oversight

Taxpayer Information: Increased Sharing and Verifying of Information Could Improve Education's Award Decisions

Published by the Government Accountability Office on 2003-07-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States General Accounting Office

GAO          Report to the Committee on Finance,
             U.S. Senate



July 2003
             TAXPAYER
             INFORMATION
             Increased Sharing and
             Verifying of
             Information Could
             Improve Education’s
             Award Decisions




GAO-03-821
             a
                                               July 2003


                                               TAXPAYER INFORMATION

                                               Increased Sharing and Verifying of
Highlights of GAO-03-821, a report to the      Information Could Improve Education’s
Committee on Finance, U.S. Senate
                                               Award Decisions



Data sharing can be a valuable tool            Education uses taxpayer information for several purposes, such as locating loan
for federal agencies in determining            defaulters; researching and computing statistical data on overall borrower debt;
applicants’ eligibility for benefit            and, upon taxpayers’ consent, determining loan repayment amounts. However,
and loan programs. Congress has                Education is not authorized to directly receive taxpayer information from IRS to
authorized the Department of                   verify eligibility for student financial aid provided under Title IV of the Higher
Education, among others, to have               Education Act of 1965 (HEA). In academic year 2001-02, 11.4 million students
limited access to federal taxpayer             applied for $54 billion in aid.
information collected by the
Internal Revenue Service (IRS).
                                               Total Title IV Federal Student Aid Dollars from Academic Years 1991-92 to 2001-02
Likewise, IRS is able to use                   (in Constant Dollars)
personal information collected by              60 Dollars in billions
outside sources to better ensure
that taxpayers are meeting their tax
                                               50
obligations.

GAO was asked to determine                     40
whether Education uses taxpayer
information to verify information              30
provided by student aid applicants,
and the benefits of increasing data
                                               20
verification activities, and whether
IRS uses personal information
maintained by Education to ensure              10
that taxpayers meet their tax
obligations, and the benefits of                0
increasing these activities.                         1991-  1992-         1993-      1994-      1995-      1996-         1997-   1998-   1999-   2000-   2001-
                                                      1992    1993         1994       1995       1996       1997          1998    1999    2000    2001    2002
                                                    Academic year
                                               Source: The College Board, Trends in Student Aid 2002, Washington, D.C.

GAO is not making any
recommendations. However,                      A 1998 amendment to HEA was intended to authorize the matching of student
earlier this year GAO                          aid applicant information with several elements of federal income tax return
recommended that Congress                      information. However, HEA could not be used as intended because Internal
consider legislation to authorize              Revenue Code Section 6103 was not specifically amended so that Education and
IRS to release individual income               its contractors, which assist Education in administering the various financial aid
data to Education so that                      programs, could have access to taxpayer information. Based on a study that
Education could verify income on               matched Education data and IRS income information, Education estimates that
student aid applications. The IRS              it made approximately $602 million in grant overpayments during fiscal years
Commissioner and Education’s                   2001 and 2002.
Chief Operating Officer of Federal
Student Aid raised no concerns in              IRS does not use personal information collected from applicants and maintained
commenting on a draft of this                  by Education to ensure that taxpayers meet their tax obligations because IRS
report. The Chief Operating Officer            officials believe the taxpayer information IRS receives is more accurate. In
said Education would continue to               general, IRS officials’ views are supported by IRS’s past estimates of taxpayers’
support a legislative change.                  levels of compliance and by the results of Education’s studies and investigations.
                                               For example, in the mid-1990s, IRS estimated that taxpayers with only wage
www.gao.gov/cgi-bin/getrpt?GAO-03-821.
                                               income had a 99 percent voluntary compliance rate and taxpayers with interest
To view the full report, including the scope   and dividend income were 95 percent compliant in reporting this income.
and methodology, click on the link above.      However, Education’s student aid application data are not suited to IRS’s tax
For more information, contact Michael          administration purposes because the applications ask students and/or their
Brostek at (202) 512-9039 or
brostekm@gao.gov.                              parents to report data that come directly from their tax returns.
Contents


Letter                                                                                                    1
               Results in Brief                                                                           2
               Background                                                                                 4
               Education Could Benefit from Access to Taxpayer Information to
                 Verify Student Eligibility for Financial Aid Programs                                   7
               IRS Does Not Use Education’s Student Aid Data and the Potential
                 Benefit of Doing So Appears to Be Limited                                               15
               Concluding Observations                                                                   17
               Agency Comments and Our Evaluation                                                        18

Appendix I     Objectives, Scope, and Methodology                                                        20



Appendix II    Comments from the Internal Revenue Service                                                22



Appendix III   Comments from the Department of Education                                                 23



Table
               Table 1: Selected Examples of Federal Student Aid Fraud Identified
                        by Education’s OIG                                                               14


Figures
               Figure 1: Title IV Federal Student Aid by Source for Academic Year
                        2001-02 (Constant Dollars)                                                        6
               Figure 2: Total Title IV Federal Student Aid Dollars from Academic
                        Years 1991-92 to 2001-02 (in Constant Dollars)                                   10




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               Page i                           GAO-03-821 Sharing and Verifying Taxpayer Information
United States General Accounting Office
Washington, DC 20548




                                   July 18, 2003

                                   The Honorable Charles E. Grassley
                                   Chairman
                                   The Honorable Max Baucus
                                   Ranking Minority Member
                                   Committee on Finance
                                   United States Senate

                                   Each year, federal agencies make billions of dollars of improper payments
                                   under various federal programs. Over the years, Congress has authorized a
                                   number of federal agencies to have access to federal taxpayer information1
                                   collected by the Internal Revenue Service (IRS) to improve the accuracy of
                                   eligibility determinations made by those agencies. The authorized agencies
                                   are able to verify (i.e., match or cross-check) some personal information2
                                   provided by applicants against corresponding information reported to IRS.

                                   Similarly, IRS is able to use some of the personal information obtained
                                   from federal and state agencies to better ensure that taxpayers are
                                   meeting their tax obligations. Various federal laws and agency policies
                                   regulate agencies’ use and disclosure of taxpayer and personal
                                   information. Section 6103 of the Internal Revenue Code (IRC) allows IRS
                                   to disclose taxpayer information to federal agencies and authorized
                                   employees of those agencies, but only under specific conditions. Such
                                   privacy protection is an important component of continued voluntary
                                   compliance with the internal revenue laws.

                                   Because of continued concerns about balancing taxpayer privacy interests
                                   with potential increased benefits from the sharing of taxpayer information
                                   among agencies administering federal benefit and loan programs, you
                                   asked us to assess whether IRS and selected federal agencies—the Bureau



                                   1
                                    Taxpayer information includes all federal tax returns and return information. This may
                                   consist of an individual’s name, Social Security number, address, wages, self-reported
                                   earnings, unearned income from interest and dividends, tax returns, and miscellaneous
                                   income statements.
                                   2
                                    Personal information is defined as all information associated with an individual and
                                   includes both identifying information (e.g., name, Social Security number, and E-mail
                                   address) and nonidentifying information (e.g., financial information, education, age,
                                   gender, and physical attributes).



                                   Page 1                            GAO-03-821 Sharing and Verifying Taxpayer Information
                   of Citizenship and Immigration Services (formerly the Immigration and
                   Naturalization Service), the Social Security Administration, and the
                   Department of Education—are making use of opportunities to use
                   taxpayer information and personal applicant information to improve
                   eligibility determinations and tax administration.

                   During the course of this work, you asked us to report separately on the
                   data sharing and verifying activities between IRS and Education and
                   provide information that can be used as Congress considers legislative
                   changes to IRC Section 6103. As agreed with your offices, our objectives
                   were to determine whether (1) Education uses IRS taxpayer information
                   to verify information provided by applicants for federal student financial
                   aid and the benefits, if any, of increasing verification activities and (2) IRS
                   uses personal information maintained by Education to ensure that
                   taxpayers meet their tax obligations and the benefits, if any, of increasing
                   these activities.

                   To respond to your request, we performed our work at various IRS offices,
                   including compliance and research offices, and various program offices at
                   Education. As used in this report, “data sharing” means obtaining and
                   disclosing information on individuals between Education and IRS to
                   determine eligibility for student financial aid and to ensure that taxpayers
                   have met their obligations. We collected and analyzed information on data
                   sharing and verifying activities between IRS and Education, including the
                   type of information received and how the information is used. We
                   reviewed federal laws and agency guidance regarding the collection,
                   disclosure, and use of taxpayer and other personal information. We also
                   interviewed IRS and Education officials to obtain views on possible
                   impediments or missed opportunities to share and verify taxpayer and
                   other personal information, as well as the potential benefits of increasing
                   these activities. We conducted our work from August 2002 through June
                   2003 in accordance with generally accepted government auditing
                   standards. For details on our scope and methodology, see appendix I.


                   Education is not authorized to directly receive taxpayer information from
Results in Brief   IRS to verify eligibility for its student financial aid programs, for which
                   Education estimates it made hundreds of millions in Pell Grant
                   overpayments in fiscal years 2001 and 2002. Education uses taxpayer
                   information for several purposes, such as locating loan defaulters;
                   researching and computing statistical data on overall borrower debt; and,
                   upon taxpayers’ consent, determining loan repayment amounts. However,
                   Education is not authorized to directly receive taxpayer information from


                   Page 2                        GAO-03-821 Sharing and Verifying Taxpayer Information
IRS to verify eligibility for student financial aid provided under Title IV of
the Higher Education Act of 1965 (HEA).

In 1998, HEA was amended to allow increased data sharing. However, the
provision could not be used as intended because IRC Section 6103 was not
specifically amended so that Education and its contractors could have
access to taxpayer information. In academic year 2001-02, 11.4 million
students applied for $54 billion in aid under these programs. Education
demonstrated the benefits of using taxpayer information to verify the
personal information that is used to determine student aid applicants’
need for assistance. Based on a study that matched Education data and
IRS income information, Education estimates that it made approximately
$602 million in Pell Grant overpayments during fiscal years 2001 and 2002.

IRS does not use personal information collected from applicants and
maintained by Education to ensure that taxpayers meet their tax
obligations because IRS officials believe the taxpayer information they
already receive is more accurate. In general, IRS officials’ views are
supported by IRS’s own data and by the results of Education studies and
investigations. For example, in the mid-1990s, IRS estimated that
taxpayers with only wage income had a 99 percent voluntary compliance
rate and taxpayers with interest and dividend income were 95 percent
compliant in reporting this income. Taxpayers with certain other sources
of income are much less compliant. However, Education’s student aid
application data are not suited to aiding IRS’s efforts because the
applications ask students and/or their parents to report data that come
directly from their tax returns.

We are not making any recommendations. However, in September 2000 we
recommended that Congress consider amending IRC Section 6103 to
authorize IRS to disclose certain taxpayer information to Education for
the purpose of verifying information reported on federal student aid
applications. Earlier this year, we also reported that Education could
benefit from receiving taxpayer information for this purpose.

On July 15, 2003, the Commissioner of Internal Revenue and the Chief
Operating Officer of Education’s Office of Federal Student Aid raised no
concerns in responding to a draft of this report. (See the Agency
Comments and Our Evaluation section and apps. II and III.) Officials
representing the Office of Federal Student Aid provided technical
comments, which we have incorporated into the report where appropriate.




Page 3                       GAO-03-821 Sharing and Verifying Taxpayer Information
                 IRC Section 6103 allows IRS to disclose taxpayer information to federal
Background       agencies and to authorized employees of those agencies for specified
                 purposes. It was enacted, in part, to control whether and how tax
                 information submitted to IRS on federal tax returns could be shared. IRC
                 Section 6103 specifies which agencies (or other entities) may have access
                 to certain types of tax return information, for what purposes such access
                 may be granted, and under what conditions the information will be
                 received. For example, before receiving taxpayer information, agencies
                 are required to advise IRS how they intend to use the information and to
                 establish detailed plans that ensure the confidentiality and safeguarding of
                 the information.

                 Similar to IRC Section 6103, the Privacy Act of 1974 regulates the federal
                 government’s use of personal information by limiting the collection,
                 disclosure, and use of personal information maintained in an agency’s
                 system of records. Personal information is further protected by the
                 Computer Matching and Privacy Protection Act of 1988 (Privacy Act). It
                 requires that agencies enter into written agreements, referred to as
                 matching agreements, when they share information that is protected by
                 the Privacy Act for the purpose of conducting computer matches.

                 IRS receives tax returns from about 88 million individual taxpayers who
                 have wage and investment income, and approximately 45 million small
                 business and self-employed taxpayers. IRS performs a variety of checks to
                 ensure the accuracy of information these taxpayers report on their tax
                 returns. These checks include verifying computations on returns,
                 requesting more information about items on tax returns, and matching
                 information reported by third parties to income reported by taxpayers on
                 returns (e.g., document matching). IRS’s document matching program has
                 proven to be a highly cost-effective way of identifying underreported
                 income, thereby bringing in billions of dollars of tax revenue while at the
                 same time boosting voluntary compliance.

                 Approximately 11 million individuals applied for over $50 billion in federal
                 student financial aid in academic year 2001-02. Title IV of HEA authorized
                 several student aid programs, including the following:

             •   Pell Grants—grants to undergraduate students who are enrolled in degree
                 or certificate programs and have federally defined financial need;




                 Page 4                      GAO-03-821 Sharing and Verifying Taxpayer Information
•   Supplemental Educational Opportunity Grants (SEOG)—grants for
    undergraduate students with federally defined financial need;
•   Stafford3 and Parent Loans for Undergraduate Students (PLUS) loans4—
    loans that are made by private lenders and guaranteed by the federal
    government (guaranteed loans) or made directly by the federal
    government through a student’s school (Direct Loans);
•   Perkins loans—low-interest loans to undergraduate and graduate students
    for which interest does not accrue while the students are enrolled at least
    half-time in eligible programs; and
•   Work-study—on- or off-campus jobs for which students who have
    federally defined need earn at least the current federal minimum wage and
    for which institutions or off-campus employers pay a portion of their
    wages.

    As shown in figure 1, for academic year 2001-02, 78 percent of federal
    student aid came from loans, 20 percent came from grants, and 2 percent
    came from federal work-study programs.




    3
     Stafford loans consist of subsidized and unsubsidized loans. Subsidized loans are loans for
    which the federal government pays the interest costs while the student is in school.
    Unsubsidized loans are loans for which the student is responsible for paying all interest
    costs.
    4
     Both graduate and undergraduate students receive Stafford loans while parents of
    dependent students receive PLUS loans.




    Page 5                            GAO-03-821 Sharing and Verifying Taxpayer Information
Figure 1: Title IV Federal Student Aid by Source for Academic Year 2001-02
(Constant Dollars)

                                                                   2%
                                                                   Federal work-study



                                      20%                          Grants




                        78%                                        Loans




Source: The College Board, Trends in Student Aid 2002, Washington, D.C.

Notes: Percentages based on estimated dollar amounts for academic year 2001-02. Percentage of
grants includes both Pell Grants and SEOGs. Percentage of loans includes Stafford loans, PLUS
loans, and Perkins loans. Current year dollars adjusted for inflation using the Consumer Price Index
as calculated by the Bureau of Labor Statistics, U.S. Department of Labor.




Education has created many information systems to support the various
student financial aid programs it administers. In many cases, these
systems are maintained and operated by contractors, which are
responsible for processing the student financial aid application data and
providing such data to the schools, as well as to Education to use in
managing and overseeing the programs. As such, a student’s financial aid
process begins when he or she submits the Free Application for Federal
Student Aid (FAFSA). The student (and parents of a dependent student)
submits the FAFSA to the contractor that enters the data from the
application. On behalf of Education, the contractor calculates the
expected family contribution figure and performs database matches and
edits to ensure that all needed information is included and that the student
meets eligibility requirements, including not having defaulted on a prior
student loan. The contractor then sends the results of the matches and
other processing results to the student and the school(s). The school(s)
request any supporting documents needed to verify application data and
determine the student’s eligibility for aid, and construct an award package
of available types of aid. Funds are then disbursed to the school(s)
according to the student financial aid program requirements.


Page 6                                         GAO-03-821 Sharing and Verifying Taxpayer Information
                          Education uses taxpayer information for some eligibility determinations
Education Could           and other purposes, but is not authorized to directly receive taxpayer
Benefit from Access       information from IRS to verify student financial aid eligibility or determine
                          payment amounts for its federal student aid programs—due to IRC Section
to Taxpayer               6103 restrictions. During fiscal years 2001 and 2002, Education could have
Information to Verify     benefited from using taxpayer information to verify personal information
                          from student aid applicants. Using aggregate IRS income information,
Student Eligibility for   Education estimates that $602 million in grant overpayments occurred
Financial Aid             during this time.
Programs

Education Uses Taxpayer   Education uses the taxpayer information it receives from IRS to determine
Information for Several   approximately 100,000 borrowers’ monthly loan repayment amounts, to
Purposes                  determine the addresses for approximately 4.6 million records of
                          borrowers who may have defaulted on their student loans, and to develop
                          aggregate borrower debt statistics.

                          In order to determine the monthly repayment amount for borrowers
                          participating in the income contingent repayment (ICR) plan, Education,
                          under IRC Section 6103(l)(13), receives income information on the
                          borrower from IRS. The ICR plan allows Federal Direct Loan Program
                          borrowers to repay loans as a percentage of their income. To participate in
                          this program, the borrower must authorize IRS (i.e., give his or her
                          consent) to share income information with Education.5 Approximately
                          100,000 consents are processed under the ICR plan for repayment each
                          year.

                          Under the Taxpayer Address Request (TAR) program, as authorized by
                          IRC Section 6103(m)(4), IRS provides the mailing addresses of taxpayers
                          to Education to be used in collecting debt from student loan defaulters.6
                          Specifically, Education furnishes the name and Social Security number



                          5
                           IRC Section 6103 (l)(13) temporarily permits IRS to disclose the taxpayer’s identity
                          information, filing status, and adjusted gross income to Education employees for use in
                          establishing the appropriate ICR amount for an applicable student loan. In practice,
                          disclosures for these purposes are only made with the taxpayer’s consent under IRC
                          Section 6103(c) because Education uses contractors to administer its ICR program and
                          6103(l)(13) prevents disclosure to contractors. The 6103(l)(13) provision has an expiration
                          date of September 30, 2003.
                          6
                           Unlike IRC Section 6103 (l)(13) disclosures, which may only be made to Education
                          employees, IRC Section 6103(m)(4) disclosures can be made to contractors.




                          Page 7                            GAO-03-821 Sharing and Verifying Taxpayer Information
(SSN) to the IRS for each defaulted student. IRS then conducts a match of
the information and provides Education the most recent address for the
taxpayer. Education sends about 4.6 million records annually to IRS for
matching under the TAR program.

Additionally, as part of its research activities, Education receives
aggregate taxpayer income information from IRS in the form of tables that
it uses in establishing performance measures and selection criteria for its
student aid application verification process. Education also uses these
data in researching and computing statistical data on overall borrower
debt, such as determining the average and median debt burden ratios for
any given year.

As part of the federal student aid application process, every year since the
mid-1980s, Education selects approximately 30 percent of its student aid
applicants for verification purposes.7 When a student is selected for
verification, he or she is required to provide copies of his or her (or
parents’) tax returns to the school.8 If the student refuses to do so, he or
she will not receive federal aid. The school then compares the information
on the tax return to information on the FAFSA and corrects any
inconsistencies on the FAFSA to match the information on the tax return.9
This current verification process has at least two drawbacks. The process
is time consuming and paper intensive because it involves approximately
3.6 million paper copies of tax returns that schools match. In addition, the
process relies on applicants providing copies of their tax returns, which
may not be the same as those submitted to IRS.

Beginning in October 2002, Education began an electronic verification
pilot project involving 148 of these selected students who were asked to
authorize IRS to release their tax information to their academic
institutions via the Internet. The purpose of this pilot was to take the
student and/or his or her parents out of the middle of the verification


7
 Education determines who falls into that sample based on analyses of past years’ data on
the characteristics of those individuals who are most likely to commit errors on their
applications. Education primarily focuses on selecting students who are eligible for federal
grants.
8
 Not all individuals selected for the 30 percent sample are required to provide copies of
their tax returns. Some of these individuals are legitimately not required to file tax returns,
and instead, provide the school with statements attesting to their nonfiling status and the
amount and type of their untaxed income.
9
Education has established a $400 tolerance level for the discrepancy amount.




Page 8                              GAO-03-821 Sharing and Verifying Taxpayer Information
                           process between the IRS and the school so that the school relies on
                           income information it obtains directly from IRS, thereby making the
                           process more efficient.

                           Under this pilot project, once the student, parent, or spouse authorized the
                           release of his or her tax information, IRS sent the tax transcripts for that
                           individual to the school, which then resolved any inconsistencies between
                           information on the tax transcript and on the FAFSA. This pilot match
                           ended on March 31, 2003, and, according to an Education official, the
                           initial feedback from the participating schools and taxpayers was very
                           positive. Education officials are currently compiling data from the pilot
                           schools and taxpayers and will be issuing a report in the fall of 2003 on the
                           ease of use, statistical data, and any needed changes.


Legal Impediment Hinders   Although Education receives some taxpayer information in conjunction
Data Sharing for           with some of its programs, IRC Section 6103 does not authorize Education
Education’s Student        to obtain taxpayer information directly from IRS to verify eligibility or
                           determine payment amounts for its federal student aid programs.
Financial Aid Programs     Approximately 11.4 million individuals applied for over $50 billion in
                           federal student financial aid in academic year 2001-02. As shown in figure
                           2, over a 10-year academic period, the amount of student aid awarded
                           grew 92 percent, from approximately $28 billion in academic year 1991-92
                           to approximately $54 billion in academic year 2001-02.




                           Page 9                      GAO-03-821 Sharing and Verifying Taxpayer Information
Figure 2: Total Title IV Federal Student Aid Dollars from Academic Years 1991-92 to
2001-02 (in Constant Dollars)

60 Dollars in billions



50



40



30



20



10



 0
     1991-       1992-       1993-       1994-       1995-       1996-    1997-   1998-   1999-   2000-   2001-
      1992        1993        1994        1995        1996        1997     1998    1999    2000    2001    2002
     Academic year
Source: The College Board, Trends in Student Aid 2002, Washington, D.C.

Note: Percentages based on estimated dollar amounts for academic years 2000-01 and 2001-02.


Also, because IRC Section 6103 does not authorize Education to directly
obtain taxpayer information from IRS to establish the repayment amount
for ICR student loans, taxpayer consent is required for IRS to share
income information with Education.

IRC Section 6103 was enacted, in part, to control whether and how tax
information submitted to IRS on federal tax returns could be shared. It
was amended in 1976 in an attempt to balance confidentiality and the need
to disclose returns and return information for legitimate purposes.
Determining the most appropriate way to balance these two
considerations has been an issue that has faced Congress for a number of
years. Congress believed that not only did taxpayers have a right to expect
the personal information they report to IRS to remain private, but that
such privacy protection was also an important component of continued
voluntary compliance. Moreover, many observers and privacy advocates
believe that disclosure of return information may decrease taxpayers’
willingness to comply with the tax law and that tax administration suffers
when return information is disclosed for nontax purposes.




Page 10                                          GAO-03-821 Sharing and Verifying Taxpayer Information
IRC Section 6103 restrictions were the focus of past legislative action
taken to address limitations on data sharing and matching activities
between IRS and Education in connection with student financial aid
programs. According to Education officials, a 1998 amendment to HEA
was intended to authorize the matching of student aid applicant
information with several elements of federal income tax return
information. However, that provision could not be used as intended
because IRC Section 6103 was not specifically amended so that Education
and its contractors, which assist Education in administering the various
financial aid programs, could have access to taxpayer information.

In an October 2000 report to Congress on taxpayer confidentiality and the
use of taxpayer information, Treasury’s Office of Tax Policy recommended
that IRC Section 6103 be amended to permit disclosure of necessary items
to Education for income verification, and to permit the use of contractors
as contemplated by HEA, if Education could show that such disclosure
was warranted.10 Further, in August 2002, officials from Treasury, the
Office of Management and Budget, and Education proposed a legislative
amendment to IRC Section 6103 that would allow IRS to match the income
reported on federal student aid applications with income tax return
information and share the results with Education.

The language in the proposed amendment stresses balancing the need for
accurate student aid applicant information with the importance of
maintaining the integrity of IRS taxpayer information. The proposed
legislative amendment specifies, “the tax data would be disclosed only for
very limited purposes, only to the Department of Education and its
contractors, and then only after a series of rigorous safeguards were
implemented.” The proposed amendment was included in the President’s
Fiscal Year 2004 Budget, which stated that IRS matching of student aid
application income data with applicant tax data “is projected to save
$638 million in Pell Grant costs over 2003–2004, significantly reducing
existing funding shortfalls.”11 However, it does not appear in the Taxpayer


10
 U.S. Department of the Treasury, Office of Tax Policy, Report to Congress on Scope and
Use of Taxpayer Confidentiality and Disclosure Provisions, Vol. I: Study of General
Provisions (Washington, D.C.: October 2000).
11
 Office of Management and Budget, Executive Office of the President of the United States,
“Department of Education,” Budget of the United States Government: Fiscal Year 2004
(Washington, D.C.: U.S. Government Printing Office, 2003),
http://www.whitehouse.gov/news/usbudget/budget-fy2004/education.html
(downloaded June 11, 2003).




Page 11                          GAO-03-821 Sharing and Verifying Taxpayer Information
Protection and IRS Accountability Act of 2003—the most recent tax bill
that contains several other confidentiality and disclosure provisions.12
Moreover, as of June 2003, Congress had not acted on the proposed
amendment.

Apart from the proposed legislative amendment, Education officials noted
that several operational details remain to be addressed by IRS and
Education, many of which depend ultimately on the final language in the
legislation. For example, because the schools act as agents for Education
in the review, collection, and disbursement of financial aid awards, the
details surrounding how best to make the matching program work for both
the schools and the applicants must be addressed. In addition, Education
officials said careful consideration must be given to the timing for
matching student aid applications with tax returns. According to the
officials, most students can submit their FAFSAs starting January 1. The
applications provide details on their income, or that of their parents’, for
the previous year. However, taxpayers have until April 15 to file their tax
returns and can request extensions. Therefore, IRS information may not be
available for matching purposes until well after initial student aid
eligibility determinations have been made. In a September 2000 report, we
noted that while such a match may not be timely enough for initial
eligibility verification purposes, it may be possible to conduct a match
with IRS using fairly complete taxpayer data because financial aid
payments are typically not made until late August or September.13

Education officials contend that while the timing of the match would be
less than ideal for helping to make initial student financial aid decisions,
they have established interim steps to address the timing issue, such as
multiple disbursement periods and withholding of payments until income
verification is completed. Even with these interim steps in place, they
acknowledge that the timing of the matching program still remains a
challenge. Education officials said they are also in the process of
identifying other ways to address all operational details, and are
committed to working with IRS to make the matching program a success.




12
 H.R. 1528, The Taxpayer Protection and IRS Accountability Act of 2003, April 1, 2003.
13
 U.S. General Accounting Office, Benefit and Loan Programs: Improved Data Sharing
Could Enhance Program Integrity, GAO/HEHS-00-119 (Washington, D.C.: Sept. 13, 2000).




Page 12                          GAO-03-821 Sharing and Verifying Taxpayer Information
Increased Data Sharing    Increased data sharing and verification between IRS and Education could
Can Improve Student       result in better decision making when awarding student financial aid and
Financial Aid Decisions   reduced fraud. Both Education’s Office of the Inspector General (OIG) and
                          we have reported that increased data sharing can improve Education’s
                          student financial aid decisions. Additionally, Education is currently
                          conducting a project that supports the need for increased data sharing.

                          In a September 2000 report, we recommended that Congress consider
                          amending IRC Section 6103 to improve the ability of certain federally
                          funded benefit and loan programs to obtain and share information to make
                          timely and accurate eligibility determinations, while protecting personal
                          privacy and the confidentiality of personal information.14 Specifically, we
                          said “the Congress should consider amending Section 6103(l) of the
                          Internal Revenue Code to authorize IRS to disclose certain taxpayer data
                          to officers, employees, and contractors or other agents (such as schools)
                          of Education for purposes of verifying information reported on
                          applications for financial aid.” Additionally, our recent January 2003
                          Performance and Accountability Series report indicates that Education
                          could benefit from receiving IRS taxpayer information to verify income
                          information reported on student aid applications.15

                          According to Education’s OIG, some students report inaccurate
                          information either through error or fraud on their federal student aid
                          applications through, for example, underreporting of income. In a
                          statement before Congress in 2000, the Education’s Inspector General
                          stated that underreporting of income by student aid applicants costs
                          federal taxpayers over $100 million annually in overawards of Pell Grants
                          and awards to ineligible persons. In addition to underreporting,
                          Education’s OIG found numerous examples of fraud, as shown in table 1.
                          Applicants’ ability to receive student aid fraudulently could be reduced if
                          Education could verify applicant information using IRS taxpayer data.




                          14
                           GAO/HEHS-00-119.
                          15
                           U.S. General Accounting Office, Major Management Challenges and Program Risks:
                          Department of Education, GAO-03-99 (Washington, D.C.: January 2003).




                          Page 13                        GAO-03-821 Sharing and Verifying Taxpayer Information
Table 1: Selected Examples of Federal Student Aid Fraud Identified by Education’s
OIG

 Date                Program                                Description of fraud
 1993-96             Pell Grant                             Falsification of student eligibility documents
                                                            (including false IRS documents) that made
                                                            ineligible students appear eligible. Received in
                                                            excess of $250,000 in Pell Grant funds.
 1994-2000           Pell Grant                             Eight admissions representatives charged with
                                                            three multicount criminal indictments for
                                                            procuring students to falsify financial information
                                                            to qualify for Pell Grant funds.
 1998                Federal student aid                    Financial aid consultant lowered clients’ incomes
                                                            on FAFSA and tax forms to increase students’
                                                            chances of receiving financial aid.
 1999                Pell Grant                             Scheme involving program fraud, false
                                                            statements, and tax fraud in connection with
                                                            postsecondary programs the defendants falsely
                                                            claimed to be administering.
 2001                Federal grants, work-                  Twenty-six people charged in 23 separate
                     study, and loans                       criminal cases with fraudulently obtaining over
                                                            $2.6 million in federal grants, work-study, and
                                                            loans.
 2003                Pell Grant                             Defendant found guilty of embezzling $600,000 of
                                                            Pell Grant funds through false ownership tactics.
Source: Office of Inspector General, Department of Education.




In addition to these examples of fraud, Education’s research indicates it
may have overpaid an estimated $602 million in Pell Grants over a 2-year
period. As part of its efforts to show the effect of IRC Section 6103
restrictions on eligibility and payment decisions, Education is conducting
the Pell Grant Payment Study by matching information provided on
student aid applications with IRS taxpayer information. The study began in
1999 and measures the extent of underreporting and overreporting of
income based on student aid applicants’ characteristics, such as income,
tax filing status, and recipients’ schools.

To enable this match, Education provides IRS with a file of student aid
applicants’ SSNs. IRS officials match these SSNs with taxpayer income
information and provide the aggregated results to Education. This format
protects the taxpayers’ confidentiality, in accordance with IRC Section
6103, which prohibits IRS from revealing the identity of these taxpayers to
Education. Since Education does not know the identity of the taxpayers, it
can estimate the amount of overpayments but cannot associate a specific



Page 14                                          GAO-03-821 Sharing and Verifying Taxpayer Information
                       overpayment with a particular individual and cannot ascertain when a
                       mismatch may be legitimate. Thus far, the study has estimated the
                       percentage of Pell Grant overpayments to be 3.4 percent, or $272 million
                       dollars, in fiscal year 2001 and 3.3 percent, or $330 million dollars, in fiscal
                       year 2002, for a total of $602 million. Education has not done a similar
                       study for its loan programs, which account for approximately 80 percent
                       of federal student aid funds.

                       Education officials believe amending IRC Section 6103 to enable
                       Education to match student aid applicant information with several
                       elements of federal income tax return information “would substantially
                       reduce the risk of fraud and overpayments” associated with Education’s
                       student financial aid program, would eliminate the need for taxpayer
                       consent in conjunction with the ICR program, and would make the
                       program more administratively efficient. This, in turn, would enhance the
                       integrity of the federal student aid programs and ensure that students are
                       receiving the amounts of assistance for which they are eligible.


                       IRS does not use personal information from applicants that Education
IRS Does Not Use       collects and maintains to ensure that taxpayers meet their tax obligations
Education’s Student    because IRS officials believe the taxpayer information IRS receives is
                       more accurate. In general, IRS officials’ views are supported by its past
Aid Data and the       estimates of taxpayers’ levels of compliance and by the results of
Potential Benefit of   Education studies and investigations.
Doing So Appears to    IRS officials cite a number of reasons for not using information Education
Be Limited             collects and maintains to ensure that taxpayers meet their tax obligations.
                       IRS officials said they believe the taxpayer information IRS collects and
                       maintains on over 100 million individual taxpayers, who file income tax
                       returns annually, is more accurate than that collected and maintained by
                       Education from applicants applying for federal student aid. The officials
                       noted that because federal student aid is based on income, applicants
                       seeking financial aid might be inclined to underreport their income to
                       Education in hopes of securing larger aid awards. The officials said they
                       believe most taxpayers know that failure to fully disclose income to IRS
                       could result in an audit or the use of IRS enforcement authorities to collect




                       Page 15                       GAO-03-821 Sharing and Verifying Taxpayer Information
delinquent taxes.16 Further, the officials also said they believe the
requirement to file a tax return annually helps to ensure that some of the
information IRS maintains, such as taxpayers’ addresses, is more current
when compared to similar information maintained by Education.

IRS routinely relies on information from third-party sources (e.g., banks)
to ensure that taxpayers meet their tax obligations, including both whether
taxpayers correctly report information necessary to determine the taxes
due, if any, and whether any taxpayers who should have filed returns did
not. Through its document matching programs, IRS uses these third-party
documents to verify what taxpayers report on their tax returns.17 Similarly,
IRS identifies individuals who did not file tax returns if it receives third-
party documents for these individuals.

Past IRS estimates of taxpayers’ compliance have indicated that taxpayers
whose incomes are subject to document matching are among the most
compliant. For example, in the mid-1990s, IRS estimated that taxpayers
with only wage income had a 99 percent voluntary reporting compliance
rate, and taxpayers with interest and dividend income were 95 percent
compliant in reporting this income. IRS is currently conducting a study
that is intended to update these compliance estimates.

However, although document matching programs work well for taxpayers
whose incomes are subject to third-party reporting to IRS, they do not help
when taxpayers have sources of income that are not subject to such
reporting. Both the Treasury Inspector General for Tax Administration and
we have previously reported that taxpayers whose incomes are not subject
to information reporting, like those who are self-employed, are much less




16
  In general, if taxes remain unpaid after IRS gives appropriate notice and demand for
payment, IRS is authorized by the IRC to use its enforcement authority in the form of a
levy, seizure, or lien. The levy of assets such as bank accounts and wages that are in the
possession of third parties, such as banks and employers, is referred to as a levy, and the
levy of assets in the possession of the taxpayer is referred to as a seizure. A lien is a legal
claim that attaches to property to secure the payment of a debt. The filing of a lien would
prevent the taxpayer from selling an asset, with clear title, without payment of the tax debt.
17
 IRS’s Automated Underreporter Program is designed to identify wage earners who do not
report all of their income on their tax returns. The program compares the income reported
on their tax returns to the income reported by employers and other third-party sources on
Forms W-2 and 1099.




Page 16                            GAO-03-821 Sharing and Verifying Taxpayer Information
               compliant in fulfilling their tax obligations than those whose incomes are
               subject to such reporting.18

               However, the data collected and maintained by Education are not suited to
               helping IRS identify taxpayers who are not covered by existing document
               matching programs. The student aid applications ask students and/or their
               parents to report income information directly from their tax returns and
               generally do not ask for other corroboration of income.

               IRS officials’ view that IRS data are likely to be more accurate than
               Education’s data is also supported by Education’s studies. As noted
               earlier, Education’s Pell Grant Payment Study results have found that
               some student aid applicants have underreported income on their
               applications compared to the income that they reported to IRS. Although
               Education estimates some underpayments to students during these
               studies, officials say that these, in their judgment, appear to result from
               mistakes in filling out applications. The work of the Education OIG also
               suggests that a significant number of student aid applicants falsify copies
               of tax returns or other information that they submit to Education to show
               lower incomes and thereby claim higher amounts of student aid.

               Given that Education data may have limited utility for tax administration,
               IRS has not investigated use of the data for tax administration. If Congress
               does authorize Education to obtain taxpayer information to verify
               students’ eligibility for financial aid, the resulting database of mismatches
               between data reported to each institution may represent a ready and low-
               cost opportunity for IRS to investigate whether there is any reasonable
               potential for using Education information for tax administration purposes.
               The database mismatches would identify how many, if any, student aid
               applicants reported less income to IRS than to Education and the number
               of cases in which the applicants may not have filed tax returns at all.


               Education obtains some information from IRS to use in administering its
Concluding     programs but is unable to obtain information that could help it reduce
Observations   financial aid overpayments that it estimated to total $602 million in fiscal


               18
                 U.S. General Accounting Office, Reducing the Tax Gap: Results of a GAO-Sponsored
               Symposium, GAO/GGD-95-157 (Washington, D.C.: June 2, 1995), and Treasury Inspector
               General for Tax Administration, Management Advisory Report: Comparing the Internal
               Revenue Service’s Verification of Income for Wage Earners and Business Taxpayers,
               Reference No: 2001-30-166 (Washington, D.C.: September 2001).




               Page 17                        GAO-03-821 Sharing and Verifying Taxpayer Information
                     years 2001 and 2002. As government agencies continue to seek efficient
                     ways to improve federal benefit and loan program decisions by reducing
                     fraud and error, data sharing has been a valuable tool for supporting
                     integrity in federal programs. However, the need to verify self-reported
                     information must be balanced with privacy concerns. Existing disclosure
                     laws help ensure that federal agencies properly handle the personal
                     information they collect. Modifying the legal constraints in IRC Section
                     6103 for sharing taxpayer information—with accompanying requirements
                     to ensure that the data are used only for authorized purposes—is one way
                     to address student aid program vulnerabilities while retaining protections
                     for personal privacy. We have previously recommended that Congress
                     consider such a change.

                     IRS does not use student aid application data because IRS officials believe
                     that the data IRS receives are more accurate than student aid application
                     data. This belief is supported by IRS data and by Education studies, and
                     thus there appears to be little benefit to attempting to use the Education
                     data for tax administration purposes.


                     We requested comments on a draft of this report from the Commissioner
Agency Comments      of Internal Revenue and the Secretary of Education. On July 15, 2003, the
and Our Evaluation   Commissioner of Internal Revenue and the Chief Operating Officer of
                     Education’s Office of Federal Student Aid each provided written
                     comments on a draft of this report. (See apps II and III, respectively.)
                     Officials representing the Office of Federal Student Aid also provided
                     technical comments to clarify specific sections of the draft report. We
                     have incorporated these comments into the report where appropriate.

                     The IRS Commissioner and Education officials raised no concerns. In his
                     comments, the Commissioner noted that although we did not make any
                     recommendations, the report provides an accurate and comprehensive
                     review of the issue, and will be a good source document for policymakers
                     as they address increased sharing of taxpayer information. Additionally,
                     the Chief Operating Officer acknowledged the potential for saving
                     hundreds of millions of dollars annually in overpayments and other
                     benefits through an effective data matching program with IRS, and said
                     that Education officials would continue to support necessary legislative
                     changes.




                     Page 18                     GAO-03-821 Sharing and Verifying Taxpayer Information
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from its
date. At that time we will send copies to the Chairman and Ranking
Minority Member, House Committee on Ways and Means; the Chairman
and Ranking Minority Member, Subcommittee on Oversight, House
Committee on Ways and Means; the Secretary of Education; the Secretary
of the Treasury; and the Commissioner of Internal Revenue. We will also
make copies available to others on request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact
me at (202) 512-9110 or on brostekm@gao.gov, or Signora May at (404)
679-1920 or on maysj1@gao.gov. Other staff who made key contributions
to this report were Michelle Bowsky, Michele Fejfar, Jyoti Gupta, Shirley
Jones, Anne Laffoon, and Miltresa McMichael.




Michael Brostek
Director, Tax Issues




Page 19                      GAO-03-821 Sharing and Verifying Taxpayer Information
              Appendix I: Objectives, Scope, and
Appendix I: Objectives, Scope, and
              Methodology



Methodology

              To respond to your request, we performed our work at various Internal
              Revenue Service (IRS) offices, including the Office of Governmental
              Liaison; the Office of Safeguards; the Office of Program, Evaluation, and
              Risk Analysis; and the Privacy Advocate’s Office. Our work also included
              interviews with employees in IRS’s Wage and Investment Operating
              Division and IRS’s Small Business/Self Employed Operating Division, the
              Department of the Treasury’s Office of Tax Policy and the Office of the
              Treasury Inspector General for Tax Administration, and program offices at
              the Department of Education. We collected and analyzed information on
              data sharing and matching between IRS and Education during fiscal years
              2000 through 2002.

              To determine whether Education uses IRS taxpayer information to verify
              information provided by applicants for federal student aid and the benefits
              of increasing verification activities, we analyzed the student financial aid
              application and determined what personal information Education collects
              from applicants. We interviewed Education officials as well as IRS officials
              to obtain data on the type of taxpayer information received from IRS,
              including how, when, and for what purpose the information is received.
              We identified the legislative and regulatory authorities that govern IRS’s
              disclosure of taxpayer information to Education.

              Additionally, we determined how Education is using the information
              received from applicants and IRS, and whether it is matching/cross-
              checking the information to improve eligibility determinations. To
              determine the benefits of increasing verification activities, we collected
              and analyzed data to assess how increased disclosure of information
              would affect taxpayer confidentiality and privacy interests. We
              interviewed IRS and Education officials to obtain views on possible
              impediments or missed opportunities to match/cross-check information to
              make better programmatic decisions, and we reviewed existing studies or
              reports on data matching/cross-checking activities. We determined what
              personal information Education collects but does not match/cross-check
              with IRS and why not, and whether officials believed matching/cross-
              checking would be useful for eligibility determinations.

              To determine whether IRS uses personal information maintained by
              Education to ensure that taxpayers meet their tax obligations and the
              benefits of increasing such activities, we collected data to determine what
              personal information IRS obtains from Education. We interviewed IRS and
              Education officials to obtain data on the type of personal information that
              is received from Education, including how, when, and for what purpose
              the information is received. We identified the legislative and regulatory


              Page 20                              GAO-03-821 Sharing and Verifying Taxpayer Information
Appendix I: Objectives, Scope, and
Methodology




authorities that govern Education’s disclosure of personal information to
IRS.

Additionally, we assessed how IRS is using the information received from
Education, and whether it is matching/cross-checking the information to
better ensure taxpayers are meeting their tax obligations. To determine
the benefits of increasing verification activities, we collected and analyzed
data to determine what personal information IRS receives from Education
but does not match/cross-check and why not, and whether officials believe
the information would be useful for tax administration. We determined
what personal information IRS does not receive from Education, whether
IRS is aware of the information, and whether IRS officials believe
receiving it would be useful for tax administration.

As used in this report, “data sharing” means obtaining and disclosing
information on individuals between Education and the IRS to determine
eligibility for student financial aid and to ensure that taxpayers have met
their obligations. Education’s use of taxpayer information to verify
information obtained from applicants refers to the matching or cross-
checking procedures that are conducted, and is covered by interagency
computer matching agreements between IRS and Education.

Our review was subject to some limitations. We did not assess the
reliability or quality of taxpayer and other personal information that is
shared and verified between Education and IRS. We relied on officials to
identify those IRS offices that use personal information because there is
no central, coordinating point within IRS for receipt of this type of
information. Additionally, we relied on IRS and Education officials’ views
on possible impediments or missed opportunities to match/cross-check
information, any additional data sharing and verification needs, and the
benefits and challenges of increased disclosure of taxpayer information.

We conducted our work from August 2002 through June 2003 in
accordance with generally accepted government auditing standards.




Page 21                              GAO-03-821 Sharing and Verifying Taxpayer Information
                    Appendix II: Comments from the Internal
Appendix II: Comments from the Internal
                    Revenue Service



Revenue Service




          Page 22                      GAO-03-821 Sharing and Verifying Taxpayer Information
                     Appendix III: Comments from the Department
Appendix III: Comments from the
                     of Education



Department of Education




(440151)
           Page 23                      GAO-03-821 Sharing and Verifying Taxpayer Information
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