IRS E-File Rejecting Tax ReturnsIRS E-File Rejecting Tax Returns

A multimillion system the Internal Revenue Service is rolling out to make it easier for people to electronically file their taxes is erroneously rejecting valid tax returns, according to a report released last week.

Some of the business rules the Modernized e-File system uses to check the validity of returns are not working properly, according to the report released by the Treasury inspector general for tax administration.

The MeF is a $524 million system upgrade currently in process to replace the IRS e-file system. It has processed business returns for several years and, for the first time, this year is processing some but not all individual returns.

The IRS planned to accept 1.5 million individual tax returns via MeF through the end of February, with another 4.4 million returns to be processed through the system by the end of March.

The report audited the system's handling of tax returns until March 5, 2010. At that point, however, only 98,596 returns were processed through MeF, and of them 23,902 -- or 24% -- were rejected.

The system uses 434 business rules to either accept or reject claims based on certain criteria, and has so far rejected claims based on one or more of 158 of them, according to the report.

The report analyzed 30 of the 158 rules that were rejecting returns and found that 19 rejected valid returns. Those business rules handle several individual tax issues, including the making work pay credit, the earned income tax credit, and the validity of individuals' Social Security numbers.

According to the IRS, the MeF upgrade in process is not affecting the ability for American taxpayers to file their returns electronically, and the number of returns filed through eFile this year is up slightly, according to statistics on the IRS Web site.

So far more than 77 million people have successfully filed their tax returns through eFile. The deadline for filing income taxes in the United States was April 15.

The Treasury inspector general is working with IRS officials to monitor how the MeF system continues to handle individual returns to ensure the system is working properly before it is fully implemented, according to the report.