Internal Revenue Service
Assessment of the Interim Results of the 2006 Filing Season and Fiscal Year 2007 Budget Request Gao ID: GAO-06-499T April 27, 2006The Internal Revenue Service's (IRS) filing season performance affects tens of millions of taxpayers who expect timely refunds and accurate answers to their tax questions. IRS's budget request is a planning tool showing how it intends to provide taxpayer service and enforce the tax laws in 2007. It is also the first in a series of annual steps that will determine whether IRS meets its new long-term goals of increasing tax compliance and reducing taxpayers' acceptance of cheating on their taxes. Tax law enforcement remains on GAO's list of high-risk federal programs, in part, because of the persistence of a large tax gap. IRS recently estimated the gross tax gap, the difference between what taxpayers owe and what they voluntarily pay, to be $345 billion for 2001. GAO assessed (1) IRS's interim 2006 filing season performance; (2) the budget request; and (3) how the budget helps IRS achieve its longterm goals. GAO compared performance and the requested budget to previous years.
IRS has improved its filing season performance so far in 2006, continuing a trend. More refunds were directly deposited, which is faster and more convenient. Electronic filing continued to grow, but at a slower rate than in previous years. IRS's two most commonly used services--telephone and Web site assistance--continued to improve. IRS estimates that the accuracy rate for its telephone answers is now at 90 percent or more. Taxpayers continued the recent pattern of using IRS's walk-in sites less and community-based volunteer sites more. While millions of taxpayers use chain paid tax preparers, taxpayers may not be receiving accurate and complete assistance, putting them at risk of owing back taxes, interest, and penalties. The 2007 budget request of $11 billion (a small decrease after adjusting for inflation) sets performance goals for service and enforcement that are all equal to or higher than the 2006 goals. The budget reduces funding by 15 percent for Business Systems Modernization, the ongoing effort to replace IRS's aging information systems. The reduction could impede progress delivering improvements to taxpayers. The budget request identified over $121 million in savings; however, opportunities exist for further savings. For example, IRS officials told us IRS's 25 call centers have underutilized space. Those centers could be consolidated without affecting service to taxpayers. Achieving IRS's long-term compliance goals will be challenging because the tax gap has persisted for many years at about its current level. In addition, because the effect of taxpayer service and enforcement on compliance has never been quantified, IRS does not have a data-based plan demonstrating how it will achieve its goals. Nor does IRS have a plan for measuring compliance by 2009, the date for achieving the goals. Reducing the tax gap will likely require new and innovative solutions such as simplifying the tax code, increasing income subject to withholding, and increasing information reporting about income.
GAO-06-499T, Internal Revenue Service: Assessment of the Interim Results of the 2006 Filing Season and Fiscal Year 2007 Budget Request
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United States Government Accountability Office:
GAO:
Statement for the Record:
Before the Subcommittee on Transportation, Treasury, the Judiciary, and
Housing and Urban Development, and Related Agencies, Committee on
Appropriations, U.S. Senate:
Internal Revenue Service:
Assessment of the Interim Results of the 2006 Filing Season and Fiscal
Year 2007 Budget Request:
Statement of James R. White:
Director:
Strategic Issues:
Statement of David A. Powner:
Director:
Information Technology Management Issues:
GAO-06-499T:
GAO Highlights:
Highlights of GAO-06-499T, a statement for the record for the
Subcommittee on Transportation, Treasury, the Judiciary, and Housing
and Urban Development, and Related Agencies, Committee on
Appropriations, U.S. Senate.
Why GAO Did This Study:
The Internal Revenue Service‘s (IRS) filing season performance affects
tens of millions of taxpayers who expect timely refunds and accurate
answers to their tax questions. IRS‘s budget request is a planning tool
showing how it intends to provide taxpayer service and enforce the tax
laws in 2007. It is also the first in a series of annual steps that
will determine whether IRS meets its new long-term goals of increasing
tax compliance and reducing taxpayers‘ acceptance of cheating on their
taxes. Tax law enforcement remains on GAO‘s list of high-risk federal
programs, in part, because of the persistence of a large tax gap. IRS
recently estimated the gross tax gap, the difference between what
taxpayers owe and what they voluntarily pay, to be $345 billion for
2001.
GAO assessed (1) IRS‘s interim 2006 filing season performance; (2) the
budget request; and (3) how the budget helps IRS achieve its long-term
goals. GAO compared performance and the requested budget to previous
years.
What GAO Found:
IRS has improved its filing season performance so far in 2006,
continuing a trend. More refunds were directly deposited, which is
faster and more convenient. Electronic filing continued to grow, but at
a slower rate than in previous years. IRS‘s two most commonly used
services”telephone and Web site assistance”continued to improve. IRS
estimates that the accuracy rate for its telephone answers is now at 90
percent or more. Taxpayers continued the recent pattern of using IRS‘s
walk-in sites less and community-based volunteer sites more. While
millions of taxpayers use chain paid tax preparers, taxpayers may not
be receiving accurate and complete assistance, putting them at risk of
owing back taxes, interest, and penalties.
The 2007 budget request of $11 billion (a small decrease after
adjusting for inflation) sets performance goals for service and
enforcement that are all equal to or higher than the 2006 goals. The
budget reduces funding by 15 percent for Business Systems
Modernization, the ongoing effort to replace IRS‘s aging information
systems. The reduction could impede progress delivering improvements to
taxpayers. The budget request identified over $121 million in savings;
however, opportunities exist for further savings. For example, IRS
officials told us IRS‘s 25 call centers have underutilized space. Those
centers could be consolidated without affecting service to taxpayers.
Achieving IRS‘s long-term compliance goals will be challenging because
the tax gap has persisted for many years at about its current level. In
addition, because the effect of taxpayer service and enforcement on
compliance has never been quantified, IRS does not have a data-based
plan demonstrating how it will achieve its goals. Nor does IRS have a
plan for measuring compliance by 2009, the date for achieving the
goals. Reducing the tax gap will likely require new and innovative
solutions such as simplifying the tax code, increasing income subject
to withholding, and increasing information reporting about income.
Table: Changes in Funding and Full-time Equivalent (FTE) Staff for the
Fiscal Year 2007 Budget Request Compared to Fiscal Year 2006 Enacted
Budget:
Dollars in thousands:
Processing, Assistance, & Management:
Fiscal year 2007 requested;
Dollars: $4,159,893;
FTEs: 37,126;
Percentage change fiscal years 2006-2007;
Dollars: $1.58;
FTEs: -4.30.
Tax Law Enforcement:
Fiscal year 2007 requested;
Dollars: $4,764,954;
FTEs: 49,179;
Percentage change fiscal years 2006-2007;
Dollars: $1.85;
FTEs: -2.14.
Information Systems:
Fiscal year 2007 requested;
Dollars: $1,619,834;
FTEs: 7,351;
Percentage change fiscal years 2006-2007;
Dollars: $2.33;
FTEs: 4.54.
Business Systems Modernization:
Fiscal year 2007 requested;
Dollars: $167,310;
FTEs: 0;
Percentage change fiscal years 2006-2007;
Dollars: $-15.08;
FTEs: 0.
Health Insurance Tax Credit Administration:
Fiscal year 2007 requested;
Dollars: $14,846;
FTEs: 17;
Percentage change fiscal years 2006-2007;
Dollars: $-25.80;
FTEs: 0.
Total:
Fiscal year 2007 requested;
Dollars: $10,726,837;
FTEs: 93,973;
Percentage change fiscal years 2006-2007;
Dollars: $1.45;
FTEs: -2.52.
Existing user fees and reimbursables:
Fiscal year 2007 requested;
Dollars: $282,543;
FTEs: 1,503;
Percentage change fiscal years 2006-2007;
Dollars: $9.17;
FTEs: 11.33.
Total program operating level:
Fiscal year 2007 requested;
Dollars: $11,009,307;
FTEs: 95,476;
Percentage change fiscal years 2006-2007;
Dollars: $1.63;
FTEs: -2.33.
Source: GAO analysis of IRS data.
Notes: Fiscal year 2007 FTEs reflect an adjustment made after the
budget was printed. Enacted FTEs differ from actual FTEs.
[End of Table]
What GAO Recommends:
GAO is not making any new recommendations, but notes past
recommendations and their implementation status where relevant and
identifies opportunities for additional savings.
[Hyperlink, www.gao.gov/cgi-bin/getrpt?GAO-06-499T].
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]
Mr. Chairman and Members of the Subcommittee:
Since the passage of the Internal Revenue Service (IRS) Restructuring
and Reform Act of 1998 (RRA 98)[Footnote 1], IRS has made noticeable
improvements to taxpayer services such as telephone assistance and
delivered some modernized information systems that, among other
benefits, speed up refunds to taxpayers. Increased funding financed
some of the improvements, but a significant portion has been financed
internally through efficiencies from increased electronic filing of tax
returns and other operational improvements.
IRS has also increased revenue collected through its enforcement
programs; however, tax law enforcement continues to be included on our
list of high-risk federal programs.[Footnote 2] This is due, in part,
to the persistence of a large tax gap. [Footnote 3] IRS estimated the
gross tax gap to be $345 billion for tax year 2001. After late payments
by taxpayers and revenue brought in by IRS's enforcement efforts, the
resulting net tax gap is estimated to be $290 billion.[Footnote 4] Even
modest progress in reducing the tax gap would yield significant
revenue; each 1 percent reduction would likely yield nearly $3 billion
annually.
If its 2007 budget request is a harbinger of longer term funding, IRS
faces an era of tight budgets. Consequently, continued performance
improvements will depend on the extent to which IRS can make more
efficient use of limited resources to provide internal funding for the
improvements. By indicating how resources are allocated to specific
programs and activities within the agency, the budget request is a key
planning tool showing where the agency intends to achieve additional
efficiencies.
The 2007 budget request is also an indication of how IRS intends to
achieve longer term goals. For the first time, IRS lists two agencywide
long-term goals: to increase the compliance rate and reduce the
proportion of taxpayers who think it is acceptable to cheat on their
taxes.[Footnote 5] This budget can be viewed as a first step in a
series of annual steps that will determine whether IRS achieves these
long-term goals.
Our statement discusses IRS's 2006 filing season performance to date
and fiscal year 2007 budget request. To address your request, we
assessed (1) the interim results of IRS's 2006 filing season
performance compared to prior years; (2) IRS's budget request compared
to prior years; and (3) how the budget helps IRS achieve its long-term
goals aimed at reducing the tax gap.
Our assessment of the interim results of IRS's filing season is based
on comparing IRS's performance this year to prior filing seasons,
monitoring various production meetings and production statistics,
reviewing other IRS documents and reports, interviewing IRS and
Treasury Inspector General for Tax Administration (TIGTA) officials and
paid tax preparers and other external stakeholders, reviewing TIGTA and
other external reports, and reviewing IRS's Web site. Our assessment of
the budget request is based on a comparative analysis of IRS's fiscal
year 2002 (in most cases) through 2007 budget requests, funding,
expenditures, and other documentation and interviews with IRS
officials. We used historical budget and performance data from reports
and budget requests used by the IRS, Department of the Treasury, and
Office of Management and Budget. In past work, we assessed IRS's budget
and performance data. Since the data sources and procedures for
producing this year's budget and performance data have not
significantly changed from prior years, we determined that the data
were sufficiently reliable for the purposes of this statement. We did
not verify IRS's estimates for enforcement revenue and the tax gap. IRS
presents tax gap information as supplemental information in its
financial statements; that information is not required to be audited.
However, we have been involved in tax gap methodology briefings, and
the TIGTA has an ongoing review of the accuracy of IRS's tax gap
estimates. Additionally, our analysis of IRS's Business Systems
Modernization (BSM) program was based primarily upon the results of our
detailed review of IRS's fiscal year 2006 BSM expenditure plan that we
recently reported to you.[Footnote 6] We performed our work in
Washington, D.C., and Atlanta, Georgia, from January 2006 through April
2006, in accordance with generally accepted government auditing
standards.
Our statement makes these key points:
* IRS has improved its 2006 filing season performance to date in
important areas compared to last year, continuing a recent trend. IRS's
returns processing has gone smoothly and over 64 percent of refunds are
now directly deposited to taxpayers' bank accounts, which is faster,
more convenient and less costly than issuing paper checks. Electronic
filing continues to grow, but at a slower rate. So far this filing
season, electronic filing rate has increased 2.1 percentage points
compared to an average percentage point increase of 5.1 annually for
the previous two years. According to IRS officials, the slower rate of
growth is due, in part, to new income limits in the Free File program,
which reduced the number of taxpayers eligible to file electronically
for free via IRS's Web site, and the termination of the TeleFile
program, which eliminated electronic filing by phone. Telephone
assistance has improved this year, in part, due to lower call volume.
The percentage of taxpayers attempting to reach an IRS telephone
assistor and who actually received service increased 1.6 percentage
points to 83.3 percent this filing season and the length of time
taxpayers waited to get their calls answered decreased from 256 seconds
to 205 seconds. The accuracy of IRS's responses to tax law and account
questions improved--both are now at 90 percent or more. IRS's Web site
is being used more, is performing well based on third-party
evaluations, and has been reconfigured with the goal of improving
taxpayer service. Taxpayers continued the recent pattern of using IRS's
walk-in sites less, and using sites run by community-based
organizations and staffed by volunteers more. In addition to service
from IRS, millions of taxpayers--particularly those with complicated
returns--receive service from paid preparers.[Footnote 7] However, we
recently reported[Footnote 8] that chain paid tax preparers may not be
providing accurate and complete assistance, putting taxpayers at risk
of owing back taxes, interest, and penalties.
* IRS's fiscal year 2007 proposed budget is $11 billion, which is a
small decrease compared to the 2006 enacted level after adjusting for
expected inflation. [Footnote 9] For service, the budget proposes to
cut staffing by 4 percent. For enforcing tax laws, the budget proposes
to cut staffing by 2 percent. However, for service and enforcement, the
budget sets performance goals for 2007 that are higher than or equal to
those for 2006. For maintaining and operating IRS's existing
information systems (IS), the 2007 budget request shows an increase in
resources when compared to the 2006 enacted budget. However, when
compared to the level currently assumed for 2006, the 2007 budget
request leaves Full-time Equivalents (FTE)[Footnote 10] for IS
virtually constant. For the BSM program, which is the ongoing effort to
replace the agency's aging information systems, the budget proposes to
reduce spending by about 15 percent. This reduction could delay
delivery of improved services for taxpayers. As it has in prior years,
IRS's budget request identifies savings--the 2007 budget proposes to
save over $121 million and 1,424 FTEs. However, additional
opportunities exist for savings. One would be to increase electronic
filing by additional use of mandates. IRS currently mandates electronic
filing by large corporations and 12 states currently mandate electronic
filing of individual income tax returns by certain tax preparers.
Another opportunity would be to consolidate IRS's 25 telephone call
sites. IRS officials told us that the call sites have space that is not
used for 850 staff. Call sites could be consolidated without affecting
service to taxpayers. Finally, IRS has long been hampered by a lack of
current and accurate cost information for making resource allocation
decisions. IRS recently implemented components of a cost accounting
system, but needs to continue gathering the cost data needed to make it
an effective planning tool.
* IRS's budget request sets two long-term goals: increasing the rate of
voluntary compliance from 83 percent to 85 percent by 2009 and reducing
the percentage of taxpayers who think it is acceptable to cheat on
their taxes from 10 percent to 9 percent in 2008. These goals will be
challenging to meet because the tax gap has persisted at a relatively
stable level of 81 to 84 percent for many years. However, because the
effect of taxpayer service and enforcement on compliance has never been
quantified, IRS does not have a data-based plan demonstrating how it
will use its programs to achieve its goals and reduce the tax gap. Nor
does IRS have a plan for measuring compliance by 2009. Reducing the tax
gap will likely require new and innovative solutions such as
simplifying the tax code, increasing income subject to withholding, and
increasing information reporting about income. Despite these
limitations, IRS's budget request includes several proposals for
increasing compliance that would not require additional resources for
IRS. For example, the Department of the Treasury plans to study, and we
have long supported, clarifying the definition of independent
contractors and requiring additional information reporting on their
income, steps that could increase tax revenue by billions of dollars.
IRS's Filing Season Performance to Date Has Improved in Important
Areas, Continuing a Recent Trend:
IRS improved its 2006 filing season performance in important areas that
affect large numbers of taxpayers. This continues a trend of
improvement since at least 2002. Returns processing has gone smoothly
and electronic filing continues to grow, although at a slower rate than
in previous years. Taxpayer assistance has improved in the two most
commonly used services--toll-free telephones and the Internet Web site.
Fewer taxpayers visited IRS's walk-in sites, and more sought assistance
at volunteer-staffed sites.
Return Processing Has Been Smooth and Electronic Filing Continues to
Grow, Although At a Slower Rate Than Previous Years:
From January 1 through April 14, 2006, IRS processed 91.8 million
individual income tax returns. Of those returns, 63.4 million returns
were filed electronically (up 2.3 percent) and 28.3 million returns
were filed on paper (down 7.1 percent).
According to IRS data and officials, returns processing has gone
smoothly so far this filing season. IRS issued 78 million refunds, 50
million, or 64 percent of which were directly deposited, up 5.4 percent
over the same period as last year. Direct deposit is faster, more
convenient for taxpayers, and less expensive for IRS than mailing paper
checks.
Because of the volume of tax returns, it is normal for IRS to
experience some processing disruptions, although this year, disruptions
have not been significant. For example, 13 different tax forms were
unavailable for electronic filing until February 1 due to the late
hurricane relief legislation, which caused a minor processing delay for
some returns.
Furthermore, IRS officials said that the new Customer Account Data
Engine (CADE), which is intended eventually to replace IRS's antiquated
Master File system containing taxpayer records, processed over 6
million returns and dispersed 5.3 million refunds as of April 14, 2006
without disruptions. IRS is reporting that direct deposit refunds and
paper check refunds are being issued within 4 and 6 business days,
respectively, after tax returns are posted to CADE, which is faster
than for returns processed by the Master File system. CADE's growth in
future years will directly benefit taxpayers. Not only can it speed up
refunds, but it also updates taxpayer account information quicker than
the Master File system.
Representatives of the taxpayer industry corroborated IRS's view that
the filing season is going smoothly. Groups and organizations that we
talked to included the National Association of Enrolled Agents, the
American Institute of Certified Public Accountants, and others. In
addition, the TIGTA recently testified that thus far it has seen no
significant problems during the filing season.[Footnote 11]
The growth of electronic filing is important, because it generates
savings by reducing staff years needed for labor intensive paper
processing. Between fiscal years 1999 and 2006, IRS reduced the number
of staff years devoted to paper and electronic processing by 1,586, or
34 percent as shown in figure 1.
Figure 1: 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.
[A] Fiscal years 2006 and 2007 are IRS projections.
Note: 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.
[End of figure]
Electronic filing continues to grow but at a slower rate than previous
years. This year's 2.1 percent rate of growth is less than the average
annual rate of growth of 5.1 percent for each of the preceding 2 years.
According to IRS officials, the slower growth in electronic filing this
year is due, in part, to changes in the Free File program, which
reduced the number of taxpayers eligible to file electronically for
free this year and reduced publicity and advertising by companies
involved in that program, and the termination of the TeleFile program,
which eliminated the way for taxpayers to file their returns
electronically via telephone.
The Free File program enables taxpayers to file their returns
electronically via IRS's Web site. Through IRS's Web site, taxpayers
can access the Web sites of 20 companies comprising the Free File
Alliance. The alliance is a consortium of tax preparation companies
that agreed to offer free return preparation and electronic filing for
taxpayers that meet certain criteria (see app. 1 for further detail).
In an amended agreement with IRS that took effect this year, the Free
File Alliance set a $50,000 income limitation on taxpayer
participation. This limit was absent last year and reduced the number
of taxpayers eligible to participate in the program. As of April 13,
2006, IRS processed about 3.5 million free file returns, which is a
decrease of 24 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, almost a million more
compared to last year.
For 2006, IRS 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 program had been decreasing--from
approximately 5.7 million in 1999 to 3.8 million in 2004. IRS estimated
the cost per tax return submitted through TeleFile, typically Form
1040EZ, to have been $2.63 versus $1.51 for a return filed on paper,
largely due to contractor, telecommunications, and other costs. Given
the limitations of IRS's cost accounting system, the validity of these
figures is unknown. IRS officials stated that the reason for this
year's increase in the number of 1040EZ returns filed on paper is due,
in part, to the elimination of TeleFile. Through April 14, 2006, the
number of 1040EZ returns filed on paper has increased 20 percent from
last year.
Options for increasing electronic filing, in particular mandated
electronic filing, will be discussed in the budget section of this
statement.
Telephone Access and Accuracy Improved, in Part Due to Lower Call
Volume:
Taxpayers' ability to access IRS's telephone assistors and the accuracy
of answers provided improved compared to previous years. From January 1
through April 15, 2006, IRS answered approximately 31 million phone
calls, which is about a 7 percent decline from the same period last
year.[Footnote 12] The call volume has been less than projected by IRS
and less than was assumed when IRS set staffing levels for telephone
assistors for the filing season. IRS officials offered several
explanations for the unexpected decline in call volume. One explanation
is that more taxpayers are using improved tax preparation software,
which reduces their need to call IRS. Another explanation is that more
taxpayers are getting through to a telephone assistor the first time
they call, thus reducing the need for taxpayers to call again.
As shown in table 1, the percentage of taxpayers who attempted to reach
an assistor and actually got through and received service--referred to
as the level of service--is 83.3 percent so far this filing season
compared to 81.7 percent over the same period last year--and greater
than its 2006 fiscal year goal of 82 percent. According to IRS
officials, one possible explanation for the improvement in access is
the decline in overall call volume. When call volume decreases,
taxpayers are likely to wait less time to speak with an IRS telephone
assistor. As a result, fewer taxpayers would likely hang up, increasing
the percentage of taxpayers who get through to an assistor.
IRS also reported that, so far this filing season, the average speed of
answer (length of time taxpayers wait to get their calls answered) is
down 51 seconds from the same time last year to 205 seconds, a decrease
of about 20 percent, and significantly better than IRS's 2006 fiscal
year goal of 300 seconds. IRS also reported that the rate at which
taxpayers abandoned their calls[Footnote 13] to IRS decreased from 12
percent to 9.7 percent compared to the same period last year.
Table 1: IRS Telephone Assistance Performance in the First Weeks of the
Filing Seasons, 2002 through 2006:
Telephone assistance:
Total calls[A] (volume in thousands);
2002: 51,148;
2003: 40,805;
2004: 41,647;
2005: 33,935;
2006: 31,540.
Answered by assistors;
2002: 14,799;
2003: 14,987;
2004: 15,915;
2005: 14,804;
2006: 13,709.
Answered by automation;
2002: 36,349;
2003: 25,818;
2004: 25,732;
2005: 19,132;
2006: 17,831.
Assistor level of service;
2002: 66.5%;
2003: 82.4%;
2004: 84.7%;
2005: 81.7%;
2006: 83.3%.
Average speed of answer[B];
2002: 253 seconds;
2003: 175 seconds;
2004: 187 seconds;
2005: 256 seconds;
2006: 205 seconds.
Accounts customer accuracy rate estimates[C];
2002: 89.3%; +/-0.7%;
2003: 89.1%; +/-0.5%;
2004: 89.3%; +/-0.6%;
2005: 91.6%; +/-0.5%;
2006: 92.9%; +/-0.5%.
Tax law customer accuracy rate estimates[C];
2002: 84.0%; +/-0.5%;
2003: 82.0%; +/-0.8%;
2004: 77.7%; +/-1.0%;
2005: 88.2%; +/-0.8%;
2006: 90.0%; +/-0.8%.
Source: IRS.
[A] Total calls (i.e., calls answered by assistors and automation) and
CSR level of service are based on actual counts from January 1 to April
20, 2002; April 19, 2003; April 17, 2004; April 16, 2005; and April 15,
2006.
[B] From January 1 to April 20, 2002; April 19, 2003; April 17, 2004;
April 16, 2005; and April 15, 2006.
[C] Based on a representative sample estimated at the 90 percent
confidence interval from January through March 2002, 2003, 2004, 2005,
and 2006.
[End of table]
Using a statistical sampling process, IRS estimates that the accuracy
of telephone assistors' responses to taxpayers' tax law and account
questions improved compared to last year. IRS estimates its tax law
accuracy rate to be 90 percent, an increase of 1.9 percentage points
over the same time period last year, continuing an improvement since
2004.[Footnote 14] Additionally, IRS estimates that the accuracy rate
to taxpayers' inquiries about their accounts, to be 92.9 percent this
year compared to 91.6 percent over the same period last year,
continuing an improvement since 2003. IRS officials attribute these
improvements in performance to several factors, including better and
more timely performance feedback for telephone assistors, increased
assistor experience, better training, and increased use of the Probe
and Response Guide, a script used by telephone assistors to understand
and respond to tax law questions.
IRS's Web Site Is Being Used More, Is Performing Well, and Has Been
Reconfigured with the Goal of Improving Taxpayer Service:
Use of IRS's Web site has increased so far this filing season compared
to prior years based on the number of visits and downloads. From
January 1 through March 31, IRS's Web site was visited 95 million times
by visitors who downloaded 90 million forms and publications. The
number of visits reflects a 7.5 percent increase over the same period
last year while the number of forms and publications downloaded has
increased by 34 percent.
Further, IRS's Web site is performing well. For example,
* we found IRS's Web site to be readily accessible, easy to navigate,
and easy to search,
* an independent weekly study by Keynote, a company that evaluates Web
sites, reported that IRS's Web site has repeatedly ranked second out of
40 government agencies evaluated in terms of average download time. The
same study also reported that IRS has repeatedly ranked first out of
the most commonly accessed government related Web sites for response
time and success rate, and:
* the American Consumer Satisfaction Index overall customer
satisfaction with IRS's Web site increased from 68 to 72 percent after
IRS reconfigured the site.
IRS reconfigured its Web site for the 2006 filing season. According to
IRS officials, the goal for reconfiguring the Web site was to improve
overall customer service through easier navigation and a more effective
search function. As a result, the number of Web site searches has
decreased by 51 percent, from 108 million during the same period last
year to 52.5 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 also added the following new features to its Web site this year:
* Electronic IRS: The Electronic IRS brand reconfigured the IRS's Web
site and made it easier to locate items, as evidenced by the decline in
searches;
* Alternative Minimum Tax (AMT) Assistant: Helps taxpayers determine if
they do not owe AMT; and:
* Help for Hurricane Victims: A special link that provides victims of
the recent hurricanes information on special tax relief, assistance and
how to get help with tax matters.
IRS's Web site continues to include several important features in
addition to the Free File program:
* Where's My Refund, which allows taxpayers to check on the status of
their refunds. As of April 15, 2006, 24 million taxpayers accessed the
Where's My Refund feature to check on the status of their tax refunds.
This was a 17 percent increase from the same period last year; and:
* Electronic Tax Law Assistance, where taxpayers can ask IRS general
tax law questions via its Web site. From January 1 through April 14,
2006, IRS received 10,160 emails requesting tax law assistance (down
over 43 percent compared to last year). As of March 31, 2006, IRS
estimated the accuracy rate of IRS's responses to tax law questions
submitted via the Web site, to be 85 percent, similar to 2005. However,
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 1.2 days
in 2005.
Taxpayers Continue Their Recent Pattern of Using IRS's Walk-In Sites
Less and Using Volunteer Sites More, And Information About the Quality
of Service Remains Limited:
Fewer taxpayers have used IRS's 400 walk-in sites so far in the 2006
filing season compared to the same period in prior years. Staff at walk-
in sites provide taxpayers with information about their tax accounts
and answer taxpayers' questions within a limited scope of designated
tax law topics, such as those related to income, filing status,
exemptions, deductions, and related credits.[Footnote 15] Walk- in site
staffs also provide need-based tax return preparation assistance,
limited to taxpayers meeting certain requirements.[Footnote 16] As of
April 1, 2006, the total number of contacts at IRS's walk-in sites
declined by approximately 12 percent compared to last year. The decline
thus far this year is consistent with the annual trends in walk-in use
shown in figure 2, including IRS's projection for 2006. The declines in
the number of taxpayers using IRS's walk-in sites, including for tax
return preparation, are also consistent with IRS's strategy to reduce
its costly face-to-face assistance by providing taxpayers with
additional options, such as IRS's toll-free telephone service, Web
site, and numerous volunteer sites. It is unclear, however, whether the
declining volume is an indicator of how well IRS is meeting taxpayers'
demand for face-to-face assistance. For example, IRS does keep track of
the number of taxpayers entering a walk-in site, taking a number to
queue for service, but then leaving the site without receiving service.
If a taxpayer did not take a number, IRS would have no way of counting
those taxpayers.
IRS officials said the types of services offered at walk-in sites
remained constant for most sites from 2005 to 2006. For sites in areas
with a high number of natural disaster victims, IRS expanded the types
of assistance provided. For example, IRS adjusted the type of tax law
questions that it would answer at walk-in sites to include casualty
loss and removed income limitations for disaster victims seeking return
preparation assistance at walk-in sites.
Figure 2: Assistance Provided at IRS Walk-in Sites and Volunteer Sites,
2001 - 2006 Filing Seasons (contacts in millions):
[See PDF for image]
Source: GAO analysis of IRS data.
Note: "Other walk-in contacts" includes assistance for account notices,
tax law inquiries, forms, and compliance work, but not return
preparation. For the walk-in sites, the time periods covered are
December 31, 2000, through April 28, 2001; December 30, 2001, through
April 27, 2002; December 29, 2002, through April 26, 2003; December 28,
2003, through April 24, 2004; and December 26, 2004, through April 23,
2005. For volunteer sites, the time period covered for 2001 is January
1, 2001, through April 21, 2001; December 30, 2001, through April 27,
2002; December 29, 2002, through April 26, 2003; December 28, 2003,
through April 24, 2004; and December 26, 2004, through April 23, 2005.
[A] Fiscal years 2006 and 2007 are IRS projections. For walk-in sites,
projections cover the time periods of December 25, 2005 through April
22, 2006, and December 31, 2006 through April 28, 2007. For volunteer
sites, projections cover the time periods from January 1 through April
30, 2006 and 2007.
[End of figure]
In contrast to IRS walk-in sites, the number of taxpayers seeking
return preparation assistance at approximately 14,000 volunteer sites
has increased this year by 8.7 percent, continuing the trend since 2001
(see fig. 2). These sites, often run by community-based organizations
and staffed by volunteers who are trained and certified by IRS, do not
offer the range of services IRS provides at walk-in sites, but instead
focus on preparing tax returns primarily for low-income and elderly
taxpayers and operate chiefly during the filing season. As we have
previously reported,[Footnote 17] the shift of taxpayers from walk-in
to volunteer sites 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.
IRS has used both 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 noted above, volunteer sites
performed outreach within their network of partners by creating
training material for tax preparers, and agreeing with two
organizations to accept referrals from IRS of disaster victims needing
tax return preparation assistance.
IRS continues to lack reliable data on the quality of the services
provided at walk-in and volunteer sites. As in previous years, TIGTA is
conducting an audit on the accuracy of some services provided at walk-
in sites, although the results will not be available until after the
filing season. However, TIGTA has noted problems with the quality of
services provided at IRS walk-in sites in prior reports.[Footnote 18]
We have made recommendations for IRS to improve its quality measurement
at walk-in sites.[Footnote 19] At volunteer sites, IRS is conducting
different types of reviews to monitor tax return preparation
assistance.[Footnote 20] According to IRS officials, the results to
date show that the quality of service has improved at volunteer sites
compared to previous years, but they acknowledge that challenges remain
in terms of volunteers' adherence to IRS's procedures and use of IRS
materials. As in previous years, TIGTA will conduct limited quality
reviews at volunteer sites. While the results of those reviews are
based on a judgmental sample, TIGTA has concluded in the past that,
while significant improvements have been made in the oversight of
volunteer sites, continued effort is needed to ensure the accuracy of
tax return assistance provided.[Footnote 21]
Taxpayers Using Chain Paid Tax Preparers May Receive Incorrectly
Completed Tax Returns:
In addition to service from IRS, millions of taxpayers receive service,
such as tax return preparation, from paid preparers. About 56 percent
of about 130 million individual tax returns filed for tax year 2002
used a paid tax preparer, with higher paid preparer usage among
taxpayers with more complicated returns.[Footnote 22]
We recently reported, however, that some preparers make serious errors
when completing returns. Based on our very limited sample of 19 paid
tax preparers, taxpayers who rely on tax preparers to provide them with
accurate, complete, and fully compliant tax returns may not get what
they pay for. For example, during visits to paid preparers, tax returns
prepared for GAO often varied widely from what we determined the
returns should and should not include, sometimes with significant
consequences. Their work resulted in unwarranted extra refunds of up to
almost $2,000 in 5 instances, while in 2 cases they cost the taxpayer
over $1,500.
Some of the most serious problems involved paid preparers:
* not reporting business income in 10 of 19 cases;
* not asking about where a child lived or ignoring GAO's answer to the
question therefore allowing an ineligible child to be claimed for the
Earned Income Tax Credit in 5 out of the 10 applicable cases;
* failing to take the most advantageous postsecondary education tax
benefit in 3 out of the 9 applicable cases; and:
* failing to itemize deductions at all or failing to claim all
available deductions in 7 out of the 9 applicable cases.
Many of the problems we identified put paid preparers, taxpayers, or
both at risk of IRS enforcement actions. According to IRS officials,
paid preparers and taxpayers risk enforcement action by filing a tax
return that includes the types of misstatements or omissions we
reported. According to the officials, if IRS were to uncover problems
with the preparation of real tax returns similar to several that we
found, the preparers would be subject to civil sanctions. If an
erroneous return was prepared, in addition to paying the correct tax
due and any related late payment interest, the taxpayer may also be
assessed a penalty, depending on the facts and circumstances of each
situation, according to IRS officials. For example, if taxpayers
substantially understate income, overstate deductions, or provide other
incorrect information resulting in decreased tax or improperly high
refunds, they may be assessed an accuracy-related penalty. The penalty
could be assessed for any failure to comply with the tax laws,
including the failure to report self-employment income (further
discussion on the consequences of the errors of paid tax preparers is
provided in the discussion on the tax gap).
IRS's Budget Proposes Decreases in Staffing and Identifies Savings, but
Opportunities for Additional Savings Exist:
IRS's fiscal year 2007 budget request is a small decrease compared to
2006 enacted levels after adjusting for expected inflation. It proposes
to reduce overall staffing levels, as well as staffing levels for
taxpayer service and enforcement activities, while maintaining or
improving taxpayer service and enforcement. As it has in prior years,
IRS has identified some savings, but additional opportunities exist for
enhancing savings.
IRS's Budget Proposes Decreases in Funding After Adjusting for Expected
Inflation and in Staffing:
IRS's proposed fiscal year 2007 budget is $11 billion (a 1.6 percent
increase), but after adjusting for expected inflation, it reflects a
slight decrease over last year's enacted budget. The $11 billion
includes $417 million from new and existing user fees and reimbursable
agreements with other federal agencies.[Footnote 23] The 2007 budget
request for IRS's appropriation accounts is shown in table 2 (see app.
II for more details).[Footnote 24]
Table 2: IRS's Changes in Funding and FTEs for Fiscal Years 2006
through 2007:
Dollars in thousands.
Processing, Assistance, and Management (PAM);
Fiscal year 2007 requested including new user fee revenue;
Dollars: $4,159,893; FTEs: 37,126;
Fiscal year 2006 enacted;
Dollars: $4,095,212; FTEs: 38,796;
Percentage change fiscal year 2006-2007;
Dollars: $1.58; FTEs: -4.30.
Tax Law Enforcement (TLE);
Fiscal year 2007 requested including new user fee revenue;
Dollars: $4,764,954; FTEs: 49,479;
Fiscal year 2006 enacted;
Dollars: $4,678,498; FTEs: 50,559;
Percentage change fiscal year 2006-2007:
Dollars: $1.85; FTEs: -2.14.
IS;
Fiscal year 2007 requested including new user fee revenue;
Dollars: $1,619,834; FTEs: 7,351;
Fiscal year 2006 enacted;
Dollars: $1,582,977; FTEs: 7,032;
Percentage change fiscal year 2006-2007;
Dollars: $2.33; FTEs: 4.54.
BSM;
Fiscal year 2007 requested including new user fee revenue;
Dollars: $167,310; FTEs: 0;
Fiscal year 2006 enacted;
Dollars: $197,010; FTEs: 0;
Percentage change fiscal year 2006-2007;
Dollars: $-15.08; FTEs: 0.00.
Health Insurance Tax Credit Administration (HITCA);
Fiscal year 2007 requested including new user fee revenue;
Dollars: $14,846; FTEs: 17;
Fiscal year 2006 enacted;
Dollars: $20,008; FTEs: 17;
Percentage change fiscal year 2006-2007;
Dollars: $-25.80; FTEs: 0.00.
Total;
Fiscal year 2007 requested including new user fee revenue;
Dollars: $10,726,837; FTEs: 93,973;
Fiscal year 2006 enacted;
Dollars: $10,573,706; FTEs: 96,404;
Percentage change fiscal year 2006-2007;
Dollars: $1.45; FTEs: -2.52.
Existing user fees and reimbursables[A];
Fiscal year 2007 requested including new user fee revenue;
Dollars: $282,543; FTEs: 1,503;
Fiscal year 2006 enacted;
Dollars: $258,820; FTEs: 1,350;
Percentage change fiscal year 2006-2007;
Dollars: $9.17; FTEs: 11.33.
Total program operating level;
Fiscal year 2007 requested including new user fee revenue;
Dollars: $11,009,380; FTEs: 95,476;
Fiscal year 2006 enacted;
Dollars: $10,832,526; FTEs: 97,754;
Percentage change fiscal year 2006-2007:
Dollars: $1.63; FTEs: -2.33.
Source: GAO analysis of IRS data.
Notes: For fiscal year 2007, the figures shown for requested FTEs
reflect an IRS adjustment and differ slightly from what IRS reported in
its budget request. The Congressional Budget Office projects the
inflation rate to be 1.8 percent in 2007; therefore, IRS's proposed
increases are less than the rate of inflation.
[A] Reimbursables are payments IRS receives for providing services to
other federal agencies and states.
[End of table]
The real decrease in the proposed budget can be seen in staffing. IRS
proposes to fund 95,476 FTEs in fiscal year 2007, down over 2 percent
from 97,754 FTEs in enacted fiscal year 2006 (see table 5 in app. II
for comparisons in enacted FTE levels for fiscal years 2002 through
2007). Actual FTEs tend to be lower than enacted FTEs, in part, because
of how IRS absorbs unbudgeted costs (see table 6 in app. II for actual
FTEs).
The decrease in FTEs may be greater than shown in IRS's fiscal year
2007 budget request. Every year agencies, including IRS, are expected
to absorb some costs that are not included in their budget requests.
For fiscal year 2007, IRS officials currently anticipate having to
absorb over $117 million in costs, including about $41 million for
homeland security-related controls over physical access to government
facilities. Absorbing such costs reduces the actual number of FTEs that
IRS can support. For example, for fiscal year 2005, the enacted level
of FTEs was 96,435 but the actual level was 94,282.
IRS's Budget Request Proposes to Maintain or Improve Taxpayer Services
with Fewer Resources:
IRS is requesting $4.2 billion for PAM, including some user fees, which
is funding primarily spent on providing service to taxpayers.[Footnote
25] The amount requested is about a 1.6 percent increase over fiscal
year 2006 enacted levels, but is a slight decrease after adjusting for
expected inflation. This funding level translates into reduced
staffing, down over 4 percent from an enacted level of 38,796 FTEs in
fiscal year 2006 to 37,126 proposed FTEs in fiscal year 2007. Since
fiscal year 2002, FTEs devoted to PAM have declined over 15 percent
from an enacted level of 43,866 FTEs.
Despite the proposed inflation-adjusted decrease in funding in 2007,
IRS is planning to maintain or improve taxpayer services. For every one
of the major taxpayer services listed in the budget, 2007 planned
performance goals are higher or equal to 2006 performance goals. These
services include telephone assistance and refund issuance.
IRS's Budget Request Reduces Enforcement Staffing Slightly, While
Increasing Major Enforcement Activities:
IRS is requesting $4.8 billion for TLE. [Footnote 26] The 2007 budget
request proposes an overall decrease in enforcement FTEs, down over 2
percent to a proposed 49,479 FTEs from last year's enacted level of
50,559 FTEs. For its three main categories of skilled enforcement
staff, IRS is proposing a marginal increase in staffing of 0.2 percent
(see fig. 3). For special agents (those who perform criminal
investigations), the increase is 1.7 percent. For the other two
categories--revenue agents (those who examine complex returns), revenue
officers (those who perform field collection work)--IRS is proposing to
keep the number of staff the same as in 2006.
Figure 3: Revenue Agents, Revenue Officers, and Special Agents, Fiscal
Years 1998-2007:
[See PDF for image]
Source: GAO analysis of IRS data.
Notes: Numbers for 2006 and 2007 are IRS estimates. IRS recalculated
the figures since GAO reported them last year. GAO is using the new
figures because IRS has validated those figures using its new cost
accounting system.
[End of figure]
Despite keeping skilled enforcement staff virtually unchanged, IRS is
proposing to maintain or increase its major enforcement activities. For
all the major enforcement activities listed in the budget, IRS is
establishing goals in 2007 that are higher or equal to 2006 planned
performance goals. Major enforcement activities include individual
taxpayer examinations, collection coverage,[Footnote 27] and criminal
investigations completed. IRS officials anticipate increased revenue
collected and other performance improvements as a result of using data
from IRS's most current compliance research effort, known as the
National Research Program (NRP).[Footnote 28]
Budget Request for IS Funding is Up Slightly, and IRS Has Taken
Additional Steps to Improve Budgeting for IS Operations and Maintenance:
IRS is requesting about $1.6 billion for IS in fiscal year 2007, which
is intended to fund information technology (IT) staff and related costs
for activities such as information security and maintenance and
operations of its current tax administration systems. Although the
number of FTEs proposed in 2007 is up when enacted FTEs are considered,
it is virtually the same as the operating level currently assumed in
2006 (see app. II for more details).
In 2002, we reported that the agency did not develop its fiscal year
2003 IS operations and maintenance budget request in accordance with
the investment management approach used by leading organizations. We
recommended that IRS prepare its future budget requests in accordance
with these best practices.[Footnote 29] To address our recommendation,
IRS agreed to take a variety of actions, which it has made progress in
implementing. For example, IRS planned to develop a capital planning
guide to implement processes for capital planning and investment
control, budget formulation and execution, business case development,
and project prioritization. In August 2005, IRS issued the initial
version of its IT Capital Planning and Investment Control (CPIC)
Process Guide, which (1) provides executives with the framework within
which to select, control, evaluate, and maintain the portfolio of IT
investments to best meet IRS business goals and (2) defines the
governance process that integrates the agency's IT investments with the
strategic planning, budgeting, and procurement processes. According to
IRS officials and documentation, the agency formulated its prioritized
fiscal year 2007 IT portfolio and associated budget request, including
operations and maintenance requirements, in accordance with this CPIC
Process Guide. We will continue to monitor the implementation of IRS's
CPIC process as its IT investment management process matures.
In addition, IRS stated that it planned to develop an activity-based
cost module to plan, project, and report costs for business tasks/
activities funded by the IS budget. During fiscal year 2005, as part of
the first release of the Integrated Financial System (IFS),[Footnote
30] IRS implemented a cost module that is potentially capable of
allocating costs by activity. However, agency officials stated that
they needed to accumulate 3 years of actual costs to have the
historical cost data necessary to provide a basis for meaningful future
budget estimates. Since then, according to the Office of the Chief
Financial Officer, IRS has (1) populated the cost module with all
actual fiscal year 2005 expenses; (2) identified the data needed from
IFS to support its budget requests; and (3) developed a system to
capture, test, and analyze the cost data to devise a standard
methodology to provide the necessary data from the cost module. IRS
still expects to have the requisite 3 years of historical cost data
available in time to support development of the fiscal year 2010 budget
request. Although IRS has made progress in implementing best practices
in developing its IS operations and maintenance budget, until IRS
completes the actions necessary to fully implement the activity-based
cost module, the agency will not be able to ensure that its request is
adequately supported.
IRS's Proposed BSM Budget Reduction Could Impede Future Progress:
BSM is a high-risk, highly complex effort that involves developing and
delivering a new set of information systems that are intended to
replace the agency's aging tax processing and business systems. The
program is critical to supporting IRS's taxpayer service and
enforcement goals. For example, BSM includes projects to allow
taxpayers to file and retrieve information electronically and to
provide technology solutions to help reduce the backlog of collections
cases. It also helps IRS considerably in providing the reliable and
timely financial management information needed to account for the
nation's largest revenue stream and better enable the agency to both
determine and justify its resource allocation decisions and budget
requests.
IRS's fiscal year 2007 budget request of $167.3 million for the BSM
program reflects a reduction of about 15 percent (and even greater when
adjusted for expected inflation), or about $30 million, from the
enacted fiscal year 2006 budget of $197 million.
Over the past year, IRS has made further progress in implementing BSM,
although some key projects did not meet short-term cost and schedule
commitments. During 2005 and the beginning of 2006, IRS deployed
additional releases of several modernized systems that have delivered
benefits to taxpayers and the agency, including CADE, e-Services (a new
Web portal and electronic services for paid tax preparers), and
Modernized e-File (a new electronic filing system). While three BSM
project releases were delivered within the cost and/or schedule
commitments presented in the fiscal year 2005 expenditure plan, others
experienced cost increases or schedule delays. For example, two IFS and
Modernized e-File project release segments experienced cost increases
of 93 percent[Footnote 31] and 29 percent, respectively. As we have
previously reported,[Footnote 32] the BSM program has had a history of
cost increases and schedule delays that have been due, at least in
part, to deficiencies in various management controls and capabilities
that have not yet been fully corrected. IRS is in the process of
implementing our prior recommendations to correct these deficiencies.
IRS has identified significant risks and issues that confront future
planned system deliveries. For example, according to IRS, schedule
delays and contention for key resources between multiple releases of
CADE necessitated the deferral of some functionality. This deferral, in
conjunction with additional recently reported risks and issues, may
negatively impact the cost, schedule, and functionality for future CADE
releases. The agency recognizes the potential impact of these project
risks and has developed mitigation strategies to address them. We will,
however, continue to monitor the various risks IRS identifies and the
agency's strategies to address them and will report any concerns.
IRS also has made additional progress in addressing high-priority BSM
program improvement initiatives during the past year, including
initiatives related to shifting the role of systems integrator from the
prime contractor to IRS and establishing requirements management
standards--an initiative on which we recently issued a report to you,
Mr. Chairman, and made a number of recommendations for
improvement.[Footnote 33] IRS's program improvement process appears to
be an effective means of assessing, prioritizing, and addressing BSM
issues and challenges. However, much more work remains for the agency
to fully address these issues and challenges.
In addition, in response to our prior recommendation, IRS is developing
a new Modernization Vision and Strategy to address BSM program changes
and provide a modernization roadmap. According to the Associate Chief
Information Officer for BSM, the agency's new strategy focuses on
promoting investments that provide value in smaller, incremental
releases that are delivered more frequently, with the goal of
increasing business value. IRS is currently finalizing a high-level
vision and strategy as well as a more detailed 5-year plan for the BSM
program. We believe these actions represent sound steps toward
addressing our prior recommendation to fully revisit the vision and
strategy and develop a new set of long-term goals, strategies, and
plans consistent with the budgetary outlook and with IRS's management
capabilities. Further, this strategy is important because it will
describe how and when IRS will receive the full benefits from its
modernization efforts, such as when CADE will be able to replace the
Individual Master File.
While the requested fiscal year 2007 BSM budget will allow IRS to
continue the development and deployment of the CADE, Modernized e-File,
and Filing and Payment Compliance (F&PC)[Footnote 34] projects, the
proposed reduced funding level would likely affect the agency's ability
to deliver the functionality planned for the fiscal year and could
result in project delays and/or scope reductions. This could, in turn,
impact the long-term pace and cost of modernizing tax systems and of
ultimately improving taxpayer service and strengthening enforcement.
For example, according to IRS documents, the agency had planned to
spend $85 million in fiscal year 2007 to develop and deploy additional
CADE releases that would enable the system to process up to 50 million
individual tax returns by the 2008 filing season and issue associated
refunds faster. However, with a proposed budget of $58.5 million--over
30 percent less than anticipated--IRS would likely have to scale back
its planned near-term work on this project. In addition, the reductions
to the planned budgets for the Modernized e-File and F&PC projects may
also result in IRS having to redefine the scope and/or reassess
schedule commitments for future project releases.
The proposed BSM budget reduction would also significantly reduce the
amount allotted to program management reserve by about 82 percent (from
$13 million in fiscal year 2006 to $2.3 million in fiscal year 2007).
If BSM projects have future cost overruns that cannot be covered by the
depleted reserve, this reduction could result in increased budget
requests in future years or delays in planned future activities.
While the BSM program still faces challenges, IRS has recently made
progress in delivering benefits and addressing project and program-
level risks and issues. Reducing BSM funds at a time when benefits to
taxpayers and the agency are being delivered could adversely impact the
momentum gained from recent progress and result in delays in the
delivery of future benefits. However, until IRS addresses our prior
recommendation by clearly defining its future goals for the BSM program
as well as the impact of various funding scenarios on meeting these
goals in its new Modernization Vision and Strategy, the long-term
impact of the proposed budget reduction is unclear.
IRS's Budget Request Identified Some Savings, but Opportunities Exist
for Enhancing Savings:
In its 2007 budget request, IRS identified savings as it has done in
prior years and plans to redirect some of those savings to front-line
taxpayer service and enforcement activities. IRS is proposing to save
over $121 million and 1,424 FTEs by, for example, automating the
process of providing an individual taxpayer identification number to
those taxpayers ineligible for a Social Security number and improving
data collection techniques and work processes for enforcement
activities through increased financial reporting requirements and
scanning and imaging techniques.
IRS's history of realizing savings proposed in past budget requests
provides some confidence that the agency will be able to achieve
savings in fiscal year 2007. For example, IRS reported it realized 88
percent of the anticipated dollar savings and 86 percent of the
anticipated staff savings identified in the fiscal year 2004 budget
request. IRS also reported exceeding the savings targets in the fiscal
year 2005 budget request (see app. III).
In addition to the areas identified by IRS in its budget request, there
may be additional opportunities for efficiency gains.
* Increasing electronic filing: In an era of tight budgets, continued
growth in electronic filing may be necessary to help fund future
performance improvements. One proposal for continuing to increase
electronic filing is additional use of electronic filing mandates.
Currently, IRS mandates electronic filing for large corporations. The
2007 budget request proposes a legislative change that would expand its
authority to require electronic filing for businesses. Moreover, 12
states now mandate electronic filing for certain classes of tax
preparers (see app. IV for more information on state mandates). As we
have reported,[Footnote 35] although there are costs and burdens likely
to be associated with electronic filing mandates for paid tax preparers
and taxpayers, state mandates have generated significant increases in
electronic filing. IRS has an electronic filing strategy, which the
agency is updating.
* Changing the menu of taxpayer services: IRS currently lacks a
comprehensive strategy explaining how its various taxpayer services
(including its telephone, walk-in, volunteer, and Web site assistance)
will collectively meet taxpayer needs. In response to a Congressional
directive,[Footnote 36] IRS is developing such a strategy. The strategy
is important because some taxpayers may not be well served by the
current service offerings. IRS's attempts to reduce some taxpayer
services, namely reducing the hours of telephone operations and closing
some walk-in sites, have met with resistance from the Congress.
Although congressional directives to study the impact of IRS's actions
exist,[Footnote 37] we still believe there may be opportunities to
adjust IRS's menu of services to reduce costs, without affecting IRS's
ability to meet taxpayers' needs.
* Consolidating telephone call sites: IRS operates 25 call sites
throughout the country. Consistent with earlier plans, IRS closed two
of its smallest call sites--Chicago and Houston--in March 2006, to
realize savings in its toll-free telephone operations. Also, IRS has
gained efficiencies from using a centralized call router located in
Atlanta. As a result, there are currently more than 850 workstations
that are not being used; consequently, IRS may have the potential to
close several additional call sites. Consolidations would not affect
telephone service and would be invisible from the taxpayer's
perspective.
Accurate Cost Information Would Help IRS Make Resource Allocation
Decisions, and Help Provide Some Information about the Return on
Investment for its Programs:
Managing a federal agency as large and complex as IRS requires managers
to constantly weigh the relative costs and benefits of different
approaches to achieving the goals mandated by the Congress. Management
is constantly called upon to make important long-term strategic as well
as daily operational decisions about how to make the most effective use
of the limited resources at its disposal. As constraints on available
resources increase, these decisions become correspondingly more
challenging and important. In order to rise to this challenge,
management needs to have current and accurate information upon which to
base its decisions, and to enable it to monitor the effectiveness of
actions taken over time so that appropriate adjustments can be made as
conditions change.
In its ongoing effort to make such increasingly difficult resource
allocation decisions and defend those decisions before the Congress,
IRS has long been hampered by a lack of current and accurate
information concerning the costs of the various options being
considered. Instead, management often has relied on a combination of
the limited existing cost information; the results of special analysis
initiated to establish the full cost of a specific, narrowly defined
task or item; and estimates based on the best judgment of experienced
staff. This has impaired IRS's ability to properly decide which, if
any, of the options at hand are worth the cost relative to the expected
benefits. For example, accurate and timely cost information may help
IRS consider changes in the menu of taxpayer services that it provides
by identifying and assessing the relative costs, benefits, and risks of
specific projects. Without reliable cost information, IRS's ability to
make such difficult choices in an informed manner is seriously impaired
and IRS cannot prepare cost-based performance measures to assist in
measuring the effectiveness of its programs over time.
Further, IRS does not have the capability to develop reliable
information on the return on investment for each category of taxpayer
service and enforcement. IRS lacks reliable information on both the
return from services (the additional revenue collected by helping
taxpayers understand their tax obligations) and the investment or cost
of the services. While developing return on investment information is
difficult, the cost component of that equation may be the least complex
to develop. Having such cost information is a building block for
developing return on investment estimates. For its enforcement
programs, IRS has developed a rough measure of return on investment in
terms of tax revenue that is directly assessed from uncovering
noncompliance. Continuing to develop return on investment measures
could help officials make more informed decisions about allocating
resources.[Footnote 38] Even without return on investment information,
cost information can help IRS determine if, for example, IRS should
change the menu of services provided.
As discussed in the BSM section, in fiscal year 2005, IRS implemented a
cost accounting module as part of IFS. However, while this module has
much potential and has begun accumulating cost information, IRS has not
yet determined what the full range of its cost information needs are or
how best to tailor the capabilities of this module to serve those
needs. Also, IRS does not have an integrated workload management system
which would provide the cost module with detailed allocation of
personnel cost information.[Footnote 39] In addition, as noted in
developing its IS budget, because it generally takes several years of
historical cost information to support meaningful estimates and
projections, IRS cannot yet rely on IFS as a significant planning tool.
It will likely require several years, implementation of additional
components of IFS, and integration of IFS with IRS's tax administration
activities before the full potential of IFS's cost accounting module
will be realized. Furthermore, IRS's fiscal year 2007 BSM budget
request does not include funding for additional releases of IFS. In the
interim, IRS decision making will continue to be hampered by inadequate
underlying cost information.
IRS Sets Long-Term Goals, but Lacks a Data-Based Plan for Achieving the
Goals, and Addressing the Tax Gap Requires Solutions Beyond Funding and
Staffing for IRS:
For the first time, IRS's budget request sets long-term goals aimed at
reducing the tax gap, although IRS does not have a data-based plan for
achieving the goals. However, because of its persistence, reducing the
tax gap requires solutions which go beyond funding and staffing for IRS.
IRS's Budget Proposes Long-Term Goals, but Lacks a Data-Based Plan for
Achieving Them:
IRS established two agencywide, long-term performance goals, as shown
in table 3. IRS plans to improve voluntary compliance from 83 percent
in 2005 to 85 percent by 2009, and reduce the number of taxpayers who
think it is acceptable to cheat on their taxes from 10 percent in 2005
to less than 9 percent in 2010. According to IRS, these are the first
in a series of quantitative goals that will link to its three strategic
goals--improve taxpayer service, enhance tax law enforcement, and
modernize IRS through technology and processes.
Table 3: IRS Agencywide Goals for Fiscal years 2004 through 2010:
Performance level: Improve voluntary compliance;
Fiscal year 2004 actual performance: N/A;
Fiscal year 2005 actual performance: 83.0%;
Fiscal year: 2006 planned performance: N/A;
Fiscal year: 2007 planned performance: N/A;
Fiscal year: 2008 planned performance: N/A;
Fiscal year: 2009 planned performance: 85.0%;
Fiscal year: 2010 planned performance: N/A.
Performance level: Reduce the percentage of taxpayers who think it is
acceptable to cheat on their taxes;
Fiscal year 2004 actual performance: 12.0%;
Fiscal year 2005 actual performance: 10.0%;
Fiscal year: 2006 planned performance: 10.0%;
Fiscal year: 2007 planned performance: 10.0%;
Fiscal year: 2008 planned performance: 9.0%;
Fiscal year: 2009 planned performance:
