Tax Administration
IRS Improved Some Filing Season Services, but Long-term Goals Would Help Manage Strategic Trade-offs Gao ID: GAO-06-51 November 14, 2005During the filing season, the Internal Revenue Service (IRS) processes about 130 million individual tax returns, issues refunds, and responds to millions of inquiries. Budget cuts combined with IRS's strategy of shifting resources from taxpayer service to enforcement make providing quality service a challenge. GAO was asked to assess IRS's 2005 filing season performance compared to past years and 2005 goals in the processing of paper and electronic tax returns, telephone service, face-to-face assistance, and Web site service. GAO also examined whether IRS has long-term goals to help assess progress and guide in making decisions. Finally, GAO summarized IRS's response to Hurricanes Katrina and Rita, and their possible effects on IRS's performance.
IRS improved some filing season services. According to officials, IRS made a strategic decision to reduce others to accommodate budget cuts. IRS's processing of returns and refunds went smoothly. Accuracy of responses to telephone inquiries about tax law and about taxpayers' accounts significantly improved. And, IRS's Web site performed well. On the other hand, in response to budget cuts, IRS reduced access to telephone assistors, resulting in longer wait-times and more callers hanging up. IRS officials viewed telephone access as a more flexible area for absorbing budget cuts than, for example, processing. The number of taxpayers visiting IRS walk-in sites continued to decline, while the number of tax returns prepared at volunteer sites increased. This is consistent with IRS's strategy of reducing the number of its employees providing expensive face-to-face assistance. IRS continues to lack reliable data on the accuracy of walk-in and volunteer site assistance but has plans in place to improve quality measurement. For the first time, more than half of individual tax returns were filed electronically, which is important because electronic filing has allowed IRS to reduce resources devoted to processing paper returns. However, despite IRS's actions to promote electronic filing, it is not on track to achieve its long-term goal of having 80 percent of such returns filed electronically by 2007. State mandated electronic filing has proven effective at encouraging electronic filing at the federal level and one IRS advisory group has recommended a federal mandate. However, little is known about the costs and burdens of such mandates. IRS has been developing long-term goals to help assess agency progress and understand the impact of budget decisions. Because of the difficulty in developing goals, IRS has experienced delays and lacks a schedule for finalizing those goals. IRS is taking numerous actions to assist taxpayers affected by Hurricanes Katrina and Rita. Most of the impact on IRS, such as more questions from taxpayers, will be felt during the 2006 filing season and beyond.
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Director: Team: Phone:GAO-06-51, Tax Administration: IRS Improved Some Filing Season Services, but Long-term Goals Would Help Manage Strategic Trade-offs
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GAO Highlights:
Highlights of GAO-06-51, a report to the Chairman, Subcommittee on
Oversight, Committee on Ways and Means, House of Representatives.
Why GAO Did This Study:
During the filing season, the Internal Revenue Service (IRS) processes
about 130 million individual tax returns, issues refunds, and responds
to millions of inquiries. Budget cuts combined with IRS‘s strategy of
shifting resources from taxpayer service to enforcement make providing
quality service a challenge. GAO was asked to assess IRS‘s 2005 filing
season performance compared to past years and 2005 goals in the
processing of paper and electronic tax returns, telephone service, face-
to-face assistance, and Web site service. GAO also examined whether IRS
has long-term goals to help assess progress and guide in making
decisions. Finally, GAO summarized IRS‘s response to Hurricanes Katrina
and Rita, and their possible effects on IRS‘s performance.
What GAO Found:
IRS improved some filing season services. According to officials, IRS
made a strategic decision to reduce others to accommodate budget cuts.
IRS‘s processing of returns and refunds went smoothly. Accuracy of
responses to telephone inquiries about tax law and about taxpayers‘
accounts significantly improved. And, IRS‘s Web site performed well. On
the other hand, in response to budget cuts, IRS reduced access to
telephone assistors, resulting in longer wait-times and more callers
hanging up. IRS officials viewed telephone access as a more flexible
area for absorbing budget cuts than, for example, processing. The
number of taxpayers visiting IRS walk-in sites continued to decline,
while the number of tax returns prepared at volunteer sites increased.
This is consistent with IRS‘s strategy of reducing the number of its
employees providing expensive face-to-face assistance. IRS continues to
lack reliable data on the accuracy of walk-in and volunteer site
assistance but has plans in place to improve quality measurement.
For the first time, more than half of individual tax returns were filed
electronically, which is important because electronic filing has
allowed IRS to reduce resources devoted to processing paper returns.
However, despite IRS‘s actions to promote electronic filing, it is not
on track to achieve its long-term goal of having 80 percent of such
returns filed electronically by 2007. State mandated electronic filing
has proven effective at encouraging electronic filing at the federal
level and one IRS advisory group has recommended a federal mandate.
However, little is known about the costs and burdens of such mandates.
IRS has been developing long-term goals to help assess agency progress
and understand the impact of budget decisions. Because of the
difficulty in developing goals, IRS has experienced delays and lacks a
schedule for finalizing those goals. IRS is taking numerous actions to
assist taxpayers affected by Hurricanes Katrina and Rita. Most of the
impact on IRS, such as more questions from taxpayers, will be felt
during the 2006 filing season and beyond.
What GAO Recommends:
GAO recommends that IRS develop better information about the costs of
mandatory electronic filing of tax returns for certain categories of
tax practitioners and establish a schedule for developing its long-term
goals. In comments, IRS agreed with the recommendations.
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact James R. White at (202) 512-9110 or
whitej@gao.gov
[End of section]
Report to the Chairman, Subcommittee on Oversight, Committee on Ways
and Means, House of Representatives:
November 2005:
Tax Administration:
IRS Improved Some Filing Season Services, but Long-term Goals Would
Help Manage Strategic Trade-offs:
GAO-06-51:
Contents:
Letter:
Results in Brief:
Scope and Methodology:
Background:
IRS's Processing Performance Continued to Improve, and, for the First
Time, More Returns Were Filed Electronically Than by Paper:
IRS Reduced Access to Telephone Assistors, but Accuracy of Tax Law and
Account Responses Significantly Improved:
Fewer Taxpayers Used IRS Walk-in Sites and More Used Volunteer Sites,
but IRS Lacks Reliable Quality and Other Data:
Web Site Performed Well, Was Highly Rated, and Used Extensively:
IRS Is Developing Long-term Goals for Taxpayer Service, but Completion
Date Is Unknown:
IRS Has Taken Numerous Actions to Deal with the Aftermath of Hurricanes
Katrina and Rita, but Implications for the 2006 Filing Season Are Not
Yet Known:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Data on Processing Performance Relative to Fiscal Years
2001 through 2004 Performance and Fiscal Year 2005 Goals:
Appendix II: Budget Reduction Had Some Impact on Service to Taxpayers:
Appendix III: Comments from the Internal Revenue Service:
Tables:
Table 1: IRS Telephone Assistors Accessibility Performance, 2001-2005
Filing Seasons:
Table 2: IRS Telephone Assistors Accuracy Performance, 2001-2005 Filing
Seasons:
Table 3: IRS's Processing Performance, Fiscal Years 2001 through 2005:
Table 4: Overall Taxpayer Service Budget Reduction, Fiscal Years 2004
and 2005:
Figures:
Figure 1: Full-time Equivalents Budgeted for IRS Activities, Fiscal
Year 2005:
Figure 2: IRS's 2005 Filing Season Activities:
Figure 3: Number of Individual Returns and IRS Staff Years for
Individual Paper and Electronic Processing, Fiscal Years 1999 through
2006:
Figure 4: How IRS Handled Calls for Telephone Assistance during the
2005 Filing Season:
Figure 5: Assistance Provided by IRS Walk-in Sites, 2001-2005 Filing
Seasons:
Figure 6: Direct FTEs Used for Assistance Provided by IRS Walk-in
Sites, 2001-2005 Filing Seasons:
Figure 7: Assistance Provided by Volunteer Sites, 2001-2005 Filing
Seasons:
Abbreviations:
CADE: Customer Account Data Engine:
CSR: Customer Service Representatives:
ETAAC: Electronic Tax Administration Advisory Committee:
ETLA: Electronic Tax Law Assistance:
FEMA: Federal Emergency Management Agency:
FTE: Full-time Equivalent:
GAO: Government Accountability Office:
GPRA: Government Performance and Results Act of 1993:
IRS: Internal Revenue Service:
P&R: Probe & Response Guide:
PART: Program Assessment Rating Tool:
RAL: Refund Anticipation Loan:
RRA: IRS Restructuring and Reform Act of 1998:
SPEC: Stakeholder Partnership, Education, and Communication:
TIGTA: Treasury Inspector General for Tax Administration:
W&I: Wage and Investment Division:
Letter:
November 14, 2005:
The Honorable Jim Ramstad:
Chairman:
Subcommittee on Oversight:
Committee on Ways and Means:
House of Representatives:
Dear Mr. Chairman,
During the filing season most taxpayers have their only contact with
the Internal Revenue Service (IRS) by filing their individual income
tax returns, receiving refunds, and, if needed, seeking assistance.
Consequently, the agency's performance during this period is a key
indicator of how well IRS is serving taxpayers and helping them fulfill
their tax responsibilities.[Footnote 1]
In past reports and testimonies we said that IRS has made significant
progress improving taxpayer service since passage of the IRS
Restructuring and Reform Act of 1998 (RRA).[Footnote 2] However, we
also described challenges to continued progress. In fiscal year 2005,
IRS's budget for taxpayer service was 2.8 percent less than in 2004 and
IRS has an ambitious strategy of providing filing season services with
fewer resources. This strategy is intended to allow IRS to shift
resources to enforcement.
Because of IRS's importance to taxpayers and Congress, you asked us to
assess IRS's 2005 filing season performance. With respect to processing
paper and electronically filed individual income tax returns, telephone
assistance, face-to-face assistance, and the Web site, our objectives
were to assess IRS's performance compared to annual goals and past
performance and describe any factors or initiatives that significantly
affected performance. Additionally, we examined whether IRS has long-
term goals to help assess progress and guide in resource and other
decision making. In light of Hurricanes Katrina and Rita, we summarized
IRS's actions and plans to assist affected taxpayers and the possible
implications for the 2005 and 2006 filing seasons. We testified on
IRS's interim 2005 performance in a hearing held by your Subcommittee
on Oversight, House Committee on Ways and Means, on April 14,
2005.[Footnote 3]
Our assessment is based on the reported results and analysis of key IRS
performance measures, observations of IRS's operations, interviews with
IRS officials, information from representatives of the tax practitioner
community, and analyses by the Treasury Inspector General for Tax
Administration (TIGTA). For the purpose of this report, we found IRS's
data to be sufficiently reliable for assessing IRS's 2005 filing season
performance and comparing to prior filing seasons. Further details on
our scope and methodology are provided later in this report. We
performed our work from January through October 2005 in accordance with
generally accepted government auditing standards.
Results in Brief:
During the 2005 filing season, IRS improved some services, but to
accommodate budget cuts, officials made a strategic decision to reduce
others. With one notable exception, IRS currently lacks, but is
developing, long-term goals that would be useful for managing budgetary
trade-offs between improving taxpayer service and enhancing
enforcement.
Processing: IRS nearly met or exceeded most of its 2005 processing
performance goals. For the first time, more than half of all individual
income tax returns were filed electronically. Despite numerous actions
IRS has taken over the years, it is not on track to meet its one long-
term goal of having 80 percent of all returns filed electronically by
2007. Electronic filing mandates in several states for certain
categories of tax practitioners have increased electronic filing of
federal tax returns. The growing use of mandates by states for
electronic filing could lead to more discussion about mandates at the
federal level. In fact, one IRS advisory group recommended that IRS
should support mandated electronic filing. However, decision makers
lack information on the costs that tax practitioners and taxpayers
would incur to file electronically.
Telephone service: IRS made a strategic decision to reduce access to
its telephone service to accommodate a budget reduction, because IRS
officials viewed it as flexible area for absorbing budget reductions
without significantly affecting taxpayer service. As a result,
taxpayers waited longer to speak with telephone assistors and more
taxpayers hung up than last year. In contrast, the accuracy of customer
service representatives' (CSR) responses to tax law and account
questions significantly improved compared to past performance.
Walk-in assistance: Fewer taxpayers used IRS walk-in sites during the
2005 filing season, continuing a trend since 2001. In contrast to walk-
in sites, the numbers of taxpayers seeking return preparation
assistance at volunteer sites increased since 2001. These trends are
consistent with IRS's strategy of reducing face-to-face assistance in
favor of less costly options for receiving service, such as IRS's
telephone and Internet services, and volunteer sites. Moreover, IRS
lacked reliable data on the quality of services provided at both walk-
in and volunteer sites, making it impossible to accurately characterize
IRS's performance in providing face-to-face assistance. In an effort to
obtain reliable data, IRS has initiated quality improvement programs at
both sites.
Internet Web site: IRS's Web site performed well, was user friendly,
and was used extensively this filing season based on the number of
visits to the site, pages viewed, and forms and publications
downloaded. This is consistent with IRS's strategy to improve taxpayer
service by providing options for automated interaction with the IRS,
such as "Where's My Refund."
Long-term goals that are focused on results or outcomes are critical
for holding agencies accountable and helping agencies and Congress make
strategic trade-offs. IRS has been working to establish long-term goals
for all aspects of its operations for well over a year. Because of the
difficulty in developing goals, IRS has experienced delays and lacks a
schedule for finalizing those goals. Although we recognize the
difficulty in establishing such goals, until they are developed,
taxpayers, Congress, and IRS management will have difficulty assessing
long-term progress. In addition, budget decisions that affect the
filing season will be made with limited context about the potential
impact on long-term performance.
IRS had taken numerous actions to address the aftermath of Hurricanes
Katrina and Rita, working closely with, and in support of, other the
federal agencies. IRS officials report that any effect on the 2005
filing season performance would be slight, because the hurricanes
occurred so late in the filing season. Actions taken to date include
finding IRS employees who had been affected by Katrina and Rita,
helping answer telephone calls for emergency assistance, reviewing tax
provisions, and putting extensive information about taxpayer assistance
and relief for individuals and businesses on its Web site; other
actions are planned. According to IRS officials, IRS is also assessing
the longer term implications of the hurricanes for the 2006 filing
season, such as the potential impact on the number of telephone
inquiries.
We are making recommendations to the Commissioner of Internal Revenue
that IRS should:
* develop better information about the costs to tax practitioners and
taxpayers of mandatory electronic filing of tax returns for certain
categories of tax practitioners and:
* establish a schedule for developing its long-term goals.
In a letter commenting on a draft of this report (see app. III), the
Commissioner of IRS agreed with our recommendations and generally
outlined the actions IRS plans to take to address those
recommendations.
Scope and Methodology:
To assess IRS's 2005 filing season performance in the four key filing
season activities--processing, telephone assistance, face-to-face
assistance, and Web site--compared to goals, past performance, as well
as initiatives intended to improve performance, we:
* reviewed and analyzed IRS reports, testimonies, budget submissions,
and other documents and data, including workload data and data from
IRS's current suite of balanced performance measures and annual goals;
* reviewed legislation, policies, and procedures;
* reviewed related TIGTA reports and interviewed TIGTA officials about
IRS's performance and initiatives;
* followed up on our recommendations made in prior filing season and
related reports;
* tested for statistical differences between yearly changes for various
performance measures;
* observed operations at IRS's Atlanta paper processing center, and
Atlanta and Pittsburgh call centers, all of which are managed by IRS's
Wage and Investment operating division (W&I); 3 of IRS's approximately
400 walk-in locations;[Footnote 4] and 3 of over 14,000 volunteer
sites.
* analyzed information posted to IRS's Web site based on our knowledge
of the type of information taxpayers look for, and assessed the ease of
finding information, as well as the accuracy and currency of the data
on the site;
* reviewed information from companies that evaluate Internet
performance;
* reviewed staffing data for paper and electronic processing, telephone
assistance, and walk-in assistance;
* interviewed IRS officials about current operations, performance
relative to 2005 performance goals, and prior filing season
performance, trends, and significant factors and initiatives that
affected or were intended to improve performance; and:
* interviewed representatives of large private and nonprofit
organizations that prepare tax returns and trade organizations that
represent both individual practitioners and tax preparation companies.
This report discusses numerous filing season performance measures and
data that cover the quality, accessibility, and timeliness of IRS's
services, which we have used to evaluate IRS's performance in key areas
for years. Although some measures could be further refined, the
majority of IRS's filing season measures have the attributes of
successful measures, including objectivity and reliability. We reviewed
IRS documentation, interviewed IRS officials about computer systems and
data limitations, and compared those results to GAO standards of data
reliability.[Footnote 5] As a result, we determined that the IRS data
we are reporting are sufficiently reliable for assessing IRS's filing
season performance. Data limitations are discussed where appropriate.
We conducted our work at IRS headquarters in Washington, D.C; the Small
Business/Self-Employed Division headquarters in New Carrollton,
Maryland; the W&I Division headquarters, the Joint Operations Center
(which manages telephone service), and a telephone call site in
Atlanta, Georgia; a telephone call site in Pittsburgh, Pennsylvania;
and walk-in and volunteer locations in Georgia and Maryland. We
selected these offices for a variety of reasons, including the location
of key IRS managers, such as those responsible for telephone, walk-in,
and volunteer services. Hurricanes Katrina and Rita struck just as we
were completing our 2005 filing season review.[Footnote 6] Because
Katrina and Rita occurred when we were finishing our work, we did not
assess the effectiveness of IRS's actions. We performed our work from
January through October 2005 in accordance with generally accepted
government auditing standards.
Background:
IRS received over $10 billion in fiscal year 2005 to fund over 96,000
full-time equivalents (FTE).[Footnote 7] Of the total, processing and
taxpayer services account for 41 percent, almost 40,000 FTEs, as shown
in figure 1. Of the roughly 40,000 FTEs, almost 16,000, just less than
40 percent, were budgeted just for processing, most of which occurs
during the filing season.
Figure 1: Full-time Equivalents Budgeted for IRS Activities, Fiscal
Year 2005:
[See PDF for image]
[End of figure]
IRS provides a variety of taxpayer services. Tens of millions of
taxpayers receive telephone assistance. Taxpayers call IRS to inquire
about their refunds, the tax laws, or their accounts. The calls are
answered by CSRs or automated services.
For face-to-face assistance, IRS has approximately 400 walk-in sites
where taxpayers ask basic tax law questions, get account information,
receive assistance with their accounts, and have returns prepared (if
annual gross income is $36,000 or less).[Footnote 8] Also, low-income
and elderly taxpayers get returns prepared at over 14,000 volunteer
sites run by community-based coalitions that partner with IRS. IRS's
Stakeholder Partnership, Education, and Communication (SPEC)
organization fosters relationships between IRS and the nonprofit
community to provide an alternative means for taxpayers to receive
volunteer return preparation assistance. According to IRS, SPEC
officials identify and select partners, such as the American
Association of Retired Persons, that meet taxpayer needs, such as tax
assistance for the elderly, and help train, provide resource materials,
and oversee operations at these partners' facilities. In some cases,
IRS awards grants, trains and certifies volunteers, and provides
reference materials, computer software, and computers to these
volunteers.
IRS now provides many Internet services that did not exist a few years
ago. For example, the "Where's My Refund" feature has the benefit of
reducing phone calls and enables taxpayers to use the IRS Web site to
find out if IRS received their tax returns and whether their refunds
were processed. IRS's filing season activities and associated workload
volumes are depicted in figure 2.
Figure 2: IRS's 2005 Filing Season Activities:
[See PDF for image]
Notes: The number of paper and electronic returns and refunds are
estimated for the time period January 1, 2005, to September 16, 2005;
toll-free calls for the time period January 1, 2005, to July 16, 2005;
walk-in contacts, which includes returns prepared at volunteer sites,
for the time period December 26, 2004, to April 23, 2005; and Internet
downloads for the time period October 1, 2004, to August 31, 2005. We
used different dates for the various areas because those dates best
reflect IRS's filing season workload in that area.
[End of figure]
IRS's Processing Performance Continued to Improve, and, for the First
Time, More Returns Were Filed Electronically Than by Paper:
IRS's performance measures show that IRS has improved its performance
processing individual income tax returns and nearly met or exceeded
most of its 2005 goals. The continued growth in the number of tax
returns filed electronically resulted in more than half of all
individual income tax returns being filed electronically for the first
time. Despite the continued growth, IRS is not on track to meet its 80
percent long-term electronic filing goal. Electronic filing mandates
imposed by several states on tax practitioners who meet certain
criteria have increased electronic filing of federal individual income
tax returns. However, stakeholders have noted information is lacking on
the costs and burdens of mandating electronic filing.
Most Measures Showed that IRS Continued to Improve Its Processing
Performance:
As of September 16, 2005, IRS processed about 130 million individual
tax returns, including 68 million returns electronically, with no
significant disruptions and issued 99 million refunds in a timely
manner.[Footnote 9]
According to IRS data, IRS equaled or exceeded its 2004 performance and
nearly met or exceeded its 2005 goals for the following seven measures
(see app. 1 for further details).[Footnote 10]
* Deposit error rate: the percentage of payments applied in error.
* Deposit timeliness, paper: the amount of interest forgone by not
depositing payments the business day after receipt.
* Letter error rate: the percentage of letters issued to taxpayers with
errors.
* Notice error rate: the percentage of incorrect notices issued to
taxpayers.
* Refund error rate, individual: the percentage of refunds with IRS-
caused errors in the entity information (e.g., incorrect name or Social
Security number).
* Refund timeliness, paper: the percentage of refunds issued within 40
days or less for individual tax returns filed on paper.
* Productivity: the weighted volume of work processed per staff year.
For one measure IRS's performance declined and the 2005 goal was not
met.
* Refund interest paid rate: the interest paid per $1 million of
refunds issued late.
One measure was new for 2005, and IRS met the goal.
* Individual Master File efficiency: the number of tax returns
processed per staff year.
Although IRS's performance measures indicate smooth processing and
improved performance, we have previously recommended that IRS adopt
others. Specifically, we recommended that IRS adopt a refund timeliness
performance measure for individual tax returns filed electronically to
promote growth in electronic filing.[Footnote 11] This measure could
help IRS better monitor and evaluate electronic filing performance and
determine the impact of initiatives intended to increase electronic
filing. However, IRS does not plan to implement such a measure, stating
it would not enhance performance and, in fact, might be
counterproductive if disappointed taxpayers who had to wait longer than
expected to receive their refunds were to call or seek face-to-face
assistance. Although not publicly reported, IRS data shows that refunds
associated with returns filed electronically are received in about half
the time as those filed on paper. IRS publications also inform
taxpayers that they can receive their tax refund in 10 days if they
file electronically if they use direct deposit.
The number and costs of refund anticipation loans (RAL) are evidence
that taxpayers might benefit from having more information about the
time it takes to get refunds. RALs are very short-term loans issued
while taxpayers wait for their refunds. In a previous testimony, we
found examples of interest rates on RALs of well over 100
percent.[Footnote 12] The measure could be designed to minimize the
problem of disappointed taxpayers calling IRS by, for example,
reporting the number of days within which 90 percent of refunds are
issued.
For the first time, IRS used the Customer Account Data Engine
(CADE)[Footnote 13] to process the simplest taxpayer returns, that is,
1040EZs. CADE is important because it is the foundation of IRS's
modernization effort and will ultimately replace the Individual Master
File, which currently houses taxpayer data for individual filers, with
new technology, applications, and relational databases. As of August
2005, CADE processed over 1.4 million returns with no significant
problems, handled $424 million in refunds, and shortened the average
turnaround for refunds from 7 days to 3.5 days. A recent TIGTA report
noted that information from tax returns was accurate and posted on time
to CADE accounts.[Footnote 14] IRS released the next update to CADE in
mid-September 2005; another release is scheduled for January 2006 and
is on schedule, according to an IRS division chief.[Footnote 15]
IRS officials attribute this year's smooth processing to adequate
planning and relatively few tax law changes. Tax practitioners, who
last year prepared approximately 60 percent of all individual income
tax returns, agreed that the processing of individual tax returns has
gone smoothly during the 2005 filing season. Representatives from the
National Association of Enrolled Agents, National Society of Certified
Public Accountants, and other tax-related organizations had positive
comments about IRS's processing of individual tax returns. Similarly,
TIGTA officials told us that IRS generally processed individual tax
returns smoothly in 2005.
For the First Time, More Than Half of All Individual Tax Returns Were
Filed Electronically:
Electronic filing remains important to IRS because electronic returns
cost less to process than paper returns. While obtaining accurate cost
estimates may be problematic given inadequacies in IRS's financial
accounting system,[Footnote 16] IRS estimates it saves $2.15 on every
individual tax return that is processed electronically. According to
IRS data, electronic filing has allowed IRS to use about 300 fewer
staff years to process paper returns in 2005 than in 2004, which is
reflected in budget savings for processing. This is in addition to
about 1,000 staff years saved between 2002 and 2003. IRS anticipates
additional staff-year savings when paper processing is eliminated in
the Submission Processing Center in Memphis, Tennessee, after the 2005
filing season.
This is the first year that more than half of the 130 million returns
filed were filed electronically. The number of individual tax returns
filed electronically increased by about 11 percent, to an estimated
67.9 million electronic individual tax returns as of September 16,
2005. IRS is forecasting about a 9 percent increase in the number of
individual income tax returns filed electronically in 2006.
Figure 3: Number of Individual Returns and IRS Staff Years for
Individual Paper and Electronic Processing, Fiscal Years 1999 through
2006:
[See PDF for image]
[A] Fiscal years 2005 and 2006 are IRS projections and, given the
current lower electronic filing growth rates, the estimates may be
optimistic.
Note: Staff years and FTEs are units of measurement that are often used
interchangeably. According to IRS, an FTE is the equivalent of one
person working full-time for 1 year with no overtime. A staff year
includes overtime. Therefore, the cost of 1 staff year is equal to the
cost of 1 FTE plus overtime. As noted in the figure, staff years for
paper filing are for selected major activities only.
[End of figure]
IRS Has Taken Actions to Encourage Electronic Filing but Will Not Meet
Long-term Goal:
Over the years, IRS has taken numerous actions to encourage electronic
filing by taxpayers and tax practitioners, including:
* making electronic filing free to most taxpayers via the Free File
Alliance program[Footnote 17] on the IRS Web site;
* making the process totally paperless if a taxpayer uses a personal
identification number to sign their tax return;
* making over 99 percent of all individual tax forms suitable for
electronic filing;
* allowing electronic payment of balance due payments; and:
* surveying taxpayers and tax practitioners in response to a
recommendation in our 2001 filing season report[Footnote 18] to
determine why 40 million tax returns were prepared on a computer but
filed on paper.
For the 2005 filing season, IRS took the following actions to encourage
taxpayers and tax practitioners to file electronically. IRS:
* contacted about 4,600 tax practitioners who prepared tax returns on
computers but then filed paper tax returns and encouraged them to file
tax returns electronically. IRS estimates that these types of
practitioners file over 15 million paper tax returns annually;
* accepted e-filed returns from married taxpayers filing separately who
reside in community property states; and:
* made four more forms available for electronic filing.
Despite these actions, IRS is not on track to achieve its long-term
goal of having 80 percent of all individual income tax returns filed
electronically by 2007. IRS officials do not want to abandon the goal
because it serves as a symbol of IRS's determination to increase
electronic filing. As we have previously reported, IRS's progress
toward the goal has required enhancement of its technology, development
of software to support electronic filing, education of taxpayers and
practitioners, and other steps that could not be completed in a short
time frame.[Footnote 19]
To achieve its long-term goal, however, IRS would have to average about
a 26 percent growth rate over the next 2 years. Assuming a continuation
of the current growth rates of 11.08 percent for individual tax returns
filed electronically and 1.18 percent for the total number of
individual tax returns filed, IRS would receive an estimated 63 percent
of all individual income tax returns filed electronically in 2007. This
would leave IRS about 23 million short of the approximately 107 million
individual income tax returns that would need to be filed
electronically to meet the goal. We estimate that if IRS could close
this gap, it could save about $49 million in processing costs.[Footnote
20]
IRS, the Electronic Tax Administration Advisory Committee
(ETAAC),[Footnote 21] and GAO[Footnote 22] do not expect IRS to
maintain this year's rate of growth. IRS is predicting declining growth
rates in 2006 and 2007, and in 2003, ETAAC concurred with IRS's
prediction. IRS officials stated that, to achieve its electronic filing
goal, tax practitioners and taxpayers who prepare about 40 million tax
returns on computers but file paper returns would have to convert to
filing electronically; however, IRS's efforts have not resulted in
converting a large portion of these filers from paper to electronic
filing.
State Mandates Have Encouraged Electronic Filing of Federal Tax
Returns:
Electronic filing mandates imposed by several states on tax
practitioners who meet certain criteria, such as filing 100 state tax
returns or more, have increased electronic filing of federal individual
income tax returns. According to IRS, the growth rate in 2004 of
federal tax returns filed electronically was greater than expected,
because five states, including California, mandated electronic filing
of state tax returns prepared by qualified tax practitioners who filed
a certain number of state returns. In 2005, three more states mandated
electronic filing of state tax returns prepared by qualified tax
practitioners. These state mandates have contributed to an increase in
electronic filing of not only state tax returns, but of federal
individual tax returns as well. According to IRS officials, these
mandates led to significantly more electronic filing of federal tax
returns in these states because tax practitioners converted their
entire practices to electronic filing. In total, the eight states with
electronic filing mandates added an estimated 5.6 million additional
electronically-filed federal income tax returns over the 2 years. For
2006, several additional states, including New York, are mandating
electronic filing for state returns for some tax practitioners.
In its 2004 report to Congress, ETAAC stated that federal electronic
filing growth may now be entirely dependent on what states are doing,
rather than actions taken by IRS. IRS cannot require states to mandate
electronic filing. However, IRS continually informs states of the
benefits of electronic filing in hopes that more states will institute
mandates.
The growing use of mandates by the states could lead to more discussion
of mandates at the federal level. In the past, ETAAC has recommended
that Congress should support mandated electronic filing by tax
practitioners because in ETAAC's view, electronic filing mandates are
key to IRS achieving its 80 percent goal.
IRS knows more about the benefits of mandated electronic filing than it
knows about the costs. The benefits are reduced processing costs to
IRS, and faster issuance of refunds to taxpayers. As already discussed,
IRS has an estimate of how much it saves on each electronic return.
However, in 2005, ETAAC noted that decision makers lack information on
the costs and burdens of electronic filing. The costs are borne largely
by tax practitioners and taxpayers. In the past, tax practitioners have
complained about the costs and burdens associated with converting their
businesses to electronic filing, although benefits have also been
reported, once the businesses converted. Knowing more about the nature
and magnitude of these costs could provide fact-based information that
could help inform any future debate about making electronic filing
mandatory for certain categories of tax practitioners or taxpayers.
ETAAC believes that IRS is well positioned to gather such information.
IRS Reduced Access to Telephone Assistors, but Accuracy of Tax Law and
Account Responses Significantly Improved:
IRS made a strategic decision to reduce access to its telephone service
to accommodate a budget reduction because IRS officials viewed it as
flexible area for absorbing such reductions without significantly
affecting taxpayer service. As a result, the average time taxpayers
waited for CSRs increased and more taxpayers hung up without receiving
service than last year. In contrast, the accuracy of CSR answers to
millions of tax law and account questions significantly improved
compared to past performance.
IRS Reduced Access to Telephone Assistors:
IRS received 72 million calls on its toll-free telephone lines through
mid-July 2005. Over a third of those calls--31 million--were from
callers trying to obtain information on the status of their tax
refunds. Another 16 and 20 million calls were about tax law or taxpayer
account questions respectively. The rest were miscellaneous calls.
Figure 4 shows how IRS handled those calls. Toll-free telephone calls
from taxpayers typically are routed through IRS's telephone system
based on taxpayers' response to prompts and are then answered by CSRs
or by automated recordings. IRS's automated service handled 24 million
calls and CSRs handled 23 million. The remaining 26 million calls came
in after business hours, were transferred, were disconnected, or the
caller hung up before receiving service.
Figure 4: How IRS Handled Calls for Telephone Assistance during the
2005 Filing Season:
[See PDF for image]
Note: Data cover the period January 1, 2005, through July 16, 2005.
Numbers do not add to the total and percentages do not add to 100 due
to rounding.
[End of figure]
IRS devotes significant resources to providing access to CSRs. Since
2001, IRS has devoted at least 8,300 staff years per year to telephone
service. IRS estimates that it will use 8,561 staff years to answer
telephone calls in 2005, primarily during the filing season.
According to IRS officials, IRS made a strategic decision to reduce its
CSR level of service goal from 85 to 82 percent to accommodate a budget
reduction of about $5 million. (see app. II). In response, IRS reduced
the number of FTEs devoted to phone service by less than 1 percent,
resulting in taxpayers having less access to CSRs. Also, due to a lower
call volume than last year, as of July 16, IRS had used 7 percent fewer
FTEs than planned for to answer telephones.
IRS officials chose to reduce telephone access because they viewed it
as a more flexible area to absorb budget reductions than, for example,
processing. IRS officials said that telephone access had improved in
recent years to a more acceptable level, giving IRS flexibility to
adjust CSR level of service. As a result of IRS reducing access to its
telephone assistors, the average time taxpayers waited for CSRs
(average speed of answer) increased, and more taxpayers hung up
(abandoned rate) as shown in table 1.
Table 1: IRS Telephone Assistors Accessibility Performance, 2001-2005
Filing Seasons:
Accessibility measures[A]: CSR level of service[B];
2001 Actual: 66%;
2002 Actual: 69%;
2003 Actual: 87%;
2004 Actual: 86%;
2005 Actual: 82%;
Fiscal year 2005 goals: 82%;
Accessibility measures[A]: Average speed of answer (in minutes) [C];
2001 Actual: 5.7;
2002 Actual: 4.5;
2003 Actual: 2.8;
2004 Actual: 2.8;
2005 Actual: 4.4;
Fiscal year 2005 goals: 2.8;
Accessibility measures[A]: Abandoned rate;
2001 Actual: 16.1%;
2002 Actual: 14.3%;
2003 Actual: 8.3%;
2004 Actual: 8.4%;
2005 Actual: 12.2%;
Fiscal year 2005 goals: n/a;
Source: GAO analysis of IRS data.
[A] Based on actual counts from January through mid-July for 2001,
2002, 2003, 2004, and 2005.
[B] The percentage of callers who want to speak to a CSR who get
through and receive service.
[C] Average number of minutes a taxpayer waits in queue for a CSR.
Beginning in 2004, IRS expanded the services included in this measure.
However, the calculation of the measure remained the same. Recomputed
figures are shown here and, as a result, are different than what we
reported in the past (see GAO-04-84).
[End of table]
IRS officials told us that these declines are acceptable and IRS is
effectively managing its resources while still providing a high level
of service. According to the IRS Oversight Board's 2004 Taxpayer
Attitude Survey, most taxpayers are willing to wait an average of 11
minutes to speak to a CSR. On the other hand, table 1 shows that
taxpayers abandoned more calls in 2005 when the average speed of answer
increased. According to IRS officials, there are no government or
industry standard definitions for telephone measures, such as for
average speed of answer. IRS is part of a new government wide group
organized to baseline, research, benchmark, standardize, and implement
a minimum set of expectations for agencies with telephone operations so
that agencies can be measured and compared against an objective
standard to demonstrate success and improvement.
Some taxpayers who hang up may not be receiving poor service.
Preliminary results from IRS analyses of callers who hung up show some
taxpayers hang up after hearing the prompt to visit IRS's Web site.
Rather than wait for a CSR, these taxpayers may have switched to IRS's
Web site to get the information they needed. Midway through the 2005
filing season, IRS began collecting detailed data on why taxpayers hang
up. According to IRS officials, they will continue to collect and
analyze the hang-up data to further determine when and why taxpayers
are hanging up.
This year represents the first time since 1998 that IRS reduced its
annual level of service goal. However, it is difficult to assess what
this year's decline means in the longer term because IRS does not have
long-term goals for taxpayer service. A long-term CSR level of service
goal may help Congress and other stakeholders understand whether this
year's reversal of telephone access is the beginning of a trend. As
will be discussed in a later section, we recognize that setting a long-
term goal for telephone service would depend on assumptions about
available resources, but that is part of the value of long-term goals.
They help clarify the trade-off between service and other priorities.
Accuracy of Responses to Telephone Inquiries Improved:
As table 2 shows, compared to goals and past performance, the accuracy
of CSR responses to tax law and account questions significantly
improved. First, IRS officials attributed the improved tax law accuracy
rate primarily to changes in the Probe & Response (P&R) Guide, a
publication that CSRs use to help answer tax law questions. In the last
2 years, IRS blamed problems with the P&R Guide for declines in
accuracy. Unlike previous years, IRS tested this year's changes before
disseminating the guide to CSRs.
Second, with respect to the accuracy of accounts inquiries, IRS
officials stated that IRS improved the rate and exceeded the goal
because of an improved quality review process, which, in their view,
gives employees a heightened sense of their contribution to the
agency's mission. Part of that review process is Contact Recording, a
system for recording all contacts between taxpayers and CSRs including,
for some calls, the computer screen displays used by CSRs. Managers can
then review the contacts in their entirety. IRS officials told us that
Contact Recording has resulted in employees receiving more constructive
feedback and more efficient and consistent scoring of performance and
quality by managers, which likely has improved both tax law and
accounts accuracy. One IRS manager we spoke with stated that she liked
the system because it allows managers to listen to the prerecorded
contact at their convenience, and therefore provide more complete
feedback to employees. Furthermore, she said that Contact Recording is
more efficient than the method used before, wherein managers listened
to selected calls in "real time" and provided CSRs feedback based on
what the managers heard during the call.
As noted in our 2004 filing season report, IRS decided to implement
Contact Recording at all call sites by the end of the 2005 filing
season. IRS was slightly behind schedule on implementing this system by
the end of this year's filing season.
Table 2: IRS Telephone Assistors Accuracy Performance, 2001-2005 Filing
Seasons:
Accuracy measures[A]: Tax law accuracy rate[B];
2001: Actual: 79.1%; +/-0.6;
2002 Actual: 84.9%; +/-0.5%;
2003: Actual: 81.3%; +/-0.7%;
2004: Actual: 79.5%; +/-0.8%;
2005 Actual: 89.5%; +/-0.6%;
Fiscal year 2005 goals: 82.0%.
Accuracy measures[A]: Accounts accuracy rate[B];
2001: Actual: 88.1%; +/-0.6;
2002 Actual: 90.5%; +/-0.4%;
2003: Actual: 88.6%; +/-0.4%;
2004: Actual: 89.0%; +/-0.5%;
2005 Actual: 91.3%; +/-0.4%;
Fiscal year 2005 goals: 89.8%.
Source: GAO analysis of IRS data.
[A] Based on representative samples from January through June for 2001,
2002, 2003, 2004, and 2005. [B] The percentage of calls in which CSRs
provided accurate answers for the call type and took the appropriate
follow-up resolution action, with a 90 percent confidence interval.
[End of table]
IRS Has Efforts Intended to Improve Its Telephone Services:
IRS had two efforts intended to improve telephone services for the 2005
filing season. First, IRS continued to implement Contact Recording, as
previously discussed. Second, in an effort to streamline the process
for managing its telephone workforce, and in turn save FTEs, IRS began
to implement the Centralized Contact Center Forecasting and Scheduling
project in 2005. The project is designed to assess IRS's current
telephone workforce management efforts and determine the most
appropriate and efficient solution for managing that workforce. IRS has
held initial meetings to solicit team members and define high-level
requirements for the project. IRS has a project plan in place and is on
schedule to meets its deadlines for this project.
Fewer Taxpayers Used IRS Walk-in Sites and More Used Volunteer Sites,
but IRS Lacks Reliable Quality and Other Data:
Past trends have continued as fewer taxpayers used IRS's walk-in
services and more used volunteer tax return preparation services. These
trends are consistent with IRS's strategy to direct taxpayers away from
face-to-face assistance provided by its employees to less costly
alternatives. However, IRS lacks reliable data on quality that could be
used to compare the two services and understand the impact of IRS's
strategy on taxpayers. IRS initiated quality improvement programs for
both services intended to improve data reliability, but these programs
have yet to produce sufficiently reliable data.
Fewer Taxpayers Used IRS Walk-in Sites for Return Preparation and Other
Types of Assistance, but Quality Data Are Not Reliable:
Fewer taxpayers used IRS's approximately 400 walk-in sites during the
2005 filing season, continuing a trend since 2001. At these sites, IRS
employees provide taxpayers with information about their tax accounts,
answer a limited scope of tax law questions,[Footnote 23] and prepare
returns if the taxpayer's annual gross income is $36,000 or less. As
reflected in figure 5, the total number of walk-in taxpayer contacts
during the 2005 filing season declined by nearly 385,000 (10 percent)
from last year.[Footnote 24] Contacts for return preparation declined
by almost 68,000 (22 percent) during the same period.
Figure 5: Assistance Provided by IRS Walk-in Sites, 2001-2005 Filing
Seasons:
[See PDF for image]
Note: "Other walk-in contacts" includes assistance for account notices,
tax law inquiries, forms, and compliance work, but not return
preparation. The time periods covered are December 31, 2000, through
April 28, 2001; December 30, 2001, through April 27, 2002; December 29,
2002, through April 26, 2003; December 28, 2003, through April 24,
2004; and December 26, 2004, through April 23, 2005.
[End of figure]
The declines in walk-in usage were consistent with IRS's strategy of
reducing costly face-to-face assistance in favor of other service
options such as the telephone and Web site.[Footnote 25] While some of
the decline in return assistance is likely due to taxpayers taking
advantage of other increasingly available and attractive alternatives,
like the improved Web site, some of it is attributable to IRS's attempt
to direct taxpayers away from face-to-face assistance. For example,
since 2003, IRS has required appointments for most taxpayers seeking
return preparation service at its sites.[Footnote 26]
As we have previously reported,[Footnote 27] this decline and the shift
of taxpayers from walk-in sites to other service options is important
because it has allowed IRS to transfer time-consuming services, such as
return preparation, from IRS to other less costly alternatives that can
be more convenient for taxpayers. As a result, IRS devoted fewer
resources--as represented by direct FTEs[Footnote 28]--to providing
return preparation and other services during the 2005 filing season. As
reflected in figure 6, IRS reduced the number of direct FTEs devoted to
walk-in sites during the filing season by over 4 percent overall and by
22 percent for return assistance from the same period last year.
Figure 6: Direct FTEs Used for Assistance Provided by IRS Walk-in
Sites, 2001-2005 Filing Seasons:
[See PDF for image]
Note: The time periods covered are December 31, 2000, through April 28,
2001; December 30, 2001, through April 27, 2002; December 29,
2002,through April 26, 2003; December 28, 2003, through April 24, 2004;
and December 26, 2004, through April 23, 2005.
[End of figure]
In previous years, IRS transferred enforcement staff to walk-in sites
to help staff handle the workload that occurs during the filing season.
IRS has nearly eliminated this practice, which pulled the staff away
from performing enforcement work, and instead hired more full-time
staff to cover the workload during the filing season.
To prevent the newly expanded walk-in staff from experiencing downtime
after the filing season, when the workload drops off, since fiscal year
2004, IRS began having walk-in staff perform some collections work
after the filing season.[Footnote 29] For example, between October and
July 2005, IRS used 53 of its 602 total direct FTEs (9 percent) to
handle this collections work. According to IRS officials, this has
provided sufficient work to keep walk-in staff productive all year and
greatly reduced dependence on enforcement staff. Besides regulating the
filing season workload, IRS officials stated that handling these
individual taxpayer collection cases at walk-in sites could help them
address overdue collections that, in their view, may be overlooked by
the normal collections process.
Some IRS officials question moving collections work out of the normal
collection process because IRS lacks information about the
effectiveness of conducting such work using walk-in site staff.
According to IRS officials, IRS will have a reporting system in January
2006 that will allow it to analyze the results of that work and compare
it to normal collection results to determine the most effective place
to do the work. IRS is on schedule for implementing this system,
according to IRS officials. Furthermore, IRS is reevaluating the
services provided at walk-in sites, including collections work.
IRS lacks reliable and comprehensive data on the quality of the
services provided at walk-in sites. In 2004, IRS began implementing a
program to collect data on the quality of services provided to
taxpayers at walk-in sites, and we noted concerns with the reliability
of the data due to the collection method.[Footnote 30] Under this
program, managers directly observe a sample of employee interactions
with taxpayers. We were concerned that employees' performance could be
influenced by the knowledge that they are being observed by managers,
biasing the sample results. Also, IRS found that managers were not
consistently coding employee performance. As a result, we[Footnote 31]
and TIGTA[Footnote 32] have stated that the quality review program used
to monitor walk-in sites does not provide reliable data and made
recommendations intended to improve quality measurement.
To obtain reliable and comprehensive data on the quality of services
provided, IRS is implementing Contact Recording at walk-in sites, which
is similar to the method used for IRS's telephone service, whereby IRS
employee and taxpayer interactions will be recorded and reviewed later
by managers.[Footnote 33] IRS piloted Contact Recording at a small
number of walk-in sites, ending in July 2005, and decided to continue
implementation.
The results of the Contact Recording pilot and the current direct
observation method are quite different. According to IRS officials,
Contact Recording results showed quality to be significantly worse than
the results from the direct observation method.[Footnote 34] However,
IRS is not scheduled to fully implement Contact Recording at walk-in
sites until December 2007. Until that occurs, IRS will lack reliable
and comprehensive data. While IRS appears to be on schedule based on
its implementation plan for Contact Recording, it has previously
experienced delays implementing other parts of its quality review
program. In fact, in a previous report we made a recommendation to help
ensure that IRS addresses the causes of past delays in implementing its
quality program at walk-in sites.[Footnote 35]
For 2006, IRS asked TIGTA to assess the accuracy of tax law assistance,
one service offered at walk-in sites. The results of TIGTA's requested
assessment of tax law assistance would be unreliable because sites they
covered would be selected judgmentally and the results could not be
projected to all sites. Also, IRS will continue to lack data on the
other services it provides, namely account assistance and return
preparation.
In addition to the lack of reliable data on quality, IRS lacks complete
data on what kind of services these sites should offer. As
TIGTA[Footnote 36] and the National Taxpayer Advocate[Footnote 37] have
noted, IRS lacks accurate and complete management information on walk-
in sites. For example, TIGTA reported that (1) IRS has limited
information on the exact numbers and types of services provided at
IRS's walk-in sites as well as information on what kind of face-to-face
service taxpayers need or want and (2) the lack of information hinders
IRS's ability to make appropriate decisions about the locations and
services it provides taxpayers. Consequently, TIGTA made
recommendations to IRS to enhance the validity and reliability of
information on taxpayer needs and ensure that the services provided
effectively and efficiently address these needs.
More Taxpayers Sought Return Preparation Assistance from Volunteer
Sites, but Quality Data Are Not Reliable:
In contrast to IRS's walk-in sites, the numbers of taxpayers seeking
return preparation assistance at about 14,000 volunteer sites increased
by nearly 13 percent from last year (see fig. 7). Again, this increase
is consistent with IRS's strategy to direct taxpayers away from face-
to-face IRS assistance to volunteer sites.
Figure 7: Assistance Provided by Volunteer Sites, 2001-2005 Filing
Seasons:
[See PDF for image]
Note: The time periods covered are January 1, 2001, through April 21,
2001; December 30, 2001, through April 27, 2002; December 29, 2002,
through April 26, 2003; December 28, 2003, through April 24, 2004; and
December 26, 2004, through April 23, 2005. IRS does not collect data on
the number of contacts at volunteer sites.
[End of figure]
As with its walk-in sites, IRS lacks reliable data on the quality of
services provided at volunteer sites. Ensuring quality service at
volunteer sites is important because not only does IRS provide
assistance to volunteer sites, but IRS actively promotes volunteer
sites as an alternative for face-to-face services at its walk-in sites.
Furthermore, we[Footnote 38] and TIGTA[Footnote 39] have reported
concerns about the quality of return preparation assistance provided at
volunteer sites and have made recommendations to remedy the concerns,
some of which date back to 2000.[Footnote 40] More recently, a TIGTA
official told us that that while improvements have been made at
volunteer sites, continued effort is needed to ensure the accuracy of
services provided.
IRS recognized the data quality problems and proposed a strategy to
address them, but there is still insufficient data to determine the
quality of services provided. As part of IRS's strategy for improving
quality at volunteer sites, it developed three methods to monitor
quality during the 2005 filing season--observation reviews, site
reviews, and mystery shopping.[Footnote 41] However, IRS halted its use
of observation reviews immediately after starting due to concerns
raised by the National Taxpayer Advocate and some partner organizations
that observation reviews violate taxpayer privacy and unfairly target
low-income taxpayers. IRS maintained its two other methods, but
according to IRS officials, neither of these methods are as
comprehensive as the observation method in following the process
volunteers used to prepare returns, such as appropriate probing
techniques to acquire dependency information from taxpayers.
Furthermore, IRS conducted only 14 of the proposed 100 mystery shopping
visits, which did not provide sufficient results. As a result, the
methods used to collect data on quality at volunteer sites were
inadequate for monitoring and evaluating quality at volunteer sites in
2005.
IRS has proposed conducting return reviews instead of observational
reviews for the 2006 filing season.[Footnote 42] During each site
review, IRS officials plan to select three tax returns to examine by
comparing a taxpayer's return against their supporting tax-related
documents, as well as other information obtained by the volunteers, to
determine the accuracy of the return. According to IRS officials, IRS
has consulted with several partner groups participating in the
volunteer program about the return reviews. The partners did not
express the same concerns with return reviews as those they had with
observation reviews.
IRS intends to use return reviews, along with site and mystery shopping
reviews, in an implementation plan for the 2006 filing season as part
of its strategy to monitor and evaluate quality of return preparation
at volunteer sites. According to IRS officials, the plan is on schedule
for critical events, such as developing publications and training. For
example, IRS officials told us that they were working to avoid the
logistical problems of last year that resulted in fewer than the
anticipated number of mystery shopping reviews.
Web Site Performed Well, Was Highly Rated, and Used Extensively:
IRS's Web site is important because it provides taxpayers and tax
practitioners with assistance without having to contact IRS employees
and results in IRS saving resources. Our review and external Web site
ratings of IRS's Web site and various other data indicates that it
performed well, was user friendly, and was used extensively. This is
consistent with IRS's strategy to improve taxpayer service by providing
options for automated interaction with the IRS, such as "Where's My
Refund."
Web Site Performed Well and Was User Friendly:
IRS's Web site was user friendly, based on our testing for the types of
information taxpayers look for when accessing the Web site.
Specifically, our testing found it (1) was accessible and easy to
navigate, (2) had no broken links, (3) did not have outdated or
inconsistent data, (4) had facts and information logically arranged and
easy to obtain, (5) had a search function that worked well, and (6) had
a quick response time.
Two independent assessments done by Keynote and Brown University's
Center for Public Policy confirm our observations of IRS's Web site.
* Keynote, an independent Web site rater of Internet performance that
does a weekly study during the filing season, reported that IRS's Web
site performed very well. For example, it was ranked in the top 4 out
of 40 government Web sites and users were able to access the IRS Web
site in less than 1 second during the entire filing season. The same
independent weekly assessment reported that IRS ranked first or second
in response time for downloading data.
* Brown University's Taubman Center for Public Policy rated IRS's Web
site among the upper half of 61 federal government Web sites in
providing service to citizens.
Taxpayers can ask IRS tax law questions via the agency's Electronic Tax
Law Assistance (ETLA) program on its Web site. The substantial increase
in IRS's performance for the ETLA program this year is due to the fact
that IRS received significantly fewer questions than last year, which
allowed it to improve its timeliness and accuracy in responding to
those questions. IRS received fewer questions because it kept the ETLA
function at the same, less prominent location on the Web site that it
was moved to last year. As we reported last year, IRS moved the ETLA
function on its Web site to a less prominent location in the middle of
the filing season last year.[Footnote 43] According to IRS officials,
this significant increase in performance is because the number of
questions being submitted declined from about 64,200 last filing season
to 18,700 this filing season. As a result, the average time to respond
to questions is down from 3 days last filing season to 1.2 days in the
2005 filing season and the accuracy rate in responding to questions has
improved from 64 percent last year to 86 percent this filing season.
IRS intended to discontinue this program for the 2006 filing season for
taxpayers residing in the United States because questions can be
answered more efficiently if handled via the telephone. However, due to
congressional concerns, IRS now plans to keep the program.
Web Site Was Used Extensively:
IRS's Web site experienced extensive use this filing season based on
the number of visits to the Web site, pages viewed, and forms and
publications downloaded. As of August 31, 2005, the Web site had been
visited about 169 million times and users viewed about 1.2 billion
pages. This year is the first year that IRS is publicly reporting these
figures. Further, as of August 31, 2005, about 150 million forms and
publications had been downloaded via the IRS Web site.
IRS's Web site continues to provide two very important tax service
features that were used extensively by taxpayers: (1) "Where's My
Refund" enables taxpayers to check on the status of their refund and
for the first time this year allows a taxpayer whose refund was
returned as undeliverable mail to change their address and (2) Free
File provides taxpayers the ability to file their tax return
electronically for free. As of August 31, 2005, 28.5 million taxpayers
had accessed the "Where's My Refund" feature, about a 24 percent
increase over the same time period last year. As of September 16, 2005,
over 5 million tax returns had been filed via Free File, which
represents a 46.2 percent increase over the same time period last year.
For the first time this year, all individual taxpayers were eligible to
file for free via IRS's Web site. The performance of IRS's Web site is
consistent with IRS's strategy to improve taxpayer service by providing
options for automated interaction with IRS.
IRS Is Developing Long-term Goals for Taxpayer Service, but Completion
Date Is Unknown:
IRS currently lacks, but is developing, long-term goals for taxpayer
services, tax enforcement, and modernization. We have reported on lack
of such goals in past reports in each of these three areas.[Footnote
44] Similarly, a 2004 Program Assessment Rating Tool (PART)[Footnote
45] review conducted by the Office of Management and Budget found that
IRS lacks long-term goals, not just for filing season activities, but
for all aspects of its operations. PART asks, for example, whether a
program's long-term goals are specific, ambitious, and focused on
outcomes, and found that IRS did not meet the criteria.
IRS has been working to establish long-term goals as part of its
strategic planning efforts for all aspects of its operations for well
over a year. However, at this time IRS does not have a schedule for
finalizing its long-term goals.
According to federal law and good management practices, as part of its
strategic planning, a executive agency should not only have annual
performance goals for each program, but these annual goals should be
linked to long-term goals that set longer term and broader expectations
for how an agency should be accomplishing its mission. While these long-
term goals do not necessarily need to be quantifiable, they should be
sufficiently focused on results or outcomes to provide the agency's
management and Congress with information not only prospectively--i.e.,
how well the agency expects to perform, but retrospectively as well--
i.e., how close actual performance is to expectations. This information
holds agencies accountable and helps agencies and Congress make
strategic trade-offs. Long-term goals can help:
* an agency meet its goals by setting targets and providing incentives
to meet them;
* determine whether annual goals contribute to long-term progress;
* identify gaps in performance or misaligned priorities;
* consider new strategies to improve service in the future, especially
since these strategies could take several years to implement; and:
* provide a framework for assessing budgetary trade-offs--for example,
for IRS, between taxpayer service and enforcement on an annual basis
and over the longer term.
Long-term goals are a component of the statutory strategic planning and
management framework that Congress adopted in the Government
Performance and Results Act of 1993[Footnote 46] (GPRA). GPRA requires
executive agencies to develop a strategic plan with long-term, results-
or outcome-oriented goals and objectives for all major functions and
operations. Furthermore, each long-term goal must be linked to annual
performance goals, which should be quantifiable, i.e., should indicate
whether or not incremental progress is being made toward the long-term
goal.
IRS has taken some steps toward meeting GPRA's criteria for strategic
planning. IRS has established a strategic plan and associated strategic
and annual performance goals. The strategic goals, which are
qualitative and descriptive, are long-term goals in the sense that they
represent IRS's vision for the next 5 years. IRS's Strategic Plan for
fiscal years 2005-2009 describes IRS's three strategic goals for 5
years hence: (1) improve taxpayer service, (2) enhance enforcement of
tax laws, and (3) modernize IRS through its people, processes, and
technology. The plan includes strategies and means for achieving the
strategic goals, such as reducing face-to-face assistance and
increasing less expensive ways of interacting, i.e., electronic
interactions such as IRS's Web site.
IRS's strategic goals, however, lack specific targets against which
progress can be measured. More specifically, IRS's strategic goals do
not spell out where IRS wants to be in the future with respect to
levels of taxpayer service or enforcement. In contrast, IRS has one
long-term goal--for electronic filing--which is quantitative. Because
it is specific, it is useful for identifying gaps between actual and
intended performance and measuring progress toward the goal.
We recognize that developing long-term goals that meet the above
criteria is difficult. Not all goals may be as easily quantified as the
goal for electronic filing. Because of the difficulty, IRS has
experienced delays in finalizing its proposed goals. In our April 2005
testimony,[Footnote 47] we stated IRS reported that the goals would be
finalized and publicized before May 2005. However, as of October 2005,
IRS lacked a schedule for the public release of long-term goals.
If long-term goals are not in place in a timely manner in 2006,
Congress and IRS management will be less informed about budgetary trade-
offs between improving taxpayer service and enhancing enforcement. Such
trade-offs, as we have noted before, involve risk. One risk is
surrendering some of the gains that have been made in taxpayer service.
IRS Has Taken Numerous Actions to Deal with the Aftermath of Hurricanes
Katrina and Rita, but Implications for the 2006 Filing Season Are Not
Yet Known:
IRS has taken numerous actions to address the aftermath of Hurricanes
Katrina and Rita, including assessing employee and infrastructure
needs, providing tax relief, and providing assistance to federal
partners. IRS officials report that any effect on this year's filing
season performance was slight because the hurricanes occurred so late
in the filing season. IRS is also assessing the longer term
implications of the hurricanes for the 2006 filing season and beyond.
According to IRS officials, IRS followed mandated procedures, which
focus on the impact to employees, critical business processes, and
computer systems. IRS established an Emergency Command Center in
Nashville, Tennessee, to deal with immediate issues in the field
related to employee safety and assistance, damage to facilities and
equipment, and security of taxpayer data and other IRS records. The
center maintained ongoing communications with the highest levels of IRS
management, including the two deputy commissioners, providing daily
reports on the impact of the disaster and recovery process. IRS planned
to close the center by mid-September 2005. IRS located and contacted
all 517 employees in the affected areas. Many have returned to work at
sites that have been reopened or alternative locations.
A vital part of IRS's response to any disaster is its support of other
federal agencies and stakeholders. IRS worked with the Federal
Emergency Management Agency (FEMA) and the General Services
Administration to inspect the buildings, determine if and when those
facilities would be operational, and obtain replacement space for the
offices closed indefinitely. IRS reopened offices in all but two
locations (Gulfport, Mississippi, and New Orleans, Louisiana) in
September and plans to reestablish workload inventories at those
offices. IRS plans to reopen offices in Gulfport and New Orleans after
November 4, 2005. Finally, IRS had four offices closed as a result of
Hurricane Rita, all of which were reopened by the end of October 2005.
In response to Hurricane Katrina, IRS has assigned employees to work in
approximately 30 disaster recovery centers including in Alabama,
Mississippi, and Texas; assigned nearly 5,000 employees to augment
federal telephone call sites; and called back 4,000 seasonal employees
to minimize the disruption to ongoing IRS work.
IRS gave priority over its regular telephone service to help disaster
victims with the FEMA registration process whereby people call in and
provide IRS employees with basic information such as their name,
address, and property damage. IRS officials estimated that IRS staff
may handle up to 50 percent of these FEMA calls. As of September 18,
2005, IRS had answered over 384,000 telephone calls for FEMA, which was
about 65 percent of all calls at the time. In a letter commenting on a
draft of this report, the Commissioner noted that as of the end of
October, IRS answered over 786,000 disaster-related calls. Besides
FEMA, IRS was the only other federal agency using its own facilities
and employees to answer these calls.
IRS's actions to safeguard taxpayer data include working with external
groups such as the Federal Protection Service and General Services
Administration to secure facilities and assess operational capability.
According to IRS officials, they are implementing the best practices
learned from Hurricane Andrew and the September 11TH attack, retrieved
archived documents, and used many of the managers and employees who
were involved in these prior events to support the current efforts.
IRS took numerous actions to provide broad relief to affected taxpayers
including postponing deadlines for filing and payment, providing relief
from interest and penalties, waiving some low-income housing tax credit
rules, waiving the usual fees and expedite requests for copies of
previously filed tax returns for affected taxpayers who need them to
apply for benefits or to file amended returns claiming casualty losses,
and encouraging widespread use of leave donation programs for disaster
victims.
IRS communicated this and other information via a series of news
releases and notices. In addition, IRS established a special toll-free
disaster number to handle taxpayer inquiries and launched a special
section on its Web site to provide information on tax relief and
related issues.
IRS also coordinated with the Department of Labor to expedite filing
verifications and with the U.S. Postal Service to locate and redirect
mail to the affected area. IRS temporarily suspended correspondence and
compliance activities in the affected areas; additional guidance was
pending at the time we concluded our work. Also, IRS has partnered with
the Associated American Institute of Certified Public Accountants to
provide outreach to affected taxpayer disaster recovery centers, and
has coordinated with the Federation of Tax Administrators to provide
assistance to impacted states.
IRS also is assessing the longer term implications of Hurricanes
Katrina and Rita for the 2006 filing season and beyond, which was
complicated by the number of taxpayers involved, dispersion of those
taxpayers across the country, and unanticipated computer programming
and other business changes that need to be made in response to
legislation under relatively tight time frames. Regarding the 2006
filing season, according to IRS officials, IRS's actions, including
using seasonal employees to answer IRS calls, should help minimize
disruption to telephone service in particular while other employees
assist FEMA in answering emergency calls.
Conclusions:
In recent years, IRS has significantly improved its filing season
services to taxpayers. The trend continued this year in several areas,
such as telephone accuracy. However, because of overall budget
constraints and its strategy of shifting resources from service to
enforcement, IRS will be challenged to continue improving service.
In principle, IRS could shift resources from service to enforcement
while maintaining or improving the quality of service to taxpayers if
it can provide service more efficiently. But there is risk that this
strategy could result in surrendering some of the past gains in
taxpayer services.
In practice, however, IRS has been able to shift resources and realize
noticeable efficiency gains. IRS's efficiency gains can be linked, in
part, to management's focus on results, performance measurement, and in
the case of electronic filing, progress towards its long-term goal.
We identified two areas where additional information might lead to
better informed decision making about how to continue improving IRS's
performance. The first area is electronic filing. Despite numerous IRS
initiatives that have increased electronic filing, there remains
considerable room for further growth. Some states and federal tax
experts have recognized that mandatory electronic filing for certain
categories of tax practitioners is the one remaining option with the
potential for significant impact. However, mandatory electronic filing
would likely impose some costs and burdens on tax practitioners. Better
information about the nature and magnitude of these costs and burdens
would provide more facts about the pros and cons of mandatory
electronic filing.
The second area is long-term goals. Without agency wide long-term goals
that are concrete and as quantifiable as possible, it is difficult to
assess IRS's progress and budget requests.
Recommendations for Executive Action:
To address the problems with meeting its long-term electronic filing
goal and needing time frames for developing and publicizing long-term
goals, we recommend that the Commissioner of Internal Revenue direct
the appropriate officials to:
* develop better information about the costs to tax practitioners and
taxpayers of mandatory electronic filing of tax returns for certain
categories of tax practitioners and:
* establish a schedule for developing its long-term goals.
Agency Comments and Our Evaluation:
The Commissioner of Internal Revenue provided written comments in a
November 4, 2005, letter outlining IRS's view of its 2005 filing season
performance in return processing, telephone service, walk-in service,
volunteer return preparation, and Internet services, which is reprinted
in appendix III. The Commissioner wrote that he appreciated our
recognition of IRS's successes for the 2005 filing season, which he
characterized as one of the most successful ever for IRS. He stated
that IRS was able to balance its resources to focus on both service and
enforcement and provide customer service through detailed planning,
improved efficiencies, and the dedication of IRS staff. However, he
also recognized room for improvement.
The Commissioner agreed with both of the report's recommendations. In
responding to our first recommendation to develop better information
about the costs of mandatory electronic filing of returns for certain
categories of tax practitioners, the Commissioner stated that IRS would
initiate a study to analyze the relationship of state-mandated
electronic filing requirements to the federal electronic filing rate.
Regarding the second recommendation for IRS to establish a schedule for
developing its long-term goals, the Commissioner stated that IRS had
initiated efforts to develop long-term, outcome-oriented goals and
would establish a schedule for developing these goals by the end of the
calendar year 2005.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we will not distribute it until 30 days from
the date of the report. At that time, we will send copies of this
report to the Chairmen and Ranking Minority Members of the Senate
Committee on Finance, the House Committee on Ways and Means, and the
Ranking Minority Member, Subcommittee on Oversight, House Committee on
Ways and Means. We are also sending copies to the Secretary of the
Treasury; the Commissioner of Internal Revenue; the Director, Office of
Management and Budget; and other interested parties. We will also make
copies available to others on request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.
If you have any questions regarding this report, please contact me at
(202) 512-9110 or at whitej@gao.gov. Contacts points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. Key contributors to this report include Emily
Byrne, Evan Gilman, John Lesser, Alan Patterson, Cheryl Peterson, Neil
Pinney, Amy Rosewarne, Joanna Stamatiades, and Daniel Zeno.
Sincerely yours,
Signed by:
James R. White,
Director, Tax Issues:
Strategic Issues:
[End of section]
Appendixes:
Appendix I: Data on Processing Performance Relative to Fiscal Years
2001 through 2004 Performance and Fiscal Year 2005 Goals:
As table 3 shows, the Internal Revenue Service (IRS) nearly met or
exceeded eight of the nine processing performance goals for 2005. For
five measures (refund timeliness, deposit error rate, letter error
rate, productivity, and efficiency), IRS exceeded its goal. For three
of the remaining measures (refund error rate, deposit timeliness, and
notice error rate), IRS nearly met or met its goal. For one measure,
refund interest paid, IRS did not meet the goal, according to IRS
officials, because of an unanticipated but substantial increase in the
interest rate.
Comparing actual 2005 performance to 2004 performance shows that IRS's
performance improved or remained about the same for seven of the eight
measures, again with the exception of refund interest paid. Table 4
also shows that IRS processing performance in 2005 has improved
compared to 2002 performance for all but one of the measures that could
be compared.
Table 3: IRS's Processing Performance, Fiscal Years 2001 through 2005:
Measure name: Deposit error rate;
Definition: Percentage of payments applied in error by, for example,
reimbursing a taxpayer who overpaid when the taxpayer wanted any
overpayment credited to next year's tax bill;
Fiscal year 2001 actual[A]: 5.0%;
Fiscal year 2002 actual: 4.8%; +/-.3%[D];
Fiscal year 2003 actual: 4.2%; +/-.3%[D];
Fiscal year 2004 actual: 3.5%; +/-.31%[D];
Fiscal year 2005 actual: (through July)[A]: 2.3%; +/-.23%[D];
Fiscal year 2005 goal: 3.4%.
Measure name: Deposit timeliness-paper;
Definition: Interest foregone by not depositing monies the business day
after receipt, per $1 million in deposits. Measure assumes an 8 percent
interest rate;
Fiscal year 2001 actual[A]: Not comparable because of revisions to
the measure;
Fiscal year 2002 actual: Not comparable because of revisions to the
measure;
Fiscal year 2003 actual: Not comparable because of revisions to the
measure;
Fiscal year 2004 actual: $407[E];
Fiscal year 2005 actual: (through July)[A]: $401[E];
Fiscal year 2005 goal: $400.
Measure name: Letter error rate;
Definition: Percentage of letters issued to taxpayers with errors
(includes systemic errors).[A];
Fiscal year 2001 actual[A]: Not comparable because of revisions to
the measure;
Fiscal year 2002 actual: 7.4%; +/-.6%[C];
Fiscal year 2003 actual: 7.1%; +/-.5%[C];
Fiscal year 2004 actual: 6.6%; +/- .38%[C];
Fiscal year 2005 actual: (through July)[A]: 3.1%; +/-.30[C];
Fiscal year 2005 goal: 5.9%.
Measure name: Notice error rate;
Definition: Percentage of incorrect notices issued to taxpayers
(includes systemic errors).[B];
Fiscal year 2001 actual[A]: Not comparable because of revisions to
the measure;
Fiscal year 2002 actual: 18.7%; +/-2.4%[C];
Fiscal year 2003 actual: 9.4%; +/-1.2%[C];
Fiscal year 2004 actual: 9.5%; +/- 1.31%[C];
Fiscal year 2005 actual: (through July)[A]: 8.8%; +/-1.07%[C];
Fiscal year 2005 goal: 8.6%.
Measure name: Refund error rate -individual (paper);
Definition: The percentage of refunds with IRS-caused errors in the
entity information (e.g., incorrect name, Social Security number, or
refund amount);
includes systemic errors.[C];
Fiscal year 2001 actual[A]: 9.8%;
Fiscal year 2002 actual: 8.0%; +/-.46%[C];
Fiscal year 2003 actual: 5.3%; +/-.41%[C];
Fiscal year 2004 actual: 4.9%; +/-.44%[C];
Fiscal year 2005 actual: (through July)[A]: 5.1%; +/-.53%[C];
Fiscal year 2005 goal: 4.8%.
Measure name: Refund interest paid;
Definition: Amount of refund interest IRS paid per $1 million of
refunds issued;
Fiscal year 2001 actual[A]: Not comparable because of revisions to
the measure;
Fiscal year 2002 actual: Not comparable because of revisions to the
measure;
Fiscal year 2003 actual: $36.29;
Fiscal year 2004 actual: $20.55;
Fiscal year 2005 actual: (through July)[A]: $27.54;
Fiscal year 2005 goal: $19.00.
Measure name: Refund timeliness-individual (paper);
Definition: Percentage of refunds issued within 40 days or less;
Fiscal year 2001 actual[A]: 95.2%;
Fiscal year 2002 actual: 98.2%; +/-.32%[D];
Fiscal year 2003 actual: 98.8%; +/-.26%[D];
Fiscal year 2004 actual: 98.3%; +/-.17%[D];
Fiscal year 2005 actual: (through July)[A]: 99.2%; +/-.18%[D];
Fiscal year 2005 goal: 98.4%.
Measure name: Productivity;
Definition: Weighted volume of documents processed per staff year
expended at the processing centers;
Fiscal year 2001 actual[A]: 30,133;
Fiscal year 2002 actual: 28,389;
Fiscal year 2003 actual: 30,179;
Fiscal year 2004 actual: 30,405;
Fiscal year 2005 actual: (through July)[A]: 31,286;
Fiscal year 2005 goal: 30,179.
Measure name: Individual;
Master File Efficiency;
Definition: Measure of individual Master File returns processed per
staff year expended;
Fiscal year 2001 actual[A]: Measure not in existence;
Fiscal year 2002 actual: Measure not in existence;
Fiscal year 2003 actual: Measure not in existence;
Fiscal year 2004 actual: Measure not in existence;
Fiscal year 2005 actual: (through July)[A]: 16,172;
Fiscal year 2005 goal: 14,878.
Note: GAO analysis of IRS data.
[A] According to IRS officials, they did not compute a margin of error
for these measures in 2001.
[B] The measures for fiscal year 2005 are through July 31, which were
the latest data available at the time we ended our audit work.
According to IRS officials, the 2004 results through July 31 are
reflective of IRS's performance during the filing season. In addition,
IRS officials told us that the results for the measures should not
change significantly through September 30.
[C] Systemic errors are computer-generated errors over which a
particular processing center would have no control.
[D] IRS estimates these measures to have a 90 percent confidence
interval.
[E] IRS's measure for deposit timeliness for 2004 and 2005 was not
comparable to previous years because IRS changed the formula to not
include weekends.
[End of table]
[End of section]
Appendix II: Budget Reduction Had Some Impact on Service to Taxpayers:
IRS's fiscal year 2005 budget was approximately $10.2 billion which
funded approximately 96,400 full-time equivalents (FTE). The taxpayer
services accounted for about $3.6 billion (35 percent) of the entire
IRS budget. The remaining budget was used to fund various operations
such as examination, collection, investigations, and business systems
modernization.
From fiscal year 2004 through fiscal year 2005, IRS received a slight
budget reduction in taxpayer service of about $103 million (2.8
percent) as shown in table 4.[Footnote 48] Although IRS officials
stated that the reduction would have had minimal impact on taxpayer
service during the 2005 filing season, our analysis of IRS's
performance measures showed some impact on service, most notably in the
area of telephone access. IRS also absorbed budget reductions for its
volunteer and Web site operations, with minimal impact on taxpayer
service, according to IRS officials. In both these areas, however,
officials stated that future budget reductions could have a negative
impact on taxpayer service. As discussed in the report section on long-
term goals, long-term goals could help IRS decision makers decide how
to best allocate resources during times of budget reductions.
Table 4: Overall Taxpayer Service Budget Reduction, Fiscal Years 2004
and 2005:
Assistance;
Fiscal Year 2004: $1,828,373;
Fiscal Year 2005: $1,829,189
Change: Dollars: $817;
Change: Percentage: 0.0%.
Outreach;
Fiscal Year 2004: 544,146;
Fiscal Year 2005: 500,329
Change: Dollars: -43,817;
Change: Percentage: -8.1.
Processing;
Fiscal Year 2004: 1,337,128;
Fiscal Year 2005: 1,276,459
Change: Dollars: -60,669;
Change: Percentage: -4.5.
Total;
Fiscal Year 2004: $3,709,647;
Fiscal Year 2005: $3,605,977
Change: Dollars: -$103,670;
Change: Percentage: -2.8%.
Source: GAO analysis of IRS data.
[End of table]
Direct Costs. About $18 million of the $103 million budget reduction
shown in table 4 was a reduction in direct costs and these reductions
did have some impact on taxpayer service, primarily telephone service.
Support Costs. Most of the $103 million reduction, about $85 million,
was in support costs. Support costs are composed of both indirect costs
and overhead costs such as rent, management, information services,
legal services, and security. According to IRS officials, while large,
this reduction did not impact taxpayer service because the services are
not directly related to the funding of IRS programs.
We examined those budget adjustments that we believed could have
significantly affected the filing season activities we review annually.
We found the following:
* Tax return processing. Processing received a slight overall budget
reduction of direct funds of $7.6 million, about 1 percent, in fiscal
year 2005. In particular, Submission Processing received a direct
reduction of $11 million. IRS absorbed this reduction by allowing some
management contracts to expire because they were no longer needed due
to the consolidation of paper processing operations. Additionally, the
Electronic Tax Administration, which is responsible for advertising
electronic filing, received a marketing budget reduction of
approximately $7.6 million (40 percent) for the 2005 filing season. In
spite of the budget reduction, the number of tax returns filed
electronically increased 11 percent from 2004. However, IRS officials
are becoming increasingly concerned about the potential impact of
future reduction on their ability to increase electronic filing.
* Telephone services. Perhaps the most significant impact of the budget
reduction was in the area of telephone services. According to IRS
officials, IRS's telephone services received a direct budget reduction
of $5 million. As a result, taxpayers' ability to talk to a customer
service representative (CSR) was more limited than the year before,
their wait time increased, and more taxpayers hung up before speaking
with a CSR.
* Walk-in & volunteer sites. IRS's budget for walk-in sites remained
stable, and due to congressional concerns, plans to close some walk-in
sites in 2006 are on hold. For its volunteer sites, IRS shifted
resources from taxpayer service to enforcement, resulting in an overall
reduction in the Stakeholder Partnership, Education, and Communication
(SPEC) budget of about $3 million. SPEC absorbed approximately $2
million of the budget reduction by implementing a voluntary
reassignment program that allowed 28 SPEC staff, including 10 front-
line managers, to transfer to enforcement work. Although SPEC had
planned to reorganize its field management structure for the 2006
filing season as a result of changes made in 2005, as with the walk-in
sites, it no longer plans to do so. Also, IRS officials stated that
future budget reductions could impede sustainable growth and negatively
impact taxpayer service in the future because their model of leveraging
resources relies on partnerships and networking opportunities.
* Web site. Web Services, which oversees IRS's Web site, received an
overall budget reduction of approximately $4 million (10 percent) in
2005. As a result, Web Services reduced some contract services.
Officials believe that because Web site use has increased annually, its
budget should grow to keep pace with the increase. However, they
expressed concern that future reductions could negatively impact the
Web site's performance.
[End of section]
Appendix III: Comments from the Internal Revenue Service:
Commissioner:
Department Of The Treasury:
Internal Revenue Service:
Washington, D.C. 20224:
November 4, 2005:
Mr. James R. White:
Director, Tax Issues:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. White:
I have reviewed your draft report entitled "Tax Administration: IRS
Improved Some Filing Season Services, but Long-Term Goals Would Help
Manage Strategic Trade Offs," and I appreciate your recognition of our
success this year; the 2005 filing season was one of our most
successful ever. We were able to balance our resources to better focus
on both service and enforcement, and we were able to provide solid
customer assistance through detailed planning, improved operational
efficiency, and the dedication of our managers and employees. We
recognize there is always room for improvement and thus will continue
to dedicate our efforts to providing more accurate, timely, and
professional customer service.
Following are our additional comments concerning specific aspects of
the filing season:
Telephone Service:
Our 2005 efforts focused on improving efficiency to save resources with
as little impact to levels of service (LOS) as possible. For example,
in our efforts to ensure a LOS of 82 percent, we increased staffing
schedule accuracy, allowing sites to staff, by half hour, to meet
anticipated demand. Having the right skills in the right place at the
right time has minimized our wait time and optimized available
resources. More accurate staffing schedules have also kept Customer
Service Representatives (CSRs) working at optimal capacity. Through mid-
July 2005, assistor availability (the percentage of a CSR's time spent
waiting for calls) was 5.9 percent, compared to 10.4 percent for the
same period in Fiscal Year (FY) 2004. The lower availability is
indicative of our more efficient use of available resources. Moreover,
notwithstanding the slightly lower LOS in this filing season, we were
pleased to maintain our high level of customer satisfaction scores on
our telephone service.
This year we also improved the accuracy of our tax law and account
answers on the IRS Toll-Free telephone lines. Recognizing that the
Probe & Response Guide (P&RG) is a major driver behind improving tax
law accuracy, we significantly revised the guide for 2005. We solicited
extensive front-line employee input and conducted field validations,
which resulted in a more user-friendly and interactive P&RG. We ensured
consistent implementation of the revised P&RG by delivering topic-
specific training to all employees and their managers responsible for
responding to tax law inquiries.
As a result of these efforts, through August 2005, we achieved a Toll-
Free Tax Law accuracy rate of 88.9 percent, marking the highest tax law
accuracy the Service has ever achieved and surpassing our goal of 82
percent by 6.9 percentage points. Our accuracy on taxpayer accounts
inquiries also improved. Through August 2005, the Toll-Free Accounts
accuracy rate was 91.5 percent, which is 1.7 percentage points greater
than our FY 2005 goal, and 2.2 percentage points above what we achieved
in 2004. Accuracy gains can also be attributed to our improved quality
review process, which employs Contact Recording to allow managers to
listen to and/or review recorded customer contacts, and provide more
complete feedback to employees.
Tax Return Processing:
We continued to meet or exceed performance goals for returns processing
activities, as we have done each year since 2001. Through September 30,
we processed over 130 million income tax returns and issued over $210
billion in refunds to our customers. At the same time, we successfully
implemented several significant tax law changes resulting from the
Medicare Prescription Drug Improvement and Modernization Act of 2003,
the Working Families Tax Relief Act of 2004, and the American Jobs
Creation Act of 2004.
Finally, the IRS achieved a major modernization milestone with the
initial roll-out of the Customer Account Data Engine (CADE) in 2005.
CADE successfully processed over 1.4 million returns and shortened the
time for issuing refunds by approximately 50 percent. The successful
implementation of this new technology has paved the way for expanding
CADE's scope to include more complex returns as we move forward with
our modernization effort.
Electronic Firinq and Internet Services:
We are pleased your report recognizes our key accomplishments in
electronic filing. The following are highlights of our 2005
accomplishments:
* As of October 5, 2005, over 68 million taxpayers filed
electronically, surpassing the 61 million who did so last year and
resulting in more accurate returns and faster processing. For the first
time, individuals who filed their returns on paper were in the
minority. More than 47.6 million of the returns filed in 2005 were
filed by electronic return originators.
* Home computer e-filing continued to increase as taxpayers filed more
than:
17 million returns from their home computers, a 17 percent increase
over last year. Over 5.1 million taxpayers used free online filing
services offered by the Free File Alliance, a 46 percent increase over
last year.
* Over 51.5 million taxpayers signed their returns electronically using
one of our three Personalized Identification Number options.
* The IRS website, IRS.gov, is consistently one of the most heavily
visited government sites. So far in 2005, there have been more than 174
million total visits resulting in more than 1.2 billion page views. The
number of page views is a 34 percent increase from 2004 and the total
visits in 2005 is 15 percent higher than 2004.
More than 125 million forms, publications, instructions, and other
documents were downloaded from IRS.gov in 2005.
As stated in your report, we agree that state electronic filing
mandates have significantly contributed to an overall increase in the
electronic filing of Federal returns. To that end, we will continue to
inform states of the benefits of electronic filing and we will
encourage them to implement policies that promote electronic filing.
Taxpayer Assistance Centers (Walk-In Service):
Your report states the IRS lacks reliable data on the quality of the
services we provide at walk-in sites due to the manner in which we
collect this data, which relies upon managers' observations of employee
interactions with taxpayers. You raise concerns that employees'
performance could be influenced by the knowledge they are being
observed by managers, biasing the sample results. We agree this method
of data collection has limitations and we will not base critical
measures on managers' direct observations.
We requested that the Treasury Inspector General for Tax Administration
(TIGTA) continue anonymous shopping at our Taxpayer Assistance Centers
(TAC) until Field Assistance's (FA) Embedded Quality Business
Integration (EQBI) system is refined. We are optimistic that full
implementation of EQBI, along with Contact Recording, will provide FA
managers the means to consistently evaluate employees' performance.
You also stated we lack complete data on the kind of services walk-in
sites should offer. Your report cites TIGTA findings that indicate the
IRS has limited information on the exact numbers and types of services
provided at our walk-in sites, as well as the kind of face-to-face
service taxpayers need or want. We use various methods to ensure
services offered in TACs are those most needed by our customers. For
example, we use results from our customer satisfaction survey, and we
solicit feedback from stakeholders, practitioners, Congressional
liaisons, and others to ensure the TACs continue to provide timely,
accurate, and professional services.
Volunteer Return Preparation:
Another driver behind our successful filing season is our community-
based coalitions and partners. Through September 3, 2005, over 2.1
million returns were filed through Volunteer Income Tax Assistance
(VITA) and Tax Counseling for the Elderly (TCE) sites, a 9.1 percent
increase over 2004. Other achievements include:
Over 299 million outreach contacts, including more than 214 million
through media channels (television, radio, newspaper, etc.), and 84
million through non-media channels (seminars, etc.)
Increased outreach to underserved segments of the population (low-
income, elderly, disabled, and Limited English Proficient) by expanding
community-based coalitions from 265 in 2004 to over 290 in FY 2005.
Increased electronic filing (of the 2.1 million volunteer-prepared
returns filed in FY 2005, 77.7 percent e-filed).
In 2005 SPEC established and implemented a number of initiatives and
processes that resulted in significant improvements to the VITA
Program. We believe these improvements are commensurate with SPEC's
increased ability to oversee and monitor the VITA Program, as well as
SPEC's increased focus on quality. This includes requiring all VITA
volunteers, regardless of their professional background and experience,
to pass a tax law examination and sign a Standards of Conduct Volunteer
Return Preparation Program (Form 13615). Additional improvements
include providing enhanced training and tax reference materials,
developing a multi-year quality business plan, and upgrading SPEC's
management information system.
In August 2005, the IRS was recognized for its community-based
partnerships that link low-income taxpayers with organizations that
prepare tax returns for free, ensure they properly receive tax credits,
and assist them in ways to build financial savings. SPEC received the
Connect America Partner of the Year Award that is presented each year
by the Points of Light Foundation & Volunteer Center National Network.
The IRS is the first Federal agency to receive the award.
Finally, as cited in your report, observation reviews were discontinued
during the 2005 filing season due to concerns over potential adverse
taxpayer reaction to the presence of IRS employees during the return
preparation process. As a result of these concerns, we will not include
observation reviews for SPEC quality assurance in 2006. However, SPEC
will continue to work with its partners to achieve and sustain quality
service and accuracy.
However, until our quality processes are refined, we have requested
TIGTA continue anonymous shopping at our volunteer sites.
Hurricanes Katrina and Rita:
We appreciate your recognition of our numerous and continuing efforts
in response to the Hurricane Katrina disaster. The IRS has played a
significant role in supporting relief efforts by converting four IRS
call sites (Atlanta, Buffalo, Dallas, and Philadelphia) to Federal
Emergency Management Agency (FEMA) call sites. Since we began assisting
FEMA on September 2nd, we have answered over 786,000 disaster-related
calls.
As noted in your report, IRS has taken steps to minimize any disruption
of service due to Hurricanes Katrina and Rita during the 2006 filing
season; and we are in the process of assessing the overall impact to
taxpayers.
Long-Term Goals:
The IRS has initiated efforts to develop long-term, outcome-oriented
goals to directly support the IRS mission. All of the Operating
Divisions have provided substantive input, feedback, and support to
these efforts. While the IRS has not yet finalized the Service-wide
long-term goals, we anticipate their approval in the future.
Responses to your specific recommendations are enclosed. I appreciate
your observations on the successful filing season for 2005 and if you
have any questions, please contact me or Floyd Williams, Director,
Legislative Affairs, at (202) 622-3720.
Sincerely,
Signed by:
Mark W. Everson:
Enclosure:
Recommendation for the Commissioner:
Develop better information about the costs to tax practitioners and
taxpayers of mandatory electronic filing of tax returns for certain
categories of tax practitioners.
Response:
The IRS will initiate a study to analyze the relationship of state-
mandated electronic filing requirements to the federal electronic
filing rate. We will also collect information on the cost and burdens
of electronic filing for the practitioner community and taxpayers.
Understanding the impact of state-mandated electronic filing and the
cost incurred by practitioners and taxpayers of electronic filing will
better prepare the IRS to meet its long-term electronic filing goals.
Recommendation for the Commissioner:
Establish a schedule for developing its long-term goals.
Response:
The IRS has initiated efforts to develop long-term, outcome-oriented
goals that are consistent with the IRS' Strategic Plan and directly
support the IRS mission. All of the Operating Divisions, including Wage
and Investment, have provided substantive input, feedback, and support
to these efforts. The IRS is currently identifying the key components
for the set of enterprise long term goals, and by the end of calendar
year 2005 we will establish a schedule for the development of these
goals.
(450382):
FOOTNOTES
[1] Most taxpayers file their tax returns between January 1 and April
15, which is the deadline for filing individual income tax returns.
However, millions of taxpayers receive extensions from IRS, which
allows them to delay filing until as late as October 15.
[2] Pub. L. No. 105-206 (1998).
[3] GAO, Internal Revenue Service: Assessment of Fiscal Year 2006
Budget Request and Interim Results of the 2005 Filing Season, GAO-05-
416T (Washington, D.C. Apr. 14, 2005).
[4] Our review focuses on IRS's W&I Division, which serves taxpayers
whose income is from wages and investments, processes individual income
tax returns, and provides assistance to taxpayers who call on the
telephone or walk into an IRS office.
[5] GAO, Assessing the Reliability of Computer-Processed Data, GAO-02-
15G (Washington, D.C. Sept. 1, 2002).
[6] Hurricane Katrina struck Alabama, Florida, Louisiana, and
Mississippi, between August 25 and 29, 2005, and Hurricane Rita struck
Louisiana and Texas on September 24, 2005, causing widespread
displacement of over a million people.
[7] According to IRS, an FTE is the equivalent of one person working
full-time for 1 year without overtime.
[8] According to IRS officials, need-based return preparation at IRS
walk-in sites is limited to taxpayers meeting certain requirements.
These requirements provide return preparation assistance to taxpayers
with a total income limit of $36,000 or less, because they approximate
the amount set in the tax code for claiming the Earned Income Tax
Credit.
[9] The time period covered for paper returns and refunds was January 1
through September 16, 2005.
[10] Two of IRS's nine performance measures cannot be compared to years
before 2004. Deposit timeliness is not comparable to years prior to
2004, since IRS changed the formula to not include weekends in
calculating timeliness in 2004. The measure for Individual Master File
efficiency cannot be compared to other years because this is the first
year for this performance measure. The only performance measure that
did not meet or exceed its performance since last year was refund
interest paid, which increased $20.55 in 2004 to $27.54 in 2005.
According to IRS officials, performance did not improve relative to
this measure because IRS did not anticipate the significant increase in
the interest rates that has taken place this year.
[11] GAO, Tax Administration: IRS Needs to Further Refine Its Tax
Filing Season Performance Measures, GAO-03-143 (Washington, D.C. Nov.
22, 2002).
[12] GAO, Paid Tax Preparers: Most Taxpayers Believe They Benefit, but
Some Are Poorly Served, GAO-03-610T (Washington, D.C. Apr. 1, 2003).
[13] CADE is intended to replace IRS's antiquated system that contains
the agency's repository of taxpayer information. In July 2004 and
January 2005, IRS implemented the initial releases of CADE, which were
used to process 2004 and 2005 1040EZ returns, respectively, for single
taxpayers with refund or even-balance returns.
[14] Treasury Inspector General for Tax Administration, Individual
Income Tax Return Information Was Accurately and Timely Posted to the
Customer Account Data Engine 2005-40-109, July 18, 2005.
[15] The September release added the ability to process tax returns
with address changes. The January 2006 release will add two new
features, forms 1040/1040A with no schedules attached, and tax law
changes for tax year 2005.
[16] GAO, Financial Audit: IRS's Fiscal Years 2005 and 2004 Financial
Statements, GAO-06-137 (Washington, D.C.Nov. 10, 2005).
[17] In 2003, IRS entered into a 3-year agreement with the Free File
Alliance, a consortium of tax preparation companies that provide free
electronic filing to taxpayers who access any of the companies via a
link on IRS's Web site. Twenty companies offered free filing via IRS's
Web site this filing season.
[18] GAO, Tax Administration: Assessment of IRS' 2001 Tax Filing
Season, GAO-02-144 (Washington, D.C. Dec. 21, 2001).
[19] GAO, IRS Modernization: Continued Progress Requires Addressing
Resource Management Challenges, GAO-05-707T (Washington, D.C. May 19,
2005).
[20] Our estimated savings is based on the IRS figure of $2.15 per tax
return processed electronically multiplied by the approximately 23
million additional tax returns that would have to be filed
electronically if the 80 percent goal were met in 2007. This estimate
may be potentially low, because IRS officials have stated that as
electronic filing increases, greater savings are achieved because
shared fixed costs are distributed to the total number of tax returns
processed electronically.
[21] ETAAC, Annual Report to Congress (Washington D.C., June 30, 2003
and June 30, 2004). The IRS Restructuring and Reform Act of 1998
mandated that the Secretary of the Treasury convene an electronic
commerce advisory group to ensure that the Secretary receives input
from the private sector on IRS's plan to increase electronic filing.
ETAAC reports annually on IRS's progress towards meeting electronic
filing goals.
[22] GAO-05-416T.
[23] Walk-in site employees are trained and authorized to only answer
tax law questions on specific tax topics such as those related to
income, filing status, exemptions, deductions, and related credits.
[24] Total walk-in contacts represent the total number of in-person
contacts concerning notices, tax law inquiries, return preparation,
forms, and other in-person contacts.
[25] In a similar effort to reduce face-to-face assistance, in February
2005, California's Franchise Tax Board closed 11 of its 16 field
offices due to budget constraints. These offices provided limited
public access that allowed taxpayers to walk in, address particular tax-
related issues, and obtain information and assistance about other
programs administered by the state's tax board. The board estimated
that these sites were the most expensive way by far to deliver general
taxpayer assistance, with an average $11.15 for a field office contact,
versus $6.07 per call center response, and $5.21 for a written
response.
[26] Because of legislative concerns about the impact of reduced
services at walk-in sites, IRS does not plan to further reduce the
number of taxpayers receiving tax return assistance in the 2006 filing
season. Instead, IRS will attempt to maintain this level of assistance
with available resources.
[27] GAO, Tax Administration: IRS Improved Performance in the 2004
Filing Season, but Better Data on the Quality of Some Services Are
Needed, GAO-05-67 (Washington, D.C. Nov. 15, 2004).
[28] An FTE is the equivalent of one person working full-time for a
year with no overtime. A direct FTE does not include overhead.
[29] IRS officials stated that IRS uses these staff to contact
individual taxpayers, notify them of their delinquent tax accounts and,
perhaps, enable them to make arrangements, such as face-to-face
appointments at local sites, to discuss their account.
[30] GAO-05-67.
[31] GAO-05-67.
[32] Treasury Inspector General for Tax Administration, Customer
Service at the Taxpayer Assistance Centers Is Improving but Is Still
Not Meeting Expectations, Reference No. 2005-40-021 (Washington, D.C.
December 2004).
[33] As with IRS's telephone service, Contact Recording is intended to
enable supervisors to provide walk-in site staff with more complete
feedback on their performance and better assess the quality of services
provided at walk-in sites. The system records all interactions,
including the computer screen activity of the walk-in-site employee as
they work with the taxpayer, into a database. A sample is selected for
review, where managers play back and monitor the interaction and score
it for quality. Staff can review the interaction when receiving
feedback.
[34] IRS officials believe results obtained from Contact Recording to
be more reliable compared to results from direct observations because,
for example, far more interactions are captured than are used for
potential review and staff are not aware of which of their recorded
interactions with taxpayers will be selected for review.
[35] GAO-05-67.
[36] Treasury Inspector General for Tax Administration, The
Effectiveness of the Taxpayer Assistance Center Program Cannot be
Measured, Reference No. 2005-40-110 (Washington, D.C.: July 2005).
[37] National Taxpayer Advocate, 2004 Annual Report to Congress
(Washington, D.C.: Dec. 31, 2004).
[38] GAO-05-67.
[39] Treasury Inspector General for Tax Administration, Improvements
Are Needed to Ensure Tax Returns Are Prepared Correctly at Internal
Revenue Service Volunteer Income Tax Assistance Sites, Reference No.
2004-40-154 (Washington, D.C.: August 2004).
[40] GAO, Tax Administration: Assessment of IRS' 2000 Tax Filing
Season, GAO-01-158 (Washington, D.C., Dec. 22, 2000).
[41] Observation reviews were to be used to assess tax return
preparation accuracy through first-hand observations of site operations
as well as watching volunteers prepare taxpayers' returns. IRS staff
conducted site reviews through mandatory and routine visits to
volunteer sites nationwide to gauge adherence to minimum site
requirements, such as use of IRS resources. Mystery shopping was done
by representatives from the American Institute of Certified Public
Accountants who posed as taxpayers needing assistance.
[42] IRS officials stated that they would use results of return reviews
to obtain information about the accuracy of return preparation. IRS
would review a sample of taxpayers' returns before the taxpayer leaves,
and compare information on the return to supporting documents and any
additional information prepared by the site. Accuracy would be
determined on such factors as filing status, dependencies, exemptions,
Earned Income Tax Credit applications, and income. According to IRS
officials, unlike observation reviews, neither site representatives nor
taxpayers can opt out from participating in return reviews.
[43] GAO-05-67.
[44] GAO-05-416T, GAO-05-707T, GAO, Tax Compliance: Better Compliance
Data and Long-term Goals Would Support a More Strategic IRS Approach to
Reducing the Tax Gap, GAO-05-753 (Washington, D.C.: July 18, 2005), and
IRS Telephone Assistance: Opportunities to Improve Human Capital
Management, GAO-01-144 (Washington, D.C.: Jan. 30, 2001).
[45] The PART is a diagnostic tool meant to provide a consistent
approach to assessing federal programs. The PART includes general
questions in each of four broad topics to which all programs are
subjected: (1) program purpose and design, (2) strategic planning, (3)
program management, and (4) program results (i.e., whether a program is
meeting its long-term and annual goals).
[46] Pub. L. No. 103-62 (1993).
[47] GAO-05-416T.
[48] IRS presented its fiscal year 2006 taxpayer service budget in the
proposed format of Assistance, Outreach, and Processing. However, it is
unlikely that Congress will approve this new budget structure. We were
unable to obtain information within the old structure in the time
available for this audit, so the information is presented in the new
proposed format. However, the impact of the budget reduction on
taxpayer service remains unchanged.
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