Tax Administration
2007 Filing Season Continues Trend of Improvement, but Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated Gao ID: GAO-08-38 November 15, 2007In 2007, the Internal Revenue Service (IRS) will spend over $3 billion to process returns and provide taxpayer service. Effective service can reduce taxpayers' burden of complying with tax laws and, many tax experts believe, may improve compliance. GAO was asked to assess IRS's performance relative to 2007 goals and prior years' performance including identifying actions that might generate efficiencies and increase compliance. GAO analyzed IRS performance data, reviewed IRS operations at various locations, and interviewed IRS and paid preparer representatives.
IRS improved most filing season services during 2007, continuing a longer-term trend. Tax return processing exceeded last year's performance by most measures. Electronic filing grew at a faster rate than IRS anticipated and continued to generate savings. Access to IRS telephone assistors was comparable to last year, and the accuracy of responses to questions remained at about 90 percent. The performance of IRS's Web site improved in several measures, such as customer satisfaction. Continuing past trends, more taxpayers used volunteer sites, which are less costly than IRS's walk-in sites. Despite these improvements, IRS could reduce the number of paper tax returns processed and also transcribe all lines from the residual paper returns, making that data more available for enforcement. Two options for reducing paper processing are electronic filing mandates, previously suggested by GAO, and bar coding, which could be required for paper returns prepared on computers and reduces processing costs. Currently, because of the cost, IRS does not transcribe all lines from paper returns. Further, IRS policy is to post the same lines from electronic and paper returns to its enforcement databases. As a result, IRS does not use all tax return information in its automated compliance checking programs. However, IRS does not know the actions needed to require software vendors to include bar codes on printed tax returns; the benefits, in terms of processing savings and improved enforcement, of having all return data available electronically; or how much electronic filing would have to increase, either through mandates or bar coding, for the benefits of transcribing all residual paper returns to exceed the costs. Despite more reliance on its volunteer program, IRS has not evaluated its effectiveness at reaching underserved taxpayers. Further, IRS may be missing an opportunity to assess the quality of return preparation assistance at its walk-in sites through contact recording, a system IRS uses to record and assess the quality of other interactions between its employees and taxpayers.
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-08-38, Tax Administration: 2007 Filing Season Continues Trend of Improvement, but Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated
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United States Government Accountability Office:
GAO:
Report to Congressional Requesters:
November 2007:
Tax Administration:
2007 Filing Season Continues Trend of Improvement, but Opportunities to
Reduce Costs and Increase Tax Compliance Should be Evaluated:
GAO-08-38:
GAO Highlights:
Highlights of GAO-08-38, a report to congressional requesters.
Why GAO Did This Study:
In 2007, the Internal Revenue Service (IRS) will spend over
$3 billion to process returns and provide taxpayer service. Effective
service can reduce taxpayers‘ burden of complying with tax laws and,
many tax experts believe, may improve compliance. GAO was asked to
assess IRS‘s performance relative to 2007 goals and prior years‘
performance including identifying actions that might generate
efficiencies and increase compliance. GAO analyzed IRS performance
data, reviewed IRS operations at various locations, and interviewed IRS
and paid preparer representatives.
What GAO Found:
IRS improved most filing season services during 2007, continuing a
longer-term trend. Tax return processing exceeded last year‘s
performance by most measures. Electronic filing grew at a faster rate
than IRS anticipated and continued to generate savings. Access to IRS
telephone assistors was comparable to last year, and the accuracy of
responses to questions remained at about 90 percent. The performance of
IRS‘s Web site improved in several measures, such as customer
satisfaction. Continuing past trends, more taxpayers used volunteer
sites, which are less costly than IRS‘s walk-in sites.
Despite these improvements, IRS could reduce the number of paper tax
returns processed and also transcribe all lines from the residual paper
returns, making that data more available for enforcement. Two options
for reducing paper processing are electronic filing mandates,
previously suggested by GAO, and bar coding, which could be required
for paper returns prepared on computers and reduces processing costs.
Currently, because of the cost, IRS does not transcribe all lines from
paper returns. Further, IRS policy is to post the same lines from
electronic and paper returns to its enforcement databases. As a result,
IRS does not use all tax return information in its automated compliance
checking programs. However, IRS does not know the actions needed to
require software vendors to include bar codes on printed tax returns;
the benefits, in terms of processing savings and improved enforcement,
of having all return data available electronically; or how much
electronic filing would have to increase, either through mandates or
bar coding, for the benefits of transcribing all residual paper returns
to exceed the costs.
Despite more reliance on its volunteer program, IRS has not evaluated
its effectiveness at reaching underserved taxpayers. Further, IRS may
be missing an opportunity to assess the quality of return preparation
assistance at its walk-in sites through contact recording, a system IRS
uses to record and assess the quality of other interactions between its
employees and taxpayers.
Figure: IRS‘s 2007 Filing Season Activities:
What GAO Recommends:
GAO recommends that IRS determine the actions needed to require for
software vendors to include bar codes on printed returns, the benefits
of having all return information available electronically, and how much
electronic filing would have to increase for the benefits of
transcribing all paper returns to exceed the costs. GAO also recommends
that IRS develop estimates of the effectiveness of its volunteer
program, and determine the feasibility of using contact recording to
monitor return assistance quality at walk-in sites.
In response, the Acting IRS Commissioner agreed with our
recommendations and outlined the actions that IRS would take.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-08-38]. For more information, contact James
White at (202) 512-9110, or WhiteJ@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Scope and Methodology:
Background:
Electronic Filing Continued to Generate Savings, Processing Performance
Improved, but CADE Was Delayed, and Opportunities Exist to Reduce Costs
and Improve Compliance:
IRS Has Limited Information on Paid Preparers Who Prepare the Majority
of Tax Returns, but Has Efforts Underway to Acquire More:
Access to IRS‘s Telephone Assistors Was Comparable to Last Year,
Accuracy Remains High, and IRS Is Reviewing Options for Reducing Excess
Capacity at Call Sites:
Web Site Performance Remains High, and Initiatives Are On-going to
Enhance Web Capabilities and User Experience:
Taxpayer Assistance Continued to Grow at Volunteer Sites and Decline at
IRS‘s Walk-in Sites; While Quality has Improved in Some Areas, More
Reliable Data Are Needed:
The Value of TAB Depends on Funding and Ability to Link Taxpayer
Service to Compliance:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: IRS‘s Processing Performance Relative to 2001-2006
Performance and 2007 Goals:
Appendix II: Comments from the Internal Revenue Service:
Tables:
Table 1: IRS Telephone Assistors Performance, 2001”2007 Filing Seasons:
Table 2: IRS Telephone Assistor Accuracy Performance, 2001”2007 Filing
Seasons:
Table 3: IRS Web Site Use, 2006 and 2007 (data are in thousands):
Table 4: IRS‘s Fiscal Year 2005 Estimated Unit Costs:
Table 5: IRS‘s Processing Performance, Fiscal Years 2001”2007:
Figures:
Figure 1: IRS‘s 2007 Filing Season Activities:
Figure 2: Percentage of Returns with a Paid Preparer Signature:
Figure 3: How IRS Handled Calls During 2007:
Figure 4: Telephone Assistance and Paper Inventory Resources by
Workload:
Figure 5: Trends in Face-to-face Return Preparation, 2001 through 2007:
Figure 6: Contact Recording at Walk-in Sites:
Abbreviations:
AMS: Account Management System:
BSM: Business Systems Modernization:
CADE: Customer Account Data Engine:
IRS: Internal Revenue Service:
RRA 98: IRS Restructuring and Reform Act of 1998:
SSN: Social Security numbers:
TAB: Taxpayer Assistance Blueprint:
TETR: Telephone Excise Tax Refund:
TIGTA: Treasury Inspector General for Tax Administration:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
November 15, 2007:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Jim Ramstad:
Ranking Member:
Subcommittee on Oversight:
Committee on Ways and Means:
House of Representatives:
The quality of the Internal Revenue Service‘s (IRS) filing season
service is important for several reasons. Effective service can reduce
the burden for taxpayers, in terms of time and money, of complying with
tax laws. Further, many tax experts believe that quality service has a
positive effect on compliance, although it is difficult to demonstrate
empirically.
Taxpayer service also matters because IRS allocated over 30 percent of
its $11 billion budget to provide such service for fiscal year 2007.
IRS spends most of this during the filing season when most taxpayers
interact with the agency.[Footnote 1] Filing season service includes
individual income tax return processing as well as telephone, Web site,
and face-to-face assistance. In past reports and testimonies we said
that IRS has made significant progress improving taxpayer service since
the passage of the IRS Restructuring and Reform Act of 1998 (RRA 98).
[Footnote 2] In an effort to continue improving service, IRS recently
released, as mandated by the Congress, its Taxpayer Assistance
Blueprint (TAB). TAB is intended to outline a 5-year comprehensive
strategy for improving taxpayer service while minimizing cost and
determining the link between service and compliance.[Footnote 3]
In addition to IRS, paid tax return preparers are another important
provider of service to taxpayers during the filing season, preparing
over half of individual income tax returns. In previous reports, we
have expressed concern about the quality of paid preparer service and
lack of information IRS has about the extent of problems.[Footnote 4]
In light of the tax filing season‘s cost and importance to taxpayers,
you asked us to assess IRS‘s 2007 filing season performance. Our
objectives, for each of IRS‘s main filing season services, were to
assess IRS‘s performance relative to 2007 goals and prior years‘
performance, including identifying actions that might generate
efficiencies and increase compliance, and the extent to which IRS
monitors paid preparer performance. Additionally, you asked us to
describe the challenges associated with TAB. We testified on IRS‘s
interim 2007 performance before the Subcommittee on Financial Services
and General Government, Committee on Appropriations, U.S. Senate, on
May 9, 2007, and before the Committee on Finance, U.S. Senate, on April
12, 2007; we also issued a report to the Subcommittee on Oversight,
Committee on Ways and Means, House of Representatives on April 3,
2007.[Footnote 5]
We based our assessment on the results and analyses of IRS data and
reports, workload and performance information, observations of IRS‘s
operations, interviews with IRS officials, information from
representatives of some of the larger tax preparation companies and
professional associations that represent preparers providing tax
assistance, and reports by the Treasury Inspector General for Tax
Administration (TIGTA). We have used IRS data in past filing season
reports and continue to find them sufficiently reliable for the
purposes of this report. Further details on our scope and methodology
are provided later in this report. We performed our work from January
through October 2007 in accordance with generally accepted government
auditing standards.
Results in Brief:
IRS improved most of its filing season services”paper and electronic
processing and telephone, Web site, and face-to-face assistance”but
opportunities to realize additional savings and increase tax compliance
exist, but have not been evaluated.
Processing: IRS processed approximately 135 million individual income
tax returns during 2007, by most measures exceeding last year‘s
performance and meeting this year‘s goals. However, further
improvements in processing are possible. First, IRS delivered the
latest release of its new tax return processing system, the Customer
Account Data Engine (CADE), late, which prevented millions of taxpayers
from getting faster refunds in 2007. The new release was fully
operational in May, which should benefit taxpayers in the 2008 filing
season. Second, despite almost 60 percent of returns being filed
electronically, taxpayers filed over 50 million returns on paper.
Because of the cost, IRS does not transcribe all lines from tax
returns, precluding the use of these data in IRS‘s computerized
compliance checks. Further, to avoid disadvantaging taxpayers who file
electronically, IRS does not post those lines from electronic returns
to its enforcement data bases. At least two options exist for
transcribing and posting all lines from tax returns. One, which we
previously suggested, is to mandate electronic filing for paid
preparers. Another option would be to require paper returns prepared
using commercial software to be bar coded, allowing for scanning and
some of the efficiencies of electronic filing. Either option might
reduce the number of residual paper returns enough to allow for full
transcription. Although IRS has done some research on bar coding and
full transcription, it does not know the actions needed to require
commercial software vendors to include bar codes on printed returns,
the benefits in terms of processing cost savings and increased
enforcement revenue of having all tax return data available
electronically, or how much electronic filing would have to increase
(either through mandates or bar coding) for the benefits of fully
transcribing all residual paper returns to exceed the costs.
Paid preparers: In 2006, paid preparers accounted for 61 percent of
returns filed. IRS gathers basic information on preparers, such as
names and Social Security numbers (SSN), but does not compile other
information about each preparer, such as the number of returns filed and
type of preparer.[Footnote 6] IRS has research and other initiatives
under way to gather more information on paid preparers, which should
give the Congress and IRS a better basis for making decisions about the
future oversight of paid preparers.
Telephone assistance: Access to IRS telephone assistors was comparable
to last year and the accuracy of responses to telephone tax law and
account questions is at least 90 percent. IRS has several improvement
initiatives under way and is reviewing options for reducing excess
capacity at call sites, addressing our previous recommendation to
timely develop and implement a plan to consolidate excess capacity at
call sites.
Web site: IRS‘s Web site performed well according to independent rating
services. IRS‘s Web site is the least expensive way to provide service
and is consistent with IRS‘s strategy of increasing self-assistance.
Face-to-face assistance: Fewer taxpayers used IRS‘s walk-in sites,
while more used return preparation assistance at volunteer sites. IRS
continues to miss opportunities to assess the quality of face-to-face
assistance. Despite IRS‘s increased reliance on community-based
volunteers to target underserved populations, such as the elderly, IRS
does not know the effectiveness of such targeting. At its walk-in
sites, IRS uses direct observation to assess the accuracy of return
preparation. However, because this method is likely to yield biased
results, IRS lacks valid performance information. In contrast, contact
recording”a system capturing the audio portion of the assistor/taxpayer
interactions and assistors‘ computer screen activity”shows promise in
monitoring the accuracy of tax law and account assistance.
Taxpayer Assistance Blueprint (TAB): IRS has completed TAB, a data-
driven strategy for improving services to taxpayers, lowering costs, and
understanding the link between taxpayer service and compliance. TAB has
potential value. In the past we have stressed the importance of
reconsidering the level and types of services IRS provides to
taxpayers, such as whether to maintain the same number of walk-in
sites. Realizing the value of TAB will depend on several factors, such
as future funding and progress quantifying the link between service and
compliance.
We recommend that the Commissioner of the Internal Revenue direct the
appropriate officials to:
* determine actions needed to require software vendors to include bar
codes on printed individual income tax returns and the cost of those
actions;
* determine the benefits, in terms of processing costs and improved
enforcement, of having all return information available electronically;
* determine how much electronic filing would have to increase, either
through electronic filing mandates or bar coding, for the benefits of
transcribing all remaining paper returns to exceed the costs;
* develop estimates of the effectiveness of IRS‘s volunteer program at
targeting underserved populations; and:
* determine the feasibility of using contact recording as a method of
monitoring and improving the quality of return preparation assistance
at IRS‘s walk-in sites.
In commenting on a draft of this report (see app. II), the IRS
Commissioner agreed with our recommendations and outlined IRS‘s actions
to address those recommendations.
Scope and Methodology:
To assess IRS‘s 2007 filing season performance in the key filing season
activities compared to goals and past performance, and identify and
assess potential improvements or efficiencies in filing season
operations, we:
* reviewed and analyzed IRS reports, testimonies, budget submissions,
and other documents and data, including workload data, data related to
IRS‘s performance measures and goals, and data on taxpayer usage and
other statistics such as the number of paid preparers;
* observed operations at IRS‘s Atlanta, Ga. and Andover, Ma. paper
processing centers, the Atlanta and Andover call sites, the Joint
Operations Center (which manages IRS‘s telephone services) in Atlanta,
and several of IRS‘s walk-in locations in Atlanta and Baltimore, Md.
and 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;
* tested for statistically significant differences between annual
performance measures based on IRS sample data;
* analyzed staffing data for paper and electronic filing, telephone
assistance, and walk-in assistance;
* reviewed information from organizations, such as Keynote Systems,
that evaluate Internet performance;
* interviewed IRS officials about current operations, performance
relative to 2007 performance goals and prior filing season performance,
trends, significant factors and initiatives that affected or were
intended to improve performance, monitoring and oversight of paid tax
preparers, and research conducted or planned to examine links between
taxpayer service and compliance;
* interviewed representatives of some of the larger private and
nonprofit organizations that prepare tax returns, including H&R Block
and trade organizations that represent both individual paid preparers,
tax preparation companies, and professional associations, including the
American Institute of Certified Public Accountants;
* reviewed TIGTA reports and interviewed TIGTA officials about IRS‘s
performance and initiatives; and:
* reviewed prior GAO reports and followed up on our recommendations
made in prior filing season and related reports.
This report discusses numerous filing season performance measures and
data that cover the quality, accessibility, and timeliness of IRS‘s
services that, based on our prior work, we consider sufficiently
objective and reliable for purposes of this report. 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 7] Data limitations are discussed where
appropriate. Finally, we conducted our work primarily at IRS
headquarters in Washington, D.C., the Wage and Investment Division
headquarters in Atlanta, Ga., as well as the other sites mentioned
earlier.
Background:
IRS‘s filing season is an enormous and critical undertaking that
consists of two primary activities, processing individual income tax
returns and providing taxpayer assistance. It consumes more than $3
billion annually.
Figure 1: IRS‘s 2007 Filing Season Activities:
[See PDF for image]
This figure includes a graphic illustration of tax forms, as well as
depicting the following data:
Returns processing:
* 56 million paper returns at 5 paper processing centers;
* 79 million electronic returns at 5 electronic processing centers.
Taxpayer assistance:
* 69 million toll-free calls at 24 call sites and automation;
* 5 million walk-in contacts at 401 walk-in sites and 12,000 volunteer
sites;
* 121 million Internet downloads at IRS website.
Source: GAO analysis of IRS data, IRS (images).
Notes: The number of paper and electronic returns are estimated for the
time period January 1, 2007, to September 14, 2007; toll-free calls for
the time period January 1, 2007 to June 30, 2007; walk-in contacts,
which includes returns prepared at IRS walk-in sites from December 31,
2006, through April 21, 2007, and volunteer sites from January 1
through April 30, 2007; and Internet downloads for the time period
January through July 2007. We used different dates for the various
areas that best reflect IRS‘s filing season workload in that area.
[End of figure]
Taxpayers can file their returns by mailing paper returns to one of
IRS‘s five paper processing centers or submitting the returns
electronically.[Footnote 8]
Electronic filing has provided IRS with significant cost savings.
Electronic filing is faster, which allows taxpayers to receive refunds
faster, and is less error prone”IRS does not have to transcribe
electronic tax return information and built-in checks eliminate many
errors that IRS has to address when processing paper tax returns, such
as correcting computational mistakes and SSNs. In addition, taxpayers
below an income ceiling can access the Free File program offered
through IRS‘s Web site by a consortium of 19 tax preparation companies
that offer free online tax preparation and filing services.
IRS‘s Business Systems Modernization (BSM) program, which began eight
years ago, is a high-risk, highly complex effort critical to supporting
IRS‘s taxpayer service goals, such as increasing electronic filing and
providing more accurate and timely responses to taxpayer inquiries. To
date, IRS has deployed releases of modernized systems that have
delivered substantial benefits to taxpayers and the agency, including e-
Services (a new Web portal and services for paid preparers) and parts
of CADE, which is the new taxpayer information database that
facilitates faster refund processing and provides IRS with more up-to-
date account information. CADE is intended to eventually replace IRS‘s
antiquated Individual Master File legacy processing system, which is
the agency‘s repository of taxpayer account information, and therefore,
is the BSM program‘s cornerstone and highest priority project.
[Footnote 9]
IRS also provides a variety of taxpayer services, including tax law
assistance, account resolution, limited return preparation, tax forms
and publications distribution, outreach, and education, mainly through
its telephone operations, Web site, and face-to-face assistance sites.
Taxpayers can call IRS‘s toll-free assistance telephone lines with
questions about tax law or their refunds. Depending on how taxpayers
respond to menu choices, questions are answered by an automated message
or calls are routed to telephone assistors located at 24 call sites
around the country. Calls are routed to the next available assistor
assigned to answer specific questions, e.g., tax law, account, or
refund questions.
IRS provides many services through its Web site, including ’Where‘s My
Refund,“ which enables taxpayers to use the 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.
IRS‘s volunteer program has become an increasingly important part of
IRS‘s face-to-face assistance. It expanded to 66 national partners that
include financial, social service, corporate, educational, and
government organizations and helps IRS serve traditionally underserved
taxpayer segments, including the elderly, low-income, disabled
taxpayers, taxpayers with limited-English proficiency, Native
Americans, and rural taxpayers. Additionally, IRS has 401 walk-in sites
where taxpayers can ask basic tax law questions, get account
information, receive assistance with their accounts, and have returns
prepared if their annual income is $39,000 or less.[Footnote 10]
In April 2007, IRS released its final TAB report, a 5-year plan
designed to assist the agency in providing, evaluating, and improving
taxpayer services at lower costs. As part of its research into the
costs of taxpayer services, IRS developed estimates of the cost-per-
service contact for providing different types of taxpayer services and
conducted preliminary research about the effect of taxpayer service on
compliance.[Footnote 11] We have reported that IRS lacks quantitative
estimates of the impact of taxpayer service and its enforcement efforts
on voluntary compliance; TAB should help IRS obtain better estimates.
We also have long supported IRS‘s research efforts to measure the tax
gap, which is the difference between what is paid voluntarily and on
time and what is owed, and help reduce it.[Footnote 12]
As we previously reported, despite the 2007 filing season being
characterized as high-risk, in large part because of the Telephone
Excise Tax Refund (TETR), the impact of TETR on taxpayer services has
been much less than IRS anticipated.[Footnote 13]
In addition to IRS, paid preparers are a critical part of the nation‘s
tax administration system because of the wide variety of services they
offer and their unique relationship with taxpayers. Paid preparers may
combine several taxpayer services, including help understanding tax
obligations, answering tax law questions, and providing tax forms and
publications, return preparation, and electronic filing. In previous
reports and testimony, we have reported that paid preparers have made
serious errors, although undoubtedly many do their best to provide
their clients with quality service.[Footnote 14]
Electronic Filing Continued to Generate Savings, Processing Performance
Improved, but CADE Was Delayed, and Opportunities Exist to Reduce Costs
and Improve Compliance:
Electronic filing and CADE both have the potential to further reduce
IRS‘s costs and improve processing speed and accuracy. Many tax returns
are still filed on paper, which increases processing cost, and limits
information readily available for IRS‘s enforcement programs.[Footnote
15]
Electronic Filing Continues to Increase and Generate Savings:
As of September 14, 2007, IRS processed approximately 135 million
individual income tax returns. Of those returns, approximately 79
million (58 percent) were filed electronically and the remaining 56
million were filed on paper. The number of returns filed electronically
increased 9 percent over last year, which is greater than last year‘s
increase and more than IRS projected.[Footnote ]16 One factor
contributing to the growth in electronic filing is mandates. Thirteen
states now mandate electronic filing of state returns, which has
increased electronic filing of both state and federal tax returns.
Despite the overall increase in electronic filing, taxpayer‘s use of
the Free File program continued to decline. For example, as of June 21,
IRS processed about 3.8 million returns filed through the Free File
program, 2 percent less than last year. IRS officials attributed this
decline in part to companies offering free electronic online filing
separate from the Free File program.
Growth in electronic filing generates savings for IRS by reducing staff
needed for labor-intensive paper processing.[Footnote 17] In 2006, IRS
used almost 1,700 (36 percent) fewer staff for processing tax returns
than in 1999. IRS estimates that this saved the agency $78 million in
salary, benefits, and overtime in 2006.[Footnote 18] In addition, IRS
has achieved ancillary space cost savings from the closing of
submission processing centers. IRS estimated the cost savings as a
result of closing the Brookhaven and Memphis paper processing centers
to be $24.9 million in 2007.[Footnote 19] IRS closed its Philadelphia
paper processing center at the end of September 2007, and plans to
close its Andover paper processing center in 2009.
IRS‘s Processing Performance Continues to Improve:
IRS issued over 103 million refunds, totaling almost $233 billion, as
of September 14, 2007. Nearly 60 percent of the refunds were directly
deposited, almost 7 percent over the same period last year, which is
important because direct deposit is faster, more convenient for
taxpayers, and less expensive for IRS than mailing paper checks.
IRS met or exceeded seven out of nine processing performance goals and
continues a trend of improvement (see app. I for details). For example,
IRS met or exceeded its goals for the percentage of errors included in
letters, notices, and refunds. For eight of its nine measures, IRS met
or exceeded its previous year‘s performance. IRS did not meet one goal
and paid more interest on delayed refunds than expected, because of
problems with a computer system that processes some taxpayer
identification numbers and the inexperience of new staff. IRS did not
meet its efficiency goal because it received fewer easy to process TETR
returns than expected.
Groups and organizations we spoke with, including the National
Association of Enrolled Agents, the American Institute of Certified
Public Accountants, and large tax preparation and tax preparation
software companies, corroborated what the processing performance data
showed, saying the filing season went smoothly. Similarly, TIGTA
recently reported that IRS had a successful filing season.[Footnote 20]
Delays in CADE Prevented Millions of Taxpayers from Benefiting from
Faster Refunds:
IRS was late in delivering its latest version of CADE, its new tax
return database, intended to replace the legacy Individual Master File.
CADE Release 2.2 started processing returns in early March but did not
become fully operational until late May, nearly 5 months behind
schedule, because of problems identified during testing. IRS originally
intended CADE to post 33 million taxpayer returns during 2007, more
than four times the 7.4 million posted by CADE last year. With the
delay IRS revised its estimate down to approximately 17 to 19 million
returns, then down to 11 to 12 million returns. As of early August,
CADE had posted 11 million returns, or about one-third of what IRS
expected, and disbursed 11 million refunds totaling over $11 billion.
A major benefit of CADE is that it is faster than the legacy Individual
Master File system. According to IRS officials, direct deposit refunds
are issued by CADE 1 to 5 business days faster than the current legacy
system, and paper check refunds are issued 4 to 8 business days faster.
Because of the delays in CADE millions of taxpayer refunds were not
issued as fast as IRS planned.
Even with the latest version of CADE deployed, last year IRS estimated
that over $500 million more would be required to fully implement the
individual income tax processing part of the system.[Footnote 21]
Moreover, the CADE setback adversely affected IRS‘s ability to deliver
the functionality planned for the next release, such as processing the
earned income tax credit schedule, and has caused IRS to reconsider the
functionality of other future CADE releases. IRS expects future
releases of CADE to be linked with its Account Management System (AMS)
releases, requiring increased attention to issues of synchronization
and coordination between the two systems. According to IRS officials,
CADE and AMS working together will enable IRS to process tax returns
and address many taxpayer issues, such as address changes, in a near
real-time manner, which benefits both IRS and taxpayers.
Further complicating matters, IRS has additional plans for CADE, such
as processing tax returns claiming the earned income tax credit, during
the 2008 filing season. IRS is aware of these challenges and is working
on a revised Release Content Master Plan, which it plans to complete by
November 2007, detailing the capabilities and interdependencies
associated with future releases of CADE and AMS and the plans for
replacing the legacy Individual Master File system.[Footnote 22]
IRS May Be Missing Opportunities to Further Reduce Costs and Increase
Compliance by Not Doing More to Reduce the Number of Paper Returns
Processed and Transcribe all Tax Return Data:
Paper returns cost IRS tens of millions of dollars to process. In all
of 2006, IRS received about 63 million paper returns.[Footnote 23] Of
these, 60 percent (38 million) were prepared on a computer, but then
printed and mailed to IRS. IRS codes such returns with a ’V.“ IRS
estimates that a paper return costs $2.36 more to process than an
electronically filed return. This difference implies that, if IRS could
convert all v-coders to electronic filing, IRS could save roughly $90
million annually. Furthermore, if all v-coders could be converted to
electronic filing, the number of paper returns remaining and needing to
be transcribed would be greatly reduced.
Paper returns also limit the effectiveness of IRS‘s enforcement
programs. To control costs, IRS does not transcribe all the lines on
paper tax returns into its computer databases, such as taxpayers‘
telephone numbers, limiting the amount of information available
electronically for enforcement purposes. As we previously reported,
even small changes in the amount of information IRS transcribes can
consume substantial resources that might offset some potential savings
from electronic filing.[Footnote 24] Further, to avoid disadvantaging
taxpayers who file electronically, IRS has a policy of posting the same
information from electronic and paper returns to its databases.
Consequently, if a line is not transcribed from paper returns, it is
not posted from electronic returns either. Only information posted to
computer databases is readily available for use in IRS‘s automated
compliance checking programs. These programs include matching tax
return entries with information returns from third parties, such as
Form W-2s from employers or Form 1099s from financial institutions, and
selecting suspicious returns for audit.
According to IRS officials, transcribing and posting more comprehensive
information from individual income tax returns could facilitate the
audit process, expedite contacts for faster resolution, reduce handling
costs, allow for improved case selection, and potentially better define
specific tax gap issues. Although we have not independently verified
IRS‘s methodology, for one of its main enforcement programs”the
Automated Underreporter Program”IRS officials estimate that having all
tax return information available electronically would result in a $175
million increase in tax revenue annually, while at the same time,
reduce its ’no-change“ rate, making it less likely that IRS would
select taxpayers for further contact where no additional tax was
assessed, thus lowering taxpayer burden.[Footnote 25]
State experiences provided some corroboration of IRS‘s views, as
officials we spoke with reported that greater electronic access to
return information allowed them to verify information on state returns
and improved their enforcement programs while reducing the number of
compliant taxpayers who were contacted.
At least two options exist to increase electronic filing”mandates and
bar coding. Last year we suggested that the Congress mandate electronic
filing by paid preparers meeting certain criteria, such as a threshold
number of returns.[Footnote 26] Mandating electronic filing would not
convert all v-coders, because it would not apply to taxpayers who
prepare their own returns on a computer. Still, most v-coders use a
paid preparer (68 percent in 2006).
Another option to increase electronic filing is bar coding of all
printed returns prepared using commercial software. IRS has done
preliminary research showing that 100 percent of the information on a
return could be condensed into a bar code, which could be read by hand-
held scanners. Consequently, bar coding produces some of the
efficiencies of electronic filing by replacing the labor-intensive
transcription process and eliminating transcription errors. However,
bar coding would still require some processing of paper such as
receiving and opening paper mail.
Several states already require bar coding on their printed returns and
there is an industry standard among developers and vendors for creating
bar codes.[Footnote 27] Moreover, many of the largest software
providers already support bar coding.
IRS‘s Wage and Investment Operating Division staff developed a proposal
for bar coding. However, Wage and Investment officials rejected that
proposal in June 2007, in part because it involved upgrading a legacy
system. Wage and Investment officials told us they are developing a new
funding proposal for no earlier than 2010, which would likely include
bar coding.
IRS, however, lacks several pieces of information that would help it
make a decision about whether the benefits exceed the costs of bar
coding and transcribing the residual paper returns.
* Actions required: IRS does not know the actions needed to require
commercial software vendors to include bar codes on printed returns.
IRS officials told us that they have not conferred with the software
vendors about the actions that would be necessary. Nor have they
conferred with the states about the actions they took to mandate bar
coding. Without knowing the necessary actions, IRS cannot estimate the
costs and time frames for a bar code program.
* Benefits: While IRS has estimates of the savings from converting from
paper to electronic filing, it does not have estimates of the savings
from converting paper to bar coded returns. Although it estimated the
increased revenue possible from the Automated Underreporter Program,
IRS does not have a complete estimate of the revenue gains across all
its enforcement programs that would be realized if all tax return
information were transcribed and posted.
* Breakeven: IRS does not know how much electronic filing would have to
increase, through either mandated electronic filing or bar coding,
before transcribing the residual paper returns would pass a
benefit/cost test.[Footnote 28]
Gathering the above information would have some costs to IRS. However,
the cost savings to IRS and increased revenue could be in the range of
hundreds of millions of dollars. Additionally, taxpayer compliance
burden might be reduced.
IRS Has Limited Information on Paid Preparers Who Prepare the Majority
of Tax Returns, but Has Efforts Underway to Acquire More:
Although they are an important part of the tax administration system,
IRS has limited information about paid preparers. However, IRS has
research and other initiatives under way intended to gain more
information.
As shown in figure 2, paid preparers have filed an increasing majority
of all individual income tax returns over the last decade.[Footnote 29]
During the 2006 filing season, paid preparers prepared nearly 78
million (61 percent) of the 127 million individual income tax returns.
Of the preparer returns, nearly 70 percent were filed electronically.
Figure 2: Percentage of Returns with a Paid Preparer Signature:
[See PDF for image]
This figure is a line graph representing the percentage of returns with
a paid preparer signature. The vertical axis of the graph represents
percentage of returns from 0 to 70. The horizontal axis of the graph
represents years from 1997 to 2006. The line depicts a gradual increase
in the percentage of returns with a paid preparer signature from about
52% in 1997 to 61% in 2006.
Source: GAO analysis of IRS data.
[End of figure]
As we said in past reports, paid preparers are a critical quality-
control checkpoint for the tax system and, as with IRS, the quality of
the service they provide is important.[Footnote 30] However, we also
said that some paid preparers made serious errors. For example, in 2006
we found that all 19 of the commercial preparers we visited made errors
completing returns. Some of the most serious errors involved not
reporting business income and failing to itemize deductions. Our
limited work did not permit generalizing about the quality of all paid
preparers‘ work and undoubtedly, many preparers do their best to
prepare returns that are compliant with tax laws. We also previously
reported that, while many taxpayers believe they benefited from using a
paid preparer, millions may have been poorly served.[Footnote 31]
IRS has some information on paid preparers. For example, IRS requires
paid preparers to identify themselves on all income tax returns they
prepare by entering their SSN or PTIN. However, IRS does little to
monitor or track basic information about individual paid preparers. For
example, IRS does not collect information on the type of preparers,
such as whether the preparer is an enrolled agent or part of a
commercial chain, or the number or types of returns filed by preparers.
Having such information could allow IRS to better identify filing
errors and target its outreach to specific preparers or preparer
groups.
IRS currently has efforts under way intended to begin remedying the
lack of information about paid preparers. One important step was the
Return Preparer Summit, which took place in late September 2007.
According to IRS, the Summit included officials from multiple IRS
offices who discussed how to better coordinate and communicate between
offices with paid preparer responsibilities. IRS officials expect to
present their findings and potential recommendations in March 2008 when
IRS updates its recent report on voluntary compliance and the tax
gap.[Footnote 32]
IRS is exploring the development of a database that will serve as a
centralized repository of paid preparer information. IRS envisions that
such a database could facilitate more robust compliance efforts and
allow taxpayers to access information on the status of an enrolled
agent. Additionally, the database could potentially be expanded to
operate as a tracking system if proposed legislation mandating
universal enrollment and testing of preparers was to be passed by the
Congress.[Footnote 33] In the meantime, IRS is working to better
utilize and potentially improve existing databases to share preparer
information across its offices with paid preparer responsibilities.
Further, according to IRS, the agency plans to conduct research on paid
preparers as outlined in TAB. Paid preparer initiatives include:
* studying how taxpayers select a paid preparer;
* evaluating the scope and nature of paid preparer errors;
* assessing IRS‘s outreach strategy to paid preparers; and:
* observing paid preparers‘ business models in order to better
understand how to provide effective services to reduce errors.
Paid preparers can support IRS‘s efforts to improve compliance. They
assist the majority of individual income tax filers, and the assistance
they offer can potentially help taxpayers avoid errors. Having
additional information on paid preparers could help the agency identify
and possibly prevent systematic errors and noncompliance, and could be
important in guiding IRS‘s outreach and education strategies for paid
preparers. TAB and other initiatives IRS has planned are steps that
should give the Congress and IRS a better basis for making decisions
about the future oversight of paid preparers.
Access to IRS‘s Telephone Assistors Was Comparable to Last Year,
Accuracy Remains High, and IRS Is Reviewing Options for Reducing Excess
Capacity at Call Sites:
Access and accuracy are key measures of IRS‘s telephone performance,
because IRS received 69 million calls during the filing season. At the
same time, reducing excess capacity at call sites is important, because
of the magnitude of IRS‘s telephone operations.
Telephone Access Was Comparable to Last Year and Accuracy of Responses
to Telephone Inquiries Remains High:
Taxpayers‘ access to IRS‘s telephone assistors was comparable to last
year and IRS‘s goal, as measured by level of service which is the
percentage of taxpayers who wanted to talk with an assistor and
actually got through and received service (see table 1).[Footnote 34]
For two other access measures, average speed of answer”the length of
time taxpayers wait to get their calls answered”and taxpayer
disconnects”the rate at which taxpayers waiting to speak with an
assistor abandoned their calls to IRS”IRS‘s performance weakened
somewhat compared to the same period last year, but the comparison is
complicated by a policy change. As of June 30, average speed of answer
increased about 15.4 percent and was slightly higher than IRS‘s goal,
and the taxpayer disconnect rate also increased. According to IRS
officials, both increases were due, in part, to a decision by IRS to
disconnect fewer taxpayers waiting to speak with an assistor. This
decision resulted in taxpayers having the option of either waiting to
speak with an assistor or hanging up rather than IRS deciding for them
by disconnecting the call, resulting in increased taxpayer choice along
with increases to both the average speed of answer and the taxpayer
disconnect rate. Finally, IRS officials noted that Customer Voice
Portal, a new call queuing process that routes calls directly to
available assistors instead of to call sites, resulted in a more
equalized wait-time for taxpayers calling to speak with an assistor
this year.
Table 1: IRS Telephone Assistors Performance, 2001”2007 Filing Seasons:
Telephone assistance[A]: Assistor level of service[B];
2001 Actual: 68.6%;
2002 Actual: 68.6%;
2003 Actual: 83.7%;
2004 Actual: 85.9%;
2005 Actual: 82.2%;
2006 Actual: 81.0%;
2007 Actual: 81.6%;
Fiscal year 2007 goals: 82%.
Telephone assistance[A]: Average speed of answer[C];
2001 Actual: 5.5;
2002 Actual: 4.6;
2003 Actual: 2.8;
2004 Actual: 2.8;
2005 Actual: 4.3;
2006 Actual: 3.9;
2007 Actual: 4.5[E];
Fiscal year 2007 goals: 4.3.
Telephone assistance[A]: Taxpayer disconnect rate[D];
2001 Actual: 16.0%;
2002 Actual: 14.6%;
2003 Actual: 8.3%;
2004 Actual: 8.6%;
2005 Actual: 12.0%;
2006 Actual: 10.6%;
2007 Actual: 13.3%[E];
Fiscal year 2007 goals: NA.
Source: GAO analysis of IRS data.
[A] Telephone assistance data are based on the date range of January 1
through June 30.
[B] The percentage of callers who want to speak to an assistor who get
through and receive service.
[C] Average number of minutes a taxpayer waits in queue for an
assistor.
[D] The percentage of callers who hang up while waiting in queue for an
assistor.
[E] IRS officials attributed increases in average speed of answer and
taxpayer disconnects to a conscious decision by IRS to decrease the
times IRS disconnects taxpayers, which resulted in taxpayers being able
to decide whether or not to hang up (taxpayer disconnect) or wait to
speak with an assistor (average speed of answer).
[End of table]
IRS estimates that the accuracy of telephone assistors‘ responses to
tax law and account questions was comparable to the same time period
last year and met IRS‘s goals. Moreover, as noted in table 2, since
2005, accuracy has been about 90 percent or more and was significantly
better than in 2001.
Table 2: IRS Telephone Assistor Accuracy Performance, 2001”2007 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;
2007 Actual: 90.7 +/-0.9;
Fiscal year 2007 goals: 91.0.
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;
2007 Actual: 93.2 +/-0.5;
Fiscal year 2007 goals: 93.3.
Source: GAO analysis of IRS data.
[A] Based on representative samples from January through June for 2001,
2002, 2003, 2004, 2005, 2006, and 2007.
[B] The percentage of calls in which telephone assistors provided
accurate answers for the call type and took the appropriate action,
with a 90 percent confidence interval.
[End of table]
Call Demand Was Comparable to Last Year, and Telephone Service Remains
Important for Taxpayers:
IRS received about 69 million calls on its toll-free telephone lines
through June 2007, which was less than expected, but slightly more than
in 2006. IRS‘s automated service handled roughly the same number of
calls as those handled by IRS assistors, although the number of
automated calls received was fewer than last year (22.1 million), while
the calls answered by assistors was equivalent to last year.[Footnote
35]
Figure 3: How IRS Handled Calls During 2007:
This figure is a pie-chart representing how the IRS Handled Calls
During 2007. The following data is depicted:
Total calls to IRS: 69 million;
* Received automated service: 20.8 million (30.1%);
* Reached an assistor: 21.2 million (30.7%);
* Hung up or disconnected without receiving service: 14.2 million
(20.6%);
* Called after business hours: 6.7 million (9.7%);
* Transferred out to another IRS operation, such as Examination: 6.1
million (8.8%).
Source: GAO analysis of IRS data and Art Explosion (images).
Note: Data cover the period January 1 through June 30, 2007. Due to
rounding, percentages do not add to 100.
Of the calls received by IRS, 28.8 million calls were from taxpayers
trying to obtain information on the status of their tax refunds,
despite increasing use of IRS‘s Web site feature, ’Where‘s My Refund.“
Another 22.2 million were about account questions, and 13.1 million
were about tax law questions.
Because millions of taxpayers continue to depend on IRS‘s telephone
assistance, it remains a critical part of taxpayer services. Moreover,
IRS and our prior reports have noted that assisting taxpayers with tax
questions reduces burdensome notices and inadvertent
noncompliance.[Footnote 36] As part of TAB and other initiatives, IRS
plans to conduct more research into the effect of telephone assistance
on compliance.
IRS‘s telephone operations consume most of IRS‘s taxpayer service
budget. According to TAB, assisted telephone services accounted for 65
percent and automated assistance accounted for 2 percent of the nearly
$1 billion total costs to the agency for providing taxpayer assistance
in 2005. At this time IRS does not have plans to automate more calls,
since the agency has already shifted easier calls to automation and Web
assistance, leaving the more difficult and time-consuming account and
tax law calls that require the attention of assistors.
In addition to answering telephones, IRS devotes resources to
processing paper inventory, such as amended returns and taxpayer
correspondence at some of its call sites. Because of limited TETR call
demand, IRS closed more paper inventory than anticipated, meaning that
taxpayer issues were resolved more quickly. As seen in figure 4, call
volume has not declined and accordingly, resources devoted to answering
telephones have not declined noticeably since 2001, while resources
devoted to paper inventory have declined almost 14 percent since 2001.
Figure 4: Telephone Assistance and Paper Inventory Resources by
Workload:
[See PDF for image]
This figure is a combination vertical bar and line graph depicting
telephone assistance and paper inventory resources by workload. The
left vertical axis of the graph represents staff years from 0 to 9,000.
The right vertical axis represents volume from 0 to 40 million. The
horizontal axis of the graph represents fiscal years 2001 to 2007
(projected). For each fiscal year there are vertical bars depicting
staff years used for assistor calls and staff years used for paper
inventory. Also, for the entire time period represented in the graph
there are lines depicting volume of assistor calls answered and volume
of paper inventory.
Source: GAO analysis of IRS data.
Note: The figure includes data for entire fiscal years, not just for
the filing season.
[End of figure]
IRS has initiatives to expand and improve on telephone services
including:
* Centralized Customer Contact Forecasting and Scheduling to modernize
the current system of workload forecasting, scheduling, and tracking
workload and training requirements;
* Working groups looking into ways of improving taxpayer services, such
as developing ways to synchronize telephone message information with
Web site services to better link different service channels. IRS‘s goal
is to revise the messages heard by taxpayers calling to speak with
assistors after business hours, during holidays, or when telephone
lines are too crowded to accommodate them, so that taxpayers are told
not only when to try back, but are also referred to IRS‘s Web site for
further information.
IRS Is Reviewing Options for Reducing Excess Capacity at Call Sites:
Last year we recommended that IRS timely develop, validate, and
implement a plan to consolidate call sites because, at the filing
season‘s peak, IRS determined that it had 850 unused assistor
workstations spread across its 24 call sites.[Footnote 37] According to
IRS officials, the number of unused workstations has not changed. IRS
completed a workload analysis designed to evaluate changes in telephone
staff resources and call demand and used business criteria, such as the
types of calls answered at call sites and facility and employee costs,
to identify call sites for potential closure. IRS plans to conduct an
extensive cost-analysis review of different options for reducing excess
capacity prior to potentially closing any sites, has secured funding
for the analysis, and is in the process of obtaining a contractor to
assist with the review.
Web Site Performance Remains High, and Initiatives Are On-going to
Enhance Web Capabilities and User Experience:
Web site performance remains high, which is important because IRS‘s Web
site is used by millions of taxpayers, is available to taxpayers 24
hours a day, is much less costly than other types of assistance, and
will remain important as more taxpayers use self-assistance.
Use of IRS‘s Web site increased this filing season compared to prior
years‘ except for downloads of files such as tax forms and
publications, as shown in table 3 below. According to IRS officials,
one reason for the decrease in downloads is the conversion of IRS
publications and instructions from file format to another format, which
IRS does not count as part of downloads. Additionally, the increased
use of electronic filing and tax preparation software reduces the need
for taxpayers to download tax forms and publications. However, because
of the decline, IRS will continue to monitor the number of downloads
and identify possible issues associated with downloading files.
Table 3: IRS Web Site Use, 2006 and 2007 (data are in thousands):
Uses: Visits[A];
2006: 152,345;
2007: 168,332;
Percentage change: 110.5.
Uses: Downloads[A];
2006: 160,477;
2007: 120,596;
Percentage change: -24.9.
Uses: Searches[A];
2006: 88,250;
2007: 101,072;
Percentage change: 14.5.
Uses: Where‘s My Refund[B];
2006: 30,663;
2007: 40,325;
Percentage change: 31.5.
Uses: Number of TETR-related visits[C];
2006: N/A;
2007: 4,570;
Percentage change: N/A.
Source: GAO analysis of IRS data.
Note: N/A means not applicable.
[A] Web site visits, searches, and downloads are from January through
July 2006 and 2007. A visit begins when a visitor views their first
page on IRS.gov, and ends when the visitor leaves the site. A visit is
not a count of the number of unique individuals accessing the site.
[B] For January 1 through July 29, 2006, and July 28, 2007.
[C] Visits to a Web page specific to TETR, which was not operational in
2006. Data are for October 1, 2006, through June 9, 2007.
[End of table]
Evidence that IRS‘s Web site is performing well includes the following:
* According to the American Customer Satisfaction Index, for the 2007
filing season, January 1 through April 17, 2007, IRS‘s Web site scored
above other government agencies, nonprofits, and private sector firms
for customer satisfaction (74 for IRS versus 72 for all government
agencies versus 71 for all business surveyed), and better than during
the 2006 filing season.[Footnote 38]
* An independent weekly study by Keynote Systems, Inc., a company that
evaluates Web sites, reported that, as of July 16, 2007, IRS‘s Web site
repeatedly ranked in the top 6 out of 40 government agency Web sites
evaluated in terms of average download time.
* According to IRS, the number of e-mails and telephone calls to the
Web site HelpDesk decreased compared to the 2006 filing season, and
average page views per visit decreased, indicating that visitors to the
Web site are finding information more quickly.
Additionally, this year IRS implemented a new sales tax deduction
calculator, which IRS wants to use as a standard for developing other
online calculators, and updates to the Free File, Alternative Minimum
Tax, and Earned Income Tax Credit applications. [Footnote 39] Also,
this year the ’Where‘s My Refund“ feature allowed taxpayers to check on
the status of split refunds, and told the taxpayer if one or more
deposits were returned from the bank because of an incorrect routing or
account number.
IRS has initiatives to expand and improve on its Web site services.
* Tax Law Support Tools will provide Web site self-assistance tools to
taxpayers and other external stakeholders, allowing users to conduct
keyword and natural language queries.
* The first release of Internet Customer Account Services will allow
individual taxpayers to view their account information online and is
expected to be deployed in July 2008.
* A Spanish version of ’Where‘s My Refund“ will enable Spanish speaking
taxpayers to check refund status and receive account information.
Taxpayer Assistance Continued to Grow at Volunteer Sites and Decline at
IRS‘s Walk-in Sites; While Quality has Improved in Some Areas, More
Reliable Data Are Needed:
Volunteer sites play an increasingly important role in the tax system
and are part of IRS‘s and the Department of Treasury‘s integrated
multiyear strategy to reduce the tax gap by better identifying and
recruiting partners that are more skilled than IRS at reaching
underserved taxpayers, including the elderly, disabled, low-income,
Native American, and rural taxpayers. Volunteer sites prepared 2.4
million returns, an increase of 17 percent over last year and higher
than projected through April 21, 2007. As illustrated in figure 5, this
is consistent with previous trends for volunteer and walk-in sites.
Return preparation at volunteer sites has more than doubled since 2001,
while return preparation at IRS‘s walk-in sites has declined by almost
74 percent during the same period.
Figure 5: Trends in Face-to-face Return Preparation, 2001 through 2007:
[See PDF for image]
This figure is a multiple line graph depicting trends in face-to-face
return preparation, 2001 through 2007. The vertical axis of the graph
represents number in millions from 0.0 to 2.5. The horizontal axis of
the graph represents years from 2001 to 2007. The line depicting
volunteer sites shows a gradual increase, while the line depicting IRS
walk-in sites shows a gradual decrease.
Source: GAO analysis of IRS data.
Note: For walk-in sites, data covers the time periods of December 31,
2006 through April 21, 2007. According to IRS, most taxpayers having
their returns prepared at volunteer sites do so during the filing
season, which is from January 1 through April 30.
[End of figure]
Increased return preparation assistance at volunteer sites, rather than
at walk-in sites, allows IRS to devote more resources to services such
as account assistance, which can only be provided by IRS staff.
Further, TAB data show return preparation assistance provided at walk-
in sites is four times more expensive per return than at volunteer
sites. Moreover, TAB data show that walk-in sites are used by a small
percentage of taxpayers, yet account for over 20 percent or, $201
million, of the almost $1 billion spent on taxpayer assistance in 2005.
Despite an increase in the number of returns prepared at volunteer
sites, the quality of volunteer-prepared returns remains largely
unknown and what is known is not statistically reliable. IRS‘s current
initiative to monitor the quality of returns at volunteer sites is in
its second year of implementation and includes mystery shopping, site
and return reviews.[Footnote 40] However, according to IRS officials,
volunteer sites had advanced notice of site and return reviews, but not
mystery shopping. Consequently, IRS acknowledged that the advance
notice of these reviews was likely to bias the results.
While IRS plans to continue to perform site and return reviews in 2008,
officials said that following a sampling plan that would yield results
that could be generalized to the universe of volunteer sites would be
too costly. Instead, IRS plans to conduct unannounced return reviews,
continue site reviews, and increase the number of mystery shopping
visits from the 39 done in 2007 to 100. According to IRS officials,
mystery shopping yields the best evaluative result of the three reviews
IRS uses to assess the quality of volunteer-prepared returns. We agree
that having unannounced visits and increasing the number of mystery
shopping visits is likely to yield a better evaluative result than the
potentially biased methods previously used for monitoring return
preparation. Furthermore, we and TIGTA acknowledge the difficulties in
collecting statistically valid information about return preparation
assistance at volunteer sites.[Footnote 41]
In addition to quality, IRS uses some other measures to monitor the
performance of its volunteer program, such as the number of returns
prepared, percentage prepared electronically, and the satisfaction of
its partners, such as financial, social service, corporate, and
government organizations. While useful, these measures do not reflect
the extent to which the volunteer program improves taxpayer compliance
and participation in programs such as the earned income tax credit. IRS
has increased its reliance on the volunteer program and plans to commit
more resources. However, as we testified earlier this year, IRS‘s
budget submission did not include basic performance information about
the program.[Footnote 42] More specifically, IRS does not know the
extent to which the program influences the taxpaying behavior of its
target populations.
Regarding IRS‘s walk-in sites, IRS recently started implementing
contact recording intended to better measure the accuracy of tax law
and account assistance.[Footnote 43] As shown in figure 6, contact
recording automatically captures the audio portion of a taxpayer
contact and synchronizes it with an IRS walk-in site assistor‘s
computer screen activity. With the exception of a microphone that sits
atop the desk of the walk-in site assistor, contact recording is
similar to the system IRS uses to monitor and assess the quality of
telephone interaction between taxpayers and telephone assistors. IRS
has deployed contact recording at 127 of its 401 walk-in sites, which
represents 46 percent of walk-in site contacts. As of May 26, 2007, IRS
data show accuracy rates of 85 percent for accounts assistance and 80
percent for tax law assistance, and IRS officials expect accuracy rates
to improve as IRS deploys contact recording at more sites.[Footnote 44]
Figure 6: Contact Recording at Walk-in Sites:
[See PDF for image]
This figure is an illustration of the following way in which contact is
recorded at walk-in sites:
* Walk-in staff initiate contact recording, which captures taxpayer
contacts and screen displays.
* Data are stored in a database for subsequent quality review.
* Managers and quality review staff hear and ’see“”through screen
displays”the taxpayer and walk-in staff interaction.
* Walk-in staff reexperience both sides of the interaction, to improve
performance.
Source: GAO analysis of IRS data and Art Explosion (images).
[End of figure]
Although IRS currently has plans to fully deploy the contact recording
systems to all walk-in sites by 2009, contact recording is not included
in its plans to assess the quality of return preparation
assistance.[Footnote 45] IRS intends on relying on managerial
observation of employee/taxpayer interactions while providing return
assistance. We have previously reported that employees‘ performance
could be influenced by the knowledge that they are being observed by
managers, biasing the results. Additionally, managers were not
consistently coding employee performance.[Footnote 46] Consequently,
without an unbiased method, IRS lacks reliable information to assess
performance, establish obtainable goals, and measure progress toward
goals.[Footnote 47]
According to IRS officials, contact recording used to measure the
accuracy of tax law and account assistance could be extended to include
return preparation assistance. For example, the equipment is already at
many of the sites”it is used to measure the accuracy of tax law and
account assistance, but turned off for return assistance. IRS officials
said that IRS had not yet determined the feasibility of using contact
recording for return assistance. IRS officials were concerned that
contact recording, as it is currently configured, might miss some
aspects of return preparation assistance, such as verifying taxpayers‘
documents. Further, IRS officials noted that because it takes longer to
prepare a return than answer a tax law or account question, managerial
review of return preparation takes longer than for tax law or account
assistance. However, officials also noted that managers would be likely
to spend the same amount of time using the manager observation method
as with contact recording but manager observation would not yield
reliable results. Without fully determining the feasibility of using
contact recording for return assistance, IRS will not know if the
concerns could be addressed and the existing equipment could be more
fully utilized.[Footnote 48]
The Value of TAB Depends on Funding and Ability to Link Taxpayer
Service to Compliance:
TAB is a data-driven strategy that includes the results of extensive
research designed to assist IRS in better understanding taxpayers‘
service needs.[Footnote 49] For example, TAB research included several
surveys that provided IRS with information about the services that
taxpayers use or would use. TAB also provides plans to improve taxpayer
services and a multiyear portfolio of research designed to provide
information on the value of IRS services to taxpayers and partners and
the effect of taxpayer service on compliance. According to IRS
officials, with TAB, they now have more information about taxpayers
than ever before.
IRS developed estimates of the cost-per-service contact for providing
different types of taxpayer services, although there were
qualifications to those estimates.[Footnote 50] According to TAB, these
estimates will provide a baseline methodology for computing and
comparing the costs of services in the future. Having reliable cost
information, together with a better understanding of taxpayers‘
preferences, needs, and expectations, will assist IRS in determining
whether it can provide taxpayers with the same services and benefits at
lower cost through alternative methods. As table 4 shows, these costs
vary widely depending on the type of service provided.
Table 4: IRS‘s Fiscal Year 2005 Estimated Unit Costs:
Service: Answering tax law questions via e-mail;
Estimated cost-per-contact: $52.51.
Service: Providing assistance at walk-in sites;
Estimated cost-per-contact: $28.73.
Service: Answering correspondence;
Estimated cost-per-contact: $24.97.
Service: Providing assistance by assistors via toll-free telephones;
Estimated cost-per-contact: $19.46.
Service: Providing assistance through VITA sites;
Estimated cost-per-contact: $12.01.
Service: Providing assistance by automation via toll-free telephones;
Estimated cost-per-contact: $0.71.
Service: Providing assistance such as downloads and searches on IRS‘s
Web site;
Estimated cost-per-contact: $0.13.
Source: GAO analysis of IRS data.
TAB has potential value. In the past, we have stressed the importance
of reconsidering the level and types of services IRS provides to
taxpayers, such as whether to maintain the same number of walk-in
sites.[Footnote 51] While we support IRS‘s efforts to develop a data-
driven strategy, the value of TAB will depend on several factors, such
as:
* Quantifying the linkage between taxpayer service and voluntary
compliance. As noted above, TAB outlines a research portfolio that
includes additional research on the impact of taxpayer service on
voluntary compliance, which is consistent with the Department of
Treasury tax gap report. According to TAB, a better understanding of
the causes of noncompliance and the impact of specific taxpayer
services on compliance would allow IRS to focus investments in taxpayer
service to positively impact compliance. However, TAB recognizes that
previous research has shown that quantifying this linkage is difficult.
* Coordinating and managing oversight responsibilities for TAB
initiatives. IRS recently established a TAB Program Management Office
responsible for facilitating, coordinating, and integrating TAB
activities. The Program Management Office currently does not have
authority to allocate funding for initiatives, and TAB officials said
that it could be difficult to develop initiatives that require funding
or coordination between different organizations without such authority.
* Obtaining funding. While some of the initiatives under TAB are funded
mostly as extensions of existing efforts, most are not yet funded, and
TAB does not contain any information related to how much, as a whole,
it will cost. According to IRS, unfunded and future initiatives will
have to compete with other IRS projects for funding within approved
annual budgets.
* Including submission processing services. IRS officials acknowledge
that submission processing is a significant component of service
delivery and must be integrated into TAB. The timely processing of
returns supports tax compliance and possibly reduces the need for
taxpayer services.
Conclusions:
Over the last decade, IRS has improved its performance processing tax
returns and providing taxpayer assistance. We see value in two IRS
initiatives intended to further improve this performance. TAB, besides
being a data-driven strategy for further improving service, may provide
IRS with a better understanding of the effect of taxpayer service on
compliance and thus of the return on IRS‘s large investment in service.
Similarly, obtaining more information about paid preparers is valuable
because doing so should give the Congress and IRS a better basis for
making decisions about the future oversight of paid preparers.
In addition to these initiatives, we have identified other potential
means for improving service. One opportunity is to increase
electronically filed returns, either through mandates or bar coding,
and transcribing the remaining lines on residual paper returns.
However, IRS does not have the benefit/cost estimates that would be
useful to make decisions about how to proceed. In particular, IRS does
not know the actions needed to require software vendors to include bar
codes on printed individual income tax returns and the cost of those
actions; the benefits, in terms of processing costs and improved
enforcement, of having all information available electronically; and
how much electronic filing would have to increase for the benefits of
transcribing all remaining paper returns to exceed the costs. Such
information would allow IRS to compare the costs of additional
transcription to the benefits of processing costs savings, additional
enforcement revenues and reduced taxpayer burden.
Additionally, despite increasing reliance on volunteer organizations to
target underserved taxpayer groups, IRS lacks information on the
effectiveness of its efforts. Finally, while IRS has been implementing
contact recording at walk-in sites to monitor the accuracy of tax law
and account assistance, it has not determined the feasibility of
extending contact recording to its low-income return preparation
assistance program. In both cases, the missing information impedes
IRS‘s ability to make data-based decisions about how to improve
assistance to underserved taxpayers.
Recommendations for Executive Action:
We recommend that the Acting Commissioner of Internal Revenue direct
the appropriate officials to:
* determine actions needed to require software vendors to include bar
codes on printed individual income tax returns and the cost of those
actions;
* determine the benefits, in terms of processing costs and improved
enforcement, of having all return information available electronically;
* determine how much electronic filing would have to increase, either
through electronic filing mandates or bar coding, for the benefits of
transcribing all remaining paper returns to exceed the costs;
* develop estimates of the effectiveness of IRS‘s volunteer program at
targeting underserved populations; and:
* determine the feasibility of using contact recording as a method of
monitoring and improving the quality of return preparation assistance
at IRS‘s walk-in sites.
Agency Comments and Our Evaluation:
The Acting Commissioner of Internal Revenue provided written comments
in a November 7, 2007 letter in which she agreed with all our
recommendations and outlined IRS‘s actions to address those
recommendations. With respect to reducing processing costs and
improving enforcement, IRS plans on specifically addressing these
recommendations in a report to the Congress. With respect to assessing
the effectiveness and quality of IRS‘s face-to-face services, IRS
reported it plans to develop methods of estimating how it can provide
better face-to-face assistance.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its date. At that time, we will send copies of this report to the
Secretary of the Treasury; the Acting Commissioner of Internal Revenue;
the Director, Office of Management and Budget; relevant congressional
committees; and other interested parties. This report is available at
no charge on GAO‘s web site at [hyperlink, http://www.gao.gov].
For further information regarding this testimony, please contact James
R. White, Director, Strategic Issues, on 202-512-9110 or
whitej@gao.gov. Contacts for our Offices of Congressional Relations and
Public Affairs may be found on the last page of this statement.
Individuals making key contributions to this testimony include Joanna
Stamatiades, Assistant Director; Amy Dingler; Evan Gilman; Timothy D.
Hopkins; Jennifer McDonald; Paul B. Middleton; Emily Norman; Karen
O‘Conor; Cheryl Peterson; Neil Pinney; and Lerone Reid.
If you or your staffs have any questions, please contact me at (202)
512-9110 or WhiteJ@gao.gov.
Signed by:
James R. White:
Director:
Tax Issues:
Strategic Issues:
[End of section]
Appendix I: IRS‘s Processing Performance Relative to 2001-2006
Performance and 2007 Goals:
As of June 30, the Internal Revenue Service met or exceeded seven out
of nine processing performance goals and continues a general trend of
improvement. As shown in table 6 below, IRS met or exceeded its goals
for the percentage of errors included in letters, notices, refunds, and
deposits; deposit timeliness (i.e., interest foregone by untimely
deposits); and productivity. IRS met its goal for refund timeliness but
did not meet its goals for refund interest paid and Individual Master
File efficiency. IRS officials said that the lighter than expected TETR
volume meant that IRS‘s goal for Individual Master File efficiency
could not be achieved because TETR returns were the easiest to process.
Additionally, problems with a computer system that processes some
taxpayer identification numbers and the inexperience of new staff
adversely affected performance on refund interest paid. Table 5 also
shows that IRS‘s processing performance has significantly improved in
some areas, such as the deposit and refund error rates, since 2001.
Table 5: IRS‘s Processing Performance, Fiscal Years 2001”2007:
Measure name: Deposit error rate[C];
Definition: Percentage of payments applied in error by, for example,
reimbursing a taxpayer who overpaid when the taxpayer wanted the
overpayment credited to next year‘s tax bill;
Fiscal year 2002 actual: 4.8%(+/-.3%);
Fiscal year 2003 actual: 4.2%(+/-.3%);
Fiscal year 2004 actual: 3.5%(+/-.31%);
Fiscal year 2005 actual: 2.2% (+/-.26%);
Fiscal year 2006 actual: 1.6%(+/-.24%);
Fiscal year 2007 actual (through June)[B]: 1.3%(+/-.25%);
Fiscal year 2007 goal: 1.5%.
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: $354;
Fiscal year 2007 actual (through June)[B]: $343;
Fiscal year 2007 goal: $380.
Measure name: Letter error rate[C];
Definition: Percentage of letters issued to taxpayers with errors
(includes systemic errors)[D];
Fiscal year 2001 actual[A]: Not comparable because of revisions to the
measure;
Fiscal year 2002 actual: 7.4%(+/-.6%);
Fiscal year 2003 actual: 7.1%(+/-.5%);
Fiscal year 2004 actual: 6.6%(+/-.38%);
Fiscal year 2005 actual: 3.1% (+/-.30%);
Fiscal year 2006 actual: 3.6%(+/-.34%);
Fiscal year 2007 actual (through June)[B]: 2.3%(+/-.37%);
Fiscal year 2007 goal: 3.0%.
Measure name: Notice error rate[C];
Definition: Percentage of incorrect notices issued to taxpayers
(includes systemic errors)[D];
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%(+/-1.3%);
Fiscal year 2005 actual: 9.2% (+/-1.6%);
Fiscal year 2006 actual: 5.4%(+/-1.1%);
Fiscal year 2007 actual (through June)[B]: 4.3%(+/-1.0%);
Fiscal year 2007 goal: 7.3%.
Measure name: Refund error rate - individual (paper)[C];
Definition: Percentage of refunds with IRS-caused errors in the entity
information (e.g., incorrect name, Social Security number, or refund
amount); includes systemic errors.[D]
Fiscal year 2001 actual[A]: 9.8%;
Fiscal year 2002 actual: 8.0%(+/-.46%);
Fiscal year 2003 actual: 5.3%(+/-.41%);
Fiscal year 2004 actual: 4.9%(+/-.44%);
Fiscal year 2005 actual: 5.0% (+/-.48%);
Fiscal year 2006 actual: 4.5%(+/-.46%);
Fiscal year 2007 actual (through June)[B]: 2.8%(+/-.41%);
Fiscal year 2007 goal: 4.6%.
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: $30.12;
Fiscal year 2007 actual (through June)[B]: $36.09;
Fiscal year 2007 goal: $34.00.
Measure name: Refund timeliness - individual (paper)[C];
Definition: Percentage of refunds issued within 40 days or less;
Fiscal year 2001 actual[A]: 95.2%;
Fiscal year 2002 actual: 98.2%(+/-.32%);
Fiscal year 2003 actual: 98.8%(+/-.26%);
Fiscal year 2004 actual: 98.3%(+/-.17%);
Fiscal year 2005 actual: 99.2% (+/-.18%);
Fiscal year 2006 actual: 99.3%(+/-.13%);
Fiscal year 2007 actual (through June)[B]: 99.3%(+/-.18%);
Fiscal year 2007 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: 33,237;
Fiscal year 2007 actual (through June)[B]: 33,535;
Fiscal year 2007 goal: 32,640.
Measure name: 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: 16,124;
Fiscal year 2007 actual (through June)[B]: 23,532;
Fiscal year 2007 goal: 24,650.
Source: GAO.
Note: GAO analysis of IRS data.
[A] According to IRS officials, they did not compute a margin of error
for these measures in 2001.
[B] The measures for fiscal year 2006 are through July 31, which were
the latest data available at the time we ended our audit work.
According to IRS officials, the 2006 results through July 31 are
reflective of IRS‘s performance during the filing season. In addition,
IRS officials told us that the results for the measures should not
change significantly through September 30.
[C] IRS estimates these measures to have a 90 percent confidence
interval.
[D] Systemic errors are computer-generated errors over which a
particular processing center would have no control.
[End of table]
[End of section]
Appendix II: Comments from the Internal Revenue Service:
Commissioner:
Department Of The Treasury:
Internal Revenue Service:
Washington, DC 20224:
November 7, 2007:
Mr. James R. White:
Director, Tax Issues:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. White:
I have reviewed your draft report entitled Tax Administration: 2007
Filing Season Continues Trend of Improvement, but Opportunities to
Reduce Costs and Increase Tax Compliance Should be Evaluated. I
appreciate your recognition of our significant achievements in
successfully delivering the 2007 filing season, which as you note
continues a long-term trend of continually improving IRS services to
taxpayers.
Processing – We had an outstanding filing season, successfully
implementing significant and sometimes extremely late tax law changes.
Through September 28, 2007, we processed over 134 million individual
income tax returns and issued over 103 million refunds, totaling nearly
$234 billion.
Electronic filing grew again this year with 78.7 million, or 58.5
percent, of individual taxpayers filing electronically. The remaining
55.9 million were filed on paper. The number of returns filed
electronically increased 9 percent over last year, which exceeds the 6
percent increase we achieved in the prior year. So far, this year's e-
file rate has also exceeded our projection for an 8 percent increase
for the year.
The most significant increase in e-file occurred in the number of
taxpayers who filed from their home computer. Over 22.4 million returns
were filed from home, nearly an 11 percent increase from the prior
year. Over 3.8 million taxpayers took advantage of the free online
filing services offered by the Free File Alliance. Also notable is the
fact that over 66.6 million taxpayers electronically signed their
electronic returns, further increasing the efficiency of e-file.
Additionally, more than 65,000 individuals have registered for e-
services and over 53 percent of applications to electronically file
were submitted online.
Through May 2007, the IRS received 84.5 million individual tax returns
with Telephone Excise Tax Refund (TETR) claims totaling $3.6 billion.
The IRS processed over 600,000 paper, and 100,000 e-file, Forms 1040EZ-
T for taxpayers without a return filing requirement that claimed the
TETR. The IRS also received 400,000 business tax returns with TETR
claims totaling $204.5 million.
For the first time, the IRS offered taxpayers the opportunity to split
their refunds and direct deposit them into multiple accounts. We
successfully processed approximately 80,000 split refund requests,
which was significantly lower than the anticipated 1.4 million.
However, several major software vendors did not provide the ability to
split refunds in their tax preparation software and may have
contributed to the lower than expected volume.
Late passage of the Tax Relief and Health Care Act of 2006 included an
extension of the tuition and fees deduction, state and local sales tax
deduction, and the deduction for educator expenses. The late passage of
this legislation caused IRS delays in processing some returns until mid-
February. Nonetheless, the IRS successfully managed taxpayer,
practitioner, and tax software-provider expectations through extensive
information and outreach. As a result, there were minimal negative
consequences for taxpayers from this delay.
Successful Implementation of the Customer Account Data Engine (CADE)
continued during 2007. Release 2.2, although delayed, successfully
deployed in March 2007 followed by the successful deployment of Release
3.1 into production in August 2007. This portion of Release 3.1
introduced Disaster Area Designation Processing into CADE and has
resulted in the ability to maintain over 616,000 accounts within CADE
that would have returned to the Individual Master File without this
functionality. The second portion of Release 3.1 introduces online
address changes, which enables CADE to process and post address changes
for the first time. In addition to faster refunds, these new
functionalities working together set the framework to enable IRS to
post additional account changes in a near real-time manner in the
future. As of September 28, 2007, CADE posted over 11.2 million returns
and disbursed over 10.9 million refunds for over $11.6 billion.
Telephone Service - We appreciate your recognition that customer access
was better this year than last year. This increase in access was made
possible through proper planning and the IRS ability to quickly respond
to actual demand by redeploying resources. Although we overestimated
the demand for telephone assistance related to TETR, the demand for
other telephone assistance services was slightly higher than last year.
We achieved an 81.6 percent Level of Service for the filing season,
exceeding the planned Level of Service of 81.1 percent and ended the
fiscal year at 82.1 percent, exceeding the goal of 82 percent. We also
successfully managed our staffing to ensure non-telephone
correspondence inventories were maintained at levels below Fiscal Year
2006.
In October 2006, we transitioned to Customer Voice Portal, which is a
key telephone technology implemented to improve customer experience by
equalizing wait times within the various topics. This revealed
approximately nine to twelve seconds that was not previously accounted
for when calculating the length of time a caller waits before
connecting to an agent. We report the average of this wait time as
average speed of answer (ASA). This additional time increased our ASA.
Despite this, we achieved an ASA of 273 seconds, four seconds higher
than the planned filing season ASA of 269 seconds, and delivered a
fiscal year ASA of 266 seconds, six seconds above the goal of 260
seconds.
During peak periods, we will sometimes advise the taxpayer to call back
at a less busy time and disconnect the call. In an effort to improve
the customer experience this year, we administered fewer courtesy
disconnects up front allowing customers to determine how long they were
willing to wait to receive assistance. This decision contributed to a
10 percent decrease when combining taxpayer and courtesy disconnects
for the filing season.
We appreciate your continued recognition of our improvement and high
performance in the accuracy of our tax law and account answers on the
toll-free telephone lines. The 2007 accuracy rates for toll-free tax
law and accounts surpassed FY 2006 achievements. Through September
2007, we achieved a Toll-Free Tax Law accuracy rate of 91.2 percent. We
continually focus on identifying defects and provide the information to
call sites to share with telephone assistors. Through September 2007,
the Toll-Free Accounts accuracy rate was 93.4 percent. Accuracy gains
can be attributed to the improved quality review process, conference
calls held to address specific tax law or accounts topics, and Contact
Recording that allows managers to listen to and review recorded
customer contacts as a part of performance feedback to employees.
Customer satisfaction for toll-free through July was 94 percent, with a
2 percent dissatisfaction rate demonstrating the excellent service that
we continue to provide our customers.
Website – The IRS website, IRS.gov, is consistently one of the most
heavily used government sites. So far in 2007, our website has been
visited more than 214 million times, a 10.3 percent increase over 2006.
These visits resulted in more than 1.3 billion page views, an almost 4
percent increase over 2006. Visits are the measurement of actions
beginning when a visitor views their first web page on IRS.gov and ends
when the visitor leaves our website. Taxpayers and practitioners also
downloaded more than 128 million forms, publications, instructions, and
other documents.
Walk-In Assistance - During the 2007 filing season, the IRS continued
to provide services at all of its 401 Taxpayer Assistance Centers. As
of May 26, 2007, accuracy of the services we provided in these walk-in
sites was 85 percent for accounts assistance and 80 percent for tax law
assistance. To better measure the accuracy of tax law and account
assistance, the IRS recently started implementing Contact Recording. As
you note in your report, we have deployed Contact Recording in 127 of
the 401 walk-in sites and plan to fully deploy this systems to all walk-
in sites by 2009.
In addition, the IRS successfully responded to late legislation by
hiring seasonal employees to lessen the impact of anticipated demands
of the TETR legislation. The IRS also conducted additional training for
all employees to address legislative changes enacted after our regular
fall 2006 Continuing Professional Education classes.
Volunteer Assistance - During the 2007 filing season, approximately
76,619 IRS supported volunteers in 11,922 locations provided assistance
to traditionally underserved populations. These include individuals
with low incomes, the elderly, the disabled, rural, Native American,
and those with Limited-English proficiency. Through September 2007,
over 2.6 million returns were filed through our Volunteer Income Tax
Assistance and Tax Counseling for the Elderly sites, an increase of
15.8 percent over the prior year. Of these, 84.6 percent were e-filed,
a 2.4 percent increase over 2006. To increase awareness of these
services, as well as taxpayer education on basic income tax return
filing and payment requirements, the availability of the Earned Income
Tax Credit, e-file, and other tax related issues, more than 410 million
outreach contacts were made during 2007. These contacts include
multiple messages on varied topics to targeted taxpayer segments
through both media and non-media channels. In order to serve more
taxpayers through these programs, we also expanded our partnerships
with community-based coalitions to approximately 326 in 2007. These
strategic partnerships leverage IRS resources and allow us to reach far
more taxpayers through trusted local community sources.
Responses to your specific recommendations are enclosed. I appreciate
your observations on the successful filing season for 2007, and if you
have any questions, please contact me or Floyd Williams, Director,
Legislative Affairs, at (202) 622-3720.
Sincerely,
Signed by:
Linda E. Stiff:
Acting Commissioner of Internal Revenue:
Enclosure:
[End of letter]
Enclosure:
Recommendation for the Commissioner:
Determine actions needed to require software vendors to include bar
codes on printed individual income tax returns and the cost of those
actions.
Response:
We agree with this recommendation. Senate Report 110-129 of the
Financial Services and General Government Appropriations Bill of 2008
requires the IRS to provide to Congress a report addressing 2-D Bar
Coding as stated, "Accordingly, the Committee directs the IRS, in
consultation with stakeholders, such as the National Taxpayer Advocate,
to develop a detailed strategic plan to meet the 80 percent e-File
goal. This plan should address alternate electronic filing strategies,
including Telefile and 2-D Bar Coding and methods of e-filing directly
with the IRS for free."
The report to Congress will include the information requested in your
recommendation and specifically address:
* The impact on commercial software providers to include bar codes on
paper returns.
* The IRS cost for processing bar coded returns.
* Cost-benefit analysis of capturing all tax return information.
* "Break-even" point paper processing versus electronic filing.
Recommendation for the Commissioner:
Determine the benefits, in terms of processing costs and improved
enforcement, of having all return information available electronically.
Response:
We agree with this recommendation. Our planned actions in response to
the first recommendation above will also address this recommendation.
Recommendation for the Commissioner:
Determine how much electronic filing would have to increase, either
through electronic filing mandates or bar coding, for the benefits of
transcribing all remaining paper returns to exceed the costs.
Response:
We agree with this recommendation. Our planned actions in response to
the first recommendation above will also address this recommendation.
Recommendation for the Commissioner:
Develop estimates of the effectiveness of IRS's volunteer program at
targeting underserved populations.
Response:
We agree with the recommendation. Our Stakeholder Partnerships,
Education and Communication (SPEC) organization is currently working to
develop appropriate measures to determine the success of targeted
activities in specific underserved markets. Our territories throughout
the country have targeted their local underserved markets (including
low-income, disabled, rural, elderly, and Limited-English Proficient)
since the October 2000 standup of the organization. The type and extent
of activities vary, depending upon the local population, identified
partners, partner needs and that of their customers, and the amount of
available SPEC resources. The SPEC organization has recently taken
steps to bring additional focus to these efforts by developing national
initiatives to address these markets. National teams comprised of
headquarters and field managers and employees are assessing current
activities, identifying gaps, and developing action plans for
nationwide direction.
Recommendation for the Commissioner:
Determine the feasibility of using contact recording as a method of
monitoring and improving the quality of return preparation assistance
at IRS's walk-in sites.
Response:
We agree with this recommendation. The IRS will determine the
feasibility of testing the use of contact recording as a tool for
monitoring the quality of return preparation assistance at walk-in
sites. We will assess several methodologies using a Data Collection
Instrument to monitor accuracy of return preparation. This is a new
area of review with additional contingencies not experienced in
accounts and tax law contacts. At the end of testing, we plan to
recommend whether or not to adopt Centralized Quality Review Systems as
a new review process.
[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: Most Filing Season
Services Continue to Improve, but Opportunities Exist for Additional
Savings, GAO-07-27 (Washington, D.C.: Nov. 15, 2006). Pub. L. No. 105-
206 (1998).
[3] Joint Explanatory Statement of the Committee of Conference:
Internal Revenue Service, Processing Assistance, and Management
(Including Rescission of Funds), H. R. Rep. No. 109-307 (2005).
[4] See, for example, GAO, Paid Tax Return Preparers: In a Limited
Study, Chain Preparers Made Serious Errors, GAO-06-563T (Washington,
D.C.: Apr. 4, 2006).
[5] GAO, Internal Revenue Service: Assessment of the 2008 Budget
Request and an Update of 2007 Performance, GAO-07-719T (Washington,
D.C: May 9, 2007), 2007 Tax Filing Season: Interim Results and Updates
of Previous Assessments of Paid Preparers and IRS‘s Modernization and
Compliance Research, GAO-07-720T (Washington, D.C: Apr. 12, 2007), and
Internal Revenue Service: Interim Results of the 2007 Tax Filing Season
and the Fiscal Year 2008 Budget Request, GAO-07-673 (Washington, D.C.:
Apr. 3, 2007).
[6] We use ’paid preparer“ to refer to any individual acting alone or
as an employee of an entity who provides fee-based return preparation
assistance. Within this broad classification, there are tax
practitioners and commercial preparers. Tax practitioners, who are
governed by the Department of the Treasury Circular 230, are authorized
to represent taxpayers before IRS. They can include attorneys,
certified public accountants, and enrolled agents. Commercial preparers
include corporations and self-employed individuals who are not
regulated by IRS or governed by Circular 230. While there are currently
no federal competence standards or registration requirements for
unenrolled commercial preparers, federal legislation has been proposed
to mandate Treasury to test and certify tax return preparers.
[7] GAO, Assessing the Reliability of Computer-Processed Data, GAO-02-
15G (Washington, D.C.: Sept.1, 2002).
[8] While taxpayers and paid preparers can mail a paper return directly
to IRS, only paid preparers and tax preparation software companies that
IRS has designated as electronic return originators (ERO) can transmit
tax returns electronically to IRS, which may involve a fee to the
taxpayers. IRS conducts suitability checks of applicants who are
applying to become EROs. These checks may include checking applicant‘s
criminal background, credit history, and tax compliance.
[9] IRS also has plans to replace its Business Master File legacy
processing system.
[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 taxpayers seeking this assistance
since 2003.
[11] The cost accounting module in IRS‘s Integrated Financial System is
not yet capable of producing the detailed cost information needed to
perform estimates. See, GAO, Financial Audit: IRS‘s Fiscal Years 2006
and 2005 Financial Statements, GAO-07-136 (Washington, D.C.: Nov. 9,
2006).
[12] 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. See GAO-07-719T.
[13] The IRS Commissioner characterized this year‘s filing season as
high-risk because of challenges related to implementing the new
Telephone Excise Tax Refund, a split refund option that allows for
direct deposits in up to three separate accounts, and tax law changes
that were enacted in December 2006. We reported earlier this year that
these challenges had little impact on the filing season performance, in
large part because workload failed to materialize. See GAO 07-720T.
[14] See, for example, GAO-07-720T.
[15] IRS auditors can get the entire paper return. Consequently, all
the information can be used during an audit, but not in the automated
audit selection process.
[16] The total number of returns processed during the 2007 filing
season includes 717,000 1040EZ-T forms, of which 100,000 were filed
electronically. This form was for individuals who requested a refund of
federal telephone excise tax in 2007 and, therefore, did not apply to
previous filing seasons.
[17] See GAO-07-727.
[18] TIGTA found that some technology and start-up costs were not
reliable or properly tracked (see Treasury Inspector General for Tax
Administration, Consolidation of Tax Return Processing Sites Is
Progressing Effectively, But Improved Project Management Is Needed,
Reference No. 2007-40-165 (Washington, D.C.: Aug. 31, 2007).
[19] We have not independently verified this estimate. As we have
previously reported, IRS‘s cost accounting system is not yet able to
support preparation of such cost estimates. See, for example, GAO-07-
136.
[20] TIGTA determined that IRS‘s 2007 filing season was successful
because most key tax law changes were implemented correctly and IRS
timely processed returns and issued refunds and electronically filed
returns increased 9 percent over last year. See the Treasury Inspector
General for Tax Administration, The 2007 Tax Filing Season was
Generally Successful, and Most Returns were Timely and Accurately
Processed, Reference No. 2007-40-187 (Washington, D.C.: Sept. 21,
2007).
[21] Because of the substantial costs associated with fully
implementing CADE, the Congress could find information about the
benefits of CADE, such as faster refund timeliness, useful as an
indication of both the magnitude and likelihood of the future benefits
from full implementation. Consequently, last year we recommended that
IRS report to the Congress on refund timeliness for CADE compared to
the Master File legacy system. According to IRS officials, IRS is in
the process of developing this measure.
[22] The most recent release of CADE, originally scheduled for delivery
in July 2007, was deployed into production on August 8, 2007, but with
reduced functionality. This release will also interface with AMS,
currently scheduled to be deployed in October 2007 to allow address
changes for CADE accounts.
[23] Full data for 2007 is not available.
[24] GAO, Tax Administration: Electronic Filing‘s Past and Future
Impact on Processing Costs Dependent on Several Factors, GAO-02-205
(Washington, D.C., Jan. 10, 2002).
[25] IRS officials said that if all data from tax returns were
transcribed and posted, the Automated Underreporting Program could
eliminate human screeners who currently review return information that
has not been transcribed or posted. IRS estimated that if the screeners
could be reallocated to performing audits, they could bring an
additional $175 million annually.
[26] GAO-07-27.
[27] According to a recent TIGTA report, some states estimate that bar
codes reduce the time and effort involved in processing paper returns
by 50 to 90 percent and use of bar codes is $.57 to $.70 cheaper to
process per return than a conventional paper return. See Treasury
Inspector General for Tax Administration, Additional Action is Needed
to Expand the Use and Improve the Administration of the Free File
Program, Reference No. 2007-40-105 (Washington, D.C.: June 27, 2007).
[28] Such an analysis may have to rely on estimates, since IRS‘s cost
accounting system is not yet capable of producing the detailed cost
information. See GAO-07-136.
[29] GAO previously reported statistics that support that this upward
trend has existed since at least 1981. See GAO, Tax Administration:
Most Taxpayers Believe They Benefit from Paid Tax Preparers, but
Oversight for IRS Is a Challenge, GAO-04-70 (Washington, D.C.: Oct. 31,
2003).
[30] GAO-06-563T.
[31] GAO-04-70.
[32] Internal Revenue Service, U.S. Department of the Treasury,
Reducing the Federal Tax Gap: A Report on Improving Voluntary
Compliance (Washington, D.C.: Aug. 2, 2007).
[33] Legislation has been introduced in the Congress to regulate paid
preparers. See the Taxpayer Protection and Assistance Act of 2007, S.
1219, 110th Cong. § 1 (2007).
[34] IRS does not have a specific productivity measure for telephone
assistance, but instead uses two measures, average handle time”the
average amount of time assistors spend assisting taxpayers”and customer
contacts resolved per staff year”the number of contacts resolved in
relation to time expended based on staff usage. As of last June,
average handle time was 10 minutes and comparable to last year and the
number of contacts resolved far surpassed IRS‘s goal.
[35] Of the 42 million calls answered by automation or assistors as of
June 30, only about 716,000 were related to the telephone excise tax
refunds, a small portion of the 17.6 million expected calls.
[36] GAO, IRS Modernization, Continued Progress Requires Addressing
Resource Management Challenges, GAO-05-707T (Washington, D.C.: May 19,
2005) and IRS Telephone Assistance: Opportunities to Improve Human
Capital Management, GAO-01-144 (Washington, D.C.: Jan. 30, 2001).
Internal Revenue Service, U.S. Department of the Treasury, Reducing the
Federal Tax Gap: A Report on Improving Voluntary Compliance
(Washington, D.C.: Aug. 2, 2007).
[37] GAO-07-27.
[38] The American Customer Satisfaction Index tracks trends in customer
satisfaction and is considered to be an industry leader.
[39] According to IRS, the sales tax deduction calculator allows
taxpayers to figure out the amount of optional general sales tax they
are eligible to claim.
[40] Mystery shopping involves IRS officials visiting volunteer sites
posing as taxpayers to assess the experience of the taxpayer. Site
reviews assess whether volunteer preparers were adhering to minimum
quality standards required by all sites. Return reviews determine
whether the tax law was applied properly for critical items and
resulted in an accurate return based on the taxpayer interview and
supporting documentation.
[41] Treasury Inspector General for Tax Administration, Internal
Revenue Service FY 2008 Budget Request, (Washington, D.C.: 2007).
[42] GAO-07-719T.
[43] According to IRS officials, the benefits of contact recording
include, for example, IRS‘s ability to monitor site activity, train
employees, and improve quality of service without having to visit the
site. Importantly, contact recording provides managers with a
statistically valid sample.
[44] The accuracy measures include precision margins of +/-2 percentage
points.
[45] There are challenges that may delay further deployment. First,
according to IRS officials and a recent TIGTA report, contact recording
will have to compete with other systems that may have priority”see the
Treasury Inspector General for Tax Administration, System Updates and
Control Improvements Are Needed to Ensure Contact Recording Will
Provide an Accurate Assessment of Taxpayer Assistance Quality,
Reference No. 2007-40-115 (Washington, D.C.: July 9, 2007). Second,
many walk-in sites will not be able to accommodate contact recording
without additional modifications to the offices. Finally, IRS is in the
process of evaluating the viability of its walk-in sites to determine
which and how many of its sites should be consolidated, expanded or
closed.
[46] GAO-05-51.
[47] GAO, Tax Administration: IRS Improved Performance in the 2004
Filing Season, but Better Data on the Quality of Some Services are
Needed, GAO-05-67 (Washington, D.C.: Nov. 10, 2004).
[48] Additionally, by extending contact recording to return
preparation, IRS would have an opportunity to learn more about the
steps taxpayers and preparers need to follow to ensure filing accurate
returns.
[49] IRS issued TAB reports in two phases. Phase I outlined the results
of preliminary research on taxpayer expectations and established five
strategic themes for improving taxpayer services including optimizing
use of partner services (e.g., paid preparers and community-based
organizations) and elevating self-service options, such as on IRS‘s Web
site. Phase II included research results on taxpayer service needs and
preferences and 54 recommended initiatives for service improvements.
[50] IRS qualified these estimates by noting that they do not fully
allocate all indirect overhead and support costs and represent the
average cost per contact rather than the marginal costs per contact,
which could be significantly lower due to the unused capacity and fixed
costs associated with many services. Moreover, we previously commented
on long-standing limitations in IRS‘s cost accounting capabilities (see
for example, GAO-07-310 and GAO-07-247). However, it is our
determination that IRS is a competent source for these cost estimates,
which seem to be reasonable; therefore, we consider these estimates to
be sufficiently reliable for describing how IRS could potentially use
the information to provide taxpayer services at a lower cost.
[51] See GAO, IRS‘s 2002 Tax Filing Season: Returns and Refunds
Processed Smoothly; Quality of Assistance Improved, GAO-03-314
(Washington, D.C.: Dec. 20, 2002).
[End of section]
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