Tax Administration: IRS Needs to Assess Options to Make Faster Deposits of Large Tax Payments

Published by the Government Accountability Office on 1990-08-31.

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

G A Ot             United States
                   General Accounting Office
                   Washington, D.C. 20548

                   General Government Division


                   August31, 1990

                   The Honorable J. J. Pickle
                   Chairman, Subcommittee on Oversight
                   Committee on Ways and Means
                   House of Representatives

                   Dear Mr. Chairman:

                   On May 9, 1990, you asked us to provide information about the timeli-
                   ness of Internal Revenue Service (IRS) deposits of tax payments. As dis-
                   cussed with the Subcommittee, this report deals specifically with the
                   lost interest associated with delays in depositing individual income tax
                   payments around April 15 each year, a time when iRs' 10 service centers
                   receive a large number of such payments.

Results in Brief   Our analysis of deposit activity at the Cincinnati and Philadelphia Ser-
                   vice Centers showed that the two centers averaged about 7 days to
                   deposit about $6 billion in individual income tax payments received
                   between April 15 and May 7, 1990. iRs officials said that they needed
                   additional time to make deposits during this period because ms
                   processes returns on a first in, first out basis, and it does not have the
                   staff or equipment to more quickly handle the large volume of returns it
                   receives in mid-April each year.

                    One way IRs could reduce deposit times and increase government
                    interest earnings would be to isolate and expedite the deposit of large
                    tax payments. For example, our results for the two centers showed that
                    tax payments of $5,000 or more accounted for about 70 percent of the
                    potential interest earnings during this period, but less than 8 percent of
                    the volume. We estimate the government could have earned additional
                    interest of about $6.2 million if the two centers had deposited payments
                    of $5,000 or more within 24 hours-the time ins officials believe is
                    achievable if they focus on the large payments. Although our results
                    cannot be generalized to ins' other eight centers, iRs officials said that
                    similar results could be expected at any center.

                    This report (1) discusses several approaches Rms might use to isolate and
                    expedite the deposit of large tax payments and (2) provides some infor-
                    mation on the advantages and disadvantages of each. ms needs to assess
                    those approaches, and any others it might identify, and adopt one that
                    strikes an appropriate balance between costs and benefits.

                    Page 1                             GAO/GGD904120 Depoits of Large Tax Paymnt

                         When IRms receives tax returns it processes them on a first in, firu-st out
                         basis. As returns enter a service center, employees open the returns and
                         sort them according to the type of return (such as forms 1040, 1040A, or
                         1040EZ) and whether the returns involve a refund (called refund
                         returns) or a tax payment (called remittance returns). Normally, ins
                         requires service centers to deposit the payments with a bank within 24
                         hours of receipt, and the service centers generally meet. that require-
                         nlent. During periods of heavier volume, however, the centers are
                         allowed to take longer.

                         The period of heaviest volume is at the end of the filing season because
                         many taxpayers wait until then to file their returns. Between January 1
                         and May 4, 1990, IRs' 10 service centers received 106 million individual
                         income tax returns, about 22 million of which were remittance returns.
                         About 30 million of the 106 million total returns and about 12.7 million
                         of the 22 million remittance returns arrived between April 13 and May
                         4. ins officials said that they do not have the staff and equipment to
                         handle such a large volume of mail in a way that would allow the cen-
                         ters to deposit the remittances within the typical 24-hour time frame.
                         For that reason, the centers were given until May 7, 1990, to deposit all
                         of the payments received from April 15 to May 4 that year.

Objectives, Scope, and   Our objectives were to (1) determine the lost interest earnings associatec
                         with deposits of individual income tax payments sent to IRs between
Methodology              April 15 and May 7, 1990, and (2) identify options available to IRS to
                         make faster deposits.

                         To determine the lost interest earnings, we obtained ns computer files
                         showing the deposit activity at the Cincinnati and Philadelphia Service
                         Centers. We selected these two centers because we had staff working on
                         a related assignment at those locations. Although our results are not sta-
                         tistically representative of Is' other eight centers, IRs officials said that
                         we could expect similar results at any of the others.

                         In analyzing the files, we foc;seai on remittances that Iss received and
                         deposited from April 15 to May 7, 1990. The remittances were associ-
                         ated with returns filed on forms 1040, 1040A, and 1040EZ. For each
                         remittance, we determined (1) how long it took ms to deposit the remit-
                         tance and (2) how much lost interest income was associated with the
                         deposit time. To calculate the amount of interest, we used the Treasury
                         Tax and Loan Account rate-the rate at which the Department of the
                         Treasury invests excess funds. During mid-April 1990, that rate was

                          Page 2                               GAO/GGD-0120 Depoat of Large Tax Payas

                                             about 8 percent. We also calculated the potential interest earnings if         IRS
                                             shortened its deposit time to 24 hours and expedited the deposit of
                                             remittances over certain amounts.

                                             To identify steps IRs might take to expedite its deposits, we reviewed IRS'
                                             current procedures for depositing remittances, analyzed ms' manage-
                                             ment information reports on its deposit activity, and interviewed
                                             various officials involved in the deposit process. These officials worked
                                             in IRS' National Office in Washington, D.C.; IRs service centers in Cincin-
                                             nati and Philadelphia; and the Department of the Treasury's Financial
                                             Management Service, which is responsible for establishing monitoring
                                             agreements with financial institutions that act as depositaries for the

                                             We did our work from April through June 1990 in accordance with gen-
                                             erally accepted government auditing standards. Much of our analysis
                                             required us to work with data in IRs' computerized files of deposit
                                             activity. We did not determine if the data were accurate. However, we
                                             did review the data for reasonableness. Responsible IRS officials pro-
                                             vided comments on this report Those comments are presented
                                             on page 9.

Deposit Times                                Computer files from the Cincinnati and Philadelphia Service Centers
                                             showed that the two centers received and deposited about 2.5 million
Resulted in Lost                             remittances from April 15 to May 7, 1990. The deposits totaled about $6
Interest Earnings                            billion, with an average deposit time of about 7 days. Had ms been able
                                             to deposit the remittances within 24 hours-the time it takes to make
                                             deposits when receipts are at normal levels-we estimate that the gov-
                                             ernment would have earned an additional $8.8 million in interest. Table
                                             1 shows the results for each service center.

Table 1: Analysis of Deposit Activity at                 ]
Two IRS Service Centers (April 15 - May 7,                            Number of      Amount of      Average
1990)                                        Service center           deposits       deposits       deposit time Lost interest
                                             Cincinnati                1.2 million   $2.7 billion   6.9 days     $3.8 million
                                             Philadelphia              1.3 million    3.3 billion   7.2 days      5.1 million
                                             Total                    2.5 million    $6.0 billion                $8.8 mniliona
                                             aDoes not total due to rounding.

                                             ms National Office and service center officials acknowledged that they
                                             do not deposit remittances received around mid-April as fast as they do
                                             at other times of the year. They attributed the delays to a lack of staff

                                             Page 3                                    GAO/GGDdIZLW Depott of lrge Tax Pamws

                        and equipment needed to open the mail, sort it, and process the remit-
                        tances. They expressed doubt that it would be cost effective to purchase
                        additional equipment and hire the additional staff necessary to meet a
                        once-a-year surge in receipts.

                        IRsplans to upgrade its remittance processing equipment in 1993.
                        Although that upgrade may alleviate some of the deposit delays, it will
                        not allow the centers to make end-of-filing-season deposits within 24
                        hours. According to a Cincinnati Service Center official, the planned
                        upgrade might reduce the average deposit time from 7 to 5 days.

                        Over the longer term, IRs is exploring the feasibility of receiving tax pay-
                        ments electronically. Currently, is' electronic filing program is almost
                        exclusively limited to tax returns with refunds. Although lRs plans to
                        have electronic payment of taxes available to all taxpayers by 1992, it
                        does not expect to have substantial taxpayer participation within the
                        next 4 or 5 years. IRs is also exploring the feasibility of allowing tax-
                        payers to make their tax payments with credit cards. That too, in the
                        long term, may affect IRs' deposit activity. Until such major changes
                        take effect, however, we believe that IRs could reduce deposit times in
                        the short term without purchasing additional equipment and with little
                        change to existing procedures.

Separate Mailing        Although it may not be feasible for IRs to process all of the remittances it
                        receives in mid-April within 24 hours, it should be possible to expedite
Address for Large Tax   the processing of large remittances-those that result in the greatest
Payments Could Help     potential interest earnings. Our analysis of IRS' computer files showed,
                        for example, that payments of $5,000 or more accounted for about 70
IRS Reduce Deposit      percent of the potential interest earnings ($6.2 million of the $8.8 million
Times                   total), but only about 8 percent of the total number of remittances
                        processed. (App. I contains a more detailed breakout of the remittances
                        received by amount of payment.) is officials in the National Office and
                        in the Cincinnati Service Center told us that if they knew which returns
                        contained large payments they would be able to deposit those payments
                        within 24 hours.

                        To expedite the deposit of large payments, ms has to be able to identify
                        envelopes containing those payments as soon as possible after receipt. It
                        can then segregate those envelopes from the many others waiting to be
                        opened, sorted, and processed and give them and their contents priority
                        handling. That segregation could be facilitated if taxpayers making

                         Page 4                             GAO/GGD4120i Deposits of Lare Tax Paymeo

large payments sent their returns to a different address than other

Currently, IRs instructs taxpayers to send their returns to the particular
service center that services their geographic area. IRsalso includes an
envelope with the service center's address in the tax package that it
mails to taxpayers before the start of each tax filing season. If IRs
instructed taxpayers making large tax payments to mail their returns to
the same service center but to a different address, those returns would
come into the center in a different mail pouch from the rest of the
returns. Center officials would then know which envelopes contain large
tax payments and could expedite the handling of those envelopes and
the deposit of those payments. The success of this procedure would
require the cooperation of taxpayers in using the special address. There
would be little risk to IRS, however, because the failure of taxpayers to
cooperate would merely result in payments being sent to IRs the same
way they are now.

From the taxpayer's standpoint, being instructed to mail large payments
to a different address could cause some confusion. To avoid confusion,
IRS could identify taxpayers who are more likely to make large end-of-
filing-season payments and send them a tax package that includes a spe-
cially-addressed return envelope in lieu of the normal envelope. There
would then be no need to provide separate instructions related to the
mailing of large payments. Taxpayers would fill out and mail their
returns just as they do now, but the special envelope would direct the
return and payment to a different address than other returns.

To identify taxpayers who would receive the specially-addressed enve-
lope, IRS could research its computerized taxpayer accounts for tax-
payers who have made large tax payments around April 15 in past filing
seasons. One potential problem with this approach is that a taxpayer's
filing history may not be a good indicator of whether the taxpayer will
owe a large payment in the future. If not, ms could end up giving pri-
ority attention to many returns that are received in the special enve-
lopes that involve small payments.

To test the predictability of a taxpayer's filing history, the Cincinnati
Service Center sampled 100 taxpayers who made tax payments of
$10,000 or more to the center between April 15 and May 7. Of the 100
taxpayers, 16 had made payments of $10,000 or more in April 1989, and
16 had made payments between $5,000 and $10,000. Of the other 68
taxpayers, 63 either made smaller payments or received refunds. In the

 Page 5                             GAO/GGD-O.120 Depoits of Large Tax Payment

remaining five cases, the service center could not determine the tax-
payer's 1989 filing record.

Although Cincinnati's test results tend to show that filing history is not
a good predictor, the results are not conclusive given the small sample.
IRS plans to make a more extensive test later in 1990. us might be able to
enhance the feasibility of this approach if it identifies all taxpayers who
have a history of making large payments, even if they do not always
make them at the end of the filing season, and sends each of those tax-
payers a tax package containing the specially-addressed envelope.
Because there are points during the filing season other than the very
end when the volume of receipts causes IRs to deviate somewhat from
the normal 24-hour deposit time, it might be useful to send specially-
addressed envelopes to all taxpayers who have a history of making
large payments no matter when they make the payments.

The approaches discussed above involve the use of a special service
center address. Instead of having large payments sent to a different
address at the service center, however, Ras could decide to make use of a
lock box, ' as it now does with estimated tax payments. Under that
arrangement, taxpayers would be instructed to mail large payments to
the lock box along with a payment voucher. Taxpayers would still send
their returns to their designated service center and receive credit for the
payment upon the center's receipt of the payment voucher. Although
the use of a lock box would have some advantages in terms of mini-
mizing IRS' work load, requiring taxpayers to send their payments and
returns to different addresses could cause some confusion and heighten
taxpayer anxiety.

 Any of the approaches discussed above would entail some additional
 costs. The additional costs include (1) the printing and distribution costs
 if IRS chooses to develop a tax package with a specially-addressed enve-
 lope for taxpayers making large tax payments, (2) the costs if IRS
 chooses to revise its instructions and/or redesign its tax payment
 voucher, and (3) the fees paid to banks if Is chooses to use a lock box.
 IRS could curtail some of these costs if it limits the changes to the Form
  1040. Our analysis of tax payments of $5,000 or more made to the Cin-
 cinnati and Philadelphia Service Centers in conjunction with forms

 IA lock box is a postal rental box serviced by a conmreiaI bank where persom who owe the govern
 ment money are instructed to send their payments. The bank then proceses the payments and trans-
 fers the funds to Treasury's Federal Reserve Account, usually by the next business day.

 Page 6                                       GAO/GGD90-120 Deposits of Large Tax Payments

1040, 1040A, and 1040EZ showed that about 99 percent were remitted
with a Form 1040.

The approach IRs chooses could also affect the amount of additional
interest the government earns. First, according to officials in IRs'
National Office Accounting Branch, lock box depositaries might need 48
hours to process the number of payments shown by our results because
current contractual agreements with the depositaries provide for 48-
hour processing during high volume periods. We estimate that the
interest earnings associated with expediting the deposit of payments of
$5,000 or more would have decreased from $6.2 million to $5.3 million
at the Cincinnati and Philadelphia centers if those deposits took 48
hours instead of 24 hours. Second, if IRs chooses to have service centers
(instead of lock box depositaries) expedite the processing and depositing
of large payments, work load considerations night delay the deposit of
smaller payments. These delays would offset the gain in interest earn-
 ings by a relatively small amount. For example, we estimate that
 delaying the deposit of payments less than $5,000 at the two centers
 would have decreased interest earnings by about $237,000.2

Although each of the approaches discussed above has drawbacks, we
believe, and IRS officials agree, that the potential interest earnings war-
rant some action to reduce the deposit times discussed in this report.
The officials indicated, in fact, that the potential earnings might be even
greater than our assessment indicated. They pointed out that additional
interest earnings would be possible if large payments made by tax-
payers who apply for extensions to file were included among the expe-
dited payments. 3 To see how much additional interest might be
associated with extensions to file, we extracted data from IRs' computer-
ized deposit files for the Cincinnati Service Center. The data showed
that the center received 96,937 extensions to file from April 15 to May
7, 1990, of which 26,104 involved payments of $5,000 or more. The data
showed also that IRS took an average of 8.1 days to deposit those large
payments. We determined that if the large payments had been deposited
in 24 hours, the government would have earned additional interest of

  To compute this $237,000, we assumed that for each day of interest saved by expediting deposits of
 S5,000 or more IRS would incur an additional day of interest expense for the average deposit of less
 than $5,000. In the Cincinnati and Philadelphia Service Centers, the average deposits of less than
 $5,000 were $812 and $846, respectively.
  Taxpayers who apply for extensions must still pay their taxes by April 15 in order to avoid penalty

 Page 7                                          GAO/GGD-90-120 Deposits of Large Tax Payments

                      about $1.3 million. If the deposits had been made in 48 hours, the addi-
                      tional interest would have been about $1.1 million.4

                      IRS officials also expressed doubt that IRs could implement a new
                      approach before the 1992 filing season because of the time needed to
                      make the type of changes discussed above.

                      ms receives a large volume of tax remittances around nmid-April each
                      year as taxpayers file their individual income tax returns in time to
                      meet the April 15 filing deadline. Because of the heavy volume, IRS is not
                      able to deposit tax payments within the 24 hours it normally takes to
                      make deposits during less busy times. Our analysis of the deposits made
                      by two service centers in April 1990 showed that the government loses
                      substantial interest earnings because of the delays.

                      IRs is considering certain procedural changes, like allowing taxpayers to
                      pay electronically or with credit cards, that could significantly change
                      IRS' deposit activity in the long term. Until then, however, IRS needs to
                      consider steps it can take to reduce the amount of lost interest earnings.
                      One step IRS could take would be to isolate large remittances for priority
                      handling by having them sent to a different address than other pay-
                      ments. Our inquiries identified several possible ways IRs could do that.
                      Although each of those ways has drawbacks, some more than others,
                      none of those drawbacks would appear to offset the potential benefits.

                      To reduce the time it takes to deposit large tax payments and increase
Recormmendation to    the government's interest earnings, IRS should assess various options,
the Commissioner of   including the ones discussed in this report, and adopt one that strikes an
Internal Revenue      appropriate balance between adnunistrative costs, taxpayer impact, and
                      potential benefits. That assessment should be completed in time to allow
                      IrS to implement the adopted approach in time for the filing season
                      beginning January 1, 1992.

                      4IRS officials said they were planning changes to the extersion-to-file procedures that may, if imple-
                      mented, predude the need for service centers to handle large payments associated with extensions.
                      Upon implementation, extensions will be automatic, thus eliminating the need for taxpayers to file
                      applications and reducing the volume of mail coming into service centers at the end of the filing
                      season by 5 or 6 million pieces. Taxpayers getting extensions would still be required to pay their
                      taxes by April 15, but IRS is considering having taxpayers send those payments to a lock box rather
                      than to a service center.

                      Page 8                                           GAO/GGD-9120 Deposits of Large Tax Payments

We discussed the results of our work with IRs' Assistant Commissioner
for Returns Processing and members of his staff. They agreed with the
facts in our report and agreed that the revenue implications warranted
further IRsstudy of various options to expedite large deposits. They said
that the most feasible approach might be to require that large payments
be made electronically once that capability is available to taxpayers.

As for the approaches discussed in this report, they noted that (1) the
option that involves preidentifying taxpayers who can be expected to
make a large payment at the end of a filing season might not be feasible,
as indicated by the small sample done in Cincinnati, and (2) they were
not confident that taxpayers or their representatives would comply with
any instruction to send large payments to a different address or would
use any specially-addressed envelope. They pointed out that most tax-
payers with such a large tax payment would probably be using a tax
practitioner and that IRS has historically had problems getting practi-
tioners to use the pre-addressed labels and envelopes that IRS now
includes in tax packages. Despite those potential problems, the Assistant
Commissioner acknowledged that rRs should do the kind of cost-benefit
analysis called for in our recommendation.

As arranged with the Subcommittee, unless you publicly announce its
contents earlier, we plan no further distribution of this report until 30
days from the date of issuance. At that time, we will send copies to the
Commissioner of Internal Revenue and other interested parties.

 The major contributors to this report are listed in appendix II. Please
 contact me on 275-6407 if you or your staff have any questions about
 the report.

 Sincerely yours,

 Jennie S. Stathis
 Director, Tax Policy and
   Administration Issues

 Page 9                             GAO/GGD-90-120 Deposits of Large Tax Payments

Letter                                                                                                1
Appendix I                                                                                           12
Analysis of Deposit
Activity at Cincinnati
and Philadelphia
Service Centers
Appendix II                                                                                          13
Major Contributors to
This Report
Tables                   Table 1: Analysis of Deposit Activity at Two IRS Service                     3
                             Centers (April 15 - May 7, 1990)
                         Table 1.1: Analysis of Deposit Activity by Amount of                        12
                             Deposit at Cincinnati Service Center (All 1040/
                         Table 1.2: Analysis of Deposit Activity by Amount of                        12
                             Deposit at Philadelphia Service Center (All 1040/


                         IRs       Internal Revenue Service

                         Page 10                            GAO/GGD-90-120 Deposits of Large Tax Paymento
     Pagqe 11   GAO/CG-JsW12   Depotib of Lare Tax lay
Appendix I

Analysis of Deposit Activity at Cincinnati and
Philadelphia Service Centers

Table 1.1: Analyis of Deposit Activity by
Amount of Deposit at Cincinnaf Service                                                                 Cumulative
Center (All 1040/1040A;1040EZ)                                                                 Percent of                               Percis
                                                                             Number of              totea   Lost interest                      I
                                             Deposit amount                   deposits          depotits        earnings                  Atra
                                             $10,000 or more                      41,048                3.5         $2.089.971
                                               9,000 or more                      46,088                3.9           2.159.218
                                               8,000 or more                      52.545                4.4           2.239.243
                                               7,000 or more                      60,737                5.1           2.327.676
                                               6,000 or more                      71,826                6.1           2.432.734
                                               5,000 or more                      87,685                74            2.557.711
                                               4,000 or more                     110,952                9.3           2.705.444
                                               3,000 or more                     148,346               12.5           2.885.973
                                               2,000 or more                     219,186               18.5           3,125.405
                                               1,000 or more                     384,529               32.4           3.436.708
                                                    1or more                   1.186.693              100.0           3.760.620                   1
                                             "Estimated interest earnings it IRS deposited each remittance within 24 hours and the interest rate -
                                             8 percent
                                             Source: IRS computer hiles of deposit activity from April 15, 1990. to May 7. t990

Table 1.2: Analysis of Deposit Activity by          l
Amount of Deposit at Philadelphia                                                                      CumUlative
Service Center(All 1040/1040A/1040EZ)                                                          Percent of                               PeroaSl
                                                                             Number of              total    Lost interest                     I
                                             Deposit amount                   deposits          deposits        earnmings'                  sayv
                                             $10,000 or more                    50,200                38        $3,074.850
                                               9.000 or more                    56,565                43         3,167.300
                                                8,000 or more                      64,448                4.9           3.269.664
                                                7.000 or more                      74.632                5.7           3.384.583
                                                6.000 or more                      88,141                6.7           3,516,213
                                                5,000 or more                     107,240                8.2           3.672,468
                                                4,000 or more                     135.044               10.3           3.856.572
                                                3,000 or more                     179,228               13.7           4,078.307
                                                2.000 or more                     261,185               20.0           4.360.486
                                                1,000 or more                     447,309               34.2           4.716.887
                                                        1 or more               1,306,183              100.0           5,073.104                  1
                                             aEstimated interest earnings if IRS deposited remittances within 24 hours and the interest rate was
                                             Source: IRS computer tiles of deposit activity from April 15. 1990. to May 7. 1990

                                              Page 12                                           GAO/GGD-90-120 Deposits of Large Tax Pay
Appendix II

Major Contributors to This Report

General Goverunment
General Government          lDavid J. Attianese, Assistant Director, Tax Policy and Administration
Division, Washington,       Joseph T. Valonis, Evaluator

Cincinnati Regional         Robert I.Lidman, Evaluator-in-Charge
      Cincinnati Regional   Michael J. Enriquez, Evaluator
Office                      Barbara L.Centers, Evaluator
                            Michael W. Hoffman, Advisor

Philadelphia Regional       Donald R.White, Evaluator

San Francisco               Arthur L. Davis, Evaluator

Regional Office

(268449)                    Page 13                            GAO/GGD90-120 Deposits of large Tax Payr