United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Oversight, Committee on Ways and

Means, House of Representatives

December 1996 IRS’ 1996 TAX FILING

SEASON

Performance Goals

Generally Met; Efforts

to Modernize Had

Mixed Results

G O A

years

1921 - 1996

GAO/GGD-97-25

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-271107 

December 18, 1996

The Honorable Nancy L. Johnson

Chairman, Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

Dear Chairman Johnson:

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

Service’s (IRS) performance during the 1996 tax filing season. Specifically,

we discuss (1) IRS’ overall performance during the filing season, including

information on changes in 1996 that relate to taxpayer services and the

processing of taxpayer refunds, and (2) some of IRS’ efforts to modernize

its processing activities. In March 1996, we testified before the Oversight

Subcommittee on the interim results of our work.1

Results in Brief IRS uses various indicators to measure its performance during a particular

filing season. On the basis of those indicators alone, the 1996 filing season

would be considered generally successful. For example, IRS met or

exceeded its timeliness and accuracy goals for processing individual

income tax returns and issuing taxpayer refunds, answered more

telephone calls from taxpayers seeking assistance than it had planned to

answer, and received more returns through alternative filing methods than

it had projected. Contributing to the generally successful filing season

were improvements in two areas that were the sources of problems in

1995 (i.e., answering taxpayers’ telephone calls for assistance and issuing

taxpayer refunds).

As compared with the 1995 filing season, IRS received about 119 million

fewer telephone calls for assistance and answered about 4 million more

calls during the 1996 filing season. That combination of reduced demand

and increased service enabled IRS to increase the percentage of calls

answered from 8 to 20 percent and to increase the percentage of callers

who were eventually able to get through to IRS from 41 to 50 percent.

Although these results are much better than last year, there is still

considerable room for improvement.

In 1995, IRS delayed about 7 million refunds to allow itself time to verify

Social Security Numbers (SSN), with an emphasis on returns claiming the

1

Tax Administration: IRS’ Fiscal Year 1996 and 1997 Budget Issues and the 1996 Filing Season

(GAO/T-GGD-96-99, Mar. 28, 1996).

Page 1 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

Earned Income Credit (EIC).2 Although that verification effort had some

positive results, there were problems. For example, IRS identified many

more missing or invalid3 SSNs than it was able to pursue and eventually

released the refunds, after several weeks, without resolving the problems.

For the 1996 filing season, IRS revised its procedures to (1) limit the

number of delayed refunds to the volume of cases it could review and

(2) focus on the cases most in need of review. As a result, IRS delayed

many fewer refunds in 1996 than it did in 1995 and avoided the kind of

negative press it received in 1995 as taxpayers and tax return preparers

reacted to the delays.

Although IRS met its timeliness and accuracy goals for processing returns

and refunds during the 1996 filing season, IRS set those goals on the basis

of what it expected that it could achieve with the systems and procedures

currently in place. Recognizing that much could be done to improve its

systems and procedures, IRS has initiated several modernization efforts.

Those efforts achieved mixed results in 1996. For example, although a new

document scanning and imaging system performed better in 1996 than it

did in 1995, the system still was not meeting performance expectations

and may eventually cost much more than originally estimated. Also,

although the system that allows certain taxpayers to file their returns by

telephone worked very well and had a high rate of user satisfaction, only

about 10 to 14 percent of those eligible to use the system in 1996 did so.

For all but one of the modernization projects discussed in this report, IRS is

taking steps to enhance its efforts. For example, IRS is developing a

strategy to increase the use of electronic filing and reassessing its strategy

for processing paper returns. The one exception is IRS’ use of lockboxes,

which are postal rental boxes serviced by commercial banks, to process

Form 1040 tax payments. IRS’ decision to have taxpayers send not only

their payments but also their tax returns to a lockbox and to have the

banks sort those returns before sending them to IRS has increased program

costs, unnecessarily in our opinion, by about $4.7 million.

Objective, Scope, and

Methodology

Our objective was to assess IRS’ performance during the 1996 filing season,

including some of IRS’ initiatives to modernize its processing activities. To

achieve our objective, we

2

The EIC is a refundable tax credit available to low-income working families with children and certain

taxpayers without children.

3

An invalid SSN is one that does not match Social Security Administration records.

Page 2 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

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

Cincinnati, and Kansas City service centers who were responsible for the

various activities we assessed;4

• interviewed staff from the Department of the Treasury’s Financial

Management Service (FMS) about the use of lockboxes to process Form

1040 tax payments;

• analyzed filing season related data from various IRS sources, including its

Management Information System for Top Level Executives;

• visited four walk-in assistance sites (two in Atlanta and one each in Kansas

City, MO, and Mission, KS) to interview staff and taxpayers;

• visited two banks in Atlanta and St. Louis that were being used by IRS as

lockboxes to process tax remittances and analyzed cost/benefit data

related to IRS’ use of lockboxes;

• reviewed data on the results of and costs associated with IRS’ decision to

allow filers of paper returns to request direct deposits of their refunds;

• reviewed data on IRS efforts to identify and resolve questionable refund

claims;

• reviewed computer system availability reports and periodically attended

weekly operational meetings held by IRS’ Network and Operations

Command Center in February, March, and April 1996;

• analyzed IRS’ toll-free telephone system accessibility data, telephone

activity data for forms distribution centers, and accessibility reports for

the IRS system (known as TeleFile) that enables some taxpayers to file

their returns by telephone;

• reviewed data compiled by IRS, including the results of a user survey, on

the performance of TeleFile; and

• reviewed relevant IRS internal audit reports.

We did our work from January 1996 through September 1996 in

accordance with generally accepted government auditing standards. We

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

Internal Revenue or her designated representative. On November 6, 1996,

several IRS officials, including the Assistant Commissioner for Forms and

Submission Processing, the National Director for Submission Processing,

and the National Director for Customer Service (Planning and Systems),

provided us with oral comments. Their comments were reiterated in a

November 18, 1996, memorandum from the Acting Chief of Taxpayer

Service. IRS’ comments are summarized and evaluated on pages 24 and 25.

IRS also provided some factual clarifications that we have incorporated in

the report where appropriate.

4

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

Page 3 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

IRS Generally Met Its

Filing Season Goals

for Fiscal Year 1996

Appendix I has data on 12 indicators that IRS uses to assess its filing season

performance.5

 These indicators relate to workload, such as the number of

answered telephone calls from taxpayers who are seeking assistance;

timeliness, such as the number of days needed to process returns or issue

refunds; and quality, such as the accuracy of IRS’ answers to taxpayer

questions and the accuracy with which IRS processes individual income tax

returns and refunds. As shown in appendix I, IRS met or exceeded 11 of the

12 performance goals for the 1996 filing season and almost met the 12th

goal (the number of forms-ordering calls answered).

Two specific aspects of IRS’ filing season performance that are of

particular interest to taxpayers and that were the source of problems in

1995 are (1) the level of taxpayer service being provided during the filing

season, especially the ability of taxpayers to reach IRS by telephone, and

(2) the timely issuance of refunds. In 1995, as in the past several years,

taxpayers who sought answers to questions about the tax law or their

accounts had considerable difficulty reaching IRS by telephone. In 1996, IRS

improved its telephone accessibility while, at the same time, it reduced the

availability of face-to-face services at its walk-in sites. Also, in 1995,

millions of persons had their refunds delayed as a result of new IRS

procedures for verifying the SSNs of dependents and EIC-qualifying

children. The new procedures were designed to better ensure that persons

were entitled to the dependents and EICs they were claiming. In 1996, IRS

implemented revised case selection criteria that resulted in many fewer

refund delays than in 1995. Sufficient information was not available when

we completed our audit work to assess the impact of IRS’ revised

procedures on the identification and correction of questionable SSNs.

Telephone Accessibility

Improved While the

Availability of Walk-in

Assistance Declined

IRS officials have reaffirmed that service to taxpayers remains a primary

goal. However, IRS took steps in 1996 to change the blend of methods that

it uses to deliver that service. IRS placed more emphasis on providing

telephonic and computer-oriented service (such as a new World Wide Web

site on the Internet) while walk-in, face-to-face assistance was

deemphasized. As a result, telephone accessibility improved while many

walk-in sites either closed or offered a reduced level of service.

Telephone Accessibility

Improved

An important indicator of filing season performance is how easily

taxpayers who have questions are able to contact an IRS assistor on the

telephone (i.e., telephone accessibility). In reports on past filing seasons,

5

Two other indicators (the number of individual income tax returns received and the number filed

through alternative methods) are not included in the appendix but are discussed later in this report.

Page 4 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

we discussed the difficulty taxpayers have had in reaching IRS over its

toll-free tax assistance telephone line.6

Accessibility, as we define it, is the total number of calls answered divided

by the total number of calls received. The total number of calls received is

the sum of the following: (1) calls answered, (2) busy signals, and (3) calls

abandoned by the caller before an assistor got on the line. By our

definition, accessibility of IRS’ toll-free telephone assistance improved in

1996, although it was still low. From January 1 to April 20, 1996, IRS

reported receiving about 114 million call attempts, of which about

23 million were answered—an accessibility rate of 20 percent. For the

same period in 1995, IRS reported receiving about 236.0 million call

attempts, of which 19.2 million (8 percent) were answered. As the data for

1995 and 1996 indicate, a major reason for the improved accessibility in

1996 was the significant drop in call attempts. IRS attributed that drop to

(1) fewer refund delay notices being issued, as discussed in more detail

later in this report, and (2) IRS’ efforts to publicize other information

sources, such as its World Wide Web site on the Internet.

While acknowledging that telephone accessibility is low, IRS believes that

accessibility should be measured not only by the percentage of calls

answered but also by the percentage of callers who were able to get

through to IRS, which IRS refers to as the “taxpayer service level of access.”

Accordingly, IRS summarized its toll-free telephone assistance during the

1996 filing season as follows:

“For the period January 1, 1996, to April 20, 1996, IRS received calls made by 46 million

callers. IRS answered 23 million calls, or 50% of the callers.7

 Of the 114 million total call

attempts received, 23 million or 20% received an answer. The remaining 91 million

attempts, often the result of redials, received a busy signal or were terminated by the

callers because they did not want to wait in queue for an assistor. The total number of

callers mentioned earlier was determined by discounting for redials. Therefore, the

114 million call attempts equates to 46 million callers. This is an average of 2.5 attempts per

caller.”

6

Tax Administration: Increased Fraud and Poor Taxpayer Access to IRS Cloud the 1993 Filing Season

(GAO/GGD-94-65, Dec. 22, 1993); Tax Administration: Continuing Problems Affect Otherwise

Successful 1994 Filing Season (GAO/GGD-95-5, Oct. 7, 1994); and The 1995 Tax Filing Season: IRS

Performance Indicators Provide Incomplete Information About Some Problems (GAO/GGD-96-48;

Dec. 29, 1995).

7

For the same period in 1995, IRS reported that 41 percent of the callers were able to get through to an

assistor.

Page 5 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

As IRS’ data indicate, the accessibility of IRS’ toll-free telephone assistance

during the 1996 filing season, whether measured as a percentage of calls or

callers, was still not good.

Availability of Walk-in

Assistance Reduced

For the 1996 filing season, IRS closed 93 sites that had previously provided

walk-in assistance, reduced the operating hours of some of the 442 sites

that remained open, and eliminated free electronic filing at many of the

sites. According to IRS, the closed sites were selected on the basis of their

historical volume of work and their proximity to other walk-in sites. As an

indication of the effect of these closures and cutbacks, IRS data showed

that (1) walk-in sites served about 2.8 million taxpayers from January 1 to

April 20, 1996, which was about 17-percent fewer taxpayers than were

served during the same period in 1995, and (2) about 59,000 electronic

returns were filed at walk-in sites in 1996, compared with about 104,000 in

1995.

Concerned about the reduction in walk-in service, the House and Senate

conference agreement on the Treasury, Postal Service, and General

Government appropriation for fiscal year 1997 included a provision that

requires IRS to maintain the fiscal year 1995 level of service, staffing, and

funding for taxpayer services. While noting that this provision does not

mean that IRS should be required to rehire staff or reopen offices, the

conference report said that “IRS should be very sensitive to the needs of

the taxpayers” who use walk-in sites during the filing season.

Walk-in sites provide various free services, including copies of more

commonly used forms and publications, help in preparing returns, and

answers to tax law questions. We visited four walk-in sites and asked

taxpayers where they would go if the office were closed. Many taxpayers

commented that they would go to another IRS office or a professional tax

preparer for assistance, and that they would call the toll-free

forms-ordering telephone number for forms or pick them up at a library or

post office.

As indicated by the persons with whom we spoke, there are other ways

taxpayers can obtain the free services offered by walk-in sites, although

maybe not as easily. For example, according to IRS, it generally takes from

7 to 15 workdays to receive materials that are ordered by

telephone—longer if the materials are not in stock. Persons with access to

a computer can download forms from the Internet or the FedWorld

computer bulletin board. Free forms are also available at libraries and post

offices and through IRS’ “fax on demand” service.

Page 6 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

Taxpayers who need help in preparing their returns and do not want to

pay for that help may be able to take advantage of the tax preparation

services offered at sites around the country that are part of the Volunteer

Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE)

programs. According to IRS, these programs help older, disabled,

low-income, and non-English-speaking individuals prepare their basic

returns. IRS data for the 1996 filing season indicate that there was an

increased demand for services at the VITA and TCE sites. The data showed

that although the number of VITA and TCE sites around the country

decreased by 513 compared with the 1995 filing season, about 71,000

additional taxpayers took advantage of the service.

Taxpayers who need answers to tax law questions can call IRS’ toll-free tax

assistance number or IRS’ TeleTax system, which has prerecorded

information on about 150 topics. From January 1 to April 27, 1996, the

number of tax law calls to TeleTax increased by about 11 percent over the

same period in 1995 (i.e., 6.9 million in 1996 compared with 6.2 million in

1995).

Still another option for free assistance is IRS’ World Wide Web site on the

Internet. Among other things, IRS’ Web site includes copies of forms,

information similar to that on TeleTax, and some interactive scenarios that

taxpayers can use to help them answer some commonly asked questions.

IRS reported that, as of May 1, 1996, its Web site had been accessed more

than 52 million times since January 8, 1996, when it first became available.

Fewer Refunds Delayed in

1996

In 1995, IRS took several steps in an attempt to better ensure that persons

were entitled to the dependents and EICs they were claiming. The most

visible of those efforts involved the delay of about 7 million refunds to

allow IRS time to verify SSNs, with an emphasis on returns claiming the EIC.

The delays caused adverse reaction from taxpayers and tax return

preparers during the 1995 filing season.

Although IRS’ efforts in 1995 and the publicity surrounding those efforts

appeared to have had a significant deterrent effect (e.g., according to IRS,

1.5 million fewer dependents were claimed in 1995 than were claimed in

1994), the efforts were not without problems. For example, although IRS

identified about 3.3 million returns with missing or invalid SSNs and

delayed any related refunds, it was able to pursue only about 1 million of

those returns. For those cases it was unable to pursue, IRS eventually

released any refunds, after holding them for several weeks, without

Page 7 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

resolving the problems. Also, IRS delayed about 4 million EIC-related

refunds for taxpayers whose returns had valid SSNs to check for fraudulent

use of the same SSN on more than one return. IRS eventually released

almost all of those refunds, after several weeks, without doing the checks.

For the 1996 filing season, IRS was more selective in deciding which cases

to review and which refunds to delay. IRS tried to limit the number of

delayed refunds to the volume of cases it could review and to focus its

resources on the most egregious cases. The most significant change for the

1996 filing season was that IRS did not delay EIC refunds on returns with

valid SSNs. IRS statistics on the number of refund delay notices sent to

taxpayers in 1996, concerning dependent and EIC claims, indicated that IRS

delayed far fewer refunds in 1996. As of September 6, 1996, IRS had mailed

about 350,000 such notices compared with about 7 million in 1995.

Another indicator that fewer refunds were delayed in 1996 is the decrease

in the number of “where is my refund” calls to IRS. Taxpayers wanting to

know the status of their refunds can call TeleTax and get information

through the use of an interactive telephone menu. During the 1996 filing

season, as of June 8, 1996, IRS reported receiving 48.2 million such calls,

which was a decrease of about 15 percent from the 56.6 million it reported

receiving for the same period in 1995.

In contrast to the negative reaction from taxpayers and practitioners

during the 1995 filing season, an executive of the largest tax preparation

firm told us that IRS generally did a better job in 1996. The executive said

that the firm’s clients received refunds quicker and received fewer notices

about problems, such as SSN mismatches. Likewise, in March 28, 1996,

testimony before the Oversight Subcommittee, a representative of the

National Association of Enrolled Agents said the following: “Our members

report they have encountered far fewer problems this year compared to

last year in the area of refund processing . . . .”

IRS Reviewed Fewer

Questionable SSNs and

Identified Fewer

Fraudulent Refund Claims

in 1996

As part of IRS’ increased emphasis on verifying SSNs in 1995, the

Examination function followed up on about 1 million returns that IRS’

computer, using certain criteria, had identified as having questionable

SSNs.8 As of June 30, 1996, about 986,000 of those cases had been

closed—about 500,000 (51 percent) with no change in tax liability and

about 486,000 (49 percent) with changes totaling about $808 million.

8

The computers actually identified about 3.3 million problem cases but, as previously noted, IRS was

unable to pursue many of them.

Page 8 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

In 1996, IRS (1) revised the criteria used to select cases in an attempt to

better focus its efforts and (2) identified about 700,000 returns for

follow-up, which is about 300,000 fewer than in 1995. Because it takes time

for IRS to complete its reviews, information on results was not available at

the time we completed our audit work. Thus, we do not know the impact

of IRS’ reduced level of effort in 1996. However, a decrease in the number

of cases reviewed does not necessarily mean that IRS identified less

noncompliance in 1996 than in 1995 because only about one-half of the

cases reviewed in 1995 were productive. It is possible that IRS’ revised

criteria, despite generating fewer cases, might have identified more

productive cases in 1996.

The SSN verification/refund delay efforts previously discussed were

generally directed at identifying and correcting erroneous refunds caused

by honest mistakes or negligence. Since the 1970s, IRS has had a

Questionable Refund Program (QRP) directed at identifying fraudulent

refund schemes.

QRP results for January 1996 through September 1996 showed that IRS had

identified 20,521 fraudulent returns (involving claimed refunds of about

$55.4 million) during those 9 months. These results are a significant

decline from the 59,241 returns and about $124.8 million in refunds

reported for the first 9 months of 1995. QRP officials attributed the decline

to three things. First, and most significant in their opinion, was a staffing

reduction that was part of IRS’ cost-cutting efforts in anticipation of

reduced funding levels. According to the officials, the 10 IRS service

centers were allocated a total of about 379 full-time equivalent staff for the

QRP in fiscal year 1996 compared with 553 full-time equivalent staff in 1995,

which was a decrease of 31 percent. The other two reasons cited by the

QRP officials were (1) the impact of enhanced upfront filters in the

electronic filing system that prevented bad returns from getting into the

system and (2) a decision to focus QRP efforts on certain kinds of cases.

IRS’ Efforts to

Modernize Its

Processing Activities

Had Mixed Results in

1996

Although IRS was able to meet its processing goals (such as cycle time,9

processing accuracy, and refund timeliness) in 1996, those goals were

based on expectations as to what IRS could achieve with the systems and

procedures currently in place. In that regard, there is general agreement

that much can be done to improve those systems and procedures. IRS has

initiated several efforts toward that end, including (1) providing

alternatives to the filing of paper returns, (2) using scanning and imaging

9

Cycle time is the average number of days it takes service centers to process returns.

Page 9 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

technology to eliminate the manual data transcription of paper returns,

and (3) using lockboxes and direct deposits to expedite the processing of

tax payments and refunds, respectively.

Despite IRS’ generally successful performance during the 1996 filing

season, there are still several concerns centering around IRS’

modernization efforts. For example, although more returns were filed

using alternatives to the traditional paper form, the number of returns filed

through one of those alternatives (electronic filing) fell short of IRS’

projections. Also, although a document scanning and imaging system that

was intended to streamline parts of IRS’ paper-processing operations

performed better in 1996, the system still is not meeting IRS’ performance

expectations and may eventually cost much more than originally

estimated. Although data on the results of IRS’ use of lockboxes to process

Form 1040 tax payments indicate that the government is saving money,

those savings are being diminished significantly by the extra cost

associated with having taxpayers send not only their payments but also

their returns to the lockbox banks. Finally, expansion of the direct-deposit

option for refunds to taxpayers who filed a paper return was not as widely

received by taxpayers as IRS had anticipated.

Number of Returns Filed

Through Alternative

Methods Increased but

Electronic Filing Falls

Short of Projections

As of October 18, 1996, IRS had received about 118.1 million individual

income tax returns, which was about 1.5 percent more than the

116.4 million returns received as of the same period in 1995. While the

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

the number filed through alternative methods was substantially higher

than in 1995 (about 50 percent). IRS offers three alternatives to the

traditional filing of paper returns (i.e., electronic filing, TeleFile, and Form

1040PC).10 As shown in table 1, most of the growth in alternative filings

was due to TeleFile and Form 1040PC. Table 1 also shows that, of the

three alternatives, only electronic filing failed to meet IRS’ projections.

10Under the electronic filing method, return data in electronic format are transmitted over

communication lines through a third party (such as a tax return preparer or an electronic return

transmitter) to an IRS service center, where the data are automatically edited and processed. Under

TeleFile, certain taxpayers who are eligible to file a Form 1040EZ are allowed to file using a toll-free

number on Touch-Tone telephones. Under the Form 1040PC method, a taxpayer or tax return preparer

uses personal computer software that produces a paper tax return in an answer-sheet format. The

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

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

Page 10 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
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Table 1: Number of Individual Income

Tax Returns Received Through

Alternative Filing Methods

Filing method

Number of

returns IRS

projected for

1996 filing

season

Number of

returns filed in

1996a

Number of

returns filed in

1995a

Percentage

change from

1995

Electronic 13,648,400 12,139,000 11,144,000 +8.9

TeleFile 2,497,400 2,840,000 680,000 +317.6

Form 1040PC 4,617,600 7,031,000 2,912,000 +141.4

Total 20,763,400 22,010,000 14,736,000 +49.4

aData are as of October 18, 1996, and October 20, 1995.

Source: IRS data.

Electronic Filing Electronic filing has several benefits. It enables taxpayers to receive their

refunds sooner than if they had filed on paper and gives them greater

assurance that IRS has received their returns and that the returns are

mathematically accurate. The benefit for IRS is that electronic filing

reduces processing costs and facilitates more accurate processing. IRS

began offering electronic filing in 1986. Since that time, 1995 was the first

year that the number of individual income tax returns received

electronically decreased from the number received the prior year. IRS

attributed that decline to the secondary effects of measures it

implemented to combat filing fraud.

IRS took several steps in an attempt to increase the use of electronic filing

in 1996. For example, IRS (1) put increased emphasis on the availability of

On-Line Filing, a program that allows taxpayers to file their returns,

through a third party, via a personal computer-modem link, and

(2) extended the period during which returns could be filed electronically

by moving the closing date from August 15 (the filing deadline for

taxpayers who get one extension to file) to October 15 (the filing deadline

for taxpayers who get a second extension).11

Taxpayers’ use of electronic filing recovered somewhat in

1996—increasing to about 12.1 million individual income tax returns as of

October 18 (about a 9-percent increase). According to IRS, a major

contributor to this increase was growth in the Federal/State electronic

filing program. Under that program, taxpayers can file both their federal

and state income tax returns through one submission to IRS. A taxpayer’s

11IRS also eliminated free electronic filing at many of its walk-in sites. However, because only a small

number of returns had been filed at walk-in sites in the past, the impact of that action on electronic

filing was minimal.

Page 11 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

federal and state data are combined into one electronic record that is

transmitted to IRS, which, in turn, makes the state portion of the data

available to the state. IRS reported that about 3.2 million returns were filed

under the Federal/State program in 1996 compared with about 1.6 million

in 1995. Some of the increase in electronic filing in 1996 was also due to

the steps discussed in the preceding paragraph. According to IRS data,

158,284 taxpayers had used the On-Line Filing option as of October 18, and

about 22,000 taxpayers had filed electronically between August 9 and

October 18, 1996. Despite the increase in 1996, electronic filings that year

were still below the 13.5 million individual returns filed electronically in

1994 and below IRS’ projection of about 13.6 million returns in 1996.

A major impediment to the growth of electronic filing is that the method is

not completely paperless. Taxpayers must send IRS their W-2s and a

signature document (Form 8453) after their return has been electronically

transmitted. IRS must then manually input these data and match them to

the electronic return.

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

tested the use of digitized signatures during the 1996 filing season. The

goal of that test was to gauge the willingness of taxpayers and preparers to

use an electronic signature pad in place of signing a Form 8453.12 The

electronic signature was attached to the electronic return and both were

transmitted to IRS. The test was conducted at three locations (two VITA

sites located on military bases and a private, tax return preparation office).

According to IRS officials, about 50 percent of the taxpayers who were

offered the chance to participate in the test agreed to do so. Given the

level of participation in 1996 and positive preparer feedback, IRS plans to

expand the test in 1997, but details of that expansion will not be finalized

until just before the filing season begins.

Besides eliminating the paper associated with electronic returns, there are

other steps IRS could take to increase the use of electronic filing. In

October 1995, we reported that without some dramatic changes in IRS’

electronic filing program, many of the benefits available from electronic

filing could go unrealized.13 We recommended that IRS (1) identify those

groups of taxpayers that offer the greatest opportunity to reduce IRS’

paper-processing workload and operating costs if they filed electronically

12Test participants were also granted a waiver from the requirement to submit W-2s. According to an

IRS official, tax return preparers were instructed to review the paper W-2s and not prepare electronic

returns for taxpayers whose W-2s looked fraudulent.

13Tax Administration: Electronic Filing Falling Short of Expectations (GAO/GGD-96-12, Oct. 31, 1995).

Page 12 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

and (2) develop strategies that focus on eliminating or alleviating

impediments that inhibit those groups from participating in the program.

As of October 9, 1996, IRS was finalizing a new electronic filing strategy.

Telefile TeleFile generally provides the same benefits to taxpayers and IRS as

electronic filing. However, TeleFile is more convenient and less costly

than electronic filing because the latter requires that taxpayers go through

a third party. The increase in taxpayer use of TeleFile in 1996 was due

primarily to the program’s expansion nationwide. As shown in table 1, IRS

received about 2.8 million TeleFile returns in 1996, when TeleFile was

available to taxpayers in 50 states, compared with 680,000 in 1995, when

Telefile was available in only 10 states. Although most of the increase was

due to the program’s nationwide expansion in 1996, TeleFile use also

showed a significant rate of increase in the 10 states that were in the

program in 1995 (from 680,000 returns in 1995 to 804,732 in 1996—an

18-percent increase). A major change that might have contributed to the

increase in TeleFile use was IRS’ decision to make TeleFile paperless in

1996. Unlike past years, taxpayers did not have to mail their W-2s or a

signature document to IRS. Instead of the signature document, taxpayers

used a personal identification number that was provided by IRS.

14

IRS’ Internal Audit Division reviewed the 1996 TeleFile Program and

concluded that management had “effectively prepared for and successfully

implemented” the nationwide expansion of TeleFile.15 For example,

Internal Audit noted that (1) its sample of returns filed through TeleFile

showed that all tax calculations were correctly computed and that data

had been posted accurately to IRS’ master file of taxpayer accounts and

(2) taxpayer demand for TeleFile during the 1996 filing season was

generally met. However, Internal Audit also noted that IRS had not

completed a system security certification and accreditation and thus had

no assurance that taxpayer data were adequately secured. According to

Internal Audit, certification is a comprehensive evaluation of a system’s

security features; accreditation is a declaration that the system is

approved to operate. As of November 21, 1996, according to the TeleFile

Project Manager, IRS was working to complete the certification and

accreditation.

14Instead of mailing their W-2s to IRS, taxpayers were required to enter certain data from the W-2s

(such as the employer identification number and the amount of taxable wages) into the TeleFile

system.

15Review of the 1996 TeleFile Program, IRS Internal Audit, Reference No. 064401, June 14, 1996.

Page 13 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

Internal Audit’s evaluation and various statistics compiled by IRS, including

the results of an IRS survey of TeleFile users, indicate that TeleFile worked

very well in 1996. For example, about 92 percent of the users surveyed by

IRS said that they were very satisfied with TeleFile. However, it is

important to note that only about 10 to 14 percent of the more than

20 million 1040EZ filers who IRS estimated would be eligible to use the

system in 1996 actually used it.16 IRS did not survey the nonusers because,

according to IRS officials, past surveys showed that the most important

reason eligible users cited for not using TeleFile was their preference for a

paper version. However, those past surveys did not probe into why

nonusers preferred paper.

According to the TeleFile Project Manager, IRS plans several changes to

TeleFile for the 1997 filing season, which he estimates will increase the

participation rate to about 25 percent. For example, he said that eligibility

to use TeleFile will be extended to married persons filing jointly and

TeleFile users will be able to take advantage of the direct-deposit option

that was available to other taxpayers in 1996 (this option is discussed later

in this report).

The most significant change for 1997, in terms of its potential impact on

taxpayer participation, is IRS’ decision to revise the tax package sent to

persons eligible to use TeleFile. Instead of sending eligible users a package

that also contains a Form 1040EZ and related instructions, in case they

choose not to use TeleFile, IRS has decided to send them a much smaller

package that contains only the TeleFile worksheet and instructions.

Although this action may encourage more persons to use TeleFile and

reduce IRS’ overall printing and mailing costs, it could be seen as imposing

a burden on persons who, for whatever reason, prefer not to use TeleFile

and would, in that case, need a Form 1040EZ. It is unclear how taxpayers

will react to this change. On the one hand, IRS summaries of three

1040EZ/TeleFile focus groups held in August and September 1996

indicated that focus group participants did not view the noninclusion of

Form 1040EZ as a burden because they could easily get a copy, if needed,

from their local library or post office. On the other hand, a mail survey that

IRS sent to a random number of TeleFile users in 1996 showed that about

28 percent of the respondents thought it was very important that the

1040EZ information be included in the TeleFile package.

16There was conflicting IRS information on the number of eligible filers, which we were unable to

resolve before finalizing the report. However, we are confident that the percentage of use falls

somewhere within the range cited.

Page 14 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

Form 1040PC The increase in the use of Form 1040PC during the 1996 filing season

resulted, in part, from the largest user’s (a tax return preparation firm)

rejoining the program after dropping out in 1995. For the 1995 filing

season, IRS initially required that preparers provide taxpayers with a

specifically formatted legend explaining the Form 1040PC.17 However,

after the 1995 filing season began, IRS decided not to require the

specifically formatted legend but to allow preparers to provide any type of

descriptive printout that explained each line on the taxpayer’s Form

1040PC. According to an executive of the previously mentioned tax return

preparation firm, (1) the firm chose not to participate in the program in

1995 rather than comply with the requirement for a specifically formatted

legend and (2) IRS’ decision to change its requirement came too late for the

firm to change its plans. The firm then rejoined the program for the 1996

filing season.

The Form 1040PC was developed to reduce the number of pages that a

standard Form 1040 requires, which is a benefit to taxpayers and IRS, and

to streamline paper processing. Although use of the Form 1040PC reduces

the amount of paper, IRS has not yet realized the full processing

efficiencies available from that form. Because of problems encountered

with IRS’ new document scanning and imaging system, as discussed in the

next section of this report, IRS terminated plans to have Forms 1040PC

scanned and, instead, is manually keying data from the forms into its

computers.

Problems Have Hampered

Efforts to Modernize Paper

Processing Systems

The Distributed Input System (DIS), which is IRS’ primary data entry system

for paper tax returns and other paper documents submitted by taxpayers,

has been in operation since 1984. Although DIS generally performed

without major problems during the 1996 filing season, its age is a source of

concern within IRS. IRS had planned to replace DIS with two document

scanning and imaging systems. The first replacement system, the Service

Center Recognition/Image Processing System (SCRIPS), was implemented

nationwide in 1995 and is not yet performing to IRS’ expectations at that

time. On October 8, 1996, IRS announced that the second planned system,

the Document Processing System (DPS), was being terminated.

SCRIPS Is Not Performing to

IRS Expectations

IRS experienced significant performance problems with SCRIPS in 1995,

which was the system’s first year of nationwide operation. Two major

problems were significant system downtime and slow processing rates.

17The legend’s purpose was to provide better supporting documentation than was previously available

to the taxpayers, and it was to be used as an aid in doing things such as preparing state returns and

completing financial aid forms.

Page 15 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

IRS made some hardware and software modifications that helped improve

the performance of SCRIPS during the 1996 filing season. IRS officials in all

five SCRIPS service centers told us that SCRIPS performed significantly better

during the 1996 filing season than it did in 1995. Specifically, IRS data for

April through June of 1995 and 1996 (the first 3 months for which IRS had

comparable data) indicate that system downtime decreased from 791

hours in 1995 to 43 hours in 1996.

Despite the improved performance in 1996, SCRIPS (1) is still not processing

all of the forms that it was expected to process and (2) may cost more

than originally estimated. In an October 1994 business case for SCRIPS, IRS

said that, by 1996, the system would be processing all Federal Tax Deposit

coupons and information returns, all Forms 1040EZ, 50 percent of the

Forms 1040PC, and 93 percent of the Forms 941 (Employers Quarterly

Federal Tax Return). In fiscal year 1996, SCRIPS processed all Federal Tax

Deposit coupons and information returns, as expected. However, SCRIPS

only processed about 50 percent of the Forms 1040EZ and did not process

any Forms 1040PC or Forms 941. In addition, the cost estimate for SCRIPS

has increased from $133 million in October 1992 to a current estimate of

$288 million. Part of the increase is due to the inclusion of certain costs,

such as for maintenance, that were not part of the original estimate.

We will be issuing a separate report that has more information on SCRIPS’

problems in 1995, its performance in 1996, and IRS’ plans for the system in

the future.

DPS Terminated A second scanning system, DPS, was to replace SCRIPS and expand IRS’

imaging capability to more complex tax forms. IRS expected DPS to begin

handling some of the DIS workload by the start of the 1998 filing season.

However, due to concerns about the future of DPS, IRS reassessed its

strategy for processing paper tax returns. According to IRS, part of the

reassessment involved options, such as outsourcing the processing of

some returns and/or acquiring a new manual data entry system to replace

DIS. As of September 26, 1996, according to a cognizant IRS official, the

reassessment was done but a final decision had not yet been reached. That

reassessment took on added importance when IRS announced, on

October 8, 1996, that DPS was being terminated. IRS attributed that decision,

at least in part, to budgetary concerns and “the need to prioritize

investments in systems that have a direct and immediate benefit on

improved customer service, such as better telephone access.”

Page 16 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

The uncertainty of IRS’ plans for processing paper returns means that IRS

may have to continue to rely on DIS longer than it had originally expected.

In a February 1996 report, Internal Audit said that DIS could be required to

process forms until 2003.18 Over the course of the 1996 filing season,

various service center officials expressed concern about IRS’ ability to

adequately maintain and repair the system. Despite their concerns, DIS

performed satisfactorily during the filing season. Officials also told us that,

until this year, IRS had not kept detailed maintenance records to capture

DIS downtime. Thus, an accurate comparison of DIS downtime and system

reliability over the years is not possible. We recently began a review of IRS’

ability to maintain current operating levels with its existing systems.

Use of Lockboxes to

Process Form 1040 Tax

Payments Raises Burden,

Cost, and Security Issues

IRS envisions that by 2001, most tax payments will be processed by

lockbox banks rather than by IRS service centers. The banks process the

payments and transfer the funds to a federal government account. The

payment and payer information are then recorded on a computer tape and

forwarded to IRS for use in updating taxpayer accounts. One reason for

using lockboxes is the expectation that tax payments will be deposited

faster into the Treasury. Faster deposits mean that the government has to

borrow less money to fund its activities and less borrowing means lower

interest costs (otherwise known as “interest cost avoidance”).

IRS’ Testing of Lockboxes to

Process Form 1040 Payments

Since 1989, IRS has used lockboxes to process payments sent in with

estimated tax returns (Forms 1040ES). For the last several years, IRS has

been testing the use of lockboxes to process payments sent in by

individuals when they file their income tax returns (Forms 1040). For the

1996 test, IRS sent special Form 1040 packages to specific taxpayers. These

packages included (1) mailing instructions and (2) a payment voucher that

could be scanned by optical character recognition equipment.

The test packages contained one return envelope with two different

tear-off address labels. One label, which was addressed to a lockbox, was

to be used for a return with an accompanying tax payment, and the other

label, which was addressed to a service center, was to be used for a return

with no payment. Taxpayers with payments were instructed to put their

returns, payments, and vouchers in the envelope in their tax packages and

to affix the label addressed to the lockbox. The bank that serviced the

lockbox was to separate the returns from the payments, deposit the

payments, record the payment information on a computer tape, sort the

18Review of the Distributed Input System Transition/Contingency Plan, IRS Internal Audit, Reference

No. 062208, February 23, 1996.

Page 17 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

returns,19 and forward the returns and the computer tape to IRS for

processing.

IRS had tested another mailing method during the 1994 and 1995 filing

seasons. This test involved the use of two envelopes. One envelope was

addressed to a service center, and the other envelope was addressed to a

lockbox. Taxpayers were instructed to put their tax returns in the

envelope addressed to the service center and to put any payments and

vouchers in the envelope addressed to the lockbox. The bank was to

process the payments and vouchers as previously described.

Lockbox Burden, Cost, and

Security Issues

IRS has decided, for the 1997 filing season, to continue testing the two-label

method in certain tax packages. According to an IRS official responsible for

the lockbox program, IRS will no longer use the two-envelope approach

due to the increased taxpayer burden IRS anticipates the approach would

cause. She explained that IRS has found, in its studies of taxpayer behavior,

that, among other things, taxpayers who participated in the test preferred

to keep their remittances and returns together. Because of this, IRS

believes that asking taxpayers to split their tax payments from their

returns is burdensome.

The studies referred to by IRS, all of which were done by a contractor in

1993 and 1994, included mail and telephone surveys of about 1,900

taxpayers, interviews with 46 individuals, and 5 taxpayer focus groups. We

reviewed the contractor’s reports and considered the results to be

inconclusive as they related to burden. For example, of the people

surveyed by mail and telephone who said they remembered what they did

in the test, 45.9 percent said that they felt uneasy about mailing their

checks and returns in separate envelopes while 41.2 percent said that they

did not feel uneasy (the other 12.9 percent did not know). The results of

the 46 interviews showed a similar lack of consensus, in our opinion.

Several people said that they preferred using one envelope because it was

easier or because they were worried about the payments and the tax

returns not getting linked if they were sent to two different places.20 But,

several other people said that they preferred using two envelopes because

they were concerned about the confidentiality of their tax returns or the

19In some cases, the payment sent in by a taxpayer does not fully satisfy the tax liability reported on

the return. Because IRS gives priority processing to those returns, so that it can speed up issuance of a

balance due notice to the taxpayer, the banks are to segregate those returns from returns that do not

have a balance due.

20It is important to note that, if linkage were a concern, the use of one envelope is not the answer. Even

though both the return and payment originally go to the same location (the bank), they are processed

at two separate locations (the payment at the bank and the return at the service center), just as they

would be under the two-envelope method.

Page 18 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

increased risk of their returns getting lost. Even some of those who

preferred one envelope expressed concern about the banks’ involvement

in handling their returns.

Burden is one issue to consider in deciding on the use of lockboxes; cost is

another. Information we received from IRS and FMS indicates that having

taxpayers send their returns to the lockboxes along with their payments

has substantially increased the cost of the lockbox service to the

government. During the first 8 months of the 1996 filing season, according

to IRS, the lockbox banks had processed about 7 million Form 1040

payments. According to FMS, the government paid the banks an average of

$2.03 per payment in 1996—98 cents to process each payment, 92 cents to

sort each accompanying tax return, and 13 cents to ship each return to a

service center—and the same fees will be in effect until April 1, 1997.21

Fees after that date are subject to negotiation between FMS and the banks.

Cognizant FMS staff said that the banks have been charging such a high fee

for sorting returns to encourage IRS to stop having the returns sent to the

banks.

Service centers process returns received from a lockbox bank in the same

manner as they process returns that come directly from taxpayers, with

one exception—the returns coming from the bank do not have to be

sorted by IRS. According to IRS data, not having to sort the returns saves IRS

about 37 cents a return22—much less than the 92 cents per return being

charged by the banks. Thus, assuming a volume of 7 million returns, the

government paid about $6.4 million for a service (return sorting) that it

could have done itself for about $2.6 million, or about $3.8 million less.

Shipping those returns cost the government another $910,000.

According to FMS, the use of lockboxes to process Form 1040 tax payments

enabled the government to avoid interest costs of $15.7 million in fiscal

year 1996.23 This interest cost avoidance compares with $1.6 million in

21FMS, not IRS, has been paying these fees and will continue to do so in 1997.

22According to IRS’ data, which we did not verify, the 37 cents includes direct labor, benefits, quality

assurance, and overhead.

23FMS, in computing interest cost avoidance, assumed that the lockbox banks were able to deposit tax

remittances 3 days faster, on average, than the service centers. Although we did not do sufficient work

to validate that assumption, information we obtained during this review, along with related

information obtained during reviews of past filing seasons, indicates that the assumption is reasonable.

Page 19 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

fiscal year 1995.24 Because these savings result from faster processing of

tax payments, having the banks sort and ship the tax returns does not add

to the savings and could, by increasing the banks’ workload, cause

processing delays that would reduce any savings.

In an August 30, 1996, letter to Treasury’s Fiscal Assistant Secretary, IRS’

Deputy Commissioner acknowledged the high costs associated with

having returns sent to lockboxes. In a September 11, 1996, reply, the

Assistant Secretary also expressed some concern about the costs

associated with the processing of Form 1040 tax payments through

lockboxes. The Assistant Secretary said that “[t]he most appealing option

from a cost standpoint is the two-envelope concept. This option . . . makes

good business sense as tax payments and tax returns are sent to the

appropriate place best prepared to handle them.”

As a way to lower costs, the Assistant Secretary suggested that IRS explore

the possibility of not having the banks sort the returns and have the

sorting done by the service centers. We discussed this option with officials

in IRS’ National Office and at one service center. We were told that it would

be difficult for service centers to sort the returns once they had been

separated from the payments because the service center would not know

if the taxpayer had fully paid his or her tax liability.25 According to the IRS

officials, that distinction is important because, as previously discussed,

returns involving less than full payment are given priority processing to

enable more timely issuance of the balance-due notice to the taxpayer. IRS

had considered adding a checkbox on the return for the taxpayer to

indicate whether full payment was enclosed with the return. According to

IRS, asking taxpayers to check such a box would be another form of

burden—although not a significant one.

Security is a third issue that needs to be considered in deciding how to use

lockboxes. As previously noted, several individuals who participated in the

focus groups and interviews about IRS’ use of lockboxes expressed

concern that their returns would be lost or their return data would be

misused. We did not do a thorough analysis of security at the lockbox

banks. However, we reviewed security and processing procedures at 2 of

24In our report on the 1995 filing season (GAO/GGD-96-48), we referred to an interest cost avoidance of

$44.3 million in 1995. That figure related to all tax remittances being processed through lockboxes,

including estimated tax payments. The $1.6 million figure relates just to remittances associated with

Form 1040.

25This would also be a problem under the two-envelope method because the return and payment would

be separated.

Page 20 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

the 10 lockbox banks and found that controls exist to minimize the risk of

lost or misused tax data.

IRS’ lockbox procedures require that the tax returns be separated from the

payment as soon as the envelope is opened. Only personnel who open the

envelopes and their supervisors are to have access to the returns. Security

cameras are to monitor all of the lockbox processing. The returns are to

be bundled and packed into boxes as soon as they are separated from the

payment. Each day, the boxes of returns are to be shipped by bonded

courier to the service center. Background checks, such as a criminal

record check, are to be done on lockbox personnel hired by the bank.

These are the same checks that are to be done on IRS service center

personnel with the same duties. Bank personnel, like service center

employees, are to sign statements of understanding about the

confidentiality of the information they will process and the penalties for

disclosing any of this information. IRS and FMS lockbox coordinators are to

visit the banks to ensure compliance with these procedures and are to

submit quarterly reports on the basis of those visits. An FMS staff person

who was responsible for IRS’ lockbox processing program told us there

have been no known incidents of disclosure of taxpayer information from

a lockbox bank.

During our visits to the two banks, we observed the security-surveillance

cameras in operation and verified that badges were being worn by all

personnel and that access to the processing area was controlled by a

guard. We also reviewed judgmental samples of personnel files and, for

each employee whose file we reviewed, we (1) found that disclosure

statements were maintained and (2) saw evidence that background checks

had been done.

Use of Direct-Deposit

Option Was Not as

Widespread as IRS Had

Expected

Unlike past years, IRS allowed taxpayers who filed paper returns in 1996 to

request that their refunds be deposited directly to their bank account

through an electronic fund transfer. IRS included a Form 8888 (Request for

Direct Deposit of Refund) in almost all paper tax packages. IRS estimated

that about 5 million taxpayers who filed paper returns would request the

direct-deposit option and, on average, that the option would enable paper

filers to get their refunds 10 days faster than if they had waited for a paper

check. IRS also estimated that it would cost about 25-percent less to

process a Form 8888 than it costs to mail a paper refund check (20 cents

per form v. 27 cents per paper check).

Page 21 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

Only about 1.6 million taxpayers took advantage of the direct deposit

option. An IRS official said that IRS will retain its goal of about 5 million

direct-deposit refunds for the 1997 filing season. IRS has taken a couple of

steps to enhance its chances of achieving that goal. Most significantly, it

has eliminated the Form 8888. Instead of having a separate form, most of

the individual income tax forms will be revised to provide space for the

taxpayer to request a direct deposit and to provide the necessary bank

account information. Also, as previously noted, TeleFile users will be able

to request a direct deposit in 1997.

Conclusions Was the 1996 filing season a success? The answer depends on one’s

perspective. From IRS’ standpoint, it was a success. IRS met or exceeded all

but one of its performance goals and was very close to meeting the other.

IRS was able to process individual income tax returns and refunds without

any apparent problem, with its aging computer systems having made it

through another filing season. From the taxpayer’s perspective, the filing

season was also successful in many key respects. For example, relatively

few refunds were delayed in 1996, unlike 1995 when millions of taxpayers

were angered by IRS’ decision to delay their refunds while it checked

dependent and EIC claims; more taxpayers were given the opportunity to

file by telephone and to have their refunds directly deposited into their

bank accounts; and IRS’ World Wide Web site on the Internet provided a

convenient source of information for taxpayers with access to a computer.

However, there were some problems in 1996. Although the accessibility of

IRS’ toll-free telephone assistance improved, taxpayers continued to have

problems reaching IRS by telephone, and some taxpayers may have been

inconvenienced by the reduction in IRS’ walk-in services.

IRS has several efforts under way to modernize the systems and procedures

it has used for many years to process returns, remittances, and refunds.

These efforts are essential if IRS is to successfully meet the demands of

future filing seasons. To date, the results of those efforts have been mixed.

IRS has taken steps to enhance its efforts. For example, IRS is (1) expanding

eligibility for TeleFile and taking other steps in an effort to increase the

use of that filing alternative, (2) working to make electronic filing

paperless by broadening its test of digitized signatures, (3) making it easier

for taxpayers to request direct deposits of their refunds, and

(4) reassessing its strategy for processing paper tax returns.

Even if IRS is successful in increasing the TeleFile participation rate to

25 percent in 1997, that would still leave a large number of eligible users

Page 22 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

who choose not to use TeleFile. We believe that IRS’ efforts to expand the

use of TeleFile could be enhanced if it had more specific information on

why eligible users prefer to file on paper. More specifics might help IRS

identify barriers to TeleFile use and develop mitigating strategies.

We also question whether IRS’ decision to have taxpayers send both their

tax returns and their tax payments to lockboxes and to have banks sort

those returns adequately considered both the costs to the government and

taxpayer burden. Although it is important to minimize taxpayer burden,

the evidence we were given was not convincing concerning the amount of

burden associated with using two envelopes, especially in light of the

extra cost to the government associated with using one envelope (about

$4.7 million during the first 8 months of the 1996 filing season). It is

understandable that persons contacted by IRS’ contractor, when asked to

choose between one or two envelopes, would pick one, because it is easier

to put everything into one envelope than to segregate things into two

envelopes and pay additional postage. But, it is not clear that those

persons considered the use of two envelopes an unreasonable burden. Nor

is it clear how those persons might have responded if they were told that

the use of one envelope causes the government to spend several million

dollars more than it would if taxpayers used two envelopes.

The cost associated with using lockboxes to process Form 1040 tax

payments might become less of an issue if the government is able to

negotiate bank fees for sorting that are more comparable to the service

center costs for that activity. Absent lower fees, an alternative is to

continue to have returns sent to the bank but to have the banks ship the

returns to the service centers unsorted. That would require IRS to add a

checkbox to the return (which would also be required if IRS decided to use

two envelopes) but checking a box would likely be perceived by taxpayers

as less of a burden than using two envelopes. However, while a reduction

in bank fees or a decision to accept returns from the banks unsorted

would make the one-envelope method more advantageous, they would not

relieve the anxiety expressed by some taxpayers about their returns being

lost or misused by bank personnel.

Recommendations to

the Commissioner of

Internal Revenue

If most eligible TeleFile users do not use the system during the 1997 filing

season, as IRS is anticipating, we recommend that the Commissioner of

Internal Revenue conduct a survey to determine why, including more

specific information on why the nonusers prefer to file on paper, and take

steps to address any identified barriers to increased user participation.

Page 23 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

If the government is unable to negotiate lockbox fees that are more

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

data on taxpayer burden, we recommend that the Commissioner, for filing

seasons after 1997,26 either discontinue having returns sorted by the banks

or reconsider the decision to have taxpayers send their tax returns to the

banks along with their tax payments.

We are not making any recommendations in this report to address

problems with telephone accessibility and electronic filing because we

have recently issued separate reports on these topics.27 We will also be

issuing a separate report on SCRIPS.

Agency Comments

and Our Evaluation

We requested comments on a draft of this report from the Commissioner

of Internal Revenue or her designated representative. Responsible IRS

officials, including the Assistant Commissioner for Forms and Submission

Processing, the National Director for Submission Processing, and the

National Director for Customer Service (Planning and Systems), provided

IRS’ comments in a November 6, 1996, meeting. Those comments were

reiterated in a November 18, 1996, memorandum from the Acting Chief of

Taxpayer Service. IRS officials also provided some factual clarifications

that we incorporated in the report where appropriate.

IRS agreed with our recommendation that it determine why more eligible

taxpayers do not use TeleFile, including more specific information as to

why nonusers prefer to file on paper. IRS officials told us that by the end of

fiscal year 1997, IRS would conduct a focus group study of TeleFile

nonusers to determine why they prefer to file on paper and to identify any

barriers.

IRS officials said that steps have also been taken to address some concerns

identified by past nonuser surveys. IRS believes that taxpayers’ preference

for paper returns is linked to their familiarity with the form. The TeleFile

worksheet that taxpayers had been instructed to fill out and maintain as a

record of their filing did not have the same “official” appearance as a tax

form. For the 1997 filing season, according to IRS officials, TeleFile users

will be instructed to complete a TeleFile Tax Record instead of a

worksheet. As described by the officials, the TeleFile Tax Record will

26Our recommendation is directed at filing seasons after 1997 because it is too late for IRS to

reconsider its lockbox plans for the 1997 filing season.

27Telephone Assistance: Adopting Practices Used by Others Would Help IRS Serve More Taxpayers

(GAO/GGD-95-86, Apr. 12, 1995) and GAO/GGD-96-12.

Page 24 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
B-271107 

(1) include lines for the taxpayer’s name and address, (2) look more like

the Form 1040EZ, and (3) be an official document. IRS hopes this change

will provide potential TeleFile users with a higher comfort level. IRS

officials also said that advertisements and other publicity tools that were

used in 1996 will be emphasized again in 1997 to educate the public on the

simplicity of using TeleFile.

In commenting on our second recommendation, IRS officials said that IRS,

in conjunction with FMS, has formed a task force to identify a long-term

solution for 1998 and beyond for directing Form 1040 tax payments to

lockboxes. According to the officials, the group has been tasked with

(1) identifying options that complement Treasury’s goals of increasing the

availability of funds and reducing the cost of collecting federal funds,

(2) reviewing what is required of lockboxes by IRS to minimize operational

and ancillary costs, and (3) making recommendations to management. The

group is scheduled to present their findings to management by

March 1997. This time frame should provide IRS with information to make

a decision on Form 1040 tax payment processing that could be

implemented for the 1998 filing season.

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

Minority Member, the Chairmen and Ranking Minority Members of the

House Committee on Ways and Means and the Senate Committee on

Finance, various other congressional committees, the Secretary of the

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

of Management and Budget, and other interested parties.

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

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

Sincerely yours,

Lynda D. Willis

Director, Tax Policy and

 Administration Issues

Page 25 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
Contents

Letter 1

Appendix I 

IRS’ Performance

Goals for the 1995 and

1996 Filing Seasons

and Related

Accomplishments

28

Appendix II 

Major Contributors to

This Report

30

Table Table 1: Number of Individual Income Tax Returns Received

Through Alternative Filing Methods

11

Abbreviations

DIS Distributed Input System

DPS Document Processing System

EIC Earned Income Credit

FMS Financial Management Service

IRS Internal Revenue Service

QRP Questionable Refund Program

SCRIPS Service Center Recognition/Image Processing System

SSN Social Security Number

TCE Tax Counseling for the Elderly

VITA Volunteer Income Tax Assistance

Page 26 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
Page 27 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
Appendix I 

IRS’ Performance Goals for the 1995 and

1996 Filing Seasons and Related

Accomplishments

1995 filing seasona 1996 filing seasona

Performance indicator Goal Accomplishment Goal Accomplishment

Accuracy of returns

processed by Code

and Edit staffb

Process 93.0%

accurately

94.1% were processed

accurately

Process 93.0%

accurately

94.0% were processed

accurately

Accuracy of returns

processed by data

transcribers

Process 94.0%

accurately

94.6% were processed

accurately

Process 93.0%

accurately

94.2% were processed

accurately

Service centers’ returns

processing productivityc

Process 9,800 returns

per staff year

10,820 returns were

processed per staff

year

Process 10,000 returns

per staff year

12,174 returns were

processed per staff year

Returns processing

cycle timed

11 days Various types of 1040s

ranged between 5 and

9 days

11 days Various types of 1040s

ranged between 8 and

11 days

Accuracy of refunds on

paper returns

Process 97.0%

accurately

99.5% were processed

accurately as of May

1995

Process 98% accurately 99.6% were processed

accurately as of May

1996

Timeliness of refunds on

paper returnse

Issue within an average

of 40 days

Issued within an

average of 36 days as of

May 1995

Issue within an average

of 40 days

Issued within an average

of 38 days as of May

1996

Timeliness of processing

tax payments submitted

with returns

Payments received

4/17/95 through 5/2/95

were to be deposited no

later than 5/3/95

All payments received

4/17/95 through 5/2/95

were deposited by

5/3/95

Payments received

4/15/96 through 5/1/96

were to be deposited no

later than 5/1/96

All payments received

4/15/96 through 5/1/96

were deposited by

5/1/96

Tax assistance

telephone calls

scheduled to be

answeredf

Answer 16.5 million calls 19.2 million calls were

answered (116% of

schedule)

Answer 19.2 million calls 22.9 million calls were

answered (119.5% of

schedule)

Taxpayer service level of

accessg

Not applicable Not applicable Provide 41.4% level of

access

Provided 50% level of

access

Accuracy of tax law

assistance

Answer 90% accurately 90% were answered

accurately

Answer 90% accurately 91% were answered

accurately

Forms-ordering

telephone calls

scheduled to be

answeredf

Answer 4.4 million calls 4.2 million calls

answered (95.7% of

schedule)

Answer 4 million calls 3.9 million calls

answered (98.3% of

schedule)

Accuracy of processing

form orders

Process 96.5%

accurately

97.2% processed

accurately

Process 96.5%

accurately

97.3% processed

accurately

(Table notes on next page)

Page 28 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
Appendix I 

IRS’ Performance Goals for the 1995 and

1996 Filing Seasons and Related

Accomplishments

aData are as of April 1995 and April 1996, unless otherwise noted.

bCode and Edit staff prepare returns for computer entry by, among other things, ensuring that all

data are present and legible.

cThe “returns processing productivity” indicator is based on the number of weighted returns

processed, which includes all returns whether they were processed manually, through scanning

equipment, or electronically. The different types of returns are weighted to account for their

differing processing impacts. For example, a paper Form 1040 has a higher weighting factor than

a paper Form 1040EZ, which in turn has a higher weighting factor than electronically processed

returns.

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

eThe “refund timeliness” indicator is based on a sample of paper returns and is calculated starting

from the signature date on the return to the date the taxpayer should receive the refund, allowing

2 days after issuance for the refund to reach the taxpayer. As discussed in our report on the 1995

filing season (GAO/GGD-96-48), the 36-day accomplishment cited for 1995 was slightly

understated by the exclusion of certain refunds that, according to IRS’ standards, should have

been included. That issue was not a problem in 1996.

f

The “calls scheduled to be answered” indicator is the number of telephone calls IRS believes its

call sites will be able to answer with available resources. The indicator does not reflect the

number of calls IRS expects to receive.

gThe “level of access” indicator is the number of calls answered divided by the number of

individual callers. See pages 4 to 6 for more information on this indicator.

Source: IRS data.

Page 29 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
Appendix II 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

David J. Attianese, Assistant Director, Tax Policy and Administration

Issues

William H. Bricking, Senior Evaluator

Robert L. Giusti, Senior Evaluator

Monika R. Gomez, Evaluator

Christopher E. Hess, Evaluator

Kansas City Field

Office

Royce L. Baker, Issue Area Manager

Doris J. Hynes, Evaluator-in-Charge

H. Yong Meador, Evaluator

Atlanta Field Office Katherine P. Chenault, Senior Evaluator

Jyoti Gupta, Evaluator

(268717) Page 30 GAO/GGD-97-25 IRS’ 1996 Tax Filing Season
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