Executive Summary

Preface

Objective and Scope

Background

Results

conclusion

Detailed Scope and Objectives

Management’s Response

This review was conducted as part of Internal Audit’s Fiscal Year 1997 Business Taxpayer Audit Strategy. Under the strategy, Internal Audit initiated a series of national reviews which were designed to identify opportunities to improve customer service and reduce burden for the business taxpayer. This review focused on those business taxpayer accounts where more than one Form 941, Employer’s Quarterly Federal Tax Return, was processed which resulted in a duplicate filing condition.

During tax year 1996, approximately 250,000 business taxpayers (3.5% of total business taxpayers) filed more than one Form 941 return for at least one quarter. Because of the relatively low volume, we focused our objective on profiling these modules and determining if there were any cost-effective solutions to reduce the volume, expedite processing, and improve service to business taxpayers. We performed the review in accordance with generally accepted government auditing standards.

Although duplicate Form 941 returns do not create a significant burden to the Service, we did identify two processes which the Service may be able to cost-effectively improve. These changes will improve the efficiency of processing duplicate returns and should also improve service to the taxpayer. Management acknowledged that the Service could expedite processing in these two areas.

We also discussed with management our profiling of Tax Year 1995 and 1996 duplicate Form 941 return accounts. Based on the low number of taxpayers in the various profile characteristics, we jointly determined that there were no cost-effective solutions to reduce the volume of duplicate returns.

Implementation of a Prescreening Process for Amended/corrected Returns. Four of the six service centers we visited had already implemented an upfront prescreening process to identify amended or corrected returns. The prescreened returns were then sent directly to Adjustments rather than continuing through regular return processing before being routed to Adjustments. Our EDP analysis showed that three of these four service centers had fewer duplicate returns processed for amended or corrected returns. Prescreening has been shown to be a cost-effective method to prevent duplicate return postings, streamline processing, and resolve taxpayer accounts quicker.

Elimination of cP 193A Notice. We determined that at all six service centers reviewed, management was not using the cP 193A notices (used to request the original return be pulled and forwarded to Adjustments), but were instead using cFOL commands to view the original return online. Management agreed to eliminate the cP 193A notices.

Because of the prescreening efforts ongoing in some of the service centers, the following numbers do not represent the total number of duplicate returns filed by the taxpayers, only those duplicate returns that posted to the master file. However, the numbers do provide a high level indication of the different characteristics of duplicate returns. We did not perform further audit work beyond these analyses.

• 83% of the taxpayers had a duplicate return post to only one of the eight quarters in the two-year period, indicating that taxpayers do not repeatedly file duplicate returns.
• 49% of the businesses were less than six years old, indicating that taxpayers may not understand filing requirements during the first few years of being in business.
• 64% of the original returns had under $5,000 tax liability, indicating that the smaller businesses may not understand the filing requirements.
• In 21% of the duplicate postings, the taxpayer wrote "amended or corrected" on the return, indicating that taxpayers may not understand how corrections should be reported (included on the current Form 941 return).
• The volume of duplicate returns was almost evenly distributed among the four quarters (23% - 29%), indicating that taxpayers do not understand when corrections should be reported (in the fourth quarter only).

Directions for correcting Form 941 returns are provided in both the Form 941 Instructions and the Employer’s Tax Guide (Publication 15, circular E).

• consider expanding to all service centers a prescreening process for amended or corrected Form 941 returns.

Management agreed with our recommendation and is taking appropriate corrective action. The complete response is shown as Attachment II.

This review was conducted as part of Internal Audit’s Fiscal Year 1997 Business Taxpayer Audit Strategy. Under the strategy, Internal Audit initiated a series of national reviews which were designed to identify opportunities to improve customer service and reduce burden for the business taxpayer. collectively, the series of reviews addressed the major points of contact that a business taxpayer could have with the Service; from establishing a new business, through making tax deposits and filing returns, and responding to notices. We conducted these reviews from the perspective of how the business taxpayer might view the Service.

We discussed the reviews included in the strategy up-front with executive management and obtained their input on objectives and potential outcomes, as well as their commitment to take appropriate actions. We also worked closely with all levels of Service management to determine the significance and scope of the burden on the business taxpayer and the inefficiencies in existing practices for providing quality customer service. Through discussions with management, we jointly identified feasible alternatives to address these areas. We presented executive management with information to assist them in determining which alternatives to implement.

Our objective was to profile Form 941, Employer’s Quarterly Federal Tax Return, account modules where more than one return was processed (duplicate filing condition) and determine if there are any cost-effective solutions to reduce the volume, expedite processing, and improve service to taxpayers. This objective supports Internal Audit’s Business Taxpayer Strategy efforts for improving the way the Service manages and resolves business taxpayer accounts.

To accomplish this objective, we performed the following tests.

• Determined the volume of Form 941 returns filed and processed with duplicate filing conditions and their impact on the Service.
• Determined the procedures for processing original and duplicate Form 941 returns and compared the methods used at the six service centers included in our review.
• Analyzed a Master File extract of Tax Year 1995 (extract cycle 9643) and 1996 (extract cycle 9726) Form 941 account modules that contained a duplicate filing condition and profiled the following data:
• Number of taxpayers and modules,
• Age of taxpayer entities,
• Tax settlement amounts,
• Number of returns filed as amended returns, etc.
• Determined costs associated with processing duplicate Form 941 returns.
• Discussed results with management to work jointly towards identifying cost-effective alternatives.

We conducted these tests in accordance with generally accepted government auditing standards. Attachment I contains the detailed objectives and scope of review.

Most Form 941 returns received by the Service are handled through the various Submission Processing functions, such as: Receipt and control, Document Perfection, Data conversion, etc. The return is considered completely processed when a Transaction code (Tc) 150 posts on the Master File account module.

Some Form 941 returns are marked or identified as "Amended" or "corrected" by the taxpayer. These returns require different processing actions. For example, Document Perfection will assign a "G" computer condition code indicating the return is an amended, corrected, or revised return. Only the return entity information is transcribed and the return posts to Master File with a Tc 976, duplicate return, instead of a Tc 150.

A duplicate filing condition (Tc 976) occurs when an amended ("G" coded) return is processed or a return posts to a module already containing a return (Tc 150). When a Tc 976 posts, the computer freezes the account to prevent any refund or offset from the module. A Master File analysis is performed weekly to identify all the account modules where a Tc 976 posted. cP 193 and 193A notices are generated (in duplicate) and forwarded to the Files Unit. The Files Unit pulls the returns by associating the notices with the duplicate (cP 193) and original (cP 193A) returns. One copy of the notice is attached to the return and the other is used as a charge-out document in the Files Unit. The associated notices and returns are then forwarded for resolution to the Adjustments function.

Some common reasons that a return posts as a duplicate return to Master File with a Tc 976, are:

• Amended/corrected return information.
• Incorrect tax period.
• Response to a delinquency notice from the IRS.
• Filing a second return as a final return.
• Subsequent payment or address change, etc.

We met with management at the beginning of the review to discuss the duplicate return filing issues and the objective of our review. Management was not significantly concerned about the workload created by processing accounts with duplicate return filings. In addition, based on the low volume of duplicate returns (3.5% of the taxpayers and 1% of the returns), we jointly determined there were no cost-effective solutions to reduce the volume of duplicate returns.

Our evaluation of the Service’s procedures for processing duplicate filing condition accounts identified the following two ways that the Service can expedite the process. As a result, the taxpayers will benefit because their returns will be resolved earlier; and, the Service will benefit because fewer actions will be needed to process the accounts.

• Implementation of a prescreening process for returns identified by the taxpayer as amended.
• Elimination of cP 193A notices.

Management was also interested in information about the taxpayers who are filing duplicate returns. Therefore, we are providing information from our computer analysis of duplicate filing conditions to help management better understand the population.

Our review identified two areas that have the potential to provide a benefit to the Service and the taxpayer.

• Performing a prescreening of Form 941 returns will benefit both the Service and the taxpayer by reducing processing time and resolving accounts quicker.
• Eliminating the cP 193A notice will benefit the Service by reducing the volume of notices printed, cost of paper and computer time.

To expedite processing and reduce the volume of Form 941 returns processed with a duplicate filing condition, we found four of six service centers reviewed had implemented prescreening procedures. Three of the four centers prescreened the returns noted by the taxpayer as amended/corrected, while the fourth center prescreened all Form 941 returns that were not for the current period. By implementing the prescreening processes, the four centers reduced the volume of returns processed to Master File, resulting in fewer duplicate postings and promoting quicker resolution for the taxpayer.

Both types of prescreening procedures involve an agreement between Submission Processing and Adjustments. The specific returns are identified and sorted by Receipt and control or Document Perfection and then forwarded directly to Adjustments.

The process used for just the amended/corrected returns does not have any impact on Adjustments’ workload. The amended/corrected return will still be worked after it posts to Master File as a duplicate return. The prescreening process just works the duplicate return sooner. In addition, prescreening amended/corrected returns will have a positive impact on Submission Processing since fewer returns will be processed to Master File.

The other prescreening process that includes all Form 941 returns other than current periods does increase Adjustments’ workload, but also has a positive impact on other service center functions. Additional resources in Adjustments are needed to review all the "other than current period" returns, not just the amended/corrected returns.

Prescreening the "other than current period" returns involves researching Master File using cFOL commands to determine necessary resolution actions. The process immediately identifies exact duplicate returns and prevents unnecessary processing to Master File. The process also identifies returns where the taxpayer put the wrong tax period on the return. The returns with the corrected tax period, along with the other returns that have been determined to be original prior period returns are returned to Submission Processing to post to Master File. By verifying and correcting the tax return before processing, the return will have a better chance of posting correctly the first time.

The service center that prescreened all the prior period Form 941 returns also maintained records to determine the volume of cP 193 notices prevented. We analyzed prescreening reports consisting of 45 cycles in cY 1997. We determined that the prescreening process prevented 37% (13,714) of the number of cP 193 notices that would have been processed. Of the 13,714 notices prevented:

• 59% were attributable to amended returns.
• 30% were for periods that would have posted to the wrong period.
• 11% were for true duplicate returns.

Our EDP analysis of the duplicate returns filed in the six service centers reviewed showed that the centers that prescreened had fewer duplicate filing conditions. The following provides the volume of TY 1996 Form 941 total modules, the volume of "G" coded duplicate filing condition modules, and the percentage of the "G" coded modules to the duplicate modules population.

The chart indicates that three of the service centers that prescreened (Kansas city, Ogden, cincinnati) had fewer "G" coded returns with duplicate filing conditions as shown by the smaller percentage of "G" coded returns. These centers have had the prescreening procedures in place for at least the last three years. The fourth service center that prescreens, Memphis, had a comparably higher percentage of "G" coded returns. However, Memphis only started prescreening in 1996 and since then, the percentage has been reduced.

Discussions with management indicated that they were interested in giving the option of expanding prescreening to other service centers to help expedite the resolution of these types of returns.

If prescreening were performed in all service centers, the number of duplicate returns processed could be reduced, which could result in reduced processing costs for the Service. In addition, taxpayers would benefit by having their accounts resolved quicker.

1. consider implementing a prescreening process in all service centers.

Management agreed with the recommendation. copies of the Ogden Service center’s prescreening guidelines have been provided to each service center. Each service center Director was asked to review the package and decide whether to adopt some form of a prescreening process or not.

Additionally, Submission Processing will work with Adjustments and conduct a Risk Analysis to determine the implications of service centers conducting a presorting and prescreening process on the duplicate Forms 941.

We determined that five of six service centers reviewed are destroying the Form 941 cP 193A notice and not using it to pull the original returns. The sixth center stopped printing the cP 193A in August 1996. cFOL commands are being used to view the original return. We determined from service center reports:

• In cY 1995, 359,276 Form 941 cP 193A notices were generated.
• In cY 1996, approximately 355,500 Form 941 cP 193A notices were generated.

The cost to forward and destroy the notices is low; however we determined there is no need for them to be generated. Although the actual cost savings are small, by not printing the cP 193A, there will be computer and printer savings. The following shows the cost savings.

1. Eliminate the cP 193A notices.

Management agreed with the recommendation and implemented a Request for Information Services to eliminate the cP 193A notice.

We profiled Tax Year (TY) 1995 and 1996 Form 941 account modules where a duplicate filing condition was present (Tc 976). The purpose was to provide a breakdown of the characteristics of the taxpayers and module accounts with a duplicate filing condition. Because of the prescreening efforts ongoing in some of the service centers, our analysis does not represent the total number of duplicate returns filed by the taxpayers, only those duplicate returns that posted to the master file.

We presented and discussed these characteristics with management to help them understand the population and to determine if the Service needs to address taxpayer education.

We compared the volume of account modules with a duplicate filing condition to the total population of Form 941 modules. We determined that only 3.5% of the total business taxpayers filed more than one Form 941 return. The population of the duplicate returns posted compared to the total Form 941 module accounts is also relatively small (1%) and the Tax Settlement Amount is a low percentage (4%). The estimated percent of duplicate return workload in the BMF Adjustments Area is also relatively small (7-8%). This information reaffirmed management’s and our conclusion that processing Form 941 duplicate filing conditions is not a significant problem. See charts below.

* = Original Return Tax Liability (Tc 150)

 We also determined that the majority of modules with duplicate filing conditions had a timely filed original return.

Further breakdown of the duplicate return population identified useful information to help understand which taxpayers were filing returns that posted with duplicate filing conditions. These trends follow.

Our analysis showed that 83% of the 501,665 taxpayers filed a duplicate return for only one of the eight periods. This indicates that there is not a problem with many taxpayers repeatedly filing duplicate returns.

We analyzed the age of the business based on the entity creation date and determined that most of the returns with a duplicate filing condition were filed by young businesses. This indicates that taxpayers may not understand filing requirements the first few years of being in business.

• 29 percent of the business taxpayers were less than three years old.
• 49 percent of the business taxpayers were less than six years old.

We analyzed the module account tax settlement amounts and determined that the majority of the businesses filing returns with a duplicate filing condition have low tax settlement amounts. This may indicate that these are small businesses. The following table identifies the volume of modules by tax settlement amount ranges:

Analysis of the tax periods where the duplicate return posted showed that the volume was almost evenly distributed (23% - 29%) among the four quarters. We could attribute this to various causes based on the many reasons that a duplicate filing condition occurs. For example, the taxpayer did not indicate the correct tax period or the Service did not transcribe the correct tax period, resulting in the return posting to an incorrect period.

However, duplicate filing should be expected more often in the fourth quarter because the taxpayer would be correcting income tax withheld from wages paid in earlier quarters to reconcile with the year-end reports (employee’s Forms W-2 and employer’s Form W-3). This could indicate that taxpayers are not aware of the requirements to make the corrections in the fourth quarter.

We analyzed the duplicate filing condition returns where the taxpayer indicated that the return was an amended or corrected return. These were the returns identified during Document Perfection and "G" coded (computer condition code) as amended/corrected returns. Our analysis showed the following volumes.

• 71,066 (22%) of TY 1995 modules
• 61,120 (21%) of TY 1996 modules

Further analysis showed that "G" coded returns posted evenly to the first three quarters (approximately 21% per quarter) and more often to the fourth quarter (37%). This further indicates that the taxpayers do not fully understand how to amend or correct previously filed Form 941 returns.

To correct prior period Form 941 returns, taxpayers should attach a Form 941c, Statement to correct Information Previously Reported Under the Federal Insurance contributions Act, to the current period return. This is different from amending/correcting other types of returns, i.e. 1040X and 1120X. In addition, the type of tax (income or Social Security and Medicare) that needs to be corrected determines how and when the corrections are to be made. Since these Form 941 instructions are inconsistent with other types of tax returns, this may contribute to the taxpayer’s confusion, causing more returns to be received and processed by the Service.

We analyzed the duplicate filing condition returns where the taxpayer indicated that the return was a final return. These were the returns identified during Document Perfection and "F" coded (computer condition code) as a final return to stop the filing requirement. The following shows the taxpayer filed few second returns to inform the Service that they are no longer required to file.

• 15, 633 (4.9%) of TY 1995 duplicate returns were processed indicating a final return.
• 14,918 (5.1%) of TY 1996 duplicate returns were processed indicating a final return.

We performed an analysis to determine if the Service may have caused the taxpayer to send in another return. If the taxpayer timely filed a return and the Service did not timely process the return, the taxpayer may receive a delinquency inquiry notice. This may cause the taxpayer to file another return for the same period.

We identified the modules that were in a delinquency inquiry status the cycle prior to the Tc 976 posting. From those modules, we identified the modules that also had a timely filed original return. We identified only 10,548 (3.3% of TY 1995) and 9,333 (3.2% of TY 1996) modules where a delinquency inquiry notice was issued on accounts where the original return was timely filed.

Since the timely filed original returns were not timely processed, a delinquency inquiry notice would have been mailed to the taxpayer. This would indicate that the Service did not cause many second or duplicate returns to be filed by the taxpayer.

We analyzed the data to determine whether the second returns were filed to submit a Form 941 Schedule B, Employer’s Record of Federal Tax Liability that was not attached to the original return. We compared the volume of returns that required a Form 941 Schedule B to the volume that did not include the Schedule B with the original return.

We determined that only 3% of the total modules created by a duplicate filing condition may have been caused by the taxpayer sending another return with the Schedule B attached.

• In TY 1995, 60,580 modules required a Schedule B of which only 10,742 (3% of the total duplicate modules with a Tc 150) original returns did not include the Schedule B.
• In TY 1996, 54,306 modules required a Schedule B of which only 9,312 (3% of the total duplicate modules with a Tc 150) original returns did not include the Schedule B.

These various trends and characteristics can be useful information to help understand why the taxpayers filed the duplicate returns. This can help the Service identify areas for further taxpayer education.

Our analysis of duplicate returns and evaluation of the Service’s procedures for processing duplicate filing condition accounts provides information to help the Service better understand the population of duplicate filing conditions and to improve processing procedures.

For example, by considering a prescreening process and different characteristics of the population, the Service might be able to improve account management and taxpayer service. In addition, eliminating cP 193A notices will reduce the volume of notices and paper costs and also eliminate an out-dated practice.

Audit Manager

The overall objective of this audit was to profile Form 941, Employer’s Quarterly Federal Tax Return, account modules where more than one return had been processed (duplicate filing condition), and determine if there are any cost-effective solutions to reduce the volume, expedite processing, and help taxpayers by resolving their cases earlier.

We conducted the following tests to accomplish the objective.

1. Determined how Form 941 returns are processed and duplicate return issues are resolved by researching the IRM, discussing procedures with National Office management, conducting a walkthrough at the service centers in our review and reviewing a judgmental sample.

1. Determined the flow of work from Receipt and control to Files for remittance and non-remittance processed Form 941 returns in one service center.
2. Determined how a Transaction code (Tc) 976, Duplicate Return posting, is generated.
3. Determined the 1995 and 1996 Program completion Dates (PcD) for remittance and non-remittance Form 941 returns and Return Delinquency checks.

• Identified and discussed how the Service center PcD are established for remittance and non-remittance Form 941 returns.
• Identified and discussed how and when the Master File Return Delinquency check is performed.

1. Determined processing procedures to issue and resolve return delinquency check notices.
2. Determined what function resolves duplicate returns posted and what actions are taken to settle the account.
3. Reviewed a judgmental sample of 132 cases from one service center’s adjustments of cP 193 accounts and correspondence related to duplicate returns to determine the reason why the taxpayer filed the return again or sent in a copy of the original return. Noted any trends.

2. Determined the number of taxpayers filing duplicate returns by service center and quarter by identifying the number of Form 941 duplicate return accounts. We used Master File extracts for Tax Year 1995 (extract cycle 9643) and Tax Year 1996 (extract cycle 9726) to perform a nationwide analysis of all duplicate Form 941 returns filed. We evaluated this data for trends.

1. Validated the data received and resolved problems with the data.
2. Determined the total count and tax dollars of Form 941 modules for tax year 1995 and 1996 by service center.
3. Determined the total count and tax dollars of Form 941 modules for tax year 1995 and 1996 with a Tc 976 (duplicate return) posting by service center and tax quarter.

• Based on test II.c. (Modules with Tc 976), determined:
• The age of the entities.
• The number that were "G" coded returns, indicating amended/corrected returns.
• The number that were "F" coded returns, indicating final returns.
• Modules with Tc 976 that were filed subsequently to the issuance of a Return Delinquency First Notice (cP 515/Status code 02).
• For modules with Tc 976, identified the number of original Form 941 returns that required a Schedule B.

1. Determined how many original returns were filed with the Schedule B.
2. Determined how many original returns were processed without the required Schedule B.
3. Trended the characteristics of the duplicate filings and summarized the results for management.

3. Determined each service center’s procedures for processing Forms 941 and duplicate Forms 941. This test was accomplished by performing collateral tests in six service centers.

1. Discussed with Service center Processing management (i.e.: Receipt and control) how Forms 941 received with attachments/correspondence are sorted, batched, controlled, and routed.
2. Discussed with Service center computer Operations management the procedures used to download, print, and distribute the cP 193 and cP 193A listing.
3. Discussed with Service center Files Unit management whether the cP 193 and cP 193A notices are received, in duplicate, and what returns are pulled and forwarded to BMF Adjustments.
4. Discussed with BMF Adjustments management procedures used to obtain, assign, and resolve Form 941 duplicate and amended return filing conditions.

4. Determined the potential impact that duplicate return filings have on Service workload and taxpayers by determining costs associated with the process.

1. Determined and summarized the costs associated with processing Form 941 returns and duplicate Forms 941 by using Service center costing data, management discussions, work processing and control reports, and overhead percentages, etc.
2. Determined cost savings if a prescreening process for potential duplicate returns was used in Receipt and control.

5. Identified and discussed recommendations to reduce the processing work associated with the filing of duplicate returns. Worked jointly with management to identify cost-effective solutions.