IRS Issued Most 2012 Refunds Months Before Receiving Information Returns and Matching Them to Tax Returns

Consistent with IRS’s practice of issuing refunds promptly after a return is  filed, IRS issued 50 percent of 2012 refunds for tax year 2011 to  individual taxpayers by the end of February, at which point only 3 percent  of all information returns had been received. While amendment rates for  most information returns were low for tax year 2011, they still represented  millions of returns. On Average, More Than a Year Passes Before IRS Notifies Taxpayers of Matching Discrepancies

For 2010 income tax returns which were filed starting in 2011, IRS took  over 1 year (388 days), on average, to notify taxpayers about AUR  discrepancies. IRS Is Generally Following Leading Practices in Its Exploratory Efforts, but Has Not Developed a Timeline or Risk Management Framework

		IRS Is Exploring Options Before Deciding Whether to Pursue Real Time Tax

IRS officials and the planning documents they have developed make it  clear that Real Time Tax is an exploratory effort. Officials noted that IRS  management views Real Time Tax as a broad goal, and the core team  did not set milestone dates to avoid causing concern among the  stakeholder community that IRS has already decided on a path for Real  Time Tax. Without a timeline for the overall exploratory effort, planning may go on  endlessly, and IRS cannot know if its efforts are on track or will be  completed in even the broad time frames IRS is considering. In addition,  Congress may not be able to determine what legislative action may be  needed. IRS officials stated that managing risk is a high priority for IRS, but while  they have documented potential risks to Phase 2 testing, they have not  developed an overall risk management framework for Real Time Tax. IRS officials  plan to further develop the risk strategy if IRS decides to pursue Real  Time Tax. Without systematically identifying and evaluating the risks of Real Time  Tax options, IRS officials may miss critical factors that could complicate  the effort, including the potential costs to IRS, taxpayers, and other  stakeholders. For an effort that cuts across as many IRS functions  as Real Time Tax and will likely take years to implement, a record of prior  risk analyses could help prevent unnecessarily repeating the same  analyses. Recommendations for Executive Action

Recognizing IRS’s exploratory efforts are in their early stages and the  Real Time Tax concept will likely evolve over time, we recommend the  Acting Commissioner of Internal Revenue take the following actions to  help ensure managers are able to assess the progress of exploratory  efforts and have the information needed to weigh the potential risks,  costs, and benefits of options:  Identify time frames for the Real Time Tax exploratory effort’s critical  phases and essential activities. In written comments, reproduced in appendix V,  IRS agreed with our recommendations. Appendix I: Objectives, Scope, and Methodology

This appendix describes our methodology for addressing the following  objectives: (1) describe when the Internal Revenue Service (IRS)  receives and matches individual tax and information returns and (2)  assess the extent to which IRS is following leading practices for  managing an exploratory effort of this importance at IRS. To describe when IRS receives and matches individual tax and  information returns, we reviewed IRS documents and guidance, including  the Internal Revenue Manual and IRS information return forms.
Why GAO Did This Study

For tax year 2011, IRS matched over 140 million individual income tax returns against the 1.6 billion information returns it received from third parties such as employers. Generally, this match does not occur until well after refunds are issued. In early 2011 the then IRS Commissioner outlined a vision for a "Real Time Tax" system--a strategy to improve verification by matching third party information to income tax returns before refunds are issued, and IRS began exploring options for Real Time Tax later that year. GAO was asked to review IRS's strategy for exploring Real Time Tax. This report (1) describes when IRS receives and matches individual tax and information returns and (2) assesses the extent to which IRS is following leading practices for managing an exploratory effort of this importance. GAO reviewed IRS documents and guidance, including the Internal Revenue Manual, information return forms, and drafts of Real Time Tax planning documents. GAO generated descriptive data on the timing and volume of 25 information returns using IRS's Compliance Data Warehouse database. GAO identified leading practices on planning new initiatives at IRS using past GAO reports, internal control standards, and IRS documents.

What GAO Found

The Internal Revenue Service (IRS) receives few information returns before issuing most tax refunds. In 2012, IRS issued 50 percent of tax year 2011 refunds to individuals by the end of February, but had only received 3 percent of information returns. Most information returns are not received by IRS until after mid-April, and IRS conducts the first match of tax and information returns in July, with subsequent matches in February and May of the following year. For tax year 2010, over a year passed on average before IRS notified taxpayers of matching discrepancies, and IRS recognizes that this long time lag burdens taxpayers.
IRS is generally following leading practices in its Real Time Tax exploratory effort by, for example, dedicating a team and defining program goals. IRS did not develop an overall timeline because management views Real Time Tax as a broad goal, and officials wanted to avoid causing concern that IRS had already decided on a path. Without a timeline for the overall exploratory effort, IRS cannot know if its efforts will be completed in even the broad time frames IRS is considering, and Congress may not be able to determine what legislative action might be required. IRS officials stated that managing risk is a high priority, but they have not developed an overall risk management framework, as they are still in the early stages of the exploratory effort. They said they plan to further develop the strategy if IRS pursues Real Time Tax. Without systematically identifying and evaluating the risks of Real Time Tax options, IRS officials may miss critical factors that could complicate the effort. A record of prior risk analyses could help prevent unnecessarily repeating the same analyses.

What GAO Recommends

GAO recommends IRS identify time frames for the exploratory effort's critical phases and activities and develop a risk management framework for Real Time Tax. IRS agreed with our recommendations.