IRS E-file Overhaul Triggers Errors

A $574 million program to overhaul the IRS' existing method for electronically collecting tax returns is supposed to provide instant processing capabilities and improved error detection, but the system is erroneously rejecting returns, according to report released Thursday, tax day, by a Treasury watchdog.

The Modernized e-File (MeF) program will replace the IRS' existing e-filing system with a more uniform and faster online platform.

"The success of the MeF system this year has been hindered as a result of erroneously rejected tax returns," states a report released Thursday by the Treasury Inspector General for Tax Administration. The system is configured to deny returns that fail to meet various criteria for ensuring accuracy. As of March 5, 24 percent of returns filed through the system were rejected. The IG's analysis of some of the accuracy criteria found that 63 percent of the edit checks appeared to be denying returns in error or without explanation.

IRS officials responded that they are working closely with the IG and taxpayers to monitor the system's functionality. In addition, the agency has made a number of corrections and reached out to filers to ensure the system meets their needs.

The edit checks apply to several key tax policies, including the Making Work Pay tax credit and social security numbers.

In addition, the number of individual returns that the modernized e-file program processed came in lower than expected. While MeF has processed business returns for several years, this is the first year the IRS is trying out the system on individual returns. Individual returns typically require more complex coding and system requirements, so the IRS wanted to limit the number of individual returns processed this year to monitor whether the system works or not.

The IRS planned to allow for processing only 1.5 million through the end of February. Transmissions would go up another 4.4 million through the end of March. However, as of March 5, the IRS had only processed 98,596 tax returns.

IRS officials noted that the volume constraints were intended to maintain system performance, not to establish expected tax return receipts, according to Thursday's report. "Regardless of the purpose of the volume management plan, low tax return transmissions negatively impact the IRS' ability to effectively evaluate MeF system performance," it stated.

The project is delivering on budget and on time, by Treasury's accord. Data the department posted to the IT Dashboard, a site that tracks governmentwide IT spending, indicates that, in fiscal 2010, the project is expected to cost $71 million. That figure differs by less than 10 percent from expected expenses.

On April 10, the agency reported, "Business returns submitted through Modernized e-File (MeF) have an average 8% processing error rate, compared to 24% for transcription-based paper processing."