2018 Tax Filing: IRS Managed Processing Challenges and Enhanced Its Management of Tax Law Changes

During the tax filing season, generally from January to mid-April, IRS processes over 100 million individual tax returns and provides telephone, correspondence, online, and in-person service to tens of millions of taxpayers. In 2018, IRS had to begin taking steps to implement major tax law changes passed in what is commonly referred to as the Tax Cuts and Jobs Act that affect both individuals and businesses.

GAO was asked to review IRS's performance during the 2018 filing season and its efforts to implement the Tax Cuts and Jobs Act. GAO assessed IRS's (1) performance providing service to taxpayers and processing individual tax returns and (2) early efforts to implement the Tax Cuts and Jobs Act.

GAO analyzed IRS documents and data and interviewed IRS officials.

The Internal Revenue Service (IRS) generally improved its customer service during the 2018 filing season compared to prior years and managed multiple return processing challenges. For the third year in a row, IRS improved its telephone service by answering 80 percent of calls seeking live assistance and reducing wait times to about 5 minutes, as of the end of the 2018 filing season. This compares to 37.5 percent of calls answered with an average wait time of about 23 minutes during the 2015 filing season. Taxpayer use of online services also increased, including irs.gov and its online account tool for taxpayers to view their balances due. However, answering taxpayer correspondence remains a challenge—IRS was late responding to about 37 percent of correspondence as of the end of the 2018 filing season compared to about 26 percent at the same time in 2017. In 2015, GAO recommended that the Department of the Treasury (Treasury) include timeliness in handling taxpayer correspondence as part of its performance goals, but as of June 2018 Treasury had not done so. Overall, despite multiple challenges including mid-filing season changes to tax law and a computer system failure, IRS met its processing targets for individual tax returns.

In 2018, IRS began taking steps to implement significant tax law changes from Public Law 115-97—commonly referred to by the President and many administrative documents as the Tax Cuts and Jobs Act. To implement the changes, IRS established a centralized office to coordinate implementation across IRS offices and divisions. IRS officials cited the broad scope and complexity of the changes—which will require extensive changes to tax forms, publications, and computer systems—along with the 1 year time frame as key implementation challenges. Although IRS has taken steps to address these challenges, such as developing a project planning tool, GAO found that the new coordination office did not initially fully include the Human Capital Office (HCO), the division responsible for managing the agency's workforce. Based on GAO's discussions with IRS officials, representatives from HCO now attend weekly coordination meetings discussing and planning the tax law changes. Involving HCO in these discussions will better position IRS to hire new employees and train them and the existing workforce. It will also help HCO better understand training requirements and staffing needs ahead of the 2019 filing season.

Because HCO is now attending the weekly meetings, GAO is not making a related recommendation. In addition, GAO believes that its 2015 recommendation to Treasury to include timeliness in handling correspondence as part of its performance goals, which Treasury neither agreed or disagreed with, is still valid. IRS generally concurred with GAO's findings but noted concerns with interpreting the percentage of correspondence considered “overage” (more than 45 days old). GAO clarified its report but notes that while the open inventory of overage correspondence at the end of the fiscal year is not representative of total overage items for the year, the overage rates are relatively consistent throughout the year.

The Internal Revenue Service (IRS) enforces tax laws, provides service  to tens of millions of taxpayers, and processes over 100 million individual  tax returns during the filing season. High-quality customer service is  important for taxpayers to fulfill their tax obligations accurately and timely.  Meanwhile, IRS continues to face the ongoing threat of identity theft (IDT)  refund fraud and other forms of noncompliance with the Internal Revenue  Code. IRS estimates that at least $1.68 billion in IDT refund fraud was  paid in 2016. In addition, in 2016, IRS estimated the average gross tax  gap—the difference between the amount that taxpayers owe and the  amount they actually pay—was $458 billion each year from 2008 to 2010.  Of that amount, IRS estimated $406 billion will never be collected through  late payments or enforcement activities—this amount is the net tax gap.  We have previously found that more could be done to reduce the net tax  gap and help taxpayers voluntarily comply with tax requirements.

In 2017, IRS implemented provisions of the Protecting Americans from  Tax Hikes Act of 2015 (the act) to help combat fraud and other forms of  noncompliance. The act allowed IRS earlier access to Wage and Tax  Statement forms (W-2) that IRS uses in a process called systemic  verification, which helps IRS verify return information against employer- provided information on W-2s before issuing refunds to combat fraud and  noncompliance. The act also required IRS to hold a subset of returns— those that claimed the Earned Income Tax Credit (EITC) or Additional  Child Tax Credit (ACTC)—until February 15 to increase the number of  returns that could be verified before issuing refunds. To improve fraud  prevention, the act required IRS to assess and make changes to its  management of individual taxpayer identification numbers (ITIN), used by  taxpayers who are required to file but who are ineligible for Social  Security numbers (SSN), such as certain non-U.S. citizens who have tax  liabilities.

Along with these responsibilities, during the 2018 filing season, IRS had  to begin preparations for implementing significant changes to the tax law.  In December 2017, Public Law 115-97—commonly referred to by the  President and many administrative documents as the Tax Cuts and Jobs  Act—was enacted. The law included significant changes to corporate and  individual tax law.

You asked us to review IRS’s performance during the 2018 tax filing  season. In this report, we assess (1) IRS’s performance in providing  customer service and processing individual income tax returns, including  addressing tax law changes, detecting fraud and noncompliance, and  processing ITINs, in the 2018 filing season compared to prior filing  seasons, and (2) IRS’s early efforts to implement the Tax Cuts and Jobs  Act prior to the 2019 filing season.

To assess IRS’s performance providing customer service and processing  tax returns, we reviewed IRS performance data for the 2013 through 2018  filing seasons (January through mid-April) for telephone, correspondence,  online, and in-person services to identify any differences among years.  We interviewed IRS officials to obtain their views on the reasons for any  differences in IRS’s service and processing performance. We reviewed  changes in tax law resulting from the Disaster Tax Relief and Airport and  Airway Extension Act of 2017, the Bipartisan Budget Act of 2018, and the  Tax Cuts and Jobs Act that affected taxpayers filing during the 2018 filing  season, and we assessed IRS’s performance processing tax returns  affected by these provisions. Regarding systemic verification (IRS’s  process for verifying tax return information against employer-provided W- 2 information to identify fraud and noncompliance), we reviewed IRS data  and documents to compare 2017 and 2018 results, and we interviewed  IRS officials about their efforts to improve and expand systemic  verification’s application to other areas. Regarding implementation of the  ITIN provisions, we reviewed the Protecting Americans from Tax Hikes  Act of 2015 and IRS policies and data on ITIN issuance, renewal, and  deactivation for 2017 and 2018 to describe IRS’s ITIN renewal  processing. We also interviewed IRS officials about their efforts to  manage ITIN renewals.

To assess IRS’s efforts to implement tax law changes, we reviewed  provisions of the Tax Cuts and Jobs Act and other recently passed laws  with tax law implications. We interviewed IRS officials to identify key  implementation steps, including challenges and risk mitigation efforts.

To assess the reliability of data used in this report, we reviewed IRS data  to identify unexpected values, interviewed IRS officials, and assessed  documentation for any data limitations, which we note, as applicable,  within the report. We compared those results to our data reliability  standards and determined that the data presented in this report are  sufficiently reliable for our purposes.

We conducted this performance audit from January 2018 to September  2018 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

IRS’s budget declined by about $658 million (5.5 percent) between fiscal  years 2013 and 2018 (see fig. 1). Furthermore, full-time equivalents  funded with annual appropriations declined by 10,876 (12.7 percent)  between fiscal years 2013 and 2018. The President’s fiscal year 2019  budget request was $11.135 billion. This amount is less than the fiscal  year 2000 level for IRS, after adjusting for inflation. IRS requested an  additional $397 million to cover implementation expenses for the Tax  Cuts and Jobs Act over the next 2 years and received $320 million for  implementation pending submission of a spend plan, which IRS provided  in June 2018. IRS officials said the majority of the money would be  directed toward technological updates.

IRS uses multiple channels to provide customer service to taxpayers, as  follows:  Telephone service. Taxpayers can contact IRS assistors via telephone  to obtain information about their accounts throughout the year or to ask  basic tax law questions during the filing season. Taxpayers can also listen  to recorded tax information or use automated services to obtain  information on the status of refund processing as well as account  information such as balances due. During fiscal years 2013 through 2017,  IRS received an average of about 107 million calls from taxpayers each  year, according to IRS data.

Correspondence. Taxpayers may also use paper correspondence to  communicate with IRS, which includes responding to IRS requests for  information or data, providing additional information, or disputing a notice.  IRS assistors respond to taxpayer inquiries on a variety of tax law and  procedural questions and handle complex account adjustments, such as  amended returns and duplicate filings. IRS tries to respond to paper  correspondence within 45 days of receipt; otherwise, such  correspondence is considered overage. In fiscal year 2017, about 35  percent of the nearly 17.5 million pieces of correspondence IRS received  was overage, down from approximately 47 percent of 20.8 million pieces  of correspondence in fiscal year 2013. Minimizing overage  correspondence is important because delayed responses may prompt  taxpayers to write again, call, or visit IRS Taxpayer Assistance Centers  (TAC); each of which lead to additional costs. Additionally, IRS is required  to pay interest on refunds owed to taxpayers if it did not process  amended returns within 45 days.

Online services. IRS’s website is a low-cost method for providing  taxpayers with basic interactive tools to check their refund status or  balance due, make payments, and apply for plans to pay taxes due in  scheduled payments (installment agreements). Taxpayers can use the  website to print forms, publications, and instructions and can use IRS’s  interactive tools to get answers to tax law questions without calling or  writing to IRS. IRS data show that total visits to IRS’s website in fiscal  year 2017 were about 500 million.

In-person services. Face-to-face assistance remains an important part  of IRS’s service efforts, particularly for low-income taxpayers. Taxpayers  can receive face-to-face assistance at one of about 370 IRS TACs or at  thousands of sites staffed by volunteer partners during the filing season.  At TACs, IRS representatives provide services including answering basic  tax law questions, reviewing and adjusting taxpayer accounts, taking  payments, authenticating ITIN applicants, and assisting IDT victims.  Based on IRS data, nearly 3.3 million taxpayers visited an IRS TAC in  fiscal year 2017. At sites staffed by volunteers, taxpayers can receive free  return preparation assistance as well as financial literacy information. In  fiscal year 2017, nearly 3.6 million taxpayers had their returns prepared at  volunteer sites, according to IRS data.

Systemic verification is one element of IRS’s Return Review Program, its  primary system to detect fraud and noncompliance. The Return Review  Program is a platform that runs individual tax returns through a set of  rules and models to detect potential taxpayer fraud and other  noncompliance. During systemic verification, IRS checks information that  taxpayers report on their returns against W-2 data in order to verify wage  and withholding information and identify discrepancies.

We previously reported that the wage information that employers report  on the W-2 had not been available to IRS until after it issued most  refunds. In an effort to address issues such as refund fraud and  improper EITC payments, Congress enacted the Protecting Americans  from Tax Hikes Act of 2015, which included provisions that took effect in  2017. The act required employers to submit W-2s to the Social Security  Administration (SSA) by January 31, which is about 1 to 2 months earlier  than in prior years. SSA then provides W-2 data to IRS for verifying  employee wage and withholding data on tax returns. The act also  required IRS to hold refunds for all taxpayers claiming the EITC or ACTC  until February 15. Now that IRS has earlier access to W-2 information,  IRS is using it to conduct additional verification checks before issuing  billions of dollars in potentially fraudulent refunds.

IRS issues individual taxpayer identification numbers (ITIN) to certain  non-U.S. citizens who have federal tax reporting or filing requirements  and do not qualify for SSNs. The Protecting Americans from Tax Hikes  Act required taxpayers that filed a U.S. federal tax return containing an  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 reported that it deactivated approximately 12.4 million ITINs in 2017 and notified affected taxpayers via mail and public  notices. If affected taxpayers did not renew their ITINs either before filing  or in conjunction with filing, their refunds may have been delayed.

The Tax Cuts and Jobs Act made a number of significant changes to the  tax law affecting both individuals and corporations. For example, for  individual taxpayers, for tax years 2018 through 2025, tax rates were  lowered for nearly all income levels, some deductions from taxable  income were changed (personal exemptions were eliminated while the  standard deduction was increased), and certain credits, such as the  child tax credit, were expanded. For individuals with business income  reported on their tax return (pass-through entities), effective tax rates can  be reduced with a 20 percent deduction of qualified business income.  For corporate filers, the tax rate was changed from a range between 15  and 35 percent to a flat rate of 21 percent, and the corporate alternative  minimum tax was eliminated. IRS must take action to make the  necessary changes to process tax returns in 2019 and to help taxpayers  understand the new law and its effect on their tax obligations. For  example, IRS has planned and begun conducting outreach to employees,  employers, and industry associations encouraging employees to reassess  their withholdings in light of changes the law made to deductions and  credits that may affect tax liability and withholding for a large number of  taxpayers.

IRS Improved Customer Service, Managed Multiple Challenges Processing Returns, and Identified More Potential Fraud and Noncompliance Compared to Last Year

Customer Service Generally Improved During the 2018 Filing Season

IRS’s telephone, online, and in-person services generally improved during  the 2018 filing season compared to prior years. However, timeliness in  responding to written correspondence declined from last year. Our prior  recommendations could help IRS better manage its correspondence  performance and develop a comprehensive customer service strategy to  improve its efforts.

During the 2018 filing season, IRS slightly improved its telephone level of  service—the percentage of callers seeking and receiving live  assistance—and reduced wait times (see fig. 2). From January 1 through  April 21, 2018, IRS estimated that it answered 80 percent of calls seeking live assistance, which is a slight  increase from about 79 percent for the same period last year, and  reduced the average caller’s wait time to speak to an assistor from 6.5  to 5.1 minutes.

This marks the third year of measured improvements since IRS reached a  low of 37.5 percent level of service in 2015 with a 23.1-minute average  wait time. IRS officials attributed the improvements to decreased telephone call volume and sufficient staff levels to meet the demand for  service. IRS expected its level of service for the entire fiscal year 2018 to  be 75 percent, which is similar to fiscal year 2017 when IRS achieved a  77.1 percent level of service.

Total call volume to IRS taxpayer service lines has declined by about 43  percent since 2013 (see fig. 3). IRS officials attributed the decline in call  volume to several factors, including  targeted media campaigns to ensure taxpayers had the information  they needed to prepare and file their tax returns prior to the filing  season,  fewer attempts by callers to re-dial multiple times after receiving busy  signals or disconnects or abandoning the call after long wait times,  and moving calls inquiring about balances due and installment payments  to the compliance division, which, according to IRS data, accounted  for approximately 2 million calls in the 2018 filing season.

The percentage of calls that IRS assistors have answered since 2013 has  generally increased, while calls answered by automated services has  generally decreased. IRS officials attributed the decrease in automated  calls answered to discontinuation of the e-file personal identification  number (PIN) automated retrieval service in June 2016, along with a  decrease in callers using the Where’s My Refund automated service.

In December 2014, we recommended that IRS systematically and  periodically compare its telephone service to the best in business to  identify gaps between actual and desired telephone performance. In  response, IRS benchmarked its telephone service, measures, and goals  to comparable agencies and companies in an internal 2016 study. IRS  projected that achieving an 83 percent level of service would optimize its  balance between wait-time, disconnects, and assistor availability.  However, officials told us in June 2018 that they are adjusting this  projection based on new services and procedures introduced since the  2016 study.

The study also recommended exploring using new technology, including  email, online chat, and telephone call-back features as well as  establishing regularly scheduled follow-up benchmarking. In March 2018,  IRS officials told us they are implementing some of the recommendations  from the study, including requesting funding to implement a customer call- back feature. IRS is also developing new methods of monitoring and  reporting service performance across telephone, online, and in-person  channels to identify changes in taxpayer behavior and better adapt to  their needs.

IRS telephone performance data for 2018 were unavailable from  November 2017 until March 2018. IRS officials explained that IRS was  upgrading the Enterprise Telephone Data System—IRS’s official source  for all data related to its toll-free telephone performance measures—to a  more current version. Before IRS completed the upgrade, the system  crashed. Due to the system outage, IRS was unable to publish its reports  on telephone performance. IRS officials told us that while the system  remained offline, they could still monitor daily call demand and staff  resources, which they used to develop an estimated level of service to  monitor telephone performance. Once the system was operational, IRS  recovered and validated the data, confirming that the data they used  while the system was offline were sufficiently accurate.

In addition, IRS replaced the approximately 15-year-old telephone  equipment it uses for answering taxpayer calls because of ongoing  failures that contributed to poor service. For example, at times the  assistor could hear the customer speaking, but the customer could not  hear the assistor. The new equipment will enable future service  improvements such as a call-back feature so customers will not have to  wait on the line for a response. IRS completed the upgrades as planned  in June 2018.

Because the same staff answer telephone calls and respond to  correspondence, IRS has continued to struggle to balance competing  demands for maintaining quality telephone level of service with timely  responses to written correspondence. Between October 1, 2017 and April  21, 2018, IRS received over 9 million pieces of correspondence. IRS staff  focus on answering the telephones during the filing season, so they have  less time to respond to correspondence, resulting in inventory and  processing time increases. As it had in prior years, IRS directed staff to  focus on correspondence early in December 2017 and January 2018 to  reduce the inventory before the filing season. However, through April 21,  2018, the overage rate of correspondence—the percentage of cases  generally not processed within 45 days of receipt by IRS—was 36.8  percent compared to 26.4 percent at the same time last year.

To improve the management of taxpayer services, in 2015 we  recommended that the Secretary of the Treasury update the Department  of the Treasury’s (Treasury) performance plan to include overage rates  for handling taxpayer correspondence as a part of Treasury’s  performance goals. To implement this recommendation, we suggested  that Treasury include this performance measure as part of a  comprehensive customer service strategy. Treasury neither agreed nor  disagreed with our recommendation, and as of June 2018, it had not  included correspondence overage rates as a performance goal in its  performance plan. We continue to believe that this recommendation is  valid.

IRS established its new online account service in November 2016 and  taxpayer use of this service has increased since then. The online account  service was unavailable to new users between mid-October and early  December 2017 because of a security breach at Equifax, the service IRS  used to verify users’ identities. In September 2017, Equifax announced  that criminals had exploited a vulnerability in its systems and obtained  personally identifiable information on 145.5 million individuals, including  names, SSNs, birth dates, addresses, and in some cases, driver’s license  information. IRS suspended its online account service, eventually re- activating it when it replaced Equifax’s identity verification service with  another provider. IRS’s online account allows taxpayers to view their IRS  account balance (including the amount they owe for tax, penalties, and  interest), take advantage of various online payment options, and access  the Get Transcript application where taxpayers can obtain copies of their  prior tax returns.

Despite these challenges, use of IRS’s online account has increased  since its launch. Between January 1, 2018 and April 30, 2018, total  unique users of the online account reached over 1 million compared to  327,000 for the same period in 2017 when the service was newly  launched. In addition, taxpayers increasingly used the online account to  access payment options, including payment agreements. For example,  taxpayers made four times as many payments using the online account to  access Direct Pay, IRS’s online payment option, between January 1 and  April 30, 2018 compared to the same period last year.

IRS experienced a separate online service disruption prior to the 2018  filing season. Tax professionals could not access e-services between  September and October 2017 because of an IRS delay in a scheduled  upgrade to the system and improvement to the security of the application.  This service is used by tax professionals to conduct transactions,  including applying for authorization as an e-file provider. As a result of this  delay, tax professionals were unable to use this key service during a  critical planning period prior to the filing season, shortening the amount of  time available to complete the necessary actions before filing season.  Despite this delay, IRS officials told us that more than 60,000 tax  professionals were able to complete their transactions in preparation for  the 2018 filing season.

Finally, IRS launched a redesigned website in August 2017 to make it  easier to use and find information. Website use during the 2018 filing  season showed the greatest year-to-year increase over the past 5 years  (see fig. 4). From January 1 through April 21, 2018, visits to irs.gov  increased by about 24.2 percent compared to the same period last year  (from 311.4 million to 386.9 million). During that same period, total page  views increased by about 50.4 percent (from 1.27 billion to 1.91 billion).

In-person visits to IRS’s Taxpayer Assistance Centers (TAC) have  declined since IRS began requiring appointments for in-person service in  2016. During the 2018 filing season (January 1 through April 21, 2018),  IRS served 1 million taxpayers at the TAC locations compared to about  1.3 million during the same period in 2017. However, IRS officials  reported that, between January 1 and April 30, 2018, over half of the  approximately 1.6 million taxpayers requesting an appointment had their  questions resolved on the telephone and did not need an appointment.

IRS policy mandates that, under special circumstances, taxpayers who  arrive at a TAC without an appointment receive service if staff members  are available, even when the assistors do not have appointment  openings. Officials acknowledged that not all taxpayers receive service if  they walk in because there are not always assistors available. As of April  30, 2018, IRS served nearly 63,000 taxpayers during the 2018 filing  season under an exception to the required appointment process. IRS  officials noted that the lines at TACs have shortened in recent years,  which they attribute to the appointment system and services available  through the telephone. Nationwide, 5.8 percent of taxpayers waited over  30 minutes for assistance between January 1 and April 21, 2018,  compared to 5.6 percent during the same period in 2017, according to  IRS data. Service improved compared to the same period for 2013 to  2016 when between 27 and 33 percent of taxpayers waited over 30  minutes for assistance.

To improve the appointment process, in 2018 IRS developed the Field  Assistance Scheduling Tool, which helps IRS manage appointments at  the TACs and monitor availability and demand. IRS expects to add to this  tool by developing reporting capabilities for managing staff availability and  appointments, including the capability to measure the time lapse between  when a taxpayer calls to schedule an appointment and the actual  appointment. According to IRS officials, by using the tool’s current  capabilities, they identified the need to recruit and train nearly 100  employees from other areas of IRS to support increased demand at 27  TAC locations near the end of the filing season.

IRS also provided alternative options for in-person taxpayer services. In  January 2017, IRS opened four co-locations with the Social Security  Administration (SSA). During the 2018 filing season, 708 taxpayers  received in-person service at these co-locations as of April 21, 2018. In  May 2018, IRS officials said they were working to open an additional co- location with SSA. In addition, IRS added six virtual assistants—kiosks  that provide video calling to an IRS assistor—to the 31 existing terminals  across the United States.

We have made several recommendations for IRS to improve its customer  service. In December 2012, we recommended IRS develop a strategy to  improve telephone and correspondence service. While IRS has taken  steps toward implementing related recommendations, including the  telephone benchmarking study mentioned earlier, IRS has not completed  the actions we recommended, including (1) outlining a comprehensive  strategy that defines appropriate levels of correspondence service and  wait time and (2) listing specific steps to manage service based on an  assessment of time frames, demand, capabilities, and resources.  However, IRS officials told us in June 2018 that they had begun drafting a  customer service strategy that they expected to complete by September  2018. We will assess this strategy once it is issued.

Additionally, in December 2011 and April 2013 we made  recommendations that call for IRS to develop a long-term strategy for  providing and improving web-based services to taxpayers. In June  2018, officials in the Office of Online Services stated that they do not  have a specific strategy that outlines their long-term vision for increasing  online services and web offerings. Rather, they rely on IRS’s fiscal year  2018–2022 Strategic Plan to provide that vision. The fiscal year 2018– 2022 Strategic Plan includes objectives related to expanding digital  options for taxpayers and professionals to interact efficiently with IRS,  and developing additional self-assistance and correction tools for  enhanced online account capabilities. However, this plan is at a high level  and does not include business cases for new online services that  describe the potential benefits and costs of the projects, timelines and a  prioritization of proposed projects. In July 2018, IRS officials provided  additional documentation that we are reviewing to assess the steps being  taken to develop a long-term strategy to improve web services for  taxpayers.

IRS Managed Multiple Processing Challenges During the 2018 Filing Season Including Changes in Tax Law and Issues with Hiring and Redistributing Work Responsibilities

IRS started the filing season on January 29, 2018, approximately 1 week  later than it has in recent years to ensure the security and readiness of  processing systems and to assess the potential impact of recently passed  tax laws on 2017 tax returns. IRS also extended the filing deadline by 1  day after a system outage occurred on tax day, April 17, 2018, that  prevented IRS from processing electronically filed returns. Taxpayers  were able to prepare and submit returns electronically during the day; but  a flaw in the mainframe prevented data from being accepted and released  for processing. IRS officials said the problem was caused by a hardware  issue in a 1.5 year old mainframe subcomponent and was not related to  IRS applications or any of the agency’s legacy computer systems. The  system failure affected a number of electronic applications, including  Direct Pay and the online account service, and delayed return processing  until the end of the day. IRS officials said that the agency recovered the  system without data loss and worked with software companies to  coordinate their transmission of returns that were held earlier in the day.  These officials said the agency was able to process all returns submitted  electronically by the end of the day.

Neither the system issue nor the later start had a significant effect on  returns processing during the filing season. As of April 20, 2018, IRS had  processed 130.48 million returns, compared to 128.85 million by the  same time last year.

IRS experienced several additional challenges during the 2018 filing  season, including multiple pieces of legislation affecting individual tax  returns that passed soon before the beginning of the filing season or after  it had begun, as well as issues hiring and redistributing work  responsibilities in some IRS processing facilities.

Disaster relief. On September 29, 2017, Congress passed a law which  provided tax relief related to retirement plan distributions and casualty  losses for people affected by Hurricanes Harvey, Irma and Maria. The  law allowed storm victims to deduct disaster losses on their 2017 returns  or on amended 2016 returns. On February 9, 2018, Congress extended  these benefits to certain taxpayers affected by wildfires in California.  The President also issued major disaster declarations for many areas  affected by the hurricanes and wildfires, allowing IRS to use its authority  to postpone certain tax-related deadlines under the Robert T. Stafford  Disaster Relief and Emergency Act. The laws also offered other forms  of tax-relief—such as hardship distributions from employer-sponsored  retirement plans. To address issues resulting from disaster-related legal  changes, IRS  issued press releases and public notices informing taxpayers of tax- relief options; postponed various filing and payment deadlines for individuals and  businesses affected by disasters; ensured that sites offering in-person taxpayer assistance in Puerto  Rico, Florida, and Texas were open and developed special products  to support these sites in dealing with affected taxpayers; and adapted procedures to accommodate disaster-relief efforts.

IRS officials also said they corresponded with taxpayers they thought  were eligible for new disaster relief benefits as a result of legal changes  put in place. The officials told us that as of May 26, 2018, the agency had  assisted 37,000 taxpayers seeking live telephone assistance and worked  or closed 6,196 amended returns and 8,847 correspondences related to  Hurricanes Harvey, Irma, and Maria.

Tax Cuts and Jobs Act. While many of the provisions included in the  Tax Cuts and Jobs Act will not affect filing until the 2019 filing season, a  few changes affected filing in 2018. For example, the threshold to claim  the medical expense deduction was temporarily lowered, allowing  individuals to claim deductions for medical expenses totaling more than  7.5 percent of their adjusted gross income for tax years 2016 and 2017.  Also, provisions similar to those described above were implemented for  certain qualified federally declared disasters that occurred in 2016. The  law passed shortly before the start of the filing season and IRS had to  recall, revise, and re-issue more than 100 products that had already been  published.

In addition, several provisions affecting business filers presented  processing challenges during the 2018 filing season. For example, IRS  made changes to its forms to address fiscal year filers whose earnings  will be taxed at different rates for 2017 and 2018 (referred to as blended  rate) and developed forms and instructions for filers whose returns  involve the foreign earnings of foreign subsidiaries of U.S. companies.  Officials told us they processed returns subject to the blended rate  provision manually and held returns affected by the foreign earnings  provision until they completed necessary programming changes for the  systems to process them in accordance with the new law. As of May 18,  2018, the agency was holding 2,265 affected individual and business  returns. IRS officials said they completed the programming required to  process all of these returns automatically by July 2, 2018. However,  depending on when IRS completes processing these returns, it may need  to pay interest on some refunds. IRS officials said they do not expect  many of the held returns affected by the foreign earnings provision to  claim refunds.

Extension of expired tax provisions. On February 9, 2018, after some  taxpayers had already filed their 2017 taxes, Congress extended to 2017  a number of temporary tax provisions that expired at the end of 2016.  These provisions include deductions for qualified tuition and related  expenses and the ability to deduct premiums for mortgage insurance as  interest. Testifying before Congress, the Acting Commissioner of IRS  described the extensions as a major processing challenge and said this is  the only time the agency has been required to implement retroactive tax  extensions after the beginning of a filing season. To address the  extensions, IRS officials told us they  reprogrammed systems to accept taxpayer claims related to these  retroactively extended provisions;  recalled, revised, and re-released more than 50 already published  products; and held 5,624 individual returns while necessary programming changes  were made to ensure proper processing.

Issues Hiring and Redistributing Work Responsibilities

IRS faced challenges in two of its five paper processing centers related to  hiring and redistributing work responsibilities. The center in Ogden, UT  experienced issues related to changes in work assigned to the site while  the center in Austin, TX experienced ongoing hiring difficulties. Despite  these challenges, IRS officials reported that the agency was able to meet  all of its target dates for processing returns and issuing refunds.

Ogden. To realize cost savings from the decrease in paper filing as a  result of increased electronic filing, IRS began to consolidate its paper  processing centers in 2018. As part of this plan, IRS moved some  individual paper return processing to its facility in Ogden. This facility had  not processed individual returns since 2000 and IRS officials told us that  the lack of recent experience with this kind of work caused processing to  fall behind targets. For example, as of March 2, 2018, Ogden had missed  IRS targets for return processing time by between 14 and 15 days,  depending on the form type.

Officials told us the agency had reintroduced Ogden to the work  gradually, by assigning fewer returns to the site in the first year;  nevertheless, the site still experienced delays. For example, as of March  2, Ogden had processed 10.6 percent of the 202,000 returns expected,  while the processing centers in Fresno, CA and Kansas City, MO had  processed 98.5 percent (723,000 out of 734,000) and 98.2 percent  (545,000 out of 555,000) of their expected returns respectively on the  same date.

IRS minimized the effects of these delays on overall processing by  transferring returns initially sent to Ogden to the Kansas City location,  which enabled IRS to meet its overall processing goals. Later in the filing  season, processing at Ogden had improved, but still had not reached  IRS’s goal for the site. For example, as of May 11, 2018, Ogden was at  approximately 73 percent of schedule, having processed 716,000 out of  977,000 scheduled returns. IRS officials said that responding to changes  in work flows is a normal aspect of processing across all locations, but  noted that the agency continued to monitor the situation in Ogden and  learn from the experience to guide future consolidation efforts.

Austin. This processing facility, slated for closure in 2024, also  experienced processing delays. As we reported in 2017, and as IRS  officials told us again this year, IRS was unable to hire enough personnel  to process paper tax returns at this site, which may be due to low  unemployment rates in the area. IRS officials told us Austin planned to  hire 567 employees by early March to transfer data from paper returns to  an electronic format, but had only been able to hire 142 people, or 25  percent of that target. IRS officials told us the position was perceived as  undesirable in a low-unemployment environment. The officials said they  had addressed the issue by (1) moving resources as needed within the  service center and (2) transferring returns to the Kansas City facility for  processing.

IRS Identified More Potential Fraud and Noncompliance by Verifying Wage Information Than It Did at the Same Point in the 2017 Filing Season

IRS identified more potential fraud and noncompliance through February  15, 2018, than it had by the same time last year. In its second year of  receiving earlier W-2 data from SSA to match against returns, IRS  identified a larger number of potentially fraudulent or noncompliant  returns claiming the EITC or ACTC prior to issuing refunds—340,000  compared to 162,000 at the same point in 2017. IRS also reduced the  percentage of returns for which it was unable to verify wage information to  13 percent, compared to 58 percent in 2017. IRS officials told us this was,  in part, a result of receiving 224 million W-2s by February 15 compared to  214 million by the same time in 2017. Having more W-2 data available  earlier also allowed IRS to better target its selection of returns for review,  helping to reduce taxpayer burden and IRS workload. For example, IRS  had excluded 10,000 returns from review as of February 15, 2018,  compared to 3,000 during the same time in 2017.

In addition, IRS improved its ability to identify potentially false and  fraudulent returns for returns with EITC or ACTC—including those for  which it did not have W-2 data at the time of identification—by developing  two new filters that automated some aspects of the manual review  process used in 2017. IRS developed the new filters based on cases of  confirmed fraud identified through systemic verification in 2017 and  selected returns with characteristics that are more likely to be fraudulent  or noncompliant. The filters select returns for review among those  reporting information that does not match corresponding W-2 data and  that IRS could not verify because it did not have W-2 data at the time of  selection. Last year, IRS identified 12,000 cases of confirmed fraud from  the 162,000 cases it selected for review. IRS officials told us that they do  not have final data at this time, but that they anticipate they will confirm  more cases of fraud and noncompliance in 2018 as a result of these  filters.

Returns with refunds not claiming EITC or ACTC benefits are also subject  to systemic verification as well as additional fraud filters. However, for  returns not claiming these benefits, IRS does not hold refunds when it is  unable to verify wages reported by the taxpayer unless the returns are  selected by other fraud filters for review. As we reported in January 2018,  IRS cannot verify information reported for more than half of returns  submitted early in the filing season prior to issuing refunds because it  receives W-2 information throughout the filing season. In 2017 and  2018, IRS received and processed the majority of W-2s by mid- to late- February. In addition, IRS verified most wage information on returns  submitted in mid-February as being accurate. IRS verified that accurate  wage information was reported on 77 percent of returns not claiming the  EITC or ACTC submitted between February 9 and 15, 2018, representing  $10.91 billion in refunds.

However, IRS does not have data available early in the filing season that  would help it better identify which returns are potentially fraudulent or  noncompliant. As a result, IRS issues refunds for a large percentage of  returns without the EITC or ACTC that cannot be verified against W-2  data prior to February 15. For example, among 2017 returns without EITC  or ACTC, IRS was unable to verify

91 percent of returns submitted before January 25, 2018— representing $4.27 billion in refunds; and

60 percent of returns submitted prior to February 15—representing  $29.27 billion in refunds.

IRS has the authority to hold refunds for these returns (as it does for  returns that do claim the EITC or ACTC) until any date deemed  necessary to make inquiries, determinations, and assessments in  conjunction with those determinations. However, IRS officials told us that  IRS has not held those refunds because of the volume of existing cases,  challenges of processing large numbers of refunds on a single day, and  other costs to the agency, such as inquiries from taxpayers about their  refunds.

In January 2018, we recommended that IRS study the benefits and costs  of the refund hold and consider modifying it based on the study results.  For example, IRS could hold refunds for taxpayers not claiming EITC or  ACTC and release the refunds once it has the W-2 data available and has  verified the wage information. IRS officials reiterated that the potential of  verification to detect more fraud and noncompliance is limited by delays  caused by filing extensions and use of paper W-2s—which are  transcribed at SSA before being transmitted to IRS. For example, IRS  had not received any paper W-2 data for tax year 2017 by the February  15 refund hold date. IRS is continuing to study systemic verification’s  potential, and is working to identify additional fraud and noncompliance by  beginning to match non-wage income reported by taxpayers against data  reported on Forms 1099-MISC by companies or individuals that paid the  taxpayer miscellaneous income.

IRS Continued to Deactivate and Renew ITINs

The Protecting Americans from Tax Hikes Act also contained a number of  provisions relating to individual taxpayer identification numbers (ITIN).  The provisions required IRS to deactivate (1) all ITINs issued prior to  2013 and (2) all ITINs not used at least once during the 3 most recent  consecutive tax years. As of February 26, 2018, IRS said it had  deactivated 14.7 million ITINs, approximately 12.4 million of those in 2017  and an additional 2.3 million in 2018.

Following this initial round of deactivations, ITIN renewal requests have  been significantly lower than IRS anticipated. IRS expected it would  receive 1.3 million renewal applications by the end of 2018 for ITINs that  expired in 2017. However, by April 21, 2018, IRS had only received 23  percent (297,825 of 1.3 million) of the expected renewals.

IRS officials said they based their renewal projections on a computation  assuming that all ITINs with middle digits 78 and 79—which were issued  16 or more years prior to their deactivation and were the first set of older  ITINs to be deactivated—would be renewed. However, the actual  renewal rate in 2017 was only 60 percent for these ITINs. IRS officials  said the agency used actual renewal data to revise its renewal estimate  for the remaining ITINs issued prior to 2013 and containing certain middle  digits that will be deactivated. Based on these new estimates, IRS will  accelerate the completion date for deactivation of older ITINs.

IRS Developed a Management Structure to Implement the Tax Cuts and Jobs Act and Address Associated Challenges and Took Steps to More Fully Involve Human Capital Decision Makers

IRS Developed a Management Structure to Implement the Tax Cuts and Jobs Act and Took Steps to More Fully Involve Its Human Capital Decision Makers

To address the changes included in the Tax Cuts and Jobs Act, in  January 2018 IRS established the Tax Reform Implementation Office  (TRIO), a central office that coordinates implementation efforts. IRS  officials said that the 2017 tax law will affect all IRS divisions and  responsibilities. Each of the 119 provisions in the Tax Cuts and Jobs Act  that fall under IRS responsibility has been assigned to one of IRS’s four  business divisions—Wage and Investment, Large Business and  International, Small Business/Self-Employed, and Tax-Exempt and  Government Entities—each of which will be responsible for planning and  executing the assigned provisions. In addition to TRIO, IRS also  established the Tax Reform Executive Steering Committee and the Tax  Reform Implementation Council (TRIC), described below:

Tax Reform Implementation Office (TRIO). TRIO principally  consists of executive-level IRS employees and coordinates efforts by  each business operating division to revise and develop forms,  instructions, tools, and guidance and to execute programming  changes, communications, and training initiatives required to  implement the individual provisions of the Tax Cuts and Jobs Act. The  office is intended to monitor the implementation action plans of each  business division and ensure risks associated with implementation  efforts are captured and addressed. TRIO has developed an  integrated project plan to track critical implementation activities  identified by the business divisions and discussed by TRIC (described  below). Personnel can access the project plan and update it with  accomplishments and milestones.

Tax Reform Executive Steering Committee. TRIO reports to the  Executive Steering Committee, which includes IRS’s Acting  Commissioner, Deputy Commissioners, Treasury officials, and heads  of offices. The steering committee serves as a forum to provide  leadership guidance, direction, and advice on implementation  activities for the Tax Cuts and Jobs Act.

Tax Reform Implementation Council (TRIC). TRIC consists of  representatives from business divisions and functional units—such as  Information Technology (IT) and Communication and Liaison—that  are performing implementation activities. The group first met on  February 8, 2018, and meets weekly to discuss activities, concerns,  and needs that might involve other IRS divisions. The meetings are  also a forum to discuss accomplishments and deadlines.

Figure 5 illustrates TRIO’s role in coordinating the various changes IRS  expects to make.

To implement the Tax Cuts and Jobs Act, IRS’s Human Capital Office  (HCO) estimated that the agency will need to hire and train staff to fill  approximately 1,100 positions requiring a variety of competencies and  provide additional training on tax law changes for current employees.  HCO will be responsible for recruiting and hiring these new employees  and ensuring they have the needed skills and HCO will play a key role in  training them. It is HCO’s mission to provide human capital strategies and  tools for recruiting, hiring, developing, retaining, and transitioning a highly  skilled and high-performing workforce to support IRS’s mission. TRIO and  other senior IRS officials acknowledged that HCO’s role in implementing  the new tax law is as valuable as other supporting stakeholders, such as  IT. Nevertheless, HCO did not initially have representation in TRIC, as did  IT and other essential operational support units. TRIC meetings provide a  forum not only for the business operating divisions directly implementing  the provisions of the Tax Cuts and Jobs Act to discuss and coordinate  needs and activities, but for supporting stakeholders to understand the  status of implementation efforts as well as future expectations and needs.

HCO officials said that when the formation of TRIO was first announced,  they contacted TRIO leadership to request that HCO have representation.  However, they were told that the purpose of the group was to discuss the  tax law itself, not hiring or other human resources matters affected by the  law. In our discussions with IRS officials, they told us that HCO has an  informal liaison to TRIO, participates in the executive steering committee,  and has existing human resource partners in the business operating  divisions, and that additional HCO representation in tax law  implementation—including the weekly TRIC calls—was not necessary.

However, a senior HCO official told us that it would be beneficial for HCO  to participate in the weekly TRIC meetings to stay abreast of current  developments and future plans and share relevant timelines and  processes related to hiring and training. Participation will help HCO to  manage its operations more strategically, for example, by planning for  training required ahead of the 2019 filing season.

Based on our discussions with IRS officials about HCO’s role in tax law  implementation, in June 2018, HCO began participating in the weekly  TRIC calls. HCO’s participation will likely help IRS make more informed  decisions concerning implementation of major tax law changes. It will also  position HCO to proactively understand human capital needs and  timelines across the agency and to hire and train personnel at the  appropriate times. At the same time, IRS will also be better positioned to  improve its management and strategy for executing implementation plans  while also fulfilling the agency’s mission.

IRS Identified the Scope, Nature, and Time Frame of the Tax Cuts and Jobs Act as Implementation Challenges

IRS officials identified a number of challenges associated with  implementing the Tax Cuts and Jobs Act:

Scope of changes. To implement 119 provisions of the Tax Cuts and  Jobs Act, IRS will need to (1) interpret the law; (2) create or revise  nearly 500 tax forms, publications, and instructions; (3) publish  guidance and additional materials; (4) reprogram 140 interrelated  return processing systems; (5) hire additional staff and train its  workforce to help taxpayers understand the law and how it applies to  them; and (6) conduct extensive taxpayer outreach. IRS officials  stated that these provisions will require extensive changes relevant to  both individual and business filers and affect all areas of IRS.

Complex and extensive nature of changes. According to IRS  officials, many of the revisions are complex and interrelated and  require central coordination and oversight. While IRS has to make  changes to its products every year, many of the changes needed to  implement the Tax Cuts and Jobs Act are more extensive than usual  and affect some of the forms with which taxpayers are most familiar.  For example, all Form 1040 products—the forms and instructions for  individual tax return filing—will be changed in accordance with the  law.

One-year time frame. IRS officials told us that implementing the Tax  Cuts and Jobs Act in 1 year will be challenging. Officials said the  agency is using implementation of the Patient Protection and  Affordable Care Act as a general guide for its current efforts, but  noted this earlier legislation was less expansive. IRS was responsible  for 47 provisions of the Patient Protection and Affordable Care Act  and had multiple years to implement some of its provisions, including  those officials identified at the time as the most challenging.  Implementing individual provisions of the Tax Cuts and Jobs Act  involves multiple, dependent actions. For example, IRS cannot  determine the changes it will need to make to various tax forms until it  has interpreted the law and cannot reprogram its return processing  systems until those forms are changed.

To complete necessary changes in time for the 2019 filing season,  IRS has used overtime and compensatory hours. For example,  according to IRS officials, as of May 26, 2018, IRS had used 1,749  overtime hours to make changes to forms and publications, between  two and three times as many overtime hours as it did in the entirety of  fiscal years 2016 or 2017. In addition, the agency delegated authority  to approve requests for work to a larger group of managerial staff and  temporarily reassigned existing staff to assist with time-sensitive  changes to tax forms and publications. In March 2018, IRS also made  a request for direct hiring authority, which would allow the agency to  hire IT staff more quickly. While this authority could be helpful to fill  specific positions more timely, IRS officials explained that these staff  will require training on tax processing procedures. According to a  senior IRS official, as of June 2018 the Office of Personnel  Management had not yet authorized this request.

IRS has taken a number of steps to implement time-sensitive provisions  of the new law. IRS officials noted that while some provisions of the Tax  Cuts and Jobs Act are retroactive or relevant to the 2018 filing season,  most will not take effect until the 2019 filing season. As part of the  planning process, IRS determined when various provisions of the law  would become relevant and acted to release information on the provisions  with the earliest relevance first. For example, IRS  released new withholding tables and associated guidance;  revised the form and online withholding calculator that taxpayers use  to provide information to employers about the amount of tax that  employers should withhold from their wages; and provided guidance on the transition tax on untaxed foreign earnings of  foreign subsidiaries of U.S. companies, a new section of the Tax Cuts  and Jobs Act that changes how business income is calculated and tax  is paid for the 2018 filing season.

IRS is continuing to revise its forms and issue guidance in advance of the  2019 filing season.

We provided a draft of this report to the Internal Revenue Service for  review and comment. IRS provided written comments, which are  reproduced in appendix I. In its written comments, IRS generally  concurred with our findings and noted a concern regarding interpretation  of correspondence overage data. IRS said that the overage rate we report  is based upon the open inventory at the end of the fiscal year. We  clarified the basis of the overage rate in our report. However, we believe  the total that IRS cites in its letter could also be misinterpreted in that it  does not represent the total overage inventory; rather it is a total for the  last week of the fiscal year. IRS tracks the overage correspondence rate  on a weekly basis, which can vary somewhat during the year given  fluctuations in correspondence receipts and staff availability to respond,  but is relatively consistent throughout the year. Therefore, the overage  rate at the end of the fiscal year provides a basis for assessing IRS’s  annual performance in responding to written correspondence.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of the Treasury, the Acting Commissioner of  Internal Revenue, and other interested parties. In addition, the report is  available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-9110 or lucasjudyj@gao.gov. Contact points for our  offices of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff members who made major  contributions to this report are listed in appendix II.

Appendix I: Comments from the Internal Revenue Service

Appendix II: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Tom Gilbert (Assistant Director);  Erin Saunders Rath (Analyst-in-Charge); Shea Bader; Jacqueline Chapin;  Jehan Chase; Kirsten B. Lauber; Regina Morrison; Robert Robinson; and  Sarah Wilson made significant contributions to this report.

IRS had multiple challenges during the 2018 tax filing season, yet it improved its customer service and met target dates for processing returns and issuing refunds. This happened despite a system outage on tax filing day. IRS also took steps to handle changes, such as tax rate revisions, under the 2017 Tax Cuts and Jobs Act.

Before the 2019 filing season begins, IRS needs to reprogram its computer systems to process tax returns, revise nearly 500 forms and instructions, hire and train employees, and help taxpayers understand the changes when filing taxes in 2019. To do this, IRS set up a central office to coordinate efforts across the agency.