Tax Administration

The 1994 tax filing season was successful in many respects. The number of returns filed increased after an unexpected decline in 1993, and more taxpayers used alternatives to the traditional paper filing method. Tax refunds were generally processed accurately and issued promptly, and the Internal Revenue Service (IRS) improved the accuracy of its return processing, reducing the amount of rework. IRS computers generally worked well with minimal downtime. Taxpayers looking for tax forms and publications at IRS walk-in sites could reasonably expect to find them, and taxpayers calling IRS' toll-free telephone lines with tax law questions could generally expect to get accurate answers. However, there were some significant problems. The number of IRS-detected fraudulent refund claims continued the steady increase that has troubled the agency for the past several years. The ability of taxpayers to reach IRS by telephone has been a problem for several years and has degraded even further in 1994. The earned income credit was the source of many errors by taxpayers and tax practitioners preparing returns.

GAO found that: (1) during the 1994 filing season, the number of filed tax returns increased and taxpayers increased their use of alternative filing methods; (2) tax refunds were accurately and timely issued at one IRS service center; (3) IRS reduced the amount of rework and downtime by improving the accuracy of its returns processing and computer operations; (4) IRS fulfilled most taxpayer requests for tax forms and publications and provided accurate toll-free telephone assistance to taxpayers with tax law questions; (5) during the 1994 filing season, IRS identified twice as many fraudulent claims as in 1993; (6) it is unclear whether the growth in tax fraud was due to increased fraudulent activity or improved IRS monitoring and detection; (7) taxpayers' ability to reach IRS by telephone continued to decline during the 1994 filing season; (8) at the peak of the 1994 filing period, IRS answered only about 20 percent of its toll-free telephone assistance calls, 50 percent of the calls to its forms distribution centers, and 13 percent of the calls to its Telefile system; (9) the Earned Income Credit (EIC) provision continued to cause problems for IRS and taxpayers; (10) EIC was the source of many tax preparation errors and almost all of the refund fraud cases identified by IRS; and (11) EIC fraud could increase significantly as more taxpayers become eligible to claim EIC.