Internal Revenue Service
Interim Results of the 2007 Tax Filing Season and the Fiscal Year 2008 Budget Request Gao ID: GAO-07-673 April 3, 2007The Internal Revenue Service's (IRS) tax filing season performance is a key indicator of how well IRS serves taxpayers. This year's filing season was expected to be risky because of tax system changes, including the telephone excise tax refund (TETR). IRS's fiscal year (FY) 2008 budget request shows its spending proposal for taxpayer service, enforcement, and Business Systems Modernization (BSM). The request includes initiatives to reduce the tax gap, the difference between what taxpayers owe and what they voluntarily pay on time. IRS recently estimated the net tax gap to be $290 billion in 2001. GAO was asked to (1) describe IRS's 2007 filing season performance, (2) determine how IRS's proposed FY 2008 budget compares to prior years', provides information on how proposals may impact the tax gap, justifies new spending, and whether there are opportunities to reduce or reallocate resources, and (3) evaluate the status of IRS's efforts to develop and implement BSM.
Despite initial concerns about this year's filing season being high risk due to increased workload from TETR and other tax system changes, early data suggest that the impact has been minimal because anticipated volume has not materialized. IRS has processed over 63 million returns, most filed electronically. However, one of IRS's key tax return processing systems became operational two months behind schedule, resulting in slower posting of returns and delayed refunds for several days for millions of taxpayers. IRS's 2008 budget request of $11.6 billion would increase spending by 5.6 percent and continue a trend since 2004 of shifting overall spending toward enforcement. The proposed budget provides limited information on the impact of proposed initiatives on the tax gap. Expected direct enforcement revenue to be gained is small--less than 1 percent of the net tax gap. The indirect effect of the initiatives on voluntary compliance is unknown although some research suggests that the indirect effect might be larger than the direct effect. Further, justifications for selected taxpayer service and enforcement initiatives varied. While documents for some initiatives had useful detail for assessing them, others lacked this information. For example, the initiative to determine the impact of taxpayer service on compliance lacked details such as a problem statement, a research approach, and how IRS determined needed resources. While GAO has been supportive of this kind of research, without a more detailed justification GAO cannot comment on specifics of the proposal. GAO is continuing to assess the justifications. IRS may be able to deliver taxpayer service more cost effectively, but its study of taxpayer service delivery options is several months behind schedule; in March 2007, the IRS Commissioner testified that the report will be issued soon. Despite progress made in implementing BSM projects and improving modernization management controls and capabilities, significant challenges and serious risks remain, and IRS has more to do to fully address our prior recommendations.
GAO-07-673, Internal Revenue Service: Interim Results of the 2007 Tax Filing Season and the Fiscal Year 2008 Budget Request
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Report to the Ranking Minority Member, Subcommittee on Oversight,
Committee on Ways and Means, House of Representatives:
United States Government Accountability Office:
GAO:
April 2007:
Internal Revenue Service:
Interim Results of the 2007 Tax Filing Season and the Fiscal Year 2008
Budget Request:
GAO-07-673:
GAO Highlights:
Highlights of GAO-07-673, a report to the Ranking Minority Member,
Subcommittee on Oversight, Committee on Ways and Means, House of
Representatives
Why GAO Did This Study:
The Internal Revenue Service‘s (IRS) tax filing season performance is a
key indicator of how well IRS serves taxpayers. This year‘s filing
season was expected to be risky because of tax system changes,
including the telephone excise tax refund (TETR). IRS‘s fiscal year
(FY) 2008 budget request shows its spending proposal for taxpayer
service, enforcement, and Business Systems Modernization (BSM). The
request includes initiatives to reduce the tax gap, the difference
between what taxpayers owe and what they voluntarily pay on time. IRS
recently estimated the net tax gap to be $290 billion in 2001. GAO was
asked to (1) describe IRS‘s 2007 filing season performance, (2)
determine how IRS's proposed FY 2008 budget compares to prior years',
provides information on how proposals may impact the tax gap, justifies
new spending, and whether there are opportunities to reduce or
reallocate resources, and (3) evaluate the status of IRS‘s efforts to
develop and implement BSM.
What GAO Found:
Despite initial concerns about this year‘s filing season being high
risk due to increased workload from TETR and other tax system changes,
early data suggest that the impact has been minimal because anticipated
volume has not materialized. IRS has processed over 63 million returns,
most filed electronically. However, one of IRS‘s key tax return
processing systems became operational two months behind schedule,
resulting in slower posting of returns and delayed refunds for several
days for millions of taxpayers.
IRS‘s 2008 budget request of $11.6 billion would increase spending by
5.6 percent and continue a trend since 2004 of shifting overall
spending toward enforcement. The proposed budget provides limited
information on the impact of proposed initiatives on the tax gap.
Expected direct enforcement revenue to be gained is small”less than 1
percent of the net tax gap. The indirect effect of the initiatives on
voluntary compliance is unknown although some research suggests that
the indirect effect might be larger than the direct effect. Further,
justifications for selected taxpayer service and enforcement
initiatives varied. While documents for some initiatives had useful
detail for assessing them, others lacked this information. For example,
the initiative to determine the impact of taxpayer service on
compliance lacked details such as a problem statement, a research
approach, and how IRS determined needed resources. While GAO has been
supportive of this kind of research, without a more detailed
justification GAO cannot comment on specifics of the proposal. GAO is
continuing to assess the justifications. IRS may be able to deliver
taxpayer service more cost effectively, but its study of taxpayer
service delivery options is several months behind schedule; in March
2007, the IRS Commissioner testified that the report will be issued
soon.
Despite progress made in implementing BSM projects and improving
modernization management controls and capabilities, significant
challenges and serious risks remain, and IRS has more to do to fully
address our prior recommendations.
Figure: Funding for IRS Enforcement and Taxpayer Service Programs and
Related Support Functions, Fiscal Years (FY) 2004-2008:
[See PDF for Image]
Source: GAO analysis of IS data.
[End of figure]
What GAO Recommends:
GAO is not making any new recommendations, but notes relevant past
recommendations, their implementation status, and where our previous
work has identified opportunities for additional savings.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-673].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact James R. White at (202)
512-9110 or whitej@gao.gov.
[End of section]
Contents:
Letter:
Scope and Methodology:
Agency Comments:
Appendix I: Updated Briefing Slides from the March 15, 2007, briefing
to the Subcommittee on Oversight, House Committee on Ways and Means:
Appendix II: GAO Contact and Staff Acknowledgments:
United States Government Accountability Office:
Washington, DC 20548:
April 3, 2007:
The Honorable Jim Ramstad:
Ranking Minority Member:
Subcommittee on Oversight:
Committee on Ways and Means:
House of Representatives:
Dear Mr. Ramstad:
Effective tax administration requires a balance of taxpayer service and
tax law enforcement. To provide enforcement and taxpayer service in
fiscal year (FY) 2008, the Internal Revenue Service (IRS) has requested
an $11.6 billion[Footnote 1] operating level budget with about 63
percent going for enforcement activities and 31 percent for taxpayer
service (including operational support). The remaining request includes
funding to develop and implement modernized information systems.
IRS provides much of its services to taxpayers during the annual tax
return filing season, making filing season performance a key indicator
of how well IRS is serving taxpayers. In past reports and testimonies,
we said that IRS has made significant progress improving taxpayer
service since passage of the IRS Restructuring and Reform Act of 1998
(RRA 98).[Footnote 2] Improvements include increased electronic filing,
better access to IRS's telephone assistors, and more accurate answers
to taxpayers' questions. However, we have also described taxpayer
service challenges such as the quality of assistance at walk-in and
volunteer sites where taxpayers get face-to-face assistance. Moreover,
the Commissioner of Internal Revenue stated that this year's filing
season is high risk for several reasons, including challenges in
implementing the new telephone excise tax refund (TETR), split refund
option (refunds can now be directly deposited to up to three separate
accounts), and several tax law extensions that passed late in 2006.
Although IRS has increased revenue collected through its enforcement
programs in recent years, enforcement continues to be included on our
list of high-risk federal programs.[Footnote 3] This is due, in part,
to the persistence of a large tax gap.[Footnote 4] 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.
Another high-risk challenge is IRS's ongoing Business Systems
Modernization (BSM) program, a multibillion-dollar, highly complex
effort that involves the development and delivery of a number of
modernized information systems that are intended to replace the
agency's aging business and tax processing systems. The program is
critical to supporting IRS's taxpayer service and enforcement goals and
reducing the tax gap. We recently reported that despite progress made
in implementing BSM projects and improving modernization management
controls and capabilities, significant challenges and serious risks
remain, and further program improvements are needed, which IRS is
working to address.[Footnote 5]
In light of the challenges IRS faces, you asked us to assess IRS's 2007
tax filing season performance, FY 2008 budget request, and the status
of the BSM program. Our objectives were to (1) describe IRS's 2007 tax
filing season performance for returns processing and taxpayer
assistance including the impact of tax system changes, such as the
TETR, split refund option, and several tax law extensions that passed
late in 2006, (2) assess IRS's proposed FY 2008 budget and compare it
with prior years' spending and staffing and determine what information
it provides on the impact of proposals on the tax gap, how new spending
initiatives are justified, and whether there are opportunities to
reduce or reallocate resources, and (3) evaluate the status of IRS's
efforts to develop and implement BSM.
On March 15, 2007, we briefed your staff and staff of the Subcommittee
Chair on the preliminary observations of our review. This report
transmits the updated materials we used at the briefing, which are
reprinted as appendix I.
In summary, we made the following major points:
* Despite initial concerns and IRS's characterization of this year's
filing season as high risk, early data show that tax systems changes
have not had a significant effect on filing season operations or
performance. In particular, TETR-related requests and telephone calls
have been far less than IRS planned. As of March 16, 2007, IRS has
processed 63.5 million individual income tax returns, with 69 percent
including TETR requests. The number of returns filed electronically is
5 percent greater than this time last year. Also, IRS is achieving its
goals for telephone service. However, there are areas of concern. In
early March, the latest release of the Customer Account Data Engine
(CADE), one of IRS's key tax return processing systems, became
operational--2 months behind schedule. As a result of the delay, IRS
has had slower processing times and delayed refunds for up to several
days for millions of taxpayers. This delay may have a more serious
impact on IRS's ability to deliver future releases of CADE, because it
caused contention for key resources, but it is too early to know.
Taxpayers' use of the Free File program (an alliance of companies that
offer free return preparation and electronic filing on their Web sites
to eligible taxpayers) is 5.5 percent below last year at this time.
* IRS's 2008 budget request would increase spending, particularly for
enforcement. The $11.6 billion requested total operating budget is an
increase of $608.8 million (5.6 percent) over the FY 2007 continuing
resolution level. IRS proposes spending $7.2 billion for enforcement
(including operational support), an increase of 6.5 percent, continuing
a trend since 2004 of shifting a greater proportion of overall spending
toward enforcement as compared to taxpayer service. IRS's budget
request includes initiatives and legislative proposals to address the
tax gap. There is limited data in IRS's request on the expected impact
of the proposals on the gap. The expected direct enforcement revenue to
be gained is small compared to the size of the tax gap. For example,
IRS expects to yield about $699 million in FY 2010, or about ¼ of 1
percent of the tax year 2001 net tax gap from additional enforcement
staffing. However, the indirect effect on voluntary compliance is
unknown. Several research studies by economists, while subject to data
limitations, suggest that indirect revenue might exceed direct revenues
gained. We asked for supplementary documents on six initiatives to
better understand their expected benefits and costs. The documented
justifications for those initiatives varied in the depth of useful
information they provided. We continue to assess the justifications for
the initiatives and whether IRS could cost effectively provide
additional information that could be useful for the Congress and others
as they assess IRS's budget request. IRS identified savings in the 2008
budget request, but other savings opportunities may exist. For example,
IRS may be able to change the mix of services provided--such as giving
taxpayers more options for help by e-mail or its Web site in place of
more costly telephone or walk-in operations--but its study to identify
cost-effective service delivery methods is several months behind
schedule.
* IRS continues to make progress in implementing BSM projects and
meeting cost and schedule commitments, but two key projects--CADE
(discussed above) and Modernized e-File (a new electronic filing
system)--experienced significant cost overruns during 2006. Future BSM
project releases face serious risks, which IRS is working to mitigate.
For example, delays in deploying the latest release of CADE have
resulted in contention for key resources and will likely impact the
design and development of the next two important releases, which are
scheduled to be deployed later this year. IRS has made significant
progress in implementing our prior recommendations and improving its
modernization management controls and capabilities. However, critical
controls and capabilities related to requirements development and
management and post implementation reviews of deployed BSM projects
have not yet been fully implemented. In addition, more work remains to
be done by the agency to fully develop a long-term vision and strategy
for completing the BSM program, including establishing time frames for
consolidating and retiring legacy systems.
Scope and Methodology:
To assess IRS's filing season performance for processing, telephones,
face-to-face assistance and its Internet Web site, we obtained and
analyzed IRS's performance and production data and compared it to
annual goals and prior years' performance. Our work also included
direct observations of key filing season operations, and interviews
with IRS officials and other external stakeholders.
To assess IRS's 2008 budget request, we reviewed IRS's congressional
budget justifications and supplementary documents to (1) identify
trends in spending and staffing from FYs 2004 through 2008, (2) assess
information on the tax gap and selected spending initiatives to assess
the information provided to justify the request, and (3) identify areas
of potential opportunities for savings and efficiencies. Our assessment
is based on a comparative analysis funding, expenditures, and other
documentation and interviews with IRS officials.
Our filing season and budget audit work was done primarily at IRS's
National Office and its operating divisions including the Large and Mid-
Size Business operating division in Washington, D.C; Small
Business/Self-Employed operating division in New Carrollton, Md; and
Wage and Investment Division operating division headquarters and Joint
Operations Center and call site in Atlanta, Ga. We also interviewed
officials at the IRS Oversight Board in Washington, D.C. Additionally,
we reviewed relevant external documentation and our reports and reports
of the Treasury Inspector General for Tax Administration.
Our analysis of the BSM program was based primarily upon the results of
our detailed review of the FY 2007 BSM expenditure plan that we issued
in a recent report.[Footnote 6]
In past work, we assessed IRS's budget and filing season performance
data. We considered filing season performance measures and data that
cover the quality, accessibility, and timeliness of IRS's services to
be objective and reliable based on our prior work. Since the data
sources and procedures for producing this year's budget and filing
season data have not significantly changed from prior years, we
determined that the data were sufficiently reliable for the 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 attributed to IRS officials. We have
determined that the estimates for cost savings and Web site performance
come from competent sources and are reasonable. Data limitations are
discussed where appropriate. We performed our work from December 2006
through March 2007 in accordance with generally accepted government
auditing standards.
Agency Comments:
In commenting on a draft of this report, IRS officials emphasized that
the budget's initiatives and legislative proposals will result in
additional direct and indirect revenue and, ultimately, increase
compliance. It also reported that it will soon release its strategic
plan for taxpayer service delivery, which will serve as the foundation
for future decisions for service improvements and efficiencies.
We are sending copies of this report to the Chairmen and Ranking
Minority Members of other Senate and House committees and subcommittees
that have appropriation, authorization, and oversight responsibilities
for the IRS. We are also sending copies to the Commissioner of Internal
Revenue, the Secretary of the Treasury, the Chairman of the IRS
Oversight Board, and the Director of the Office of Management and
Budget. Copies are also available at no charge on the GAO Web site at
http://www.gao.gov.
If you or you staff have any questions or wish to discuss the material
in this briefing further, please call me at (202) 512-9110 or at
whitej@gao.gov. Contact points for our offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. GAO staff who made major contributions to this report are
listed in Appendix II.
Sincerely yours,
Signed by:
James R. White:
Director, Tax Issues Strategic Issues Team:
[End of section]
Appendix I: Updated Briefing Slides from the March 15, 2007, briefing
to the Subcommittee on Oversight, House Committee on Ways and Means:
Interim Results of IRS's 2007 Tax Filing Season Performance and Fiscal
Year 2008 Budget Request:
Update of March 15, 2007 Briefing To the Subcommittee on Oversight,
House Committee on Ways and Means:
Review Objectives:
What is IRS's 2007 filing season performance for returns processing and
taxpayer assistance including impacts of tax system changes, such as
the telephone excise tax refund (TETR), split refund option (refunds
can be directly deposited to up to three separate accounts), and
several tax law extensions that passed late in 2006?
How does IRS's proposed FY 2008 budget compare with prior years'
spending and staffing and what information does it provide on how
proposals may impact the tax gap, how new spending initiatives are
justified, and opportunities to reduce or reallocate resources?
What is the status of IRS's efforts to develop and implement its
Business Systems Modernization (BSM) program?
Background:
IRS's primary filing season operations include processing electronic
and paper individual income ax returns and issuing refunds as well-as
providing taxpayer service through its toll-free telephone operations,
Web site, and face-to-face assistance.
* Taxpayers can electronically file their returns by using a paid tax
preparer, commercial tax preparation software, or the Free File
program. The Free File program, accessible through IRS's Web site, is
an alliance of 20 companies that have an a agreement with IRS to
provide free on-line tax preparation and electronic filing on their Web
sites for taxpayers below an adjusted gross income ceiling ($52,000 in
2000.
While it is always a massive undertaking, the IRS Commissioner
characterized this ear's filing season as high risk for three reasons:
the TETR, split refund option, and tax law extender provisions.
* IRS estimated that over 180 million individuals and businesses are
eligible for the TETR. Individuals businesses, and tax-exempt
organizations that paid the excise tax on long-distance telephone
service after February 28, 2003 and before August 1, 2006 are eligible
to request the refund. Individuals who do not have tax filing
obligations, but paid the tax, can request the refund on Form 1040EZ-T
(Request for Refund of Federal Telephone Excise tax).
* Individuals can request a standard TETR amount ranging from $30 to
$60 depending on the number of exemptions they are eligible or they can
use Form 8913 (Credit for Federal Telephone Excise Tax Paid) to claim
the tax paid.
* Taxpayers have 3 years to file an amended tax return to request TETR.
Individuals who have no tax filing obligation can file a 1040 EZ-T
within 3 years to request TETR without filing an extension.
Prior to the 2007 filing season, taxpayers could have their refunds
directly deposited into one account. Beginning in 2007, to encourage
savings, taxpayers are allowed to directly deposit their refunds into
up to three accounts.
The Tax Relief and Health Care Act of 2006 signed into law in December
2006 extended some provisions that expired at the end of calendar year
2005. These changes include extensions of three tax deductions: (1)
state and local sales tax, (2) higher education tuition and fees, and
(3) educator expenses.
The most recent (tax year 2001) estimated gross tax gap-the difference
between what taxpayers pay voluntarily and on time and what they should
pay under the law-is 345 billion. IRS estimated that it would recover
$55 billion of the 2001 tax gap through late payments and enforcement
actions, leaving a net tax gap of $290 billion.
IRS's BSM program is a multibillion-dollar, high-risk, highly complex
effort to develop and deliver modernized information systems that are
intended to replace the agency's aging business and tax processing
systems. The program is critical to supporting IRS's taxpayer service
and enforcement goals and reducing the tax gap.
IRS's new tax return processing system, the Customer Account Data
Engine (CADE), is the cornerstone of IRS's modernization efforts. CADE
is being introduced through a series of releases and is intended to
fully replace IRS's antiquated Individual Master File system of
taxpayer accounts by 2012.
Interim Results of IRS's 2007 Filing Season - Returns Processing:
The volume of returns processing and refund issuance is comparable to
last year.
According to IRS data, as of March 16, 2007, compared to the same time
last year IRS:
processed 63.5 million returns compared to 62.7 million returns, and:
issued 55.2 million refunds for $139.3 billion compared to 56.3 million
refunds for $134.0 billion.
According to IRS officials, the agency is meeting most processing goals
and performance is comparable to last year.
The growth rates for electronic filing and direct deposits are up from
the same period last year.
As of March 16,
Over 77 percent of all individual income tax returns or 49.3 million
were filed electronically, up 5.3 percent over the same time last year,
an increase over the previous years' growth of 2.2 percent, and:
76.2 percent of refunds were directly deposited into taxpayers'
accounts, up 5.8 percent over the same time last year. Direct deposits
are faster and more convenient for taxpayers than mailing paper checks.
We previously reported that state mandates for electronic filing of
state tax returns also encourage electronic filing of both state and
federal tax returns.[Footnote 7] Last year, electronic filing of
federal returns increased 27 percent for the three states (NY, CT & UT)
with new 2006 mandates. This year, state mandates are likely to
continue to show a positive effect on federal electronic filing
because, with the addition of West Virginia, 13 states now have state
mandates.
Compared to processing paper returns, electronic filing:
reduces IRS's costs by reducing staff devoted to processing. In 2006,
IRS used almost 1,700 (36 percent) fewer staff years for processing tax
returns than in 1999, which IRS estimates to have saved the agency $78
million in salary, benefits, and overtime, and:
improves service to taxpayers, not only by a more accurate return, but
also by a faster refund:
As electronic filing grows, resources devoted to processing continue to
decline.
Figure 1: Number of Individual Returns and IRS Staff Years for
Individual Paper and Electronic Processing, FYs 1999 - 2008:
[See PDF for Image]
Source: GAO analysis of IRS data.
Notes: Staff years and FTEs are units of measurement that are often
used interchangeably. An FTE is the equivalent of one person working
full-time for 1 year with no overtime. As noted in the figure, staff
years for paper filing are for selected major activities only. Also,
2007 projections do not include 1040EZ-T.
[End of figure]
Early data show that the tax system changes have not had a significant
impact on returns processing operations because the volume IRS
anticipated has not materialized.
As it does every filing season, IRS planned and prepared extensively
for tax system changes which minimized problems.
IRS anticipated a significant volume of TETR claims to process, which
IRS has not received to date. While all taxpayers who paid the tax are
eligible, of those who filed as of March 10, 68.7 percent have claimed
TETR. Additionally of those who do not otherwise have tax obligations,
approximately 312,000 have asked for a refund (2.5 percent of the 12.4
million IRS expected by this time). Both IRS's CADE and legacy systems
are processing TETR requests made on the 1040 and 1040EZ-T forms.
IRS also anticipated an increased workload from split refunds that has
not yet materialized. As of March 24, about 61,00 taxpayers, out of the
3.8 million IRS expected for the filing season, chose the slit refund
option to directly deposit their refund in more than one account.
According to IRS, split refunds cost more to process, reducing the
agency's savings from direct deposit. Further, two large tax software
packages do not offer split refunds.
IRS delayed processing a small number of returns (compared to total
filing population) claiming tax extender provisions until February 3
until it completed changes to its tax processing systems to accommodate
the provisions.
The latest release of CADE became operational in early March 2 months
behind schedule because of problems identified during testing. IRS had
on initially planned to post 33 million taxpayer returns to CADE.
However, as a result of the delay of that release of CADE,
IRS estimates that CADE will post about 12.5 million fewer returns.
Thus, returns processing has been slowed for millions of taxpayers who
would have been eligible for their returns to be posted on CADE,
because of the longer posting times for the legacy system versus CADE,
and:
refunds for millions of those CADE-eligible taxpayers were delayed by 1-
5 days for direct deposit and 4-8 days for paper checks.
The setback may have a more serious impact on IRS's ability to deliver
expanded functionality of future versions of CADS, thus delaying the
transition to the new processing system (discussed further in the BSM
section of this briefing).
IRS did not plan to process returns with split refunds on CADE this
year because of IRS's concerns about having enough time to complete the
programming for the current release of CADE after passage of the
legislation.
IRS made several changes in the Free File program:
IRS and the Free File Alliance agreed to provide services to taxpayers
with an average gross income of $52,000 or less which equates to about
95 million or 70 percent of all taxpayers. Under the agreement,
companies are not allowed to offer refund anticipation loans and
checks, or other ancillary products to free file participants.
While all 19 companies participation in the free file program allow for
TETR requests, 3 of the 19 companies offer form 1040 EZ-T requests.
Taxpayers' use of the Free File program continues to decline:
As of March 8, 2.5 million returns were filed via free file (down 5.5
percent from the same time last year). As of March 10, just under half
requested TETR.
Interim Results of IRS's 2007 Filing Season - Telephone Assistance:
Call volume to IRS's toll free assistance is less than planned and last
year's volume.
Table 1: IRS Telephone Assistance Volume in the First Weeks of the
Filing Seasons, 2006 and 2007:
Telephone assistance: Total calls[B];
2006 Actual: 19,201,258;
2007 Actual: 18,460,273;
2007 Plan[A]: 20,584,114.
Telephone assistance: Answered by IRS assistors (percentage);
2006 Actual: 7,677,406 (40.0%);
2007 Actual: 7,474,521 (40.5%);
2007 Plan[A]: 8,182,026 (39.7%).
Telephone assistance: Answered by automated menu of recordings
(percentage);
2006 Actual: 11,523,852 (60.0%);
2007 Actual: 10,985,752 (59.5%);
2007 Plan[A]: 12,402,088 (60.3%).
Source: GAO analysis of IRS data.
[A] 2007 plan is IRS's year-to-date plan to monitor performance toward
annual goals.
[B] Total calls (i.e., calls answered by assistors and automation) are
based on actual counts from January 1 to March 4, 2006 and March 3,
2007.
[End of table]
The assistor level of service peaked in 2003 at 87 percent. This year,
IRS is meeting its goals, including for assistor level of service, but
goals are lower than last year's actual performance.
Table 2: IRS Telephone Assistance Performance in the First Weeks of the
Filing Seasons, 2006 and 2007:
Telephone Performance-access: Assistor level of service[B,C];
2006 Actual: 83.8%;
2007 Actual: 82.4%;
2007 Plan[A]: 81.1%.
Telephone Performance-access: Average speed of answer (in
minutes)[C,D];
2006 Actual: 3.1;
2007 Actual: 4.4;
2007 Plan[A]: 4.6.
Telephone Performance-access: Taxpayer disconnects [C,E];
2006 Actual: 9.0%;
2007 Actual: 12.7%;
2007 Plan[A]: 14.7%.
Telephone Performance-access: IRS disconnects[F];
2006 Actual: 462,303;
2007 Actual: 137,926;
2007 Plan[A]: N/A.
Telephone Performance-accuracy[G]: Accounts customer accuracy rate
estimates[H];
2006 Actual: 92.7% +/- 0.7%;
2007 Actual: 92.9% +/- 0.9%;
2007 Plan[A]: N/A.
Telephone Performance-accuracy[G]: Tax law accuracy rate estimates[H];
2006 Actual: 90.2% +/- 1.0%;
2007 Actual: 88.7% +/- 1.5%;
2007 Plan[A]: N/A.
Source: GAO analysis of IRS.
Note: N/A means that IRS did not set goals for these measures.
[A] 2007 plan is IRS's year-to-date plan to monitor performance toward
annual goals.
[B] Assistor level of service is the percentage of taxpayers who wanted
to talk with an assistor and actually go through and received service.
[C] Assistor level of service, average speed of answer, and taxpayer
disconnects are based on actual counts from January 1 to March 4, 2006
and March 3, 2007.
[D] The number of minutes a taxpayer waits in a queue to speak with an
assistor.
[E] When a taxpayer hangs up before receiving assistance.
[F] An IRS disconnect occurs when IRS disconnects callers due to long
wait times. Based on actual counts for January 1 through March 4, 2006
and March 3, 2007.
[G] Based on a representative sample estimated at the 90 percent
confidence interval for January and February 2006 and 2007.
[H] The percentage of calls in which telephone assistors provided
accurate answers for the call type and took the appropriate action.
[End of table]
Tax systems changes have had minimal impact on IRS's telephone
operations.
TETR-related calls are a small fraction of what IRS expected. Of the
6.8 million TETR-related calls IRS expected between January 1 and March
3, it received over 326,000 calls (or 4.8 percent) for TETR
assistance.[Footnote 8] TETR-related calls were 1.8 percent of total
calls received by IRS to date.
IRS prepared for TETR by hiring about 650 FTEs with the expectation
that those hires would be used to cover anticipate attrition in 2008
and trained to handle account calls and paper inventory should the
demand for TETR not materialize. Because TETR call volume has not
materialized, TETR hires are allowing IRS to focus more on processing
paper correspondence, such as amended returns, at call sites.
For split refunds, IRS anticipated about 7,000 calls (compared to the
70 million total calls it receives each year).
For tax provision extenders, IRS anticipated that the affected
taxpayers would be a small portion of total taxpayers and determined
questions on extenders would be a part of general tax law calls.
IRS has surplus space at call sites and is reviewing options for
reducing excess capacity.
Last year, IRS determined that because of excess capacity, it has the
potential to close several call sites without negatively affecting
taxpayer service even at peak times, but had no plans to do so. As a
result, we recommended that IRS plan to consolidate call sites.
IRS is reviewing the feasibility and costs of different options to
decrease excess capacity should issue a report in FY 2008.
Interim Results of IRS's 2007 Filing Season - IRS's Web Site
Assistance:
Use of IRS's Web site increased during initial filing season months
compared to last year and data show that the site is performing well.
Table 3: IRS Web Site Use in the First Weeks of the Filing Seasons,
2006 and 2007:
Uses: Visits[A];
2006: 66,571,225;
2007: 72,978,709;
Percentage change: 9.6%.
Uses: Downloads[A];
2006: 21,609,956;
2007: 24,429,718;
Percentage change: 13.0%.
Uses: Searches[A];
2006: 35,917,428;
2007: 41,434,606;
Percentage change: 15.4%.
Uses: Where's My Refund[B];
2006: 17,732,356;
2007: 21,656,492;
Percentage change: 22.1%.
Source: GAO analysis of IRS data.
[A] Web site visits and searches and downloads from January and
February 2006 and 2007. Downloads are from January 2006 and 2007. A
visit begins when a visitor views their first page from the server
IRS.gov, and ends when the visitor leaves the site. Visits are not
counts of the numbers of unique individuals who have accessed the site.
[B] For January 1 through March 11, 2006 and March 10, 2007.
[End of table]
According to independent evaluations, such as Keynote and the American
Consumer Satisfaction Index, IRS's Web site is scoring high compared to
other government agencies, non-profits, and private sector firms for
customer satisfaction and compared to other government agencies for
average download time.
IRS added a state deduction calculator feature this filing season,
which IRS wants to use as a new standard for other on line calculators.
Interim Results of IRS's 2007 Filing Season - Face-to-face Assistance:
Taxpayers are using IRS's walk-in sites less and using volunteer site
return preparation services more.
As of March 10, the total taxpayer contacts at IRS's 401 walk-in sites
declined to 1.8 million (down 4.7 percent) from the same period last
year. IRS has devoted 9 percent fewer FTEs compared to last year for
walk-in assistance (down from 176 to 160 FTEs). IRS continues to limit
return preparation by setting income limits that approximate the amount
for claiming the Earned Income Tax Credit (less than $39,000) and in
some cases, requiring appointments as it has done since 2003. IRS has
prepared about 6,700 (5.3 percent) of the over 126,000 1040EZ-T forms
it expected to be prepared at the sites.
As of March 11, the number of returns prepared at over 11,700 volunteer
sites has increased to just over 1.3 million returns (up over 8
percent), including 33,600 1040EZ-T forms. IRS did not develop 1040EZ-T
projections for volunteer sites.
We and the Treasury Inspector General For Tax Administration (TIGTA)
have raised concerns about the quality of assistance at walk-in and
volunteer sites for years.[Footnote 9]
* For IRS's walk-in sites, as of March 10, tax law and accounts
assistance accuracy rates were 74 and 85 percent respectively as
measured by IRS. IRS's goal for tax law accuracy is 78 percent. In
2007, IRS is collecting data to set a goal for accounts accuracy for
2008. IRS prepared over 125 000 returns and schedule at walk-in sites,
but it lacks information on the accuracy of that assistance.
* For volunteer sites, IRS is conducting several types of reviews. As
of March 2, for a small non-statistical sample IRS is re reporting a 69
percent accuracy rate for return preparation, compared to the goal of
55 percent. In contrast, TIGTA's results, using similar methods, show a
60 percent accuracy rate. Available IRS and TIGTA data is limited, not
statistically based, and therefore cannot be projected to all sites.
IRS's FY 2008 Budget Request:
Requested funding would increase spending particularly for enforcement.
IRS is requesting $11.6 billion total program operating level for FY
2008, an increase of $608.8 million or 5.5 percent over the FY 2007
continuing resolution level and 11 percent over the FY 2004 enacted
level.[Footnote 10]
* When adjusted for inflation, requested 2008 funding would be a 0.5
percent increase since 2004.
* IRS plans to spend a total of $7.2 billion for enforcement and $3.6
billion for tax payer service (increases of 6.5 and 3.8 percent
respectively over the 2007 continuing resolution levels) and Continuing
a trend since 2004 of shifting the portion of overall spending toward
en enforcement as compared to service, as shown in figure 2.
* The, request would provide over 56,500 FTEs for enforcement and about
35,200 FTEs for taxpayer service (an increase of 0.7 percent and a
decrease of 3.74 percent, respectively, compared to the FY 2007 enacted
levels).[Footnote 11]
* At FY 2008 requested levels, since 2004, total spending for
enforcement would increase by 19.4 percent while spending for service
would decrease by 3.8 percent.
* IRS proposes to fund 92,814 FTEs, a 0.29 percent decrease compared to
the FY 2007 enacted level.
* Between FYs 2004 and 2008 (requested), total FTEs would decline 6.3
percent, from 99,055 to 92,814.
* The decline in FTEs is due, in part, to reduced staffing devoted to
paper return processing, which is part of taxpayer service. As noted
earlier, IRS used almost 1,700 (36 percent) fewer staff years for
processing tax returns in 2006 than in 1999.
Figure 2: Funding for IRS Enforcement and Taxpayer Service Programs and
Related Support Functions, FYs 2004-2008:
[See PDF for Image]
Source: GAO analysis of IRS data.
[A] These data, based on assumptions prior to Congress passing IRS's
fiscal year 2007 budget, are the best available on total taxpayer
service and enforcement spending in 2007 as IRS was unable to provide
updated data in time for this briefing.
[End of figure]
Proposed spending could help address the tax gap but there is limited
information on impact.
To help address the tax gap, the budget request proposes additional
revenue-producing initiatives, non revenue-producing initiatives, and
legislative proposals.
* The expected direct revenue to be gained from revenue-producing
initiatives and legislative proposals is small compared to the size of
the tax gap. Direct revenue includes the additional dollars generated
through increased enforcement efforts, such as through audits or
collections.
* Additional enforcement staffing to be hired for these initiatives is
expected to yield about $699 million in direct revenue in FY 2010,
about 1/4 of 1 percent of the tax year 2001 net tax gap.
* Of the 16 legislative proposals on tax gap reduction, 7 are related
to expanded information reporting. The legislative proposals are
estimated to produce $1.9 billion in additional revenue in FY 2010.
* In 2010, the total estimated increased revenues from both the revenue-
producing initiatives and legislative proposals, about $2.6 billion, is
about 0.9 percent of the 2001 net tax gap.
Increased enforcement could have indirect revenue effects that exceed
direct revenue, but indirect effects are not known or addressed in the
budget.
Indirect revenue of enforcement includes the additional revenue
generated due to targeted taxpayers' increased voluntary compliance in
subsequent years and the deterrent effect of enforcement on the larger
population. Widespread agreement exists that IRS enforcement programs
have indirect revenue effects through increases in voluntary tax
compliance.
* Several research studies by economists, while subject to data
limitations, suggest that indirect revenue might exceed direct revenues
gained.[Footnote 12]
* The precise magnitude of the indirect effects of enforcement is not
known given challenges in measuring compliance developing reasonable
assumptions about taxpayer behavior; and accounting for factors outside
of IRS's actions that can affect taxpayer compliance, such as changes
in tax law.
* That the impact of increased enforcement and legislative proposals on
the tax gap is small is consistent with our previous statements which
noted that no single approach-such as increased enforcement efforts-is
likely to fully and cost effectively address noncompliance.
- The tax gap has multiple causes and spans different types of taxes
and taxpayers.
- Multiple approaches are needed to reduce the tax gap, including
providing IRS additional enforcement authority and tools and
simplifying the tax laws.
Justifications of new spending initiatives vary in depth of useful
information provided.
To better understand IRS's initiatives and their expected benefits and
costs, we asked for supplementary documentation on selected new
spending initiatives:
* Improve tax gap estimates, measures, and noncompliance detection:
$41.0 million; 258 FTEs:
* Improve compliance for large multinational businesses: $26.2 million;
158 FTEs:
* Improve compliance among small businesses and self-employed
taxpayers: $73.2 million; 485 FTEs:
* Critical upgrades to IT infrastructure: $60 million; 0 FTEs:
* Research effects of taxpayer service on compliance: $5 million; 8
FTEs:
* Expand volunteer income assistance: $5 million; $46 FTEs:
For the six initiatives we reviewed, the budget request and
supplementary documents varied in the detail provided to justify new
spending initiatives, for example:
* Documents for the IT infrastructure initiative included information
on the extent of the problem to be addressed by new spending, including
its impact on employee performance. However, the documents supporting
expanding volunteer income tax assistance had no such information, such
as, for example, evidence of how current spending levels result in some
groups of taxpayers not receiving needed services.
* Beyond the general, half-page description in the budget request, IRS
lacked documentation to justify the initiative to research the effects
of taxpayer service on compliance, such as potential research questions
or methodologies. While we have been supportive of this kind of
research, without more detailed documentation we cannot comment on
specifics of the proposal, such as the proposed research approach and
how IRS determined needed resources.
We continue to assess the documentation for the initiatives and whether
IRS could cost effectively provide additional useful information for
Congress and others as they consider the appropriate level of funding
for IRS.
IRS's request shows savings, but other savings opportunities may exist.
As it has in prior years, IRS identified millions in savings based on
its past history of reporting achieving those savings, we have no
reason to believe those savings will not materialize.
We have suggested that Congress mandate electronic filing for certain
paid preparers. Much of IRS's proposed savings continue to result from
efficiencies-from electronic filing.
IRS may be able to better identify the mix of taxpayer service deliver
methods to best meet taxpayer needs more cost effectively. IRS's
comprehensive study of taxpayer service delivery options is several
months behind schedule. In his March 20, 2007, testimony, the
Commissioner of IRS said the report will be released soon.
We and TIGTA have long reported that IRS has faced challenges in
managing and improving the quality of services provided by volunteer
organizations. If IRS is unable to ensure that quality is up to an
acceptable level, it might need to rethink its funding for these in the
future.
GAO has done past work related to some of the budget's information
reporting proposals and suggested them as options for reducing the tax
gap .[Footnote 13]
Status of BSM:
Additional progress made in BSM implementation, but challenges and
risks remain.
IRS continues to make progress in implementing BSM projects and meeting
cost and schedule commitments, but two key projects experienced
significant cost overruns during 2006-CADE and Modernized e-File.
According to IRS, the cost overrun for Modernized e-File was due in
part to upgrading infrastructure to support the electronic filing
mandate for large corporations and tax exempt organizations which was
not in the original projections or scope.
Future BSM project releases continue to face significant risks and
issues, which IRS is addressing. Delays in deploying the latest release
of CADE have resulted in continued contention for key resources and
will likely impact the design and development of the next two important
releases, scheduled to be deployed later this year. The potential for
schedule delays, coupled with reported resource constraints and
expanding complexity of CADE, increases the risk of scope problems and
the potential for deferring planned functionality to later releases.
Maintaining alignment between the planned releases of CADE and the new
Accounts Management Services project-intended to deliver improved
customer support--is also a key area of concern because of the
functional interdependencies. The agency recognizes the potential
impact of these project risks and issues on its ability to deliver
planned functionality within cost and schedule estimates, and has
developed mitigation strategies to address them.
IRS has made further progress in addressing high-priority BSM program
improvement initiatives during the past year, including efforts related
to hiring and training 25 entry-level programmers to support CADE
development.
IRS has made significant progress in implementing our prior
recommendations, including improving its modernization management
controls and capabilities and developing an updated modernization
vision and strategy. However, critical controls and capabilities
related to requirements development and management and post
implementation reviews of deployed BSM projects are not yet fully
implemented.
IRS has more to do to fully address our prior recommendation of
developing a long-term vision and strategy for completing the BSM
program, including establishing time frames for consolidating and
retiring legacy systems.
450550:
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
James R. White, (202) 512-9110 or whitej@gao.gov:
Staff Acknowledgment:
In addition to the contact person named above, Amy Dingler, Charles R.
Fox, Carol Henn, Timothy D. Hopkins, Ronald W. Jones, Matthew Kalmuk,
Varflay Kesselly, Jennifer McDonald, Paul B. Middleton, Sabine R. Paul,
David A. Powner, Cheryl Peterson, Neil Pinney, and Joanna Stamatiades
made key contributions to this report.
FOOTNOTES
[1] The $11.6 billion includes $11.1 billion in new appropriated funds
and $0.5 billion in other funds.
[2] See, for example, GAO, Tax Administration: IRS Improved Some Filing
Season Services, but Long-term Goals Would Help Manage Strategic Trade-
offs, GAO-06-51 (Washington, D.C.: Nov. 14, 2005), Internal Revenue
Service: Assessment of the Interim Results of the 2006 Filing Season
and Fiscal Year 2007 Budget Request, GAO-06-615T (Washington, D.C.:
Apr. 6, 2006), and Tax Administration: Most Filing Season Services
Continue to Improve, but Opportunities Exist for Additional Savings,
GAO-07-27 (Washington, D.C.: Nov. 15, 2006).
[3] GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.:
January 2007).
[4] The tax gap is an estimate of the difference between what taxpayers
pay in taxes voluntarily and on time and what they should pay under the
law.
[5] GAO, Business Systems Modernization: Internal Revenue Service's
Fiscal Year 2007 Expenditure Plan, GAO-07-247 (Washington, D.C.: Feb.
15, 2007).
[6] GAO-07-247.
[7] 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).
[8] We are in the process of obtaining additional information to
evaluate IRS's projections of TETR.
[9] See GAO, Tax Administration: IRS Improved Some Filing Season
Services, but Long-term Goals Would Help Manage Strategic Trade-offs,
GAO-06-51 (Washington, D.C.: Nov. 14, 2005) and TIGTA Taxpayer Service
is Improving, but Challenges Continue in Meeting Expectations,
Reference No. 2006-40-052 (Washington, D.C.: Feb. 17, 2006).
[10] The $11.6 billion includes $11.1 billion in appropriated resources
and $0.5 billion in other resources, including such funds as user fees
and funds available for obligation over multiple years. Continuing
resolution data is based on assumptions prior to Congress passing IRS's
FY 2007 budget and is the best available as IRS was unable to provide
updated data in time for this briefing.
[11] IRS provided updated FTE data based on its enacted FY 2007 budget.
[12] For citations of research studies, see GAO, Tax Compliance:
Multiple Approaches Are Needed to Reduce the Tax Gap, GAO-07-488T
(Washington, D.C.: Feb. 16, 2007).
[13] For citations of our past reports, see GAO-07-488T.
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