IRS Has Little Information about How Tax Software Pricing Strategies Affect Taxpayers’ Willingness to Use Software and File Electronically

For the 2009 tax filing season, the two largest tax software companies that  previously charged separate electronic filing fees for federal returns in  some of their retail and downloadable products have eliminated those  electronic filing fees. These standards are optional in 2009 because IRS finalized them late  in 2008. Without appropriate monitoring, IRS has limited assurance that the  standards have been adequately implemented or software companies are  complying with the standards. IRS Has Not Assessed the Risks to Tax Administration of the Use of Commercial Tax Software by Individuals

Despite devoting some resources to oversight of the tax software industry,  IRS has not conducted an assessment to understand whether reliance on  commercial tax software poses any significant risks to tax administration. According to IRS officials, the agency has not conducted a risk assessment  because it does not believe the benefits warrant the cost of such an  assessment. As already noted, IRS has said that it is in the agency’s best interest to  ensure that taxpayers can rely on commercial tax software to make  electronic filing accurate, easy, and efficient. If enhancements to tax software could produce even small improvements  in voluntary compliance by taxpayers, the additional dollars of tax revenue  could be substantial. Without a risk  assessment, IRS does not know whether its existing investment in  oversight of the tax software industry is too great, about right, or needs to  be expanded. Recommendations for Executive Action

To help increase electronic filing and allow IRS to better target its efforts,  we recommend that the Commissioner of Internal Revenue direct the  appropriate officials to take the following six actions:  1.  require tax software companies, as soon as practical, to include a  software identification number that specifically identifies the software  package used to prepare tax returns, which can be used in IRS  research efforts;  2.  ensure that, as part of the second phase of IRS’s Advancing E-file  Study, surveys ask taxpayers the effect of tax software pricing changes  and the opportunity to file for free using online tax forms on IRS’s Web  site on their decision to either file or not file tax returns electronically;  3.  to the extent possible, study the effect of the 2009 pricing changes and  the opportunity to file for free using online tax forms on IRS’s Web site  on taxpayers’ use of tax software and electronic filing rates;  4.  determine if tax software companies that are authorized to participate  in online filing are adhering to advisory security and privacy standards  for the 2009 filing season;  5.  develop and implement a plan for effectively monitoring compliance  with recommended security and privacy standards for the 2010 filing  season; and  6.  assess the extent to which the reliance on tax software creates  significant risks to tax administration, particularly in the areas of tax  return accuracy, the security and privacy of taxpayer information, and  the reliability of electronic filing. We also interviewed  IRS and software industry officials to determine what steps they took to  identify and address risks.
Why GAO Did This Study

Individual taxpayers used commercial tax software to prepare over 39 million tax returns in 2007, making it critical to the tax administration system. The majority were then filed electronically, resulting in fewer errors and reduced processing costs compared to paper returns. GAO was asked to assess what is known about how pricing of tax software influences electronic filing, the extent to which the Internal Revenue Service (IRS) provides oversight of the software industry, and the risks to tax administration from using tax software. To do so, GAO analyzed software prices, met with IRS and software company officials, examined IRS policies, and reviewed what is known about the accuracy, security, and reliability of tax software.

What GAO Found

IRS has little information about how the pricing of tax software affects taxpayers' willingness to file tax returns electronically. In 2009, the two largest tax software companies eliminated separate fees to file federal tax returns electronically when using software purchased from retail locations or downloaded from a Web site. As a result, IRS has an opportunity to study whether this and other changes are effective in increasing electronic filing. Additionally, IRS would benefit from being able to identify which software package the taxpayer used to better target research and efforts to increase software use and electronic filing. IRS provides some oversight of the tax software industry but does not fully monitor compliance with established security and privacy standards. Further, IRS has not developed a plan to monitor compliance with new standards, which are optional in 2009 but may be mandatory in 2010. Without appropriate monitoring, IRS has limited assurance that the standards are being implemented or complied with. IRS has not conducted an assessment to determine whether taxpayers' use of tax software poses any risks to tax administration. Risks include that IRS may be missing opportunities to systemically identify areas to improve software guidance and enhance information security. IRS officials said the likely benefits of an assessment would not warrant the costs but have not determined either the benefits or costs of such an assessment. Moreover, IRS has also said that it is in the agency's best interest to ensure that taxpayers can rely on commercial software to make electronic filing accurate, easy, and efficient. Further, if even small improvements in the accuracy of tax returns could be made by clarifying the guidance in tax software, the effect on revenue could be substantial. Without a risk assessment, IRS does not know whether its existing oversight of the tax software industry is sufficient or needs to be expanded.