The Internal Revenue Service’s new process for verifying information from W-2 forms did not go completely smoothly this past tax season, although it did hold promise for combating identity theft and tax fraud.
At a hearing Wednesday on the 2017 tax filing season before the House Ways and Means Oversight Subcommittee, Jessica Lucas-Judy, acting director of strategic issues at the Government Accountability Office, presented a GAO report on the implementation challenges of the new W-2 verification process. The new authentication procedure was mandated by the PATH Act of 2015 and was rolled out for the first time this tax season in an effort to discourage identity theft refund fraud and improper payments. The PATH Act advanced the deadline for employers filing W-2 forms with the Social Security Administration to January 31, giving the IRS extra time to verify the wage and withholding information reported on tax returns before issuing refunds. The IRS calls the process “W-2 systemic verification.”
As of Feb. 17, 2017, IRS received more than 214 million W-2 forms, representing a 125 percent increase over the same time a year ago. The PATH Act also required the IRS to hold tax refunds until February 15 for taxpayers claiming the Earned Income Tax Credit or Additional Child Tax Credit to provide more time to use the W-2 data to verify returns. Although the IRS applied the verification process to all tax returns, preliminary data suggests that for returns where the taxpayer claimed the EITC or ACTC, the IRS verified the wage information for over 35 percent of the returns before February 15.
The refund hold gave the IRS more time to verify returns when it received W-2 data, resulting in approximately $863 million in additional refunds being identified as potentially fraudulent. However, since not all the W-2 data was available before February 15, the IRS couldn’t verify the wage information for 7.7 million tax returns with refunds claiming the EITC or ACTC (that is, over 58 percent), for a total of $38.1 billion.
The IRS did not put a hold on the returns that didn’t claim the EITC or ACTC because it wasn’t required to do so, though those tax returns were subject to systemic verification and other checks by the IRS. The preliminary data examined by the GAO indicated the IRS verified the wages reported on 8.6 million tax returns that did not claim the EITC or ACTC before February 15 (41 percent, that is). However, the IRS couldn’t verify the wage information reported on 12.3 million tax returns (over 58 percent) claiming $28.1 billion in refunds, because not all the W-2 data was available.
Several issues contributed to delays in the availability of W-2 information, the GAO pointed out. The IRS processes W-2 electronic data on a weekly basis rather than when it’s received, due to its aging computer systems. That results in a lag between the time when IRS has the data and can use it. On top of that, some employers can request and be granted 30-day filing extensions and some file W-2s on paper, which take longer to process. The IRS is continuing to analyze the W-2 systemic verification process and its outcomes.
The GAO noted that the IRS also experienced two brief electronic filing system interruptions during filing season. The IRS launched a new online service during filing season, but others were unavailable or discontinued due to security concerns. In March, the IRS and the Department of Education responded to security concerns and removed access on fafsa.gov and StudentLoans.gov to the IRS’s Data Retrieval Tool, the online process through which student financial aid applicants can get their family’s tax information. The IRS suspects that fraudsters used personal information obtained elsewhere to access the Data Retrieval Tool and access tax information, particularly adjusted gross income. As of April 6, IRS reported that fewer than 8,000 fraudulent returns from this incident had been filed and processed, and refunds issued, but estimated that about 100,000 taxpayers may have been affected. The IRS said it expects the Data Retrieval Tool to be unavailable until October 2017 while IRS and the Department of Education make updates.
Last June, the IRS also discontinued its e-file Personal Identification Number tool. The e-File PIN served as an alternative signature verification method on 1040 forms and helped taxpayers electronically file their tax returns. Discontinuing the tool followed the IRS’s announcement in February of last year that cybercriminals had stolen more than 100,000 e-file PINs through the tool.
Despite the challenges this past filing season, the IRS said it had been a successful one on the whole. “The Commissioner has stated that it was the smoothest filing season of his tenure,” said IRS deputy commissioner for services and enforcement Kirsten B. Wielobob in her opening statement. “As of April 14 the IRS received more than 118.4 million individual returns. We issued over 8 7 million refunds for more than $246 billion, with an average refund of approximately $ 2,800. The smooth operation of the filing season is not automatic or accidental; it has been made possible because of the hard work and dedication of the IRS workforce. Thousands of employees spend month s planning and then administering it effectively. In fact, we are already working on delivering the 2018 filing season.”
She noted that the IRS had implemented the changes required under the PATH Act, improved taxpayer assistance and increased its efforts to protect taxpayer information. “The refund delay and a second PATH Act change—to accelerate the filing date of Form W-2 s—together helped the IRS improve our ability to spot incorrect or 2 fraudulent returns,” she said. “Receiving W-2s earlier also assisted us in releasing legitimate refunds to taxpayers more quickly when returns were stopped by our filters. When we can verify the compliant taxpayer’s identity, we can reduce the delay in sending that refund.”