Tax Administration
Most Filing Season Services Continue to Improve, but Opportunities Exist for Additional Savings Gao ID: GAO-07-27 November 15, 2006In 2006, the Internal Revenue Service (IRS) spent about 38 percent of its $10.8 billion budget on processing returns and providing taxpayer assistance. GAO was asked to (1) assess IRS's 2006 filing season performance processing paper and electronically filed tax returns and providing telephone, Web site, and face-to-face assistance relative to 2006 goals and prior years' performance; (2) identify potential cost savings or other improvements; and (3) report on the status of IRS's Taxpayer Assistance Blueprint (TAB). To address these issues, GAO collected relevant information from IRS and other sources, reviewed performance measures and past filing season assessments, and interviewed officials.
IRS improved most filing season services in 2006, continuing improvements since 2001. IRS also generated efficiencies from increased electronic filing and benefits for taxpayers through systems modernization. IRS's processing of individual tax returns and refunds improved by most measures, but the growth rate of electronic filing continued to slow in part because of changes to the Free File Program, which reduced the number of taxpayers eligible to use it and the elimination of a program that allowed taxpayers to file via the telephone. Access to IRS's telephone assistors was comparable to last year. The accuracy of responses to telephone inquiries was 90 percent or over in 2006. Use of IRS's Web site increased substantially and IRS reconfigured the site to improve service. Continuing past trends, fewer taxpayers used IRS walk-in sites and more used less-costly volunteer sites. Also, IRS completed Phase I of the TAB, which identified strategic themes for improving taxpayer service; TAB Phase II is expected to be completed by early 2007. With the slowing growth rate in electronic filing, IRS is missing an opportunity to generate additional savings. Federal and state mandates for electronic filing have demonstrated success in increasing electronic filing; however, IRS currently lacks the authority to mandate electronic filing for certain income tax returns such as individual returns filed by paid tax preparers. Using IRS estimates, savings from such a mandate could be on the order of $60 million per year. IRS has another opportunity to generate savings because of excess space at its call sites. However, IRS lacks a strategy for eliminating that space by consolidating call sites. To replace its aging legacy computer system, IRS continues to implement a modernized system for processing tax returns and refunds. However, IRS does not report information on the chief benefit realized to date, faster refund issuance. Such information could be useful for the Congress when making decisions about funding the completion of the individual tax return processing part of the system, estimated by IRS to require at least another $500 million.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-27, Tax Administration: Most Filing Season Services Continue to Improve, but Opportunities Exist for Additional Savings
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United States Government Accountability Office:
GAO:
November 2006:
Report to the Chairman, Subcommittee on Oversight, Committee on Ways
and Means, House of Representatives:
Tax Administration:
Most Filing Season Services Continue to Improve, but Opportunities
Exist for Additional Savings:
Tax Administration:
GAO-07-27:
GAO Highlights:
Highlights of GAO-07-27, a report to the Chairman, Subcommittee on
Oversight, Committee on Ways and Means, House of Representatives
Why GAO Did This Study:
In 2006, the Internal Revenue Service (IRS) spent about 38 percent of
its $10.8 billion budget on processing returns and providing taxpayer
assistance. GAO was asked to (1) assess IRS‘s 2006 filing season
performance processing paper and electronically filed tax returns and
providing telephone, Web site, and face-to-face assistance relative to
2006 goals and prior years‘ performance; (2) identify potential cost
savings or other improvements; and (3) report on the status of IRS‘s
Taxpayer Assistance Blueprint (TAB). To address these issues, GAO
collected relevant information from IRS and other sources, reviewed
performance measures and past filing season assessments, and
interviewed officials.
What GAO Found:
IRS improved most filing season services in 2006, continuing
improvements since 2001. IRS also generated efficiencies from increased
electronic filing and benefits for taxpayers through systems
modernization. IRS‘s processing of individual tax returns and refunds
improved by most measures, but the growth rate of electronic filing
continued to slow in part because of changes to the Free File Program,
which reduced the number of taxpayers eligible to use it and the
elimination of a program that allowed taxpayers to file via the
telephone. Access to IRS‘s telephone assistors was comparable to last
year. The accuracy of responses to telephone inquiries was 90 percent
or over in 2006. Use of IRS‘s Web site increased substantially and IRS
reconfigured the site to improve service. Continuing past trends, fewer
taxpayers used IRS walk-in sites and more used less-costly volunteer
sites. Also, IRS completed Phase I of the TAB, which identified
strategic themes for improving taxpayer service; TAB Phase II is
expected to be completed by early 2007.
With the slowing growth rate in electronic filing, IRS is missing an
opportunity to generate additional savings. Federal and state mandates
for electronic filing have demonstrated success in increasing
electronic filing; however, IRS currently lacks the authority to
mandate electronic filing for certain income tax returns such as
individual returns filed by paid tax preparers. Using IRS estimates,
savings from such a mandate could be on the order of $60 million per
year. IRS has another opportunity to generate savings because of excess
space at its call sites. However, IRS lacks a strategy for eliminating
that space by consolidating call sites.
To replace its aging legacy computer system, IRS continues to implement
a modernized system for processing tax returns and refunds. However,
IRS does not report information on the chief benefit realized to date,
faster refund issuance. Such information could be useful for the
Congress when making decisions about funding the completion of the
individual tax return processing part of the system, estimated by IRS
to require at least another $500 million.
Figure: IRS's 2006 Filing Season Activities:
[See PDF for Image]
Source: GAO analysis of IRS data, IRS (images).
[End of Figure]
What GAO Recommends:
GAO suggests the Congress should mandate electronic filing by paid tax
preparers meeting criteria such as filing a certain number of tax
returns. In comments, the IRS Commissioner said he appreciated our
acknowledging the effect of the statutory limitation.
GAO recommends that IRS timely develop, validate, and implement a plan
to consolidate call sites and report to the Congress refund timeliness
for its modernized processing system compared to its legacy system. In
comments, the Commissioner said he agreed with the recommendations and
outlined actions IRS plans to take.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-27].
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]
Contents:
Letter:
Results in Brief:
Scope and Methodology:
Background:
Opportunities Exist to Generate Savings by Encouraging Electronic
Filing; Processing Performance Continued to Improve:
Access to IRS's Telephone Assistors Was Comparable to Last Year and
Accuracy Improved, but IRS Has Excess Space at Its Call Sites:
IRS's Web Site Use Grew Substantially and Is Now a Major Component of
Taxpayer Service:
Continuing Past Trends, Fewer Taxpayers Used IRS Walk-in Sites and More
Used Volunteer Sites, but Data on Services Provided Remains Incomplete
for Both:
IRS Has Completed the First Phase of the TAB and Has Begun Assessing
Taxpayers' Service Needs:
Conclusions:
Matter for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Differences between the 2002 and 2005 Free File Agreements:
Appendix II: Status of CADE Implementation and Future Releases:
Appendix III: State Mandates for Electronic Processing:
Appendix IV: IRS's Processing Performance Relative to 2001-2005
Performance and 2006 Goals:
Appendix V: Telephone Access Varies Depending on the Time of Year and
Type of Call:
Appendix VI: Comments from the Internal Revenue Service:
Tables:
Table 1: IRS Processing Performance Measures:
Table 2: IRS Telephone CSRs Accessibility Performance, 2001-2006 Filing
Seasons:
Table 3: IRS Telephone CSRs Accuracy Performance, 2001-2006 Filing
Seasons:
Table 4: Schedule of CADE Releases and Related Functionality:
Table 5: Electronic Filing Rates of Growth in Federal Returns for
States with Mandates Compared to National Averages:
Table 6: IRS's Processing Performance, Fiscal Years 2001-2006:
Figures:
Figure 1: IRS's 2006 Filing Season Activities:
Figure 2: Number of Individual Returns and IRS Staff Years for
Individual Paper and Electronic Processing, Fiscal Years 1999-2007:
Figure 3: How IRS Handled Calls during 2006:
Figure 4: Assistance Provided by IRS Walk-in Sites, 2001-2006 Filing
Seasons:
Figure 5: Direct FTEs Used for Assistance Provided at IRS Walk-in
Sites, 2001-2006 Filing Seasons:
Figure 6: States with Electronic Filing Mandates for Paid Tax
Preparers:
Abbreviations:
BSM: Business Systems Modernization:
CADE: Customer Account Data Engine:
CSR: Customer Service Representative:
EIN: Employer Identification Number:
ETAAC: Electronic Tax Administration Advisory Council:
ETLA: Electronic Tax Law Assistance:
FTE: Full-time Equivalent:
IRS: Internal Revenue Service:
NTA: National Taxpayer Advocate:
RAL:Refund Anticipation Loan:
RRA 98: IRS Restructuring and Reform Act of 1998:
TAB: Taxpayer Assistance Blueprint:
TIGTA: Treasury Inspector General for Tax Administration:
United States Government Accountability Office:
Washington, DC 20548:
November 15, 2006:
The Honorable Jim Ramstad:
Chairman:
Subcommittee on Oversight:
Committee on Ways and Means:
House of Representatives:
Dear Mr. Chairman,
In fiscal year 2006, the Internal Revenue Service (IRS) spent
approximately $4.1 billion or 38 percent of its $10.8 billion budget on
processing income tax returns and providing taxpayer assistance, with
most of this occurring during the annual tax filing season.[Footnote 1]
During the 2006 filing season, taxpayers filed an estimated 131 million
individual income tax returns and received almost $218 billion in
refunds. IRS's filing season performance is a key indicator of how well
IRS is serving taxpayers and helping them fulfill their tax
responsibilities.
In past reports and testimonies[Footnote 2] we said that IRS has made
significant progress improving taxpayer service since passage of the
IRS Restructuring and Reform Act of 1998 (RRA 98).[Footnote 3] However,
we also described challenges to continued progress. For example, the
President's proposed fiscal year 2007 budget for IRS would cut staffing
by over 2 percent. At the same time, IRS has ambitious goals of
maintaining or improving filing season services, while also maintaining
or increasing enforcement activities in order to improve voluntary
compliance by 2009. Another challenge is continuing progress on the
Business Systems Modernization (BSM) program, IRS's ongoing effort to
replace its aged computer systems. Earlier this year we testified that
proposed reduced funding levels could affect the pace of modernization
and ultimately of improving service and enforcement.[Footnote 4]
In light of these challenges and the tax filing season's cost and
importance to taxpayers, you asked us to assess IRS's 2006 filing
season performance. Our objectives were to (1) assess IRS's 2006 filing
season performance in processing paper and electronically filed tax
returns and providing telephone, Web site, and face-to-face assistance
relative to 2006 goals and prior years' performance; (2) identify
potential cost savings or other improvements; and (3) report on the
status of IRS's Taxpayer Assistance Blueprint (TAB), which is intended
to be the long-term strategy for cost effectively delivering services
that meet taxpayer needs. We testified on IRS's interim 2006
performance in a hearing held by your Subcommittee on Oversight, House
Committee on Ways and Means, on April 6, 2006.[Footnote 5]
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 paid tax
preparer community, and analyses by the Treasury Inspector General for
Tax Administration (TIGTA).[Footnote 6] For the purpose of this report,
we found IRS's data to be sufficiently reliable for assessing IRS's
2006 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 2006 in
accordance with generally accepted government auditing standards.
Results in Brief:
IRS improved most of its primary filing season services, including
returns processing, telephone, Web site, and face-to-face operations.
This continues a trend of recent improvements. Opportunities exist to
generate additional savings by increasing electronic filing of tax
returns and consolidating some operations.
Processing: Electronic filing continued to grow, which has resulted in
significant cost savings. Since 1999 IRS has eliminated approximately
1,600 staff years that were devoted to processing returns and closed
two paper processing centers, with a third center scheduled to close in
2007. However, the growth rate of electronic filing in 2006 slowed to
about 6 percent, lower than any of the previous 3 years. Two factors
contributed to the slower growth rate: fewer taxpayers being eligible
for and using the Free File Program, which allows some taxpayers to
file for free through IRS's Web site, and the elimination of a program
that allowed some taxpayers to file electronically via telephone.
Slower growth limits opportunities to generate additional savings from
electronic processing. Federal mandates requiring large corporations to
electronically file and state mandates requiring certain paid tax
preparers to electronically file individual returns have demonstrated
success in increasing electronic filing. State mandates imposed on paid
tax preparers have also increased electronic filing, including of
federal returns. In eight of the nine states with mandates in place by
2005, the growth rate of electronically filed federal returns increased
in the year the mandate was implemented. In four of the states, the
growth rate more than doubled. This experience demonstrates that
mandated electronic filing can generate savings. Using IRS's estimates,
if 90 percent of returns submitted by paid preparers that are filed on
paper were filed electronically, IRS would save about $68 million per
year. However, IRS lacks the statutory authority to mandate electronic
filing of individual income tax returns by paid tax preparers. With
respect to processing performance, most measures show improvement.
However, IRS does not report the information to the Congress that would
clearly highlight the benefits of its new processing system, such as
gains in refund timeliness. As we previously reported, having estimates
of the benefits of large investment programs could be useful for the
Congress when making decisions about funding. IRS estimates the
completion of the individual tax return processing part of the new
system will require at least another $500 million.
Telephone service: The percentage of taxpayers who got through to IRS
customer service representatives (CSR) was slightly lower than last
year, but there were improvements both in wait times and in the rate at
which taxpayers abandoned their calls while waiting for an assistor.
The accuracy of responses to telephone tax law and accounts questions
is 90 percent or over, an improvement since last year and more so since
2001. However, IRS could reduce costs. IRS officials told us that
during peak staffing the agency had about 850 unused CSR workstations
spread across IRS's 25 call sites. Because IRS directs incoming calls
through a centralized routing system, the location of call sites does
not affect the level of service provided. As a result, IRS has the
potential to generate savings by closing some sites without negatively
affecting customer service even at peak times.
Web site: Taxpayer use increased, as indicated by a 36 percent growth
in the number of downloads for tax forms and publications. IRS
reconfigured its Web site and the site is performing well, according to
independent rating services. One indicator of success is that taxpayers
searched less to find the information they needed. The increased usage
of IRS's Web site is consistent with IRS's strategy to improve service
by providing taxpayers with an option for automated interaction at the
convenience of taxpayers.
Walk-in assistance: Continuing a trend since 2001, fewer taxpayers
received assistance at IRS's walk-in sites and more received return
preparation assistance at sites staffed by volunteers. In response to
past concerns raised by us and the TIGTA, IRS has initiatives underway
intended to provide detailed management data on the services offered at
walk-in sites, and reliable methods for assessing the quality of
services offered at walk-in and volunteer sites.
Taxpayer Assistance Blueprint (TAB): IRS has completed the first of two
phases of the TAB, its initiative to measure taxpayer services against
the needs and preferences of taxpayers and develop a 5-year plan for
improving services. Phase I provides information on taxpayer
preferences and identifies themes for improving service. IRS
anticipates Phase II of its TAB report will be released early 2007, and
will include its research plan designed to build on these strategic
improvement themes and enhance understanding of the effect of taxpayer
service on compliance.
This report includes a matter that the Congress may want to consider to
reduce the costs of processing tax returns. Specifically, Congress
should mandate electronic filing by paid tax preparers meeting criteria
such as a threshold number of returns filed. We are also making
recommendations that the Commissioner of Internal Revenue direct the
appropriate officials to timely develop, validate, and implement a plan
to consolidate call sites and report to the Congress refund timeliness
for its new system for processing individual income tax returns
compared to the Master File legacy system.
In commenting on a draft of this report (see app. VI), the IRS
Commissioner said that, with respect to the matter for congressional
consideration, he appreciated our acknowledging the current statutory
limitation that is impeding electronic filing growth. The Commissioner
said he agreed with our recommendations and he generally outlined the
actions IRS plans to take to address those recommendations.
Scope and Methodology:
To assess IRS's 2006 filing season performance in the key filing season
activities--paper and electronic processing, plus telephone, Web site,
and face-to-face assistance--compared to goals and past performance,
and report on the status of the TAB, we:
* reviewed and analyzed IRS reports, testimonies, budget submissions,
and other documents and data, including workload data and data related
to IRS's current suite of balanced performance measures and annual
goals;
* analyzed staffing data for paper and electronic processing, telephone
assistance, and walk-in assistance;
* tested for statistically significant differences between annual
performance measures based on sample data;
* observed operations at IRS's Atlanta and Cincinnati paper processing
centers, the Atlanta Call Site and Joint Operations Center, and 4 of
IRS's 400 walk-in locations;[Footnote 7]
* reviewed legislation, policies, and procedures;
* reviewed information from organizations that evaluate Internet
performance;
* reviewed related TIGTA reports and interviewed TIGTA officials about
IRS's performance and initiatives;
* reviewed prior GAO reports and followed up on our recommendations
made in prior filing season and related reports;
* interviewed IRS officials about current operations, performance
relative to 2006 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 the few larger private and nonprofit
organizations that prepare tax returns including H&R Block and trade
organizations that represent both individual paid tax preparers and tax
preparation companies including the American Institute of Certified
Public Accountants.
This report discusses numerous filing season performance measures and
data that cover the quality, accessibility, and timeliness of IRS's
services. We report on IRS's filing season measures that, based our
prior work, we consider to objective and reliable. To the extent
possible, we corroborated information from interviews with
documentation and data and where not possible, we report the
information as attributable to IRS officials. We reviewed IRS
documentation, interviewed IRS officials about computer systems and
data limitations, and compared those results to GAO standards of data
reliability.[Footnote 8] 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., and New
Carrollton, Maryland; the Wage and Investment Division headquarters and
Joint Operations Center (which manages telephone service) in Atlanta,
processing centers in Atlanta and Cincinnati, and a telephone call site
in Atlanta; and walk-in locations in Georgia and Ohio. We selected
these offices for a variety of reasons, including the location of key
IRS managers, such as those responsible for telephone and walk-in site
services.
Background:
The majority of taxpayers have their tax returns prepared by
professional preparers. In fiscal year 2005, about 59 percent of
individual tax returns were prepared by paid tax preparers. We have
noted in previous testimony that the rate of preparer usage is higher
among taxpayers with more complicated returns.[Footnote 9]
Once returns are prepared, taxpayers can file their returns by mailing
paper returns to one of IRS's submission processing centers or
submitting the returns electronically. Both taxpayers and paid tax
preparers can submit paper returns directly to IRS. However, taxpayers
cannot submit electronic returns directly to IRS. Instead, only paid
tax preparers and tax preparation software companies that IRS has
designated as electronic return originators can transmit tax returns
electronically to IRS which may involve a fee to the taxpayer. In
addition, the Free File program is offered by 20 companies that make up
the Free File Alliance, a consortium of tax preparation companies that
agreed to offer free return preparation and electronic filing for
taxpayers that meet certain criteria. Taxpayers can access the Free
File program via IRS's Web site (see app. I for further detail on the
Free File program).
For 7 years, IRS has been modernizing its aging tax processing and
business systems. The BSM program is a high-risk, highly complex effort
critical to supporting IRS's taxpayer service goals. For example, the
program includes projects to allow taxpayers to file and retrieve
information electronically. To date, IRS has deployed releases of
modernized systems that have delivered benefits to taxpayers and the
agency, including e-Services (a new Web portal and electronic services
for paid tax preparers), Modernized e-File (a new electronic filing
system), and the Customer Account Data Engine (CADE), which is the new
taxpayer information database. CADE is intended to eventually replace
IRS's antiquated Master File legacy processing system that contains the
agency's repository of taxpayer account information and, therefore, is
the BSM program's cornerstone and highest priority project. CADE
facilitates faster refund processing and more timely response to
taxpayer inquiries (see app. II for more details on CADE).
In addition to processing tax returns, IRS provides a variety of
taxpayer services, including providing tax law assistance, account
resolution, limited return preparation, tax forms and publications
distribution, outreach, and education. IRS provides these services
mainly via telephone, its Web site, and face-to-face assistance. IRS
automatically routes taxpayers' calls from one of three toll-free
lines--tax law, accounts, or refunds. Depending on how taxpayers
respond to menu choices, questions are answered by a recorded message
or taxpayers are directed to CSRs located at 25 call sites around the
country. Calls are centrally routed to the site with the shortest wait
times among CSRs assigned to answer particular tax law, account, or
refund status questions.
For face-to-face assistance, IRS has 400 walk-in sites where taxpayers
can ask basic tax law questions, get account information, receive
assistance with their accounts, and have returns prepared if annual
income is $38,000 or less.[Footnote 10] Also, low-income, elderly, and
qualifying military taxpayers can get returns prepared at over 12,000
volunteer sites run by community-based coalitions that partner with
IRS. In addition, IRS identifies and selects community partners, such
as AARP, that meet taxpayer needs, such as assistance for the elderly,
and helps train, provides resource materials, and oversees operations
at these partners' facilities. In some cases, IRS awards grants, trains
and certifies volunteers, and provides reference materials, computer
software, and computers.
IRS provides many Web services that have become popular, such as
"Where's My Refund" which enables taxpayers to use IRS's Web site to
determine whether the agency received their tax returns and processed
their refunds. Taxpayers can also download forms, instructions, and
publications; research their own tax law issues through Frequently
Asked Questions or Tax Topics; and receive help with specific tax law
questions and procedural questions via e-mail using Electronic Tax Law
Assistance (ETLA). One benefit of the Web site is that it reduces the
number of phone calls received.
IRS's 2006 filing season activities and associated workload volumes are
depicted in figure 1.
Figure 1: IRS's 2006 Filing Season Activities:
[See PDF for image]
Source: GAO analysis of IRS data, IRS (images).
Note: The number of paper and electronic returns and refunds are
estimated for the time period January 1, 2006, to September 15, 2006;
toll-free calls for the time period January 1, 2006, to July 15, 2006;
walk-in contacts, which includes returns prepared at volunteer sites,
for the time period December 25, 2005, to April 22, 2006; and Internet
downloads for the time period January 1, 2006, to August 31, 2006. We
set different dates for the various areas that best reflect IRS's
filing season workload in that area.
[End of figure]
IRS evaluates taxpayer service against performance measures such as
timeliness and quality of telephone responses. IRS's definitions for
some of those measures vary. For example, IRS measures accuracy for
telephone and face-to-face assistance, but because of differences in
the methodologies used to collect the data, comparisons between the two
types of assistance are not possible. IRS also considers volume
important when assessing service delivery and recognizes that volume
does not necessarily reflect actual demand for services, but can
reflect changes in taxpayer behavior, such as more willingness to use
IRS's Web site to receive services. Finally, IRS uses other means to
collect information, such as surveys on taxpayer satisfaction.
Opportunities Exist to Generate Savings by Encouraging Electronic
Filing; Processing Performance Continued to Improve:
The growth rate of electronic filing is important because electronic
filing eliminates costs associated with processing paper returns. IRS's
performance processing the paper and electronic returns it received in
2006 improved compared to earlier years.
Electronic Filing Continues to Grow, but at a Slower Rate, Which Limits
Opportunity to Achieve Additional Savings:
As of September 15, 2006, IRS processed 131 million individual income
tax returns. Of those returns, 72 million or 55.1 percent were filed
electronically and the remaining 59 million returns were filed on
paper. The number of returns filed electronically increased by 6.3
percent over the last year, which was less than the 9 percent increase
forecasted by IRS and less than last year's 11 percent increase, the 12
percent increase in 2004, and the nearly 17 percent increase in 2003.
The growth rate has slowed and, according to IRS officials, it is
getting harder to convert additional taxpayers to electronic filing
because those who might convert most readily have already done so.
Slower growth limits IRS's progress toward achieving the goal set by
the Congress in RRA 98, which was for IRS to have 80 percent of all
federal tax and information returns filed electronically by 2007. We
and IRS have previously reported that IRS likely will not meet the 80
percent goal, but that the agency did not want to abandon it because it
serves as a symbol of IRS's determination to increase electronic
filing.[Footnote 11]
Growth of electronic filing is important because it generates savings
from reductions in staff needed for labor-intensive paper processing
and associated space. As shown in figure 2, as electronic filing
increased between fiscal years 1999 and 2006, IRS has greatly reduced
the number of staff years devoted to paper and electronic processing by
1,586, or 34 percent.
Figure 2: Number of Individual Returns and IRS Staff Years for
Individual Paper and Electronic Processing, Fiscal Years 1999-2007:
[See PDF for image]
Source: GAO analysis of IRS data.
Notes: Staff years and FTE are units of measurement that are often used
interchangeably. As noted in the figure, staff years for paper filing
are for selected major activities only.
[A] Fiscal years 2006 and 2007 are IRS projections.
[End of figure]
In addition to generating savings by reducing FTEs, IRS can and has
achieved ancillary space cost savings from the closing of submission
processing centers.[Footnote 12] IRS estimates that the elimination of
the Brookhaven Submission Processing Center in 2003 resulted in savings
of $5.5 million in annualized rent and related savings. In addition,
IRS closed the Memphis Submission Processing Center in 2005, and IRS is
projecting annualized rent and related savings equal to $1.3 million
beginning in fiscal year 2007. IRS plans to close the Philadelphia
Submission Processing Center in 2007, although IRS will not realize
space savings until late 2011 because the Service cannot close the
entire facility or move other operations into the space vacated by
paper processing operations.[Footnote 13]
Two other factors that contributed to this year's slower growth in
electronic filing were (1) changes in the Free File program, which
reduced the number of taxpayers eligible to file electronically for
free this year, and (2) termination of the TeleFile program, which had
allowed taxpayers to file their returns electronically via telephone.
Through August, IRS processed about 4 million returns filed through the
Free File program, which is a decrease of about 23 percent from the
same period last year. This decline is inconsistent with IRS's
projection that it would receive 6 million tax returns filed through
the Free File program, or almost a million more than received last
year, when some members of the Free File program provided free
electronic filing to all taxpayers. In 2005, IRS renegotiated and
amended the agreement with the tax preparation companies participating
in the Free File program. Among the important changes was a new income
limitation of $50,000 or less that resulted in 30 percent of the
nation's taxpayers not being eligible for the Free File Program. This
change left 92 million taxpayers eligible for the program and 39
million taxpayers ineligible.[Footnote 14]
IRS also terminated the TeleFile program. IRS expected that eliminating
TeleFile would reduce electronic filing, but justified the decision
because of declining usage and relatively high costs. The number of
taxpayers using the TeleFile program had been decreasing--from
approximately 5.7 million in 1999 to 3.3 million in 2005. IRS estimated
the cost per tax return submitted through TeleFile, typically Form
1040EZ, to be about 74 percent more than it costs IRS to process a
return filed on paper, largely due to telecommunications and other
costs. IRS officials stated that the reason for this year's increase in
the number of 1040EZ returns filed on paper is, in part, the
elimination of TeleFile. According to IRS officials, approximately 1.3
million or 40 percent of taxpayers who formerly used Telefile in 2005
filed on paper in 2006.
Over the years, IRS has taken numerous actions to encourage electronic
filing by taxpayers and tax practitioners. In addition, IRS has
responded to many of our recommendations to increase the use of
electronic filing.[Footnote 15] Despite these actions, and as we have
already noted, growth in electronic filing has slowed as IRS's recent
efforts have not resulted in converting a large portion of tax filers
from paper to electronic filing.
Nevertheless, IRS continues to look at options for increasing
electronic filing. A recent proposal is aimed at converting taxpayers
and paid tax preparers who prepare individual income returns on
computer, print them out, and then send them to IRS--a process known as
V-coding--to electronic filing. According to IRS officials, converting
these taxpayers could be an important step to reduce the number of
paper returns filed. Between January and May 2006, IRS estimates that
nearly 39 million, or 72 percent of all paper returns filed were V-
coded returns. To help convert V-coders, IRS officials stated that the
agency is considering creating a secured electronic mailbox where tax
preparers could send in a return, the taxpayer could review and sign
it, then submit it to IRS electronically, or return it to the preparer
for additional work and subsequent electronic filing to IRS. According
to IRS officials, this initiative would be part of e-Services.[Footnote
16] Further, this and other proposals to expand electronic filing and
capitalize on new technologies will be contained in an update to its E-
Strategy for Growth, which is a long-term vision for providing ways for
taxpayers to interact electronically with IRS. While the proposal may
be an important tool for paid tax preparers and taxpayers,
participation remains on a voluntary basis as part of e-Services, IRS
officials did not have estimates as to its effect on reducing V-coding,
and it covers only practitioners and not taxpayers.
Mandates Have Demonstrated Success in Increasing Electronic Filing, but
IRS Lacks the Authority to Impose Mandates for Individual Taxpayers:
For the first time, in the 2006 filing season IRS mandated that
corporations with assets over $50 million file their corporate tax
returns electronically. As of September 15, 2006, over 12,000 large
corporations electronically filed their returns, up from 131 in 2005.
Next year, corporations with over $10 million in assets will be
required to file their returns electronically. Perhaps in anticipation
of the mandate, over 16,000 of those corporations filed electronically,
compared to just over 1,100 in 2005. According to the IRS Commissioner,
electronic filing by large corporations will cut many months off the
audit process and will allow IRS to develop analytical tools to better
select areas of audit inquiry. Consequently, those corporations will
benefit by having uncertainties on their tax returns resolved sooner,
and the government will benefit by more promptly identifying and
responding to areas of noncompliance.
Last year we reported that state mandates for electronic filing of
state tax returns also encourage electronic filing of both state and
federal tax returns.[Footnote 17] Of the 50 states, 12 had electronic
filing mandates for paid tax preparers in effect for the 2006 filing
season. These mandates require preparers who meet certain criteria,
such as filing 100 individual state tax returns or more, to file
individual state returns electronically (see app. III for more
information on state mandates).[Footnote 18]
State mandates have increased the electronic filing of federal
individual income tax returns. According to IRS officials, this
increased growth is because paid tax preparers converted their entire
practice to electronic filing. Nine states had electronic filing
mandates in effect in 2005 or earlier. In eight of these nine states,
the growth rate of electronically filed federal returns increased the
year the mandate was implemented. For one state, Virginia, the growth
rate declined by 11 percent.[Footnote 19] Four states had increases of
between 7 and 48 percent in their growth rates. Four other states had
their growth rates more than double including California, which nearly
tripled.
An alternative comparison of state growth rates to the nationwide
growth rate also shows the benefits of state mandates. For eight of the
nine states that have imposed a mandate, the growth rate of federal
returns electronically filed from that state was greater than the
national growth rate for the year the mandate took effect.
In the past, some tax preparers have voiced concern regarding the costs
and burdens associated with converting their businesses to electronic
filing. As a result, last year we recommended to IRS that it develop
better information about the costs to preparers and taxpayers of
mandatory electronic filing of tax returns for certain categories of
preparers.[Footnote 20] According to an IRS survey, cost was not the
primary factor cited by preparers for not converting their businesses
to electronic filing; instead, the major factor was that their clients
did not ask for or want electronic filing. However, once over the
initial barrier of having converted to electronic filing, several state
tax officials we consulted with, including New York and Minnesota,
reported receiving very little negative feedback from preparers. In
fact, one state official noted that a substantial number paid tax
preparers have reported how easy electronic filing is compared to
filing returns on paper. Given the current rate of growth in electronic
filing of federal returns, mandates represent an important option for
realizing further growth.
Because mandates drive significant electronic filing increases, the
Electronic Tax Administration Advisory Council (ETAAC) recently
recommended a federal mandate for paid tax preparers that prepare
individual tax returns.[Footnote 21] ETAAC estimated that if preparers
filed all individual returns electronically, IRS would be only 5
percentage points below the 80 percent goal set by the Congress,
instead of being 25 percentage points below the goal as it is
currently.
IRS, however, is prohibited by law from requiring electronic filing of
income tax returns for individuals, estates, and trusts.[Footnote 22]
Because IRS lacks the statutory authority to mandate electronic filing
of individual tax returns, it has not developed any plans or proposals
for doing so. Any proposal would likely have to consider such factors
as to whom the mandate should apply, thresholds for such mandates, if
penalties should be assessed for noncompliance, and the length of time
needed to develop the capacity to receive additional electronically
filed returns.
State and federal experiences with mandates demonstrate that mandated
electronic filing can generate savings. By not requiring electronic
filing by paid preparers, IRS is missing an opportunity for generating
savings and efficiencies. IRS estimates that it saves $2.38 on every
return that is processed electronically.[Footnote 23] Using IRS's
estimates, if 90 percent of returns submitted by preparers that are
currently filed on paper were filed electronically, IRS would have
saved an estimated $68.5 million per year.[Footnote 24]
Senate bill S. 1321 shows Congressional interest in increasing use of
electronic filing for preparers.[Footnote 25] This bill provides IRS
with the authority to require tax preparers to file individual income
tax returns electronically.
Processing of Paper and Electronic Returns Continued to Improve,
Although IRS Lacks a Refund Timeliness Measure for Its New Processing
System:
In addition to processing 131 million tax returns, IRS has issued
almost 99 million refunds, totaling over $218 billion. Over 56.4
million or more than half of the refunds were directly deposited, up
nearly 8 percent over the same period last year. This increase is
important, because direct deposit is faster, more convenient for
taxpayers, and less expensive for IRS than mailing paper checks.
Of the nine processing performance measures listed in table 1 used by
IRS to assess performance, the agency met or exceeded eight out of its
nine of its 2006 goals, and equaled or exceeded its 2005 performance
for seven of the nine measures (see app. IV for further details). For
one measure, the letter error rate, IRS's performance declined and the
2006 goal was not met. IRS officials said that computer system errors
were partially to blame for the higher letter error rate, along with
some errors as a result of the lack of training of new employees at one
submission processing center. More importantly, however, IRS's
processing performance has significantly improved for all nine measures
compared to 2001 or for measures not in existence in 2001, compared to
their first year in existence.
Table 1: IRS Processing Performance Measures:
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.
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.
Measure name: Letter error rate;
Definition: Percentage of letters issued to taxpayers with errors
(includes systemic errors).
Measure name: Notice error rate;
Definition: Percentage of incorrect notices issued to taxpayers
(includes systemic errors).
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.
Measure name: Refund interest paid;
Definition: Amount of refund interest IRS paid per $1 million of
refunds issued.
Measure name: Refund timeliness--individual (paper);
Definition: Percentage of refunds issued within 40 days or less for
returns filed on paper.
Measure name: Productivity;
Definition: Weighted volume of documents processed per staff year
expended at the processing centers.
Measure name: Individual; Master File efficiency;
Definition: Measure of individual Master File returns processed per
staff year expended.
Source: GAO analysis of IRS data.
[End of table]
In addition to the processing measures results, representatives of the
tax preparer industry reported that returns processing went well.
Groups and organizations that we talked to included the National
Association of Enrolled Agents and the American Institute of Certified
Public Accountants. In addition, TIGTA testified and later reported no
significant problems during the filing season.[Footnote 26] IRS
officials corroborated the view that returns processing went smoothly.
CADE, the cornerstone of IRS's investment in systems modernization,
also performed well. For the 2006 filing season, CADE processed about
7.4 million, or 5.6 percent, of the 131 million income tax returns
filed electronically or on paper, and disbursed about 6.6 million
refunds totaling over $3.4 billion.[Footnote 27] While the percentage
of returns CADE processed is modest, CADE is important because it is
ultimately expected to replace IRS's antiquated Master File legacy
system, which contains the agency's repository of taxpayer account
information.
A major benefit of CADE is that it is much faster compared to the
Master File legacy system, partly due to CADE's daily processing cycle,
compared to the Master File's weekly processing cycle. For example,
according to IRS officials, direct deposit refunds are issued by CADE 1-
5 business days faster than the current system, and paper check refunds
are issued 4-8 business days faster. The benefits of CADE, in terms of
faster processing, are likely to expand to more taxpayers because the
next release of CADE is expected to process an estimated 33 million
returns in 2007, over four times more than the number processed through
CADE in 2006. Because CADE processes returns and refunds more quickly,
it can help minimize the need for Refund Anticipation Loans
(RAL).[Footnote 28] Reducing the need for RALs matters because of the
high interest rates that taxpayers are often charged for these short-
term loans, making them controversial.
Systems modernization has been a key part of IRS's efforts to improve
taxpayer services. CADE is a major investment, with almost $200 million
spent on development and implementation through fiscal year 2006, and
the cornerstone of IRS's systems modernization program. CADE is only
partially completed, and IRS estimates that over $500 million more is
required to fully implement the individual tax return processing part
of the system.
In its proposed fiscal year 2007 budget request to the Congress, IRS
did not report the benefits from CADE to date in terms of faster refund
timeliness. IRS had not established separate processing performance
measures for CADE that report the total time it takes CADE to process a
return and issue a refund. According to IRS officials, this was due to
the newness of CADE's implementation, the difficulty in separating CADE
and Master File processing information, and IRS's desire to keep
performance measures to a vital few. The refund timeliness measure
included in table 1 covers only returns filed on paper, not
electronically, and combines refund timeliness information for all
paper returns together.
Because of the substantial costs associated with fully implementing
CADE, the Congress could find information about the benefits useful. We
have previously reported the value in knowing estimates of benefits
when making decisions about whether to fund large investment
programs.[Footnote 29] The actual benefits received from CADE may be
useful as an indication of both the magnitude and likelihood of the
future benefits from full implementation. As discussed above, IRS
officials are aware of benefits from CADE. Reporting such benefits in
future budget requests could be done without necessarily making changes
to IRS's current refund timeliness measure.[Footnote 30]
Access to IRS's Telephone Assistors Was Comparable to Last Year and
Accuracy Improved, but IRS Has Excess Space at Its Call Sites:
Taxpayers' access to IRS's telephone assistors and the accuracy of
answers are both key indicators of IRS's filing season performance
because of the volume of calls and labor costs associated with
answering them.
Telephone Access, as Indicated by Three Performance Measures, Was About
the Same as Last Year:
Taxpayers' access to IRS's telephone assistors, as indicated by three
IRS performance measures, was more or less comparable to last year's,
lower than in 2004, but better than in 2002, as shown in table 2. The
percentage of taxpayers who wanted to talk with a CSR and actually got
through and received service--referred to as the CSR level of service
or telephone access--was 81 percent through mid-July as compared to 82
percent over the same period last year--and slightly less than its 2006
goal of 82 percent. This translated into 22.3 million calls being
answered by CSRs. Taxpayers gain access to a CSR depending on their
responses to telephone prompts. Some go through an automated system to
determine if a CSR is needed, while other taxpayers, such as those
seeking tax law assistance, are screened and transferred to a CSR who
is trained to respond to their questions.
Other access measures showed improvement, such as the average speed of
answer and the abandon rate, also shown in table 2. IRS reported that,
through mid-July, the average speed of answer, the time taxpayers wait
to get their calls answered, was nearly 4 minutes, which is an 11.4
percent decrease from last year. The abandon rate, or the percentage of
callers who hang-up after reaching the queue to wait for an assistor,
was 10.5 percent, down from 12.2 percent from last year. The table
below indicates that as the average speed of answer decreases from 2005
to 2006, so does the number of taxpayers who abandon their calls to
IRS. However, this relationship may be influenced by other factors as
well, such as call volume, staffing, or efficiencies, as well as an
increased number of what IRS refers to as courtesy disconnects.
According to IRS, the Agency disconnects some callers when wait times
become excessive for particular types of questions in order to improve
taxpayers' experiences overall. IRS disconnected 1.7 million calls
through mid-July. While this is a 93 percent increase for the same
period over last year, courtesy disconnects represent only about 2
percent of the total call attempts, although IRS has not estimated the
impact of disconnects on call volume overall.
Table 2: IRS Telephone CSRs Accessibility Performance, 2001-2006 Filing
Seasons:
Accessibility measures[A]: CSR level of service (in percent)[B];
2001: Actual: 66;
2002: Actual: 69;
2003: Actual: 87;
2004: Actual: 86;
2005: Actual: 82;
2006: Actual: 81;
Fiscal year: 2006 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;
2006: Actual: 3.9;
Fiscal year: 2006 goals: 5.0.
Accessibility measures[A]: Abandon rate (in percent)[D];
2001: Actual: 16.1;
2002: Actual: 14.3;
2003: Actual: 8.3;
2004: Actual: 8.4;
2005: Actual: 12.2;
2006: Actual: 10.5;
Fiscal year: 2006 goals: n.a.
Source: GAO analysis of IRS data.
Notes: n.a. = not applicable.
[A] Based on actual counts from January through mid-July for 2001,
2002, 2003, 2004, 2005 and 2006. The composition of Customer Accounts
Services has changed, but prior year data represented here are
comparable.
[B] The percentage of callers wanting to speak to a CSR who get through
and receive service.
[C] Average number of minutes a taxpayer waits in queue for a CSR.
[D] The percentage of callers who hang up while waiting in queue for a
CSR.
[End of table]
The level of service, average speed of answer, and other dimensions of
access experienced by individual taxpayers are likely to vary depending
on the time of year, type of call, and other factors. Consequently,
aggregated or annualized results may mask fluctuations in performance
and taxpayer experiences may vary (see app. V for further discussion):
IRS officials had planned to reduce toll-free telephone service from 15
to 12 hours a day this year because 93 percent of calls come in between
8 a.m. and 8 p.m. IRS created work plans under the assumption of a
reduction in telephone assistance hours.[Footnote 31] Because of a
congressional directive,[Footnote 32] IRS had to adjust its work plans
for a 15-hour day close to the start of the filing season. According to
a recent TIGTA report, after being unable to implement the service hour
reduction, IRS had insufficient time to train new seasonal CSRs,
resulting in a decline in the number of assistors able to answer
calls.[Footnote 33] Nevertheless, according to IRS officials, lower
call volume during the filing season mitigated the potentially negative
effect on service they had expected from maintaining a 15-hour day.
Accuracy of Responses to Telephone Inquiries Improved since Last Year
and More So since 2001:
The accuracy of telephone CSR responses to tax law and account
questions either met or exceeded IRS's goals and past performance, as
shown in table 3. Most notably, accounts accuracy and tax law accuracy
have improved since 2001 and now both are 90 percent or over, which is
a statistical improvement over last year. IRS officials said accuracy
improved because of their focus on identifying and informing the call
sites of the top defects made by CSRs, directing accounts inquiries
away from calls sites with a focus on tax law applications, and limited
forms and tax law changes.
Table 3: IRS Telephone CSRs Accuracy Performance, 2001-2006 Filing
Seasons:
Accuracy measures[A]: Tax law accuracy rate (in percent)[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;
2006: Actual: 90.6; +/-0.6;
Fiscal year: 2006 goals: 90.0.
Accuracy measures[A]: Accounts accuracy rate (in percent)[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;
2006: Actual: 93.3; +/-0.3;
Fiscal year: 2006 goals: 92.0.
Source: GAO analysis of IRS data.
[A] Based on representative samples and from January through June for
2001, 2002, 2003, 2004, 2005, and 2006.
[B] The percentage of calls in which telephone CSRs provided accurate
answers for the call type and took the appropriate action, with a 90
percent confidence interval.
[End of table]
While IRS Expects Telephone Demand to Continue Declining, Telephone
Service Remains Important:
IRS received almost 71 million calls on its toll-free telephone lines
through mid-July 2006 compared to 72 million in 2005. Of those calls,
about:
* 30.9 million were from callers trying to obtain information on the
status of their tax refunds,
* 20.5 million were from callers seeking information about their
accounts,
* 14.4 million were about tax law questions, and:
* 4.9 million were miscellaneous inquiries to extensions, such as the
National Taxpayer Advocate (NTA) and Tax Fraud Hotline.
IRS officials stated that this year's slight decline in call volume may
be due in part to more taxpayers getting through to a CSR the first
time they call, thus reducing the need for taxpayers to call again.
According to IRS officials, call demand will continue to decline,
continuing a pattern since 2002. Call volume is important because once
staffing levels are determined prior to the filing season, unexpected
changes in call volume affect IRS's ability to meet goals.
Figure 3 shows how IRS handled the 70.8 million 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 automated recordings. Both the number of calls
answered by IRS's automated service and calls answered by CSRs were
fairly consistent with IRS's projections and slightly less than in
2005.
Figure 3: How IRS Handled Calls during 2006:
[See PDF for image]
Source: GAO analysis of IRS data and Art Explosion (images).
Note: Data cover the period January 1, 2006, through July 15, 2006. Due
to rounding, percentages may not add to 100.
[End of figure]
A recent study indicates that the telephone is still the most preferred
communication channel for all age groups---especially if the inquiry is
complex or urgent.[Footnote 34] Additionally, the NTA's 2007 Report to
Congress states that the NTA is concerned with IRS's continued movement
toward self-service, rather than individualized assistance from an IRS
employee, unless taxpayers can get assistance elsewhere.[Footnote 35]
To meet the demand for telephone service, IRS devotes significant
resources to providing telephone assistance. In fiscal year 2006, IRS
planned to use almost 8,000 FTEs to handle telephone calls, which were
similar to 2005, but 7 percent less than in 2004.
IRS Has Excess Space at Its Call Sites, but Lacks a Strategy for
Consolidation:
In a recent testimony we noted that IRS might have the potential to
close several more of its remaining 25 call sites.[Footnote 36] This is
because IRS officials had determined that during peak staffing they had
850 unused CSR workstations spread across IRS's 25 call sites.
Moreover, we have noted that call volume declined slightly this year
and IRS officials forecast that the decline will continue. This excess
capacity represents substantial costs without providing any benefits to
IRS or taxpayers.
IRS could achieve savings through eliminating the excess workstations
without negatively affecting taxpayer service even at peak times. IRS
distributes all incoming calls through one central routing system and,
therefore, the actual location of call sites does not affect the
service received by taxpayers, particularly when other factors, such as
the overall number of CSRs and call volume, remain equal.
According to IRS officials, the agency is undertaking a workload
analysis designed to reevaluate telephone staffing levels, associated
call site locations and capacity. According to the Wage and Investment
Commissioner, the study has been expanded to include call site
consolidation, although IRS has not determined which factors should be
considered or when the study will be completed.
IRS could eliminate underutilized space by consolidating or closing
call sites. For example, a small IRS call site can have as few as 200
CSRs. With 850 empty workstations, this means that IRS could
consolidate or close as many as four sites without eroding taxpayer
service.
IRS's Web Site Use Grew Substantially and Is Now a Major Component of
Taxpayer Service:
Use of IRS's Web site (IRS.gov) increased substantially this filing
season compared to last year based on the number of visits and
downloads. From January 1 through August 31, 2006, IRS's Web site was
visited 161 million times by visitors (a nearly 9 percent increase),
who downloaded 170 million forms and publications (a nearly 36 percent
increase).[Footnote 37] Where's My Refund, which allows taxpayers to
check the status of their refunds online, was accessed by 31.3 million
taxpayers as of September 10, 2006, an 11.9 percent increase over the
same period last year. As we have reported, the increased usage of
IRS's Web site is consistent with IRS's strategy to improve taxpayer
service by providing taxpayers options for automated interaction with
IRS.[Footnote 38] The Web site can be used at taxpayers' convenience
and can be used 24 hours a day.
IRS reconfigured its Web site for the 2006 filing season in order to
improve customer service through easier navigation and a more effective
search function. The Web site is performing well based on various data
including the following:
* A Brown University Study that ranks federal agency's Web sites shows
that IRS has improved its ranking from 25th in 2005 to 6th in 2006,
based on such factors as the number of publications and online services
provided.[Footnote 39]
* An independent weekly study by Keynote, a company that evaluates Web
sites, reported that IRS's Web site repeatedly ranked second out of 40
government agencies evaluated in terms of average download time through
mid-April 2006, and first out of the most commonly accessed government-
related Web sites for response time and success rate through May
2006.[Footnote 40]
* The American Consumer Satisfaction Index, which tracks trends in
customer satisfaction, noted an increase in IRS's Web site consumer
satisfaction score from 68 percent to 72 percent after IRS reconfigured
the site.[Footnote 41]
* As of August 31, 2006, the number of Web site searches has decreased
by almost half, from 181 million to 95 million this year. Typically,
search functions are used when users fail to find information through
links. According to IRS officials, the decrease in the number of
searches indicates that users are finding the information that they
need faster.
IRS added features to its Web site this year including the following:
* Electronic IRS: IRS reconfigured the IRS's Web site and made it
easier to locate items, as evidenced by the decline in searches.
* Help for Hurricane Victims: This is a special link that provides
victims of the recent hurricanes with information on special tax
relief, assistance and how to get help with tax matters.
In addition to the Free File and Where's My Refund programs, discussed
earlier, IRS's Web site has other important features including the
following:
* ETLA, where taxpayers can ask IRS general tax law questions through
its Web site. From October 1, 2005, through August 31, 2006, IRS
received 17,511 emails requesting ETLA (down over 41 percent compared
to last year) and estimated the accuracy rate of its responses to be
85.5 percent, comparable to 2005. We have previously reported that the
ability of one taxpayer to forward an IRS e-mail response to many other
taxpayers makes the accuracy of responding to inquiries submitted via e-
mail important.[Footnote 42] The average number of days that it took
IRS to respond to tax law questions submitted via the Web site was 2.2
days, compared to 1.5 days in 2005 and IRS's goal of 3 business days.
* E-Services, which is a suite of Internet services that enable paid
tax preparers to conduct business, such as electronic account
resolution and transcript delivery, with IRS electronically 24 hours a
day, 7 days a week. IRS is promoting e-Services to increase electronic
filing among preparers.
Continuing Past Trends, Fewer Taxpayers Used IRS Walk-in Sites and More
Used Volunteer Sites, but Data on Services Provided Remains Incomplete
for Both:
Shifting taxpayers from IRS walk-in sites to community sites staffed by
volunteers is part of IRS's strategy for reducing the costs of
providing taxpayers with face-to-face assistance, while providing
taxpayers with additional, and perhaps more convenient, options.
Fewer Taxpayers Received Assistance at Walk-in Sites, and IRS Continues
to Lack Comprehensive Management Data and a Reliable Method for
Assessing Quality:
Fewer taxpayers used IRS's 400 walk-in sites than last year. As
reflected in figure 4, the total number of contacts at IRS walk-in
sites declined 12 percent from the previous year, continuing a decline
of approximately 40 percent since 2001. The largest decrease since last
year was in tax law assistance, which declined by approximately 39
percent. Return preparation assistance declined by more than 8 percent
since last year and more than 70 percent since 2001. In the past 2
years, IRS has not reduced the types of assistance offered at its walk-
in sites, so the decline in usage is due to other factors. For example,
IRS officials attribute the decrease to taxpayers' receiving
alternative assistance from tax preparation software and IRS's
telephone service.
Figure 4: Assistance Provided by IRS Walk-in Sites, 2001-2006 Filing
Seasons:
[See PDF for image]
Source: GAO analysis of IRS data.
Note: For walk-in sites, "Other walk-in contacts" includes assistance
for account notices, tax law inquiries, forms, and other in-person
contacts, 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; December 26, 2004, through April 23,
2005; and December 25, 2005, through April 22, 2006.
[End of figure]
Accounts assistance was the only area of service that increased since
last year, up 66,000 contacts, or 7 percent, continuing an upward trend
since 2004. IRS officials attribute the increase in accounts assistance
to IRS's increased enforcement efforts in recent years.
This year, IRS used walk-in and volunteer sites to provide relief
efforts for federally-designated disaster zones such as in hurricane-
affected areas. IRS developed a Disaster Referral Services Guide and
new training materials for employees to better equip them to address
disaster-related issues. In addition to the expanded services for
disaster victims at IRS walk-in sites, volunteer sites performed
outreach and agreed to accept referrals from IRS of disaster victims
needing tax return preparation assistance.
The decline and 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. This has
allowed IRS to devote fewer FTEs to providing return preparation
services. As figure 5 shows, direct FTEs decreased approximately 45
percent between 2001 and 2006, roughly proportional to the decreases in
usage shown in figure 4.
Figure 5: Direct FTEs Used for Assistance Provided at IRS Walk-in
Sites, 2001-2006 Filing Seasons:
[See PDF for image]
Source: GAO analysis of IRS data.
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;
December 26, 2004, through April 23, 2005; and December 25, 2005,
through April 22, 2006.
[End of figure]
In the past, we[Footnote 43] and TIGTA[Footnote 44] reported that IRS
lacked (1) detailed management data on the services offered its walk-in
sites and (2) a reliable method for assessing the quality of services
offered at the sites. With such information, IRS managers could make
more informed decisions about staffing and business operations
including which services to offer and where improvements are needed.
TIGTA has recently reported some improvement in service quality at walk-
in sites.[Footnote 45] And, to its credit, IRS is in the process of
taking steps intended to provide better data on the services provided
at walk-in sites and the quality of those services. The steps include
the following:
* Q-Matic: IRS installed one of three versions of Q-Matic, its
automated customer tracking system, at all 400 walk-in sites in time
for the 2006 filing season. According to IRS officials, in addition to
helping control customer traffic, once this data is fully integrated
with IRS's other management information systems IRS managers will have
detailed data on the number, type, and duration of taxpayers' contacts.
* Contact Recording: As we have previously reported, contact recording
is a method for assessing quality at all walk-in sites.[Footnote 46]
For the 2007 filing season, IRS plans to deploy contact recording at
approximately 126 walk-in sites, which would cover approximately 45
percent of IRS's total walk-in contacts. According to IRS, when fully
implemented, contact recording should enable IRS to standardize its
employee evaluation and quality assessment processes, establish
performance baselines, and reliably assess the accuracy of the services
it provides at its walk-in sites.
More Taxpayers Continued to Receive Return Preparation Assistance at
Volunteer Sites, yet Quality of Service Remains Unknown:
In contrast to walk-in sites, the number of returns prepared at over
12,000 volunteer sites grew to 1.8 million returns. Although IRS has
changed the methodology it uses to count returns electronically filed
from volunteers sites, this still represents an overall increase over
last year.[Footnote 47]
As with its walk-in sites, IRS continues to lack complete data on the
quality of return preparation at its volunteer sites. We and TIGTA have
reported concerns about the quality of return preparation assistance
provided at volunteer sites and have made recommendations to remedy the
concerns.[Footnote 48] At the same time, we have noted that IRS has had
several initiatives to improve the quality of services provided at
volunteer sites.[Footnote 49] However, these initiatives have changed
in purpose and scope as IRS's efforts to centralize its partnerships
with volunteers have evolved. Furthermore, IRS has not always fully
implemented these initiatives. For example, in 2005, IRS intended to
use observation reviews to assess tax return preparation accuracy by
watching volunteers prepare taxpayers' returns. However, IRS cancelled
observation reviews due to concerns raised by some of its partners and
the NTA, noting that observation reviews violated taxpayer privacy and
unfairly targeted low-income taxpayers.
The Volunteer Return Preparation Program Quality Improvement Process is
IRS's newest initiative to promote return preparation quality at its
volunteer sites. As part of this initiative, IRS conducted two types of
reviews--site and return reviews--to monitor and evaluate quality of
return preparation at volunteer sites. IRS used site reviews to measure
volunteer sites' adherence to IRS's quality standards, but the results
could not be generalized across volunteer sites because IRS did not use
a statistically valid sample. Return reviews, which are limited in
scope, compared the information taxpayers provided on the intake sheet
to the filing status, exemptions, and credits claimed on the completed
return. However, according to IRS officials, the results from the
return reviews were too high to help identify specific improvements
that may be needed. In 2007, IRS plans to include additional testing of
the accuracy of return preparation.
IRS Has Completed the First Phase of the TAB and Has Begun Assessing
Taxpayers' Service Needs:
A November 2005 law prohibited IRS from reducing taxpayer services
until TIGTA could complete a study on the impact of those proposed
reductions, and required IRS to consult with stakeholder organizations
including NTA, the IRS Oversight Board, and TIGTA, before terminating
or significantly reducing any taxpayer service activity.[Footnote 50]
An additional congressional directive required IRS to work with the
Oversight Board and NTA to develop a 5-year plan for taxpayer service
activities, which is to include long-term goals that are quantitative
and balance enforcement and service.[Footnote 51] In response IRS is
developing the TAB to provide the agency with information on taxpayers'
needs and preferences to improve taxpayer service at lower cost as part
of a 5-year plan. IRS divided its TAB work into two phases: The Phase I
report outlines the results of preliminary research on taxpayer
expectations and establishes five strategic priorities for improving
service. Phase II research and review is in progress and is expected to
be released by early 2007.
Phase I Targets Five Themes for Improving Service:
In April 2006 IRS issued Phase I of the TAB, which includes an overview
of services provided and volume information for the different service
delivery channels. It also contains demographic information on the
population of individual taxpayers. Phase I included IRS's research on
and analysis of customer needs and preferences for service delivery and
outlined the results of IRS work to gather best practices for customer
service from other government agencies, nonprofit organizations, and
private sector firms. Finally, IRS developed the following five
strategic themes for improving taxpayer service:
1. Improve and expand education and awareness activities.
2. Optimize the use of services from community-based partners, paid tax
preparers commercial preparers, and software vendors.
3. Elevate self-service options to meet taxpayer expectations.
4. Improve and expand training and support tools to enhance assisted
services.
5. Develop short-term performance and long-term outcome goals and
metrics.
The theme of elevating self-service options is consistent with IRS's
new long-term goal for increasing taxpayer self-assistance, introduced
in 2006, as well as its strategy of matching services with taxpayer
technological proficiency. As previously noted, IRS's efforts to
increase taxpayer self-assistance is of concern to the NTA.
IRS Reports Phase II in Progress with Expected Report Release by Early
2007:
Phase II of the TAB includes additional research to build on the
strategic improvement themes. IRS officials reported that to address
the congressional directive that the plan balance service and
compliance, Phase II includes a research agenda on the effect of
taxpayer service on compliance. The studies also include an analysis
addressing respondents' preferences among service delivery channels
when other attributes change, such as convenience or cost of service to
the taxpayer.
IRS officials anticipate that the TAB Phase II report will be released
to the Congress by early 2007. They also confirm that it will include a
multiyear plan for taxpayer service activities and improvement
initiatives; the TAB team has identified over 70 projects for improving
taxpayer services, although none will be implemented in time for the
2007 filing season.
IRS anticipates that key outcomes of its Phase II work will be a
process for assessing customer preferences and subsequent research on
those preferences, because demographics are constantly changing.
Furthermore, taxpayer expectations are likely to shift with the advent
of new technology, as exemplified by the exponential availability and
use of Internet-provided services in recent years.
Conclusions:
IRS continues to make significant improvements in its filing season
performance. In an environment of tight budgets and demands to improve
service while maintaining or increasing enforcement activities,
generating savings by operating more efficiently is crucial. We have
identified two such savings opportunities.
First, despite numerous IRS initiatives to increase electronic filing,
there remains considerable room for further growth. Some states,
federal tax experts, and even IRS have recognized that mandatory
electronic filing can generate savings by reducing paper filing.
However, IRS lacks the statutory authority to expand its use of
mandates. Requiring certain paid tax preparers to file individual
returns electronically could increase electronic filing and generate
savings for IRS.
Second, IRS could achieve efficiencies by reducing unnecessary spending
on the excess capacity at its telephone operations--without negatively
affecting taxpayer service--by consolidating its call sites.
In addition, IRS continues to implement CADE. As more taxpayer accounts
are put on CADE, the benefits to taxpayers will grow and more facts
regarding those benefits, such as information on refund timeliness and
improved taxpayer service, are likely to sustain congressional support.
However, IRS is not reporting on one of the chief benefits already
realized from CADE, issuing refunds faster. The Congress could benefit
from knowing this information as it makes decisions about funding the
completion of CADE.
Matter for Congressional Consideration:
Given the efficiencies to be gained, the Congress should mandate
electronic filing by paid tax preparers meeting criteria such as a
threshold number of returns filed.
Recommendations for Executive Action:
We recommend that the Commissioner of Internal Revenue direct the
appropriate officials to:
* timely develop, validate, and implement a plan to consolidate call
sites, and:
* report to the Congress refund timeliness for CADE compared to the
Master File legacy system.
Agency Comments and Our Evaluation:
The Commissioner of Internal Revenue provided written comments in a
November 3, 2006, letter. With respect to the matter for congressional
consideration, the Commissioner said he appreciated our acknowledging
that the current statutory limitation impedes electronic filing growth.
The Commissioner agreed with both of the report's recommendations to
IRS. In responding to our first recommendation, the Commissioner stated
that IRS would take steps to develop plans, including updating data and
projections, conduct a full cost analysis to determine projected
savings, and formulating a consolidation timeline and workload
redistribution plan. The Commissioner responded to the second
recommendation stating that IRS would develop a measure to show refund
timeliness for CADE based on its current sampling methodology. However,
because the current methodology includes only paper returns, the new
measure would necessarily show CADE's benefits for only paper returns,
not all returns.
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 [Hyperlink,
http://www.gao.gov].
If you have any questions regarding this report, please contact me at
(202) 512-9110 or at whitej@gao.gov. Contact 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 Amanda
Arhontas, Paula Braun, Amy Dingler, Evan Gilman, Tim Hopkins, Kathryn
Horan, Hillary Loeffler, Paul Middleton, Karen O'Conor, Cheryl
Peterson, Neil Pinney, Stephen Sallan, and Joanna Stamatiades.
Sincerely yours,
Signed by:
James R. White:
Director, Tax Issues Strategic Issues:
[End of section]
Appendix I: Differences between the 2002 and 2005 Free File Agreements:
In 2002, the Internal Revenue Service (IRS) entered into a 3-year
agreement with the Free File Alliance, a consortium of 20 tax
preparation companies to provide free electronic filing to taxpayers
who access any of the companies via a link on IRS's Web site. The 2002
Free File Agreement stated that, as part of the agreement, IRS would
not compete with the Alliance members in providing free, online tax
return preparation and filing services to taxpayers.
IRS stated that the original purpose of the Free File Alliance was to
increase electronic filing, and at the same time, assist low-income
taxpayers with filing their taxes electronically. One of the benefits
for Alliance members of belonging to the Free File Alliance is the
ability to advertise their software programs and products through IRS's
Web site, which receives heavy traffic each year.
In 2005, IRS renegotiated and amended the agreement. Key differences
between the agreements are:
* a new income limitation of $50,000;
* new language that states the Alliance members must disclose early-on
if state tax return services are available, and if so, whether a fee
will be charged for such services; and:
* Alliance members must provide the necessary support to accomplish a
customer satisfaction survey.
Another change is that new language pertaining to the marketing and
offering of Refund Anticipation Loans (RAL) stated that no offer of
free return preparation and filing of an electronic return in the Free
File program shall be conditioned on the purchase of a RAL.[Footnote
52] Also, RALs are to be offered with clear language indicating, for
example, that they:
* are loans, not a faster way of receiving an IRS refund;
* must be repaid even if the IRS does not issue a full refund;
* are short-term loans with high interest rates and, therefore,
customers may wish to consider using other forms of credit; and:
* may be offered but not promoted.
IRS tests each Alliance member's software to ensure it is in accordance
with the Free File provisions before allowing a link to IRS's Web site.
In addition, IRS officials monitor complaints about the Free File
program received via IRS.gov, including allegations regarding false,
deceptive, or misleading information or advertising. While IRS does not
track the number of complaints it receives, according to IRS officials,
most of the complaints received thus far were a result of the taxpayer
either not carefully reading or not following instructions, or
incorrectly entering information. GAO conducted limited testing of the
Free File program and found that Alliance members were complying with
the terms outlined in the amended Free File agreement pertaining to
RALs.[Footnote 53] In addition, according to IRS, 9 of 20 Free File
companies offer RALs.
The amended Free File agreement contains provisions that enable IRS to
monitor taxpayer participation beginning in the 2006 filing season,
unlike prior years where Alliance members self-reported filing figures.
IRS also tracks the number of Free File users who are accepting any
financial products, such as RALs. As of April 17, 2006, IRS reported
that 207,814 free file returns accepted financial products. This
represents about 5 percent of all returns filed through the Free File
program.
The number of taxpayers using Free File to electronically file their
individual income tax returns has increased steadily from 2.8 million
in 2003 to 5.1 million in 2005. The substantial growth between 2003 and
2005 was due to, in part, several Alliance members offering free filing
to all taxpayers through the Free File program regardless of their
income in 2005. However, according to IRS officials, the lack of income
limitation created conflict as it put pressure on all Alliance members
to offer free service, which may not have been economically feasible
for some. Competition would be reduced if Alliance members were to drop
out of the Alliance.
IRS projected that over 6 million taxpayers would use Free File in
2006. However, this projection was overstated, because through August,
IRS processed about 4 million returns filed through the Free File
program, which is a decrease of about 23 percent from the same period
last year. According to IRS officials, the new income limitation
contributed, in large part, to this decline despite the fact that the
income limitation provides coverage to 70 percent of the nation's
taxpayers, or more than 92 million people, and includes taxpayers with
an adjusted gross income of $50,000 or less. Moreover, IRS officials
stated that it was this income limitation that contributed to the
overall lower rate of growth in electronic filing this year.
[End of section]
Appendix II: Status of CADE Implementation and Future Releases:
The IRS is developing and deploying its Customer Account Data Engine
(CADE) incrementally in multiple releases over several years, as shown
in table 4. IRS is planning for semiannual subrelease deployments in
July and January prior to each filing season. The July subreleases
(x.1) focus on new CADE functionality with some tax law changes, while
the January subreleases (x.2) contain primarily filing season and tax
law changes with minimal new functionality. Each incremental release
builds upon and expands the functionality contained in the prior
releases. For example, during the 2006 filing season, CADE Release 1
processed Form 1040EZ, 1040, and 1040A tax returns with no schedules
for single taxpayers with no dependents. Release 2 is planned to add
the capability to process Form 1040 and 1040A tax returns with various
schedules and supporting forms for taxpayers filing as single, married,
or head of household in 2007. With the deployment of Release 7 in 2012,
CADE is expected to fully replace the Individual Master File and
process all individual tax returns.
Table 4: Schedule of CADE Releases and Related Functionality:
Release: 1;
Sub-release: 1.1;
Release date: July 2004;
Tax return types: Form 1040EZ;
Filing status: Single; (never married, no dependents);
Account characteristics: Refund or even-balance returns;
No account issues (open or closed);
Estimated number of returns (millions): n.a.
Release: 1;
Sub-release: 1.2;
Release date: January 2005;
Tax return types: Form 1040EZ;
Filing status: Single; (never married, no dependents);
Account characteristics: Refund or even-balance returns;
No account issues (open or closed);
Estimated number of returns (millions): 1.4 (actual).
Release: 1;
Sub-release: 1.3.1;
Release date: September 2005;
Tax return types: Form 1040EZ;
Filing status: Single; (never married, no dependents);
Account characteristics: Address changes;
Estimated number of returns (millions): 1.4 (actual).
Release: 1;
Sub-release: 1.3.2;
Release date: January 2006;
Tax return types: Forms 1040 and 1040A; No schedules;
Filing status: Single; (never married, no dependents);
Account characteristics: Refund or even-balance returns; Closed prior
account issues; Extensions without payments;
Estimated number of returns (millions): 7.4 (actual).
Release: 2;
Sub-release: 2.1;
Release date: September 2006;
Tax return types: Form 1040; Schedules A, B, and R and supporting
forms; Form 1040A; Schedules 1 and 3;
Filing status: Single; Head of Household; (no dependents);
Account characteristics: Extensions with payments full- paid; Name
change (first name);
Estimated number of returns (millions): 33.
Release: 2;
Sub-release: 2.2;
Release date: January 2007;
Tax return types: Form 1040; Schedules C, E, F, and SE (without
Employer Identification Number [EIN]) and supporting forms; Schedule D
and supporting forms;
Filing status: Single; Head of Household; Married (joint); Married
(separate); (no dependents or clean dependents);
Account characteristics: Married only once;
Estimated number of returns (millions): [Empty].
Release: 3;
Sub-release: 3.1;
Release date: July 2007;
Tax return types: Form 1040; Schedule EIC and supporting forms;
Decedent returns; Full-paid with remittance; Credit election;
Additional schedules and forms (TBD); Form 1040A; Schedule 2; Form 1040-
ES; Form 1040-V; Form 1040X; Form 4868 with or without remittance;
Filing status: Single; Head of Household; Married (joint); Married
(separate); Surviving Spouse;
Account characteristics: Name change (last name); Split Refunds;
Dependents expanded;
Estimated number of returns (millions): 50.
Release: 3;
Sub-release: 3.2;
Release date: January 2008;
Tax return types: Form 1040; Schedule EIC and supporting forms;
Decedent returns; Full-paid with remittance; Credit election;
Additional schedules and forms (TBD); Form 1040A; Schedule 2; Form 1040-
ES; Form 1040-V; Form 1040X; Form 4868 with or without remittance;
Filing status: Single; Head of Household; Married (joint); Married
(separate); Surviving Spouse;
Account characteristics: Name change (last name); Split Refunds;
Dependents expanded;
Estimated number of returns (millions): 50.
Release: 4;
Sub-release: 4.1;
Release date: July 2008;
Tax return types: Form 6251; Additional Form 1040 schedules and forms
(TBD);
Filing status: Single; Head of Household; Married (joint); Married
(separate); Surviving Spouse;
Account characteristics: Power of Attorney; Centralized Authorization
File; Balance due returns; Math error returns;
Estimated number of returns (millions): 70.
Release: 4;
Sub-release: 4.2;
Release date: January 2009.;
Tax return types: Form 6251; Additional Form 1040 schedules and forms
(TBD);
Filing status: Single; Head of Household; Married (joint); Married
(separate); Surviving Spouse;
Account characteristics: Power of Attorney; Centralized Authorization
File; Balance due returns; Math error returns;
Estimated number of returns (millions): 70.
Release: 5;
Sub-release: 5.1;
Release date: July 2009;
Tax return types: Form 1040; Schedules C, E, F, and SE (with EIN) and
supporting forms Additional schedules and forms (TBD); Forms 940 and
720 payroll, unemployment, and excise tax returns for Form 1040 self-
employed filers;
Filing status: Single; Head of Household; Married (joint); Married
(separate); Surviving Spouse;
Account characteristics: Delinquent returns;
Estimated number of returns (millions): 90.
Release: 5;
Sub-release: 5.2;
Release date: January 2010;
Tax return types: Form 1040; Schedules C, E, F, and SE (with EIN) and
supporting forms Additional schedules and forms (TBD); Forms 940 and
720 payroll, unemployment, and excise tax returns for Form 1040 self-
employed filers;
Filing status: Single; Head of Household; Married (joint); Married
(separate); Surviving Spouse;
Account characteristics: Delinquent returns;
Estimated number of returns (millions): 90.
Release: 6;
Sub-release: 6.1;
Release date: July 2010;
Tax return types: Form 1040NR; Form 1040-PR; Form 1040-SS; Additional
Form 1040 schedules and forms (TBD);
Filing status: Single; Head of Household; Married (joint); Married
(separate); Surviving Spouse;
Account characteristics: First-time filers;
Estimated number of returns (millions): 110.
Release: 6;
Sub-release: 6.2;
Release date: January 2011;
Tax return types: Form 1040NR; Form 1040-PR; Form 1040-SS; Additional
Form 1040 schedules and forms (TBD);
Filing status: Single; Head of Household; Married (joint); Married
(separate); Surviving Spouse;
Account characteristics: First-time filers;
Estimated number of returns (millions): 110.
Release: 7;
Sub-release: 7.1;
Release date: July 2011;
Tax return types: All additional individual returns;
Filing status: Single; Head of Household; Married (joint); Married
(separate); Surviving Spouse;
Account characteristics: Foreign Address; Open account issues;
Taxpayers with history of multiple marriages;
Estimated number of returns (millions): 135.
Release: 7;
Sub-release: 7.2;
Release date: January 2012;
Tax return types: All additional individual returns;
Filing status: Single; Head of Household; Married (joint); Married
(separate); Surviving Spouse;
Account characteristics: Foreign Address; Open account issues;
Taxpayers with history of multiple marriages;
Estimated number of returns (millions): 135.
Source: GAO analysis of IRS data.
Notes: n.a. = not applicable. TBD = to be determined.
List of forms included above:
Form 720--Quarterly Federal Excise Tax Return:
Form 940--Employers Annual Federal Unemployment Tax Return:
Form 1040--U.S. Individual Income Tax Return:
Schedule A--Itemized Deductions:
Schedule B--Interest and Ordinary Dividends:
Schedule C--Profit or Loss from Business:
Schedule D--Capital Gains and Losses:
Schedule E--Supplemental Income and Loss:
Schedule EIC--Earned Income Credit:
Schedule F--Profit or Loss from Farming:
Schedule R--Credit for the Elderly or the Disabled:
Schedule SE--Self-Employment Tax:
Form 1040A--U.S. Individual Income Tax Return:
Schedule 1--Interest and Ordinary Dividends for Form 1040A Filers:
Schedule 2--Child and Dependent Care Expenses for Form 1040A Filers:
Schedule 3--Credit for the Elderly or the Disabled for Form 1040A
Filers:
Form 1040-ES--Estimated Tax for Individuals:
Form 1040EZ--Income Tax Return for Single and Joint Filers with No
Dependents:
Form 1040NR--U.S. Nonresident Alien Income Tax Return:
Form 1040-PR--Puerto Rico Resident Income Tax Return:
Form 1040-SS--U.S. Se Payment If-Employment Tax Return:
Form 1040-V--Voucher:
Form 1040X--Amended U.S. Individual Income Tax Return:
Form 4868--Application for Automatic Extension of Time to File U.S.
Individual Income Tax:
Return:
Form 6251--Alternative Minimum Tax--Individuals:
[End of table]
[End of section]
Appendix III: State Mandates for Electronic Processing:
Twelve states had electronic filing mandates for paid tax preparers in
effect for the 2006 filing season (see fig. 6). State mandates differ
but require preparers who meet specified requirements, such as filing
100 individual income tax returns per year, to file individual income
tax returns electronically.
Figure 6: States with Electronic Filing Mandates for Paid Tax
Preparers:
[See PDF for image]
Source: GAO analysis; Copyright Corel Corp. All rights reserved (map).
[End of figure]
Nine states had electronic filing mandates in effect in 2005 or
earlier. In eight of these nine states, the mandates increased the
growth rate of electronically filed federal returns (see table 5).
Table 5: Electronic Filing Rates of Growth in Federal Returns for
States with Mandates Compared to National Averages:
Percent.
Tax year when state mandates were implemented.
2004;
State: Alabama;
Electronic filing rate of growth prior to the tax year the mandate was
implemented[A]: 9.9;
Electronic filing rate of growth in the tax year the mandate was
implemented[B]: 14.6;
Percent change in electronic filing rate of growth[C]: 48.0;
Nationwide electronic rate of growth the year the mandate was
implemented: 11.2.
2004;
State: Massachusetts;
Electronic filing rate of growth prior to the tax year the mandate was
implemented[A]: 11.2;
Electronic filing rate of growth in the tax year the mandate was
implemented[B]: 28.1;
Percent change in electronic filing rate of growth[C]: 150.9;
Nationwide electronic rate of growth the year the mandate was
implemented: 11.2.
2004;
State: New Jersey;
Electronic filing rate of growth prior to the tax year the mandate was
implemented[A]: 12.7;
Electronic filing rate of growth in the tax year the mandate was
implemented[B]: 35.0;
Percent change in electronic filing rate of growth[C]: 176.5;
Nationwide electronic rate of growth the year the mandate was
implemented: 11.2.
2004;
State: Virginia;
Electronic filing rate of growth prior to the tax year the mandate was
implemented[A]: 12.4;
Electronic filing rate of growth in the tax year the mandate was
implemented[B]: 11.0;
Percent change in electronic filing rate of growth[C]: -10.6[D];
Nationwide electronic rate of growth the year the mandate was
implemented: 11.2.
2003;
State: California;
Electronic filing rate of growth prior to the tax year the mandate was
implemented[A]: 14.8;
Electronic filing rate of growth in the tax year the mandate was
implemented[B]: 55.7;
Percent change in electronic filing rate of growth[C]: 276.7;
Nationwide electronic rate of growth the year the mandate was
implemented: 12.3.
2003;
State: Michigan;
Electronic filing rate of growth prior to the tax year the mandate was
implemented[A]: 14.2;
Electronic filing rate of growth in the tax year the mandate was
implemented[B]: 40.3;
Percent change in electronic filing rate of growth[C]: 184.1;
Nationwide electronic rate of growth the year the mandate was
implemented: 12.3.
2003;
State: Oklahoma;
Electronic filing rate of growth prior to the tax year the mandate was
implemented[A]: 8.9;
Electronic filing rate of growth in the tax year the mandate was
implemented[B]: 12.6;
Percent change in electronic filing rate of growth[C]: 42.0;
Nationwide electronic rate of growth the year the mandate was
implemented: 12.3.
2002;
State: Wisconsin;
Electronic filing rate of growth prior to the tax year the mandate was
implemented[A]: 23.4;
Electronic filing rate of growth in the tax year the mandate was
implemented[B]: 29.6;
Percent change in electronic filing rate of growth[C]: 26.6;
Nationwide electronic rate of growth the year the mandate was
implemented: 16.6.
2000;
State: Minnesota;
Electronic filing rate of growth prior to the tax year the mandate was
implemented[A]: 32.6;
Electronic filing rate of growth in the tax year the mandate was
implemented[B]: 34.9;
Percent change in electronic filing rate of growth[C]: 7.2;
Nationwide electronic rate of growth the year the mandate was
implemented: 13.6.
Source: GAO analysis of IRS data.
[A] The rate of growth compares the 2 years prior to the year the
mandate was implemented.
[B] The rate of growth compares the year prior to the mandate's
implementation to the year the mandate was implemented.
[C] The percent change in electronic filing rate is based on the change
from the year the mandate was implemented to year prior to
implementation.
[D] The decrease in the percent change in Virginia's electronic filing
rate of growth may be due in part to 2-D barcodes, which are attached
to the paper tax return. IRS does consider paper returns filed with 2-
D barcodes as being electronically filed.
[End of table]
According to a June 2005 study by the Federation of Tax
Administrators,[Footnote 54] many state tax administrators view
electronic filing as a means to improve tax return and refund
processing, improve customer service, and reduce the number of seasonal
workers in part by making better use of staffing resources. According
to New York, California, and Minnesota officials, given tight budget
constraints, the opportunity to generate savings was the main reason
behind their decisions to implement mandates. For example, in 2001
Minnesota estimated it saved $2.45 per return by mandating electronic
filing for paid tax preparers.[Footnote 55] Other states also reported
savings from electronic filing mandates.
While Minnesota was the first state to implement a mandate for
individual income tax returns, more states have adopted mandates and
some have used different methods to encourage electronic filing of
state returns. Some notable examples include the following:
* Filing thresholds: States with mandates often differ in the minimum
number of returns a paid tax preparer must file before having to comply
with an electronic filing mandate. In most states, the threshold is
often lowered gradually over time, increasing the base of preparers
that fall under the mandate. For example, in New Jersey in 2005,
preparers who prepared more than 200 individual state income returns in
the prior year had to electronically file all returns they prepared in
the current year. The threshold will drop to 100 returns in 2007 and 50
returns in 2008.
* Penalties: Some states do not impose penalties on noncompliant paid
tax preparers; however, those states that do levy penalties for
noncompliance often differ in amount and level of enforcement. For
example, some states waive the penalty if a taxpayer chooses to opt-out
of having their return electronically filed. In fact, most states
include "opt-out" clauses in the legislation that allows a preparer to
file a customer's return on paper at the customer's request. In
contrast, if a preparer files a return on paper, absent of the
customer's request, they could be subject to upwards of a $100 fine.
Alternatively, the state of Minnesota charges a $5.00 fee for returns
filed on paper returns prepared by mandated preparers regardless of the
circumstances.
* Including 2-D Barcodes as Electronic Filing: State mandates also vary
in what they consider an electronically filed return. Utah, Alabama,
and Virginia consider a paper return with a 2-D barcode produced by tax
preparation software as an electronically filed return. New York also
considered paper returns with 2-D barcodes as electronically filed
returns for the 2006 filing season.
In its June 2005 report, the Federation of Tax Administrators noted
that many states reviewed existing state mandate legislation for
guidance and ideas, or best practices, prior to implementing their own
mandates. For example, New York officials said they used the
experiences reported by California when deciding what provisions their
mandate should or should not include. The Federation of Tax
Administrators reported several lessons learned about implementing
mandates, including,
* having a phased-in approach over a period of several years,
* providing the ability for a taxpayer to opt out of electronic filing
if he or she chooses instead to file a paper return, and:
* having penalties for failure to file electronically.
Finally, the states' experience with mandates has shown the following:
* Communication and taxpayer education are vital. For example,
California scheduled presentations and panels on mandatory electronic
filing for tax professional organizations in order to achieve buy-in
from the paid tax preparer community.
* Lead time for implementation and the definition for the scope of the
mandate are important. Most states currently use the federal Employer
Identification Number (EIN) to define "paid tax preparer" and treat any
office or branch of an entity operating under a single EIN as a "paid
tax preparer" subject to the mandate.
* Coordination between IRS and Electronic Return Originators is
essential.[Footnote 56]
[End of section]
Appendix IV: IRS's Processing Performance Relative to 2001-2005
Performance and 2006 Goals:
IRS met or exceeded eight of the nine processing performance goals for
2006 as table 5 shows. For seven measures (i.e., deposit error rate,
deposit timeliness, notice error rate, refund interest paid, refund
timeliness, productivity, and efficiency), IRS exceeded its goal. For
one measure (refund error rate), IRS met its goal.
For one measure, the letter error rate, IRS's performance declined and
the 2006 goal was not met. The letter error rate is calculated as the
percentage of letters issued to taxpayers with errors. IRS officials
said that computer system errors were partially to blame for the higher
letter error rate this filing season; however, most of those errors
were caused by one programming error that was corrected in the
beginning of March. In addition, according to IRS officials, most
errors caused by employees were attributed to one submission processing
center, which had many new employees.
Comparing actual 2006 performance to 2005 shows that IRS's performance
improved or remained about the same for eight of the nine measures in
effect in 2005. Table 6 also shows that IRS processing performance in
2006 has significantly improved compared to prior years.
Table 6: IRS's Processing Performance, Fiscal Years 2001-2006:
Measure name: Deposit error rate[B];
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%; +/-0.3%;
Fiscal year: 2003: actual: 4.2%; +/-0.3%;
Fiscal year: 2004: actual: 3.5%; +/-0.31%;
Fiscal year: 2005 actual: 2.2%; +/-0.26%;
Fiscal year: 2006 actual: (through July): 1.7%; +/-0.28%;
Fiscal year: 2006 goal: 2.0%.
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;
Fiscal year: 2005 actual: $390;
Fiscal year: 2006 actual: (through July): $365;
Fiscal year: 2006 goal: $390.
Measure name: Letter error rate[B];
Definition: Percentage of letters issued to taxpayers with errors
(includes systemic errors).[C];
Fiscal year: 2001: actual[A]: Not comparable because of revisions to
the measure;
Fiscal year: 2002: actual: 7.4%; +/-0.6%;
Fiscal year: 2003: actual: 7.1%; +/-0.5%;
Fiscal year: 2004: actual: 6.6%; +/-0.38%;
Fiscal year: 2005 actual: 3.1%; +/-0.30;
Fiscal year: 2006 actual: (through July): 3.6%; +/-0.36%;
Fiscal year: 2006 goal: 3.0%.
Measure name: Notice error rate[B];
Definition: Percentage of incorrect notices issued to taxpayers
(includes systemic errors).[C];
Fiscal year: 2001: actual[A]: Not comparable because of revisions to
the measure;
Fiscal year: 2002: actual: 18.7%; +/-2.4%;
Fiscal year: 2003: actual: 9.4%; +/-1.2%;
Fiscal year: 2004: actual: 9.5%; +/-1.31%;
Fiscal year: 2005 actual: 9.2%; +/-1.6%;
Fiscal year: 2006 actual: (through July): 5.6%; +/-1.08%;
Fiscal year: 2006 goal: 8.6%.
Measure name: Refund error rate--individual (paper)[B];
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%; +/-0.46%;
Fiscal year: 2003: actual: 5.3%; +/-0.41%;
Fiscal year: 2004: actual: 4.9%; +/-0.44%;
Fiscal year: 2005 actual: 5.0%; +/-0.48%;
Fiscal year: 2006 actual: (through July): 4.5%; +/-0.51%;
Fiscal year: 2006 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: $29.21;
Fiscal year: 2006 actual: (through July): $29.88;
Fiscal year: 2006 goal: $32.00.
Measure name: Refund timeliness--individual (paper)[B];
Definition: Percentage of refunds issued within 40 days or less;
Fiscal year: 2001: actual[A]: 95.2%;
Fiscal year: 2002: actual: 98.2%; +/-0.32%;
Fiscal year: 2003: actual: 98.8%; +/-0.26%;
Fiscal year: 2004: actual: 98.3%; +/-0.17%;
Fiscal year: 2005 actual: 99.2%; +/-0.18%;
Fiscal year: 2006 actual: (through July): 99.4%; +/-0.13%;
Fiscal year: 2006 goal: 99.2%.
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: 31,444;
Fiscal year: 2006 actual: (through July): 33,011;
Fiscal year: 2006 goal: 32,000.
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: 14,965;
Fiscal year: 2006 actual: (through July): 17,538;
Fiscal year: 2006 goal: 15,622.
Source: GAO analysis of IRS data.
Notes: The measures for fiscal year 2006 are through July 30, which
were the latest data available at the time we ended our audit work.
According to IRS officials, the 2006 results through July 30 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.
[A] According to IRS officials, they did not compute a margin of error
for these measures in 2001.
[B] IRS estimates these measures to have a 90 percent confidence
interval.
[C] Systemic errors are computer-generated errors over which a
particular processing center would have no control.
[End of table]
[End of section]
Appendix V: Telephone Access Varies Depending on the Time of Year and
Type of Call:
Level of service can vary during different periods of the year. For
example, from January 1 through April 22 the level of service was 82
percent, but was 75 percent from April 23 through June 10. Fewer
taxpayers called after the filing season deadline and those taxpayers
who did received a lower level of service compared to those who called
during the filing season. According to IRS officials, their work plans
are built to maximize IRS's telephone performance during the filing
season when most taxpayers call.
The average speed of answer varies between questions. IRS groups each
type of call into different applications, so that they can be answered
by a properly trained customer service representative (CSR). Taxpayers'
experiences may differ depending upon the availability of CSRs and the
number of calls received in the category. For example, according to IRS
data as of April 22, taxpayers wanting answers about capital gains and
losses on average waited 4 minutes longer than those wanting answers
about tax credits.
According to IRS, however, there may be opportunities to address these
variances with the implementation of a new workforce management system
and full deployment of a single queue for telephone service. The new
system should allow IRS to make staffing decisions at the corporate
level, rather than relying on the individual sites, and in turn, create
benefits from better staffing decisions and more flexible work plans.
IRS expects to have the new workforce management system fully
implemented in fiscal year 2008. According to IRS officials,
implementing a single queue for each application across all call sites,
rather than separate queues at each site, will create a consistent
average answer time within an application. Currently, two taxpayers
with the same question may have different wait times because one waited
for a CSR in the Jacksonville call site, for example, while another
waited for a CSR in Austin. With a single queue, those taxpayers would
wait the same amount of time irrespective of their location. However,
the single queue will not improve the variations in wait time between
the different applications. IRS officials said that there will still be
fluctuations but the new workforce management solution and a single
queue should help to better manage variances.
[End of section]
Appendix VI: Comments from the Internal Revenue Service:
Commissioner:
Department Of The Treasury:
Internal Revenue Service:
Washington, D.C. 20224:
November 3, 2006:
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: Most
Filing Season Services Continue to Improve, but Opportunities Exist for
Additional Savings," and I appreciate your recognition of our
significant achievements in successfully delivering the 2006 filing
season. As you note, the IRS continued a trend of improving its primary
filing season services, including returns processing, telephone, web
site, and face-to-face operations.
Processing - Our returns processing activities continued to be highly
effective. This year we met or exceeded most of our performance goals,
continuing a trend since 2001. Through October 6, 2006, we timely
processed 131 million individual income tax returns and issued just
over $219 billion in refunds to our customers. During this same period
we also successfully implemented, in some cases on very short notice,
significant tax law changes resulting from the Energy Policy Act of
2005, Transportation Equity Act of 2005, Katrina Emergency Tax Relief
Act of 2005 and the Gulf Opportunity Zone Act of 2005. The latter was
not signed into law until December 21, 2005.
During 2006 we continued to implement our new processing system, the
Customer Account Data Engine (CADE). We successfully deployed its
fourth release in January 2006 that added functionality necessary to
include Forms 1040 and Form 1040A (without schedules) to the previous
baseline of Form 1040EZs. As of October 6, 2006, CADE successfully
posted over 7.3 million returns, well over our 4 million goal. CADE
also issued more than 6.6 million refunds totaling over $3.4 billion
dollars. We plan to deploy additional releases of CADE that will
further increase the system's functionality and speed the processing of
even more taxpayers' returns during the 2007 filing season.
Electronic filing continued to grow, with more than 72 million
taxpayers e-filing this year. E-file is up 6.6 percent over the prior
year, with the most significant increase occurring in the number of
taxpayers who filed electronically from their home computers. Taxpayers
filed over 20.3 million returns from home during 2006, an 18.6 percent
increase over last year. Over 3.9 million taxpayers took advantage of
the free online filing services offered by the Free File Alliance. Also
notable is the fact that over 59 million taxpayers signed their returns
electronically using one of the Personalized Identification Number
(PIN) options we offer, further increasing the efficiency with which we
process electronically filed returns.
Telephone Service - Even with the delayed decision to retain 15 hours a
day of toll-free service, the overall customer experience continued to
improve. We focused on increasing efficiency in order to save resources
with as little impact to service levels as possible. To ensure we
delivered our planned Customer Service Representative Level of Service
of 82 percent, we placed additional emphasis on the accuracy of our
staffing schedules. Doing so enabled sites to staff, by half hour, in
accordance with anticipated demand. By having the right skills in the
right place at the right time, we minimized wait time and optimized use
of available resources. For example, during FY 2006 we achieved an
average speed of answer (ASA) of 242 seconds, a 6 percent improvement
over last year and 58 seconds faster than our planned ASA of 300
seconds.
I appreciate your noting the accuracy of our responses to tax law and
account questions, as our accuracy rates for the 2006 filing season are
the highest we have ever achieved. By continually identifying and
addressing common errors in our responses, through September 2006 we
achieved a Toll-Free Tax Law accuracy rate of 91 percent. Likewise, our
improved quality review process, Contact Recording, which enables
managers to review recorded customer contacts and provide performance
feedback to employees, helped us achieve a Toll-Free Accounts accuracy
rate of over 93 percent, which exceeds our 2006 goal by over 1 percent.
These efforts also produced an exceptional level of customer
satisfaction. Survey results reflect that 94 percent of callers were
mostly satisfied or completely satisfied with our Toll-Free services.
Web Site - As you note, our website, IRS.gov, continued to be among the
most heavily used and highly regarded government websites during 2006.
Thus far this year, our website has been visited more than 194 million
times, a 9.8 percent increase over 2005, and visits to IRS.gov resulted
in more than 1.3 billion page views, a 3.4 percent increase over 2005.
Taxpayers and practitioners also downloaded more than 170 million
forms, publications, instructions and other documents. In recognition
of these accomplishments, IRS.gov was honored with a Government
Solutions Center Pioneer Award for "Innovative Use of Technology in
Government Programs."
Walk-In Assistance - During the 2006 filing season, the IRS kept open
and continued to provide services at all of our 400 Taxpayer Assistance
Centers (TAC), as well as through our extensive network of community-
based coalitions and partners. We assisted over 6 million taxpayers at
our TACs this filing season, and we significantly increased the
accuracy of the services we provided in these sites. Tax law accuracy
was 83 percent, an all time high and 3.8 percent over our 2006 goal.
Customer satisfaction also remained very high this year, with 91
percent of our walk-in customers reporting they were satisfied or very
satisfied with the service they received.
IRS-supported volunteer tax services also improved. This filing season,
69,000 volunteers in 12,000 locations provided assistance to the
traditionally underserved population that includes individuals with low
incomes, the elderly, the disabled, and those who have limited English
proficiency. Through September 30, 2006, over 2.2 million returns were
filed through our Volunteer Income Tax Assistance (VITA) and Tax
Counseling for the Elderly (TCE) sites, an increase of 7.4 percent over
the prior year. Of these, 82.6 percent were e-filed, a 14.3 percent
increase. To increase awareness of these services, we made more than
397 million outreach contacts through media and non-media channels. In
order to serve more taxpayers through these programs, we also expanded
our partnerships with community-based coalitions to over 300 in 2006.
Taxpayer Assistance Blueprint (TAB) - The TAB initiative continues to
make significant progress toward the development of specific taxpayer
service improvement recommendations, with major research initiatives
producing a significant body of data that is still being analyzed. A
progress update was recently provided to Congressional staff, the
Office of Management and Budget (OMB), and the Treasury, and we are
working toward completion of the Phase 2 Report. The external
stakeholder review process is scheduled to begin in December 2006, with
a targeted submission of the report to Congress by the end of January
2007. We are confident that the TAB will be a significant resource to
increase taxpayer value, address taxpayer burden, increase voluntary
compliance, and improve workforce performance and engagement well into
the future.
I appreciate your acknowledgement that the current statutory limitation
on IRS' authority to mandate electronic filing is an impediment to
achieving our electronic filing goals. I also appreciate your
recognition of the benefits we are realizing as a result of our
implementation of CADE. I also agree that reporting the timeliness of
refunds processed through CADE versus those processed through our
Master File legacy system may be useful to Congress.
Finally, IRS is committed to operating efficiently and effectively. To
that end, we agree with your recommendation to develop, validate, and
implement a plan to consolidate call sites. We have already begun a
comprehensive Accounts Management workload analysis that will assess
the feasibility of further consolidating our sites and the potential
impact on our customers.
Responses to your specific recommendations are enclosed. 1 appreciate
your observations on the successful filing season for 2006 and if you
have any questions, please contact Floyd Williams, Director,
Legislative Affairs, at (202) 622-3720.
Sincerely,
Signed by:
Mark W. Everson:
Enclosure:
Recommendation for the Commissioner:
Timely develop, validate and implement a plan to consolidate call
sites.
Response:
We agree with this recommendation. Beginning in April 2005 and
continuing through the 2006 filing season, the IRS has been engaged in
a comprehensive Accounts Management (AM) workload analysis. This
analysis confirmed a decline in paper and toll-free full-time
equivalents, total peak staffing and occupied workstations over the
past five years, and validated the feasibility of consolidating one or
more AM call sites. Next steps in the process include: developing
internal and external communication plans, updating data and
projections to reflect the most current information available,
conducting a full cost analysis to determine projected savings, and
formulating a consolidation timeline and workload redistribution plan.
Recommendation for the Commissioner:
Report to the Congress refund timeliness for CADE compared to the
Master File legacy system.
Response:
We agree with this recommendation. Using the current sample for the
refund timeliness measure, we will extract additional information in
order to provide an average number of days for refund issuance for CADE-
processed returns and Master File-processed returns thereby comparing
CADE-processed refunds to Master File-processed refunds. This
information will be compiled on a monthly basis.
[End of Section]
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] See, for example, GAO, Tax Administration: IRS Improved Some Filing
Season Services, but Long-term Goals Would Help Manage Strategic Trade-
offs, GAO-06-51 (Washington, D.C.: Nov. 14, 2005), 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), and Internal Revenue Service: Assessment of the Interim
Results of the 2006 Filing Season and Fiscal Year 2007 Budget Request,
GAO-06-615T (Washington, D.C.: Apr. 6, 2006).
[3] Pub. L. No. 105-206 (1998).
[4] GAO-06-615T.
[5] GAO-06-615T.
[6] We refer to paid tax preparers for both tax practitioners and
commercial preparers. According to IRS, tax practitioners complete tax
returns for money, are governed by the requirements outlined in U.S.
Department of the Treasury Circular 230, are authorized to represent
taxpayers legally before IRS, and include attorneys, certified public
accountants and enrolled agents. Commercial Preparers include
corporations, self-employed individuals, and electronic return
originators; they are not regulated by IRS or governed by Circular 230.
[7] Our review focuses on IRS's Wage and Investment 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. During our audit
work, we became aware of problems with IRS's primary information system
used to detect and stop fraudulent claims for refunds on income tax
returns. However, because this system is largely an enforcement
function and TIGTA had initiated an audit on the system, we determined
this work to be beyond the scope of our audit.
[8] GAO, Assessing the Reliability of Computer-Processed Data, GAO-02-
15G (Washington, D.C.: Sept. 1, 2002).
[9] GAO, Paid Tax Return Preparers: In a Limited Study, Chain Preparers
Made Serious Errors, GAO-06-563T (Washington, D.C.: Apr. 4, 2006).
[10] According to IRS, this limitation approximates the amount set in
the Internal Revenue Code for claiming the Earned Income Tax Credit.
IRS has required appointments for most taxpayers seeking this
assistance since 2003.
[11] GAO-06-51.
[12] According to IRS, an FTE is the equivalent of one person working
full-time for 1 year with no overtime.
[13] Without being able to move the remaining offices or functions to a
new location, IRS will have to pay for unused space from the closure of
the Philadelphia processing center amounting to $3.8 million per year.
[14] These calculations are based on IRS data on the number of filed
returns. A return may represent more than one taxpayer.
[15] See for example, GAO, Tax Administration: Opportunities to
Increase the Use of Electronic Filing, GAO/GGD-93-40 (Washington, D.C.:
Jan. 22, 1993).
[16] The e-Services system, offered to paid tax preparers who have
filed at least 100 electronic returns, gives them the ability to
conduct business, such as electronic account resolution and
transcription delivery, with IRS electronically 24 hours a day 7 days a
week.
[17] GAO-06-51.
[18] The mandates differ in their implementation dates and schedules,
thresholds for filing, and penalties. These differences between
mandates may affect the magnitude of electronic filing increases in
each state.
[19] The decrease in the percent change in Virginia's electronic filing
rate of growth may be due in part to 2-D barcodes, which are attached
to the paper tax return. IRS does not consider paper returns filed with
2-D barcodes as being electronically filed.
[20] GAO-06-51.
[21] ETAAC provides input and a forum for discussion of electronic tax
administration issues. ETAAC provides an annual report to the Congress
on IRS's progress meeting the goals for electronic filing of tax
returns set forth in the IRS Restructuring and Reform Act of 1998.
ETAAC, Annual Report to Congress (Washington, D.C.: June 2006).
[22] 26 U.S.C. § 6011(e).
[23] We could not independently verify this estimate using data from
IRS's cost accounting system because, in the past, IRS did not have
such a system--see GAO, Financial Audit: IRS's Fiscal Year 2005 and
2004 Financial Statements, GAO-06-137 (Washington, D.C.: Nov. 10,
2005).
[24] IRS is able to process virtually all returns filed electronically
with its current processing system, exceptions being amended and prior
year returns, which the current system cannot process. With Modernized
E-File, IRS will be able to handle the amended and prior year 1040
returns, and also have the ability to accept returns with attachments.
IRS estimates that it will begin implementing Modernized E-File for
1040s in 2009.
[25] S. 1321, 109th Cong., § 309 (2006).
[26] See written statement of Treasury Inspector General for Tax
Administration, J. Russell George, before the Committee on
Appropriations, Subcommittee on Transportation, Treasury, and Housing
and Urban Development, the Judiciary, District of Columbia, and
Independent Agencies, U.S. House of Representatives, Hearing on the
Internal Revenue Service's Fiscal Year 2007 Budget, Washington, D.C.,
Mar. 29, 2006, and Treasury Inspector General for Tax Administration,
Individual Tax Returns Were Timely Processed in 2006, but Opportunities
Exist to Improve Verification of Certain Tax Deductions, Reference No.
2006-40-164 (Washington, D.C.: Sept. 20, 2006).
[27] CADE had the ability to process 13.5 million returns this year.
However, approximately 42 percent of those returns were returned to the
Master File legacy system for processing. IRS officials stated this was
not unexpected because certain returns that CADE should have been able
to process had changes, such as in filing status, had schedules, or had
balances due, which CADE cannot process without additional
functionality.
[28] Refund Anticipation Loans are very short-term loans offered by
some paid tax preparers while taxpayers wait for their refunds.
[29] GAO-05-416T.
[30] We have previously noted that IRS lacks a refund timeliness
measure for electronically filed returns, and recommended it adopt such
a measure (see GAO-06-51). At that time, IRS stated that a measure
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. Our
position remains that such a measure could help IRS better monitor and
evaluate electronic filing performance and determine the effect of
initiatives intended to increase electronic filing.
[31] The TIGTA recently issued a report on this matter. See Treasury
Inspector General for Tax Administration, The Savings Used to Recommend
Reducing Toll-Free Telephone Hours of Operation Are Not as Significant
as Projected, Reference No. 2006-40-169 (Washington, D.C.: Sept. 21,
2006).
[32] Pub. L. No. 109-115 (2005) and Pub. L. No. 109-148 (2005).
[33] Treasury Inspector General for Tax Administration, Appropriate
Actions Were Taken to Maintain Taxpayers' Level of Service, but Access
is Lower than in Prior Years, Reference No. 2006-40-162 (Washington,
D.C.: Sept. 14, 2006).
[34] Citizen Service Levels Interagency Committee Report: Proposed
Performance Measures, Practices and Approaches For Government-wide
Citizen Contact Activities, General Services Administration's USA
Services e-Gov, 2006.
[35] National Taxpayer Advocate Service, National Taxpayer Advocate's
2007 Objectives Report to Congress (Washington, D.C.: June 30, 2006).
[36] GAO-06-499T.
[37] We cannot make comparisons before 2005 because in October 2004,
IRS changed the way that it collects and analyzes Web site data in
order to provide a more accurate count of visits and downloads.
[38] GAO-06-51.
[39] Darrell M. West, State and Federal E-Government in the United
States, 2006, Taubman Center for Public Policy, Brown University
(Providence, Rhode Island: August 2006).
[40] Keynote Systems, Keynote Government 40 Internet Performance Index
and Keynote E-Government Web Transaction Performance Index.
[41] American Consumer Satisfaction Index, Special Report on e-
Government Satisfaction, National Quality Research Center, University
of Michigan (Ann Arbor, Michigan: Mar. 21, 2006).
[42] GAO-05-67.
[43] See, for example, GAO-05-67 and GAO-06-51.
[44] See, for example, Treasury Inspector General for Tax
Administration (TIGTA), Customer Service at the Taxpayer Assistance
Centers Is Improving but is Still not Meeting Expectations, Reference
No. 2005-40-021 (Washington, D.C.: Dec. 28, 2004) and Taxpayer Service
Is Improving, but Challenges Continue in Meeting Expectations,
Reference No. 2006-40-052 (Washington, D.C.: Feb. 17, 2006).
[45] See, for example, TIGTA Customer Service at Taxpayer Assistance
Centers Showed Improvement During the 2006 Filing Season, Reference No.
2006-40-122, (Washington, D.C.: Aug. 30, 2006).
[46] GAO-06-51.
[47] According to IRS officials, IRS previously relied on volunteer
sites to manually enter their Site Identification Number on returns
they filed electronically or by paper which was then extracted from the
Master File. However, in May 2005, IRS changed its methodology to use
an automated data-based system to identify returns filed electronically
at volunteer sites. For paper returns, IRS retains this information in
the Master File data base.
[48] See GAO-06-51 and Treasury Inspector General for Tax
Administration, Oversight and Accuracy of Tax Returns Continue to be
Problems for the Volunteer Income Tax Assistance Program, Reference No.
2006-40-125 (Washington, D.C.: Aug. 31, 2006).
[49] GAO-06-51.
[50] Pub. L. No. 109-115, § 205 (2005).
[51] H. Rep. No. 109-307, 109th Cong. (2005).
[52] Refund Anticipation Loans are very short-term loans issued while
taxpayers wait for their refunds.
[53] We conducted limited testing on 13 out of 20 companies
participating in the Free File program using a scenario we constructed
that represented a low-income worker. Purposes of the testing included
examining some potential experiences of taxpayers, such as the length
of time to complete a return and whether any financial services, such
as RALs, were marketed during the filing of the return, examining what
happened if we declined the services, and evaluating our experience
compared to the Free File agreement.
[54] Federation of Tax Administrators, Electronic Filing Mandates:
Lessons Learned (Washington, D.C.: June 2005).
[55] We did not verify this estimate.
[56] Electronic Return Originators originate the electronic submission
of income tax returns to the IRS and may originate the electronic
submission of income tax returns that are either prepared by the
originator or collected from the taxpayer.
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U.S. Government Accountability Office
441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800
U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548:
