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MSP #8: E-FILING BARRIERS

Electronic Filing Barriers Increase Taxpayer Burden, Cause Processing Delays, and Waste IRS Resources

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #8-1

Evaluate the overall need to reject an e-filed “imperfect tax return” and determine the feasibility of accepting the imperfect tax return upon filing and directing it to a treatment stream for further review.

IRS RESPONSE TO RECOMMENDATION: ​The IRS disagrees with the TAS recommendation to evaluate the overall need to reject an e-filed “imperfect tax return” and determine the feasibility of accepting the imperfect tax return upon filing and directing it to a treatment stream for further review.

Business rules in the e-file system reject fraudulent or duplicate returns. The top five rules mentioned in Figure 2.8.2 of the National Taxpayer Advocate’s Annual Report to Congress are part of the Security Summit, a collaboration between the IRS and members of private industries, the states, and financial institutions, to alleviate fraud from occurring and protecting taxpayers. Additionally, the IRS works with external partners to educate them on the top error rejection codes during various industry calls.

CORRECTIVE ACTION: N/A

TAS RESPONSE: We acknowledge that many of the most frequently broken business rules reject fraudulent and duplicate returns. However, the IRS should evaluate the business rules that ultimately result in a significant number of taxpayers paper filing their rejected returns. In such cases, the IRS is in no better position than it would have been accepting the e-filed questionable returns and directing them to a treatment stream for further review. We encourage the IRS to discuss this issue with the various members of the Security Summit to determine a solution that would reduce paper filing of rejected returns and still prevent identity theft and fraud.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #8-2

Work closely with the tax return preparation software industry to ensure that the software provides the taxpayers and preparers the necessary upfront opportunity to correct any potential errors before e-filing that would currently result in an e-file rejection.

IRS RESPONSE TO RECOMMENDATION: ​The IRS agrees with the TAS recommendation to work closely with the tax return preparation software industry to ensure that software provides the taxpayers and preparers the necessary upfront opportunity to correct any potential errors before e-filing that would currently result in an e-file rejection. The IRS has implemented this recommendation, employing multiple communication channels with external partners.

During these collaborations, we provide updates including top error rejection codes, legislative initiatives, and updates to the Modernized e-File (MeF) platform. At the start of the filing season, various industry calls are held multiple times each week. For the remainder of the filing season, the call frequency continues as weekly, biweekly, monthly, then quarterly after the filing season. In addition, legislative changes affecting electronic filing software are communicated by Quick Alerts to notify partners of technical issues, the status of the MeF program, and schema/business rule availability through the Secure Object Repository mailbox.

This recommendation has already been implemented.

CORRECTIVE ACTION: N/A

TAS RESPONSE: Close communications between the IRS and the tax return preparation software industry are key to minimize the occurrence of e-file rejections. Taxpayers and return preparers are best positioned to avoid e-file rejections if they receive the necessary information directly from the tax return preparation software to address any potential issues before or during the e-filing process.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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3.

TAS RECOMMENDATION #8-3

Meet with tax return preparation software industry representatives to determine how to minimize the paper filing of software-prepared tax returns that include attachments. The goal of such discussions should be to devise a workable solution that permits taxpayers to e-file returns.

IRS RESPONSE TO RECOMMENDATION: ​The IRS agrees with the TAS recommendation to meet with tax return preparation software industry representatives to determine how to minimize the paper filing of software-prepared tax returns that include attachments. The IRS has implemented this recommendation.

Modernized e-File allows filers to attach some IRS forms and documentation such as statements and appraisals, that cannot be submitted in extensible markup language (XML) format, as Portable Document File (PDF) or binary files to the tax return. Additionally, the IRS works with external partners to educate them on the importance of accepting PDF or binary files for electronic returns during various industry calls.

CORRECTIVE ACTION: N/A

TAS RESPONSE: It is encouraging that the IRS has committed to work with external partners on the importance of accepting attachments for e-file. Taxpayers and preparers who prefer to e-file should not be prevented from doing so merely because their returns include a required IRS form or attachment that is not supported by IRS MeF.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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4.

TAS RECOMMENDATION #8-4

Meet with tax return preparation software industry representatives to determine how to minimize the paper filing of software-prepared returns with overrides of some prepopulated fields. The goal of such discussions should be to devise a workable solution that permits the e-filing of these returns.

IRS RESPONSE TO RECOMMENDATION: ​The IRS disagrees with the recommendation to meet with tax return preparation software industry representatives to determine how to minimize the paper filing of software-prepared returns with overrides of some prepopulated fields.

Some software products are designed to pre-populate fields to prevent the user from changing entries. For example, software could prevent the taxpayer’s return from being rejected due to an incorrect value.

The IRS provides software developers schemas and business rules to implement. Software companies can provide feedback to the IRS through various communication channels. Identified issues are discussed during various external working group meetings with the software providers.

CORRECTIVE ACTION: N/A

TAS RESPONSE: We acknowledge that many pre-populated fields are designed to prevent the user from entering an incorrect value. This is certainly the case for those pre-populated fields that compute or carry over numbers. However, in other types of fields, well-informed taxpayers and preparers should have the ability to override a pre-populated field, after receiving sufficient warnings from the software, if they are confident in the accuracy of the override.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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5.

TAS RECOMMENDATION #8-5

Conduct comprehensive research to determine the reasons individual and business taxpayers and their preparers, broken down by demographics, continue to paper file and whether they would convert to e-file if they are more informed about the benefits of e-file. The IRS can use the findings of this research to conduct a data-driven outreach campaign to address taxpayers’ concerns.

IRS RESPONSE TO RECOMMENDATION: ​IRS does not agree to implement TAS recommendation. A comprehensive research study of paper return filers is possible but may not be a fruitful endeavor when comparing the potential benefits to the resources needed for the study. Those choosing to file on paper are a small group and have not been responsive to past invitations to participate in research. Further, breakdowns by demographics of this group increase the sample size needed for the research and increase the resources required for the service to support the project. The likelihood of finding reasons for paper filing amenable to IRS outreach campaigns may not be high enough to justify the research effort.

The recent MITRE report “Understanding Taxpayer Motivation for Filing Method Selection to Improve Customer Service” (MITRE Report) noted the difficulty in reaching those filing a paper return and gaining their participation in surveys. The same reasons for choosing to file on paper, such as lack of access to technology or resistance to share information online, also make conducting research more challenging.

The second part of the recommendation assumes filers would migrate to e-file if given the information relevant to their concerns. However, the first part of the recommendation tries to establish the possibility of taxpayers converting to e-file when given information about its benefits. The availability of e-file is well established and current research suggests the possibility the population still choosing to file on paper are not interested in changing their method.

The recent MITRE Report is based on a survey conducted by MITRE of federal tax return filers to improve the understanding of how taxpayers consider and make their decision about preparation and filing. While this research overlaps with the TAS recommendation, the MITRE study covered the broader population of all filers. The sample included 84 paper filers out of 1,282 total respondents, most of whom reported filing on paper after the IRS rejected their e-filed return. The limited number of respondents who filed on paper prompts caution about generalizing their survey responses to the entire population of paper filers. The low number of these respondents also highlights the difficulty in reaching this population with an online survey following a mailed invitation, which is a typical method of collecting data from a large sample representative of all paper filers.

The MITRE survey found taxpayers need a motivation to change their preparation and/or filing method. Once taxpayers find a method that works for them, they are unlikely to change without significant motivation. The MITRE survey found 60% of all respondents report keeping their same filing method for at least the past 10 years. Among all the paper filers in the sample, both those choosing to file on paper and those forced to use paper due to a rejected e-file return, 17 percent stated they would always use their current method and not switch. Further, just under one third of respondents who filed on paper had always filed on paper. This and other IRS research suggests there may be no viable incentives IRS might introduce to move paper filers to e-file.

CORRECTIVE ACTION: N/A

TAS RESPONSE: We acknowledge the difficulty reaching taxpayers who file by paper. However, we disagree with the IRS’s rationale for not conducting the recommended research. The MITRE Corporation’s online survey included 84 paper filers, and 17 percent of the paper filers indicated that they would not switch their filing method. To reach this population, the IRS should consider designing the research so that it does not rely solely on online surveys. For example, it could conduct a mail or telephone survey or focus group interviews (for more in-depth information not representative of the target audience).

Alternatively, if conducting research of the paper-filing population is cost prohibitive, the IRS can provide targeted outreach and education to address the concerns raised by this population in previously conducted studies. For example, as discussed in the Most Serious Problem, IRS studies conducted in 2010, 2015 and 2020 have consistently found that security and confusion were top concerns that prevented taxpayers and preparers from e-filing. The IRS can conduct an outreach campaign to dispel these main concerns.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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6.

TAS RECOMMENDATION #8-6

Meet with tax return preparation software industry representatives to determine how to minimize any barriers to incorporating 2-D barcode technology into electronically prepared returns that are printed and filed on paper.

IRS RESPONSE TO RECOMMENDATION: ​The IRS is in the process of standing up an advisory committee that will include members of the Council of Electronic Revenue Communication Advancement (CERCA) and the National Association of Computerized Tax Processors (NACTP). The NACTP regulates industry form design standards that are agreed on by industry members and followed in good faith, though not enforced. After testing multiple types of barcodes, the IRS proposes to amend form design standards for 2-D barcodes to include the high-data volume quick response (QR) code. Adding the high-data volume QR code will open the barcode capability to more forms regardless of their length and depth.

Furthermore, the IRS will propose that form design standards specify a universal data schema, with extensible markup language (XML) as preference. This update will provide more consistency in the data structure and efficiency in data ingestion. Both amendments to the current standards will ensure that whether taxpayers use tax products directly from the IRS or through their preferred tax professional, IRS form processing is easy, and taxpayers are treated with the rapid service they deserve.

The IRS understands that certain changes to the standards may require up-front investment in time or resources. The IRS will work with industry members to overcome obstacles, determine the support needed, ensure that initial return-on-investment estimates remain applicable when all perspectives are considered, and capitalize on the benefits (e.g., improved taxpayer and employee experience).

A significant caution about the expected benefit from barcodes or QR codes is in order. While requiring software providers to include such codes in printed forms seems an easy answer, IRS experience teaches that when Congress changes the tax law shortly before the filing season or, as happened recently, during the filing season, IRS and software vendors’ ability to respond and produce accurate forms may preclude timely inclusion of bar or QR codes, resulting in more submissions without useable codes.

CORRECTIVE ACTION: The IRS is in the process of standing up an advisory committee that will include members of the Council of Electronic Revenue Communication Advancement (CERCA) and the National Association of Computerized Tax Processors (NACTP).

The IRS will work with industry members to overcome obstacles, determine the support needed, ensure that initial return-on-investment estimates remain applicable when all perspectives are considered, and capitalize on the benefits (e.g., improved taxpayer and employee experience).

TAS RESPONSE: We commend the IRS for standing up an advisory committee to address the implementation of scanning technology. Working with industry members to provide support and assist in overcoming obstacles will improve the experience for taxpayers, the IRS, and our industry partners.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Open

DUE DATE FOR ACTION (if left open): Ongoing (with continued partnership and responsiveness from industry)

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7.

TAS RECOMMENDATION #8-7

Utilize 2-D barcoding and optical character recognition (or similar) technology to improve the accuracy and efficiency of processing of paper tax returns.

IRS RESPONSE TO RECOMMENDATION: ​The IRS agrees to implement the TAS recommendation in part as written as 2-D barcoding and optical character recognition (or similar) technology may not apply inclusively to all tax forms.

To improve the efficiency and accuracy of processing paper tax returns, there are several ongoing efforts that the IRS is leading for potential expansion of the use of optical character recognition (OCR) or 2-D barcoding, namely the 2-D Barcode Pilot, OCR Pilot and a five-year forms modernization initiative.

The IRS has developed an iterative approach to investigate implementing 2-D barcodes on IRS forms, which has resulted in several initial successes; one of those successes is the perspective of how the application of 2-D barcodes could affect taxpayers and industry partners. When 2-D barcoded forms are processed, data from the barcodes are quickly extracted with 100% accuracy and do not require validation, significantly reducing processing time. The approach to implementing effective barcodes was developed and enhanced by lessons learned as high-data volume quick response (QR) codes were implemented on Form 8918 and tested in a controlled environment. The barcoded version of Form 8918 went into production in December 2021, and results are forthcoming as IRS begins to receive the form from filers through mail and eFax. 2-D barcodes were also added to Form 8886, which is slated to move into production by the end of March 2022. In a test environment, the project team reached its goals of 100% barcode readability for mailed samples and 100% data accuracy for all scanned barcodes. As an outcome of the pilot, a scalability readiness report was released in January 2022 that will help initiate adding 2-D barcodes to other IRS-owned forms. However, implementation at a larger scale is dependent upon access to adequate resources, the careful application of lessons learned and best practices, robust partnership with preparers and the software industry, and support from key internal partners.

Starting within the third quarter of fiscal year 2022, the IRS is pursuing a broader forms modernization initiative in which forms will be redesigned over the next five years providing taxpayers adaptive online forms. Scaling of 2-D barcodes on IRS forms will generally follow the five-year modernization effort timeline, beginning with forms selected for the Minimum Viable Product phase occurring within calendar year 2022.

The IRS is currently evaluating OCR solutions for their ability to extract machine-readable data, especially out of low-resolution and poor-quality digital images. As a test set, three vendors have been asked to demonstrate their ability to extract machine-readable data from Form 990, as that information is publicly available. The vendor’s OCR solution will then be evaluated on its ability to learn and improve performance since previous challenges. Based on vendor evaluation results and the anticipated return on investment (ROI), the IRS will decide to what extent funding will continue to be provided to the OCR firms. An effective OCR solution also provides a back-up function to 2-D barcoded forms that are received by IRS in poor quality and cannot be successfully scanned for automatic data extraction.

As we look to scale OCR, 2-D barcoding, or other technology solutions to address IRS business challenges, selection/implementation decisions will be made using systematic evaluation and prioritization criteria, further based on available resources and prospective ROI for the respective pilot project. It is important to note that the IRS does not have sufficient information to make a blanket statement that all forms and processes would benefit from the application of a 2-D barcode.
A significant caution about the expected benefit from barcodes or QR codes is in order. While requiring software providers to include such codes in printed forms seems an easy answer, IRS experience teaches that when Congress changes the tax law shortly before the filing season or, as happened recently, during the filing season, IRS and software vendors’ ability to respond and produce accurate forms may preclude timely inclusion of bar or QR codes, resulting in more submissions without useable codes.

CORRECTIVE ACTION: To improve the efficiency and accuracy of processing paper tax returns, there are several ongoing efforts that the IRS is leading for potential expansion of the use of optical character recognition (OCR) or 2-D barcoding, namely the 2-D Barcode Pilot, OCR Pilot and a five-year forms modernization initiative.

As we look to scale OCR, 2-D barcoding, or other technology solutions to address IRS business challenges, selection/implementation decisions will be made using systematic evaluation and prioritization criteria, further based on available resources and prospective ROI for the respective pilot project.

TAS RESPONSE: We commend the IRS’s commitment to explore the implementation of scanning technology. We look forward to reviewing the results of the 2-D barcode pilots using Forms 8918 and 8886 as well as the OCR tests on Form 990. We acknowledge resource constraints; however, we believe this issue warrants top prioritization to minimize any future backlogs and to generally improve the accuracy and efficiency of processing the millions of the paper filings the IRS will continue to receive in the foreseeable future. While we acknowledge that the IRS has included this in the five-year forms modernization initiative, it must strive to achieve widescale expansion of scanning technology long before the planned five year timeline.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Open

DUE DATE FOR ACTION (if left open): Ongoing, pending multi-year funding and IT Development

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8.

TAS RECOMMENDATION #8-8

Collaborate with ETAAC to set a new long-term electronic filing rate goal. Any implementation of e-file mandates to achieve these goals must be coupled with a fair hardship waiver process to accommodate taxpayers and preparers who cannot comply.

IRS RESPONSE TO RECOMMENDATION: ​The IRS disagrees with the recommendation to collaborate with the Electronic Tax Administration Advisory Committee (ETAAC) to set a new long-term electronic filing rate goal. The original goals were established by Congress and have been achieved. Over the last five years, over 86 percent of individual income tax returns were electronically filed.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS has surpassed the 80 percent e-file rate goal set by Congress in 1998. However, the agency still receives and manually processes millions of paper individual and business tax returns. A revision of a long term e-file rate goal is not only necessary, but it is also long overdue.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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