The IRS failed to create an online system for processing electronic business transcript requests by January 2023, a key requirement of a 2019 law that aimed to modernize the agency, the Taxpayer General for Tax Administration (TIGTA) reported.

Under the relevant section of the law, the Taxpayer First Act, the IRS was to “develop an automated system to receive third-party income verification forms” to “replace the current system, which relies on secure fax.” The IRS was also authorized “to charge a separate user fee on all Income Verification Express Services (IVES) requests over a two-year period to fund the development of the new system.” IVES provides tax transcripts to a third party with consent of the taxpayer.

The law mandated that the new system was to be in place by January 2023, which has not been accomplished.

"Despite the Taxpayer First Act requiring the IRS create a new online system to process transcript requests, IRS management has not yet made a decision to require participants to use the new system," the TIGTA report read. "Until the modernized IVES system becomes mandatory to use, enhanced controls will be needed for electronically faxed transcript requests to ensure that transcripts are not issued to unauthorized individuals."

IVES is used by mortgage lenders and others within the financial community to confirm the income of a borrower during the processing of a loan application, according to the IRS. The IRS provides return transcript, W-2 transcript and 1099 transcript information generally within approximately two to three business days to a third party with the taxpayer’s consent.

TIGTA also found that the IRS is providing insufficient information to both participants and taxpayers, that significant processing delays result from no single point of contact being responsible for resolving outages of the new inventory management system, and that the IRS continues to process transcript requests even though taxpayers have an identity theft marker on their account.

TIGTA made 14 recommendations to modernize and improve the IVES program, including alerts issued to IRS management during the review to address concerns such as ensuring the development of business transcript capability for the modernized IVES system, as well as recommendations to implement controls that will adequately authenticate all transcript requests received via electronic fax and assign responsibility for addressing and resolving future outages relating to the new inventory management system.

IRS management agreed with 11 of the 14 recommendations and partially agreed to one recommendation to provide notices to taxpayers whose transcript requests were rejected, but chose not to provide notices to participants citing an increased risk of fraud. The agency disagreed with two recommendations that would enhance controls over electronically faxed transcript requests and allow taxpayers the opportunity to identify potential unauthorized access of their tax return data.

In response to the report, Kenneth Corbin, commissioner of the IRS's Wage and Investment Division, told Accounting Today that the IRS added two new components, the IVES Application Programming Interface and Web-based User Interface, to the system in January. "We are excited to be moving the IVES program into a more fully integrated digital environment," he wrote. "Great strides have been made in the last two years in moving the program from paper-based to electronic processing."