Internal Revenue Service
Assessment of the 2008 Budget Request and an Update of 2007 Performance Gao ID: GAO-07-719T May 9, 2007The Internal Revenue Service's (IRS) budget request shows how IRS intends to balance spending for enforcement and taxpayer service, including spending for new initiatives and the Business Systems Modernization (BSM) program. A combination of enforcement and taxpayer service promotes compliance with the tax laws. GAO was asked to (1) compare IRS's proposed FY 2008 budget to prior years' and assess how the new spending initiatives are justified, and (2) describe IRS's enforcement, filing season, and BSM performance. GAO analyses are based on IRS's 2008 budget submission, supplementary IRS data, interviews with IRS officials, and prior GAO reports. Some of GAO's analyses have been reported earlier this year and updated here.
IRS's budget proposes to increase spending by almost 5 percent to $11.6 billion. The budget proposes shifting a greater proportion of spending to enforcement, continuing a trend since 2004. IRS projects that revenue from the new initiatives will have a relatively small impact on the tax gap--less than one percent of the gap last estimated at $290 billion in 2001. The tax gap is the difference between what taxpayers owe and voluntarily pay. Justifications for the new initiatives varied with some lacking descriptive, cost, and expected performance information. For example, an initiative for improving compliance estimates provided no information on how the budget and staff needed or work to be done were determined. Without such information, decision makers do not have an informed basis for approving and funding the new initiatives. IRS has made noticeable progress in its enforcement efforts including increasing the amount of enforcement revenue collected and enforcement staffing. For example, between FY 2004 and 2006 enforcement revenue increased 13 percent to $48.7 billion. Nevertheless, enforcement remains on GAO's high-risk list. The tax gap has been a persistent problem in spite of efforts to reduce it, as the rate of taxpayers' voluntarily compliance with the tax laws has changed little over the past three decades. To better target enforcement resources, IRS has requested funding to do additional compliance research which GAO has long supported. Finally, GAO has reported on IRS's lack of a data-based plan to improve compliance. Filing season performance in 2007 improved in some areas compared to prior years', but there have been challenges. As of April 20, IRS processed about 104.6 million individual income tax returns and issued 88.2 million refunds. Electronic filing grew, telephone access is somewhat better, and Web site use continues to grow. However, fewer than 4 percent of eligible taxpayers used the Free File program. The latest release of Customer Account Data Engine (CADE), the new tax processing system, was delayed. As a result, millions of taxpayers did not benefit from CADE's faster processing of refunds. IRS recently issued its plan, the Taxpayer Assistance Blueprint, to improve taxpayer service. Despite progress in implementing BSM projects including for CADE and improving management controls and capabilities, significant challenges and serious risks remain. Delays in the latest release of CADE resulted in continued contention for key resources and will likely impact future releases. IRS has more to do to address GAO's prior recommendations such as developing a long-term strategy that would include time frames for retiring legacy computer systems.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-719T, Internal Revenue Service: Assessment of the 2008 Budget Request and an Update of 2007 Performance
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Testimony:
Before the Subcommittee on Financial Services and General Government,
Committee on Appropriations, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 3:00 p.m. EST:
Wednesday, May 9, 2007:
Internal Revenue Service:
Assessment of the 2008 Budget Request and an Update of 2007
Performance:
Statement of James R. White:
Director:
Strategic Issues:
David A. Powner:
Director:
Information Technology Management Issues:
GAO-07-719T:
GAO Highlights:
Highlights of GAO-07-719T, a testimony before the Subcommittee on
Financial Services and General Government, Committee on Appropriations,
U.S. Senate
Why GAO Did This Study:
The Internal Revenue Service‘s (IRS) budget request shows how IRS
intends to balance spending for enforcement and taxpayer service,
including spending for new initiatives and the Business Systems
Modernization (BSM) program. A combination of enforcement and taxpayer
service promotes compliance with the tax laws. GAO was asked to (1)
compare IRS's proposed FY 2008 budget to prior years' and assess how
the new spending initiatives are justified, and (2) describe IRS‘s
enforcement, filing season, and BSM performance.
GAO analyses are based on IRS‘s 2008 budget submission, supplementary
IRS data, interviews with IRS officials, and prior GAO reports. Some of
GAO‘s analyses have been reported earlier this year and updated here.
What GAO Found:
IRS‘s budget proposes to increase spending by almost 5 percent to $11.6
billion. The budget proposes shifting a greater proportion of spending
to enforcement, continuing a trend since 2004. IRS projects that
revenue from the new initiatives will have a relatively small impact on
the tax gap”less than one percent of the gap last estimated at $290
billion in 2001. The tax gap is the difference between what taxpayers
owe and voluntarily pay. Justifications for the new initiatives varied
with some lacking descriptive, cost, and expected performance
information. For example, an initiative for improving compliance
estimates provided no information on how the budget and staff needed or
work to be done were determined. Without such information, decision
makers do not have an informed basis for approving and funding the new
initiatives.
IRS has made noticeable progress in its enforcement efforts including
increasing the amount of enforcement revenue collected and enforcement
staffing. For example, between FY 2004 and 2006 enforcement revenue
increased 13 percent to $48.7 billion. Nevertheless, enforcement
remains on GAO‘s high-risk list. The tax gap has been a persistent
problem in spite of efforts to reduce it, as the rate of taxpayers‘
voluntarily compliance with the tax laws has changed little over the
past three decades. To better target enforcement resources, IRS has
requested funding to do additional compliance research which GAO has
long supported. Finally, GAO has reported on IRS‘s lack of a data-based
plan to improve compliance.
Filing season performance in 2007 improved in some areas compared to
prior years‘, but there have been challenges. As of April 20, IRS
processed about 104.6 million individual income tax returns and issued
88.2 million refunds. Electronic filing grew, telephone access is
somewhat better, and Web site use continues to grow. However, fewer
than 4 percent of eligible taxpayers used the Free File program. The
latest release of Customer Account Data Engine (CADE), the new tax
processing system, was delayed. As a result, millions of taxpayers did
not benefit from CADE‘s faster processing of refunds. IRS recently
issued its plan, the Taxpayer Assistance Blueprint, to improve taxpayer
service.
Despite progress in implementing BSM projects including for CADE and
improving management controls and capabilities, significant challenges
and serious risks remain. Delays in the latest release of CADE resulted
in continued contention for key resources and will likely impact future
releases. IRS has more to do to address GAO‘s prior recommendations
such as developing a long-term strategy that would include time frames
for retiring legacy computer systems.
What GAO Recommends:
GAO recommends IRS have available basic descriptive, cost, and expected
performance information on all new initiatives and include such
information in future budget submissions. IRS agreed to provide more
information with future budgets, but said it did provide basic
information this year. However, some initiatives lacked any explanation
of how the amount requested or staff needed were determined. Without
such information, Congress would be unable to tell whether IRS spent
the money as intended.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-719T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact James R. White at (202)
512-9110 or whitej@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
We appreciate this opportunity to comment on the Internal Revenue
Service's (IRS) budget request as well as its performance in enforcing
tax laws, providing services this tax filing season, and modernizing
its information systems.
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 operating-level budget with about 63 percent going for
enforcement activities and 31 percent for taxpayer service (including
operational support).[Footnote 1] The remainder includes funding to
develop and implement IRS's Business Systems Modernization (BSM)
program, a multibillion-dollar, high-risk, complex effort intended to
help improve both enforcement and taxpayer service.
Although IRS has increased direct revenue collected through its
enforcement programs in recent years, enforcement continues to be
included on our list of high-risk federal programs.[Footnote 2] This is
due, in part, to the persistence of a large tax gap.[Footnote 3] IRS
estimated the gross tax gap to be $345 billion for tax year 2001. After
late payments by taxpayers and revenue brought in by IRS's enforcement
efforts, IRS estimates the resulting net tax gap to be $290 billion.
The annual tax return filing season is when IRS provides much of its
service to taxpayers. From January through April, IRS processed over
100 million individual tax returns and issued refunds, handled tens of
millions of phone queries from taxpayers, and provided forms and
answers to questions for tens of millions of taxpayers on its Web site.
Smaller numbers of taxpayers were assisted at IRS's walk-in sites or at
sites operated by other organizations and staffed by volunteers. While
it is always a massive undertaking, the IRS Commissioner stated that
this year's filing season was 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 were
enacted in December of 2006.[Footnote 4]
As requested, our objectives in this statement are to compare IRS's
proposed FY 2008 budget submission with prior years' spending and
staffing and assess how new spending initiatives are justified, and
whether there are opportunities to reduce or reallocate resources. In
addition, our statement will describe IRS's performance in three areas:
enforcement, service to taxpayers so far this filing season (including
the impact of this year's tax system changes), and systems
modernization.
Our analyses are primarily based on the information in IRS's FY 2008
budget request, supplementary data from IRS, interviews with IRS
officials and other tax experts, IRS's filing season performance
measures and our past reports on IRS's enforcement, filing season, and
systems modernization programs. Some of our analyses have been reported
earlier this year, but are updated here.[Footnote 5] Since sources and
procedures for producing this year's data have not changed
significantly changed from prior years, we determined that the data we
used were sufficiently reliable for the purposes of this statement.
Data limitations are discussed where appropriate. Our review of
justifications for selected new spending initiatives used criteria
based on our previous work on results-oriented government and
performance budgeting. We selected 6 of the total 14 non-legislative
new spending initiatives for review based on certain characteristics
that we believed might affect how they were justified.[Footnote 6] We
reviewed the justifications to determine whether they included basic
information such as the problem or performance shortfall to be
addressed, work to be done, explanations of estimated costs, and
measures and goals.[Footnote 7] We reviewed IRS's efforts to address
our prior year recommendations related to our annual filing season and
BSM work. We performed our work from December 2006 through April 2007
in accordance with generally accepted government auditing standards.
In summary, we make the following major points:
* IRS's 2008 budget request proposes to increase spending, particularly
for enforcement. The $11.6 billion requested total operating budget is
an increase of $608.8 million (4.9 percent) over the FY 2007 level. IRS
proposes spending a total of $7.2 billion for enforcement, including
operational support. This continues a trend since 2004 of shifting a
greater proportion of spending to enforcement and away from taxpayer
service. The budget submission includes IRS initiatives and legislative
proposals to address the tax gap. However, the expected direct
enforcement revenue (i.e., the amount collected from taxpayers targeted
by IRS's enforcement efforts) to be gained is small compared to the
size of the tax gap. For example, in FY 2010, after the initiatives are
phased-in, IRS expects to collect an additional $699 million in direct
enforcement revenue--or about one-fourth of 1 percent of the tax year
2001 net tax gap--from added enforcement staff. Furthermore, the
justifications for initiatives varied in the information they provided,
with some lacking basic descriptive, cost, and expected performance
information suitable for assessing them. For example, an initiative to
determine the impact of taxpayer service on compliance lacked
information such as a problem statement and an explanation of estimated
costs. IRS identified savings in the 2008 budget request, and we
identified additional savings opportunities in our past work including
mandating electronic filing for certain tax preparers and consolidating
and retiring legacy information systems.
* Despite progress, enforcement of the tax laws remains on our high
risk list because of the tax gap. The tax gap has been a persistent
problem in spite of a myriad of efforts to reduce it. The rate at which
taxpayers pay their taxes voluntarily and on time has tended to range
from around 81 percent to around 84 percent over the past three
decades. To be in a position to more effectively address the tax gap,
IRS needs more compliance research, which we have long supported. IRS
has requested funding to do a rolling sample of audits of individual
taxpayer accounts (small annual samples that would replace larger but
intermittent efforts). While we have concerns about the amount of
information provided to justify the specific request, we have been
generally supportive of such an approach. Finally, we have reported on
the need for a data-based plan to improve compliance. In a recent
hearing, the Chairman of the Senate Finance Committee asked the
Secretary of the Treasury for a more detailed plan by July 2007.
* IRS's filing season performance improved in some areas, although
there have been challenges. As of April 20, IRS processed approximately
104.6 million individual income tax returns, and issued 88.2 million
refunds. Electronic filing continued to grow, almost 8.5 percent
greater than last year. Challenges include the taxpayers' use of the
Free File program which was slightly less than last year and a 2 month
delay in IRS's latest release of the Customer Account Data Engine
(CADE), a modern tax return processing system that issues faster
refunds. As of April 20, IRS had posted 9.1 million returns by CADE,
far fewer than the 33 million IRS originally planned. As a result,
millions of taxpayers did not receive the benefits of CADE's faster
posting and subsequent refund issuance. Regarding taxpayer service,
telephone access is somewhat better and the accuracy of IRS's answers
to taxpayer questions is comparable to last year. Use of IRS's Web site
continues to increase, which is important because it is available
around the clock and is lower cost than most other types of assistance.
Despite the filing season being characterized as high-risk, in large
part because of TETR, the impact of TETR on taxpayer services has been
much less than IRS anticipated. Longer term, through its Taxpayer
Assistance Blueprint (TAB), IRS plans to improve taxpayer services by
assessing taxpayers' needs and preferences. TAB provides information on
the cost per service contact. Having such information could assist IRS
in determining whether it can provide taxpayers services through lower
cost options.
* IRS continues to make progress in implementing BSM projects and
meeting cost and schedule commitments, but two key projects--CADE 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.
As we will discuss in more detail later in this statement, we recommend
that the Commissioner of Internal Revenue:
* have available basic descriptive, cost, and expected performance
information on the spending initiatives proposed in the 2008 budget
submission to the extent that such information has not been provided,
and:
* include in future budget submissions, basic descriptive, cost, and
expected performance information on new spending initiatives, with
supplementary documentation available if needed.
In email comments on a draft of this statement, IRS's Chief Financial
Officer agreed with the second recommendation, but not the first. She
stated that the FY 2008 budget and justification did provide basic
descriptive, cost, and expected performance information for each
initiative. While we agree that for every initiative IRS provided the
total proposed spending, some initiatives lacked basic information such
as on how the amount to be spent was determined and work to be done.
For example, the initiative for improving compliance estimates provided
no explanation of how the 258 FTEs were determined or basic information
on the work such as the number of examinations to be conducted. Without
such information, at the end of the fiscal year, Congress would be
unable to tell whether IRS spent the money as intended.
IRS's Request Increases Enforcement Spending and Identifies Savings,
but Provides Limited Justification for Some New Spending, and Other
Savings Opportunities Exist:
IRS's 2008 budget request proposes to increase spending. The $11.6
billion requested total operating budget is an increase of $608.8
million (almost 5 percent) over the FY 2007 level as shown in table
1.[Footnote 8] IRS proposes to fund 92,814 full-time equivalents (FTE),
a slight decrease compared to the FY 2007 level.[Footnote 9]
Table 1: IRS's Changes in Funding and Full-time Equivalents for Fiscal
years 2006 through 2008:
Dollars in thousands.
Appropriation accounts: Enforcement;
Fiscal year 2006[A]: Dollar: $4,708,441;
Fiscal year 2006[A]: FTE: 49,534;
Fiscal year 2007: Dollar: $4,741,680;
Fiscal year 2007: FTE: 48,307;
Fiscal year 2008 requested: Dollar: $4,925,498;
Fiscal year 2008 requested: FTE: 48,667;
Net percentage change Fiscal years 2007-2008: Dollar: 3.88;
Net percentage change Fiscal years 2007-2008: FTE: 0.75;
Net percentage change Fiscal years 2006-2008: Dollar: 4.61;
Net percentage change Fiscal years 2006-2008: FTE: -1.75.
Appropriation accounts: Taxpayer Service;
Fiscal year 2006[A]: Dollar: 2,142,042;
Fiscal year 2006[A]: FTE: 32,050;
Fiscal year 2007: Dollar: 2,156,988;
Fiscal year 2007: FTE: 31,557;
Fiscal year 2008 requested: Dollar: 2,103,089;
Fiscal year 2008 requested: FTE: 30,160;
Net percentage change Fiscal years 2007-2008: Dollar: -2.50;
Net percentage change Fiscal years 2007-2008: FTE: - 4.43;
Net percentage change Fiscal years 2006-2008: Dollar: -1.82;
Net percentage change Fiscal years 2006-2008: FTE: -5.90.
Appropriation accounts: Operations Support;
Fiscal year 2006[A]: Dollar: 3,461,205;
Fiscal year 2006[A]: FTE: 13,468;
Fiscal year 2007: Dollar: 3,470,882;
Fiscal year 2007: FTE: 12,890;
Fiscal year 2008 requested: Dollar: 3,769,587;
Fiscal year 2008 requested: FTE: 12,957;
Net percentage change Fiscal years 2007-2008: Dollar: 8.61;
Net percentage change Fiscal years 2007-2008: FTE: 0.52;
Net percentage change Fiscal years 2006-2008: Dollar: 8.91;
Net percentage change Fiscal years 2006-2008: FTE: -3.79.
Appropriation accounts: Business Systems Modernization;
Fiscal year 2006[A]: Dollar: 242,010;
Fiscal year 2006[A]: FTE: 317;
Fiscal year 2007: Dollar: 212,659;
Fiscal year 2007: FTE: 317;
Fiscal year 2008 requested: Dollar: 282,090;
Fiscal year 2008 requested: FTE: 317;
Net percentage change Fiscal years 2007-2008: Dollar: 32.65;
Net percentage change Fiscal years 2007-2008: FTE: 0;
Net percentage change Fiscal years 2006-2008: Dollar: 16.56;
Net percentage change Fiscal years 2006-2008: FTE: 0.00.
Appropriation accounts: Health Insurance Tax Credit;
Fiscal year 2006[A]: Dollar: 20,008;
Fiscal year 2006[A]: FTE: 17;
Fiscal year 2007: Dollar: 14,856;
Fiscal year 2007: FTE: 17;
Fiscal year 2008 requested: Dollar: 15,235;
Fiscal year 2008 requested: FTE: 17;
Net percentage change Fiscal years 2007-2008: Dollar: 2.55;
Net percentage change Fiscal years 2007-2008: FTE: 0;
Net percentage change Fiscal years 2006-2008: Dollar: -23.86;
Net percentage change Fiscal years 2006-2008: FTE: 0.00.
Subtotal Appropriated Resources;
Fiscal year 2006[A]: Dollar: $10,573,706;
Fiscal year 2006[A]: FTE: 95,386;
Fiscal year 2007: Dollar: $10,597,065;
Fiscal year 2007: FTE: 93,088;
Fiscal year 2008 requested: Dollar: $11,095,499;
Fiscal year 2008 requested: FTE: 92,118;
Net percentage change Fiscal years 2007-2008: Dollar: 4.70;
Net percentage change Fiscal years 2007-2008: FTE: -1.04;
Net percentage change Fiscal years 2006-2008: Dollar: 4.93;
Net percentage change Fiscal years 2006-2008: FTE: -3.43.
Reimburseables;
Fiscal year 2006[A]: Dollar: $158,820;
Fiscal year 2006[A]: FTE: 1,350;
Fiscal year 2007: Dollar: 125,723;
Fiscal year 2007: FTE: N/A;
Fiscal year 2008 requested: Dollar: 133,498;
Fiscal year 2008 requested: FTE: 696;
Net percentage change Fiscal years 2007-2008: Dollar: 6.18;
Net percentage change Fiscal years 2007-2008: FTE: N/A;
Net percentage change Fiscal years 2006-2008: Dollar: -15.94;
Net percentage change Fiscal years 2006-2008: FTE: -48.44.
User Fees;
Fiscal year 2006[A]: Dollar: 19,000;
Fiscal year 2006[A]: FTE: N/A ;
Fiscal year 2007: Dollar: 150,000;
Fiscal year 2007: FTE: N/A;
Fiscal year 2008 requested: Dollar: 180,000;
Fiscal year 2008 requested: FTE: N/A;
Net percentage change Fiscal years 2007-2008: Dollar: 20.00;
Net percentage change Fiscal years 2007-2008: FTE: N/A;
Net percentage change Fiscal years 2006-2008: Dollar: 847.37;
Net percentage change Fiscal years 2006-2008: FTE: N/A.
Available multi-year/no-year funds;
Fiscal year 2006[A]: Dollar: 169,006;
Fiscal year 2006[A]: FTE: N/A ;
Fiscal year 2007: Dollar: 143,282[B];
Fiscal year 2007: FTE: N/A;
Fiscal year 2008 requested: Dollar: 149,135;
Fiscal year 2008 requested: FTE: N/A;
Net percentage change Fiscal years 2007-2008: Dollar: 4.08;
Net percentage change Fiscal years 2007-2008: FTE: N/A;
Net percentage change Fiscal years 2006-2008: Dollar: -11.76;
Net percentage change Fiscal years 2006-2008: FTE: N/A.
Total program operating level;
Fiscal year 2006[A]: Dollar: $10,920,532;
Fiscal year 2006[A]: FTE: 96,736;
Fiscal year 2007: Dollar: $11,016,070;
Fiscal year 2007: FTE: 93,088;
Fiscal year 2008 requested: Dollar: $11,558,132;
Fiscal year 2008 requested: FTE: 92,814;
Net percentage change Fiscal years 2007-2008: Dollar: 4.92;
Net percentage change Fiscal years 2007-2008: FTE: -0.29;
Net percentage change Fiscal years 2006-2008: Dollar: 5.84;
Net percentage change Fiscal years 2006-2008: FTE: -4.05.
Source: GAO analysis of IRS data.
Note: N/A means not applicable.
[A] The amounts are IRS's estimated allocations of funding of its
previous appropriations accounts based on the new budget appropriation
structure established in 2008. According to IRS officials, data is not
available prior to FY 2006 because of the appropriations account
restructuring.
[B] At the time IRS reported the estimated amount of available multi-
year/no-year funds in its 2008 budget request, the regular 2007
appropriation had not been enacted. Therefore, this amount represents
the amount available under the continuing resolution in effect at that
time.
[End of table]
Table 1 summarizes IRS's appropriation accounts and shows that its 2008
budget submission continues a trend of shifting spending toward
enforcement.
The request for $4.9 billion for direct enforcement appropriations is
an increase of 3.9 percent over the FY 2007 level and almost 4.6
percent over the FY 2006 level.[Footnote 10]
Table 1 also shows that IRS is requesting more funding for operational
support in 2008 over the 2007 level. Among the reasons for the
increased spending is that IRS is proposing to reduce the backlog of
outdated information systems and telecommunications equipment. Finally,
IRS is requesting $282 million for its BSM program--a significant
increase in funding over both FYs 2006 and 2007. This includes over $55
million for developing and deploying the capability to accept
individual income tax returns on Modernized e-File and $16 million for
new Web portals to support key business processes and compliance
initiatives.
When operational support funding shown in table 1 is allocated to
enforcement and taxpayer service, a more complete picture of what IRS
actually spends on these activities emerges. Based on the allocation
reported in the budget request, IRS plans to spend a total of $7.2
billion for enforcement and $3.6 billion for taxpayer service.
Including operational support, IRS is requesting almost 56,600 FTEs for
enforcement and about 35,200 FTEs for taxpayer service (an increase of
0.7 percent and a decrease of 3.7 percent, respectively, compared to FY
2007 levels).
Figure 1 shows that this continues a trend since 2004 of shifting a
greater portion of spending toward enforcement as compared to service.
In years following passage of the IRS Restructuring and Reform Act of
1998, IRS made significant progress in taxpayer service, although there
were declines in many aspects of enforcement activities, such as for
enforcement staff and revenue collected as shown in figures 2 and 3,
respectively, later in this statement.[Footnote 11] However, at FY 2008
requested levels, total spending for enforcement will increase by over
19 percent while spending for taxpayer service will decrease by almost
4 percent since 2004.[Footnote 12]
Figure 1: Funding for IRS Enforcement and Taxpayer Service Programs,
Including Operational Support, Fiscal Years 2004 through 2008:
[See PDF for image]
Source: GAO analysis of IRS data.
Note: Funding levels for all FYs are IRS estimates, with the exception
of FY 2008, which is requested.
[End of figure]
Estimated Impact of Budget Proposals on Direct Revenue Is Modest
Compared to the Tax Gap but the Effect on Indirect Revenue Is Not
Known:
In the 2008 budget submission, IRS proposes a number of new
initiatives, all of which are intended to improve taxpayer compliance-
-some by increasing staffing for enforcement or making legislative
changes, and some by improving taxpayer service or infrastructure. The
request includes estimates of the annual costs of the initiatives plus,
for some initiatives, dollar estimates of the increased revenue
expected to be realized, as summarized in table 2.
IRS recognizes that there are likely revenue effects beyond those shown
in table 2. Table 2 shows, for example, the direct revenue from new
enforcement initiatives. Direct revenue is the amount collected from
taxpayers targeted by IRS enforcement actions, such as audits. However,
the budget submission states that enforcement actions have indirect
revenue effects as well by increasing voluntary compliance by all
taxpayers.[Footnote 13]
The magnitude of the indirect effects of enforcement is not known with
a high level of confidence because of 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. However, several
research studies have offered insights to help better understand the
indirect effects of IRS enforcement on voluntary tax compliance and
show that they could exceed the direct effect of revenue
obtained.[Footnote 14] Given the uncertainty of estimates of indirect
revenue, in its budget request, IRS says that it cannot measure the
impact of deterrence of enforcement or service on compliance, but only
that their effects are positive. Finally, the budget request also
recognizes that the initiatives intended to improve taxpayer service or
modernize information systems are also expected to ultimately improve
taxpayer compliance. Again, however, reliable information about the
magnitude of the improvement is not available.
Table 2: Estimated Cost and Direct Revenue of IRS Initiatives for
Fiscal Years 2008 through 2010:
Dollars in millions.
Revenue-producing enforcement initiatives;
Estimated cost of initiatives: Fiscal year 2008: $198;
Estimated cost of initiatives: Fiscal year 2009: $163;
Estimated cost of initiatives: Fiscal year 2010: $163;
Estimated direct revenue from initiatives: Fiscal year 2008: $317;
Estimated direct revenue from initiatives: Fiscal year 2009: $526;
Estimated direct revenue from initiatives: Fiscal year 2010: $699.
Legislative initiatives;
Estimated cost of initiatives: Fiscal year 2008: 23;
Estimated cost of initiatives: Fiscal year 2009: 23;
Estimated cost of initiatives: Fiscal year 2010: 23;
Estimated direct revenue from initiatives: Fiscal year 2008: 378;
Estimated direct revenue from initiatives: Fiscal year 2009: 1,171;
Estimated direct revenue from initiatives: Fiscal year 2010: 1,898.
Non-revenue-producing initiatives;
Estimated cost of initiatives: Fiscal year 2008: 188;
Estimated cost of initiatives: Fiscal year 2009: 168;
Estimated cost of initiatives: Fiscal year 2010: 168;
Estimated direct revenue from initiatives: Fiscal year 2008: 0;
Estimated direct revenue from initiatives: Fiscal year 2009: 0;
Estimated direct revenue from initiatives: Fiscal year 2010: 0.
Total;
Estimated cost of initiatives: Fiscal year 2008: $410;
Estimated cost of initiatives: Fiscal year 2009: $355;
Estimated cost of initiatives: Fiscal year 2010: $355;
Estimated direct revenue from initiatives: Fiscal year 2008: $695;
Estimated direct revenue from initiatives: Fiscal year 2009: $1,697;
Estimated direct revenue from initiatives: Fiscal year 2010: $2,597.
Source: GAO analysis of IRS and Department of the Treasury data.
Notes: Figures may not sum to totals because of rounding. Data are from
IRS and from Treasury's February 2007 General Explanations of the
Administration's Fiscal Year 2008 Revenue Proposals.
[End of table]
Over the 3 years shown in table 2, IRS expects the estimated cost for
the initiatives will decrease while the resulting direct revenue
increases. IRS is requesting about $410 million for FY 2008 to fund all
the initiatives, with the estimated costs declining in FYs 2009 and
2010 because of start-up costs in FY 2008.
IRS is projecting that direct revenues will increase by about $2.6
billion in FY 2010, as more staff are hired, trained, and become more
productive, and all aspects of the legislative initiatives are phased-
in, particularly for the information reporting requirements. However,
the direct revenues expected are small compared to the estimated $290
billion net tax gap for tax year 2001.[Footnote 15] For instance, the
revenue-producing initiatives are expected to yield about $699 million
in FY 2010, or about one-fourth of 1 percent of the tax year 2001 net
tax gap. In 2010, the total estimated increased revenue from both the
revenue-producing and legislative initiatives, about $2.6 billion, is
about 0.9 percent of the 2001 net tax gap.
No single approach, such as IRS enforcement, is likely to fully and
effectively address noncompliance. Multiple approaches are needed
because noncompliance has multiple causes and spans different types of
taxes and taxpayers. Approaches include devoting additional resources
to enforcement, providing more enforcement tools like information
reporting, improving taxpayer service, periodically measuring
compliance, setting tax gap reduction goals, leveraging technology to
enhance IRS's efficiency, and simplifying or reforming the tax code.
For example, regarding information reporting, we recently recommended
to IRS, that to assist taxpayers in accurately reporting their capital
gains and losses from securities, in the instructions to Schedule D
clarify the appropriate use of capital losses to offset capital gains
or other income and provide guidance on resources available to
taxpayers to determine their basis.[Footnote 16]
Justifications for Some New Initiatives Lacked Basic Descriptive, Cost,
and Expected Performance Information:
Justifications for the new spending initiatives varied in the basic
information they provided. In some cases, the budget submission lacked
information that would have allowed us or others to assess the proposed
spending and comment on, for example, whether the initiative would be a
worthwhile expenditure in light of expected benefits and costs. To
better understand IRS's initiatives and their expected benefits and
costs, we asked for supplementary documentation on selected new
spending initiatives:
* Improve compliance among small businesses and self-employed (SB/SE)
taxpayers: $73.2 million; 485 FTEs:
* Critical upgrades to IT infrastructure: $60 million; 0 FTEs:
* Improve tax gap estimates, measures, and noncompliance detection
$41.0 million; 258 FTEs:
* Improve compliance for large multinational businesses: $26.2 million;
158 FTEs:
* Research effects of taxpayer service on compliance: $5.0 million; 8
FTEs:
* Expand volunteer income tax assistance (VITA): $5.0 million; 46 FTEs:
Our review of the justifications showed that some had descriptive,
cost, and expected performance information while others lacked such
information. Our previous work on results-oriented government and
performance budgeting, states that budget requests and supporting
documentation should provide information on the results to be achieved
with the funding requested. More specifically, our work has shown that
congressional decision makers benefit from information on the problem
or performance shortfall to be addressed, cost estimates, and
performance measures and goals.
Description of Problem or Performance Shortfall to Be Addressed:
The justification for the initiative to upgrade IT infrastructure
included information on the extent of the problem, including the impact
of computer downtime on employee performance and how much IRS's aged
computer inventory would grow without additional funding. Similarly,
the initiatives to increase compliance among SB/SE taxpayers and large
multinational businesses had such information as the portion of the tax
gap that is attributable to certain types of taxpayers, data on growth
in certain tax return filings for businesses that are high-risk for
underreporting, and the need for increasing enforcement activity in
these areas. However, the justification for expanding VITA did not
provide problem or performance shortfall information, such as evidence
of how some taxpayers do not receive needed services due to the current
level of spending or problems with those taxpayers' compliance levels
due to the lack of services. Similarly, the initiative to research the
effects of taxpayer service on compliance did not explain the problem
such research would correct.
Description of Work to be Done and Explanation of Estimated Costs:
The IT initiative had information on the planned expenditures to
upgrade specific computer equipment, including descriptions of the
equipment and how it is to be used. Also, the initiatives to increase
compliance among SB/SE taxpayers and large multinational businesses had
descriptions of the types of staff to be hired and work to be done--
such as examinations, collections, and legal support. However, the
justifications for the initiatives to improve tax gap estimates and
expand VITA lacked information on how IRS determined the amount
requested or FTEs needed. We could not determine the budget or FTEs or
specifics about the work to be done such as the number of examinations
to be conducted. Further, the initiative to research the impact of
service on compliance lacked descriptive details on the work to be
done--such as potential research questions, methodologies,
deliverables, and estimated costs of delivering them--that would
provide examples of what IRS would accomplish with proposed spending
and allow Congress or others to assess the initiative.
Performance Measures and Goals:
The compliance initiatives had performance measures and goals, such as
direct revenue to be generated or additional examinations to be
conducted; the IT initiative had quantitative targets for reducing the
aged computer inventory; the VITA initiative had a target for improving
the quality of returns prepared by volunteers; and the tax gap estimate
improvement initiative had quantitative targets related to
examinations. However, the initiatives for researching the impact of
service on compliance lacked a performance measure and target, such as,
for improving the use of IRS resources based on the research.
We do not contend that because some of the justifications were lacking
in certain information that the initiatives are not worthwhile, or that
all justifications should have the same extent and types of
information. For example, although the justifications for conducting
research to improve tax gap estimates and determine the effects of
taxpayer service on compliance lacked certain information, in previous
reports and testimony we have been supportive, in general, of such
research.[Footnote 17] However, without some explanation of how cost
and resource needs were determined for these initiatives, assessments
of whether the initiatives are worth their costs are not possible.
Since gathering basic information to justify an initiative has costs,
it is reasonable for justifications of more costly initiatives to have
more detail. When all the basic information becomes too cumbersome to
include in the budget submission itself, an agency can supplement its
request with readily available supporting documentation.
Other Opportunities Exist for Generating Savings:
In its 2008 budget request, IRS identified $120 million in savings as
it has done in prior years--$82.3 million through enhancing technology
and streamlining work processes in its enforcement programs and $37.7
million through increases in electronic filing from its taxpayer
service programs. IRS is proposing to use all internally generated
savings to maintain its current operating levels.[Footnote 18]
In addition to the areas identified by IRS in its budget request, there
are additional opportunities for savings and efficiency gains.
* Increasing electronic filing through mandates: Last year we reported
that state mandates that required paid preparers who file a certain
number of tax returns to electronically file state tax returns
increased federal electronic filing.[Footnote 19] Without a federal
mandate, IRS is missing an opportunity for savings--using IRS's
estimate that it saves $2.38 on every return that is processed
electronically we estimated that IRS would save $68 million per year if
90 percent of returns submitted by preparers that are currently filed
on paper were filed electronically.[Footnote 20] However, IRS lacks the
authority to mandate electronic filing for paid preparers and we
suggested to Congress that it mandate filing by paid preparers meeting
criteria, such as filing a certain number of tax returns.
* Consolidating telephone call sites: We previously reported that IRS
has excess space at its call site operations and the agency had a study
underway to determine the feasibility of consolidating those
operations.[Footnote 21] IRS has nearly completed the first phase of
the study and plans to complete the second phase in 2008. According to
IRS officials, this study is on schedule and is important because it
will allow IRS to identify the costs and benefits of consolidating
phone operations.
* Consolidating or retiring legacy systems: We have previously
recommended that IRS prepare a long-term vision and strategy for
completing the BSM program, including establishing time frames for
consolidating and retiring legacy systems.[Footnote 22] While IRS
developed an initial modernization vision and strategy and associated 5-
year plan, more remains to be done for IRS to fully address our
recommendation. Consolidating and retiring legacy systems should lead
to a reduction in costs associated with maintaining these systems.
* Changing the menu of taxpayer services: IRS recently issued its
comprehensive strategy for improving taxpayer service, including for
telephone, walk-in, volunteer and Web site assistance. That strategy,
known as TAB, was developed in response to a congressional directive.
In addition to providing information on taxpayer needs of service, TAB
provides information on the cost of taxpayer serviced for the various
types of service. Information on needs and costs, along with a better
understanding of taxpayer's preferences, needs and expectations, could
provide taxpayers with the same taxpayer service benefits at a lower
cost through alternative methods.
IRS Has Made Progress on Enforcement, but Enforcement Remains High Risk
Because of the Tax Gap:
IRS has made noticeable progress in its enforcement efforts including
increasing the amount of direct enforcement revenue collected, number
of collection activities undertaken, and enforcement staff.
Nevertheless, enforcement of the tax laws remains high risk, because of
the persistence of the tax gap and the lack of a data-based
plan.[Footnote 23]
IRS Has Taken Some Steps to Improve Enforcement:
IRS reported that direct enforcement revenue rose from $43.1 billion in
FY 2004 to $48.7 billion in FY 2006 (a 13 percent increase). As shown
in figure 2, most of the enforcement revenue is from IRS's collection
efforts ($27.5 billion), followed by examination ($17.4 billion) and
document matching ($3.2 billion).[Footnote 24]
Figure 2: IRS Direct Enforcement Revenue, Fiscal years 1997 through
2006:
[See PDF for image]
Source: IRS.
Note: Dollars not adjusted for inflation.
[End of figure]
In recent testimony, the IRS Commissioner reported increases in some
enforcement activities; for example, he reported that the overall
percentage of individual income tax returns examined between FYs 2001
and 2006 increased by about 75 percent. IRS's 2008 budget request shows
that enforcement goals are comparable or slightly greater than 2006
actual performance and 2007 planned performance; for example, the
examination rate of all individual income tax returns will remain at 1
percent. Also, IRS is proposing to increase document matching
activities for individual taxpayers and increase examinations for
businesses.
With its 2008 budget, IRS is proposing to roughly maintain its skilled
enforcement staff at the FY 2006 level--just over 21,000 FTEs. This
would be an increase of over 8 percent since its low in FY 2003, as
shown in figure 3. However, it is 9 percent less than the skilled
enforcement staff that IRS had in FY 1998. IRS has three main
categories of skilled enforcement staff: revenue officers, who perform
field collection work; revenue agents, who examine complex returns; and
special agents, who perform criminal investigations.
Figure 3: Revenue Agents, Revenue Officers, and Special Agents, Fiscal
years 1998 through 2008:
[See PDF for image]
Source: IRS.
[End of figure]
Despite the projections for skilled enforcement staffing, officials
from the SB/SE and Large and Mid-Size (LMSB) divisions noted that even
maintaining skilled enforcement staff levels may be difficult because
both divisions are experiencing high attrition rates because of
retirements. Furthermore, officials said the 2007 continuing resolution
limited their ability to hire in 2007. SB/SE and LMSB officials noted
that the delays in hiring may have an adverse affect on their ability
to meet performance goals in 2008 and beyond, particularly for the most
complex examination issues, including abusive tax shelters and
corporate returns, because of the lead time needed to train and develop
staff.
Recently, IRS studied individual taxpayer compliance through the NRP,
and used the resulting compliance data to estimate the tax gap for
individual income tax underreporting and the portion of employment tax
underreporting attributed to self-employment taxes for tax year 2001.
NRP, which involved reviewing around 46,000 individual tax returns, has
yielded new information on taxpayer compliance for the first time since
IRS's previous compliance measurement study was undertaken for tax year
1988.
As a result of NRP, IRS has taken steps to better ensure efficient
allocation and use of its enforcement resources. For example, the NRP
study has provided better data on which taxpayers are most likely to be
noncompliant. IRS is using the data to improve its audit selection
processes in hopes of reducing the number of audits that result in no
change, which should reduce the unnecessary burden on compliant
taxpayers and increase enforcement staff productivity.
Enforcement of the Tax Laws Remains High Risk:
Despite the progress in enforcement, enforcement of the tax laws
remains on our high risk list because of the persistence of the tax gap
and, among other things, the lack of a data-based plan to address
it.[Footnote 25]
The tax gap has been a persistent problem in spite of a myriad of
congressional and IRS efforts to reduce it, as the rate at which
taxpayers voluntarily comply with our tax laws has changed little over
the past three decades. The rate at which taxpayers pay their taxes
voluntarily and on time has tended to range from around 81 percent to
around 84 percent. IRS's most recent estimates of the gross tax gap are
$345 billion for tax year 2001, and the net tax gap is estimated to be
$290 billion. IRS's overall approach to reducing the tax gap consists
of enhancing enforcement and improving taxpayer service. IRS uses its
enforcement authority to ensure that taxpayers are reporting and paying
the proper amounts of taxes through efforts such as examining tax
returns and document matching. IRS seeks to improve voluntary
compliance through efforts such as education and outreach programs and
tax form simplification.
IRS needs better, more continuous compliance research and better
measurements of compliance. We have long been a supporter of such
research, because it can give IRS and Congress an important measure of
taxpayer compliance and it allows IRS to better target enforcement
resources towards noncompliant taxpayers. Taxpayers benefit as well,
because properly targeted audits mean fewer audits of compliant
taxpayers and more confidence by all taxpayers that others are paying
their fair share. IRS's budget request includes $41 million for
improving tax gap estimates and detecting noncompliance including for a
rolling NRP sample of individual taxpayers and a dedicated cadre of
examiners to conduct audits. Using a rolling sample, IRS plans to
replicate the 2001 NRP study by conducting audits of a smaller sample
size instead of larger intermittent efforts. At the end of 5 years, IRS
would have a comparable set of results to the 2001 study and continue
to update the study annually by sampling the same number of taxpayers,
dropping off the oldest year in the sample, and adding the new years'
results every year. While we have concerns about the lack of basic
information to justify the specific funding requested, we generally
support this approach. We have previously reported that doing
compliance studies once every few years does not give IRS or others
information about what is happening in the intervening years, and a
rolling sample should reduce costs by eliminating the need to plan
entirely new studies every few years or more and train examiners to
carry them out.[Footnote 26]
IRS also needs a data-based plan to reduce the tax gap. Congress has
been encouraging IRS to develop an overall tax gap reduction plan or
strategy that could include a mix of approaches like simplifying code
provisions, increased enforcement, and reconsidering the level of
resources devoted to enforcement. Some progress has been made toward
laying out the broad elements of a plan or strategy for reducing the
tax gap. On September 26, 2006, the U.S. Department of the Treasury,
Office of Tax Policy, released "A Comprehensive Strategy for Reducing
the Tax Gap." However, the document generally does not identify
specific steps that Treasury and IRS will undertake to reduce the tax
gap, the related time frames for such steps, or explanations of how
much the tax gap would be reduced. In a recent hearing, the Chairman of
the Senate Finance Committee asked the Secretary of the Treasury for a
more detailed plan by July 2007.
IRS's Filing Season Performance Is Improved in Some Areas with
Challenges in Others, and the Effect of Tax System Changes Has Been
Minimal:
IRS's key filing season efforts are processing electronic and paper
individual income tax returns and issuing refunds, as well as providing
assistance or services to taxpayers. As already noted, processing and
assistance were complicated this year by three tax system changes:
TETR, the split refund option, and enactment in December 2006 of tax
law changes.
Returns Processing Is Comparable to Last Year, Despite Delays with CADE
and Implementation of Tax System Changes:
From January 1 through April 20, 2007, IRS processed approximately
104.6 million individual income tax returns, about the same number as
last year, and issued 88.2 million refunds for $203 billion compared to
85.2 million refunds for $190.5 billion at the same time last year.
Over 65 percent of all refunds were directly deposited into taxpayers'
accounts, up 3.5 percent over the same time last year. Direct deposits
are faster and more convenient for taxpayers than mailing paper checks.
IRS recently granted some extensions to taxpayers, including those
affected by a major storm and those unable to file their returns
because of a software company's server problems.
According to IRS data and officials, performance is comparable to last
year. IRS is meeting most of its performance goals, including deposit
error rate, which is the percentage of deposits applied in error, such
as being posted to the wrong tax year. 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 IRS's
view that filing season performance is comparable to last year.
CADE Will Expedite Refunds for Millions of Taxpayers, but Delays in
Implementation Caused Millions More Not to Benefit:
IRS uses two systems for posting taxpayer account information--the
antiquated Master File legacy system and CADE. The latest release of
CADE became operational in early March, 2 months behind schedule
because of problems identified during testing. IRS originally planned
to post 33 million taxpayer returns by CADE, more than four times the
7.4 million posted by CADE last year. We reported in early April that
IRS had revised this estimate down to approximately 17-19 million
taxpayer returns. However, as of April 20, IRS has posted fewer tax
returns than expected--9.1 million--with the remainder being posted to
the Master File legacy system. This means that millions of taxpayers
did not benefit from faster CADE processing this year. Taxpayers
eligible for a refund this year whose returns are posted by CADE will
benefit from CADE's faster processing, receiving their refunds 1-5 days
faster for direct deposit and 4-8 days faster for paper checks than if
their return had been processed on the legacy system. The CADE setback
may impact IRS's ability to deliver the expanded functionality of
future versions of CADE, thus delaying the transition to the new
processing system (discussed further in the BSM section of this
testimony).
Electronic Filing Is Higher Than Last Year Despite a Decline in the
Free File Program:
The rate of electronic filing is up compared to the same period last
year. As of April 20, over 72.6 percent of all individual income tax
returns (75.9 million) were filed electronically, up 8.5 percent over
the same time last year.
We previously reported that state mandates for electronic filing of
state tax returns also encourage electronic filing of both state and
federal tax returns, and last year, we suggested that Congress consider
mandating electronic filing by paid tax preparers meeting criteria,
such as a threshold for number of returns filed.[Footnote 27] Last
year, electronic filing of federal returns increased 27 percent for the
three states (New York, Connecticut and Utah) 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, as shown in figure 4. IRS estimates this saved the agency $78
million in salary, benefits, and overtime in 2006. Electronic filing
also improves service to taxpayers. Returns are more accurate because
of built-in computer checks and reduced transcription errors (paper
returns must be transcribed in IRS's computers--a process that
inevitably introduces errors). Electronic filing also provides faster
refunds.
Figure 4: Number of Individual Returns and IRS Staff Years for
Individual Paper and Electronic Processing, Fiscal years 1999 through
2008:
[See PDF for image]
Source: GAO analysis of IRS data.
Notes: Staff years and full-time equivalents (FTE) are units of
measurement that are often used interchangeably; however, a staff year
includes overtime. Therefore, the cost of one staff year is equal to
the cost of one FTE plus overtime. Projections for 2007 do not include
Form 1040 EZ-Ts.
[End of figure]
Although electronic filing continues to grow, taxpayers' use of the
Free File program continues to decline.[Footnote 28] The Free File
program, accessible through IRS's Web site, is an alliance of companies
that have an 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 of $52,000 in 2007. About 95 million (70
percent) of all taxpayers are eligible for free file. Under the
agreement, companies are not allowed to offer refund anticipation loans
and checks, or other ancillary products, to free file participants.
Although IRS has increased its marketing efforts, the agency has not
been successful in increasing free file use. As of April 19, 2007, IRS
processed about 3.7 million free file returns--less than 4 percent of
eligible taxpayers and a decrease of 2.2 percent from the same period
last year. IRS officials attributed this decline in part to companies
offering free electronic on-line filing separate from the Free File
program. While all 19 companies participating in the Free File program
allow for TETR requests, only 3 of the 19 companies offer Form 1040 EZ-
T requests.[Footnote 29]
Tax System Changes Have Had Less Impact on Returns Processing Than
Projected:
TETR and split refund volume has been less than IRS projected. Over 68
percent of individuals who filed returns through April 14 have
requested the TETR, although all who paid the excise tax were eligible
for the refund. IRS projected that 10 to 30 million individuals who did
not have a tax filing obligation could claim TETR. As of April 13,
approximately 578,000 of this group have asked for a refund (3.4
percent of the 17.1 million IRS expected by this time).[Footnote 30]
As of April 21, just over 77,000 individual taxpayers chose to split
their refunds into different accounts, which represent a small fraction
of the 57.2 million taxpayers who had their refunds directly deposited
and the 3.8 million split refunds IRS projected for the filing season.
IRS delayed processing a small number of returns claiming tax extender
provisions until February 3 to complete changes to its tax processing
systems. IRS has anticipated some problems due to the late passage of
extender provisions which prevented information about them included in
printed tax publications.
Finally, in order to minimize problems, IRS planned and prepared
extensively for this year's primary tax system changes: TETR, split
refund, and tax law extenders. For example, IRS updated forms and
created new ones, hired and trained additional staff to handle
potential volume of TETR and split refund requests, and updated the Web
site and tax systems. As reported in App. 1, of the tax systems
changes, only TETR created new compliance concerns for IRS and IRS
modified its plans to address those concerns during the filing season.
Call Volume Continues to Decline, IRS is Meeting Goals and Performance
Is Comparable to Last Year:
The number of calls to IRS's toll-free telephone lines has been less
than last year and is significantly less for automated calls than in
2002 (see table 3). Similar to last year, IRS assistors answered over
40 percent of the total calls, while the rest of the calls were
answered by an automated menu of recordings.
Table 3: IRS Telephone Volume, 2002 through 2007:
Volume in thousands.
Telephone assistance[A].
Total calls;
2002: 51,148;
2003: 40,805;
2004: 41,647;
2005: 33,935;
2006: 31,540;
2007: 30,260.
Answered by assistors;
2002: 14,799;
2003: 14,987;
2004: 15,915;
2005: 14,804;
2006: 13,709;
2007: 13,506.
Answered by automated menu of recordings;
2002: 36,349;
2003: 25,818;
2004: 25,732;
2005: 19,132;
2006: 17,831;
2007: 16,754.
Source: IRS.
[A] Telephone assistance data are based on the following date ranges:
January 1 to April 20, 2002, January 1 to April 19, 2003, January 1 to
April 17, 2004, January 1 to April 16, 2005, January 1 to April 15,
2006, and January 1 to April 14, 2007.
[End of table]
By one measure of access, IRS's performance is somewhat better and for
another it is somewhat worse than this time last year. Taxpayers'
ability to access IRS's toll-free telephone lines is somewhat better
than last year, and IRS is meeting its annual goals.[Footnote 31]
According to IRS officials, IRS does not try to match previous years'
performance, but sets and tries to achieve performance goals according
to the budget received. As shown in table 4, the percentage of
taxpayers who attempted to reach an assistor and actually got through
and received services--referred to as the level of service--was one
percentage point higher than the same time period last year and greater
than IRS's goal of 82 percent for both FYs 2006 and 2007. Average speed
of answer, which is the length of time taxpayers wait to get their
calls answered, is just under 4 minutes, almost 15 percent longer than
last year, but better than IRS's annual goal of 4.3 minutes.
IRS estimates that the accuracy of telephone assistors' responses to
tax law and account questions to be comparable to the same time period
last year by using a statistical sampling process. IRS officials noted
that there was unprecedented hiring for FY 2007, and while every
employee working tax law applications completes a requisite
certification process, new employees will be less productive than
experienced employees. IRS has implemented several initiatives, such as
targeted monitoring and training, to assist the new hires.
Table 4: IRS Telephone Performance, 2002 through 2007:
Telephone performance-access[A].
Assistor level of service[B];
2002: 67%;
2003: 82%;
2004: 85%;
2005: 82%;
2006: 83%;
2007: 84%.
Average speed of answer (in minutes)[C];
2002: 4.2;
2003: 2.9;
2004: 3.1;
2005: 4.3;
2006: 3.4;
2007: 3.9.
Telephone performance-accuracy[D].
Accounts customer accuracy rate estimates;
2002: 89.28%;
2003: 89.10%;
2004: 89.28%;
2005: 91.59%;
2006: 92.95%;
2007: 93.00%.
Accounts customer accuracy rate estimates;
2002: +/-0.7%;
2003: +/-0.5%;
2004: +/-0.6%;
2005: +/-0.5%;
2006: +/- 0.5%;
2007: +/-0.7%.
Tax law customer accuracy rate estimates;
2002: 84.04%;
2003: 82.00%;
2004: 77.72%;
2005: 88.18%;
2006: 90.03%;
2007: 89.37%.
Tax law customer accuracy rate estimates;
2002: +/-0.5%;
2003: +/-0.8%;
2004: +/-1.02%;
2005: +/-0.8%;
2006: +/- 0.8%;
2007: +/-1.2%.
Source: IRS.
[A] Telephone performance access data are based on the following date
ranges: January 1 to April 20, 2002, January 1 to April 19, 2003,
January 1 to April 17, 2004, January 1 to April 16, 2005, January 1 to
April 15, 2006, and January 1 to April 14, 2007.
[B] Assistor level of service is the percentage of taxpayers who wanted
to talk with an assistor and actually got through and received
services.
[C] The number of minutes a taxpayer waits in queue to speak with an
assistor.
[D] Based on a representative sample estimate at the 90 percent
confidence interval for January, February, and March 2006 and 2007. The
percentage of calls in which telephone assistors provided accurate
answers for the call type and took the appropriate action.
[End of table]
IRS officials reported that tax system changes have had minimal impact
on telephone operations so far this filing season. TETR-related calls
are a small fraction of the TETR calls that IRS projected and all calls
that IRS received. Between January 1 and April 14, 2007, IRS expected
12.4 million TETR-related calls, but received about 540,000.
IRS hired 650 FTEs in FY 2007, with the expectation that those hires
would be used to cover anticipated attrition in 2008. Their first
assignment was answering TETR telephone calls and they also were
trained to handle other accounts calls allowing more experienced
employees to address paper inventory.[Footnote 32]
IRS anticipated little impact on telephone service from the split
refund option and tax provision extenders. For split refunds, IRS
anticipated it would receive about 70,000 calls to assistors compared
to the 70 million total calls it receives each year. IRS did not have
projections for tax provision extensions.
Use of Web Site Applications Continues to Increase, and Performance
Remains High:
Use of IRS's Web site has increased so far this filing season compared
to prior years except for downloads of forms and publications. From
January 1 through March 31, IRS's Web site was visited more often and
the number of searches increased over the same time period as last
year. However, the number of downloaded forms and publications has
decreased 22 percent over the same period compared to last year.
According to IRS officials, reasons for this decrease include the
increase in taxpayers using e-file, tax preparation software, and paid
preparers, negating the need for taxpayers to download and print forms
and publications. In terms of new features, IRS added a state deduction
calculator this filing season, which IRS wants to use as a new standard
for developing other on-line calculators. Web site assistance is
important because it is available to taxpayers 24-hours a day and it is
less costly to provide than telephone and walk-in assistance.
Table 5: IRS Web Site Use, 2006 and 2007 (data are in thousands):
Uses: Visits[A];
2006: 95,406;
2007: 103,775;
Percentage change: 8.8.
Uses: Downloads[A];
2006: 89,789;
2007: 70,041;
Percentage change: - 22.0.
Uses: Searches[A];
2006: 52,519;
2007: 60,145;
Percentage change: 14.5.
Uses: Where's My Refund[B];
2006: 25,350;
2007: 31,995;
Percentage change: 26.2.
Uses: Number of TETR-related visits[C];
2006: N/A;
2007: 4,013;
Percentage change: N/A.
Source: GAO analysis of IRS data.
Note: N/A means not applicable.
[A] Web site visits and searches and downloads from January, February,
and March 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 who have
accessed the site.
[B] For January 1 through April 22, 2006, and April 21 2007.
[C] Visits to a Web page specific to TETR, which was not operational in
2006. Data are for October 1, 2006, through April 7, 2007.
[End of table]
In addition to the Free File program, IRS's Web site offers several
important features, such as "Where's My Refund", which allows taxpayers
to check on the status of their refunds. This year, the feature allows
taxpayers to check on the status of split refunds, and tells the
taxpayer if one or more of the deposits were returned from the bank
because of an incorrect routing or account number. However, for certain
requests, the feature is not useful. For example, IRS stopped some
refunds related to TETR requests, but "Where's My Refund" informed
taxpayers that their refunds had been issued. Further, if taxpayers
make a mistake calculating the amount of their refund the feature would
indicate that IRS corrected the refund amount, but will not show the
new amount. IRS is considering providing more information about
taxpayer accounts on its Web site as part of its strategy to improve
taxpayer services at reduce costs.
There is further evidence that IRS's Web site is performing well as
these examples show.
* According to the American Customer Satisfaction Index, for January
through March 2007, IRS's Web site is scored above those of other
government agencies, nonprofits, and private sector firms for customer
satisfaction. For example, in March, IRS scored 74 versus 72 for all
government agencies surveyed and 71 for all Web sites
surveyed.[Footnote 33]
* An independent weekly study by Keynote, a company that evaluates Web
sites, reported that, as of April 9, 2007, IRS's Web site has
repeatedly ranked in the top 6 out of 40 government agency Web sites
evaluated in terms of average download time. Last year, IRS
consistently ranked second for the same time period. Average download
time remained about the same for IRS compared to last year, indicating
that IRS is not performing worse, but that other government agencies
are performing better.
* On the basis of our own searches, we found IRS's Web site to be
readily accessible, easy to navigate, and easy to search.
Limited Data on the Quality of Face-to-Face Assistance Show
Improvement, but Concerns Remain:
As of April 14, approximately 2.9 million taxpayers used IRS's 401 walk-
in sites, which is comparable to the same period last year. Figure 5
shows the trend in walk-in site use for the filing season including
slight projected declines in 2007 and 2008. At walk-in sites, staff
provide taxpayers with information about their tax accounts, answer a
limited scope of tax law questions about, for example, income and
filing status, and provide limited tax return preparation
assistance.[Footnote 34] As of April 14, over 10,700 taxpayers have
requested TETR on Form 1040EZ-T at walk-in sites, which is 8.5 percent
of the 126,000 individuals IRS expected.
Figure 5: Assistance Provided at IRS Walk-in Sites and Volunteer Sites,
2001 - 2008 (contacts in millions):
[See PDF for image]
Source: GAO analysis of IRS data.
Notes: "Other walk-in contacts" includes assistance for account
notices, tax law inquiries, forms, and compliance work, but not return
preparation. For the walk-in sites, the time periods covered are
December 31, 2000, through April 28, 2001; December 30, 2001, through
April 27, 2002; December 29, 2002, through April 26, 2003; December 28,
2003, through April 24, 2004; and December 26, 2004, through April 23,
2005. For volunteer sites, the time period covered for 2001 is January
1, through April 21, 2001; December 30, 2001, through April 27, 2002;
December 29, 2002, through April 26, 2003; December 28, 2003, through
April 24, 2004; December 26, 2004, through April 23, 2005; and January
1, through April 23, 2006.
[A] Fiscal years 2007 and 2008 are IRS projections. For walk-in sites,
projections cover the time periods of December 31, 2006, through April
21, 2007, and December 30, 2007, through April 19, 2008. For volunteer
sites, projections cover the time periods from January 1 through April
30, 2007 and 2008. For volunteer sites, projections cover the time
periods from October 1 through September 30 for 2007 and 2008.
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]
IRS officials attribute this year's projected decline in walk-in use to
taxpayers' increased use of tax preparation software and IRS.gov. This
decline has allowed IRS to devote 2.3 percent fewer FTEs compared to
last year for walk-in assistance (down from 260 to 266 FTEs).
Volunteer sites, often run by community-based organizations and staffed
by volunteers who are trained and certified by IRS, do not offer the
range of services provided at walk-in sites. Instead, volunteer sites
focus on preparing tax returns primarily for low-income and elderly
taxpayers and operate chiefly during the filing season. As of April 15,
the number of taxpayers getting return preparation assistance at over
11,000 volunteer sites has increased to approximately 2.3 million, up
16 percent from last year and continuing a trend since 2001. Although
no projections have been made for TETR claims, over 80,600 taxpayers
have claimed this credit at these locations. We have reported that the
shift of taxpayers from walk-in to volunteer sites is important because
it has allowed IRS to transfer time-consuming services, such as return
preparation, from IRS to other less costly alternatives that can be
more convenient for taxpayers.
While IRS is collecting better data on the quality of service at walk-
in sites, concerns about quality of the data and service remain.
According to IRS, it is measuring the accuracy of tax law and accounts
assistance. IRS has reported a goal for tax law accuracy, and plans to
use data collected for 2007 to set an annual goal for accounts
accuracy.[Footnote 35] While IRS provided return assistance for almost
210,000 taxpayers, it lacks information on the accuracy of that
assistance. For volunteer sites, as of April 12, for a small non-
statistical sample, IRS reported a 64 percent accuracy rate for return
preparation, compared to its goal of 55 percent. Independent from IRS,
but using similar methods, TIGTA showed a 56 percent accuracy rate.
TAB is Intended to Improve Taxpayer Services in a Cost-effective
Manner:
IRS developed TAB to provide the agency with information on taxpayers'
needs and preferences to improve taxpayer service at lower cost as part
of a 5-year plan, in response to a November 2005 law and a
congressional directive.[Footnote 36] IRS notes that with TAB, it has
more information than ever before about taxpayers, partners, employees,
and the effect of service-related decisions on taxpayers to help the
agency provide, evaluate, and improve services.
IRS issued two reports under TAB:
* The Phase I report, released in April 2006, outlines the results of
preliminary research on taxpayer expectations and establishes five
strategic themes for improving taxpayer services.[Footnote 37]
* Phase II, released in April 2007, includes the results of additional
research, numerous areas and initiatives both funded and unfunded for
service improvement, and a set of recommended performance measures.
IRS has identified 54 initiatives, some of which are underway, that
include taxpayer service upgrades such as improvements to the Spanish
version of "Where's My Refund" and research studies. IRS identified 28
of the initiatives as unfunded and included several as part of its FY
2008 budget request as noted above.
As part of its strategy, IRS developed estimates of the cost per
service contact for providing different types of taxpayer services,
although there were qualifications to those estimates.[Footnote 38] As
table 6 indicates some assisted services, such as e-mail, are far more
expensive than self-assisted services, such on IRS's Web site. However,
while there may be some overlap in services (e.g., taxpayers can
receive similar return assistance at both walk-in sites and volunteer
sites), they are likely to serve different taxpayers and may provide
different levels of service (e.g., taxpayers can receive account
assistance at walk-in sites, but not at volunteer sites). But, even
between the two self-assisted options, there is a difference in unit
costs, with automated phone calls estimated to be more than five times
higher than Web contacts. Having reliable cost information, together
with a better understanding of taxpayers' preferences, needs, and
expectations, could assist IRS in determining whether it could provide
taxpayers with the same taxpayer service benefits at a lower cost
through alternative methods. However, to further evaluate IRS's
strategy, additional information would be required, for example, on how
savings estimates were developed.
Table 6: 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: IRS.
[End of table]
Progress Made in BSM Implementation, but Challenges and Risks Remain:
BSM is critical to supporting IRS's taxpayer service and enforcement
goals and reducing the tax gap. For example, BSM includes projects to
allow taxpayers to file and retrieve information electronically and to
provide technology solutions to help reduce the backlog of collections
cases. 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.
Over the past year, IRS has made further progress in implementing BSM
projects and in meeting cost and schedule commitments, but two key
projects experienced significant cost overruns during 2006--CADE and
Modernized e-File. During 2006 and the beginning of 2007, IRS deployed
additional releases of the following modernized systems that have
delivered benefits to taxpayers and the agency: CADE, Modernized e-
File, and Filing and Payment Compliance (a tax collection case analysis
support system). Each of the five associated project segments that were
delivered during 2006 were completed on time or within the targeted 10
percent schedule variance threshold, and two of them were also
completed within the targeted 10 percent variance threshold for cost.
However, one segment of the Modernized e-File project as well as a
segment of the CADE project experienced cost increases of 36 percent
and 15 percent, respectively. 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.
IRS has also made significant progress in implementing our prior
recommendations and improving its modernization management controls and
capabilities, including efforts to institutionalize configuration
management procedures and develop an updated modernization vision and
strategy and associated 5-year plan to guide information technology
investment decisions during fiscal years 2007 through 2011. 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 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. IRS recognizes this and intends to conduct
further analyses and update its vision and strategy to address the full
scope of tax administration functions and provide additional details
and refinements on the agency's plans for legacy system dispositions.
Future BSM project releases continue to face significant risks and
issues, which IRS is taking steps to address. IRS has reported that
significant challenges and risks confront its future planned system
deliveries. For example, delays in deploying the latest release of CADE
to support the current filing season have resulted in continued
contention for key resources and will likely impact the design and
development of the next two important releases, which are planned to be
deployed later this year. The potential for schedule delays, coupled
with the reported resource constraints and the expanding complexity of
the CADE project, increase the risk of scope problems and the deferral
of planned functionality to later releases. Maintaining alignment
between the planned releases of CADE and the new Accounts Management
Services project is also a key area of concern because of the
functional interdependencies.[Footnote 39] 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,
to its credit, has developed mitigation strategies to address them. We
will, however, continue to monitor the various risks IRS identifies and
the agency's strategies to address them and will report any concerns.
IRS has also made further progress in addressing high-priority BSM
program improvement initiatives during the past year, including efforts
related to institutionalizing the Modernization Vision and Strategy
approach and integrating it with IRS's capital planning and investment
control process, hiring and training 25 entry-level programmers to
support development of CADE, developing an electronic filing strategy
through 2010, establishing requirements development/management
processes and guidance (in response to our prior recommendation), and
defining governance structures and processes across all projects. IRS's
high-priority improvement initiatives continue to be an effective means
of assessing, prioritizing, and incrementally addressing BSM issues and
challenges. However, more work remains for the agency to fully address
these issues and challenges.
In addition, we recently reported that IRS could improve its reporting
of progress in meeting BSM project scope (i.e., functionality)
expectations by including a quantitative measure in future expenditure
plans.[Footnote 40] This would help to provide Congress with more
complete information on the agency's performance in implementing BSM
project releases. IRS recognizes the value of having such a measure
and, in response to our recommendation, is in the process of developing
it.
Conclusions:
IRS's budget submission is important because it shows the resource
tradeoffs IRS intends to make between enforcement and taxpayer service-
-both of which have potential to reduce the tax gap. One way that IRS
reallocates resources is through new spending initiatives. However, in
order for Congress and other external parties to assess the merits of
new initiatives, basic information about the description of the
initiatives and their costs and expected performance is necessary.
Without such information, decisions makers do not have an informed
basis on whether to approve and fund new initiatives. Of course, the
costs of developing justifications must also be taken into account.
More costly initiatives generally would be expected to have more
detailed justifications.
Recommendation for Executive Action:
We recommend that the Commissioner of Internal Revenue:
* have available basic descriptive, cost, and expected performance
information on the spending initiatives proposed in the 2008 budget
submission to the extent to such information has not been provided,
and:
* include in future budget submissions, basic descriptive, cost, and
performance information on new spending initiatives, with supplementary
documentation available if needed.
In comments on a draft of this statement, IRS's Chief Financial Officer
agreed with the second recommendation, but not the first. She stated
that the FY 2008 budget and justification did provide basic
descriptive, cost, and expected performance information for each
initiative. IRS agreed that the amount of performance data provided for
each initiative varied, stating that some of the initiatives did not
necessarily merit such performance indicators and, for those
initiatives, IRS provided explanations of general benefits or reasons
behind the request. While we agree that for every initiative IRS
provided the total proposed spending, some initiatives lacked basic
information on how the amount to be spent was determined and work to be
done. For example, the initiative for improving compliance estimates
provided no explanation of how the 258 FTEs were determined or basic
information on the work such as the number of examinations to be
conducted. Without such information, at the end of the fiscal year,
Congress would be unable to tell whether IRS spent the money as
intended.
Mr. Chairman, this concludes my prepared statement. Mr. Powner and I
would be happy to respond to questions you or other members of the
Committee may have at this time.
Contacts and Acknowledgments:
For further information regarding this testimony, please contact James
R. White, Director, Strategic Issues, on 202-512-9910 or whitej@gao.gov
or David A. Powner, Director, Information Technology Management Issues,
on 202-512-9296 or powenrd@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; Ronald W. Jones; Matthew Kalmuk;
Varflay Kesselly; Frederick Lyles; Jennifer McDonald; Signora May; Paul
B. Middleton; Karen O'Conor; Lerone Reid; Sabine R. Paul; Cheryl
Peterson; Neil Pinney; and Shellee Soliday.
[End of section]
Appendix I: IRS Is Addressing TETR Compliance Issues during the Filing
Season:
TETR is the only one of the three tax changes that created new
compliance concerns for IRS (filers could request greater TETR amounts
than they are entitled to). The split refund option does not create
compliance concerns for IRS since it relates to the accounts into which
taxpayers want their refunds deposited rather than to complying with
tax provisions.[Footnote 41] Since these provisions extending the tax
laws already existed, IRS anticipates that any compliance concerns for
2006 returns will be the same as for previous years.
IRS developed a plan before the filing season began to audit suspected
TETR overclaims before issuing refunds. IRS's plan for TETR was
consistent with good management practices identified in previous GAO
reports. IRS's plan included appointing an executive, developing an
implementation plan for TETR that included standard amounts that
individuals could request, developing a compliance plan to select TETR
requests for audit, and monitoring and evaluating compliance by using
real-time data to adjust TETR compliance efforts. For example, each
week, IRS reviews the requests for TETR, selects some for audit, and
revises the criteria for audit selection as necessary.
As of April 21, 2007, about 324,000 individuals had requested the
actual amount of telephone excise tax paid for a total of $128 million.
IRS selected about 3.4 percent of these requests for audit, involving
about $33 million.[Footnote 42] IRS has closed 464 of the individual
audits with the taxpayer agreeing to accept the standard amount; it has
not completed the remaining individual audits. About 346,000 businesses
had requested TETR for a total of about $161 million. IRS selected over
1,000 for audit, involving about $22 million. IRS has closed four
business audits. IRS reassigned about 77 FTEs from discretionary audits
and Earned Income Tax Credit audits to conduct TETR audits.
Additionally, Criminal Investigation has spent 13 FTEs staff on TETR
activities in 2007.
[End of section]
Appendix II: List of Recent GAO Reports on IRS's Filing Season, Budget,
BSM, and Tax Gap:
IRS's Budget and Filing Season:
Tax Filing Season: Interim Results and Updates of Previous Assessments
of Paid Preparers and IRS's Modernization and Compliance Research
Efforts, GAO-07-720T Washington, D.C.: April 12, 2007.
Internal Revenue Service: Interim Results of the 2007 Tax Filing Season
and the Fiscal Year 2008 Budget Request, GAO-07-673 Washington, D.C.:
April 3, 2007.
Tax Administration: Most Filing Season Services Continue to Improve,
but Opportunities Exist for Additional Savings, GAO-07-27 Washington,
D.C.: November 15, 2006:
Internal Revenue Service: Assessment of the Interim Results of the 2006
Filing Season and Fiscal Year 2007 Budget Request, GAO-06-499T
Washington, D.C.: April 27, 2006.
Tax Administration: IRS Improved Some Filing Season Services, but Long-
Term Goals Would Help Manage Strategic Trade-offs, GAO-06-51
Washington, D.C.: November 14, 2005.
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.: November 10, 2004.
Business Systems Modernization:
Business Systems Modernization: Internal Revenue Service's Fiscal Year
2007 Expenditure Plan, GAO-07-247 Washington, D.C.: February 15, 2007.
Business Systems Modernization: IRS Needs to Complete Recent Efforts to
Develop Policies and Procedures to Guide Requirements Development and
Management, GAO-06-310 Washington, D.C.: March 20, 2006.
Business Systems Modernization: Internal Revenue Service's Fiscal Year
2006 Expenditure Plan, GAO-06-360 Washington, D.C.: February 21, 2006.
Business Systems Modernization: Internal Revenue Service's Fiscal Year
2005 Expenditure Plan, GAO-05-774 Washington, D.C.: July 22, 2005.
IRS Modernization: Continued Progress Requires Addressing Resource
Management Challenges, GAO-05-707T Washington, D.C.: May 19, 2005.
Tax Compliance:
Tax Compliance: Thousands of Federal Contractors Abuse the Federal Tax
System, GAO-07-742T Washington, D.C.: April 19, 2007.
Tax Compliance: Using Data from the Internal Revenue Service's National
Research Program to Identify Potential Opportunities to Reduce the Tax
Gap, GAO-07-423R Washington, D.C.: March 15, 2007.
Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax Gap,
GAO-07-488T Washington. D.C.: February 16, 2007.
Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax Gap,
GAO-07-391T Washington, D.C.: January 23, 2007.
Tax Compliance: Challenges to Corporate Tax Enforcement and Options to
Improve Securities Basis Reporting, GAO-06-851T Washington, D.C.: June
13, 2006.
Capital Gains Tax Gap: Requiring Brokers to Report Securities Cost
Basis Would Improve Compliance if Related Challenges Are Addressed, GAO-
06-603 (Washington, D.C.: June 13, 2006).
Tax Gap: Making Significant Progress in Improving Tax Compliance Rests
on Enhancing Current IRS Techniques and Adopting New Legislative
Actions, GAO-06-453T Washington, D.C.: February 15, 2006.
Tax Gap: Multiple Strategies, Better Compliance Data, and Long-Term
Goals Are Needed to Improve Taxpayer Compliance, GAO-06-208T
Washington, D.C.: October 26, 2005.
Tax Compliance: Better Compliance Data and Long-Term Goals Would
Support a More Strategic IRS Approach to Reducing the Tax Gap, GAO-05-
753 Washington, D.C.: July 18, 2005.
Tax Compliance: Reducing the Tax Gap Can Contribute to Fiscal
Sustainability but Will Require a Variety of Strategies, GAO-05-527T
Washington, D.C.: April 14, 2005.
Compliance and Collection: Challenges for IRS in Reversing Trends and
Implementing New Initiatives, GAO-03-732T Washington, D.C.: May 7,
2003.
Miscellaneous:
Tax Administration: Telephone Excise Tax Refund Requests Are Fewer Than
Projected and Have Had Minimal Impact on IRS Services, GAO-07-695
Washington, D.C.: April 11, 2007.
Taxpayer Service: State Experiences Indicate IRS Would Face Challenges
Developing an Internet Filing System with Net Benefits, GAO-07-570
Washington, D.C.: April 5, 2007.
Internal Revenue Service: Procedural Changes Could Enhance Tax
Collections: Enhancing IRS Collection Procedures, GAO-07-26 Washington,
D.C.: November 15, 2006.
Tax Debt Collection: IRS Needs to Complete Steps to Help Ensure
Contracting Out Achieves Desired Results and Best Use of Federal
Resources, GAO-06-1065 Washington, D.C.: September 29, 2006.
Paid Tax Return Preparers: In a Limited Study, Chain Preparers Made
Serious Errors, GAO-06-563T Washington, D.C.: April 4, 2006.
21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP Washington, D.C.: February 2005.
High Risk Series: An Update, GAO-07-310 Washington, D.C.: January,
2007.
Tax Administration: Most Taxpayers Believe They Benefit from Paid Tax
Preparers, but Oversight for IRS is a Challenge, GAO-04-70 Washington,
D.C.: October 31, 2003.
Tax Administration: IRS Is Implementing the National Research Program
as Planned, GAO-03-614 Washington, D.C.: June 16, 2003.
Tax Administration: IRS Needs to Further Refine Its Tax Filing Season
Performance Measures, GAO-03-143 Washington, D.C.: November 22, 2002.
FOOTNOTES
[1] Internal Revenue Service (IRS) Fiscal Year (FY) 2008 Congressional
Budget Submission, February 5, 2007. The $11.6 billion includes $11.1
billion in new appropriated funds and $0.5 billion in other funds.
[2] GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.:
January 2007).
[3] 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.
[4] 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. Pub. L. No. 109-432, Dec. 20,
2006.
[5] GAO, 2007 Tax Filing Season: Interim Results and Updates of
Previous Assessments of Paid Preparers and IRS's Modernization and
Compliance Research Efforts, GAO-07-720T (Washington, D.C.: Apr. 12,
2007); Tax Administration: Telephone Excise Tax Refund Requests Are
Fewer Than Projected and Have Had Minimal Impact on IRS Services, GAO-
07-695 (Washington, D.C.: Apr. 11, 2007); 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); Tax
Compliance: Multiple Approaches Are Needed to Reduce the Tax Gap, GAO-
07-488T (Washington, D.C.: Feb. 16, 2007); and Business Systems
Modernization: Internal Revenue Service's Fiscal Year 2007 Expenditure
Plan, GAO-07-247 (Washington, D.C.: Feb. 15, 2007).
[6] The characteristics we considered to select a subset of initiatives
that would be similar to universe of initiatives were the (1) type of
initiative, (such as enforcement, taxpayer service, research, or
information system), (2) responsible IRS operating division, and (3)
dollar amount requested.
[7] GAO-07-310.
[8] When adjusted for inflation, the funding requested in FY 2008 would
be about a 0.5 percent increase since 2004.
[9] IRS provided updated full-time equivalent (FTE) data from what is
shown in its budget request, based on its enacted FY 2007 budget. An
FTE is equivalent of one person working full-time for 1 year with no
overtime.
[10] Pub. L. No. 110-5, Feb. 15, 2007.
[11] Pub. L. No. 105-206, July 22, 1998.
[12] In contrast, consumer prices are projected to increase by about
11.6 percent from FY 2004 to FY 2008.
[13] Two types of indirect revenue are the increase in voluntary
compliance (1) in the larger population resulting from examinations or
other enforcement and nonenforcement actions on targeted taxpayers, and
(2) of the targeted taxpayer in subsequent years.
[14] Economists have estimated the indirect effect of an examination on
voluntary compliance to range from 6 to 12 times the amount of proposed
tax adjustments. See Alan H. Plumley, The Determinants of Individual
Income Tax Compliance: Estimating The Impacts of Tax Policy,
Enforcement, and IRS Responsiveness, Publication 1916 (Rev. 11-96)
(Washington, D.C.: November 1996), 2, 35-36; Jeffrey A. Dubin, Michael
J. Graetz, and Louis L. Wilde, "The Effect of Audit Rates on the
Federal Individual Income Tax, 1977-1986," National Tax Journal, vol.
43 (1990), 395, 396, 405; and Jeffrey A. Dubin, "Criminal Investigation
Enforcement Activities and Taxpayer Noncompliance" (paper written for
the IRS Research Conference, June 2004), Hyperlink,
http://www.irs.gov/pub/irs-soi/04dubin.pdf (downloaded July 1, 2005).
[15] IRS has concerns with the certainty of the overall tax gap
estimate in part because some areas of the estimate rely on old data
and IRS has no estimates for some areas of the tax gap. For example,
IRS used data from the 1970s and 1980s to estimate underreporting of
corporate income taxes and employer-withheld employment taxes.
[16] GAO, Capital Gains Tax Gap: Requiring Brokers to Report Securities
Cost Basis Would Improve Compliance if Related Challenges Are
Addressed, GAO-06-603 (Washington, D.C.: June 13, 2006).
[17] GAO, Internal Revenue Service: Assessment of the Interim Results
of the 2006 Filing Season and Fiscal Year 2007 Budget Request, GAO-06-
499T (Washington, D.C.: Apr. 27, 2006); Tax Compliance: Better
Compliance Data and Long-term Goals Would Support a More Strategic IRS
Approach to Reducing the Tax Gap, GAO-05-753 (Washington, D.C.: July
18, 2005); and Tax Compliance: Reducing the Tax Gap Can Contribute to
Fiscal Sustainability but Will Require a Variety of Strategies, GAO-05-
527T (Washington, D.C.: Apr. 14, 2005).
[18] We have previously noted that IRS reported it realized most or all
of the savings it identified in prior budget proposals and, based on
this history, there is no reason to expect that IRS will not be able to
realize the same with this year's proposed savings.
[19] 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).
[20] GAO-07-27.
[21] GAO-07-27.
[22] GAO, Business Systems Modernization: Internal Revenue Service's
Fiscal Year 2005 Expenditure Plan, GAO-05-774 (Washington, D.C.: July
22, 2005).
[23] GAO-07-310.
[24] Document matching is matching the amount of income taxpayers
report on their tax returns to the income amounts reported on
information returns it receives from third parties.
[25] GAO-07-488T.
[26] GAO-06-499T, GAO-05-753, and GAO-05-527T.
[27] See GAO-07-27, GAO-05-753, and GAO-05-527T.
[28] IRS does not have the capability to receive electronic returns
directly from taxpayers. Taxpayers can electronically file their
returns by using a paid tax preparer, commercial tax preparation
software, or the Free File program. Paid preparers and tax preparation
software companies may charge for the service.
[29] Individuals who do not normally file tax returns but paid the tax
can request the refund on Form 1040EZ-T (Request for Refund of Federal
Telephone Excise Tax).
[30] We are in the process of obtaining additional information to
evaluate IRS projections on TETR and split refund volumes.
[31] Earlier this year, we reported that IRS's telephone access was
somewhat less than last year. Since that time, IRS's performance has
improved. See GAO-07-720T.
[32] In addition to answering telephones, IRS's telephone assistors
also work on paper correspondence, such as amended returns. According
to IRS officials, staff is working on more paper correspondence than
anticipated. From October 1, 2006, through April 14, 2007, receipts of
paper inventory were up about 5 percent and IRS had closed 11 percent
more paper inventory than at the same time period last year.
[33] The American Customer Satisfaction Index tracks trends in customer
satisfaction and is considered to be an industry leader.
[34] IRS provides limited return preparation assistance to those who
meet an IRS-specified income requirement that approximates the amount
for claiming the Earned Income Tax Credit or less than $39,000.
[35] As of April 14, IRS reported tax law and accounts assistance
accuracy rates of 76 and 84 percent respectively at its walk-in sites.
However, because IRS could not provide confidence intervals for these
estimates, we do not know how precise these estimates are and, whether
the tax law accuracy rate of 76 percent would achieve the goal if a
confidence interval were considered.
[36] Pub. L. No. 109-115, § 205 (2005) and H. Rep. No. 109-307, 109th
Cong. (2005).
[37] These themes are (1) improve and expand taxpayers' education and
awareness; (2) optimize IRS's use of partner services (e.g., paid
preparers and community-based organizations); (3) elevate self-service
options, such as IRS's Web and automated phone assistance; (4) improve
and expand IRS's employee training and support tools; and (5) develop
short-term performance and long-term outcome goals and metrics.
[38] IRS qualified these estimates noting that they fall short of the
cost per contact estimates being developed for its Integrated Financial
System because they do not fully allocate all indirect overhead and
support costs. From our perspective, it would be important to know more
about the indirect and support cost to see if they might significantly
change the cost estimates. Further, according to IRS, these estimates
represent the average costs per contact rather than the marginal costs
per contact, which could be significant lower due to the unused
capacity and the fixed costs associated with many forms of services.
Moreover, we previously commented that because of long-standing
limitations in IRS's cost accounting capability, cost data at this
detailed level have not been audited (see, for example, GAO-07-310 and
07-247).
It is our determination that IRS is a competent source for these cost
estimates and that they seem to be reasonable; therefore, we have
determined these estimates to be sufficiently reliable for describing
how IRS could potentially use the information to improve taxpayer
service at a lower cost.
[39] Accounts Management Services (AMS) is a strategic project intended
to deliver improved customer support and functionality by leveraging
existing IRS applications and new technologies to bridge the gap
between modernization initiatives, such as CADE, and legacy systems.
AMS is to enhance CADE by providing applications for IRS employees and
taxpayers to access, validate, and update accounts on demand. The
development and implementation of the AMS project is also essential to
enabling CADE to accept more complicated tax returns and to deal with
taxpayer issues. AMS project releases are to provide functional
components synchronized with the CADE development schedule as well as
other components delivered independent of the CADE schedule.
[40] GAO-07-247.
[41] While there are no compliance concerns, there is a potential for
errors due to taxpayers entering incorrect account numbers on Form 8888
(Direct Deposit of Refund to More Than One Account) or IRS incorrectly
transcribing the account numbers or the dollar amounts to be deposited
into each account.
[42] According to IRS officials, as of May 2, 2007, only individuals
claiming the actual amount of telephone excise tax paid have been
selected for audit. None claiming the standard amount were selected for
audit. Individuals can claim a standard amount ranging from $30 to $60,
depending on the number of exemptions they claim or they can use Form
8913 (Credit for Federal Telephone Excise Tax Paid) to claim the actual
amount paid.
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