Your 2009 Individual Tax Return Maybe Wrong!

2009 Individual Tax ReturnsThe accuracy rates for tax returns prepared at Volunteer Program sites decreased for the first time in five filing seasons, as it is presented on review paper issued by Treasury Inspector General For Tax Administration [TIGTA] on September 15’ 2009 titled Ensuring the Quality Assurance Processes Are Consistently Followed Remains a Significant Challenge for the Volunteer Program. Of the 49 tax returns prepared for Treasury Inspector General For Tax Administration [TIGTA]’s auditors by Volunteer Income Tax Assistance and Tax Counseling for the Elderly sites in the 2009 Filing Season,  29 (59 percent) were prepared correctly and 20 (41 percent) were prepared incorrectly.  If 17 of the incorrectly prepared tax returns had been filed, taxpayers would not have received $4,138 in tax refunds to which they were entitled.  Alternatively, if the remaining 3 incorrectly prepared tax returns had been filed, the IRS would have incorrectly refunded $4,575.

Since the 2004 Filing Season, TIGTA have reported that volunteers do not always follow required procedures designed to assist in the accurate preparation of tax returns. During the 2009 Filing Season, some volunteers did not consistently use the required intake and interview process or perform a quality review to ensure that an accurate tax return was prepared.  In addition, the IRS-developed intake sheet was not effective to ensure that taxpayers received the additional property tax deduction when appropriate.

 

Types of Tax Returns Prepared by the Volunteer Program

The Volunteer Program plays an increasingly important role in achievement of the Internal Revenue Service’s (IRS) goal of improving taxpayer service and facilitating participation in the tax system.  It provides no-cost Federal tax return preparation and electronic filing (e-filing) directed toward underserved segments of individual taxpayers, including low-income to moderate-income, elderly, disabled, and limited-English-proficient taxpayers.  It includes sites operated in partnership with the military and with various community-based organizations.

The Volunteer Program is comprised of:

  • Volunteer Income Tax Assistance (VITA) Program
  • Tax Counseling for the Elderly (TCE) Program
  • VITA Grant Program

 

General characteristic of tax return prepared by the volunteer program in 2007 shown below:

Types Of Tax Returns Prepared by Volunteer
The Volunteer Income Tax Assistance [VITA] Program was originated in 1969 due to enactment of the Tax Reform Act of 19692 and an increased emphasis on taxpayer education programs.  The IRS has placed continual emphasis on expanding the VITA Program through increased recruitment of social service, nonprofit, corporate, financial, educational, and government organizations; involvement of the military on a national level; and expansion of assistance provided to the limited-English-proficient community.  

The TCE Program began with the Revenue Act of 19783 that authorized the IRS to enter into agreements with private or nongovernmental, public, nonprofit agencies and organizations to provide training and technical assistance to volunteers who provide free tax counseling and assistance to elderly individuals in the preparation of their Federal income tax returns.  The law authorizes an appropriation of special funds, in the form of grants, to provide tax assistance to persons age 60 and older.  The IRS receives the funds as a line item in the budget appropriation. The total funds are distributed to the sponsors for their expenses.

The 2009 Filing Season was the first filing season that the IRS granted funds for the VITA Grant Program.  Under the VITA Grant Program, 111 grantees were awarded $8 million in matching grants to extend services to underserved populations in hard-to-reach areas, both urban

During the 2008 Filing Season, taxpayer demand for volunteer tax services increased almost 33 percent over the approximately 2.6 million volunteer-prepared tax returns filed during the 2007 Filing Season.  The key factor of this increased activity was the passage of the Economic Stimulus Act of 2008. The IRS reached out to taxpayers with special emphasis on Social Security and Veterans Administration benefits recipients who had no tax filing requirements.

 

 

Tests Used To Measure the Tax Return Accuracy Rate

TIGTA designed four scenarios for auditors to use as they posed as taxpayers having tax returns prepared by volunteers.  The scenarios were developed to use characteristics of taxpayers who visit Volunteer Program sites to have a tax return prepared and tax law topics that assessed the volunteer’s use of the tools the SPEC function created to ensure that accurate tax returns are prepared.

Two scenarios included tax topics related to five of the six credits taxpayers most often claimed on the Tax Year 2007 returns prepared by community-based VITA and TCE sites.  The dollar amounts of these 5 credits represented about 49 percent (approximately $981 million) of the approximately $2 billion in refunds shown on the tax returns for these taxpayers.  Taxpayers whose tax returns included 1 or more of the 5 credits in our scenarios accounted for 677,413 (23 percent) of the 2,920,754 Tax Year 2007 tax returns prepared.  Scenarios 1 and 2 have been used, with minimal revisions, since our first audit of the Volunteer Program in the 2004 Filing Season.

Two scenarios were added for the 2009 Filing Season review to assess volunteer’s handling of newly enacted tax laws and, at the request of the IRS, to assess the accuracy of volunteer-prepared tax returns that do not include dependent issues.

 

Details of Scenarios Used On The Tax Return Accuracy Test

Here are scenarios used:

Scenario 1 – The taxpayer was single, had never been married, and lived with his or her sister.  The taxpayer had one child, age 7, who lived with the taxpayer in the home of the taxpayer’s sister during school vacations, including the months of June, July, and August (summer).  The child lived with the other parent during the school year.  Wages reported on the 2008 Wage and Tax Statement (Form W-2) totaled $16,435.  The taxpayer received a 2008 Interest Income (Form 1099-INT) totaling $26.35.  The taxpayer attended college part time, and the cost was paid by the taxpayer’s sister.

In this scenario, an accurately prepared tax return would result in the taxpayer receiving a refund of $598.  The tax return preparer would have correctly determined that the taxpayer’s filing status was Single.  Because the taxpayer did not provide more than one-half of the support for the child, he or she could not claim the child as a dependent for Child Tax Credit purposes.  The Earned Income Tax Credit would not be available to the taxpayer because earned income exceeded the maximum allowable amount and because the child did not live with the taxpayer for more than one-half of the year.  The taxpayer would qualify for the Recovery Rebate Credit of $600 because no economic stimulus payment was received in 2008.  The taxpayer did not file a Tax Year 2007 return since there was no income to report.

 

Scenario 2 – The taxpayer was divorced and lived with his or her 8-year-old child.  The taxpayer had the same job working as a clerk throughout Calendar Year 2008.  Wages reported on the 2008 Form W-2 totaled $28,732.  The taxpayer was paid bi-weekly and contributed to a  401(k) retirement plan.  The taxpayer received a 2008 Form 1099-INT totaling $42.13, received $400 a month for child support, had dependent care expenses totaling $1,352, and contributed $1,253 to a 401(k) retirement plan.  The taxpayer received $900, the maximum amount of economic stimulus payment.

In this scenario, an accurately prepared tax return would result in the taxpayer receiving a refund of $2,338.  The tax return preparer would have correctly determined that the taxpayer’s filing status was Head of Household and the dependency exemption could be claimed.  In addition, the taxpayer qualified for an Earned Income Tax Credit of $834, a Child Tax Credit of $990 and an Additional Child Tax Credit of $10 in a refundable credit, a Child and Dependent Care Credit of $379, and a Retirement Savings Contributions Credit of $125.

 

Scenario 3 – The taxpayer was widowed, lived alone, retired 2 years ago, and began receiving an annual pension totaling $4,092 in Calendar Year 2008.  The taxpayer began receiving Social Security Retirement payments during Calendar Year 2008, the month after reaching age 62, and received a total of $3,364 for Calendar Year 2008.  In addition, the taxpayer received a 2008 Form 1099-INT totaling $236.08.  The taxpayer did not receive an economic stimulus payment because his or her income did not qualify.  Due to the IRS’ request for an assessment specifically of the TCE Program’s preparation of tax returns involving retirement income, auditors limited their use of this scenario to TCE sites.

In this scenario, a correctly prepared tax return would result in the taxpayer receiving a refund of $300.  The preparer would have correctly determined that the taxpayer’s filing status was Single.  The preparer would have realized this taxpayer had no filing requirement due to the level of income.  However, the taxpayer would be entitled to receive the Recovery Rebate Credit and would need to file a tax return for that purpose.

 

Scenario 4 – The taxpayer was single, no children, never married, and owned and lived in a home without a mortgage.  The home was inherited from a parent.  The taxpayer worked part time in the evenings as a convenience store clerk.  Wages reported on the 2008 Form W-2 totaled $10,756, with $608.84 Federal income tax withheld, $155.96 Medicare tax, and $164.18 State income tax withheld.  The taxpayer also received $666.87 in Social Security Retirement income.  In addition, the taxpayer received a 2008 Form 1099-INT totaling $12.02 and paid $984 in county real estate property taxes based on an assessment notice received in August 2008.  The taxpayer received a $300 economic stimulus payment.

In this scenario, a correctly prepared tax return would result in the taxpayer receiving a refund of $639.  The preparer would have correctly determined that the taxpayer’s filing status was Single.  The taxpayer would receive an Earned Income Tax Credit in the amount of $161 and receive the benefit of a $500 increase in the standard deduction due to real estate taxes paid.  No Recovery Rebate Credit would be due.

 

This review was performed by TIGTA at the IRS Customer Assistance, Relationships, and Education function in the Wage and Investment Division Headquarters in Atlanta, Georgia, during the period December 2008 through May 2009In addition, from February through April 2009, Treasury Inspector General for Tax Administration [TIGTA] auditors performed 51 anonymous visits (called shopping) and had 49 tax returns prepared at 49 judgmentally selected Volunteer Program sites located in 15 States.   The performance audit was conducted in accordance with generally accepted government auditing standards.
 

How Individual Tax Returns Incorrectly Prepared [Results of Review]

The accuracy rates for tax returns prepared at Volunteer Program sites decreased for the first time in five filing seasons.  Below figure shows that accuracy rates of tax returns prepared for our auditors for the 2004 through 2009 Filing Season:

Overall Tax Returns Accuracy Rates

Since the 2004 Filing Season, TIGTA have reported that volunteers do not always follow required procedures designed to assist in the accurate preparation of tax returns.  During the 2009 Filing Season, some volunteers did not consistently use the required intake and interview process, including completion of the IRS Intake and Interview Sheet (Form 13614) or another IRS-approved intake sheet, or perform a quality review to ensure that an accurate tax return was prepared.

Of the 49 tax returns we had prepared for the 2009 Filing Season, 29 (59 percent) were prepared accurately and 20 (41 percent) were prepared incorrectly.  Below figure shows the overall accuracy rates by scenario:

2009 Tax Returns Accuracy Rates

Scenarios 1 and 2 have been used, with some slight variations, to test tax return accuracy since the 2004 Filing Season, when the Treasury Inspector General for Tax Administration first began testing the accuracy.  Scenario 3 added the tax topic of retirement income.  Scenario 4 added the tax topic of real estate taxes.

 

Specific Issues Causing Errors

Specific issues causing errors included:

  • In 7 (78 percent) of the 9 instances in which the auditors presented Scenarios 1 and 2 and the return was incorrectly prepared, the preparer overlooked what was provided by taxpayers on the intake sheet. Errors on tax returns included volunteers incorrectly determining the amounts of the Child Tax Credit, the Child and Dependent Care Credit, and/or the Retirement Savers Contributions Credit.  Also, for seven of the incorrect tax returns, there was either no required quality review performed or, for example, the quality reviewer overlooked information on the intake sheet when validating information on the tax return.
  • In 11 (100 percent) of the 11 instances in which the auditors presented Scenario 3–the retirement income scenario–volunteers correctly determined the taxability of the taxpayer’s income.  However, at one site, no tax return was prepared because the volunteer did not identify that a tax return needed to be filed to claim a $300 Recovery Rebate Credit.  There was no quality review of the volunteer’s decision not to prepare a return.  At another site, a tax return was prepared but the Recovery Rebate Credit was not claimed.
  • In 9 (75 percent) of the 12 instances in which the auditors presented Scenario 4, volunteers did not include real estate taxes as an additional standard deduction.  This was the only error for these tax returns.  For Tax Year 2008, homeowners had the option to claim an additional standard deduction for property tax if they do not itemize.  The IRS-developed intake sheet was not effective to ensure that entitled taxpayers received the additional deduction.  The IRS intake sheet does not ask whether the taxpayer paid property taxes.  The SPEC function alerted volunteers on February 15, 2009, to remind them of this new law.

 

During the 2009 Filing Season, the IRS performed 65 shopping reviews that showed 44 (68 percent) tax returns were prepared accurately, compared to a 75 percent accuracy rate for the 85 tax returns volunteers prepared for SPEC function shoppers during the 2008 Filing Season.  Observations from the 2009 Filing Season shopping visits showed that:

  • 25 percent of the sites did not perform the required quality review of the tax returns.
  • 68 percent of the sites did not effectively use the required intake and interview sheet during tax return preparation.

 

Significant challenges exist to ensure that volunteers consistently adhere to quality assurance processes Since Fiscal Year 2004, the SPEC function and its volunteer organization/partners have worked to educate and train volunteers about the benefits of following quality assurance processes during the preparation of every tax return.  For every tax return prepared, volunteers are required to ensure that the taxpayer completes an IRS-approved intake sheet, that there is an interview process to confirm a complete and accurate understanding of the taxpayer information, and that each tax return is subjected to a 100 percent Quality Review.

 

Taxpayers and Government Are Adversely Affected By Incorrect Tax Returns

Incorrectly prepared tax returns can increase the risk of taxpayers not receiving credits they are entitled to OR receiving additional credits for which they do not qualify: 

[a]. If 17 of the 20 incorrectly prepared tax returns had been filed, taxpayers would not have received $4,138 in tax refunds to which they were entitled

Specific credits not received included:

  • Child Tax Credit and Additional Child Tax Credit
  • Child and Dependent Care Credit
  • Earned Income Tax Credit
  • Recovery Rebate Credit
  • Retirement Savings Contributions Credit [and additional standard deduction amount] 

Note: This does not take into account the many years of difficulty taxpayers may face once the IRS determines that they claimed, for example, an incorrect amount of Earned Income Tax Credit [and See again “Types of Tax Returns Prepared by the Volunteer Program, above]

[b]. Alternatively, if the remaining 3 incorrectly prepared tax returns had been filed, the IRS would have refunded $4,575 incorrectly. Overstated refunds resulted from taxpayers incorrectly receiving the Child Tax Credit and Additional Child Tax Credit, dependency exemption, Child and Dependent Care Credit, and/or Earned Income Tax Credit.  Below figure presents this result:

Tax Returns Incorrectly Prepared

 

Conclusion:

If your 2009 individual tax returns prepared by the volunteer program, and unluckily fall into the [a] scenario, you may miss tax credit you’re entitled to. But, in contrary, if luckily you’re fall into the [b] scenario, you may get extra tax refund.

 

This review presents significant challenges to the IRS.  The strengths of the Volunteer Program lie with the partner organizations and their volunteers.  Although the IRS has a commitment to holding them accountable for following the direction, guidelines, and required processes that have been put in place, this commitment should be at the forefront to ensure that quality services have been presented to the taxpayers.  

Author: Lie Dharma Putra

Putra is a CPA. His last position, in the corporate world, was a controller for a corporation in Costa Mesa, CA. After spending 15 years as a nine-to-five employee, he decided to serve more companies, families and even individuals, as a trusted business advisor. He blogs about accounting, finance and tax, during his spare time, and helps accounting students (around the globe) to understand the subject matter easier , faster. Follow him on twitter @LieDharmaPutra or add him to your circle at Google Plus Lie+

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