Tax Administration

During the 1997 tax filing season, the Internal Revenue Service (IRS) substantially improved its performance in two areas of importance to taxpayers. First, telephone accessibility increased from 20 to 51 percent during 1997. IRS was able to answer more telephone calls because it assigned more staff to do so and changed its procedures for answering questions on more complex tax matters. Second, the number of tax returns filed by alternative methods increased by 25 percent, with returns filed by telephone rising 65 percent. In another major change during the 1997 filing season, IRS began treating missing or incorrect Social Security numbers on returns as math errors rather than as issues that, in the past, had to be resolved through a lengthy notice process. According to IRS, the agency protected about $1.46 billion in revenue through the disallowance of claimed credits or dependent exemptions in 1997. One issue that continues to concern GAO is the cost-effectiveness of IRS' use of lockboxes to process Form 1040 tax payments. Additional information that GAO obtained this year calls into question a key assumption that IRS and the Treasury Department's Financial Management Service have used to calculate the interest cost savings associated with the use of lockboxes.

GAO noted that: (1) the IRS met or exceeded most of its 1997 filing season related performance goals; (2) of particular note is the substantial improvement in two important areas where GAO has criticized IRS' performance in past filing seasons--telephone accessibility and the use of alternative filing methods; (3) according to IRS data, telephone accessibility increased from 20 percent during the 1996 filing season to 51 percent during the 1997 filing season; (4) the number of tax returns filed by means other than the traditional paper method increased by 25 percent over the last year, with the number of returns filed by telephone (TeleFile) showing the most significant increase--65 percent; (5) although the revised tax package apparently contributed to an increase in the use of TeleFile, it also apparently contributed to a decrease in the performance of the Service Center Recognition/Image Processing System (SCRIPS)--a document imaging and optical character recognition system that IRS implemented in 1994 to process Forms 1040EZ and certain other tax documents; (6) another major change during the 1997 filing season involved the procedures IRS used to process returns that were filed with missing or incorrect SSNs; (7) in 1997, as authorized by the Welfare Reform Act of 1996, IRS began treating missing or incorrect SSNs as math errors rather than as issues that, in the past, had to be resolved through a lengthy notice process; (8) as of September 1, 1997, according to IRS, it had protected about $1.46 billion in revenue through the disallowance of claimed credits or dependent exemptions in 1997, more than doubling the amount disallowed using the procedures IRS followed in 1996; (9) one issue that GAO discussed in a previous report that continues to be of concern is the cost-effectiveness of IRS' use of lockboxes to process 1040 tax payments; (10) additional information GAO obtained this year heightened its concern by calling into question a key assumption IRS and the Department of the Treasury's Financial Management Service (FMS) have used to calculate the interest cost savings associated with this use of lockboxes; and (11) although FMS had planned a study to further assess interest cost savings, those plans have been deferred, and there is no assurance when such a study will be done.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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