United States Government Accountability Office

GAO Testimony 

Before the Committee on Finance, 

U.S. Senate

2007 TAX FILING SEASON

Interim Results and Updates 

of Previous Assessments of 

Paid Preparers and IRS’s 

Modernization and 

Compliance Research 

Efforts 

Statement of James R. White 

Director 

Strategic Issues 

Statement of David A. Powner 

Director 

Information Technology Management Issues 

For Release on Delivery

Expected at 10:00 a.m. EST 

Thursday, April 12, 2007

 

GAO-07-720T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 12, 2007

2007 TAX FILING SEASON 

Interim Results and Updates of Previous 

Assessments of Paid Preparers and IRS's 

Modernization and Compliance Research 

Efforts 

Highlights of GAO-07-720T, testimony 

before the Committee on Finance, U.S. 

Senate 

The Internal Revenue Service’s 

(IRS) tax filing season performance

is a key indicator of how well IRS 

serves taxpayers. This year’s filing

season was expected to be risky 

because of tax system changes, 

including the telephone excise tax

refund (TETR) which can be

requested by all individuals and 

entities that paid the excise tax.

GAO was asked to describe IRS’s 

service to taxpayers so far this 

filing season (including the impact

of this year’s tax systems changes).

GAO was also asked to provide 

updates of previous assessments of 

the performance of paid tax 

preparers, IRS’s efforts to

modernize its information systems, 

and what IRS is doing to better 

measure taxpayer compliance. 

GAO compared IRS’s filing season 

performance to prior years’ and 

goals and based analyses of paid

preparers, information systems,

and compliance research efforts on 

recent reports. 

What GAO Recommends

GAO is not making any new 

recommendations, but notes 

relevant past recommendations 

and their implementation status. 

IRS’s interim filing season performance is improved in some areas. The 

number of individual income tax returns processed to date is comparable to 

last year, and the number filed electronically is almost 6 percent greater. 

Taxpayers’ ability to reach an IRS telephone assistor was somewhat less 

than last year, but the accuracy of answers to taxpayers’ questions was 

about the same. Use of IRS’s Web site increased, important because it is 

available 24 hours a day and is less costly than some other types of 

assistance. However, there have been challenges. Taxpayers’ use of the Free

File program, which provides free tax preparation and electronic filing 

through IRS’s Web site—is 5.2 percent below last year at this time. Also, the 

Customer Account Data Engine (CADE), a modern tax return processing 

system, became operational 2 months behind schedule. IRS still expects to 

post 17 -19 million taxpayer accounts to CADE, which is about two and a 

half times more than last year. Tax systems changes have not had a 

significant effect on filing season performance. For example, IRS has 

received a fraction of the TETR-related telephone calls it expected to date. 

Because paid preparers prepared over 62 percent of all individual income tax 

returns last year, they are a critical quality control for tax administration by 

helping to prevent noncompliance. Last year, GAO reported to this 

Committee about errors made by paid preparers. Some of the most serious 

errors involved not reporting business income and failing to itemize 

deductions. GAO’s limited work last year did not permit observations about 

the quality of the work of paid tax preparers in general and undoubtedly, 

many preparers do their best to prepare tax returns that are compliant with 

tax laws. In response to GAO’s report, IRS has scheduled compliance 

reviews of some preparers. In addition, recent Justice Department suits to 

stop fraudulent return preparation at more than 125 outlets of one 

preparation chain for allegedly taking part in tax preparation scams highlight 

the importance and obligations of paid preparers. 

Despite progress made in implementing Business Systems Modernization 

projects, including CADE, and improving modernization 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. Also, IRS has more to do to 

fully address GAO’s prior recommendations such as developing a long-term 

strategy that would include timeframes for retiring legacy computer systems.

GAO has long supported IRS’s research to better understand taxpayers’

compliance. IRS’s fiscal year 2008 budget request includes a proposal for 

annual research instead of larger but intermittent efforts. GAO considers 

this to be a good approach because it will allow compliance data to be 

continually refreshed and should reduce costs by eliminating the need to 

plan new studies every few years. 

www.gao.gov/cgi-bin/getrpt?GAO-07-720T.

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. 
Mr. Chairman and Members of the Committee: 

We appreciate this opportunity to support your oversight of the Internal 

Revenue Service (IRS) and the broader tax administration system. 

The annual tax return filing season is when IRS provides much of its 

service to taxpayers. From January through April, IRS will process well 

over 100 million individual tax returns and issue refunds, handle tens of 

millions of phone queries from taxpayers, and provide forms and answers 

to questions for tens of millions of taxpayers on its Web site. Smaller 

numbers of taxpayers will be 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 is high risk for several reasons, including 

challenges in implementing the new telephone excise tax refund (TETR), 

split refund option (refunds can now be directly deposited to up to three 

separate accounts), and several tax law extensions that were enacted in 

December of 2006.

1

We have reported that IRS has made significant progress improving 

taxpayer service since the passage of the IRS Restructuring and Reform 

Act of 1998 (RRA 98),2

 including increased electronic filing, better access 

to IRS’s telephone assistors, and more accurate answers to taxpayers’ 

questions. The progress has been due, in part, to IRS bringing modern 

information systems on line. However, we have also described taxpayer 

service challenges including the quality of assistance at walk-in and 

volunteer sites, delays in some new information systems, and fully 

implementing our prior recommendations on the management of systems 

acquisition and development. 

 1

 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. 

2

 See, for example, GAO, Tax Administration: IRS Improved Some Filing Season Services, 

but Long-term Goals Would Help Manage Strategic Trade-offs, GAO-06-51 (Washington,

D.C.: Nov. 14, 2005), Internal Revenue Service: Assessment of the Interim Results of the 

2006 Filing Season and Fiscal Year 2007 Budget Request, GAO-06-615T (Washington,

D.C.: Apr. 6, 2006), and Tax Administration: Most Filing Season Services Continue to

Improve, but Opportunities Exist for Additional Savings, GAO-07-27 (Washington, D.C.: 

Nov. 15, 2006). 

Page 1 GAO-07-720T 
In addition to the IRS, tax administration in the U.S. relies heavily on the 

private sector including the paid preparer industry, the tax preparation 

software industry, and third parties who withhold taxes or submit 

information returns. Last filing season, over 60 percent of returns were 

prepared by paid preparers, and another one-fourth use commercial tax 

preparation software. 

IRS’s Business Systems Modernization (BSM) program, a multibilliondollar, high-risk, highly complex effort for delivering modern information 

systems, is critical to supporting IRS’s taxpayer service and enforcement 

goals and reducing the tax gap.3

The ultimate goal of taxpayer service is to help taxpayers understand and 

comply with their tax obligations. However, we have reported that IRS 

lacks quantitative estimates of the impact of taxpayer service on voluntary

compliance by taxpayers as well as on the impact of enforcement on 

compliance. As a necessary first step to gaining more understanding of the 

impact of service on compliance, we have strongly supported IRS’s 

ongoing National Research Program (NRP) to measure compliance and 

estimate the tax gap. 

As agreed, our statement will describe IRS’s service to taxpayers so far 

this filing season (including the impact of this year’s tax system changes) 

and provide updates of previous assessments of the performance of paid 

tax preparers in our tax administration system, IRS’s ongoing efforts to 

modernize its information systems, and what IRS is doing to better 

measure taxpayer compliance with the tax laws including the impact of 

service on compliance. 

To assess IRS’s filing season performance for processing, telephones, faceto-face assistance and its Internet Web site, we obtained and analyzed 

IRS’s performance and production data and compared it to annual goals 

and prior years’ performance. Our work also included direct observations

of key filing season operations, and interviews with IRS officials and 

external stakeholders. 

 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. IRS estimated the gross

tax gap to be $345 billion for tax year 2001. After late payments by taxpayers and revenue 

brought in by IRS’s enforcement efforts, the resulting net tax gap is estimated to be $290 

billion. 

Page 2 GAO-07-720T 
Our work was done primarily at IRS’s National Office operating divisions, 

the Joint Operations Center in Atlanta, Ga. and processing centers and call 

sites in Atlanta, Ga. and Andover, Ma. We reviewed relevant external 

documentation, our reports, and reports of the Treasury Inspector General

for Tax Administration (TIGTA). Our analyses of Internet return 

preparation and electronic filing options, TETR compliance, BSM, and 

NRP is based upon the results of our recent reports.4

 We reviewed IRS’s 

efforts to address our prior year recommendations related to our annual 

filing season, paid preparer, and BSM work. 

In past work, we assessed IRS’s filing season performance data. We 

considered filing season performance measures and data to be objective 

and reliable based on our prior work. Since sources and procedures for 

producing this year’s data have not significantly changed from prior years, 

we determined that the data were sufficiently reliable for the purposes of 

this report. Data limitations are discussed where appropriate. We 

performed our work from December 2006 through March 2007 in 

accordance with generally accepted government auditing standards. 

In summary, we make the following major points: 

• IRS’s interim filing season performance is improved in some areas, 

although there have been challenges. As of March 30, 2007, IRS had 

processed 76.8 million individual income tax returns and issued over 68 

million refunds, about the same number as last year. The number of 

returns filed electronically was almost 6 percent greater than this time 

last year. However, taxpayers’ use of the Free File program, accessible 

through IRS’s Web site and which allows for free on line tax 

preparation and electronic filing, is 5.2 percent below last year at this 

time. IRS’s latest release of the Customer Account Data Engine 

(CADE), a modern tax return processing system that issues faster 

refunds, was delayed—it became operational 2 months behind

schedule. IRS expects to post approximately 17 – 19 million taxpayer 

returns to CADE in 2007. Although this is less than the 33 million 

 4

 See, for example, GAO, Taxpayer Service: State Experiences Indicate IRS Would Face

Challenges Developing an Internet Filing System with Net Benefits, GAO-07-570 

(Washington, D.C.: Apr. 5, 2007), GAO, 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), GAO, Business Systems Modernization: 

Internal Revenue Service’s Fiscal Year 2007 Expenditure Plan, GAO-07-247 (Washington,

D.C.: Feb. 15, 2007) and GAO, Tax Compliance: Multiple Approaches Are Needed to 

Reduce the Tax Gap, GAO-07-488T (Washington, D.C.: Feb. 16, 2007). 

Page 3 GAO-07-720T 
planned, it is almost two and a half times the approximately 7.4 million 

taxpayer accounts posted last year on CADE. With respect to taxpayer 

service, call volume continued to decline, taxpayers’ ability to reach an

IRS assistor was somewhat less than last year, but the accuracy of 

answers to taxpayers’ questions was about the same as last year. Use of 

IRS’s Web site continues to increase, important because it is available 

around the clock and is lower cost than most other types of assistance. 

About 69 percent of individual income tax returns filed to date included

TETR requests. The impact of TETR on taxpayer services has been 

much less than IRS anticipated. For example, IRS has received a 

fraction of the TETR-related telephone calls it expected to date. 

• Because they help the majority of taxpayers prepare their returns, paid 

preparers are a critical quality control checkpoint for the tax system. 

Last year, over 62 percent of all individual income tax returns were 

prepared by paid preparers. However, we reported to this Committee 

last year about errors made by paid preparers.5

 In visits to 19 outlets of 

several commercial chain preparers, we found that paid preparers 

made mistakes in every one of our visits, with tax consequences that 

were sometimes significant. Some of the most serious problems 

involved preparers not reporting business income and failing to itemize 

deductions at all or failing to claim all available deductions. The limited 

data did not permit observations about the quality of the work of paid 

tax preparers in general. Undoubtedly, many paid preparers do their 

best to provide their clients with tax returns that are compliant with 

the tax law. IRS has initiated some enforcement actions in response to 

our findings with audits of some preparers’ returns scheduled to begin 

in April 2007. Recent Justice Department suits to stop fraudulent return 

preparation at more than 125 outlets of one preparation chain for 

allegedly taking part in preparation scams highlight the obligations of 

paid preparers. Their due diligence has the potential to prevent

noncompliance and reduce IRS’s cost and intrusiveness. 

• IRS continues to make progress in implementing BSM projects and 

meeting cost and schedule commitments, but two key projects—CADE 

(discussed above) and Modernized e-File (a new electronic filing 

system)—experienced significant cost overruns during 2006. Future 

BSM project releases face serious risks, which IRS is working to 

mitigate. For example, delays in deploying the latest release of CADE 

have resulted in contention for key resources and will likely impact the 

 5

 GAO, Paid Tax Return Preparers: In a Limited Study, Chain Preparers Made Serious 

Errors, GAO-06-563T (Washington, D.C.: Apr. 4, 2006). 

Page 4 GAO-07-720T 
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. 

• Continued compliance research is essential to IRS’s ability to 

effectively focus its service and compliance efforts, and we have long

been a supporter of such research. Well-designed compliance research 

gives IRS and Congress an important measure of taxpayer compliance 

and it allows IRS to better target enforcement resources towards 

noncompliant taxpayers. IRS’s fiscal year 2008 budget request includes 

a proposal for a rolling sample of individual returns (small annual 

samples that would replace larger but intermittent efforts) and a 

dedicated cadre of examiners to review the returns. We consider this to 

be a good approach to refreshing research compliance data because 

doing compliance studies once every few years does not provide 

information in the intervening years. A rolling sample should also 

reduce costs by eliminating the need to plan new studies every few 

years. 

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. 

IRS’s Filing Season 

Performance Is 

Improved in Some 

Areas with Challenges 

in Others, and the 

Effect of Tax System 

Changes Has Been 

Minimal 

Page 5 GAO-07-720T 
From January 1 through March 30, 2007, IRS processed 76.8 million 

returns, about the same number as last year, and issued 68.3 million 

refunds for $163.4 billion compared to 66.7 million refunds for $154.4 

billion at the same time last year. Over 69.3 percent of all refunds were 

directly deposited into taxpayers’ accounts, up 6.2 percent over the same 

time last year. Direct deposits are faster and more convenient for 

taxpayers than mailing paper checks.

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 a large tax preparation 

company, corroborated IRS’s view that filing season performance is 

comparable to last year.

IRS uses two systems for storing 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 had originally planned 

to post 33 million taxpayer returns to CADE and the remaining 100 million 

individual returns on the legacy system. However, as a result of the delay, 

officials expect to post approximately 17 -19 million taxpayer returns to 

CADE. Although this is significantly less than planned, it is almost two and 

a half times the approximate 7.4 million taxpayer accounts posted last year 

on CADE. Taxpayers eligible for a refund this year whose returns are 

posted to 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 

remaining 14 – 16 million returns that were to have been processed on 

CADE were instead processed by the legacy system and thus did not 

receive the benefit of faster refunds. 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). 

The growth rate for electronic filing is up from the same period last year. 

As of March 30, over 56.9 million (74.1 percent) of all individual income 

tax returns were filed electronically. This is up 5.8 percent over the same 

time last year, and an increase over the previous years’ growth of 3.3 

percent. 

Returns Processing Is 

Comparable to Last Year, 

Despite Delays with CADE 

and Implementation of Tax 

System Changes 

CADE Will Expedite Refunds 

for Millions of Taxpayers, but 

Delays in Implementation 

Caused Millions More Not to 

Benefit 

Electronic Filing is Higher than 

Last Year, Despite a Decline in 

the Free File Program 

Page 6 GAO-07-720T 
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.6

 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 paper tax returns than 

in 1999, shown in figure 1. 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. 

 6 GAO-07-27. 

Page 7 GAO-07-720T 
Figure 1: Number of Individual Returns and IRS Staff Years for Individual Paper and

Electronic Processing, Fiscal Years 1999 – 2008 

Notes: Staff years and full-time equivalents are units of measurement that are often used 

interchangeably. According to IRS, a full-time equivalent is the equivalent of one person working fulltime for one year with no overtime. A staff year includes overtime. Therefore, the cost of one staff 

year is equal to the cost of one full-time equivalent plus overtime. Projections for 2007 do not include 

Form 1040 EZ-Ts. 

Although electronic filing continues to grow, taxpayers’ use of the Free 

File program continues to decline.7

 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 

 7

 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. 

Page 8 GAO-07-720T 
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 March 17, 

2007, IRS processed about 2.6 million free file returns, which is a decrease 

of 5.2 percent from the same period last year. 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.8

We recently reported to this Committee on states’ experience with return 

preparation and electronic filing on their Web sites.9

 These systems, called 

I-file, provide taxpayers with another option for preparing and 

electronically filing their tax returns. To the extent that the I-file systems 

convert taxpayers from paper to electronic filing, the costs of processing 

returns are reduced. 

States’ Internet Return 

Preparation and Electronic 

Filing Benefits and Costs Were 

Modest 

For the eight states we profiled, I-file benefits and costs were relatively 

modest. While state I-file systems generated benefits, such as increased 

electronic filing, the overall benefits were limited by low usage, which 

ranged from about 1 percent to just over 5 percent of eligible taxpayers. 

Restrictions on taxpayer eligibility and system features helped keep costs 

modest. States varied in whether they used contractors to develop and 

operate the I-file system. For the states we profiled, it is unclear whether 

benefits were greater than costs, in part, because of the low number of 

taxpayers who converted from paper to electronic filing. 

IRS’s potential to realize net cost savings from an I-file system depends on 

the costs of developing the system and the number of taxpayers converted 

from paper. IRS’s costs to provide a new I-file service could be higher than 

states’ for several reasons: (1) the federal tax system is more complex, (2) 

unlike some states that already had transactional Web sites, IRS would 

need to develop the capability to receive tax returns on its Web site, and 

(3) developing an I-file system could further stretch IRS’s capability to 

manage systems development, an area we have designated high risk since

1995. The key to IRS achieving a net cost savings depends on the number 

 8

 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). 

9 GAO-07-570. 

Page 9 GAO-07-720T 
of individuals converted from paper to electronic filing and the savings per 

return estimated to be $2.36 by IRS.10 It is uncertain how many of the 58 

million taxpayers who filed on paper would convert. The over 13 million 

taxpayers who self-prepare their returns on a computer but print them out 

and mail them to IRS are an attractive target for I-file because they already 

have access to a computer and may be more willing to try I-file. However,

IRS’s Free File program, designed to attract similar taxpayers, had low use 

in 2006, with only 4 million users (about 3 percent of total taxpayers and 4 

percent of eligible taxpayers). 

TETR and split refund volume have been less than IRS projected. Almost 

69 percent of individuals who filed individual income tax returns by the 

end of March have requested 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. Approximately 

410,000 individuals from this group have asked for a TETR refund (2.8 

percent of the 14.5 million IRS expected by this time).11

Tax System Changes Have Had 

Less Impact on Returns 

Processing Than Projected 

As of March 24, fewer than 61,000 individual taxpayers chose to split their 

refunds into different accounts out of the 44.8 million taxpayers who had 

their refunds directly deposited. This volume compares to the 3.8 million 

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. 

Call Volume Continues to 

Decline, but Performance 

Is Mixed 

The number of calls to IRS’s toll-free telephone lines has been less than 

last year and is significantly less than in 2002 for both automated and live 

assistance (see table 1). Similar to last year, IRS assistors answered about 

40 percent of the total calls, while the rest of the calls were answered by 

an automated menu of recordings. 

 10 We have previously reported that we cannot independently verify this estimate and its 

basis is unclear because IRS’s cost accounting system is not yet able to support preparation

of such cost estimates. See GAO, Tax Administration: IRS Improved Performance in the 

2004 Filing Season, but Better Data on the Quality of Some Services are Needed, 

GAO-05-67 (Washington, D.C.: Nov.15, 2006).

11 We are in the process of obtaining additional information to evaluate IRS projections on 

TETR and split refund volumes.

Page 10 GAO-07-720T 
Table 1: IRS Telephone Volume in the Filing Seasons, 2002 through 2007 

Volume in thousands 2002 2003 2004 2005 2006 2007

Telephone assistance a 

Total calls 34,489 27,905 29,085 23,340 21,616 20,732

Answered by assistors 9,208 9,434 10,143 9,421 8,653 8,434

Answered by automated menu of recordings 25,281 18,471 18,942 13,919 12,963 12,298

Source: IRS. 

a

 Telephone assistance data are based on actual counts from January 1 to March 16, 2002; March 

15, 2003; March 13, 2004; March 12, 2005; March 11, 2006; and March 10, 2007. 

Taxpayers’ ability to access IRS’s telephone assistors is somewhat less 

than last year, but IRS is meeting its goals. As shown in table 2, 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 less than the same time period last year. This 

level of performance is slightly greater than IRS’s fiscal year goal of 82

percent which is the same as last year’s goal. Average speed of answer, 

which is the length of time taxpayers wait to get their calls answered, is 

just over 4 minutes, almost 40 percent longer than last year, but is better 

than IRS’s annual goal of 4.3 minutes. 

Taxpayer disconnects, which is the rate at which taxpayers waiting to 

speak with an assistor abandoned their calls to IRS, increased to 12.3 

percent to about 1.4 million calls compared to the same time period last

year. While IRS disconnects are a smaller percentage of all calls it 

receives, those disconnects were down from approximately 491,000 at this

time last year to 148,000 (a 70 percent decline). 

Using a statistical sampling process, 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. IRS officials noted that 

there was unprecedented hiring for fiscal year 2007, and while every 

employee working tax law applications completes a requisite certification

process, new employees will be less productive than seasoned employees. 

IRS has implemented several initiatives, such as targeted monitoring of 

staff and mini-training sessions, to assist the new hires. 

Page 11 GAO-07-720T 
Table 2: IRS Telephone Performance in the Filing Season, 2002 through 2007 

 2002 2003 2004 2005 2006 2007

Telephone performance-accessa

Asssistor level of serviceb69% 82% 84% 83% 84% 83%

Average speed of answer (in minutes)c 3.8 3.1 3.3 3.9 3.0 4.2

Telephone performance-accuracyd

Accounts customer accuracy rate estimates 88.3% 

+/- 0.9%

87.9% 

+/- 0.7%

89.1% 

+/- 0.8%

91.7% 

+/- 0.7% 

92.7% 

+/- 0.7%

92.9% 

+/- 0.9%

Tax law customer accuracy rate estimates 83.5% 

+/- 0.7%

81.2% 

+/- 1.0%

75.8% 

+/- 1.3%

87.5% 

+/- 1.0% 

90.2% 

+/- 1.0%

88.7% 

+/- 1.5%

Source: IRS. 

a

 Telephone performance access data are based on actual counts from January 1 to March 16, 2002; 

March 15, 2003; March 13, 2004; March 12, 2005; March 11, 2006; and March 10, 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 and 

February 2006 and 2007. The percentage of calls in which telephone assistors provided accurate 

answers for the call type and took the appropriate action. 

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 what IRS projected. Between January 1 and March 10, 

2007, IRS expected 7.5 million TETR-related calls, but received about 

370,000. This represented 1.8 percent of total calls received by IRS. 

IRS hired 650 full-time equivalents in fiscal year 2007, with the expectation 

that those hires would be used to cover anticipated attrition in 2008. Their 

first assignment was answering TETR telephone calls. They were also 

trained to handle other accounts calls and paper inventory should the 

demand for TETR assistance not materialize.12

 12 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 more

paper correspondence than anticipated. From October 1, 2006 through March 24 2007, 

receipts of paper inventory were up about 6 percent and IRS had closed 10 percent more 

paper inventory than at the same time period last year. 

Page 12 GAO-07-720T 
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 7,000 calls compared to the 70 million total calls it 

receives each year. IRS did not have projections for tax provision 

extenders. 

Use of Some 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 and tax law 

questions. From January 1 through February 28, IRS’s Web site was visited 

more often and the number of searches increased. The number of 

downloaded forms and publications has decreased 14 percent over the 

same period compared to last year. According to IRS officials, it is too 

early in the filing season to determine why downloads have decreased. 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 3 IRS Web Site Use, 2006 and 2007 (data are in thousands) 

Uses 2006 2007 Percentage change

Visitsa 66,571 72,979 9.6

Downloadsa 56,405 48,449 -14.1

Searchesa 35,917 41,435 15.4

Where’s My Refundb19,776 24,724 25.0

Number of TETR-related visitsc N/A 3,283 N/A

Source: GAO analysis of IRS data. 

Note: N/A means not applicable. 

a

 Web site visits and searches and downloads from January and February 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 March 20, 2006, and 2007. 

c

 Visits to a Web page specific to TETR, which was not operational in 2006. For October 1, 2006, 

through March 10, 2007. 

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 

Page 13 GAO-07-720T 
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 is 

part of IRS’s 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,13 IRS’s Web 

site is scoring above other government agencies, nonprofits, and 

private sector firms for customer satisfaction (74 for IRS versus 72 for 

all government agencies surveyed and 71 for all Web sites surveyed). 

• An independent weekly study by Keynote, a company that evaluates 

Web sites, reported that 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.

 13 The American Customer Satisfaction Index tracks trends in customer satisfaction and is 

considered to be an industry leader. 

Page 14 GAO-07-720T 
As of March 17, 2007, approximately 2 million taxpayers used IRS’s 401 

walk-in sites, which is comparable to the same period last year. Figure 2 

shows the trend in walk-in site use for the entire filing season including a 

slight projected decline in 2007. At walk-in sites, staff provide taxpayers 

with information about their tax accounts, answer a limited scope of tax

law questions about, for example, to income and filing status, and provide 

limited tax return preparation assistance.14 As of March 10, 6,700 taxpayers 

have requested TETR on Form 1040EZ-T at walk-in sites, which is 5.3 

percent of the 126,000 individuals IRS expected. 

Limited Data on the 

Quality of Face-to-Face 

Assistance Show 

Improvement, but 

Concerns Remain 

 14 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. 

Page 15 GAO-07-720T 
Figure 2: Assistance Provided at IRS Walk-in Sites and Volunteer Sites, 2001—2008 (contacts in millions) 

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 28, 2006, and January 1, through April 30, 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. 

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 4 percent fewer full-time equivalents 

compared to last year for walk-in assistance (down from 187 to 179 fulltime equivalents). 

Volunteer sites, often run by community-based organizations and staffed 

by volunteers who are trained and certified by IRS, do not offer the range 

Page 16 GAO-07-720T 
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. The number of taxpayers getting 

return preparation assistance at over 11,000 volunteer sites has increased

to approximately 1.3 million, up 8 percent from last year and continuing a 

trend since 2001. Although no projections have been made for TETR 

claims, over 33,000 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.15 While IRS provides 

return assistance for 125,000 taxpayers, it lacks information on the 

accuracy of that assistance. For volunteer sites, as of March 2, for a small 

non-statistical sample, IRS reported a 69 percent accuracy rate for return 

preparation, compared to its goal of 55 percent. Independent from IRS, but 

using similar methods, TIGTA showed a 60 percent accuracy rate. 

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.16 Since the provisions extending the tax laws already existed,

IRS anticipates that any compliance concerns for 2006 returns will be the 

same as for previous years’. 

 15 As of March 10, IRS reported tax law and accounts assistance accuracy rates of 74 and 85 

percent respectively. 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 74 percent would achieve the goal if a confidence interval were 

considered. 

16 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. 

Page 17 GAO-07-720T 
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 and selects some for audit and 

revises the criteria for audit selection as necessary. 

As of March 24, about 211,000 individuals had requested the actual amount 

of telephone excise tax paid for a total of $98.8 million. IRS selected about

5 percent of these requests for audit, involving about $29 million.17 IRS has 

closed four of the individual audits with the taxpayer agreeing to accept

the standard amount, and has not completed the remaining individual 

audits or any of the business audits.18 About 189,000 businesses had 

requested TETR for a total of about $74.7 million. IRS selected about 560 

for audit, involving about $5.6 million. IRS reassigned about 77 full-time 

equivalent staff from discretionary audits and earned income tax credit 

audits to conduct TETR audits. Additionally, Criminal Investigation has 

spent 13 full-time equivalent staff on TETR activities in 2007. 

Many taxpayers choose to pay others to prepare their tax returns rather 

than prepare their own returns. Sixty-two percent of all the individual tax 

returns filed for the 2006 filing season used a paid preparer. 

In most states, anyone can be a paid preparer regardless of education, 

training, or licensure. However, there are different types of preparers. Paid

preparers who hold professional certificates include CPAs and attorneys. 

Other preparers vary in their backgrounds. Some have extensive training 

and experience and others do not. 

Paid Preparers Play a 

Major Role in Tax 

Administration but 

They Make Errors 

 17 According to IRS officials, as of March 17, 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. 

18 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. 

Page 18 GAO-07-720T 
In 2003 we reported to this Committee that while many taxpayers who 

used paid preparers believed they benefited from doing so, some were 

poorly served.19 Last year we reported to this Committee on errors made 

by commercial chain preparers, including the results of undercover visits 

to 19 locations.20

In our visits to 19 outlets of several commercial chain preparers, we found 

that paid preparers made mistakes in every one of our visits, with tax 

consequences that were sometimes significant. The errors resulted in 

unwarranted extra refunds of up to almost $2,000 in five instances, while

in two cases they cost the taxpayer over $1,500. Some of the most serious 

problems involved preparers 

• not reporting business income in 10 of 19 cases; 

• not asking about where a child lived or ignoring our answer to the 

question and, therefore, claiming an ineligible child for the earned 

income tax credit in 5 out of the 10 applicable cases; 

• failing to take the most advantageous postsecondary education tax 

benefit in 3 out of the 9 applicable cases; and 

• failing to itemize deductions at all or failing to claim all available 

deductions in 7 out of the 9 applicable cases. 

At the time, IRS officials responded that, had our undercover investigators 

been real taxpayers filing tax returns, many of the preparers would have 

been subject to penalties for such things as negligence and willful or 

reckless disregard of tax rules and some may have risen to the level of 

criminal prosecution for willful preparation of a false or fraudulent return. 

The taxpayers in these cases would also have been potentially exposed to

IRS enforcement action.

The limited data did not permit observations about the quality of the work 

of paid tax preparers in general. Undoubtedly, many paid preparers do 

their best to provide their clients with tax returns that are both fully 

 19 GAO, Tax Administration: Most Taxpayers Believe They Benefit from Paid Tax 

Preparers, but Oversight for IRS is a Challenge, GAO-04-70, (Washington, D.C.: Oct. 31, 

2003). 

20 GAO-06-563T. 

Page 19 GAO-07-720T 
compliant with the tax law and cause them to neither overpay nor 

underpay their federal income taxes.

IRS and the paid preparer community have taken some actions as a result 

of our work. After we provided the results of our 19 visits to IRS, IRS 

determined that 4 of these cases warranted a Program Action Case. In a 

Program Action Case, IRS selects 30 tax returns from a preparer and 

audits them to look for a pattern of compliance problems. IRS officials 

told us that these audits would begin in April 2007. Other cases were 

referred to the office responsible for monitoring earned income tax credit

compliance, and we have been told that 10 preparers that we visited will 

receive visits to check for compliance with the due diligence requirements 

of that program. IRS also referred the cases to the office that monitors 

electronic filing compliance. 

We also presented our findings at all six of its nationwide tax forums last 

year, large educational conferences for the paid preparer community. In 

addition, we have been told that some tax preparation chains and preparer

organizations have incorporated the results of our work into their 

educational materials. Finally, we recommended that IRS conduct 

research to determine the extent to which paid preparers live up to their 

responsibilities to file accurate and complete tax returns based on 

information they obtain from their customers. IRS officials have described 

plans to develop data to use to research paid preparer compliance issues,

including whether tax preparers who are noncompliant themselves are 

more likely to prepare client returns that are noncompliant. To date, this 

research has not been completed. While this may be useful research, we 

do not believe such research would determine the extent to which paid 

preparers live up to their responsibilities. 

Recent suits filed by the Justice Department highlight the obligations of 

paid preparers. The Justice Department filed suits to stop fraudulent 

return preparation at more than 125 outlets in four states of one 

preparation chain for allegedly taking part in preparation scams that led to 

fraudulent returns. 

Because they help the majority of taxpayers prepare their returns, paid 

preparers are a critical quality control checkpoint for the tax system. Due 

diligence by paid preparers has potential to prevent non-compliance and 

reduce IRS’s cost and intrusiveness. 

Page 20 GAO-07-720T 
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. 

Progress Made in 

BSM Implementation, 

but Challenges and 

Risks Remain 

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. 

Page 21 GAO-07-720T 
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.21 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 highpriority 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. 

 21Accounts 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. 

Page 22 GAO-07-720T 
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.22 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. 

Continued compliance research is essential to IRS’s ability to effectively 

focus its service and compliance efforts, and we have long been a 

supporter of such research. Well designed compliance research gives 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 develops its tax gap estimates by measuring the rate of taxpayer 

compliance—the degree to which taxpayers complied with their tax 

obligations fully and on time. That rate is then used, along with other data 

and assumptions, to estimate the dollar amount of taxes not timely and 

accurately paid. For instance, IRS most recently estimated a gross tax gap 

of $345 billion for tax year 2001 and that underreporting of income 

represented over 80 percent of the gap.23 IRS developed these estimates 

using compliance data collected through its 2001 NRP study, which took

several years to plan and execute. 

Continued Research 

Is Essential to 

Estimating the Impact 

of IRS’s Service and 

Enforcement on 

Compliance and the 

Tax Gap 

In that study, IRS reviewed the compliance of a random sample of about 

46,000 individual taxpayers and used those results to estimate compliance 

for the population of all individual taxpayers and identify sources of 

noncompliance. IRS also used the 2001 NRP results to update its computer 

models for selecting likely noncompliant tax returns and used that model 

to select cases beginning with returns filed in 2006. IRS’s fiscal year 2008

budget request states that this improved targeting of audits has increased

 22GAO-07-247. 

23 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 other 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. 

Page 23 GAO-07-720T 
dollar-per-case yield and reduced “no change” audits of compliant 

taxpayers. IRS now has a second NRP study underway, this one looking at 

5,000 S corporation tax returns filed in 2003 and 2004.24

IRS’s fiscal year 2008 budget request includes a proposal for a rolling NRP 

sample of individual taxpayers and a dedicated cadre of examiners to 

conduct these research audits. Using a rolling sample, IRS plans to 

replicate the 2001 NRP study by conducting audits of a smaller sample 

size. 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. We support this approach. In 

previous GAO products, we have observed that doing compliance studies

once every few years does not give IRS or others information about what 

is happening in the intervening years, and that 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.25 Compliance 

research in this way will also give Congress, IRS, and other stakeholders 

more frequent and more current information about IRS’s progress towards 

its long term compliance goals. 

Mr. Chairman, this concludes my prepared statement. We would be happy 

to respond to questions you or other members of the Committee may have 

at this time. 

For further information regarding this testimony, please contact James R. 

White, Director, Strategic Issues, at 202-512-9910 or whitej@gao.gov or 

David A. Powner, Director, Information Technology Management Issues at 

202-512-9296 or powenrd@gao.gov. Contacts for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

Contacts and 

Acknowledgments 

 24 IRS has no estimates for other areas of the tax gap, and it is inherently difficult to 

measure some types of noncompliance. The tax gap estimate for areas such as corporate 

income tax and employer-withheld employment tax underreporting rely on decades-old 

data. 

25 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). 

Page 24 GAO-07-720T 
of this statement. Individuals making key contributions to this testimony 

include Joanna Stamatiades, Assistant Director; Amy Dingler; Timothy D. 

Hopkins; Robyn Howard; Matthew Kalmuk; David L. Lewis; Frederick 

Lyles; Jennifer McDonald; Signora May; Veronica Mayhand; Paul B. 

Middleton; Sabine R. Paul; Cheryl Peterson; Neil Pinney; Shellee Soliday; 

and Tina L. Younger. 

Page 25 GAO-07-720T (450583) 
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