IRS hasn't properly tested new e-file system, audit finds

The Internal Revenue Service's transition to a new system for electronically filing individual and business tax returns has been hindered both by insufficient testing and not enough filers using the system, according to an auditor's report released Monday.

The IRS has been gradually implementing the Modernized e-File system since 2004, but began accepting standard individual 1040 forms only in February 2010.

The agency plans to fully implement the new electronic filing system during the upcoming 2012 tax season and to retire its legacy e-filing system in October 2012 before the 2013 filing season begins.

The new system allows for faster electronic processing than its predecessor and it enables filers to attach documents as PDFs rather than to mail them separately.

So few people have used the new system, however, that the IRS has little assurance it is prepared to accurately process the volume of a full season of filing, auditors said.

"Any disruption in the processing of [electronically] filed individual tax returns after the IRS retires its legacy e-file system could be catastrophic to the success of the IRS' e-file program," the report said.

The IRS received fewer than 9 million individual tax returns through the new electronic filing system through mid-April of this year, about one-fourth of the 35 million forms it expected for the tax season. During its most active day of the season, the system processed about 330,000 returns compared with more than 3.3 million processed by the legacy system on its busiest day, auditors said.

The agency also has failed to sufficiently test the new system's ability to process specific forms, auditors said. The IRS completed accuracy testing for less than 10 percent of the 2010 returns it had pledged to review, they said, and did the majority of its testing during the first two weeks of the 2011 filing season. Only about 16 percent of all forms filed through the new system had come in at that point, auditors said.

Auditors recommended the IRS ramp up its accuracy testing for documents filed through the new system and promote the system more during the upcoming filing season to give it a more rigorous workout than in previous years.