United States Government Accountability Office

GAO Statement for the Record 

Before the Subcommittee on Transportation, 

Treasury, the Judiciary, and Housing and 

Urban Development, and Related Agencies, 

Committee on Appropriations, U.S. Senate

INTERNAL REVENUE 

SERVICE 

Assessment of the Interim 

Results of the 2006 Filing 

Season and Fiscal Year 2007 

Budget Request 

Statement of James R. White 

Director 

Strategic Issues 

Statement of David A. Powner 

Director 

Information Technology Management Issues 

For Release on Delivery

Expected at 9:30 a.m. EDT

Thursday, April 27, 2006

 

GAO-06-499T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 27, 2006

INTERNAL REVENUE SERVICE 

Assessment of the Interim Results of the 

2006 Filing Season and Fiscal Year 2007 

Budget Request 

Highlights of GAO-06-499T, a statement 

for the record for the Subcommittee on 

Transportation, Treasury, the Judiciary, 

and Housing and Urban Development, 

and Related Agencies, Committee on 

Appropriations, U.S. Senate 

The Internal Revenue Service’s 

(IRS) filing season performance 

affects tens of millions of taxpayers 

who expect timely refunds and

accurate answers to their tax 

questions. IRS’s budget request is a 

planning tool showing how it 

intends to provide taxpayer service

and enforce the tax laws in 2007. It

is also the first in a series of annual

steps that will determine whether 

IRS meets its new long-term goals 

of increasing tax compliance and 

reducing taxpayers’ acceptance of

cheating on their taxes. Tax law 

enforcement remains on GAO’s list

of high-risk federal programs, in 

part, because of the persistence of

a large tax gap. IRS recently 

estimated the gross tax gap, the 

difference between what taxpayers 

owe and what they voluntarily pay,

to be $345 billion for 2001. 

GAO assessed (1) IRS’s interim 

2006 filing season performance; (2) 

the budget request; and (3) how the

budget helps IRS achieve its longterm goals. GAO compared

performance and the requested 

budget to previous years. 

What GAO Recommends

GAO is not making any new 

recommendations, but notes past

recommendations and their

implementation status where 

relevant and identifies

opportunities for additional

savings. 

 

IRS has improved its filing season performance so far in 2006, continuing a 

trend. More refunds were directly deposited, which is faster and more 

convenient. Electronic filing continued to grow, but at a slower rate than in 

previous years. IRS’s two most commonly used services—telephone and 

Web site assistance—continued to improve. IRS estimates that the accuracy

rate for its telephone answers is now at 90 percent or more. Taxpayers 

continued the recent pattern of using IRS’s walk-in sites less and communitybased volunteer sites more. While millions of taxpayers use chain paid tax 

preparers, taxpayers may not be receiving accurate and complete assistance, 

putting them at risk of owing back taxes, interest, and penalties. 

The 2007 budget request of $11 billion (a small decrease after adjusting for 

inflation) sets performance goals for service and enforcement that are all

equal to or higher than the 2006 goals. The budget reduces funding by 15 

percent for Business Systems Modernization, the ongoing effort to replace 

IRS’s aging information systems. The reduction could impede progress 

delivering improvements to taxpayers. The budget request identified over 

$121 million in savings; however, opportunities exist for further savings. For 

example, IRS officials told us IRS’s 25 call centers have underutilized space. 

Those centers could be consolidated without affecting service to taxpayers. 

Achieving IRS’s long-term compliance goals will be challenging because the 

tax gap has persisted for many years at about its current level. In addition, 

because the effect of taxpayer service and enforcement on compliance has

never been quantified, IRS does not have a data-based plan demonstrating 

how it will achieve its goals. Nor does IRS have a plan for measuring 

compliance by 2009, the date for achieving the goals. Reducing the tax gap 

will likely require new and innovative solutions such as simplifying the tax 

code, increasing income subject to withholding, and increasing information 

reporting about income. 

Changes in Funding and Full-time Equivalent (FTE) Staff for the Fiscal Year 2007 Budget 

Request Compared to Fiscal Year 2006 Enacted Budget 

Dollars in thousands 

Fiscal year 2007

requested 

Percentage change 

fiscal years 

2006-2007 

Dollars FTEs Dollars FTEs

Processing, Assistance, & Management $4,159,893 37,126 1.58 -4.30

Tax Law Enforcement 4,764,954 49,479 1.85 -2.14

Information Systems 1,619,834 7,351 2.33 4.54

Business Systems Modernization 167,310 0 -15.08 0.00

Health Insurance Tax Credit 

Administration 14,846 17 -25.80 0.00

Total 10,726,837 93,973 1.45 -2.52

Existing user fees and reimbursables 282,543 1,503 9.17 11.33

Total program operating level $11,009,308 95,476 1.63 -2.33

Source: GAO analysis of IRS data. 

Notes: Fiscal year 2007 FTEs reflect an adjustment made after the budget was printed. Enacted 

FTEs differ from actual FTEs. 

www.gao.gov/cgi-bin/getrpt?GAO-06-499T.

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 Subcommittee: 

Since the passage of the Internal Revenue Service (IRS) Restructuring and 

Reform Act of 1998 (RRA 98)1

, IRS has made noticeable improvements to 

taxpayer services such as telephone assistance and delivered some 

modernized information systems that, among other benefits, speed up 

refunds to taxpayers. Increased funding financed some of the 

improvements, but a significant portion has been financed internally 

through efficiencies from increased electronic filing of tax returns and 

other operational improvements. 

IRS has also increased revenue collected through its enforcement 

programs; however, tax law enforcement continues to be included on our

list of high-risk federal programs.2

 This is due, in part, to the persistence of 

a large tax gap. 3

 IRS estimated the gross tax gap to be $345 billion for tax 

year 2001. After late payments by taxpayers and revenue brought in by 

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

billion.4

 Even modest progress in reducing the tax gap would yield 

significant revenue; each 1 percent reduction would likely yield nearly $3 

billion annually. 

If its 2007 budget request is a harbinger of longer term funding, IRS faces 

an era of tight budgets. Consequently, continued performance 

improvements will depend on the extent to which IRS can make more 

efficient use of limited resources to provide internal funding for the 

improvements. By indicating how resources are allocated to specific 

programs and activities within the agency, the budget request is a key 

planning tool showing where the agency intends to achieve additional 

efficiencies.

 1

Pub. L. No. 105-206 (1998). 

2

GAO, High Risk Series: An Update, GAO-05-207 (Washington, D.C.: January 2005). 

3

The tax gap is an estimate of the difference between the taxes that should have been

timely and accurately paid and what was actually paid. Throughout this statement, 

references to the tax gap refer to the gross tax gap unless otherwise noted. 

4

GAO, Tax Gap: Making Significant Progress in Improving Tax Compliance Rests on

Enhancing Current IRS Techniques and Adopting New Legislative Actions, GAO-06-453T 

(Washington, D.C.: Feb. 15, 2006). 

Page 1 GAO-06-499T Internal Revenue Service 
The 2007 budget request is also an indication of how IRS intends to 

achieve longer term goals. For the first time, IRS lists two agencywide 

long-term goals: to increase the compliance rate and reduce the proportion 

of taxpayers who think it is acceptable to cheat on their taxes.

5

 This 

budget can be viewed as a first step in a series of annual steps that will 

determine whether IRS achieves these long-term goals. 

Our statement discusses IRS’s 2006 filing season performance to date and 

fiscal year 2007 budget request. To address your request, we assessed (1) 

the interim results of IRS’s 2006 filing season performance compared to 

prior years; (2) IRS’s budget request compared to prior years; and (3) how 

the budget helps IRS achieve its long-term goals aimed at reducing the tax 

gap. 

Our assessment of the interim results of IRS’s filing season is based on 

comparing IRS’s performance this year to prior filing seasons, monitoring

various production meetings and production statistics, reviewing other 

IRS documents and reports, interviewing IRS and Treasury Inspector 

General for Tax Administration (TIGTA) officials and paid tax preparers 

and other external stakeholders, reviewing TIGTA and other external 

reports, and reviewing IRS’s Web site. Our assessment of the budget 

request is based on a comparative analysis of IRS’s fiscal year 2002 (in 

most cases) through 2007 budget requests, funding, expenditures, and 

other documentation and interviews with IRS officials. We used historical 

budget and performance data from reports and budget requests used by 

the IRS, Department of the Treasury, and Office of Management and 

Budget. In past work, we assessed IRS’s budget and performance data. 

Since the data sources and procedures for producing this year’s budget 

and performance data have not significantly changed from prior years, we 

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

statement. We did not verify IRS’s estimates for enforcement revenue and 

the tax gap. IRS presents tax gap information as supplemental information 

in its financial statements; that information is not required to be audited. 

However, we have been involved in tax gap methodology briefings, and the 

TIGTA has an ongoing review of the accuracy of IRS’s tax gap estimates. 

 5

 The Congress set one long-term goal for the IRS in RRA 98 for IRS to have 80 percent of

individual returns, business returns, and information returns filed electronically by 2007.

We and IRS have previously reported that IRS likely will not meet this goal for having 80

percent of all individual returns tax returns filed electronically by 2007. Also, IRS’s budget

describes plans to establish other agencywide goals, targets for which have not yet been

established and therefore are not listed in the budget request. 

Page 2 GAO-06-499T Internal Revenue Service 
Additionally, our analysis of IRS’s Business Systems Modernization (BSM) 

program was based primarily upon the results of our detailed review of 

IRS’s fiscal year 2006 BSM expenditure plan that we recently reported to 

you.6

 We performed our work in Washington, D.C., and Atlanta, Georgia, 

from January 2006 through April 2006, in accordance with generally 

accepted government auditing standards. 

Our statement makes these key points: 

• IRS has improved its 2006 filing season performance to date in

important areas compared to last year, continuing a recent trend. IRS’s 

returns processing has gone smoothly and over 64 percent of refunds 

are now directly deposited to taxpayers’ bank accounts, which is 

faster, more convenient and less costly than issuing paper checks. 

Electronic filing continues to grow, but at a slower rate. So far this 

filing season, electronic filing rate has increased 2.1 percentage points 

compared to an average percentage point increase of 5.1 annually for 

the previous two years. According to IRS officials, the slower rate of 

growth is due, in part, to new income limits in the Free File program, 

which reduced the number of taxpayers eligible to file electronically 

for free via IRS’s Web site, and the termination of the TeleFile

program, which eliminated electronic filing by phone. Telephone 

assistance has improved this year, in part, due to lower call volume. 

The percentage of taxpayers attempting to reach an IRS telephone 

assistor and who actually received service increased 1.6 percentage

points to 83.3 percent this filing season and the length of time 

taxpayers waited to get their calls answered decreased from 256 

seconds to 205 seconds. The accuracy of IRS’s responses to tax law 

and account questions improved—both are now at 90 percent or more. 

IRS’s Web site is being used more, is performing well based on thirdparty evaluations, and has been reconfigured with the goal of

improving taxpayer service. Taxpayers continued the recent pattern of 

using IRS’s walk-in sites less, and using sites run by community-based 

organizations and staffed by volunteers more. In addition to service 

from IRS, millions of taxpayers—particularly those with complicated 

returns—receive service from paid preparers.7

 However, we recently

 6

GAO, Business Systems Modernization: Internal Revenue Service’s Fiscal Year 2006 

Expenditure Plan, GAO-06-360 (Washington, D.C.: Feb. 21, 2006). 

7

 As noted in our report, complicated returns are defined as those using the Form 1040 as

opposed to the Form 1040EZ, those claiming itemized deductions and not the standard

deduction, and those claiming the Earned Income Tax Credit. 

Page 3 GAO-06-499T Internal Revenue Service 
reported8

 that chain paid tax preparers may not be providing accurate 

and complete assistance, putting taxpayers at risk of owing back taxes, 

interest, and penalties. 

• IRS’s fiscal year 2007 proposed budget is $11 billion, which is a small 

decrease compared to the 2006 enacted level after adjusting for 

expected inflation. 9 For service, the budget proposes to cut staffing by 

4 percent. For enforcing tax laws, the budget proposes to cut staffing 

by 2 percent. However, for service and enforcement, the budget sets 

performance goals for 2007 that are higher than or equal to those for 

2006. For maintaining and operating IRS’s existing information systems 

(IS), the 2007 budget request shows an increase in resources when 

compared to the 2006 enacted budget. However, when compared to the 

level currently assumed for 2006, the 2007 budget request leaves Fulltime Equivalents (FTE)10 for IS virtually constant. For the BSM 

program, which is the ongoing effort to replace the agency’s aging 

information systems, the budget proposes to reduce spending by about 

15 percent. This reduction could delay delivery of improved services 

for taxpayers. As it has in prior years, IRS’s budget request identifies 

savings—the 2007 budget proposes to save over $121 million and 1,424 

FTEs. However, additional opportunities exist for savings. One would 

be to increase electronic filing by additional use of mandates. IRS 

currently mandates electronic filing by large corporations and 12 states 

currently mandate electronic filing of individual income tax returns by 

certain tax preparers. Another opportunity would be to consolidate 

IRS’s 25 telephone call sites. IRS officials told us that the call sites have 

space that is not used for 850 staff. Call sites could be consolidated 

without affecting service to taxpayers. Finally, IRS has long been 

hampered by a lack of current and accurate cost information for 

making resource allocation decisions. IRS recently implemented 

components of a cost accounting system, but needs to continue 

gathering the cost data needed to make it an effective planning tool. 

 8

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

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

9

The Congressional Budget Office is estimating inflation to be 1.8 percent in 2007. 

Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2007 to 

2016. (Washington, D.C.: January 2006). 

10 According to IRS, a FTE is the equivalent of one person working full-time for one year 

with no overtime. A staff year includes overtime. Therefore, the cost of 1 staff year is equal 

to the cost of 1 FTE plus overtime. 

Page 4 GAO-06-499T Internal Revenue Service 
• IRS’s budget request sets two long-term goals: increasing the rate of 

voluntary compliance from 83 percent to 85 percent by 2009 and 

reducing the percentage of taxpayers who think it is acceptable to 

cheat on their taxes from 10 percent to 9 percent in 2008. These goals 

will be challenging to meet because the tax gap has persisted at a 

relatively stable level of 81 to 84 percent for many years. However, 

because the effect of taxpayer service and enforcement on compliance 

has never been quantified, IRS does not have a data-based plan 

demonstrating how it will use its programs to achieve its goals and 

reduce the tax gap. Nor does IRS have a plan for measuring compliance 

by 2009. Reducing the tax gap will likely require new and innovative 

solutions such as simplifying the tax code, increasing income subject to 

withholding, and increasing information reporting about income. 

Despite these limitations, IRS’s budget request includes several 

proposals for increasing compliance that would not require additional 

resources for IRS. For example, the Department of the Treasury plans 

to study, and we have long supported, clarifying the definition of 

independent contractors and requiring additional information reporting 

on their income, steps that could increase tax revenue by billions of 

dollars. 

IRS improved its 2006 filing season performance in important areas that 

affect large numbers of taxpayers. This continues a trend of improvement 

since at least 2002. Returns processing has gone smoothly and electronic

filing continues to grow, although at a slower rate than in previous years. 

Taxpayer assistance has improved in the two most commonly used 

services—toll-free telephones and the Internet Web site. Fewer taxpayers 

visited IRS’s walk-in sites, and more sought assistance at volunteer-staffed 

sites. 

IRS’s Filing Season 

Performance to Date 

Has Improved in

Important Areas, 

Continuing a Recent 

Trend 

Return Processing Has 

Been Smooth and 

Electronic Filing 

Continues to Grow, 

Although At a Slower Rate 

Than Previous Years 

From January 1 through April 14, 2006, IRS processed 91.8 million 

individual income tax returns. Of those returns, 63.4 million returns were 

filed electronically (up 2.3 percent) and 28.3 million returns were filed on 

paper (down 7.1 percent). 

According to IRS data and officials, returns processing has gone smoothly 

so far this filing season. IRS issued 78 million refunds, 50 million, or 64 

percent of which were directly deposited, up 5.4 percent over the same 

period as last year. Direct deposit is faster, more convenient for taxpayers,

and less expensive for IRS than mailing paper checks. 

Page 5 GAO-06-499T Internal Revenue Service 
Because of the volume of tax returns, it is normal for IRS to experience 

some processing disruptions, although this year, disruptions have not been 

significant. For example, 13 different tax forms were unavailable for 

electronic filing until February 1 due to the late hurricane relief legislation,

which caused a minor processing delay for some returns. 

Furthermore, IRS officials said that the new Customer Account Data 

Engine (CADE), which is intended eventually to replace IRS’s antiquated 

Master File system containing taxpayer records, processed over 6 million 

returns and dispersed 5.3 million refunds as of April 14, 2006 without 

disruptions. IRS is reporting that direct deposit refunds and paper check 

refunds are being issued within 4 and 6 business days, respectively, after

tax returns are posted to CADE, which is faster than for returns processed 

by the Master File system. CADE’s growth in future years will directly 

benefit taxpayers. Not only can it speed up refunds, but it also updates 

taxpayer account information quicker than the Master File system. 

Representatives of the taxpayer industry corroborated IRS’s view that the 

filing season is going smoothly. Groups and organizations that we talked 

to included the National Association of Enrolled Agents, the American 

Institute of Certified Public Accountants, and others. In addition, the 

TIGTA recently testified that thus far it has seen no significant problems 

during the filing season.11

The growth of electronic filing is important, because it generates savings 

by reducing staff years needed for labor intensive paper processing. 

Between fiscal years 1999 and 2006, IRS reduced the number of staff years 

devoted to paper and electronic processing by 1,586, or 34 percent as 

shown in figure 1. 

 11 Written statement of Treasury Inspector General for Tax Administration, J. Russell 

George, before the Committee on Appropriations, Subcommittee on Transportation, 

Treasury and Housing and Urban Development, the Judiciary, District of Columbia, and

Independent Agencies, U.S. House of Representatives, Hearing on the Internal Revenue

Service’s Fiscal Year 2007 Budget, Washington, D.C., Mar. 29, 2006. 

Page 6 GAO-06-499T Internal Revenue Service 
Figure 1: Number of Individual Returns and IRS Staff Years for Individual Paper and

Electronic Processing, Fiscal Years 1999-2007 

a

Fiscal years 2006 and 2007 are IRS projections. 

Note: Staff years and FTE are units of measurement that are often used interchangeably. As noted in 

the figure, staff years for paper filing are for selected major activities only. 

Electronic filing continues to grow but at a slower rate than previous 

years. This year’s 2.1 percent rate of growth is less than the average annual 

rate of growth of 5.1 percent for each of the preceding 2 years. According

to IRS officials, the slower growth in electronic filing this year is due, in 

part, to changes in the Free File program, which reduced the number of 

taxpayers eligible to file electronically for free this year and reduced 

publicity and advertising by companies involved in that program, and the 

termination of the TeleFile program, which eliminated the way for 

taxpayers to file their returns electronically via telephone. 

Page 7 GAO-06-499T Internal Revenue Service 
The Free File program enables taxpayers to file their returns electronically 

via IRS’s Web site. Through IRS’s Web site, taxpayers can access the Web 

sites of 20 companies comprising the Free File Alliance. The alliance is a 

consortium of tax preparation companies that agreed to offer free return 

preparation and electronic filing for taxpayers that meet certain criteria 

(see app. 1 for further detail). In an amended agreement with IRS that took

effect this year, the Free File Alliance set a $50,000 income limitation on 

taxpayer participation. This limit was absent last year and reduced the

number of taxpayers eligible to participate in the program. As of April 13,

2006, IRS processed about 3.5 million free file returns, which is a decrease 

of 24 percent from the same period last year. This decline is inconsistent 

with IRS’s projection that it would receive 6 million tax returns filed 

through the Free File program, almost a million more compared to last 

year. 

For 2006, IRS terminated the TeleFile program. IRS expected that 

eliminating TeleFile would reduce electronic filing, but justified the 

decision because of declining usage and relatively high costs. The number 

of taxpayers using the program had been decreasing—from approximately 

5.7 million in 1999 to 3.8 million in 2004. IRS estimated the cost per tax 

return submitted through TeleFile, typically Form 1040EZ, to have been 

$2.63 versus $1.51 for a return filed on paper, largely due to contractor, 

telecommunications, and other costs. Given the limitations of IRS’s cost 

accounting system, the validity of these figures is unknown. IRS officials 

stated that the reason for this year’s increase in the number of 1040EZ 

returns filed on paper is due, in part, to the elimination of TeleFile. 

Through April 14, 2006, the number of 1040EZ returns filed on paper has 

increased 20 percent from last year. 

Options for increasing electronic filing, in particular mandated electronic 

filing, will be discussed in the budget section of this statement. 

Page 8 GAO-06-499T Internal Revenue Service 
Taxpayers’ ability to access IRS’s telephone assistors and the accuracy of

answers provided improved compared to previous years. From January 1 

through April 15, 2006, IRS answered approximately 31 million phone 

calls, which is about a 7 percent decline from the same period last year.12

The call volume has been less than projected by IRS and less than was 

assumed when IRS set staffing levels for telephone assistors for the filing 

season. IRS officials offered several explanations for the unexpected 

decline in call volume. One explanation is that more taxpayers are using 

improved tax preparation software, which reduces their need to call IRS.

Another explanation is that more taxpayers are getting through to a 

telephone assistor the first time they call, thus reducing the need for 

taxpayers to call again. 

Telephone Access and 

Accuracy Improved, in 

Part Due to Lower Call 

Volume

As shown in table 1, the percentage of taxpayers who attempted to reach

an assistor and actually got through and received service—referred to as 

the level of service—is 83.3 percent so far this filing season compared to 

81.7 percent over the same period last year—and greater than its 2006 

fiscal year goal of 82 percent. According to IRS officials, one possible 

explanation for the improvement in access is the decline in overall call 

volume. When call volume decreases, taxpayers are likely to wait less time 

to speak with an IRS telephone assistor. As a result, fewer taxpayers 

would likely hang up, increasing the percentage of taxpayers who get 

through to an assistor. 

IRS also reported that, so far this filing season, the average speed of 

answer (length of time taxpayers wait to get their calls answered) is down 

51 seconds from the same time last year to 205 seconds, a decrease of 

about 20 percent, and significantly better than IRS’s 2006 fiscal year goal 

of 300 seconds. IRS also reported that the rate at which taxpayers 

 12Despite less demand overall, call volume increased from affected taxpayers in federallydeclared disaster areas. IRS maintains a special services hotline (1-866-562-5227) to provide

assistance on questions related to hurricane relief and combat zone participation. Between

January 1 and April 15, 2006, the hotline answered 63,203 calls, an increase of 195 percent 

over the same period in 2005. According to IRS officials, the hotline received primarily 

combat zone calls in 2005 because there were so few federally-declared disaster areas. 

Therefore, IRS officials attribute the 2006 increase to the three major hurricanes in 2005. 

Page 9 GAO-06-499T Internal Revenue Service 
abandoned their calls13 to IRS decreased from 12 percent to 9.7 percent 

compared to the same period last year. 

Table 1: IRS Telephone Assistance Performance in the First Weeks of the Filing Seasons, 2002 through 2006

2002 2003 2004 2005 2006

Telephone assistance 

Total callsa (volume in thousands) 51,148 40,805 41,647 33,935 31,540

Answered by assistors 14,799 14,987 15,915 14,804 13,709

Answered by automation 36,349 25,818 25,732 19,132 17,831

Assistor level of service 66.5% 82.4% 84.7% 81.7% 83.3%

Average speed of answerb 253 seconds 175 seconds 187 seconds 256 seconds 205 seconds

Accounts customer accuracy rate estimatesc89.3%

+/- 0.7%

89.1%

+/- 0.5%

89.3% 

+/- 0.6% 

91.6%

+/- 0.5%

92.9%

+/- 0.5%

Tax law customer accuracy rate estimatesc84.0%

+/- 0.5%

82.0%

+/- 0.8%

77.7% 

+/- 1.0% 

88.2%

+/- 0.8%

90.0%

+/- 0.8%

Source: IRS. 

a Total calls (i.e., calls answered by assistors and automation) and CSR level of service are based on 

actual counts from January 1 to April 20, 2002; April 19, 2003; April 17, 2004; April 16, 2005; and 

April 15, 2006. 

b From January 1 to April 20, 2002; April 19, 2003; April 17, 2004; April 16, 2005; and April 15, 2006.

c

Based on a representative sample estimated at the 90 percent confidence interval from January 

through March 2002, 2003, 2004, 2005, and 2006.

Using a statistical sampling process, IRS estimates that the accuracy of 

telephone assistors’ responses to taxpayers’ tax law and account questions 

improved compared to last year. IRS estimates its tax law accuracy rate to

be 90 percent, an increase of 1.9 percentage points over the same time 

period last year, continuing an improvement since 2004.14 Additionally, IRS

estimates that the accuracy rate to taxpayers’ inquiries about their 

 13IRS divides abandoned calls into two subsets, primary abandons and secondary 

abandons. Primary abandons occur when callers hang up before being put into queue to

wait for an available assistor. Secondary abandons are the number of callers who hang up

after being put into the queue to wait for an assistor. In November 2004, IRS established a 

program to help determine where primary abandons occur within the IRS scripts.

According to IRS officials, looking at the number and percentage of where callers hang up

highlights opportunities where IRS can improve its menu prompt phrasings in a way that 

would be more beneficial for callers. 

14IRS’s customer account and tax law accuracy rates are estimated from representative 

samples. Based on these estimates, accuracy rates for 2006 were statistically better than 

those of 2005. 

Page 10 GAO-06-499T Internal Revenue Service 
accounts, to be 92.9 percent this year compared to 91.6 percent over the 

same period last year, continuing an improvement since 2003. IRS officials 

attribute these improvements in performance to several factors, including

better and more timely performance feedback for telephone assistors, 

increased assistor experience, better training, and increased use of the 

Probe and Response Guide, a script used by telephone assistors to 

understand and respond to tax law questions. 

IRS’s Web Site Is Being 

Used More, Is Performing 

Well, and Has Been 

Reconfigured with the 

Goal of Improving 

Taxpayer Service 

Use of IRS’s Web site has increased so far this filing season compared to 

prior years based on the number of visits and downloads. From January 1 

through March 31, IRS’s Web site was visited 95 million times by visitors 

who downloaded 90 million forms and publications. The number of visits 

reflects a 7.5 percent increase over the same period last year while the 

number of forms and publications downloaded has increased by 34 

percent. 

Further, IRS’s Web site is performing well. For example, 

• we found IRS’s Web site to be readily accessible, easy to navigate, and 

easy to search, 

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

Web sites, reported that IRS’s Web site has repeatedly ranked second 

out of 40 government agencies evaluated in terms of average download 

time. The same study also reported that IRS has repeatedly ranked first 

out of the most commonly accessed government related Web sites for 

response time and success rate, and

• the American Consumer Satisfaction Index overall customer 

satisfaction with IRS’s Web site increased from 68 to 72 percent after 

IRS reconfigured the site. 

IRS reconfigured its Web site for the 2006 filing season. According to IRS 

officials, the goal for reconfiguring the Web site was to improve overall 

customer service through easier navigation and a more effective search 

function. As a result, the number of Web site searches has decreased by 51

percent, from 108 million during the same period last year to 52.5 million 

this year. Typically, search functions are used when users fail to find 

information through links. According to IRS officials, the decrease in the

number of searches indicates that users are finding the information that 

they need faster. 

Page 11 GAO-06-499T Internal Revenue Service 
IRS also added the following new features to its Web site this year: 

• Electronic IRS: The Electronic IRS brand reconfigured the IRS’s Web 

site and made it easier to locate items, as evidenced by the decline in 

searches; 

• Alternative Minimum Tax (AMT) Assistant: Helps taxpayers determine 

if they do not owe AMT; and 

• Help for Hurricane Victims: A special link that provides victims of the 

recent hurricanes information on special tax relief, assistance and how 

to get help with tax matters. 

IRS’s Web site continues to include several important features in addition 

to the Free File program: 

• Where’s My Refund, which allows taxpayers to check on the status of 

their refunds. As of April 15, 2006, 24 million taxpayers accessed the 

Where’s My Refund feature to check on the status of their tax refunds. 

This was a 17 percent increase from the same period last year; and 

• Electronic Tax Law Assistance, where taxpayers can ask IRS general 

tax law questions via its Web site. From January 1 through April 14, 

2006, IRS received 10,160 emails requesting tax law assistance (down 

over 43 percent compared to last year). As of March 31, 2006, IRS 

estimated the accuracy rate of IRS’s responses to tax law questions 

submitted via the Web site, to be 85 percent, similar to 2005. However, 

the average number of days that it took IRS to respond to tax law 

questions submitted via the Web site was 2.2 days, compared to 1.2 

days in 2005. 

Page 12 GAO-06-499T Internal Revenue Service 
Fewer taxpayers have used IRS’s 400 walk-in sites so far in the 2006 filing 

season compared to the same period in prior years. Staff at walk-in sites 

provide taxpayers with information about their tax accounts and answer 

taxpayers’ questions within a limited scope of designated tax law topics, 

such as those related to income, filing status, exemptions, deductions, and 

related credits.15 Walk-in site staffs also provide need-based tax return 

preparation assistance, limited to taxpayers meeting certain

requirements.16 As of April 1, 2006, the total number of contacts at IRS’s 

walk-in sites declined by approximately 12 percent compared to last year. 

The decline thus far this year is consistent with the annual trends in walkin use shown in figure 2, including IRS’s projection for 2006. The declines 

in the number of taxpayers using IRS’s walk-in sites, including for tax 

return preparation, are also consistent with IRS’s strategy to reduce its 

costly face-to-face assistance by providing taxpayers with additional 

options, such as IRS’s toll-free telephone service, Web site, and numerous 

volunteer sites. It is unclear, however, whether the declining volume is an

indicator of how well IRS is meeting taxpayers’ demand for face-to-face 

assistance. For example, IRS does keep track of the number of taxpayers 

entering a walk-in site, taking a number to queue for service, but then 

leaving the site without receiving service. If a taxpayer did not take a 

number, IRS would have no way of counting those taxpayers. 

Taxpayers Continue Their 

Recent Pattern of Using 

IRS’s Walk-In Sites Less 

and Using Volunteer Sites 

More, And Information 

About the Quality of 

Service Remains Limited 

IRS officials said the types of services offered at walk-in sites remained 

constant for most sites from 2005 to 2006. For sites in areas with a high 

number of natural disaster victims, IRS expanded the types of assistance 

provided. For example, IRS adjusted the type of tax law questions that it 

would answer at walk-in sites to include casualty loss and removed 

income limitations for disaster victims seeking return preparation 

assistance at walk-in sites. 

 15IRS considers some tax law questions to be out of scope related to businesses and 

corporations, for example. If staff cannot answer taxpayer’s questions, they are required to 

refer taxpayers to IRS’s telephone service or Web site. 

16Return preparation assistance is limited to taxpayers with income of $38,000 or less. 

According to IRS, this limitation approximates the amount set in the tax code for claiming

the Earned Income Tax Credit. IRS has required appointments for most taxpayers seeking 

this assistance since 2003. 

Page 13 GAO-06-499T Internal Revenue Service 
Figure 2: Assistance Provided at IRS Walk-in Sites and Volunteer Sites, 2001 – 2006 Filing Seasons (contacts in millions) 

0

1

2

3

4

5

6

Other walk-in contacts

Return preparation at walk-in sites

2007a 2006a 2001 2002 2003 2004 2005

Fiscal year

Source: GAO analysis of IRS data.

Millions at IRS walk-in sites

0

1

2

3

4

5

6

Return preparation at volunteer sites

2007a 2006a 2001 2002 2003 2004 2005

Fiscal year

Millions at IRS volunteer sites

IRS

projections

IRS

projections

0.79 0.67 0.47 0.31

0.24 0.22 0.21 0.95 1.07 1.37 1.50 1.69 1.77 1.82

4.27

4.32

3.86

3.54

3.23 3.01 2.77

Note: “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, 

2001, 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; and December 26, 2004, through 

April 23, 2005. 

a

Fiscal years 2006 and 2007 are IRS projections. For walk-in sites, projections cover the time periods 

of December 25, 2005 through April 22, 2006, and December 31, 2006 through April 28, 2007. For 

volunteer sites, projections cover the time periods from January 1 through April 30, 2006 and 2007. 

In contrast to IRS walk-in sites, the number of taxpayers seeking return 

preparation assistance at approximately 14,000 volunteer sites has 

increased this year by 8.7 percent, continuing the trend since 2001 (see fig. 

2). These sites, often run by community-based organizations and staffed by 

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

services IRS provides at walk-in sites, but instead focus on preparing tax

returns primarily for low-income and elderly taxpayers and operate chiefly

Page 14 GAO-06-499T Internal Revenue Service 
during the filing season. As we have previously reported,17 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.

IRS has used both walk-in and volunteer sites to provide relief efforts for 

federally-designated disaster zones such as in hurricane-affected areas. 

IRS developed a Disaster Referral Services Guide and new training 

materials for employees to better equip them to address disaster-related 

issues. In addition to the expanded services for disaster victims at IRS 

walk-in sites noted above, volunteer sites performed outreach within their 

network of partners by creating training material for tax preparers, and 

agreeing with two organizations to accept referrals from IRS of disaster 

victims needing tax return preparation assistance.

IRS continues to lack reliable data on the quality of the services provided

at walk-in and volunteer sites. As in previous years, TIGTA is conducting 

an audit on the accuracy of some services provided at walk-in sites, 

although the results will not be available until after the filing season. 

However, TIGTA has noted problems with the quality of services provided

at IRS walk-in sites in prior reports.18 We have made recommendations for 

IRS to improve its quality measurement at walk-in sites.19 At volunteer 

sites, IRS is conducting different types of reviews to monitor tax return 

preparation assistance.20 According to IRS officials, the results to date 

show that the quality of service has improved at volunteer sites compared 

 17GAO, 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, 2004). 

18Treasury Inspector General for Tax Administration, Coordination and Monitoring Are

Needed for Continued Improvement in the Tax Return Preparation Process at the 

Taxpayer Assistance Centers, Reference No. 2004-40-147, (Washington, D.C.: 2005), and

Treasury Inspector General for Tax Administration, Customer Accuracy at Taxpayer

Assistance Centers Showed Little Improvements During the 2005 Filing Season, 

Reference No. 2005-40-146, (Washington, D.C.: 2003). 

19See GAO-05-67 and GAO-06-51. 

20The different types of reviews include site reviews to measure the administrative aspects 

of a volunteer site such as readiness. IRS plans on conducting 825 of these site reviews. IRS 

also plans on conducting 2,475 return reviews, approximately 3 during each site review, 

which will involve on-site review of the return for accuracy and discretionary reviews for 

problem sites not operating in accordance with the IRS’s guidelines. 

Page 15 GAO-06-499T Internal Revenue Service 
to previous years, but they acknowledge that challenges remain in terms of 

volunteers’ adherence to IRS’s procedures and use of IRS materials. As in 

previous years, TIGTA will conduct limited quality reviews at volunteer 

sites. While the results of those reviews are based on a judgmental sample, 

TIGTA has concluded in the past that, while significant improvements 

have been made in the oversight of volunteer sites, continued effort is 

needed to ensure the accuracy of tax return assistance provided.21

Taxpayers Using Chain 

Paid Tax Preparers May 

Receive Incorrectly

Completed Tax Returns 

In addition to service from IRS, millions of taxpayers receive service, such 

as tax return preparation, from paid preparers. About 56 percent of about 

130 million individual tax returns filed for tax year 2002 used a paid tax 

preparer, with higher paid preparer usage among taxpayers with more 

complicated returns.22 

We recently reported, however, that some preparers make serious errors 

when completing returns. Based on our very limited sample of 19 paid tax

preparers, taxpayers who rely on tax preparers to provide them with 

accurate, complete, and fully compliant tax returns may not get what they

pay for. For example, during visits to paid preparers, tax returns prepared 

for GAO often varied widely from what we determined the returns should

and should not include, sometimes with significant consequences. Their 

work resulted in unwarranted extra refunds of up to almost $2,000 in 5 

instances, while in 2 cases they cost the taxpayer over $1,500. 

Some of the most serious problems involved paid preparers: 

• not reporting business income in 10 of 19 cases; 

• not asking about where a child lived or ignoring GAO’s answer to 

the question therefore allowing an ineligible child to be claimed 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. 

 21Treasury Inspector General for Tax Administration, Significant Improvements Have

Been Made in the Oversight of the Volunteer Income Tax Assistance Program, but 

Continued Effort Is Needed to Ensure the Accuracy of Services Provided, Reference No. 

2006-40-004, (Washington, D.C.: 2005). 

22 As noted in our report, complicated returns are defined as those using the Form 1040 as 

opposed to the Form 1040EZ, those claiming itemized deductions and not the standard

deduction, and those claiming the earned income credit. 

Page 16 GAO-06-499T Internal Revenue Service 
Many of the problems we identified put paid preparers, taxpayers, or both 

at risk of IRS enforcement actions. According to IRS officials, paid 

preparers and taxpayers risk enforcement action by filing a tax return that

includes the types of misstatements or omissions we reported. According 

to the officials, if IRS were to uncover problems with the preparation of 

real tax returns similar to several that we found, the preparers would be 

subject to civil sanctions. If an erroneous return was prepared, in addition

to paying the correct tax due and any related late payment interest, the 

taxpayer may also be assessed a penalty, depending on the facts and 

circumstances of each situation, according to IRS officials. For example, if 

taxpayers substantially understate income, overstate deductions, or 

provide other incorrect information resulting in decreased tax or 

improperly high refunds, they may be assessed an accuracy-related 

penalty. The penalty could be assessed for any failure to comply with the 

tax laws, including the failure to report self-employment income (further 

discussion on the consequences of the errors of paid tax preparers is 

provided in the discussion on the tax gap). 

IRS’s fiscal year 2007 budget request is a small decrease compared to 2006 

enacted levels after adjusting for expected inflation. It proposes to reduce 

overall staffing levels, as well as staffing levels for taxpayer service and

enforcement activities, while maintaining or improving taxpayer service 

and enforcement. As it has in prior years, IRS has identified some savings, 

but additional opportunities exist for enhancing savings. 

IRS’s Budget 

Proposes Decreases 

in Staffing and 

Identifies Savings, but 

Opportunities for 

Additional Savings 

Exist 

IRS’s Budget Proposes 

Decreases in Funding After 

Adjusting for Expected 

Inflation and in Staffing 

IRS’s proposed fiscal year 2007 budget is $11 billion (a 1.6 percent 

increase), but after adjusting for expected inflation, it reflects a slight 

decrease over last year’s enacted budget. The $11 billion includes $417 

million from new and existing user fees and reimbursable agreements with

Page 17 GAO-06-499T Internal Revenue Service 
other federal agencies.23 The 2007 budget request for IRS’s appropriation 

accounts is shown in table 2 (see app. II for more details).24

Table 2: IRS’s Changes in Funding and FTEs for Fiscal Years 2006 through 2007 

Dollars in thousands 

Fiscal year 2007 requested

including new user fee revenue Fiscal year 2006 enacted

Percentage change

fiscal year 2006–2007 

 Dollars FTEs Dollars FTEs Dollars FTEs

Processing, Assistance, and 

Management (PAM) 

$4,159,893 37,126 $4,095,212 38,796 1.58 -4.30

Tax Law Enforcement (TLE) 4,764,954 49,479 4,678,498 50,559 1.85 -2.14

IS 1,619,834 7,351 1,582,977 7,032 2.33 4.54

BSM 167,310 0 197,010 0 -15.08 0.00

Health Insurance Tax Credit 

Administration (HITCA) 

14,846 17 20,008 17 -25.80 0.00

Total $10,726,837 93,973 $10,573,706 96,404 1.45 -2.52

Existing user fees and 

reimbursablesa

$282,543 1,503 $258,820 1,350 9.17 11.33

Total program operating level $11,009,380 95,476 $10,832,526 97,754 1.63 -2.33

Source: GAO analysis of IRS data. 

Notes: For fiscal year 2007, the figures shown for requested FTEs reflect an IRS adjustment and 

differ slightly from what IRS reported in its budget request. The Congressional Budget Office projects

the inflation rate to be 1.8 percent in 2007; therefore, IRS’s proposed increases are less than the rate

of inflation. 

a

Reimbursables are payments IRS receives for providing services to other federal agencies and 

states. 

The real decrease in the proposed budget can be seen in staffing. IRS 

proposes to fund 95,476 FTEs in fiscal year 2007, down over 2 percent 

from 97,754 FTEs in enacted fiscal year 2006 (see table 5 in app. II for 

comparisons in enacted FTE levels for fiscal years 2002 through 2007). 

 23According to IRS, the $417 million estimate is based on receiving $135 million from 

increasing existing user fees and establishing new ones. IRS has committed to distributing

the $135 million over its PAM, TLE, and IS accounts, exclusively for taxpayer service. The 

remaining user fees will be used as needed by IRS. 

24The PAM appropriation account primarily funds functions related to taxpayer service 

which includes funding for enforcement; TLE primarily funds enforcement activities but 

includes funding for taxpayer services; IS funds information technology support and

improvements for legacy systems which support both taxpayer services and enforcement;

BSM funds the new modernized business system; and HITCA administers a refundable tax

credit for health insurance for qualified individuals. We did not review the HITCA account

as part of our work.

Page 18 GAO-06-499T Internal Revenue Service 
Actual FTEs tend to be lower than enacted FTEs, in part, because of how 

IRS absorbs unbudgeted costs (see table 6 in app. II for actual FTEs). 

The decrease in FTEs may be greater than shown in IRS’s fiscal year 2007

budget request. Every year agencies, including IRS, are expected to absorb

some costs that are not included in their budget requests. For fiscal year 

2007, IRS officials currently anticipate having to absorb over $117 million 

in costs, including about $41 million for homeland security-related 

controls over physical access to government facilities. Absorbing such 

costs reduces the actual number of FTEs that IRS can support. For 

example, for fiscal year 2005, the enacted level of FTEs was 96,435 but the 

actual level was 94,282. 

IRS is requesting $4.2 billion for PAM, including some user fees, which is 

funding primarily spent on providing service to taxpayers.25 The amount 

requested is about a 1.6 percent increase over fiscal year 2006 enacted

levels, but is a slight decrease after adjusting for expected inflation. This 

funding level translates into reduced staffing, down over 4 percent from an 

enacted level of 38,796 FTEs in fiscal year 2006 to 37,126 proposed FTEs in 

fiscal year 2007. Since fiscal year 2002, FTEs devoted to PAM have 

declined over 15 percent from an enacted level of 43,866 FTEs. 

IRS’s Budget Request Proposes 

to Maintain or Improve

Taxpayer Services with Fewer 

Resources 

Despite the proposed inflation-adjusted decrease in funding in 2007, IRS is 

planning to maintain or improve taxpayer services. For every one of the 

major taxpayer services listed in the budget, 2007 planned performance 

goals are higher or equal to 2006 performance goals. These services 

include telephone assistance and refund issuance. 

 25IRS has funding in other appropriation accounts that support its taxpayer service 

programs. 

Page 19 GAO-06-499T Internal Revenue Service 
IRS is requesting $4.8 billion for TLE. 26 The 2007 budget request proposes 

an overall decrease in enforcement FTEs, down over 2 percent to a 

proposed 49,479 FTEs from last year’s enacted level of 50,559 FTEs. For 

its three main categories of skilled enforcement staff, IRS is proposing a 

marginal increase in staffing of 0.2 percent (see fig. 3). For special agents 

(those who perform criminal investigations), the increase is 1.7 percent.

For the other two categories—revenue agents (those who examine 

complex returns), revenue officers (those who perform field collection 

work)—IRS is proposing to keep the number of staff the same as in 2006. 

IRS’s Budget Request Reduces 

Enforcement Staffing Slightly, 

While Increasing Major

Enforcement Activities 

 26In his recent testimony, the IRS Commissioner said that if the Congress failed to provide 

funding outside the program integrity cap adjustment it could potentially jeopardize past

gains. This year, IRS is seeking $137 million outside the cap. 

Page 20 GAO-06-499T Internal Revenue Service 
Figure 3: Revenue Agents, Revenue Officers, and Special Agents, Fiscal Years 

1998- 2007 

0

5,000

10,000

15,000

20,000

25,000

Total agents

Special agents

Revenue officers

Revenue agents

2007a 2006a 1998 1999 2000 2001 2002 2003 2004 2005

Full-time equivalents

Fiscal year

Source: GAO analysis of IRS data.

IRS

projections

Notes: Numbers for 2006 and 2007 are IRS estimates. IRS recalculated the figures since GAO 

reported them last year. GAO is using the new figures because IRS has validated those figures using 

its new cost accounting system. 

Despite keeping skilled enforcement staff virtually unchanged, IRS is 

proposing to maintain or increase its major enforcement activities. For all 

the major enforcement activities listed in the budget, IRS is establishing 

goals in 2007 that are higher or equal to 2006 planned performance goals.

Major enforcement activities include individual taxpayer examinations, 

collection coverage,

27 and criminal investigations completed. IRS officials 

anticipate increased revenue collected and other performance 

improvements as a result of using data from IRS’s most current

 27The number of collection cases closed or otherwise eliminated compared to the total 

number of collection cases in inventory. 

Page 21 GAO-06-499T Internal Revenue Service 
compliance research effort, known as the National Research Program 

(NRP).28

IRS is requesting about $1.6 billion for IS in fiscal year 2007, which is 

intended to fund information technology (IT) staff and related costs for 

activities such as information security and maintenance and operations of 

its current tax administration systems. Although the number of FTEs 

proposed in 2007 is up when enacted FTEs are considered, it is virtually 

the same as the operating level currently assumed in 2006 (see app. II for 

more details). 

Budget Request for IS Funding 

is Up Slightly, and IRS Has 

Taken Additional Steps to 

Improve Budgeting for IS 

Operations and Maintenance 

In 2002, we reported that the agency did not develop its fiscal year 2003 IS

operations and maintenance budget request in accordance with the 

investment management approach used by leading organizations. We 

recommended that IRS prepare its future budget requests in accordance 

with these best practices.

29 To address our recommendation, IRS agreed to 

take a variety of actions, which it has made progress in implementing. For 

example, IRS planned to develop a capital planning guide to implement 

processes for capital planning and investment control, budget formulation 

and execution, business case development, and project prioritization. In 

August 2005, IRS issued the initial version of its IT Capital Planning and 

Investment Control (CPIC) Process Guide, which (1) provides executives 

with the framework within which to select, control, evaluate, and maintain 

the portfolio of IT investments to best meet IRS business goals and (2) 

defines the governance process that integrates the agency’s IT investments 

with the strategic planning, budgeting, and procurement processes. 

According to IRS officials and documentation, the agency formulated its 

prioritized fiscal year 2007 IT portfolio and associated budget request, 

including operations and maintenance requirements, in accordance with 

this CPIC Process Guide. We will continue to monitor the implementation 

of IRS’s CPIC process as its IT investment management process matures. 

 28 NRP replaced the Taxpayer Compliance Measurement Program, which last measured 

compliance for individuals for 1988 but was canceled because of concerns about costs and

burdens on taxpayers. GAO, Tax Administration: New Compliance Research Effort Is on 

Track, but Important Work Remains, GAO-02-769 (Washington, D.C.: June 27, 2002) and 

Tax Administration: Status of IRS’ Efforts to Develop Measures of Voluntary 

Compliance, GAO-01-535 (Washington, D.C.: June 18, 2001) discuss the development of the 

NRP study.

29GAO, Internal Revenue Service: Improving Adequacy of Information Systems Budget 

Justification, GAO-02-704 (Washington, D.C.: June 28, 2002). 

Page 22 GAO-06-499T Internal Revenue Service 
In addition, IRS stated that it planned to develop an activity-based cost 

module to plan, project, and report costs for business tasks/activities 

funded by the IS budget. During fiscal year 2005, as part of the first release 

of the Integrated Financial System (IFS),30 IRS implemented a cost module 

that is potentially capable of allocating costs by activity. However, agency 

officials stated that they needed to accumulate 3 years of actual costs to 

have the historical cost data necessary to provide a basis for meaningful 

future budget estimates. Since then, according to the Office of the Chief 

Financial Officer, IRS has (1) populated the cost module with all actual 

fiscal year 2005 expenses; (2) identified the data needed from IFS to 

support its budget requests; and (3) developed a system to capture, test, 

and analyze the cost data to devise a standard methodology to provide the 

necessary data from the cost module. IRS still expects to have the 

requisite 3 years of historical cost data available in time to support 

development of the fiscal year 2010 budget request. Although IRS has 

made progress in implementing best practices in developing its IS 

operations and maintenance budget, until IRS completes the actions 

necessary to fully implement the activity–based cost module, the agency 

will not be able to ensure that its request is adequately supported. 

BSM is a high-risk, highly complex effort that involves developing and 

delivering a new set of information systems that are intended to replace 

the agency’s aging tax processing and business systems. The program is 

critical to supporting IRS’s taxpayer service and enforcement goals. 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. It also helps IRS considerably in 

providing the reliable and timely financial management information 

needed to account for the nation’s largest revenue stream and better 

enable the agency to both determine and justify its resource allocation 

decisions and budget requests. 

IRS’s Proposed BSM Budget 

Reduction Could Impede 

Future Progress 

IRS’s fiscal year 2007 budget request of $167.3 million for the BSM 

program reflects a reduction of about 15 percent (and even greater when 

adjusted for expected inflation), or about $30 million, from the enacted 

fiscal year 2006 budget of $197 million. 

 30IFS replaces aspects of IRS’s core financial systems and is ultimately intended to operate 

as its new accounting system of record. The first release of this system became fully 

operational in January 2005. 

Page 23 GAO-06-499T Internal Revenue Service 
Over the past year, IRS has made further progress in implementing BSM, 

although some key projects did not meet short-term cost and schedule 

commitments. During 2005 and the beginning of 2006, IRS deployed 

additional releases of several modernized systems that have delivered 

benefits to taxpayers and the agency, including CADE, e-Services (a new 

Web portal and electronic services for paid tax preparers), and 

Modernized e-File (a new electronic filing system). While three BSM 

project releases were delivered within the cost and/or schedule 

commitments presented in the fiscal year 2005 expenditure plan, others 

experienced cost increases or schedule delays. For example, two IFS and 

Modernized e-File project release segments experienced cost increases of 

93 percent31 and 29 percent, respectively. As we have previously reported,32

the BSM program has had a history of cost increases and schedule delays 

that have been due, at least in part, to deficiencies in various management 

controls and capabilities that have not yet been fully corrected. IRS is in 

the process of implementing our prior recommendations to correct these 

deficiencies.

IRS has identified significant risks and issues that confront future planned 

system deliveries. For example, according to IRS, schedule delays and 

contention for key resources between multiple releases of CADE 

necessitated the deferral of some functionality. This deferral, in 

conjunction with additional recently reported risks and issues, may 

negatively impact the cost, schedule, and functionality for future CADE 

releases. The agency recognizes the potential impact of these project risks 

and 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 also has made additional progress in addressing high-priority BSM 

program improvement initiatives during the past year, including initiatives

related to shifting the role of systems integrator from the prime contractor

to IRS and establishing requirements management standards—an initiative 

on which we recently issued a report to you, Mr. Chairman, and made a 

 31IRS recently reported that it plans to redirect about $5 million of unobligated funding

from the IFS project to program management reserve, which would reduce this cost

overrun. 

32For example, see GAO, Business Systems Modernization: Internal Revenue Service’s 

Fiscal Year 2005 Expenditure Plan, GAO-05-774 (Washington, D.C.: July 22, 2005). 

Page 24 GAO-06-499T Internal Revenue Service 
number of recommendations for improvement.33 IRS’s program 

improvement process appears to be an effective means of assessing, 

prioritizing, and addressing BSM issues and challenges. However, much 

more work remains for the agency to fully address these issues and 

challenges. 

In addition, in response to our prior recommendation, IRS is developing a 

new Modernization Vision and Strategy to address BSM program changes 

and provide a modernization roadmap. According to the Associate Chief 

Information Officer for BSM, the agency’s new strategy focuses on 

promoting investments that provide value in smaller, incremental releases

that are delivered more frequently, with the goal of increasing business 

value. IRS is currently finalizing a high-level vision and strategy as well as

a more detailed 5-year plan for the BSM program. We believe these actions

represent sound steps toward addressing our prior recommendation to 

fully revisit the vision and strategy and develop a new set of long-term 

goals, strategies, and plans consistent with the budgetary outlook and with 

IRS’s management capabilities. Further, this strategy is important because

it will describe how and when IRS will receive the full benefits from its 

modernization efforts, such as when CADE will be able to replace the 

Individual Master File. 

While the requested fiscal year 2007 BSM budget will allow IRS to 

continue the development and deployment of the CADE, Modernized eFile, and Filing and Payment Compliance (F&PC)34 projects, the proposed 

reduced funding level would likely affect the agency’s ability to deliver the 

functionality planned for the fiscal year and could result in project delays 

and/or scope reductions. This could, in turn, impact the long-term pace 

and cost of modernizing tax systems and of ultimately improving taxpayer

service and strengthening enforcement. For example, according to IRS 

documents, the agency had planned to spend $85 million in fiscal year 

2007 to develop and deploy additional CADE releases that would enable

the system to process up to 50 million individual tax returns by the 2008 

filing season and issue associated refunds faster. However, with a 

 33GAO, Business Systems Modernization: IRS Needs to Complete Recent Efforts to

Develop Policies and Procedures to Guide Requirements Development and Management, 

GAO-06-310 (Washington, D.C.: Mar. 20, 2006). 

34F&PC is a series of projects expected to provide support for detecting, scoring, and

working nonfiler (filing compliance) and delinquency (payment compliance) cases. The

first phase of F&PC is Private Debt Collection, which will use advanced software to analyze 

tax collection cases and divide them into the complex cases requiring IRS involvement and 

the less complex (balance due) cases that can be handled by private collection agencies. 

Page 25 GAO-06-499T Internal Revenue Service 
proposed budget of $58.5 million—over 30 percent less than anticipated—

IRS would likely have to scale back its planned near-term work on this 

project. In addition, the reductions to the planned budgets for the 

Modernized e-File and F&PC projects may also result in IRS having to

redefine the scope and/or reassess schedule commitments for future 

project releases. 

The proposed BSM budget reduction would also significantly reduce the 

amount allotted to program management reserve by about 82 percent 

(from $13 million in fiscal year 2006 to $2.3 million in fiscal year 2007). If 

BSM projects have future cost overruns that cannot be covered by the 

depleted reserve, this reduction could result in increased budget requests 

in future years or delays in planned future activities. 

While the BSM program still faces challenges, IRS has recently made 

progress in delivering benefits and addressing project and program-level 

risks and issues. Reducing BSM funds at a time when benefits to taxpayers 

and the agency are being delivered could adversely impact the momentum 

gained from recent progress and result in delays in the delivery of future 

benefits. However, until IRS addresses our prior recommendation by 

clearly defining its future goals for the BSM program as well as the impact 

of various funding scenarios on meeting these goals in its new 

Modernization Vision and Strategy, the long-term impact of the proposed 

budget reduction is unclear. 

IRS’s Budget Request 

Identified Some Savings, 

but Opportunities Exist for 

Enhancing Savings 

In its 2007 budget request, IRS identified savings as it has done in prior 

years and plans to redirect some of those savings to front-line taxpayer 

service and enforcement activities. IRS is proposing to save over $121 

million and 1,424 FTEs by, for example, automating the process of 

providing an individual taxpayer identification number to those taxpayers 

ineligible for a Social Security number and improving data collection 

techniques and work processes for enforcement activities through 

increased financial reporting requirements and scanning and imaging 

techniques. 

IRS’s history of realizing savings proposed in past budget requests 

provides some confidence that the agency will be able to achieve savings 

in fiscal year 2007. For example, IRS reported it realized 88 percent of the

anticipated dollar savings and 86 percent of the anticipated staff savings 

identified in the fiscal year 2004 budget request. IRS also reported 

exceeding the savings targets in the fiscal year 2005 budget request (see 

app. III). 

Page 26 GAO-06-499T Internal Revenue Service 
In addition to the areas identified by IRS in its budget request, there may 

be additional opportunities for efficiency gains. 

• Increasing electronic filing: In an era of tight budgets, continued 

growth in electronic filing may be necessary to help fund future 

performance improvements. One proposal for continuing to increase 

electronic filing is additional use of electronic filing mandates.

Currently, IRS mandates electronic filing for large corporations. The 

2007 budget request proposes a legislative change that would expand 

its authority to require electronic filing for businesses. Moreover, 12

states now mandate electronic filing for certain classes of tax preparers 

(see app. IV for more information on state mandates). As we have 

reported,35 although there are costs and burdens likely to be associated 

with electronic filing mandates for paid tax preparers and taxpayers, 

state mandates have generated significant increases in electronic filing. 

IRS has an electronic filing strategy, which the agency is updating. 

• Changing the menu of taxpayer services: IRS currently lacks a 

comprehensive strategy explaining how its various taxpayer services 

(including its telephone, walk-in, volunteer, and Web site assistance) 

will collectively meet taxpayer needs. In response to a Congressional 

directive,36 IRS is developing such a strategy. The strategy is important 

because some taxpayers may not be well served by the current service 

offerings. IRS’s attempts to reduce some taxpayer services, namely 

reducing the hours of telephone operations and closing some walk-in 

sites, have met with resistance from the Congress. Although 

 35GAO-06-51. 

36In the H.R. Conf. Rep. No. 109-307 (2005), the Congress directed the IRS, in conjunction

with the IRS Oversight Board and the National Taxpayer Advocate, to develop a 5-year plan

for taxpayer service activities and report to the House and Senate Committees on 

Appropriations by April 14, 2006. According to IRS officials, the Department of the 

Treasury has reviewed an initial report; that report is now under review at the Office of 

Management and Budget, prior to being submitted to the Congress. 

Page 27 GAO-06-499T Internal Revenue Service 
congressional directives to study the impact of IRS’s actions exist,37 we 

still believe there may be opportunities to adjust IRS’s menu of services 

to reduce costs, without affecting IRS’s ability to meet taxpayers’ 

needs. 

• Consolidating telephone call sites: IRS operates 25 call sites throughout 

the country. Consistent with earlier plans, IRS closed two of its 

smallest call sites—Chicago and Houston—in March 2006, to realize 

savings in its toll-free telephone operations. Also, IRS has gained 

efficiencies from using a centralized call router located in Atlanta. As a 

result, there are currently more than 850 workstations that are not 

being used; consequently, IRS may have the potential to close several 

additional call sites. Consolidations would not affect telephone service 

and would be invisible from the taxpayer’s perspective.

Managing a federal agency as large and complex as IRS requires managers 

to constantly weigh the relative costs and benefits of different approaches 

to achieving the goals mandated by the Congress. Management is 

constantly called upon to make important long-term strategic as well as 

daily operational decisions about how to make the most effective use of

the limited resources at its disposal. As constraints on available resources 

increase, these decisions become correspondingly more challenging and 

important. In order to rise to this challenge, management needs to have 

current and accurate information upon which to base its decisions, and to 

enable it to monitor the effectiveness of actions taken over time so that 

appropriate adjustments can be made as conditions change. 

Accurate Cost Information 

Would Help IRS Make 

Resource Allocation Decisions, 

and Help Provide Some 

Information about the Return 

on Investment for its Programs 

In its ongoing effort to make such increasingly difficult resource allocation 

decisions and defend those decisions before the Congress, IRS has long 

been hampered by a lack of current and accurate information concerning

 37In Pub. L. No. 109-115, § 205, (Nov. 30, 2005), the Congress directed the IRS not to reduce

taxpayer services as the IRS proposed in fiscal year 2006 until TIGTA completed a study on

the impact of such reductions on taxpayer compliance and services. Further, IRS was 

directed, to consult with stakeholder organizations, including, but not limited to, the IRS 

Oversight Board, National Taxpayer Advocate, TIGTA and Internal Revenue employees

with respect to any efforts by the IRS to terminate or reduce significantly any taxpayer 

service activity. Pub. L. No. 109-148, § 5021 (Dec. 30, 2005) extends above provisions to

include any reduction in available hours of telephone taxpayer assistance below the levels 

in existence during the month of October 2005. In March 2006, TIGTA released its study on

IRS’s plans to close 68 of its 400 walk-in sites, concluding that in IRS’s plan was based on

inaccurate data (see Treasury Inspector General for Tax Administration, The Taxpayer

Assistance Center Closure Plan Was Based on Inaccurate Data, Reference No. 2006-40-

061 (Washington, D.C.: 2005)). 

Page 28 GAO-06-499T Internal Revenue Service 
the costs of the various options being considered. Instead, management 

often has relied on a combination of the limited existing cost information; 

the results of special analysis initiated to establish the full cost of a 

specific, narrowly defined task or item; and estimates based on the best 

judgment of experienced staff. This has impaired IRS’s ability to properly 

decide which, if any, of the options at hand are worth the cost relative to

the expected benefits. For example, accurate and timely cost information 

may help IRS consider changes in the menu of taxpayer services that it 

provides by identifying and assessing the relative costs, benefits, and risks 

of specific projects. Without reliable cost information, IRS’s ability to 

make such difficult choices in an informed manner is seriously impaired 

and IRS cannot prepare cost-based performance measures to assist in 

measuring the effectiveness of its programs over time. 

Further, IRS does not have the capability to develop reliable information 

on the return on investment for each category of taxpayer service and 

enforcement. IRS lacks reliable information on both the return from 

services (the additional revenue collected by helping taxpayers 

understand their tax obligations) and the investment or cost of the 

services. While developing return on investment information is difficult, 

the cost component of that equation may be the least complex to develop. 

Having such cost information is a building block for developing return on

investment estimates. For its enforcement programs, IRS has developed a 

rough measure of return on investment in terms of tax revenue that is 

directly assessed from uncovering noncompliance. Continuing to develop

return on investment measures could help officials make more informed 

decisions about allocating resources.38 Even without return on investment 

information, cost information can help IRS determine if, for example, IRS 

should change the menu of services provided. 

As discussed in the BSM section, in fiscal year 2005, IRS implemented a

cost accounting module as part of IFS. However, while this module has 

much potential and has begun accumulating cost information, IRS has not 

yet determined what the full range of its cost information needs are or 

how best to tailor the capabilities of this module to serve those needs. 

Also, IRS does not have an integrated workload management system 

which would provide the cost module with detailed allocation of 

 38Developing such measures is difficult because of incomplete information on all the costs 

and all the tax revenue ultimately collected from specific enforcement efforts, as well as 

incomplete information on the indirect tax revenues generated when current enforcement

actions prompt voluntary compliance improvements in the future. 

Page 29 GAO-06-499T Internal Revenue Service 
personnel cost information.39 In addition, as noted in developing its IS 

budget, because it generally takes several years of historical cost 

information to support meaningful estimates and projections, IRS cannot 

yet rely on IFS as a significant planning tool. It will likely require several 

years, implementation of additional components of IFS, and integration of

IFS with IRS’s tax administration activities before the full potential of 

IFS’s cost accounting module will be realized. Furthermore, IRS’s fiscal 

year 2007 BSM budget request does not include funding for additional 

releases of IFS. In the interim, IRS decision making will continue to be 

hampered by inadequate underlying cost information. 

For the first time, IRS’s budget request sets long-term goals aimed at 

reducing the tax gap, although IRS does not have a data-based plan for 

achieving the goals. However, because of its persistence, reducing the tax 

gap requires solutions which go beyond funding and staffing for IRS. 

IRS Sets Long-Term 

Goals, but Lacks a 

Data-Based Plan for 

Achieving the Goals, 

and Addressing the 

Tax Gap Requires 

Solutions Beyond 

Funding and Staffing 

for IRS 

IRS’s Budget Proposes 

Long-Term Goals, but 

Lacks a Data-Based Plan 

for Achieving Them 

IRS established two agencywide, long-term performance goals, as shown 

in table 3. IRS plans to improve voluntary compliance from 83 percent in 

2005 to 85 percent by 2009, and reduce the number of taxpayers who think 

it is acceptable to cheat on their taxes from 10 percent in 2005 to less than

9 percent in 2010. According to IRS, these are the first in a series of 

quantitative goals that will link to its three strategic goals—improve 

taxpayer service, enhance tax law enforcement, and modernize IRS 

through technology and processes. 

 39 IRS had planned to develop a workload management system, but has postponed this

project indefinitely, due to budget constraints. 

Page 30 GAO-06-499T Internal Revenue Service 
Table 3: IRS Agencywide Goals for Fiscal years 2004 through 2010 

Performance 

level 

Fiscal year 

2004 actual 

performance 

Fiscal year 

2005 actual 

performance 

Fiscal year

2006 planned 

performance

Fiscal year

2007 planned 

performance

Fiscal year 

2008 planned 

performance 

Fiscal year

2009 planned 

performance

Fiscal year

2010 planned 

performance

Improve 

voluntary 

compliance N/A 83.0% N/A N/A N/A 85.0% N/A

Reduce the 

percentage of 

taxpayers who 

think it is 

acceptable to 

cheat on their 

taxes 12.0% 10.0% 10.0% 10.0% 9.0% <9.0% <9.0%

Source: IRS. 

These goals will be challenging to meet, because for three decades, IRS 

has consistently reported a persistent, relatively stable tax gap. Although 

IRS has made a number of changes in its methodologies for measuring the 

tax gap, which makes comparisons difficult, regardless of methodology 

used, the voluntary compliance rate that underpins the gap has tended to

range from around 81 percent to around 84 percent. 

Because of a lack of quantitative estimates of how changes to its service 

and enforcement programs affect compliance, IRS is unable to show in a 

data-based plan how it will use those programs to reach the two long-term 

goals shown in table 3. If IRS could quantify the impact of its service and 

enforcement programs on the compliance rate or attitudes towards 

cheating, it could use the information to show the kinds of changes to the 

programs needed to achieve the long-term goals and how best to direct 

resources towards achieving those goals. Unfortunately, quantifying the

impact of IRS’s service and enforcement programs on compliance or 

cheating is very challenging. The type of data needed to make such a link

does not currently exist, and may not be easy to collect. 

Lacking such quantitative estimates, IRS must take a more qualitative

approach in its plans for increasing compliance, which would likely also 

involve changing attitudes towards cheating. IRS’s overall approach to 

reducing the tax gap consists of improving service to taxpayers and 

enhancing enforcement of the tax laws. We recently reported that IRS has 

Page 31 GAO-06-499T Internal Revenue Service 
taken a number of steps that may improve its ability to reduce the tax

gap.40 Favorable trends in staffing of IRS enforcement personnel; 

examinations performed through correspondence, as opposed to more 

complex face-to-face examinations; and the use of some enforcement 

sanctions such as liens and levies are encouraging. Also, IRS has made 

progress with respect to abusive tax shelters through a number of 

initiatives and recent settlement offers that have resulted in billions of 

dollars in collected taxes, interest, and penalties. Finally, IRS has 

continually improved taxpayer service by increasing, for example, the 

accuracy of responses to tax law questions. 

The effect of this overall approach and the 2007 budget proposal will have 

on voluntary compliance has not been quantified by IRS. Therefore, the 

Congress will have to rely on the IRS Commissioner for qualitative 

explanations, of why, in his judgment, IRS’s mix of taxpayer service and 

enforcement and overall approach for reducing the tax gap, including the

2007 budget proposal, will be sufficient to start IRS on a path towards 

achieving its long-term goals. More specifically, such explanations could 

include a clear statement of which service and enforcement programs 

have priorities for expansion because they are expected to contribute the 

most to increasing the compliance rate and the evidence that supports that 

judgment. 

In addition, IRS lacks a plan for measuring progress towards one goal—

improving voluntary compliance. IRS plans to measure progress towards 

the second goal—reducing the percentage of taxpayers who think it is 

acceptable to cheat—via the IRS Oversight Board’s annual Taxpayer 

Attitude Survey. 

Nevertheless, IRS recently estimated voluntary compliance as part of the 

NRP study, which reviewed the compliance of a random sample of 

individual taxpayers and used those results to estimate compliance for the

population of all taxpayers. The study took several years to plan and 

execute. In addition to providing an estimate of the compliance rate, the 

study’s results will be used to better target IRS’s audits of potentially noncompliant taxpayers. Better targeting reduces the burden on taxpayers 

because IRS is better able to avoid auditing compliant taxpayers. 

 40GAO-06-453T. 

Page 32 GAO-06-499T Internal Revenue Service 
At this time, however, IRS has not made plans to repeat the study in time 

to measure compliance by 2009. Furthermore, doing compliance studies

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

is happening in the intervening years. Annual estimating of the compliance 

rate could provide information that would enable IRS management to 

adjust plans as necessary to help achieve the goal in 2009. One option that 

would not increase the cost of estimating compliance would be to use a 

rolling sample. IRS Oversight Board officials and we agree that instead of

sampling, for example, once every 5 years, one-fifth of the sample could be 

collected every year. The total sample could include 5 years worth of 

data—with each passing year the oldest year would be dropped from the 

sample and the latest year added. The availability of current research data 

would allow IRS to more effectively focus its service and compliance 

efforts. 

Addressing the Tax Gap 

Requires Solutions Beyond 

Funding and Staffing for 

IRS 

For years, we have reported that tax law enforcement is a high-risk area, 

in part because of the size of the gross estimated tax gap, which IRS most 

recently estimated to be $345 billion for tax year 2001. IRS estimated it 

would recover around $55 billion through late payments and enforcement 

revenue, resulting in a net tax gap of around $290 billion.41 Reducing the 

tax gap would yield significant revenue and even modest progress, such as 

a 1 percent reduction, would likely yield nearly $3 billion annually. In 

recent years, IRS reported increases in enforcement revenue—revenue 

brought in as a result of IRS taking enforcement action. Between fiscal 

years 2003 and 2005, IRS reported that enforcement revenue grew from 

$37.6 billion to $47.3 billion, with a level of $48.1 billion estimated for 2006. 

However, the voluntary compliance rate has persisted at a relatively stable

level. 

Further, GAO recently reported that tax returns prepared by paid tax 

preparers often contained errors such as unwarranted extra refunds and 

underreported income. These findings are consistent with NRP data which 

indicate that tax returns prepared by paid preparers contained a 

significant level of errors. These errors, whether they are the fault of the 

preparer or the result of taxpayers providing incomplete or inaccurate

information, contribute to the tax gap. 

 41GAO-06-453T. 

Page 33 GAO-06-499T Internal Revenue Service 
We have reported that significant reductions in the tax gap will likely 

require exploring new and innovative solutions.42 Such solutions that may 

not require significant additional IRS resources, but are nonetheless 

difficult to achieve, include 

• simplifying the tax code to make it easier for individuals and 

businesses to understand and comply with their tax obligations; 

• increasing tax withholding for income currently not subject to

withholding; 

• improving information reporting; and

• leveraging technology to improve IRS’s capacity to receive and process 

tax returns. 

IRS’s 2007 budget request includes five new legislative proposals to 

address some of these solutions to reduce the tax gap, along with a 

proposal to study independent contractor compliance that would not 

require additional resources. In recent testimony, the IRS Commissioner 

stated that the amount of enforcement revenue IRS expects from the 

legislative proposals will be $3.6 billion over the next 10 years (about 0.1 

percent of the tax gap). However, the proposals should also increase 

revenue voluntarily paid without any IRS enforcement actions. The 

amount of that revenue is uncertain. The IRS Commissioner recognizes the 

implications of the tax gap and states in the budget that addressing it is a 

top priority. Although IRS’s 2007 budget request does not propose 

allocating IRS resources to new initiatives to reduce the tax gap, according

to IRS officials, they plan to continue initiatives identified in prior budgets. 

For example, IRS has two ongoing BSM projects—F&PC and Modernized 

e-File—which, according to IRS’s Associate Chief Information Officer for 

BSM, could help reduce the tax gap. F&PC is expected to increase IRS’s 

capacity to resolve the growing backlog of delinquent taxpayer cases and

increase collections, while Modernized e-File is expected to help make it 

easier for IRS to process tax returns, look for irregularities, and track 

down unpaid taxes. 

The budget request states that the administration will study the standards 

used to distinguish between employees and independent contractors for 

 42GAO-06-453T. 

Page 34 GAO-06-499T Internal Revenue Service 
purposes of paying and withholding income taxes. We have long supported 

efforts aimed at improving independent contractor compliance.43 Past IRS 

data have shown that independent contractors report 97 percent of the 

income that is reported on information returns to IRS, while contractors 

that do not receive these information returns report only 83 percent of 

income. We have also identified other options for improving information 

reporting by independent contractors, including increasing penalties for 

failing to file required information returns, lowering the $600 threshold for 

requiring such returns, and requiring businesses to separately report on 

their tax returns the total amount of payments to independent 

contractors.44 We previously reported that clarifying the definition of 

independent contractors and extending reporting requirements for those 

contractors could possibly increase tax revenue by billions of dollars.45

Two of the legislative proposals call for more information reporting on 

payment card transactions from certain businesses and on payments by 

federal, state, and local governments to businesses. Information reporting 

has been shown to significantly reduce noncompliance. Although 

information reporting is highly effective in encouraging compliance, such 

reporting imposes costs and burdens on the businesses that implement it. 

However, information reporting is a way to significantly increase 

voluntary compliance without increasing IRS’s budget. 

Mr. Chairman, this completes my prepared statement. I would be happy to

respond to any questions you or other members of the subcommittee my 

have at this time. 

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

White, Director, Strategic Issues, on 202-512-9110 or whitej@gao.gov.or 

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

on 202-512-9296 or pownerd@gao.gov. Contact points for our Offices of 

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

of this statement. Individuals making key contributions to this testimony 

Contacts and 

Acknowledgments 

 43GAO, Tax Administration: Approaches for Improving Independent Contractor 

Compliance, GAO/GGD-92-108 (Washington, D.C.: July 23, 1992). 

44GAO-06-453T. 

45GAO, Opportunities for Congressional Oversight and Improved Use of Taxpayer Funds,

GAO-04-659 (Washington, D.C.: May 7, 2004). 

Page 35 GAO-06-499T Internal Revenue Service 
include Joanna Stamatiades, Assistant Director; Amanda Arhontas; Paula 

Braun; Terry Draver; Paul Foderaro; Chuck Fox; Tim Hopkins; Kathryn 

Horan; Hillary Loeffler; Sabine Paul; Cheryl Peterson; Neil Pinney; Steve 

Sebastian; Tina Younger.

Page 36 GAO-06-499T Internal Revenue Service 
Page 37 GAO-06-499T Internal Revenue Service 

Appendix I: Differences Between the 2002 

and 2005 Free File Agreements 

In 2002, Internal Revenue Service (IRS) entered into a 3-year agreement 

with the Free File Alliance, a consortium of 20 tax preparation companies 

to provide free electronic filing to taxpayers who access any of the 

companies via a link on IRS’s Web site. The 2002 Free File Agreement 

stated that as part of the agreement, IRS would not compete with the 

Consortium in providing free, online tax return preparation and filing 

services to taxpayers. 

IRS and the Consortium amended the agreement in 2005. Key differences 

between the two agreements are: the new income limitation of $50,000 and 

new language in the amendment that states the Alliance members must 

disclose early on if state tax return services are available, and if so, 

whether a fee will be charged for such services; and provide the necessary 

support to accomplish a customer satisfaction survey. It also added 

language pertaining to the marketing and offering of Refund Anticipation

Loans (RALs)1

 whereby:

• No offer of free return preparation and filing of an electronic return in 

the free file program shall be conditioned on the purchase of a RAL; 

and 

• RALs will be offered with clear language indicating, for example, that 

RALs are loans, not a faster way of receiving an IRS refund; must be 

repaid even if the IRS does not issue a full refund; are short-term loans 

interest rates may be higher and customers may wish to consider using 

other forms of credit; and may be offered but not promoted. 

IRS tests each Consortium member’s software to ensure it is in 

accordance with the Free File provisions, including those cited previously, 

before allowing a link to IRS’s Web site. In addition, IRS officials monitor 

complaints about the Free File program received via IRS.gov, including 

allegations regarding false, deceptive, or misleading information or 

advertising. While IRS does not track the number of complaints it receives, 

according to IRS officials, most of the complaints received thus far were a 

result of the taxpayer either not carefully reading or following 

instructions, or incorrectly entering information. GAO conducted limited 

testing of the Free File program and found that the Consortium members 

were complying with the terms outlined in the amended Free File 

agreement pertaining to RALs. 

 1

 Refund Anticipation Loans are very short-term loans issued while taxpayers wait for their 

refunds. 
The amended Free File agreement contains provisions that enable IRS to 

monitor taxpayer participation beginning in the 2006 filing season, unlike 

prior years where Free File Alliance members self-reported filing figures. 

IRS also tracks the number of free file users who are accepting any 

financial products, such as RALs. As of April 17, IRS reported that 207,814 

free file returns accepted financial products. This represents about 5 

percent of all returns filed through the Free File program. 

The number of taxpayers using free file to electronically file their 

individual income tax returns has increased steadily from 2.8 million in 

2003, to 3.5 million in 2004, to 5.1 million in 2005. The substantial growth 

between 2004 and 2005 was due to, in part, several Consortium members 

offering free filing to all taxpayers through the free file program regardless 

of their income in 2005. However, according to IRS officials, the lack of 

income limitation created conflict among Consortium members as it put 

pressure on all Alliance members to offer free service, which may not have 

been economically feasible for some, threatening competition if members 

were to drop out of the Alliance. 

IRS projected that 6.1 million taxpayers would use free file in 2006. 

However, this projection may be optimistic, because between January 1 

and April 13, IRS has reported receiving only 3.5 million free file returns 

compared to 4.6 million during the same period last year, a decline of 24 

percent. According to IRS officials, contributing factors to this decline are,

in part, due to decreased press attention and advertising by the 

participating companies and the income limitation. The income limitation 

provides coverage to 70 percent of the nation’s taxpayers, or more than 92

million people. This coverage includes taxpayers with an adjusted gross 

income of $50,000 or less. 

Page 38 GAO-06-499T Internal Revenue Service 
Page 39 GAO-06-499T Internal Revenue Service 

Appendix II: Comparison of IRS’s Actual and 

Enacted Funding and Full-Time Equivalents, 

Fiscal Years 2002 through 2007 

For fiscal year 2007, the Internal Revenue Service (IRS) has requested 

$10.7 billion in its appropriation accounts. This request consists of $10.6 

billion in direct appropriations and $135 million in revenue from new user

fees, which IRS will commit to taxpayer service activities in its Processing, 

Assistance, and Management (PAM), Tax Law Enforcement (TLE), and 

Information System (IS) accounts. In addition, IRS is projecting to collect

and use $282 million from existing user fees and reimbursable agreements 

with states and other federal agencies. This brings IRS’s proposed fiscal 

year 2007 budget to approximately $11 billion (a 1.6 percent increase over 

fiscal year 2006). After adjusting for expected inflation, IRS’s $11 billion 

budget request reflects a slight decrease from last year’s enacted budget. 

IRS’s enacted budgets for its appropriation accounts from fiscal years 2002 

through 2007 are shown in table 4. IRS’s enacted budget has increased 

almost 8 percent since fiscal year 2002. By far, the biggest percentage

increase has been in TLE—almost 21 percent—and is reflective of the shift

in resources devoted to TLE from PAM during this period. The biggest 

percentage decrease was in the Business Systems Modernization (BSM) 

program, down almost 58 percent. 

Table 4: IRS’s Funding for Fiscal Years 2002 through 2007 

Dollars in thousands

Fiscal year 

2007 

Fiscal year 

2006

Fiscal year 

2005

Fiscal year 

2004

Fiscal year 

2003 

Fiscal year 

2002

Fiscal year 

2002 - 2007

 Requested

including new

user fees Enacted Enacted Enacted Enacted Enacted

Percentage

change

PAM $4,159,893 $4,095,212 $4,056,857 $4,009,205 $3,930,064 $3,982,971 4.44

TLE 4,764,954 4,678,499 4,363,539 4,171,244 3,849,884 3,940,741 20.92

IS 1,619,834 1,582,977 1,577,768 1,581,575 1,621,834 1,620,905 -0.07

BSM 167,310 197,010 203,360 387,699 363,621 391,593 -57.27

HITCA 14,846 20,008 34,562 34,794 69,545 NA NA

Total appropriations

requested $10,726,837 $10,573,706 $10,236,087 $10,184,517 $9,834,948 $9,936,210 7.96

Source: GAO analysis of IRS data. 

Notes: Numbers may not add due to rounding. Fiscal year 2007 includes $135 million in new user fee

revenue distributed in PAM, TLE, and IS accounts. Without user fees, IRS is requesting $4,045,122

for PAM, $4,762,327 for TLE, and $1,602,232 for IS. 

Tables 5 and 6 show IRS’s enacted and actual Full-time Equivalents (FTEs) 

for fiscal years 2002 through 2007. Overall, actual FTEs tend to be lower 
than enacted FTEs due in part to the way IRS funds its unbudgeted costs. 

When both enacted and actual FTEs are considered, FTEs for PAM have 

steadily decreased and, for the most part, FTEs for TLE have increased 

since fiscal year 2002. However, steady trends are not apparent when 

comparing enacted and actual FTEs in IRS’s IS account. For example, 

when enacted FTEs are considered, IS staffing appears to fluctuate up and

down between fiscal years 2002 through 2007; yet, when actual FTEs are 

considered, IS staffing decreased from fiscal year 2002 through 2005 and 

increased from fiscal years 2005 to 2006. IRS officials attribute these 

fluctuations in FTEs to reorganizations and other factors. 

Tables 5 and 6 also show significant differences in percentage changes 

between enacted and actual FTEs in some of IRS’s appropriations 

accounts from fiscal years 2006 to 2007. The enacted level of FTEs is the 

number IRS projected it could support given the level of funding the 

Congress enacted. According to IRS officials, enacted levels tend to be 

overstated compared to actual FTEs for several reasons. First, IRS, like 

most federal agencies, does not receive its budgets when expected and 

cannot fill all positions. Also, as the costs of maintaining current FTE 

levels increase annually, IRS is not able to realize all of the FTEs it 

projects to fund with the appropriations the Congress enacts. 

Table 5: IRS’s Enacted FTEs for Fiscal Years 2002 through 2007 

 

Fiscal year 

2007 

Fiscal year 

2006 

Fiscal year 

2005

Fiscal year 

2004

Fiscal year 

2003

Fiscal year 

2002 

Fiscal year 

2006 - 2007

Fiscal year 

2002 - 2007

 

Requested Enacted Enacted Enacted Enacted Enacted

Percentage

change

Percentage

change

PAM 37,126 38,796 39,901 42,332 43,452 43,774 -4.30 -15.19

TLE 49,479 50,559 49,132 49,147 47,478 48,628 -2.14 1.75

IS 7,351 7,032 7,385 7,559 7,445 7,499 4.54 -1.97

BSM 0 0 0 0 0 NA 0.00 NA

HITCA 17 17 17 17 6 NA 0.00 NA

Total 93,973 96,404 96,435 99,055 98,381 99,901 -2.52 -5.93

Source: GAO analysis of IRS data. 

Notes: Fiscal year 2007 requested FTEs reflect an adjustment after the budget was printed. Also, we 

are not reporting FTEs for user fees and reimbursable as shown in an earlier section of this 

statement, because we were unable to obtain this information for all years in time for this statement. 

Page 40 GAO-06-499T Internal Revenue Service 
Table 6: IRS’s Actual FTEs from Fiscal Years 2002 through 2007 

 

Fiscal year 

2007 

Fiscal year 

2006 

Fiscal year 

2005

Fiscal year 

2004

Fiscal year 

2003

Fiscal year 

2002 

Fiscal year 

2006 - 2007

Fiscal year 

2002 - 2007

 

Requested 

Operating

Level Actual Actual Actual Actual

Percentage

change

Percentage

change

PAM 37,126 38,308 38,710 41,436 43,452 44,191 -3.09 -15.99

TLE 49,479 49,721 48,544 47,704 47,478 48,238 -0.49 2.57

IS 7,351 7,340 7,015 7,279 7,445 7,773 0.15 -5.43

BSM 0 0 0 0 0 NA 0.00 NA

HITCA 17 17 13 12 6 NA 0.00 NA

Total 93,973 95,386 94,282 96,431 98,381 100,202 -1.48 -6.22

Source: GAO analysis of IRS data. 

Notes: Fiscal year 2007 requested FTEs reflect an adjustment after the budget was printed. Also, we 

are not reporting FTEs for user fees and reimbursable as shown in an earlier section of this 

statement, because we were unable to obtain this information for all years in time for this statement. 

In its fiscal year 2006 budget request, IRS showed its budget distributed by 

taxpayer services and enforcement, including IS funding for those areas, 

because the agency’s current appropriation accounts are not divided 

clearly between taxpayer service and enforcement. As table 7 shows, 

funding for enforcement increased 15 percent between fiscal years 2004 

and 2007 to $6.96 billion, while funding for taxpayer service declined over

3 percent to almost $3.6 billion. 

Table 7: IRS’s Funding for Taxpayer Service and Enforcement for Fiscal Years 2004 through 2007 

Dollars in Millions 

Fiscal year 2007 

requested

Fiscal year 2006 

enacted

Fiscal year 2005 

enacted

Fiscal year 2004 

enacted

Percentage change

2004-2007

Taxpayer Service $3,583 $3,533 $3,606 $3,710 -3.4

Enforcement $6,961 $6,824 $6,392 $6,052 15.0

Source: GAO analysis of IRS data. 

Note: IRS’s taxpayer service and enforcement programs are funded through its PAM, TLE, and IS 

accounts. 

Page 41 GAO-06-499T Internal Revenue Service 
Page 42 GAO-06-499T Internal Revenue Service 

Appendix III: IRS’s Estimated and Actual 

Savings and Reinvestments 

In its 2007 budget request, the Internal Revenue Service (IRS) is proposing 

to save over $121 million and 1,424 Full-time Equivalents (FTEs) and 

reinvest over $12 million and 11 FTEs. Based on IRS’s ability to achieve 

prior year savings and reinvestments as shown in table 8, we have a basis 

to believe that IRS will achieve most, if not all, of these savings. For 

example, IRS reported it realized 88 percent of its anticipated budget 

savings and 86 percent of its anticipated staff savings for savings identified

in its fiscal year 2004 budget request, and IRS reported exceeding savings

targets in fiscal year 2005. 

Table 8: IRS’s Estimated and Actual Savings and Reinvestments for Fiscal years 2004 through 2007 

Dollars in Thousands 

Fiscal year 2004 

actual 

Fiscal year 2005 

actual 

Fiscal year 2006 

estimate 

Fiscal year 2007 

estimate 

Dollars FTEs Dollars FTEs Dollars FTEs Dollars FTEs

Savingsa

Budgeted $160,872 1,993 $110,841 1,442 $230,096 2,230 $121,596 1,424

Actual $141,142 1,711 $127,239 1,628 $226,908 2,230 NA NA

Percentage realized

between Budgeted and 

Actualb 88 86 115 113 99 100 NA NA

Reinvestmentsa

Budgeted $141,419 602 $66,343 359 $95,893 805 $12,237 11

Actual $118,330 313 $96,481 958 $92,030 805 NA NA

Percentage realized

between Budgeted and 

Actualb

84 52 145 267 96 100 NA NA

Source: GAO analysis of IRS data. 

Note: Fiscal year 2007 FTE savings reflect an adjustment after the budget was printed. 

a

IRS considers savings to be gained through process or systems improvements and reinvestments to 

be those savings that were realized and available for other purposes. 

b

IRS reported actuals for 2004 and 2005, and year-end projections for 2006. 
Appendix IV: State Mandates 

Of the 50 states, 12 have electronic filing mandates for tax preparers in 

effect for the 2006 filing season (see fig. 4). The mandates differ in their 

implementation dates and schedules, thresholds for filing, and penalties. 

The differences between mandates may affect the magnitude of electronic

filing increases in each state. 

Figure 4: States with Electronic Filing Mandates for Tax Preparers 

We recently reported that state mandates encourage electronic filing of 

federal tax returns and recommended that IRS develop better information 

about the costs to paid tax preparers and taxpayers of mandatory 

electronic filing of tax returns for certain categories of tax preparers.1

 1

GAO-06-51. 

Page 43 GAO-06-499T Internal Revenue Service
Internal Revenue Service

These mandates require tax practitioners who meet certain criteria, such 

as filing 100 individual state tax returns or more, to file individual state 

returns electronically. 

Between tax years 2001 and 2004, electronic filing had grown in the 9

states with mandates from an average of 36.7 percent to 56.8 percent, or an 

increase of over 20 percentage points, compared to an increase of 14 

percentage points for the 41 non mandated states over the same time 

period. We expect this trend to continue as 3 additional states—New York, 

Utah and Connecticut—implemented mandates in time for the 2006 filing 

season. Of these 3 states, New York may have the most to gain because it 

currently has the lowest rate of electronic filing rate, with fewer than 38 

percent of its nearly 9 million federal individual income tax returns 

electronically filed last year. 

Page 44 GAO-06-499T
Appendix V: Bibliography of GAO Resources 

Filing Season 

Performance: 

Tax Administration: IRS Improved Some Filing Season Services, but 

Long-Term Goals Would Help Manage Strategic Trade-offs, GAO-06-51 

Washington, D.C.: November 14, 2005. 

Tax Administration: IRS Improved Performance in the 2004 Filing 

Season, but Better Data on the Quality of Some Services Are Needed,

GAO-05-67 Washington, D.C.: November 10, 2004. 

Tax Administration: IRS’s 2003 Filing Season Performance Showed 

Improvements, GAO-04-84 Washington, D.C.: October 31, 2003. 

IRS’s 2002 Tax Filing Season: Returns and Refunds Processed Smoothly; 

Quality of Assistance Improved, GAO-03-314 Washington, D.C.: December 

20, 2002. 

Internal Revenue Service: Assessment of Fiscal Year 2006 Budget 

Request, GAO-05-566 Washington, D.C.: April 27, 2005. 

Internal Revenue Service: Assessment of Fiscal Year 2006 Budget 

Request and Interim Results of the 2005 Filing Season, GAO-05-416T

Washington, D.C.: April 14, 2005. 

Internal Revenue Service: Assessment of Fiscal Year 2005 Budget 

Request and 2004 Filing Season Performance, GAO-04-560T Washington,

D.C.: March 30, 2004. 

Tax Gap: Making Significant Progress in Improving Tax Compliance 

Rests on Enhancing Current IRS Techniques and Adopting New 

Legislative Actions, GAO-06-453T Washington, D.C.: February 15, 2006. 

IRS’s Budget 

Requests: 

Tax Gap and 

Compliance: 

Tax Gap: Multiple Strategies, Better Compliance Data, and Long-Term 

Goals Are Needed to Improve Taxpayer Compliance, GAO-06-208T 

Washington, D.C.: October 26, 2005. 

Tax Compliance: Reducing the Tax Gap Can Contribute to Fiscal 

Sustainability but Will Require a Variety of Strategies, GAO-05-527T

Washington, D.C.: April 14, 2005. 

Taxpayer Information: Data Sharing and Analysis May Enhance Tax 

Compliance and Improve Immigration Eligibility Decisions, GAO-04-

972T Washington, D.C.: July 21, 2004.

Page 45 GAO-06-499T Internal Revenue Service
Internal Revenue Service

Compliance and Collection: Challenges for IRS in Reversing Trends and

Implementing New Initiatives, GAO-03-732T Washington, D.C.: May 7, 

2003. 

Financial Audit: IRS’s Fiscal Years 2005 and 2004 Financial 

Statements, GAO-06-137 Washington, D.C.: November 10, 2005. 

Internal Revenue Service: Status of Recommendations from Financial 

Audits and Related Financial Management Reports, GAO-05-393 

Washington, D.C.: April 29, 2005. 

Financial Audit: IRS’s Fiscal Years 2004 and 2003 Financial 

Statements, GAO-05-103 Washington, D.C.: November 10, 2004. 

Internal Revenue Service: Status of Recommendations from Financial 

Audits and Related Financial Management Reports, GAO-04-523 

Washington, D.C.: April 28, 2004. 

Financial Audit: IRS’s Fiscal Years 2003 and 2002 Financial 

Statements, GAO-04-126 Washington, D.C.: November 13, 2003. 

Business Systems Modernization: IRS Needs to Complete Recent Efforts 

to Develop Policies and Procedures to Guide Requirements Development 

and Management, GAO-06-310 Washington, D.C.: March 20, 2006. 

Financial Statement 

Audits:

Business Systems 

Modernization: 

Business Systems Modernization: Internal Revenue Service’s Fiscal Year 

2006 Expenditure Plan, GAO-06-360 Washington, D.C.: February 21, 2006.

Business Systems Modernization: Internal Revenue Service’s Fiscal Year 

2005 Expenditure Plan, GAO-05-774 Washington, D.C.: July 22, 2005. 

IRS Modernization: Continued Progress Requires Addressing Resource

Management Challenges, GAO-05-707T Washington, D.C.: May 19, 2005. 

Business Systems Modernization: IRS’s Fiscal Year 2004 Expenditure 

Plan, GAO-05-46 Washington, D.C.: November 17, 2004. 

Business Systems Modernization: Internal Revenue Service Needs to 

Further Strengthen Program Management, GAO-04-438T Washington, 

D.C.: February 12, 2004. 

Page 46 GAO-06-499T
Internal Revenue Service

IRS Modernization: Continued Progress Necessary for Improving 

Service to Taxpayers and Ensuring Compliance, GAO-03-796T 

Washington, D.C.: May 20, 2003. 

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

Serious Errors, GAO-06-563T Washington, D.C.: April 4, 2006. 

Tax Administration: IRS Can Improve Its Productivity Measures by 

Using Alternative Methods, GAO-05-671 Washington, D.C.: July 7, 2005. 

21st Century Challenges: Reexamining the Base of the Federal 

Government, GAO-05-325SP Washington, D.C.: February 2005. 

High Risk Series: An Update, GAO-05-207 Washington, D.C.: January 21,

2005. 

Internal Revenue Service: Challenges Remain in Combating Abusive Tax

Schemes, GAO-04-50 Washington, D.C.: November 19, 2003. 

Tax Administration: IRS Is Implementing the National Research 

Program as Planned, GAO-03-614 Washington, D.C.: June 16, 2003. 

Tax Administration: IRS Needs to Further Refine Its Tax Filing Season 

Performance Measures, GAO-03-143 Washington, D.C.: November 22, 

2002. 

The Results Act: An Evaluator’s Guide to Assessing Agency Annual 

Performance Plans, GAO/GGD-10.1.20 Washington, D.C.: April 23, 1998. 

For more information on Department of the Treasury major 

management challenges, see 

http://www.gao.gov/pas/2005/treasury.htm

Page 47 GAO-06-499T (450481) 
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