received more W-2 data, resulting in approximately $863 million in additional refunds being identified as potentially fraudulent. However, since not all W-2 data were available before February 15, IRS was unable to verify wage information for over 58 percent (7.7 million) of tax returns with refunds claiming the EITC or ACTC for a total of $38.1 billion.
IRS did not hold returns that did not claim the EITC or ACTC because it was not required to do so, although those returns were subject to systemic verification and other checks. Preliminary data show that IRS verified wages reported on 8.6 million (41 percent) returns that did not claim the EITC or ACTC before February 15. However, IRS was unable to verify wage information reported on over 58 percent (12.3 million) of tax returns claiming $28.1 billion in refunds, because not all W-2 data were available.
Several issues contributed to delays in availability of W-2 information. IRS processes W-2 electronic data weekly rather than when received due to the age of its computer system, resulting in a lag between when IRS has the data and can use it. In addition, some employers can request and be granted 30-day filing extensions and some file paper W-2s, which take longer to process. IRS continues to analyze the W-2 systemic verification process and its outcomes.
IRS's telephone wait times and level of service—those seeking live assistance and receiving it—improved in the 2017 filing season compared to prior years. Average wait time decreased from 9.7 to 6.8 minutes compared to last year, and telephone level of service was more than 77 percent compared to 74 percent. Further, IRS reduced the number of written correspondence that is late, or “overage,” compared to prior years. IRS also experienced minor disruptions during return processing with two brief electronic filing system interruptions. Finally, IRS launched a new online service, but others were unavailable or discontinued due to security concerns.

What GAO Recommends

GAO is not making new recommendations but provides a status update on previously recommended actions that IRS could take to further improve service and operations.