IRS’ 2000 TAX FILING

SEASON

IRS Measures Show

Tax Processing

Systems Performed

Slightly Better Than

in 1999

United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Oversight, Committee on Ways and

Means, House of Representatives

June 2000

GAO/GGD-00-146

United States General Accounting Office General Government Division

Washington, D.C. 20548

Page 1 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season

B-284658

June 16, 2000

The Honorable Amo Houghton

Chairman, Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

Dear Mr. Chairman:

This filing season, the Internal Revenue Service (IRS) estimated its

information systems would process about 127 million individual income

tax returns and issue about 95 million refunds to individual taxpayers. The

performance of the information systems that IRS uses for processing tax

returns and issuing refunds was of particular interest this year because of

the massive changes that IRS made to help ensure that its systems were

Year 2000 compliant. Completing these changes involved correcting

millions of lines of application software and upgrading or replacing

thousands of computer hardware and software products. Although it

performed extensive testing of these changes, IRS anticipated that

unexpected system-related problems might occur during the 2000 filing

season that could affect service to taxpayers.

This report discusses one of several aspects of the 2000 filing season that

you requested we review, specifically, the performance of the information

systems that IRS uses to process tax returns for individual taxpayers.1

 The

objective of this report is to compare IRS’ tax processing systems

performance in the 2000 filing season as reported by IRS to that of the 1999

filing season.2

 To the extent that IRS reported problems affecting

individual taxpayers, we identified whether IRS had taken actions to

address those problems.

According to IRS performance data and comments from IRS officials and

representatives of large tax practitioners, IRS’ tax processing systems

performed slightly better in the 2000 filing season than in the 1999 filing

 

1

You also requested that we review IRS’ efforts to (1) to improve the level of toll-free telephone service,

(2) provide walk-in assistance, and (3) increase the use of electronic filing. Later in the year, we plan to

issue reports on these areas.

2

Tax processing systems are the information systems IRS uses to input, verify, correct, and record

taxpayer information.

Results in Brief
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Page 2 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season

season.3 For example, as of mid-April 2000, IRS reported that it had

experienced fewer work stoppages caused by critical system-related

problems and had fewer such problems that remained unresolved for over

24 hours. Also, IRS reported that it processed paper returns faster than in

the 1999 filing season.

While IRS’ data indicate that tax processing systems performed slightly

better than last filing season, IRS reported that as of May 2, 2000, it had

experienced four minor system-related problems that affected relatively

small numbers of individual taxpayers (see pp. 6-9); for example, IRS sent

some refunds to the wrong individuals. According to IRS, it had (1)

corrected all the system-related problems, (2) already taken or was taking

action to mitigate their effects on taxpayers, and (3) notified individuals

affected by two of the four problems. For the other two problems that

resulted in IRS sending refunds to the wrong individuals, we were

concerned that IRS did not notify them.

In commenting on a draft of this report, the Commissioner of Internal

Revenue generally agreed with the findings and provided additional

information that either mitigated our concern or made it apparent that

notifying affected individuals now would not be meaningful. Thus, we are

not making any recommendations. We plan to follow up on the reasons

IRS officials provided for why earlier notification was not possible and

whether IRS’ planned business and systems modernization efforts may

help in this regard.

Different IRS organizational units have various methods for monitoring the

performance of IRS’ tax processing systems during the filing season. The

Information Systems (IS) Division, which is responsible for managing and

maintaining IRS’ information systems, uses “corporate systems”

performance measures and a problem-reporting system. IRS’ 10 service

centers use various performance measures to monitor and track their tax

return workload.4

 Also, IRS tracks performance vis-a-vis certain

management-level goals that focus on tax return processing.

The IS Division uses three corporate systems performance measures that

relate to tax return processing. Two of the measures focus on the percent

 

3

In the 1999 filing season, IRS reported that tax processing systems performed without any major

disruptions.

4

IRS’ 10 service centers are responsible for processing paper and electronic submissions, correcting

errors, and forwarding the data through a data processing and telecommunications infrastructure to

two computing centers. The computing centers are responsible for maintaining the Master Files—IRS’

primary taxpayer account databases.

Background
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Page 3 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season

of time that two critical information systems, the Integrated Data Retrieval

System (IDRS) and Corporate Files on Line (CFOL), are available to

frontline employees. Both of these systems provide access to certain

taxpayer account information that frontline employees use for correcting

errors in taxpayers’ returns. The third corporate systems performance

measure tracks the timeliness of IRS’ two primary computing centers in

processing weekly updates of taxpayer accounts with the latest tax return

information.

In addition to the corporate systems performance measures, the IS

Division uses a problem-reporting system across IRS to identify, correct,

and track system-related problems. IRS designates a problem as critical

and assigns it a priority 1 (hereafter referred to as critical) if it causes a

work stoppage that results in a severe disruption to normal processing,

thus requiring National Office attention and immediate correction.

According to an IRS official, the agency considers the resolution of a

critical problem to be overdue if the problem remains unresolved for over

24 hours. All problems are to be continually monitored, and overdue

problems are to receive increased scrutiny by IRS officials. IRS uses the

same process and assigns a lesser priority to other problems, including

those not requiring immediate responses.5

In addition to the IS measures, each of IRS’ 10 service centers tracks

various performance measures related to tax return workload. These

measures capture the performance of IRS’ tax processing systems as well

as employee productivity. An example of this type of measure is cycle time

(i.e., the number of days it takes to process a paper return).

Finally, IRS uses data from all of the service centers to track performance

on certain management-level goals, such as refund timeliness. These goals

are included in IRS’ performance plans for purposes of reporting on the

Government Performance and Results Act and, thus, are intended to

reflect IRS’ performance on certain aspects of its mission.

 

5

Priority 2 problems do not involve a work stoppage but require support from IRS’ National Office.

Priorities 3 to 5 are assigned to problems that can be corrected by the field offices.
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Page 4 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season

IRS’ tax processing systems performed slightly better than in 1999,

according to various sources. Every filing season, IRS anticipates that

some system-related problems might occur. At the time we completed our

work, IRS reported that for the 2000 filing season, it had experienced four

problems with its tax processing systems that it considered minor and that

affected small numbers of individual taxpayers.

Various performance data, IRS officials, and representatives of large tax

practitioners indicated that the tax processing systems performed slightly

better in the 2000 filing season than in 1999. According to IS Division

corporate systems performance measures, shown in table 1, in both 1999

and 2000, IRS reported that frontline employees had IDRS and CFOL

available to them virtually 100 percent of the time, with about a half a

percentage point improvement in 2000. As we said earlier, IRS frontline

employees use these two systems to help resolve errors in taxpayers’

returns. Also, as shown in table 1, computing centers exceeded their

timeliness goal for fiscal year 2000.

Fiscal year 1999 Fiscal year 2000

Measure: Percent of time Goal AccomplishmentaGoal Accomplishmentb

CFOL was available to

frontline employees 99% 99.3% 99% 99.8%

IDRS was available to

frontline employees 99 99.1 99 99.5

Computing center schedules

were met for weekly updates

to taxpayer accounts 97 98.7 97 98.9

a

Data as of March 31,1999.

b

Data as of March 31, 2000.

Source: IRS data.

Another measure of system performance is the number of critical systemrelated problems reported during the filing season. The IS Division

reported that as of April 22, 2000, the number of critical system-related

problems had declined by 23 percent—from 757 to 584—from the 1999 to

the 2000 filing season. Also, the number of critical problems whose

resolution was considered to be overdue was consistently below the

number in the 1999 filing season—anywhere from 38 to 77 percent lower

each week through April 22, 2000.

We recognize that the number of critical and overdue problems has some

limitations as a measure of performance because they vary in terms of

IRS Measures Show

Systems Performed

Slightly Better Than in

1999, With a Few

Minor Problems

Affecting Taxpayers

Measures Show Tax

Processing Systems

Performed Slightly Better

Than in 1999

Table 1: Corporate Systems

Performance Measures
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Page 5 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season

their complexity. But under IRS’ definition of critical problems—those that

cause a work stoppage and require National Office attention—we believe

including the number as a measure of system performance is appropriate.

Indirect measures of system performance, such as the number of days

required to process tax returns and refund timeliness, also showed some

improvement. As shown in table 2, as of April 21, 2000, IRS had processed

all types of paper form 1040s faster in the 2000 filing season than in the

corresponding period in 1999.6

Days

Tax return 1999a2000b

Percentage

change

Form 1040 (manual entry) 7 6 -14%

Form 1040A (manual entry) 7 5 -29

Form 1040 EZ (electronically scanned) 5 4 -20

Form 1040 EZ (manual entry) 8 5 -38

a

Data as of April 16, 1999.

b

Data as of April 21, 2000.

Source: GAO analysis of IRS data.

Finally, as shown in table 3, IRS exceeded the management-level goals for

refund timeliness for fiscal year 2000 for returns filed either on paper or

electronically, and exceeded its fiscal year 1999 accomplishments for

returns filed on paper.

Measure: Fiscal year 1999 Fiscal year 2000

Timeliness of

refunds filedaGoal AccomplishmentbGoal Accomplishmentc

On paper Baseline year

for establishing

a goal

Processed 84.7%

of refunds in 40

days or less

Process 85% of

refunds in 40

days or less

Processed 95.5%

of refunds in 40

days or less

Electronically Process 98% of

refunds in 21

days or less

Processed 100% of

refunds in 21 days

or less

Process 99% of

refunds in 21

days or less

Processed 99.9%

of refunds in 21

days or less

a

For individual income tax returns.

b

Data as of March 13, 1999.

c

Data as of March 11, 2000, which were the most current data at the time we prepared this report.

Source: Tax Administration: IRS’ 1999 Tax Filing Season (GAO/GGD-00-37) and IRS data.

IRS officials and representatives of tax practitioners confirmed that tax

systems performed slightly better in the 2000 filing season than in 1999.

 

6

According to IRS officials, they do not track processing times for returns filed electronically because

those returns are processed so quickly that the measurement would not be considered meaningful.

Table 2: Number of Days Required to

Process Various Types of Form 1040

Paper Returns

Table 3: Refund Timeliness Performance

Measures
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Page 6 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season

The Commissioner of Internal Revenue recently noted that the first 3

months of the 2000 filing season were smooth and “almost error free.”

Cognizant National Office officials and Kansas City and Atlanta Service

Center officials said that few system-related problems affected taxpayers

in the 2000 filing season, and overall, tax processing system performance

was better than in 1999. Likewise, in March 2000, representatives from tax

practitioners said that IRS’ tax processing systems, including those used

for electronic filing, appeared to be performing without significant

disruptions.

The Commissioner attributed the success of the 2000 filing season to the

thorough Year 2000 planning and preparation that was done over the last 3

years. For example, the Commissioner established and participated in an

executive steering committee between November 1997 and January 2000

that was, in part, to identify and mitigate potential risks for the filing

season and IRS’ Year 2000 effort.7

 Also, to accommodate the need to

conduct extensive testing of the Year 2000 system changes in advance of

the 2000 filing season, IRS compressed its normal schedules to implement

and test the Year 2000 system changes by 3 months. In December 1999, IRS

completed that testing and reported having identified and corrected 57

critical problems before the 2000 filing season began. According to IRS

officials, if these problems had not been corrected, significant disruptions

might have occurred during the 2000 filing season.

Given its tremendous workload, IRS anticipates it will have some systemrelated problems every filing season—some that directly affect taxpayers,

others that do not. As of May 2, 2000, IRS reported it had experienced four

problems that it considered minor and that affected small numbers of

taxpayers. IRS officials said they had (1) corrected all four system-related

problems, (2) already taken or were taking action to mitigate the effects on

taxpayers, and (3) notified individuals affected by two of the four

problems. Because the other two problems resulted in refunds going to the

wrong individuals, we were concerned that IRS officials had not notified

affected individuals. In commenting on a draft of this report, the

Commissioner provided information that mitigated our concern or made it

apparent that notifying them now would not be meaningful.

The first minor problem involved IRS issuing 440 balance-due notices with

erroneous due dates. The notices were sent to taxpayers who owed more

 

7

For the last several years, IRS has undertaken efforts to coordinate and monitor filing season

activities, particularly to assess filing season readiness at the 10 service centers. However, past efforts

did not include the Commissioner and other high-level executives who routinely participated in the

Year 2000 Executive Steering Committee.

IRS Reported Four

Minor Problems That

Affected Small

Numbers of Taxpayers
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Page 7 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season

than $100,000 and accounted for less than 1 percent of the balance-due

notices issued that week. IRS reported that it had corrected the problem,

contacted all affected taxpayers, and provided the correct payment dates.

The second problem involved IRS’ electronic filing system, which

improperly rejected about 40,000 individual returns that claimed a child

care credit or reported dependent care benefits from an employer. IRS

reported that the problem began in mid-January and was corrected by midFebruary. IRS posted a notification to taxpayers and practitioners about

this problem on its Web site. According to a representative of the largest

tax practitioner, most of its clients simply resubmitted their return

electronically or filed a paper return.

The third problem related to taxpayers that had designated a power of

attorney to allow a third-party representative to handle their tax matters.

One of IRS’ information systems mistakenly removed a “flag” on certain

taxpayer accounts that had designated a power of attorney. As a result,

IRS officials said that in January and February, 322 refunds were mailed

directly to the taxpayer instead of the third-party representative. Also,

nearly 34,000 notices relating primarily to current tax year matters were

delayed in being sent to third-party representatives, and an undetermined

number of notices relating primarily to past years’ tax matters were not

sent to the third-party representatives. As we reported in March, IRS said it

had corrected this problem.8

With respect to the refunds that were mistakenly sent to the taxpayer, the

Office of Taxpayer Advocate9

 was aware of this problem in February and

had requested that IRS contact the third-party representatives. At the time,

IRS estimated that only 11 refunds were affected by this problem, but

needed to (1) confirm the actual number of taxpayer accounts involved,

(2) identify which taxpayer accounts were involved, and (3) identify the

cognizant third-party representatives. These actions took about 2 months.

In commenting on a draft of this report, the Commissioner noted that IRS

decided not to notify the third-party representatives because the (1)

number of taxpayer accounts involved increased to 322, thus increasing

the staff costs associated with notification, and (2) 2-month time lag raised

questions about the meaningfulness of such notification.

 

8

Tax Administration: IRS’ 2000 Tax Filing Season and Fiscal Year 2001 Budget Request (GAO/TGGD/AIMD-00-133, Mar. 28, 2000).

9

The Office of the Taxpayer Advocate provides an independent advocate within IRS that, among other

things, is to resolve taxpayers’ problems through prompt identification and settlement.
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Page 8 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season

In his comments, the Commissioner provided other information that

mitigated our concerns about the lack of notification. First, the

Commissioner said that in most instances, the taxpayer was required to

endorse the refund check although it was to be sent to the third-party

representative. Second, the Commissioner said that upon further research,

IRS determined that these were either small business or self-employed

taxpayers, thus allaying our concern that these were individual taxpayers

who were unable to handle their tax matters because of competency

issues. Finally, the Commissioner also said that the Office of the Taxpayer

Advocate had been told of the decision not to notify the affected

taxpayers.

Regarding the nearly 34,000 notices, IRS officials said they mailed copies

to the third-party representatives anywhere from several days to several

weeks later than copies sent directly to the taxpayer. According to IRS

officials, in the event the notices related to unpaid tax liabilities and those

tax liabilities were not paid on time, certain penalties might need to be

abated. In commenting on a draft of this report, the Commissioner said

that IRS provided the service centers with instructions for doing so. For

notices that primarily related to past years’ tax matters, IRS planned to rely

on subsequent mailings to inform the third-party representatives.

IRS identified a fourth problem in March, which related to the direct

deposit of refunds, and corrected it in April 2000. As a result of this

problem, 3,463 individual taxpayers did not receive refunds via direct

deposit to which they were entitled, and IRS misdirected these refunds to

3,180 other taxpayer accounts.10 According to IRS, about $4.3 million in

refunds were erroneously issued. This represents a small fraction of IRS’

direct deposit activity. As of May 12, 2000, IRS reported that it had made

almost 29 million direct deposits to individual taxpayers totaling almost

$60 billion.

As with the problem related to the third-party representatives, IRS needed

time to identify which taxpayers were affected. For those taxpayers that

mistakenly received a refund, the service centers were taking steps to

retrieve the refunds made in error, and as of April 28, 2000, IRS officials

reported they had recovered $1.3 million. For taxpayers who did not

receive refunds to which they were entitled, IRS officials said the service

 

10IRS told us that the number of taxpayer accounts that received refunds in error is less than the

number of taxpayers who should have received refunds because some taxpayer accounts received as

many as five erroneous direct deposits and some taxpayers used joint accounts. For these reasons, IRS

provided the number of taxpayer accounts but not the exact number of taxpayers that received refunds

that were not entitled to them.
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Page 9 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season

centers were taking steps to mail refunds as soon as possible, and as of

April 28, 2000, had issued refunds to 2,784 of the 3,463—or about 80

percent—of those taxpayers. However, IRS officials said they had not

notified those taxpayers that they changed the method of payment from a

direct deposit to a check sent in the mail. According to IRS officials, they

could not easily inform taxpayers about this change, in part because IRS

could not quickly generate a notice or letter to address this problem.

Further, they said they thought it would serve taxpayers more effectively

to have staff focus on issuing refunds rather than on sending letters or

calling them.

Although, according to various sources, IRS’ tax processing systems

performed slightly better than in 1999, we were concerned that IRS did not

notify individuals about the two problems that resulted in, among other

things, IRS sending refunds to the wrong individuals. In commenting on a

draft of this report, the Commissioner of Internal Revenue provided

additional information about the circumstances that either mitigated our

concern or made it apparent that notifying them now would not be

meaningful. Thus, we are not making any recommendations. We plan to

follow up on the reasons IRS officials provided for why earlier notification

was not possible and whether IRS’ planned business and systems

modernization efforts may help in this regard.

To compare the performance of IRS’ tax processing systems used in the

2000 filing season with that of 1999 for processing individual income tax

returns, we

• attended weekly meetings at which all reported critical system-related

performance problems were discussed, and obtained and analyzed the

relevant data discussed during those meetings;

• reviewed IRS’ Web page, which posts information notifying taxpayers of

tax return processing problems;

• interviewed cognizant IRS National Office and field officials to discuss (1)

system performance and any problems reported by IRS this year, (2)

variances in system performance between the 1999 and 2000 filing seasons,

and (3) reasons for the problems and variances;

• interviewed a representative of the largest tax practitioner to solicit his

views regarding the performance of IRS’ electronic filing system and how

that performance compared with 1999 performance;

• reviewed the March 28, 2000, congressional testimonies of other large tax

practitioners; and

• obtained and analyzed certain service center performance measurement

data for the 1999 and 2000 filing seasons.

Conclusions

Scope and

Methodology
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Page 10 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season

To the extent that IRS reported problems affecting individual taxpayers,

we discussed the types of actions IRS took to address those problems with

National Office and field officials.

We relied on IRS’ performance measurement data in comparing system

performance in the 1999 and 2000 filing season. For IS performance

measures, we obtained data on corporate systems measures and did not

review performance measures for each individual tax processing system.

We also reviewed only those management-level goals that would be

directly impacted by systems performance. Where warranted, we

discussed reported system performance problems with users at the Kansas

City and Atlanta Service Centers.

Although the due date for filing individual tax returns for the 2000 filing

season was April 17, 2000, IRS continued to process tax returns for several

weeks afterward. Therefore, we continued to monitor the performance and

problems of IRS’ tax processing systems during this period. We conducted

our work at IRS’ National Office and the Kansas City and Atlanta Service

Centers between January and May 2000. We conducted our work in

accordance with generally accepted government auditing standards.

On June 6, 2000, we met with IRS officials to obtain their comments on a

draft of this report. The Commissioner of Internal Revenue subsequently

provided written comments on June 12, 2000. The Commissioner generally

agreed with our report and provided technical clarifications that we have

incorporated where appropriate. (See the appendix for a copy of the

letter).

We are sending copies of this report to Senator William V. Roth, Jr.,

Chairman, and Senator Daniel P. Moynihan, Ranking Minority Member,

Senate Committee on Finance; Representative Bill Archer, Chairman,

House Committee on Ways and Means; Representative Charles B. Rangel,

Ranking Minority Member, House Committee on Ways and Means; and

Representative William J. Coyne, Ranking Minority Member,

Subcommittee on Oversight, House Committee on Ways and Means. We

are also sending copies to the Honorable Lawrence H. Summers, Secretary

of the Treasury; the Honorable Charles O. Rossotti, Commissioner of

Internal Revenue; the Honorable Jacob J. Lew, Director, Office of

Management and Budget; and other interested parties. Copies of this

report will be made available to others upon request.

Agency Comments and

Our Evaluation
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Page 11 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season

If you have any questions regarding this report, please contact me or

Sherrie L. Russ at (202) 512-9110. Key contributors to this assignment were

Joanna Stamatiades, Doris Hynes, Linda Standau, and Bradley Terry.

Sincerely yours,

James R. White

Director, Tax Policy and

Administration Issues
Appendix

Comments From the Internal Revenue Service

Page 12 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season

Now on p. 7.

Now on p. 4.
Appendix

Comments From the Internal Revenue Service

Page 13 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season

Now on p. 7.

Now on p. 8.
Appendix

Comments From the Internal Revenue Service

Page 14 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season
Page 15 GAO/GGD-00-146 Tax Processing Systems in the 2000 Filing Season
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