United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Oversight, Committee on Ways and

Means, House of Representatives

December 1997 TAX

ADMINISTRATION

IRS’ 1997 Tax Filing

Season

GAO/GGD-98-33

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-276564 

December 29, 1997

The Honorable Nancy L. Johnson

Chairman, Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

Dear Chairman Johnson:

This report responds to your request that we assess the Internal Revenue

Service’s (IRS) performance during the 1997 tax filing season. Besides

providing data on various indicators that IRS uses to measure its filing

season performance, we discuss five areas that have been problematic in

past filing seasons: (1) the ability of taxpayers seeking answers to

questions to reach IRS via the telephone, hereafter referred to as telephone

accessibility;1

 (2) the number of returns filed by means other than the

traditional paper method; (3) IRS’ efforts to deal with returns that have

missing or incorrect Social Security Numbers (SSN); (4) the use of banks,

known as lockboxes, to process certain tax payments; and

(5) performance of the imaging system IRS uses to process certain tax

returns. In March 1997, we testified before the Oversight Subcommittee on

the interim results of our work.2

Results in Brief IRS met or exceeded most of its 1997 filing season related performance

goals. Of particular note is the substantial improvement in two important

areas where we have criticized IRS’ performance in past filing

seasons—telephone accessibility and the use of alternative filing methods.

According to IRS data, telephone accessibility increased from 20 percent

during the 1996 filing season to 51 percent during the 1997 filing season.

That improvement was due to an increase in the number of telephone calls

IRS answered and a decrease in the number of calls coming into IRS. IRS was

able to answer more telephone calls because it devoted more staff to do so

and revised its procedures for answering questions on more complex tax

issues. IRS’ ability to answer more calls also contributed to the decrease in

the number of calls coming into IRS by reducing the number of busy signals

and thus the need for redials.

1

Accessibility, as we have traditionally defined it, is the total number of calls answered divided by the

number of call attempts, which is the sum of the following: (1) calls answered, (2) busy signals, and

(3) calls abandoned by the caller before an IRS assistor got on the line.

2

Tax Administration: IRS’ Fiscal Year 1997 Spending, 1997 Filing Season, and Fiscal Year 1998 Budget

Request (GAO/T-GGD/AIMD-97-66, Mar. 18, 1997).

Page 1 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

The number of tax returns filed by means other than the traditional paper

method increased by 25 percent over last year, with the number of returns

filed by telephone (TeleFile) showing the most significant

increase—65 percent. One factor that most likely contributed to the

increase in TeleFile was IRS’ decision not to include a Form 1040EZ in the

tax package sent to taxpayers who appeared eligible to file using

TeleFile—the thinking being that if those taxpayers did not receive a form

that they could use to file on paper, they would be more inclined to file

using the telephone.

Although the revised tax package apparently contributed to an increase in

the use of TeleFile, it also apparently contributed to a decrease in the

performance of the Service Center Recognition/Image Processing System

(SCRIPS)—a document imaging and optical character recognition system

that IRS implemented in 1994 to process Forms 1040EZ and certain other

tax documents. In that regard, IRS data for the 1997 filing season show that

the number of Forms 1040EZ processed per hour on SCRIPS equipment

declined from the number processed per hour in 1996. According to IRS,

because taxpayers who were eligible to use TeleFile did not get a Form

1040EZ that they could use to file on paper, they also did not get a

preprinted address label to affix to a paper form. Thus, if they chose to file

on a Form 1040EZ, which many of them did, they had to write in their

names, addresses, and SSNs. The additional handwritten information on

those returns increased the amount of operator intervention needed to

process those returns through SCRIPS, which resulted in decreased

productivity.

Another major change during the 1997 filing season involved the

procedures IRS used to process returns that were filed with missing or

incorrect SSNs. In 1997, as authorized by the Welfare Reform Act of 1996,

IRS began treating missing or incorrect SSNs as math errors rather than as

issues that, in the past, had to be resolved through a lengthy notice

process.3

 As of September 1, 1997, according to IRS, it had protected about

$1.46 billion in revenue through the disallowance of claimed credits or

dependent exemptions in 1997. That result more than doubled the amount

disallowed using the procedures IRS followed in 1996.

3

Section 6213(g)(2) of the Internal Revenue Code specifies those conditions on a return that can be

treated as math errors. The conditions include such things as computational mistakes and missing or

incorrect SSNs. When IRS finds one of those conditions while processing a return, it can immediately

adjust the taxpayer’s return (by, for example, correcting the computation or disallowing the dependent

exemption, earned income credit, or child care credit associated with the missing or incorrect SSN)

and make appropriate changes to the taxpayer’s reported tax liability and refund, if any. IRS is to send

the taxpayer a notice explaining the change.

Page 2 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

One issue that we discussed in our report on the 1996 filing season4 and

that continues to concern us is the cost effectiveness of IRS’ use of

lockboxes to process Form 1040 tax payments. Additional information we

obtained this year heightened our concern by calling into question a key

assumption IRS and the Department of the Treasury’s Financial

Management Service (FMS) have used to calculate the interest cost savings

associated with this use of lockboxes. Although FMS had planned a study to

further assess interest cost savings, those plans have been deferred, and

there is no assurance when such a study will be done.

Objective, Scope, and

Methodology

Our objective was to assess IRS’ performance during the 1997 filing season,

with particular emphasis on those areas that were identified as

problematic in our reviews of past filing seasons. To achieve our objective,

we

• interviewed IRS National Office officials and IRS officials in the Atlanta,

Cincinnati, Fresno, and Kansas City service centers responsible for the

various activities we assessed;5

• analyzed filing season related data from various management information

systems, including IRS’ Management Information System for Top Level

Executives;

• analyzed IRS data relating to its telephone assistance and conducted a test

of IRS’ telephone accessibility during the last 2 weeks of the filing season

(see app. I for information on our test methodology);

• analyzed IRS data on alternative filing methods, including IRS surveys of

TeleFile users and nonusers;

• visited two lockbox banks, one in Atlanta and one in St. Louis, to review

remittance processing procedures; 6

• interviewed staff from FMS, which is responsible for negotiating and

administering lockbox contracts, about the use of lockboxes to process

Form 1040 tax payments and analyzed cost/benefit data related to lockbox

processing;

• interviewed officials from IRS’ Taxpayer Advocate’s Office about the

impact of various filing season activities on taxpayers;

• analyzed activity data for IRS’ Internet World-Wide Web site and forms

distribution centers; and

4

IRS’ 1996 Tax Filing Season: Performance Goals Generally Met; Efforts to Modernize Had Mixed

Results (GAO/GGD-97-25, Dec. 18, 1996).

5

We selected these locations because we had staff available to do the work in those cities.

6

We selected these locations because we had staff available to do the work in those cities.

Page 3 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

• reviewed relevant IRS internal audit reports.

We did our work from January through October 1997 in accordance with

generally accepted government auditing standards. We obtained written

comments on a draft of this report from the Deputy Commissioner of

Internal Revenue. Those comments are discussed at the end of this letter

and are reprinted in appendix II.

Filing Season Goals

Were Generally Met

IRS uses various indicators to measure its filing season performance. Those

indicators relate to workload, like the number of returns processed;

timeliness, like the number of days needed to process and issue refunds;

and quality, like the accuracy of IRS’ answers to taxpayers’ questions and

the accuracy with which IRS processes individual income tax returns and

refunds. As shown in table 1, those indicators show that IRS met or

exceeded most of its performance goals for the 1997 filing season.7

Table 1: IRS’ Performance Goals and Related Accomplishments for the 1996 and 1997 Filing Seasons

1996a 1997a

Indicator Goal Accomplishment Goal Accomplishment

Accuracy of individual income tax returns

processed by Code and Edit staffb

Process 93%

accurately

94% were

processed

accurately

Process 95%

accurately

95% were

processed

accurately

Accuracy of individual income tax returns

processed by data transcribers

Process 93.0%

accurately

94.2% were

processed

accurately

Process 95.0%

accurately

94.7% were

processed

accurately

Service center individual income tax returns

processing productivityc

Process 10,000

returns per staff year

12,174 returns were

processed per staff

year

Process 11,730

returns per staff year

12,692 returns were

processed per staff

year

Individual income tax returns processing

cycle timed

11 days Various types of

1040s ranged

between 8 and 11

days

Less than 16 days Various types of

1040s ranged

between 5 and 14

days

Timeliness of processing tax payments

submitted with individual income tax returns

Payments received

4/15/96 thru 5/1/96

were to be

deposited no later

than 5/1/96

All payments

received 4/15/96

thru 5/1/96 were

deposited by

5/1/96

Payments received

4/15/97 thru 4/30/97

were to be

deposited no later

than 4/30/97

All payments

received 4/15/97

thru 4/30/97 were

deposited by

5/2/97

Accuracy of individual income tax refunds on

paper returns

Process 98%

accurately

99.6% were

processed

accurately

Process 99.3%

accurately

99.4% were

processed

accurately

(continued)

7

The goals shown in table 1 are set by IRS; we did not assess their appropriateness.

Page 4 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

1996a 1997a

Indicator Goal Accomplishment Goal Accomplishment

Timeliness of refund check for individual

income tax returns filed on papere

Issue within an

average of 40 days

Issued within an

average of 38 days

as of 5/96

Issue within an

average of 40 days

Issued within an

average of 38 days

as of 5/97

Timeliness of refund for individual income tax

returns filed electronicallyf

Issue within an

average of 21 days

Issued within an

average of 16 days

as of 5/96

Issue within an

average of 21 days

Issued within an

average of 15 days

as of 5/97

Level of access to taxpayer service

telephone systemg

Provide 41.4% level

of access

Provided 51% level

of access

Provide 60.2% level

of access

Provided 71% level

of access

Accuracy of tax law assistance Answer 90%

accurately

91% were answered

accurately

Answer 92%

accurately

95% were answered

accurately

Level of access to forms ordering telephone

systemh

Provide 70% level of

access

Provided 54.3%

level of access

Provide 70% level of

access

Provided 76.7%

level of access

Accuracy of processing form orders Process 96.5%

accurately

97.3% were

processed

accurately

Process 96.5%

accurately

97.0% were

processed

accurately

aData are as of April 1996 and April 1997, unless otherwise noted.

bCode and Edit staff are to prepare returns for computer entry by, among other things, ensuring

that all data are present and legible.

cReturns processing productivity is based on the number of weighted returns processed, which

includes all returns (whether processed manually, through scanning equipment, or electronically).

The different types of returns are weighted to account for their differing processing impacts. For

example, a paper Form 1040 has a higher weighting factor than a paper Form 1040EZ, which in

turn has a higher weighting factor than electronically processed returns.

dCycle time is the average number of days it takes service centers to process returns for the

entire filing season—January 1 through mid-April.

eThis indicator is based on a sample of paper returns and is an average calculated starting from

the signature date on the return to the date the taxpayer should have received the refund,

allowing 3 days after issuance for the refund to reach the taxpayer.

f

This indicator is based on a sample of electronically filed returns and is an average calculated

from the date the return is received to the date the taxpayer should have received the refund,

allowing 2 or 3 days after issuance (depending on whether the refund is by check or direct

deposit) for the refund to the reach the taxpayer or the taxpayer’s bank account.

gIRS defines this indicator as the number of calls answered divided by demand. Demand is the

number of individual callers. As discussed later, we have traditionally used a different indicator to

measure IRS’ performance in providing telephone service.

hIRS defines this indicator as the number of calls answered divided by demand. Demand is the

number of individual callers.

Source: IRS data.

Page 5 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

Accessibility to IRS’

Telephone Assistance

Improved

Substantially

During each filing season, millions of taxpayers call IRS with questions

about the tax law, their refunds, or their accounts. The number of callers

who get through to an IRS assistor is an important indicator of filing season

performance. According to IRS data, as shown in table 2, telephone

accessibility, as we have defined it in the past, increased substantially

during the 1997 filing season. Results of our independent test also pointed

to an improvement in accessibility. Despite the improvement, however,

accessibility is still low.

Table 2: Accessibility of IRS’

Telephone Assistancea

Filing seasonb

Number of call

attempts

(in millions)

Number of calls

answered

(in millions)

Percent

accessibility

1997 62 32 51c

1996 114 23 20

1995 236 19 8

aThe percent accessibility presented in this table is the calculation we have traditionally used to

measure IRS’ performance in providing telephone assistance. The calculation is the total number

of calls answered divided by the total number of call attempts (the sum of calls answered, busy

signals, and calls abandoned by the caller before an IRS assistor got on the line). Because the

IRS indicator in table 1—level of access to taxpayer service telephone assistance—is based on

the number of callers, it shows a higher level of performance than does our indicator, which is

based on the number of call attempts.

bThese data are for January 1 through April 19, 1997, January 1 through April 20, 1996, and

January 1 through April 15, 1995.

cNumbers do not compute to this percent due to rounding.

Source: GAO analysis of IRS data.

To check whether accessibility had increased, we conducted an

independent test to measure taxpayer access to IRS’ telephone system from

March 31 through April 15, 1997. Our results,8

 compared with the results of

a similar test we conducted in 1995, showed that accessibility had

improved. For example, during the 1997 test, we had to make 584 calls to

gain access to a live assistor 211 times—a 36-percent accessibility rate.

That was a significant improvement over 1995, when we had to make 1,655

calls to gain access 98 times—a 6-percent accessibility rate. Also, of the

584 calls placed during the 1997 test, 288 resulted in busy signals—a

49-percent busy rate. That compares favorably with a 92-percent busy rate

during the 1995 test. Our test methodology and detailed results are

described in appendix I.

8

Our test was a nonstatistical sample. The results relate just to our test calls and cannot be projected.

Page 6 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

Despite the significant increase in 1997, telephone accessibility is still too

low. The National Commission on Restructuring IRS made that point in its

June 25, 1997, report. After noting how accessibility had improved to

51 percent, the Commission noted that “the level of access continues to be

unacceptable and inferior to service performance in private sector service

organizations.”

As table 2 showed, the increase in IRS’ telephone accessibility between the

1996 and 1997 filing seasons was due to a combination of more calls being

answered and fewer calls coming in (i.e., “call attempts”).

Increase in Number of

Calls Answered

Two primary reasons for the increase in the number of calls answered

were (1) a revision to IRS’ procedures for handling calls involving complex

tax issues and (2) more staff assigned to answer the telephone, some of

whom were detailed from other IRS functions. IRS’ decision to detail staff

from other functions resulted in some opportunity costs because these

staff were not available to perform their normal duties, such as auditing

tax returns.

In an effort to increase the number of calls answered, IRS conducted a

study to analyze the subject and length of taxpayer telephone calls.

According to IRS, the study showed that several areas of complicated tax

law involved 20- to 30-minute telephone conversations and that an assistor

could answer about 5 simpler calls within the same amount of time. Thus,

for the 1997 filing season, IRS revised its procedures so that callers with

questions in certain complex tax areas were automatically connected to a

voice messaging system.9

 Those callers were asked to leave their name,

telephone number, and the best time for IRS to call back, and they were

told that someone would be calling back within 2 working days.

According to IRS, it received 619,310 calls to the voice messaging system

during the filing season and contacted 451,051 taxpayers in response to

those calls. IRS said that there are several reasons why it may not have

responded to a message. For example, the message may have been

garbled, thus preventing IRS from deciphering the caller’s telephone

number; callers may have failed to include an area code; or IRS attempts to

contact the caller may have gone unanswered.10

9

Some of the complicated tax areas involved the sale of a residence, self-employment income and tax,

rental property, and depreciation.

10According to IRS, staff were to make at least two attempts to contact the caller.

Page 7 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

To help return calls to the messaging system, IRS detailed staff from the

Examination function, which is the IRS organization primarily responsible

for auditing tax returns. IRS data show that staff who were detailed from

the Examination function spent about 125 full-time-equivalent staff years

returning calls received by the messaging system. A cognizant official in

the Examination function estimated that the use of Examination staff to

answer taxpayer questions resulted in about $55 million in foregone

revenue because those staff were not available to audit returns. We did not

assess the validity of that estimate.

Another factor that contributed to the increase in the number of calls

answered was IRS’ decision to assign more staff to answer the telephone.

Nationwide, according to data provided by IRS’ Customer Service function,

IRS dedicated 2,546 full-time-equivalent staff years to answer taxpayers’

telephone calls between January 1 and April 30, 1997. This was an increase

of 605 staff years over the 1,941 staff years dedicated during the same

period in 1996. In addition, some field offices, including the three service

centers we visited, temporarily detailed staff to help answer the telephone,

some of whom came from functions other than Customer Service.

According to IRS, some of these staff were used only as needed, while

others were detailed for a few months.

Decrease in Call Attempts The increase in the number of calls answered contributed to the decrease

in the number of call attempts. As IRS improves its ability to answer the

telephone, taxpayers should encounter fewer busy signals. Fewer busy

signals reduce the need for taxpayers to redial, which reduces the number

of call attempts. In that regard, IRS’ telephone data showed that the number

of busy signals dropped from 86.0 million during the 1996 filing season to

22.7 million during the 1997 filing season and that the average number of

call attempts per taxpayer dropped from 2.5 during the 1996 filing season

to 1.4 during the 1997 filing season.

IRS cited two other contributors to the decrease in call attempts—the

elimination of certain notices and the availability of information through

other IRS sources, such as the Internet. Before the 1997 filing season began,

IRS eliminated 23 notices that it deemed unnecessary, which, in turn,

reduced the need for persons to call IRS with questions about these

notices. IRS estimated that its action eliminated the issuance of about

7.5 million notices, but IRS could not estimate how many calls might have

been eliminated because every notice does not necessarily generate a

telephone call to IRS. IRS has a World-Wide Web site on the Internet that

Page 8 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

was first available during the 1996 filing season. The Web site provides,

among other things, some interactive applications that answer tax

questions, IRS regulations with “plain English” summaries, answers to the

most frequently asked tax questions, and tax forms. IRS data showed a

significant growth in the use of IRS’ Web site in 1997. For example,

taxpayers accessed the Web site about 117 million times between

January 1 and April 20, 1997, compared with about 102 million accesses

throughout 1996, and taxpayers downloaded about 6.3 million files during

the 1997 filing season compared with about 2.4 million files for the same

period in 1996.

Measuring Telephone

Accessibility

As noted earlier, the data in table 2 reflect our traditional way of

measuring telephone accessibility. Over the last few years, IRS has used

another indicator, which it calls “level of access,” to measure its

performance in providing telephone assistance to taxpayers. IRS defines

level of access as the number of calls answered divided by the number of

callers (i.e., the number of taxpayers seeking assistance). Because IRS’

indicator is based on the number of callers, it shows a higher level of

performance than does our indicator, which is based on the number of call

attempts. Nonetheless, IRS’ indicator, like ours, showed a significant

improvement in performance during the 1997 filing season. IRS reported its

level of access as 71 percent through April 19, 1997, compared with

51 percent during a comparable period in 1996.

We have been working with IRS to establish one mutually agreeable

measure of telephone accessibility. As a result, we have reached

agreement on a measure to be used in future filing seasons. That measure

defines accessibility as the number of calls that get into IRS’ automatic call

distribution system, including those that are answered and those that are

abandoned by the caller before getting assistance, divided by the total

number of call attempts, which would consist of calls answered, calls that

are abandoned, and calls that receive a busy signal. As part of that

measure, IRS agreed to show, for the calls that got into the automatic call

distribution system, how many were answered11 and how many were

abandoned by the caller before receiving assistance.

Using IRS data as of April 19, 1997, the new measure shows that taxpayers

calling IRS were able to gain access 64 percent of the time (39.8 million

calls that got into IRS’ automatic call distribution system divided by

11For purposes of this measure, “answered calls” would include calls to the voice messaging system

that were subsequently answered by IRS.

Page 9 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

62.4 million call attempts). Of the 39.8 million calls that got into IRS’

system, 31.8 million (80 percent) were answered and 8 million (20 percent)

were abandoned by the caller before getting assistance.

Number of Returns

Filed Through

Alternative Methods

Increased

As of October 31, 1997, IRS had received 120.9 million individual income

tax returns, an increase of 1.8 percent compared to the 118.8 million

received at the same time last year. Although the increase in the overall

number of returns filed was small, the increase in the number filed

through alternative methods was significant—about 25 percent higher

than last year. IRS offers three alternatives—electronic filing, TeleFile, and

1040PC—to the filing of traditional paper returns.12 Among other benefits,

returns filed through these alternatives involve fewer errors and are

presumed to be less costly for IRS to process. As shown in table 3, of the

three alternatives, TeleFile had the largest percentage change, by far, in

1997.

Table 3: Number of Individual Income

Tax Returns Received Through

Alternative Filing Methods

Type of return

Number

filed in

1994a (in

thousands)

Number

filed in

1995a (in

thousands)

Number

filed in

1996a (in

thousands)

Number

filed in

1997a (in

thousands)

Percent

change in

1997 from

1996

TeleFile 519 680 2,840 4,694 65%

Electronic 13,510 11,144 12,140 14,457 19

Form 1040PC 4,193 2,917 7,042 8,427 20

Total 18,222 14,741 22,022 27,578 25%

aData are as of November 4, 1994, November 3, 1995, November 1, 1996, and October 31, 1997.

Source: IRS’ Management Information System for Top Level Executives.

Telefile There were three changes to TeleFile in 1997 that most likely contributed

to the large increase in filings: the eligibility criteria were expanded to

include certain married persons filing joint returns, persons using TeleFile

could request that any refund be directly deposited to their bank account,

and IRS changed the tax package sent eligible TeleFile users in an attempt

12Under electronic filing, returns are transmitted over communications lines through a third party

(such as a tax return preparer or electronic return transmitter) to an IRS service center, where the

data are automatically edited and processed. Under TeleFile, certain taxpayers who are eligible to file

a Form 1040EZ are allowed to file using a toll-free number on Touch-Tone telephones. Once the return

is filed, it is processed like an electronic return. Under the Form 1040PC method, a taxpayer or tax

return preparer uses personal computer software that produces paper tax returns in an answer-sheet

format. The Form 1040PC shows the tax return line number and the data (dollar amount, name, etc.)

on that line. Only lines on which the taxpayer has made an entry are included on the Form 1040PC.

Page 10 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

to encourage their use of the system. IRS data show that about 191,000

TeleFile returns were filed jointly by married couples, thus accounting for

about 10 percent of the growth in 1997. The amount of growth due to the

other two changes could not be quantified.

IRS’ decision to change the TeleFile tax package was the subject of some

disagreement within IRS. In past years, IRS sent taxpayers who appeared

eligible to use TeleFile a package that included not only TeleFile materials

but also a Form 1040EZ and related instructions. Thus, taxpayers who

could not or did not want to use TeleFile had the materials they needed to

file on paper, assuming they were still eligible to file a Form 1040EZ. For

the 1997 filing season, IRS eliminated the Form 1040EZ and related

instructions from the package sent to taxpayers who were apparently

eligible to use TeleFile—hoping that more taxpayers would be inclined to

use TeleFile if they received only the TeleFile materials.

Officials from the Taxpayer Advocate’s Office said that they did not agree

with IRS’ decision. They said that they were originally led to believe that IRS

would be sending the revised TeleFile package only to persons who had

used TeleFile in 1996 and to a sample of other taxpayers. By the time they

learned that IRS was going to send the package to all apparently eligible

TeleFile users, it was too late to effect a change. According to the officials,

their concern centered on the extra burden the revised package would

impose on taxpayers who wanted a Form 1040EZ, as well as the extra

costs IRS might incur in filling additional mail and telephone orders for

Form 1040EZ from those taxpayers. Internal Audit expressed similar

reservations in communications with IRS management before the start of

the filing season. Management responded by saying that (1) their intent

was to increase the use of TeleFile, which would actually reduce taxpayer

burden for those who used it and (2) they expected few of the affected

taxpayers to contact IRS’ form distribution centers for copies of Form

1040EZ.

Officials from the Taxpayer Advocate’s Office told us that they did not

receive many complaints from taxpayers and found no evidence that the

number of taxpayer orders for Form 1040EZ was significantly higher than

in past years. Nonetheless, they said that they continue to be concerned

about this procedure, which IRS has indicated will remain unchanged for

the 1998 filing season.

For the 1997 filing season, IRS sent about 26 million TeleFile tax packages

to taxpayers who, based on the tax returns they filed in 1996, would be

Page 11 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

eligible to use TeleFile in 1997. After allowing for the fact that some of

those taxpayers might no longer be eligible to use TeleFile because they

no longer met the qualifying criteria, IRS estimated that about 15.6 million

of the taxpayers would be eligible to use TeleFile in 1997. As of

October 31, 1997, about 4.7 million taxpayers had filed their returns using

TeleFile (about 30 percent of the number IRS estimated to be eligible).

Assuming the validity of IRS’ estimate of eligible users, about 10.9 million of

those taxpayers chose not to use TeleFile in 1997.

IRS conducted three TeleFile surveys in 1997—one electronic and one

written survey of users and one written survey of nonusers—that shed

some light on taxpayers’ reactions to the revised tax package and the

reasons why more people did not use TeleFile.

Results of the electronic user survey showed that 30.3 percent of the

TeleFile users in 1997 were repeat customers, while the rest were using it

for the first time. The results also show that 84.5 percent of the users were

able to complete their filing with one call to IRS, and 98.8 percent would

use TeleFile again. When questioned about the new tax package,

85.2 percent of the respondents said that the package “encouraged” them

to use TeleFile, 2.9 percent said that it “frustrated” them, and 2.5 percent

said that it forced them to use TeleFile. Results of the written user survey

showed that 88 percent of the users were very satisfied with TeleFile and

another 10 percent were somewhat satisfied. Also, 97 percent of the users

said they would use TeleFile again if they could, and about 96 percent said

that they were very satisfied or somewhat satisfied with the new TeleFile

tax booklet.

Results from the nonuser survey are critical, in our opinion, if IRS is to

identify and effectively deal with barriers that are preventing eligible

taxpayers from using TeleFile. In past surveys, IRS learned that most

nonusers preferred filing on paper. But IRS did not solicit more specific

information on the reasons for that preference. In our report on the 1996

filing season, we recommended that IRS conduct a survey of nonusers

during the 1997 filing season that included some specific questions on why

they prefer to file on paper.13 The questionnaire IRS used for the nonuser

survey in 1997 solicited more specific data on why taxpayers did not use

TeleFile, which, we believe, make the results more useful than earlier

surveys.

13GAO/GGD-97-25.

Page 12 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

From a list of several potential reasons provided on the questionnaire,

respondents were asked to identify the main reason they did not use

TeleFile. The main reasons they cited were:

• filed a Form 1040 or 1040A, which made them ineligible to use TeleFile

(25 percent);

• did not receive the TeleFile tax package (17 percent);14

• used a tax preparer or accountant (15 percent);

• got help from a friend or family member in filing their return (15 percent);

and

• preferred a paper copy of the return for their records (12 percent).

In response to questions about the revised TeleFile package and its

impact, 12 percent of the nonusers said that the package caused a great

deal of inconvenience. Remembering the Taxpayer Advocate’s concern

that the absence of a Form 1040EZ in the revised package might

significantly increase the number of mail and telephone orders for that

form, IRS also asked nonusers who prepared their own returns where or

how they got the tax form. Only 2 percent said that they called or wrote

IRS. The vast majority (about 82 percent) said that they got the form from a

post office, library, or bank. The remaining (about 16 percent) mentioned

other methods, such as visiting an IRS walk-in site or downloading a form

from IRS’ Internet World-Wide Web site.

IRS plans few changes to TeleFile for the 1998 filing season. For example,

the TeleFile package for 1998 will again not include a Form 1040EZ.

However, one change that might eventually make TeleFile more attractive

to taxpayers is a pilot program with Indiana and Kentucky that will allow

TeleFile users to submit their state returns at the same time they file their

federal return. In that regard, responses to the TeleFile nonuser survey

showed that about 44 percent of the nonusers might be encouraged to use

TeleFile if they could also use it to file their state tax returns.

Electronic Filing Electronic filing began as a pilot test in 1986, and the number of individual

income tax returns filed electronically continued to grow each year until a

drop in 1995. IRS attributed that drop to the various steps it took to deal

with refund fraud. As shown in figure 1, electronic filing recovered

somewhat in 1996 and continued to grow in 1997, establishing a new high

of about 14.5 million returns as of October 31, 1997.

14As of the date we completed our audit work, it was unclear why these persons would not have

received the TeleFile package.

Page 13 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

Figure 1: Number of Individual Income

Tax Returns Filed Electronically Number of tax returns (in millions)

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

0

5

10

15

20

0.6 1.2

4.2

7.6

10.9

12.3

13.5

11.1

12.1

14.5

Year

Source: IRS data.

One impediment to even more growth in electronic filing is the fact that

the method is not completely paperless. Taxpayers must still send IRS their

W-2s and a signature document (Form 8453) after their returns have been

electronically transmitted. IRS must then manually input these data and

match them to the electronic returns.

In an attempt to eliminate the paper associated with electronic returns, IRS

began testing the use of digitized signatures at three locations during the

1996 filing season. IRS planned to expand the test to seven locations in

1997. The seven locations included three private tax return preparation

offices and four sites that were part of IRS’ Volunteer Income Tax

Assistance Program. Because of some technical problems with the

software, however, IRS delayed its distribution to the seven test sites until

April 1, 1997. Because one of the four volunteer sites prepared very few

returns after April 1, it did not participate in the test.

Page 14 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

The test consisted of preparers offering eligible taxpayers the option of

signing with a stylus “pen” on an electronic signature pad in place of

signing a Form 8453.15 The electronic signature would then be attached to

the taxpayer’s electronic return and both would be transmitted to IRS.

From April 1 through April 17, 1997, the test generated 435 returns that

were submitted with electronic signatures. IRS did not collect information

on the number of taxpayers who were offered the chance to participate in

the test but declined. According to IRS, the six participating locations

provided feedback that was overwhelmingly positive, including the

reduced cost or burden from not having to store the Forms 8453 and not

having to pay someone to batch, mail, and track the forms. IRS plans to

conduct the test again in 1998 at the same seven locations.

New Procedures

Enable IRS to Protect

More Revenue

An important change for the 1997 filing season involved IRS’

implementation of new procedures for handling returns filed with missing

or incorrect SSNs. The amount of revenue protected as a result of these

new procedures greatly exceeded the amount protected under the

previous procedures.

Correct SSNs help ensure that taxpayers are entitled to the credits and

dependency exemptions they claim. While missing or incorrect SSNs are

often the result of honest taxpayer errors, they have also been linked to

fraudulent attempts to reduce tax liabilities and obtain refunds and/or

Earned Income Credits. Accordingly, over the last few years, IRS has

become more vigilant in checking SSNs.

During the last few filing seasons before 1997, when IRS identified a

missing or incorrect SSN, it was to delay the taxpayer’s refund and

correspond with the taxpayer to resolve the issue. This procedure often

required multiple correspondence and months to resolve. As we reported

in 1996, IRS did not have enough resources to pursue all of the cases

involving missing or incorrect SSNs and ended up releasing many of the

refunds associated with those cases.16

15Eligible test participants whose returns did not include any attachments that had to be submitted on

paper were also granted a waiver from the requirement to submit W-2s. According to an IRS official,

tax return preparers participating in the test were instructed to review the paper W-2s and not prepare

electronic returns for taxpayers whose W-2s looked fraudulent.

16Earned Income Credit: IRS’ 1995 Controls Stopped Some Noncompliance, But Not Without Problems

(GAO/GGD-96-172, Sept. 18, 1996) and IRS’ 1996 Tax Filing Season: Performance Goals Generally Met;

Efforts to Modernize Had Mixed Results (GAO/GGD-97-25, Dec. 18, 1996).

Page 15 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

IRS’ SSN error procedures changed in 1997 as a result of a provision in the

Welfare Reform Act of 1996. That provision authorized IRS to treat missing

or incorrect SSNs as math errors, similar to the way it has historically

handled computational mistakes. Under the new procedures, if IRS

identifies a missing or incorrect SSN while processing a return, it can

immediately adjust the return. For example, if a taxpayer claims one

dependent and the child care credit, but lists an incorrect SSN for the

dependent, IRS is to increase the taxable income by the personal

exemption amount claimed for the dependent and not allow the child care

credit. IRS then is to adjust the taxpayer’s tax liability and reduce the

taxpayer’s refund, if any. The taxpayer is to receive a notice explaining the

change to his or her tax liability and/or refund. The standard notice IRS

used in 1997 provided a special toll-free telephone number that taxpayers

could call if they wanted to discuss IRS’ changes and/or provide corrected

information to support their claims. Taxpayers could also write to IRS to

resolve the issue. If taxpayers do not respond to IRS’ notice, there is to be

no further correspondence unless they fail to pay any additional tax that

was assessed as a result of IRS’ change.

In planning for this new procedure, IRS estimated that it would send about

2.4 million notices to affected taxpayers in 1997 and that those notices

would generate about 1.68 million responses (telephone calls or letters)

from taxpayers. As of September 1, 1997, IRS had sent about 2.2 million

notices, which generated about 876,000 calls and letters. IRS said that

based on those responses, it subsequently allowed some of the claims it

had originally disallowed.17 As of September 1, after netting out

adjustments made in response to taxpayers’ calls and letters, IRS reported

that it had protected about $1.46 billion in revenue (i.e., claimed refunds or

credits not paid and additional taxes assessed). That is about 150 percent

more than the amount of revenue IRS reported as having been protected as

a result of the procedures used in 1996. That year, according to IRS, it sent

out about 629,000 notices that resulted in the protection of about

$590 million.

We asked officials in the Taxpayer Advocate’s Office whether the new SSN

error procedures posed any problems for IRS and/or taxpayers. They said

that they did have concerns about the procedures, which they voiced to IRS

management before the start of the filing season. They were concerned,

for example, that (1) the procedures may lead to an unmanageable

17If a taxpayer provided IRS with a missing SSN or corrected an inaccurate SSN, IRS would adjust its

change. However, not every taxpayer response resulted in an adjustment. In some cases, the taxpayer

may only have wanted IRS to explain the notice or may have decided, after discussing the law and the

facts with IRS, that IRS’ position was correct.

Page 16 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

workload for IRS and (2) the notices were not clear. According to the

officials, as a result of their input, some changes were made before the

filing season began. They also told us that they had not received a

significant number of complaints from taxpayers nor had there been an

increase in the number of problem resolution program cases or hardship

requests for refunds.

Even though significant problems did not arise, officials of the Taxpayer

Advocate’s Office believed that some additional changes are needed. For

example, they said that some individuals have problems obtaining an SSN

or some other taxpayer identification number either because of religious

affiliations or questionable alien status. Officials also think the notices

should be revised to provide the taxpayer with specific information about

the error.

Lockbox Processing

for Form 1040

Remittances May Not

Be Cost Effective

In an effort to improve remittance processing and deposit tax receipts

more timely, IRS has been using lockboxes to process tax payments,

including the payments associated with individual income tax returns

(Forms 1040).18 IRS and FMS assume that the use of lockboxes is beneficial

to the government because, in general, banks can get the payment

processed and the money deposited to a Treasury account quicker than

service centers can. This means that Treasury would not have to borrow

as much to pay government obligations, thereby avoiding interest charges.

In our report on the 1996 tax filing season, we expressed our concern

about the way IRS was using lockboxes for Form 1040 payments.19 Our

concern then was not with the processing of the payments but with IRS’

decision to have taxpayers send their tax returns along with their tax

payments to the lockboxes and to have the banks sort those returns before

shipping them to IRS service centers for processing. Information we

received from FMS, which has been paying the lockbox fees, and IRS

indicated that having banks sort and ship tax returns increased the cost of

the lockbox service by about $4.7 million during the first 8 months of 1996.

For example, FMS said that it paid the banks an average of 92 cents per

return to sort the 7 million returns received during those 8 months—a

18Under the lockbox concept, taxpayers are to mail payments to a lockbox, which is a postal rental box

serviced by a commercial bank. The bank is to process the payments and transfer the funds to a

federal government account, record the payment and payer information on a computer tape, and

forward the tape to IRS for use in updating taxpayers’ accounts. In addition to Form 1040 payments,

tax remittances processed at lockbox banks include estimated tax payments; various business

payments, such as Federal Unemployment tax and Social Security tax; and certain vehicle use taxes.

19GAO/GGD-97-25.

Page 17 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

function that, according to IRS, service centers performed at an average

cost of 37 cents per return. FMS also paid the banks 13 cents per return to

ship the tax returns to IRS for processing.20

Our concern about the Form 1040 lockbox program has intensified since

last year. We are no longer concerned only about having lockboxes receive

and sort tax returns but about the use of lockboxes to process the Form

1040 payments themselves. Information we obtained this year called into

question a key assumption used to calculate the interest cost avoidance

figures that IRS and FMS have cited to support the use of lockboxes to

process those payments.

IRS’ Decision to Have

Taxpayers Send Their

Returns to Lockboxes Is

Based on Inconclusive

Evidence

For the last several years, IRS has been testing the use of lockboxes to

process Form 1040 remittances. Those test results and various studies

done for IRS led to the decision to have certain taxpayers send their returns

and tax payments to lockboxes. Under the current procedure, many

taxpayers receive a tax package with one envelope and two differently

colored mailing labels. If their return involves a payment, they are to use

one label that directs their return and payment to a lockbox. If their return

does not involve a payment, they are to use the other label that directs

their return to an IRS service center.

In explaining the decision to have persons who were making payments

send their returns along with their payments to a lockbox, IRS officials

responsible for the lockbox program said that they believed an increase in

taxpayer burden would result if taxpayers were required to separate their

payments from their returns and mail each to a different address. They

cited the results of taxpayer surveys done in 1993 and 1994, which, they

said, showed that taxpayers preferred to keep their payment and return

together. IRS interpreted this preference as an indicator that asking

taxpayers to separate their return from their payment would impose a

burden.

We reviewed the taxpayer surveys and considered the results to be

inconclusive as they relate to burden—45.9 percent of the taxpayers

surveyed said that they felt uneasy about mailing their checks and returns

in separate envelopes while 41.2 percent said that they did not feel uneasy

(the other 12.9 percent did not know). Even for those respondents who

20According to IRS, the banks handled about 10 million returns through the first 11 months of fiscal

year 1997. According to FMS, it paid the banks an average of 86 cents per return to sort the returns and

13 cents per return to ship the returns to IRS (compared to averages of 92 cents and 13 cents,

respectively, in 1996).

Page 18 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

said they felt uneasy, it was unclear whether they considered the use of

separate envelopes an unreasonable burden when weighed against the

extra cost to the government associated with sending returns to

lockboxes.

We realized, in preparing our report on the 1996 filing season, that it was

too late to do anything to change IRS’ lockbox plans for the 1997 filing

season. Thus, we recommended that IRS take action that would be

effective for filing seasons after 1997. Specifically, we recommended that if

the government was unable to negotiate lockbox fees that were more

comparable to service center costs and in the absence of more compelling

data on taxpayer burden, IRS should either discontinue having returns

sorted by the banks or reconsider the decision to have taxpayers send

their tax returns to the lockboxes along with their tax payments. As noted

earlier, the combined fee paid banks for sorting and shipping tax returns

dropped only slightly from 1996. And, as discussed below, IRS still does not

have conclusive data on taxpayer burden.

In May 1997, an IRS/FMS task force that had been formed to identify a

solution to this issue for 1998 and beyond recommended that IRS have

taxpayers separate their returns from their payments—mailing the former

to an IRS service center and the latter to a lockbox. While recognizing the

extra burden on taxpayers (e.g., the extra postage associated with mailing

two envelopes and possible confusion over which envelope to use), the

task force said that such a procedure would minimize lockbox costs and

would enable the banks to deposit remittances faster because they would

no longer have to handle tax returns.

Despite the task force’s recommendation, IRS decided that lockboxes

would continue to receive and sort tax returns in 1998. The IRS official

responsible for the lockbox program told us that IRS continues to believe

that an increase in taxpayer burden would result if taxpayers were

required to separate their payments from their returns and mail each to a

different address, a view shared by representatives from the Taxpayer

Advocate’s Office. To support its position, IRS cited the results of several

focus groups that became available after the task force had completed its

work.

IRS held 8 focus groups in 4 cities involving a total of 29 taxpayers who

prepared their own federal income tax returns and 31 tax practitioners.

According to IRS, “even though there was not a dominant trend from the

[focus groups], taxpayers noted the cost of two stamps and the confusion

Page 19 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

of two envelopes as burden issues.” Although focus groups are useful in

providing insight on a particular issue, they are not statistically

representative of the population and should not, in and of themselves,

provide the basis for far-reaching conclusions. Given that and after

reviewing transcripts of the focus groups and a July 7, 1997, summary

report on the focus group results, we believe that IRS still does not have

conclusive evidence that the additional taxpayer burden that may be

caused by requiring the use of two envelopes would outweigh the millions

of dollars in additional costs the government is incurring to have banks

sort and ship tax returns.

For example, although the report noted that participants were concerned

about the extra postage associated with using two envelopes, it went on to

say that taxpayers participating in the focus groups viewed the extra cost

“as something that would be accepted” and that “some taxpayers were

willing to accept additional burden so that IRS could operate more

effectively.” In that regard, focus group participants were not told about

the amount of additional cost being incurred by the government to have

banks sort and ship the tax returns. The report also said that “several

participants voiced concern about the check being separated from the

return prior to receipt by the IRS.” However, there is no evidence that

participants were told how the two-envelope procedure compares to the

current procedure and that, even under the current procedure, the tax

return and check get separated. Under the current procedure, even though

returns and payments are mailed in one envelope to one location (the

lockbox), they are separated at the bank. The return is shipped to IRS for

processing while the bank processes the payment.

In a July 15, 1997, memorandum to the then Acting Commissioner of

Internal Revenue, Treasury’s Fiscal Assistant Secretary provided his views

on the processing of Form 1040 tax payments. He noted that he had sought

IRS’ support for having taxpayers mail their returns and payments

separately but that IRS had rejected that option because of the perceived

taxpayer burden. That left only two viable options in the Assistant

Secretary’s opinion—continue the current arrangement or return the

processing of Form 1040 tax payments to IRS’ service centers. The

Assistant Secretary noted, however, that it was his understanding that

equipment, personnel, and space issues and the lack of sufficient planning

time made it infeasible to move processing back to the service centers for

fiscal year 1998. Thus, he concluded that it would be in the best interest of

the government to continue the current lockbox arrangement for at least 1

more year. He said that this issue should be reviewed in March/April 1998

Page 20 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

to make decisions about fiscal year 1999 and that IRS should continue to

seek ways to reduce the cost of this program, by either changing

processing procedures or by continuing its search for a resolution on how

to direct the Form 1040 returns to the service centers without causing

significant taxpayer burden.

IRS Study Calls Into

Question the Validity of

Interest Cost Savings

Our concerns about the Form 1040 lockbox program were heightened this

year by new information relating to the interest cost avoidance figures that

IRS and FMS have used to show the program’s cost effectiveness. This new

information calls into question not just the decision to have tax returns

sent to the banks but the more basic decision to use lockboxes to process

Form 1040 payments.

As part of its review, the lockbox task force compared how much various

procedural options for processing Form 1040 remittances would cost IRS

and FMS in 1998. Assuming a volume of 11,373,133 items, the task force

estimated that the current lockbox procedure would cost about

$23.3 million, compared with about $14.5 million if two envelopes were

used21 and about $12.8 million if IRS decided to stop using lockboxes to

process Form 1040 remittances and return that function to the service

centers. Although this comparison would seem to argue against the use of

lockboxes, IRS and FMS assume that having lockboxes process Form 1040

remittances generates savings, in the form of interest cost avoidance, that

more than offset the increased IRS and FMS costs.

According to FMS, for example, lockboxes processed about 9.7 million

Form 1040 tax payments from October 1996 through July 1997, which

resulted in an interest cost avoidance of about $23.8 million. As in past

years, the interest cost avoidance was calculated on the basis of a general

assumption that lockboxes can process and deposit tax payments an

average of 3 days faster than IRS service centers during peak workload

periods. The validity of that assumption is critical because, according to

the lockbox task force, if lockboxes are not processing payments at least 2

days faster than service centers, the amount of interest cost avoidance

would be insufficient to offset the additional costs associated with having

lockboxes handle tax returns.

In that regard, the results of an IRS-commissioned study, issued in

March 1997, show that, on average, lockboxes processed payments only

21If the analysis were broadened to reflect the extra cost that taxpayers would have to incur to mail a

second envelope, the cost of this option would increase by $3.6 million (11,373,133 envelopes times 32

cents postage) to a total of about $18.1 million.

Page 21 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

about 1 day faster than service centers. However, that comparison covered

peak and nonpeak workload periods; there was not a similar comparison

just for the peak workload period (April 13 to May 1, 1995), when most of

the Form 1040 payments are received and when differences in processing

times might be more pronounced. Although the reported study results are

insufficient to make an informed judgment, they do raise questions about

the assumption that lockboxes process payments 3 days faster than

service centers. FMS had planned to commission another study to assess

the comparative processing times for lockboxes and service centers.

However, those plans have been deferred, and FMS could give us no

assurance when such a study would be done.

SCRIPS Processing

Rates Decline

One of IRS’ major business objectives is to move away from a

labor-intensive tax return processing system that relies on thousands of

employees transcribing data from paper tax returns and move to an

electronic system that reduces processing costs and eliminates

transcription errors. One strategy for achieving that objective is to reduce

the number of paper returns by increasing the number of returns filed

electronically. We discussed IRS’ progress in that area earlier in this report.

For returns that will continue to be filed on paper, IRS planned to achieve

its objective through document imaging and optical character recognition

systems. SCRIPS is one such system.

IRS uses SCRIPS, which was implemented in 1994, to process tax returns

filed on Form 1040EZ, Federal Tax Deposit (FTD) coupons, and

information returns (e.g., Forms 1099). In January 1997, we reported that

one of the major problems with SCRIPS was slow processing rates (i.e., the

number of documents processed per hour).22 As the data in table 4 show,

this problem intensified with respect to Forms 1040EZ and FTD coupons in

1997.

22Tax Systems Modernization: Imaging System’s Performance Improving but Still Falls Short of

Expectations (GAO/GGD-97-29, Jan. 16, 1997).

Page 22 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

Table 4: SCRIPS Processing Rates as

of September 30, 1996, and 1997 SCRIPS processing rate

(documents per hour)

Form type

Jan. 1 through

September 30, 1996

Jan. 1 through

September 30, 1997

Percent

change

Form 1040EZ 67 57 –15

Information returns 145 145 0

FTD coupons 722 619 –14

Source: GAO computations based on IRS data.

An IRS official in the SCRIPS project office attributed the decline in the

processing rate for Forms 1040EZ, at least in part, to IRS’ decision, as

discussed earlier, to issue TeleFile packages that did not have a Form

1040EZ. Because the package contained no form that the taxpayer could

use to file on paper, it also contained no preprinted label for the taxpayer

to affix to a paper form. Successful optical character recognition

operations depend, in part, on the kind of clearly printed data provided by

a label. In that regard, IRS estimated that about 95 percent of the Forms

1040EZ processed through SCRIPS in 1997 did not have the scannable

preprinted address label, compared with about 50 percent in 1996, causing

a significant increase in the amount of data IRS had to manually transcribe.

IRS attributed the decrease in the processing rate for FTD coupons to a

problem associated with the way in which blocks of data are transferred

throughout the system. In those instances where characters on the

document cannot be identified correctly by the scanner, the electronic

block of work that contains those documents is sent to a workstation

operator. That operator retrieves the block of work, reviews the image of

the document to determine what corrections are needed, then updates the

file, which is sent back to the file server. Each time a block of work is

moved from one component of SCRIPS to another, a time delay results.

According to IRS, the contractor provided a software solution to this

problem and, since then, processing times have improved, except on those

days when the service centers have to process the largest volumes of FTD

coupons.

Conclusions IRS made noteworthy progress in several critical areas during the 1997

filing season. It achieved significant increases in telephone accessibility

and alternative filings, and it implemented a major change in dealing with

missing or incorrect SSNs, all without any noticeable major problems. A

Page 23 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

couple of these successes involved trade-offs. By detailing staff to answer

telephone calls, IRS improved accessibility but, according to IRS, the

detailing of that staff caused it to forgo some enforcement revenue. By not

including a Form 1040EZ in the tax package sent potential TeleFile users,

IRS apparently encouraged some taxpayers to file their returns by

telephone. But, in doing so, IRS imposed some burden on recipients of the

TeleFile package who needed or wanted a Form 1040EZ and caused a

reduction in SCRIPS processing rates. Such trade-offs are inevitable, given

the fact that IRS does not have unlimited resources, and we saw nothing to

indicate that either trade-off was inappropriate.

We are concerned, however, about the cost effectiveness of IRS’ use of

lockboxes rather than service centers to receive and process Form 1040

tax payments. On the basis of the data currently available, we do not

believe IRS is in a position to make an informed decision on whether to

continue to use lockboxes for that purpose.

The results of an IRS-commissioned study suggest that the interest cost

avoidance figures IRS and FMS have cited to support the use of lockboxes to

process Form 1040 payments may not be valid. Although FMS had planned

another study to further assess the comparative processing times and

costs for lockboxes and service centers, those plans have been deferred,

and it is unclear when such a study will be done. As a result, it is unclear

whether the government actually realizes savings, and if so how much,

through the use of lockboxes.

Because IRS has decided to continue the use of lockboxes for the 1998

filing season and it is too late to alter that decision, it seems that IRS and

FMS have an opportunity during that filing season to develop the definitive

data needed to make more informed decisions on the future use of

lockboxes. Such data would include the average amount of time needed by

both banks and IRS to process Form 1040 tax payments during both peak

and off-peak periods and the average interest costs to the government of

borrowing during those periods. It seems that such data would be readily

available and there is still time to make any arrangements that might be

needed to capture these data during the 1998 filing season.

We are equally concerned that IRS’ decision to continue having taxpayers

send both tax returns and payments to lockboxes is also based on

inconclusive evidence. Another option would be to have taxpayers mail

their payments to a lockbox and their tax returns to IRS. An IRS/FMS task

force studied these two options and recommended the latter because it

Page 24 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

would save the government millions of dollars in payments to banks for

processing the tax returns. Although Treasury’s Fiscal Assistant Secretary

also supported this recommendation, IRS decided against this change

because of the added taxpayer burden, including mailing cost.

However, our review indicated that IRS did not have persuasive evidence

on the amount of taxpayer burden, how this burden would compare with

the government’s savings, or whether taxpayers considered the burden to

be unreasonable. The new evidence available to IRS in making its decision

for the 1998 filing season was from taxpayer focus groups. The number of

taxpayers participating in the focus groups was small, and the information

they provided on burden was inconclusive. In that regard, the participants

were not provided all of the information needed to make an informed

response about the burden associated with mailing tax returns in one

envelope and tax payments in another. Specifically, they were not told that

mailing both tax returns and tax payments to lockboxes is costing the

government, and thus taxpayers, millions of extra dollars. Had the focus

group participants been informed about all the relevant factors—the

additional postage and burden involved in separating returns from

payments and mailing them in two envelopes versus the savings that

would accrue to taxpayers overall in the form of savings to the

government if this were done—we believe that they would have been in a

better position to assess the trade-offs involved in deciding on the

reasonableness of the burden involved.

IRS has three basic options concerning the use of lockboxes for Form 1040

tax payments: (1) continue the existing practice, (2) discontinue the use of

lockboxes altogether, or (3) revise the existing practice to have taxpayers

send their returns to service centers and their payments to lockboxes. In

deciding which option to select, IRS faces the following two basic issues.

First, in deciding between options 1 and 2, IRS needs to know whether

using lockboxes to process Form 1040 tax payments generates a net

savings to the government. Second, if the use of lockboxes generates

significant savings, which would remove option 2 from the equation, IRS

needs to know, in choosing between options 1 and 3, whether the

additional savings to the government of having taxpayers send their tax

returns to IRS service centers outweigh the taxpayer burden associated

with taxpayers sending two different envelopes to two locations. Although

these issues would involve different analyses, the results and related

decisions are intertwined. That is, if the analysis for the first issue shows

that using lockboxes for Form 1040 tax payments does not result in a

Page 25 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

significant net savings to the government and IRS decides to stop using

lockboxes, the second issue would become moot.

Recommendations to

the Commissioner of

Internal Revenue

We recommend that the Commissioner of Internal Revenue require the

appropriate IRS officials to conduct, during the 1998 tax filing season, the

analyses necessary to determine (1) whether there are net savings to the

government attributable to the use of lockboxes to process Form 1040 tax

payments and (2) whether the potential savings of requiring affected

taxpayers to mail their tax returns to IRS and their tax payments to

lockboxes in separate envelopes outweigh the estimated additional cost

and other burden that this could be expected to cause taxpayers. In doing

these analyses, the officials should collect definitive data on (1) the actual

time and interest cost differences between sending tax payments to

lockboxes and sending them to IRS during peak and off-peak periods and

(2) whether taxpayers believe, given the processing cost savings to the

government, that it would cause them an unreasonable burden to mail tax

returns and tax payments to different locations. If the analyses indicate

that using lockboxes does not produce a net savings to the government,

we recommend that the Commissioner take steps to have IRS service

centers process all Form 1040 payments starting with the 1999 tax filing

season. If the analyses indicate that the use of lockboxes produces savings

and that taxpayers would support the practice of mailing returns and

payments to different locations, we recommend that the Commissioner

change the current lockbox procedures as soon as possible and instruct

taxpayers to send their returns to IRS and their payments to lockboxes.

Agency Comments

and Our Evaluation

We obtained written comments on a draft of this report from the Deputy

Commissioner of Internal Revenue (see app. II). He said that IRS generally

agreed with our findings and recommendations and that the ultimate

determination of the benefit of using lockboxes to the taxpaying public

requires information and analysis by both IRS and FMS. He said that IRS

would pursue a study with FMS during fiscal year 1998 to reach a long-term

decision about lockbox processing and that IRS would welcome the

opportunity to assist FMS in analyzing the savings to the government

attributable to the use of lockboxes to process Form 1040 tax payments.

The Deputy Commissioner also said that (1) it would be impossible to

determine conclusively whether any savings from having taxpayers mail

their returns and payments in separate envelopes outweighed the

additional cost and other burden to taxpayers because “the perceived

Page 26 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

burden of this new way of paying and filing may involve intangibles which

cannot be measured (e.g., a negative reaction to changes in procedures)”

and (2) a broad-based study to determine taxpayers’ perception of burden

and their willingness to accept that burden would be necessary to satisfy

our recommendation. In addition, the Acting Chief of Customer Service, at

a meeting to discuss IRS’ comments, told us that IRS would always come

down on the side of reduced burden.

We agree that burden cannot be measured conclusively. However, it is not

necessary to conclusively measure burden before deciding whether to use

two envelopes. In fact, IRS has made other decisions involving new ways of

paying and filing without measurable data on burden. For example, the

decision to not include a Form 1040EZ in the TeleFile tax package

involved a change in procedures that caused additional taxpayer burden

by requiring taxpayers who could not or did not want to use TeleFile to

find a Form 1040EZ elsewhere. IRS made that decision although it could

not measure the impact of the additional burden on taxpayers. In the

TeleFile case, IRS did not come down on the side of reduced burden but

decided, instead, that the additional burden, though unmeasured, was

acceptable given the expected benefits. In fact, IRS plans to send out the

same kind of abbreviated TeleFile tax package for the 1998 filing season

even though 12 percent of the TeleFile nonusers indicated that the

package IRS sent out for the 1997 filing season caused a great deal of

inconvenience. We believe that asking taxpayers to use two envelopes

might be another instance where IRS might accept a small amount of

burden, if the potential savings to the government are significant.

It is unclear what, if anything, IRS intends to do to get better information on

burden. However, if it decides to obtain more definitive data, it is

important that it structure its data collection to get specific input from

taxpayers on their willingness to assume the additional burden of dealing

with two envelopes in light of the savings to the government. Among other

things, that would mean asking them to compare the two-envelope

approach with the current approach and making sure, for both

approaches, that they know the government’s costs and benefits.

With respect to our second recommendation, the Deputy Commissioner

indicated that necessary studies could not be done and analyzed in time to

make changes for the 1999 filing season, given the lead time needed in

awarding contracts for the printing of tax packages. We do not understand

why this would be the case. It seems to us that at least the first stage of the

analysis sought by our recommendation—whether the government saves

Page 27 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

money by using lockboxes—can be made in time. Our prior analyses of IRS

data indicate that the key data needed to make that determination—the

comparative time it takes lockboxes and service centers to process and

deposit Form 1040 payments—should be readily available and can be

compiled and analyzed relatively quickly. There is no reason we are aware

of that such analysis could not be done using data from the 1997 filing

season, rather than waiting for new data from the 1998 filing season. Thus,

if the analysis shows that the government is not benefiting from the use of

lockboxes, IRS should have time to make the necessary changes to the tax

packages for 1999.

The second part of the analysis, which considers burden, would only be

needed if the first part shows that using lockboxes to process Form 1040

payments saves the government money. If the analysis shows that it does

not save the government money, IRS could change the procedure for

handling Form 1040 tax payments without further analyzing burden. The

revised procedure would still involve one envelope, but the envelope

would be mailed to a service center rather than a lockbox. Since that

change would result in all returns (remittance and nonremittance) being

mailed to IRS, it would not only avoid the additional burden of having

taxpayers deal with two envelopes but also reduce existing burden by

negating the need for taxpayers to deal with two mailing labels.

We revised our second recommendation to recognize the different

decisions that will confront IRS depending on the results of the analyses

called for in our first recommendation. As part of that revision, the

reference to the 1999 filing season now applies only if the first part of the

analysis shows that the government is not saving money by using

lockboxes to process Form 1040 payments.

In commenting on this report, the Deputy Commissioner identified a

number of actions IRS took during the 1997 filing season and asked that we

include the information in our report (see app. II). Some of the actions

identified by the Deputy Commissioner, such as those relating to

electronic tax administration, level of access, and complex tax law

questions, are discussed in our report. However, we did no audit work on

several other actions mentioned by the Deputy Commissioner and thus

cannot comment on their effectiveness.

We are sending copies of this report to the Subcommittee’s Ranking

Minority Member, the Chairmen and Ranking Minority Members of the

Page 28 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
B-276564 

House Committee on Ways and Means and the Senate Committee on

Finance, various other congressional committees, the Secretary of the

Treasury, the Commissioner of Internal Revenue, the Director of the Office

of Management and Budget, and other interested parties.

Major contributors to this report are listed in appendix III. Please contact

me on (202) 512-9110 if you have any questions.

Sincerely yours,

Lynda D. Willis

Director, Tax Policy and

 Administration Issues

Page 29 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
Contents

Letter 1

Appendix I 

Toll-Free Telephone

Accessibility Test

32

Appendix II 

Comments From the

Internal Revenue

Service

33

Appendix III 

Major Contributors to

This Report

42

Tables Table 1: IRS’ Performance Goals and Related Accomplishments

for the 1996 and 1997 Filing Seasons

4

Table 2: Accessibility of IRS’ Telephone Assistance 6

Table 3: Number of Individual Income Tax Returns Received

Through Alternative Filing Methods

10

Table 4: SCRIPS Processing Rates as of September 30, 1996, and

1997

23

Figure Figure 1: Number of Individual Income Tax Returns Filed

Electronically

14

Abbreviations

FMS Financial Management Service

FTD Federal Tax Deposit

IRS Internal Revenue Service

SCRIPS Service Center Recognition/Image Processing System

SSN Social Security Number

Page 30 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
Page 31 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
Appendix I 

Toll-Free Telephone Accessibility Test

To assess the ability of taxpayers to reach IRS by telephone to ask a

question about the tax law or their accounts, we conducted a

nonstatistical test of IRS’ toll-free telephone assistance system. Our results

relate just to the test calls; they cannot be projected. To conduct the test,

we placed telephone calls at various times during each workday from

March 31 through April 15, 1997. We made our calls from five metropolitan

areas—Atlanta, Chicago, Kansas City, San Francisco, and Washington,

D.C. Each attempt to contact IRS consisted of up to five calls spaced 1

minute apart. If we reached IRS during any of the five calls and made

contact with an assistor, we considered the attempt successful. If we

reached IRS during any of the five calls but were put on hold for more than

7 minutes without talking to an assistor, we abandoned the call, did not

dial again, and considered the attempt unsuccessful (abandoned). If we

received a busy signal, we hung up, waited 1 minute, and then redialed. If

after four redials (five calls in total) we had not reached IRS, we considered

the attempt unsuccessful. In conducting our test, we did not ask questions

of the assistors because it was not our intent to assess the accuracy of

their assistance.

We attempted to contact IRS 330 times. Of 330 attempts to contact an

assistor, 211 (64 percent) were successful—162 on the first call, 22 on the

second call, and 27 after 3 to 5 calls. When the 16 calls that resulted in

access to IRS’ voice messaging system were added, accessibility to IRS

assistance increased to 69 percent. In another 69 cases (21 percent), we

accessed IRS’ system but were put on hold more than 7 minutes and thus

hung up before making contact with an assistor. The remaining 34

attempts (10 percent) were aborted after we received busy signals on each

of our 5 dialing attempts. Our 330 attempts to contact an assistor required

a total of 584 calls to IRS’ toll-free telephone number. Of those 584 calls, we

succeeded in contacting an IRS assistor 211 times—a 36-percent

accessibility rate.

We followed the above methodology to conduct our 1995 test, but we

placed telephone calls from two additional metropolitan areas (Cincinnati

and New York) and for two separate 2-week periods (January 30 through

February 11, 1995, and April 3 through April 15, 1995). Results of the 1995

test cited in the body of this report are only for the 2-week period from

April 3 through April 15, 1995.

Page 32 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
Appendix II 

Comments From the Internal Revenue

Service

Note: GAO comments

supplementing those in

the report text appear at

the end of this appendix.

Page 33 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
Appendix II 

Comments From the Internal Revenue

Service

Page 34 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
Appendix II 

Comments From the Internal Revenue

Service

Page 35 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
Appendix II 

Comments From the Internal Revenue

Service

Page 36 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
Appendix II 

Comments From the Internal Revenue

Service

See comment 1.

See comment 2.

Page 37 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
Appendix II 

Comments From the Internal Revenue

Service

See comment 3.

See comment 4.

Page 38 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
Appendix II 

Comments From the Internal Revenue

Service

Page 39 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
Appendix II 

Comments From the Internal Revenue

Service

Page 40 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
Appendix II 

Comments From the Internal Revenue

Service

The following are GAO’s comments on IRS’ letter dated November 26, 1997.

GAO Comments 1. IRS says that lockbox payments of $213 billion were deposited during

fiscal year 1997. That figure covers all tax payments processed by the

lockbox banks. The lockbox discussion in our report focuses only on the

processing of Form 1040 tax payments.

2. IRS says that the SCRIPS sites succeeded in processing over 90 percent of

the Forms 1040EZ through SCRIPS. However, only 5 of IRS’ 10 service

centers have SCRIPS. The 90-percent figure cited by IRS means that SCRIPS

was used to process 90 percent of the Forms 1040EZ filed at those 5

centers. The other five centers used the traditional keypunching system to

process the Forms 1040EZ they received. Also, as noted in our report,

while the 5 SCRIPS centers may have processed 90 percent of the Forms

1040EZ they received, they did so at a slower rate than in 1996.

3. IRS says that the number of telephone calls answered increased from

99.2 million in fiscal year 1996 to 103.9 million in fiscal year 1997. These

numbers differ from the numbers cited in table 2 of our report because

(1) our numbers are for the filing season (January 1 through mid-April)

while IRS’ numbers are for the fiscal year (October 1 through

September 30) and (2) our numbers include just those calls answered by

IRS assistors, while IRS’ numbers include calls answered by assistors and by

automated systems, such as TeleTax (a system that has prerecorded

information on about 150 topics).

4. IRS cites an initial contact resolution rate of above 95 percent. However,

as IRS says, that rate only covers walk-in contacts and correspondence. It

does not reflect the extent to which telephone inquiries are resolved with

one contact.

Page 41 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
Appendix III 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

David J. Attianese, Assistant Director, Tax Policy and Administration

Issues

Robert L. Giusti, Senior Evaluator

Monika R. Gomez, Evaluator

Christopher E. Hess, Senior Evaluator

John Lesser, Senior Evaluator

Kansas City Office Royce L. Baker, Issue Area Manager

Doris J. Hynes, Evaluator-in-Charge

Marvin G. McGill, Evaluator

Atlanta Office Jyoti Gupta, Evaluator

Kim Rogers, Evaluator

San Francisco Office Sharon K. Caporale, Evaluator

Suzy Foster, Senior Evaluator

(268779) Page 42 GAO/GGD-98-33 IRS’ 1997 Tax Filing Season
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100