In accordance with 31 U.S.C. section 720, I am writing you concerning actions by the Internal Revenue Service (IRS) in response to the recommendations contained in the enclosed report by the General Accounting Office (GAO) entitled Tax Administration: IRS Could Do More To Verify Taxpayer Identities (GGD-95-148, August 30, 1995).

The GAO report contains several recommendations geared to addressing the processing and posting of tax returns in which the primary filer does not provide a social security number (SSN) or provides a name and social security number that do not match. Our June 21, 1995, response to GAO on the draft of this report is included in the final report on page 13. We agree with the report recommendations. Listed below are the comments regarding the recommendations:

RECOMMENDATION: Finalize the CP54B Notice in time for use during the 1996 tax-filing season.

RESPONSE: We agree. The revised CP54B Notice has been reviewed and approved by the Acting Director, Corporate Systems Division for an operational date of January 19, 1996. (See enclosed copy of the response to the Request for Information Services (RIS) TPS-5-0114.)

RECOMMENDATION: Apply the revised documentation requirements to
taxpayers who filed tax returns that were posted to the Individual Master File
(IMF) invalid segment before 1995 and whose accounts now have a permanent
refund release code.

RESPONSE: We agree. RIS INT-5-0008 has been approved and assigned to
Information Systems for development of the IRS Individual Taxpayer
Identification Number (ITIN) System. In that RIS, the Assistant Commissioner
(Taxpayer Services) requested that all inactive accounts on the invalid

The Honorable Ted Stevens

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segment be removed, effective January 1, 1996, as is currently done on the valid segment of the Master File.

The Assistant Commissioner (Taxpayer Services) staff has coordinated and
drafted another RIS to affect the reversal of the permanent refund release code
on the pre-1995 IMF invalid segment accounts. This request will freeze all
returns filed with an invalid SSN during the 1996 filing season. The CP54B will
be issued to taxpayers to solicit verification and justification for the invalid
account condition.

If you have any questions, please do not hesitate to contact me or Anne Raffaelli, National Director for Legislative Affairs, at 622-3720.

Enclosures (2)

Sincerely,

Degay Richard

Margaret Milner Richardson

As stated

www

GAO

Background

United States

General Accounting Office
Washington, D.C. 20548

General Government Division

B-260131

August 30, 1995

The Honorable Margaret M. Richardson
Commissioner of Internal Revenue
Department of the Treasury

Dear Mrs. Richardson:

This report, prepared under our basic legislative authority, discusses the Internal Revenue Service (IRS) procedures for processing and posting tax returns in which the primary filer does not provide a Social Security number (SSN) or provides a name and SSN that do not match Social Security Administration (SSA) records.1 In particular, the report discusses (1) the growth in accounts with missing or incorrect SSNs on IRS' Individual Master File (IMF), (2) IRS' procedures for verifying the identities of tax return filers, and (3) the potential effects of the procedures on IRS' plans to modernize the tax system and on IRS' income-matching program.

IRS relies on data from SSA to determine the accuracy of SSNs and names recorded on tax documents submitted by individual taxpayers. IRS uses this information to establish the identity of each taxpayer and to ensure that each transaction is posted to the correct account on the IMF.

When processing paper tax returns with missing or incorrect SSNS, IRS
service centers first try to make corrections by researching IRS files or
other documents (for example, Form W-2 wage and tax statements) that
accompany a tax return.2 Returns that can be corrected, along with those
that match SSA records, are posted to the "valid" segment of the IMF.
Returns that cannot be corrected are posted to the “invalid" segment of the
IMF, using either the incorrect SSN on the tax return or a temporary number
assigned by IRS.3 As of January 1, 1995, 4.3 million accounts were posted
on the invalid segment of the IMF, and 153.3 million accounts were posted
on the valid segment.

'Hereafter, we refer to these returns as returns with missing or incorrect SSNs.

IRS follows more stringent procedures for electronically filed returns. Returns filed electronically with missing or incorrect SSNs are rejected and sent back to the filer for correction.

IRS assigns temporary numbers when a taxpayer (1) cannot legally obtain an SSN from SSA (such as
in the case of an illegal or nonresident alien), (2) is in the process of obtaining an SSN from SSA,
(3) has been issued the same SSN by SSA as another person, (4) files a return with a missing SSN (and
IRS cannot identify one through research), or (5) files with an SSN already used to post another
taxpayer's return to the IMF invalid segment.

B-260131

Results in Brief

IRS created the invalid segment of the IMF to store the accounts of taxpayers who had changed their names, because of marriage or divorce for example, and had not yet informed SSA of the name change. However, IRS has posted returns to the invalid segment of the IMF to cover other situations, such as when a taxpayer (1) uses the SSN of another individual, (2) uses an SSN that is not issued by SSA, or (3) is assigned a temporary number. IRS tries to resolve invalid accounts and move them to the valid segment of the IMF by corresponding with taxpayers to verify their identities, periodically matching invalid accounts against updated SSA records, and reviewing tax documents subsequently filed by taxpayers.

From 1986 through 1994, the average annual growth rate for accounts on
the invalid segment of the IMF was more than twice the growth rate for
accounts on the valid segment-5 percent versus 2 percent, respectively.
The growth in IMF invalid-segment accounts stemmed in part from (1) IRS'
increasing use of temporary numbers, (2) a 1990 decision not to ask filers
who received temporary numbers to verify their identities, and
(3) procedures that did not require filers whose returns were posted with
incorrect numbers to provide proof of identity sufficient to resolve the
invalid condition. IRS paid $1.4 billion in refunds on returns that were
posted to the invalid segment of the IMF for tax year 1993. No one knows
how much, if any, of this amount was erroneously paid, but the risk of
issuing erroneous refunds was higher because IRS was less certain of these
filers' identities than of the identities of filers who matched ssa's records.

As part of its efforts to combat refund fraud, IRS revised its procedures in
1995 to require that taxpayers who file returns with (1) missing or
incorrect SSNs or (2) temporary numbers provide documentation to verify
their identities. When fully implemented, the revised procedures could
help reduce the number of accounts on the IMF invalid segment. However,
the notice IRS sends to filers does not clearly convey that they are required
to provide documentation to verify their identities. Thus, IRS has to contact
some of these filers more than once to obtain the information it needs.
This practice increases processing costs, adds to taxpayer burden, and
further delays the issuance of some refunds. IRS has a revised notice under
review that would better notify filers of this requirement, but IRS'
notice-review process has been lengthy, and the resources available to do
the necessary computer reprogramming have been limited. IRS officials
told us that they expect the notice to be available for use in the 1996
tax-filing season, which begins in January 1996.