TAX

ADMINISTRATION

IRS’ 1998 Tax Filing

Season

United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Oversight, Committee on Ways and

Means, House of Representatives

December 1998

GAO/GGD-99-21

United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-279310

Page 1 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

GAO

December 31, 1998

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 1998 tax filing season. In addition

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

season performance, we discuss six areas about which you specifically

inquired: (1) IRS’ efforts to increase the use of electronic filing; (2) IRS’

progress in addressing an issue discussed in our reports on the 1996 and

1997 filing seasons involving the use of private banks to process some tax

payments;1

 (3) IRS’ implementation of the 1997 tax law change dealing

with capital gains; (4) the status of IRS’ efforts to reduce Earned Income

Credit (EIC) noncompliance; (5) the ability of taxpayers seeking assistance

to reach IRS by telephone; and (6) other IRS efforts to provide information

to taxpayers, such as its World Wide Web site on the Internet and TeleTax

(an automated system that provides recorded information on a variety of

tax topics). Finally, we discuss IRS’ test of a new processing system that

has implications for future filing seasons. In March 1998, we testified

before the Subcommittee on the interim results of our work.2

IRS has several indicators that it uses to judge the success of a filing

season. For the 1998 filing season, those indicators showed that IRS

generally met or exceeded its performance goals. Included in IRS’

indicators are measures of the timeliness of its processing of refunds, the

accessibility of its telephone service, the accuracy with which it processes

returns, and the accuracy of assistance it provides over the telephone.

Although millions of taxpayers used the services provided by IRS’ walk-in

sites during the 1998 filing season, IRS did not have meaningful nationwide

data for assessing the performance of those sites.

 

1

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

Results (GAO/GGD-97-25, Dec. 18, 1996) and Tax Administration: IRS’ 1997 Tax Filing Season

(GAO/GGD-98-33, Dec. 29, 1997).

2

Tax Administration: IRS’ Fiscal Year 1999 Budget Request and Fiscal Year 1998 Filing Season (GAO/TGGD/AIMD-98-114, Mar. 31, 1998).

Results in Brief
B-279310

Page 2 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

This report addresses several other matters related to the 1998 filing

season. For example:

• Although the overall number of individual income tax returns filed in 1998

increased by less than 2 percent from 1997, the number of returns filed

electronically, including the number filed over the telephone (i.e.,

TeleFile), increased at a more robust rate—about 28 percent. According to

IRS and our analysis, the increase in electronic filing was due, in part, to

(1) a decision by the largest nationwide return preparation company to

include electronic filing in its basic return preparation fee and (2) a change

in IRS’ procedures that made more persons eligible to use TeleFile in 1998.

• Even with the 28-percent increase in electronic filing, about 98.5 million

returns (80 percent) were filed on paper in 1998. IRS’ most recent survey

of taxpayers who were eligible to use TeleFile, but who chose not to,

identified one possible step IRS could take to increase the use of that filing

alternative. Over 70 percent of the respondents to that survey said that

they would have been encouraged to file by telephone if the special tax

package they were sent included the tax table. IRS has opposed including

the tax table in the package because doing so would increase the size and

cost of the package and because taxpayers do not need the table to file by

telephone. Although IRS is correct on both counts, it has not conducted a

test to determine whether the potential increase in TeleFile use would

justify the additional cost of including the tax table in the package.

• IRS uses private banks, known as lockboxes, to process some tax

payments submitted with Forms 1040 (U.S. Individual Income Tax Return).

As part of that arrangement, IRS requires that taxpayers send their tax

returns, along with their payments, to the banks. The government pays the

banks several million dollars to sort those returns and ship them to IRS for

processing. As we reported in 1997, IRS has inadequate evidence to justify

the additional cost associated with having banks handle tax returns.

• The return processing procedures that IRS adopted in implementing a

legislative change relating to capital gains led to processing delays and

increased taxpayer burden in 1998. IRS plans to revise its procedures for

the 1999 filing season. The revisions, if effectively implemented, should

alleviate some of the problems encountered in 1998.

• IRS expanded its efforts to ensure that taxpayers filed correct EIC claims

in 1998. However, EIC criteria may not have been applied consistently at

service centers due to a lack of controls and standardized procedures to

ensure that field offices receive timely notification of procedural changes.

Also, as we previously reported, IRS could have done more to alert

taxpayers to the consequences of falsely claiming the EIC and could have
B-279310

Page 3 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

provided special EIC assistance earlier in the filing season.3 IRS plans

changes in 1999 that partially address these issues, but more can be done.

• The measures that IRS uses to judge the accessibility of its telephone

service showed substantial improvement. For example, the level of

service, which identifies the percentage of calls that received an answer,

increased from 52.6 percent in 1997 to 73.7 percent in 1998. The results of

our test of access to IRS’ tax assistance telephone number were consistent

with IRS’ reported increase. IRS took several steps in 1998 that may have

contributed to the improved accessibility, including (1) extending the

hours during which taxpayers could call IRS and speak to an assistor,

(2) expanding its use of voice messaging, and (3) increasing the number of

staff available to answer the telephone during peak calling periods.

• Use of IRS’ Web site, as measured by the number of “hits,” increased by

187 percent this year, while the number of files downloaded from that site

increased by about 313 percent. We tested the downloading of forms and

publications during the year and consistently found that the process was

quick and easy.

• Use of TeleTax decreased about 15 percent during the 1998 filing season.

Customer satisfaction surveys show that a majority of the users of TeleTax

expressed some dissatisfaction with that service. However, the survey only

asked if users were satisfied or dissatisfied; it did not ask any follow-up

questions that could be used to determine why a respondent might have

been dissatisfied.

We also monitored IRS’ test of a new system for processing returns and

remittances. Because of problems with the part of the system that

processes remittances, IRS has decided to revise the system’s

implementation schedule and its contingency plan for 1999. We are

concerned about the potential impact of the revised schedule on the 2000

filing season and the absence of a contingency plan for 2000, when current

systems will no longer work.

Our objective was to assess IRS’ performance during the 1998 filing

season, with particular emphasis on several areas identified in the

Subcommittee’s request. To achieve our objective, we

• interviewed IRS officials at the National Office; the Midstates, Southeast,

and Western Regional Offices; the Georgia, Kansas/Missouri, and Northern

 

3

Earned Income Credit: IRS’ Tax Year 1994 Compliance Study and Recent Efforts to Reduce

Noncompliance (GAO/GGD-98-150, July 28, 1998).

Objective, Scope, and

Methodology
B-279310

Page 4 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

California District Offices; and the Atlanta, GA; Austin, TX; Cincinnati, OH;

Fresno, CA; and Kansas City, KS, Service Centers;4

• interviewed officials from the two largest national tax return preparation

companies;

• analyzed filing-season-related data from various management information

systems, such as IRS’ Management Information System for Top Level

Executives; IRS data on processing errors, including errors involving the

EIC and capital gains; and IRS data on alternative filing methods and

TeleTax;

• interviewed IRS National Office and service center officials who were

responsible for implementing a new system for processing returns and

remittances and analyzed reports on a test of that system at the Austin

Service Center;

• analyzed IRS data relating to its toll-free telephone assistance and

conducted a nonstatistical test of IRS’ telephone accessibility during the

filing season (see app. I for information on our test methodology and

detailed results);

• interviewed officials who were responsible for walk-in assistance sites in

IRS’ Southeast and Midstates Regional Offices and officials at walk-in sites

in Atlanta; Mission, KS; and St. Louis, MO;5

• reviewed walk-in site guidance developed by IRS’ National Office; the

results of walk-in site reviews done by one regional office; and a

contractor’s report on the results of surveys of walk-in customers done in

March, April, and May, 1998;

• analyzed activity data for IRS’ forms distribution centers and World Wide

Web site and conducted a nonstatistical test of the ability to download files

from the Web site;

• interviewed officials from IRS and the Department of the Treasury’s

Financial Management Service (FMS) (which is responsible for negotiating

and administering lockbox contracts) about the use of lockboxes to

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

lockbox processing;

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

impact of various filing season activities on taxpayers; and

• reviewed reports by IRS’ Office of Internal Audit on filing season activities

and a report by Treasury’s Inspector General on the use of lockboxes.

 

4

Except for Austin, we selected these locations because we had staff available in those areas to do the

work. We selected the Austin Service Center because it was responsible for testing IRS’ new

processing system.

5

We selected these locations because we had staff available to do the work in those cities.
B-279310

Page 5 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

We did our work from January through October, 1998, in accordance with

generally accepted government auditing standards.

Table 1 shows various indicators that IRS used to measure its performance

during the 1998 filing season. Those indicators, which we selected from

various IRS documents and sources, relate to timeliness, such as the

number of days needed to process and issue refunds; quality, such as the

accuracy of answers to taxpayers’ questions and notices sent to taxpayers;

and service accessibility, such as the extent to which taxpayers with taxrelated questions were able to reach IRS by telephone.6

 The goals shown in

table 1 were set by IRS generally on the basis of historical

accomplishments and projected workload. We did not assess the

appropriateness of IRS’ goals.

Table 1 shows 11 indicators. However, IRS added one indicator, the level

of service provided by the taxpayer service telephone system, after

planning for the 1998 filing season had been completed and thus did not

establish a goal for that indicator. Of the 10 indicators for which IRS had

established goals for 1998, IRS met or exceeded the goals for 7 indicators

and came close to the goals for the other 3 indicators. Table 1 also shows

that for 8 of the 11 indicators, IRS exceeded its performance in 1997. IRS

equaled its 1997 performance for one indicator and saw its performance on

the other two indicators drop slightly.

 

6

IRS also has various workload indicators, such as the number of returns received and refunds issued.

Several of those indicators, which generally show a growth in IRS’ filing season workload and a growth

in taxpayer use of fairly new alternatives, such as electronic filing, direct deposits, and IRS’ World

Wide Web site, are shown in appendix II.

IRS Generally Met the

Filing Season Goals It

Established
B-279310

Page 6 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

1997a1998a

Indicator Goal Accomplishment Goal Accomplishment

Accuracy of individual income

tax returns processed by

Code and Edit staffb

Process 95% accurately 95% were processed

accurately

Process 95% accurately 95.5% were processed

accurately

Accuracy of individual income

tax returns processed by data

transcribersc

Process 95% accurately 94.7% were processed

accurately

Process 95% accurately 94.2% were processed

accurately

Notice accuracyd Provide accurate

notices to taxpayers

98.5% of the time

Provided accurate

notices to taxpayers

98.3% of the time

Provide accurate notices

to taxpayers 98.5% of

the time

Provided accurate

notices to taxpayers

98.4% of the time

Timeliness of processing tax

payments submitted with

individual income tax returnse

Payments received

4/15/97 through 4/30/97

were to be deposited no

later than 4/30/97

All payments received

4/15/97 through

4/30/97 were

deposited by 5/2/97

Payments received

4/15/98 through 4/30/98

were to be deposited no

later than 4/30/98

All payments received

4/15/98 through 4/30/98

were deposited by

4/30/98

Accuracy of individual income

tax refunds on paper returnsf

Process 99.3%

accurately

99.4% were processed

accurately

Process 99.3%

accurately

99.6% were processed

accurately

Timeliness of refund checks

for individual income tax

returns filed on paperg

Issue within an average

of 40 days

Issued within an

average of 38 days as

of 5/97

Issue within an average

of 40 days

Issued within an

average of 35 days as

of 5/98

Timeliness of refunds for

individual income tax returns

filed electronicallyh

Issue within an average

of 21 days

Issued within an

average of 15 days as

of 5/97

Issue within an average

of 21 days

Issued within an

average of 15 days

Level of service provided by

taxpayer service telephone

systemi

Not applicablej Provided 52.6% level

of service

Not applicablej Provided 73.7% level of

service

Level of access to taxpayer

service telephone systemk

Provide 60.2% level of

access

Provided 71% level of

accessk

Provide 70% level of

access

Provided 90.6% level of

access

Accuracy of tax law

assistancel

Answer 92% accurately 95% were answered

accurately

Answer 96% accurately 93.6% were answered

accurately

Accuracy of processing form

ordersm

Process 96.5%

accurately

97% were processed

accurately

Process 96.5%

accurately

97.3% were processed

accurately

Note: Similar tables in our reports on past filing seasons included three indicators that are not

included in this year’s table. We dropped the indicator “service center individual income tax returns

processing productivity” because IRS stopped reporting that measure. We also dropped the indicator

“individual income tax returns processing cycle time” because we determined that the refund

timeliness measures provide more meaningful information on the timeliness of IRS processing. Lastly,

the indicator “level of access to forms-ordering telephone system” was dropped because IRS now

includes telephone calls to its forms distribution centers in computing the taxpayer service level of

access and level of service indicators.

a

Data are as of April 1997 and April 1998, unless otherwise noted.

b

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

all data are present on the return and legible. This indicator represents the percentage of “other than

full paid,” individual income tax returns processed without code and edit errors. Other than full paid

returns are those that involve either a refund or an unpaid liability.

c

This indicator represents the percentage of other than full paid, individual income tax returns

processed without transcription errors.

d

This indicator is based on a sample of returns processing notices addressed to individual and

business taxpayers. Among other things, returns processing notices are used to notify taxpayers of

missing schedules or forms, missing Social Security numbers, or refunds being delayed or used to

offset another liability. IRS compares the printed notice to various data, including information in the

taxpayer’s master file record and on the taxpayer’s tax return. The indicator is calculated by dividing

Table 1: IRS’ Performance Goals and Related Accomplishments for the 1997 and 1998 Filing Seasons
B-279310

Page 7 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

the number of correct notices reviewed by the total number of notices reviewed. IRS told us that the

results for individual and business taxpayers cannot be separated.

e

Service centers are to deposit payments in a timely manner, generally within 24 hours of receipt.

Because of the volume of payments received between April 15 and April 30, IRS suspends the 24-

hour requirement during that period. Instead, IRS requires that all payments received during that

period are to be deposited by the end of business on April 30. After April 30, the centers are to

resume the 24-hour deposit schedule.

f

This indicator is based on a sample of individual income tax returns filed on paper. The indicator is

calculated as the percentage of refunds on those returns that are free of any IRS-caused errors in the

name and address field or in the refund amount.

g

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

signature date on the return to the date the taxpayer should have received the refund, allowing 2 or 3

days after issuance (depending on whether the refund is paid by check or direct deposit) for the

refund to reach the taxpayer or the taxpayer’s bank account.

h

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

the date the return is received to the date the taxpayer should have received the refund, allowing 2 or

3 days after issuance (depending on whether the refund is by check or direct deposit) for the refund to

reach the taxpayer or the taxpayer’s bank account.

i

The level of service indicator is calculated by dividing the number of calls answered by the total call

attempts. Calls answered includes the calls to the voice messaging system that were subsequently

returned by IRS. Total call attempts is the sum of calls answered, calls abandoned by the caller

before receiving assistance, and calls that receive a busy signal. IRS did not track level of service in

1997. We calculated the 1997 level of service using IRS data for that year.

j

IRS did not establish goals for this indicator because it was selected as an indicator after planning for

the 1998 filing season had been completed. Although this indicator did not exist in 1997, we

computed the 1997 accomplishment using IRS’ data and methodology.

k

For 1998, the level of access is the sum of the number of calls answered plus the number of

abandoned calls divided by the total call attempts (components are defined as in note i above). The

1997 and 1998 accomplishments cannot be compared because IRS changed its calculation method.

In 1997, the calculation was the number of calls answered divided by the number of individual callers.

In 1998, the denominator was the number of call attempts. Therefore, if one person called five times

before reaching IRS, the denominator would have been 1 in 1997 and 5 in 1998.

l

This indicator measures the accuracy of tax law information provided to taxpayers through the tollfree telephone assistance program. It is based on test calls placed to the telephone assistors.

m

The accuracy with which forms distribution centers process taxpayers’ orders is determined by

randomly checking selected taxpayer orders, monitoring telephone calls from taxpayers, and

reviewing data transcription of written form requests from taxpayers.

Source: IRS data and GAO analysis of IRS data.

During our reviews of past filing seasons, we assessed the methodology

behind some of the indicators in table 1 and validated some of IRS’

reported accomplishments. During the 1994 filing season, we examined

IRS’ methodology for testing the timeliness and accuracy of refunds issued

to taxpayers who filed paper returns.7

 We replicated IRS’ test at one

service center and concluded that it provided a valid measure of refund

accuracy and timeliness at that center. We are comfortable with IRS’

methodologies for computing the level of access and level of service

associated with its taxpayer service telephone system because we have

been working with IRS over the past few years to develop these measures.

Also, although we have not verified the validity of the data used in those

calculations, we have, in several years, done our own tests of accessibility,

 

7

Tax Administration: Continuing Problems Affect Otherwise Successful 1994 Filing Season (GAO/GGD95-5, Oct. 7, 1994).
B-279310

Page 8 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

which produced results that were consistent with IRS’ reported results. We

discuss the results of our test for the 1998 filing season later in this report.

Our work during the 1990 and 1991 filing seasons provided assurance that

IRS’ methodology for measuring the accuracy of tax law assistance was

reliable.8

 IRS followed the same methodology during the 1998 filing season,

except that test calls were made by a contractor rather than by IRS

employees. We also have done work in the past to determine the accuracy

with which IRS’ form distribution centers process taxpayers’ orders9

 and to

assess a contractor’s methodology for testing the performance of IRS’

distribution centers.10 IRS conducted this same test during the 1998 filing

season using the contractor’s methodology.

Among other things, IRS’ walk-in sites are to distribute forms, help

taxpayers prepare tax returns, resolve account issues detailed in notices to

taxpayers, and answer tax law questions. IRS data show that walk-in sites

served about 6.2 million taxpayers between January 1 and April 25, 1998.

According to IRS’ business vision and its walk-in site mission statement,

walk-in operations are to provide accessible, high-quality service to the

public; reduce taxpayer burden; and ensure compliance with tax laws.

However, as noted in our recent report on measuring customer service11

and confirmed during this review, IRS’ walk-in program lacked key

performance indicators for quality; timeliness; and service accessibility.12

IRS’ National Office provided regional offices with some overall

management guidance on the walk-in program during the 1998 filing

season. However, that guidance did not include specific requirements on

how certain items, such as quality, should be measured. To measure

 

8

Tax Administration: IRS’ 1990 Filing Season Performance Continued Recent Positive Trends

(GAO/GGD-91-23, Dec. 27, 1990) and Tax Administration: A Generally Successful Filing Season in 1991

(GAO/GGD-91-98, June 28, 1991).

9

Tax Administration: IRS’ 1992 Filing Season Was Successful but Not Without Problems (GAO/GGD-92-

132, Sept. 15, 1992).

10Tax Administration: Increased Fraud and Poor Taxpayer Access to IRS Cloud 1993 Filing Season

(GAO/GGD-94-65, Dec. 22, 1993).

11Tax Administration: IRS Faces Challenges in Measuring Customer Service (GAO/GGD-98-59, Feb. 23,

1998).

12We recognize that a complete evaluation of the walk-in program would involve other factors, such as

the comparative costs and benefits of (1) answering tax law questions or resolving account issues at

walk-in sites versus over the telephone, (2) return preparation at walk-in sites versus return

preparation by community volunteers, and (3) forms distribution at walk-in sites versus communitybased locations. An analysis of costs and benefits for these various services was beyond the scope of

this review.

IRS Lacked Key

Performance Indicators

With Which to Measure the

Services Provided by WalkIn Sites During the 1998

Filing Season
B-279310

Page 9 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

quality, the guidance stated that regions should do program reviews and

visit sites to ensure that consistent and accurate service was being

provided. However, the guidance did not specify what regional officials

should be examining during their reviews.

We gathered data about walk-in program reviews at three of IRS’ four

regions. Two regions did such reviews but conducted the reviews

differently; the other region did a pre-filing-season readiness review but

did no reviews during the filing season. Even though National Office

guidance encouraged that the reviews be “unannounced,” one of the two

regions that did reviews notified the sites of the visits in advance because,

according to a cognizant official, the guidance merely “encouraged”

unannounced visits. Therefore, sites in this region may have had time to

prepare for the visits and “be on their best behavior.” The other region that

conducted visits did those visits unannounced, with IRS staff posing as

taxpayers.

Regions were not required to report the results of any walk-in site

performance reviews to the National Office. Nevertheless, the region that

did the unannounced visits and had IRS staff pose as taxpayers reported

its results and identified several concerns. Among those concerns were (1)

incorrect advice by walk-in site assistors concerning qualification for the

EIC and (2) the failure of assistors to probe for information to ensure that

they accurately responded to the “taxpayers” questions. The region also

expressed great concern about the manner in which many “taxpayers”

were treated and said that its observations pointed to the need for basic

training in and monitoring of customer service skills. The other region that

did reviews did not report its results.

Regarding timeliness, the National Office established taxpayer wait-time

goals of 30 minutes for return preparation and 15 minutes for all other

issues. Even though the National Office established these goals, it did not

have a mechanism for monitoring walk-in sites’ performance. For example,

the National Office did not require the regions to report wait times;

therefore, two of the three regions for which we had information, did not

report any wait-time data, and the third reported such data only to the

extent that they were observed during performance reviews. Thus, IRS

cannot determine if the walk-in program met the wait-time goals of 15 and

30 minutes during the 1998 filing season.

IRS’ Internal Audit reviewed the walk-in program for the 1997 filing season

and recommended that IRS develop a customer-driven strategy that bases
B-279310

Page 10 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

program goals and measures on customer feedback.13 In response to that

recommendation, IRS contracted with a firm to develop and analyze the

results of a customer satisfaction survey. The survey was designed to

gather information on issues such as the accessibility of IRS’ service (e.g.,

the convenience of walk-in office hours). Due to printing and distribution

problems, however, the survey was shipped to walk-in sites too late in the

1998 filing season to provide a complete assessment. According to IRS,

most sites did not receive the survey until mid- to late-March 1998.

In a report on the results of walk-in surveys done during March, April, and

May, 1998, the contractor said that “Walk-in customers as a whole

indicated high overall satisfaction.” Of the nine areas that customers were

asked to rate, “employee courtesy” and “treating you fairly” scored the

highest, while “convenience of office hours” scored the lowest.

According to IRS, it plans to better measure walk-in performance in 1999.

It plans to measure customer satisfaction (with a survey starting earlier in

the filing season than was the case in 1998), the number of customers

served, and customer wait times. The 15- and 30-minute wait-time goals

that were in effect in 1998 are to be retained in 1999. Also, according to

IRS, quality will be assessed through activities such as regional readiness

reviews and program reviews.

As of October 30, 1998, IRS had received 123.1 million individual income

tax returns, which was an increase of about 2 percent compared to the

same time last year. While the increase in the overall number of returns

filed was small, the use of electronic filing increased at a much more

robust pace. These increases were consistent with filing patterns in 1997.

Even with the increase in electronic filing, about 98.5 million tax returns

(80 percent) were filed on paper in 1998.

IRS offers three alternatives to the traditional filing of paper returns. Two

of those alternatives involve electronic filing—that is, traditional electronic

filing14 and TeleFile.15 The third alternative, Form 1040PC (Individual

 

13Taxpayer Walk-In Program for the 1997 Filing Season, IRS Internal Audit, Reference No. 081004,

December 22, 1997.

14Traditional electronic filing involves the transmission of returns over communication lines through a

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

where the return data are automatically edited and processed. Traditional electronic filing can take

several forms. Taxpayers can (1) have their returns prepared by someone else, such as H&R Block, and

have the preparer arrange to transmit the return to IRS; (2) take a self-prepared return to an authorized

transmitter; or (3) prepare their returns on a computer using certain return preparation software and

transmit the return on-line to a third party who then transmits it to IRS.

Use of Electronic

Filing Continues to

Increase
B-279310

Page 11 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

Income Tax Return-Computer Prepared), provides another way to file on

paper.16 Although IRS has not done the kind of comprehensive analysis

needed to fully assess the costs and benefits associated with these

alternative filing methods, it assumes that the methods save IRS money by,

among other things, significantly reducing the number of errors that IRS

has to correct. Traditional electronic filing and TeleFile, for example,

include built-in checks that are designed to catch certain taxpayer errors,

such as computational mistakes, in advance so that they can be corrected

by the taxpayer before IRS takes possession of the return. Also, returns

filed electronically bypass the error-prone manual procedures that IRS

uses to process paper returns.

As shown in table 2, the use of both electronic filing alternatives increased

substantially in 1997 and 1998, while the use of Form 1040PC declined in

1998 after substantial growth in 1997.

(Number of returns in thousands)

Filing type

1/1/96 to

11/1/96

1/1/97 to

10/31/97

Percentage

change: 1996

to 1997

1/1/98 to

10/30/98

Percentage

change:

1997 to

1998

Paper

Traditional

Form 1040 60,536 61,413 1.45 61,664 0.41

Form 1040A 18,839 17,427 -7.50 16,440 -5.66

Form 1040EZ 17,167 14,523 -15.40 12,816 -11.75

Form 1040Ta 253 N/A N/A N/A N/A

Subtotal 96,795 93,363 -3.55 90,920 -2.62

Form 1040PC 7,042 8,427 19.67 7,533 -10.61

Subtotal 103,837 101,790 -1.97 98,453 -3.28

Electronic

Traditional 12,140 14,457 19.09 18,639 28.93

TeleFile 2,840 4,694 65.28 5,963 27.03

Subtotal 14,980 19,151 27.84 24,602 28.46

Total 118,817 120,941 1.79 123,055 1.75

Legend: N/A = not applicable.

a

IRS developed Form 1040T to test a document scanning and imaging system that was eventually

terminated in October 1996.

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

 15Under TeleFile, certain taxpayers who are eligible to file a Form 1040EZ (Income Tax Return for

Single and Joint Filers With No Dependents) are allowed to file using a toll-free number on Touch-Tone

telephones.

16Under the Form 1040PC method, a taxpayer or tax return preparer uses 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.

Table 2: Number of Individual Income

Tax Returns Received, by Filing Type
B-279310

Page 12 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

One barrier to the increase of electronic filing in the past has been its

cost—if taxpayers wanted to file electronically, they generally had to pay

more than they would pay to file on paper. Two developments in the

private sector reduced the significance of cost as a barrier to taxpayers in

1998 and, according to a cognizant IRS official, most likely contributed to

the increase in traditional electronic filing. First, the largest nationwide

return preparation company revised its fee structure to include electronic

filing in the basic return preparation fee. Thus, unlike past years, the

decision of a person who used this company to file electronically was not

influenced by cost, because it cost the same whether he or she chose to

file on paper or electronically. Second, some commercial software

packages that were available for use in preparing tax year 1997 income tax

returns included, in the cost of the software, the ability to file a return

from a personal computer through an on-line intermediary. That form of

electronic filing accounted for about 922,000 returns in 1998 compared to

about 361,000 in 1997—an 155-percent increase.

Another major barrier to the increase of electronic filing has been the fact

that traditional electronic filing is not completely paperless. For example,

taxpayers must send IRS their Forms W-2 (Wage and Tax Statements) and

Form 8453 (a signature document) after their returns have been

electronically transmitted. IRS must then manually input data from these

documents and match them to the electronic return.

In 1998, as in the prior two filing seasons, IRS tested the use of digitized

signatures at a limited number of locations. In the test, taxpayers used an

electronic signature pad in lieu of signing a Form 8453. The electronic

signature was attached to the electronic return and both were transmitted

to IRS. An IRS official responsible for the program told us that the test will

not be conducted in 1999 because previous tests have indicated that the

technology can work, if properly implemented, and that taxpayers and

preparers liked the option better than using the Form 8453. He also said

that some practitioners, especially the larger firms, had voiced a concern

about the cost of signature pads, but that they still generally preferred the

use of those pads to the burden and cost of storing and shipping paper

signature forms.

IRS has announced that it will conduct various alternative signature tests

in 1999.17 In one test, for example, taxpayers will choose a personal

 17In these tests, as in the digitized signature test, IRS plans to waive the need for participants to send

their Forms W-2 to IRS. According to a cognizant IRS official, IRS can waive the submission of W-2s

because there is no statutory requirement that these forms be attached to tax returns.

Traditional Electronic
B-279310

Page 13 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

identification number to use when filing electronically through certain tax

preparers.

In another move toward eliminating paper, IRS has entered into

agreements with two private sector firms that will allow certain taxpayers

to pay their income taxes by credit card in 1999. According to IRS, it plans

to test the use of credit cards in 1999 and, assuming there are no problems,

expand the use of credit cards in 2000.

Taxpayers’ use of TeleFile increased by 27 percent in 1998. About onethird of that increase can be traced to a change in procedures that made

more persons eligible to use TeleFile in 1998. The rest of TeleFile’s

increased use cannot be traced to any one particular cause.

In past filing seasons, IRS was unable to accept TeleFile returns from

taxpayers whose addresses had changed since their previous filing. IRS

could not accept these returns because there was no method within the

TeleFile system to update an address and because IRS believed that the

risk of fraud would be minimized if it required that a refund check be

mailed to the taxpayer’s last official address in IRS’ records.

For the 1998 filing season, IRS contracted to use the U.S. Postal Services’

National Change of Address File to update taxpayers’ addresses before the

tax package mailing labels were printed. When taxpayers called into

TeleFile, they were to confirm that the updated address was correct. If the

address was not correct, the taxpayers were ineligible to use TeleFile.

According to IRS, because of the new address update procedure in 1998, it

was able to send about 2.5 million TeleFile packages (about 10 percent of

the 24.6 million TeleFile packages mailed) to more current addresses than

it otherwise would have had in the TeleFile system. About 500,000 of those

2.5 million taxpayers used TeleFile in 1998 (i.e., 500,000 taxpayers who

would have been ineligible to use TeleFile without this procedural

change).

In an attempt to further increase the use of TeleFile, IRS, in 1999, plans to

conduct a joint federal and state TeleFile test in Indiana and Kentucky.

After completing the federal portion of TeleFile, these taxpayers are to be

given the option to file their state tax returns. If the taxpayers choose to do

so, they then are to hear instructions for filing the state return. IRS decided

to conduct this federal and state test in response to the results of a survey

of TeleFile nonusers in 1997. In responding to the survey, 44 percent of the

TeleFile
B-279310

Page 14 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

nonusers said that they might be encouraged to use TeleFile if they could

also use it to file their state returns.

In response to the same survey, 72 percent of the TeleFile nonusers

indicated that they would be encouraged to use the system if they were

able to determine their federal tax before calling TeleFile. This would

require including the tax table in the TeleFile package—a step that IRS

opposes because it would increase the size of the package by several pages

(at an estimated cost of about $1.4 million) and because the table is not

needed to file a return using TeleFile (TeleFile computes the tax for the

taxpayer on the basis of data that the taxpayer enters into the system).18

However, given the large percentage of nonusers who indicated that

having the table would influence them to use TeleFile, some kind of

limited test, similar to what IRS is doing with respect to the filing of state

returns, might indicate whether the potential increase in TeleFile use

justifies the additional cost of including the tax table in the package.

As of October 30, 1998, IRS had received about 7.5 million Forms 1040PC,

down 11 percent from the same time in 1997. IRS data show that, in both

years, more than 75 percent of these forms were prepared by tax return

preparers. According to the largest user of Form 1040PC in the preparer

community, the drop in the number of Forms 1040PC may be attributable

to the increase in electronic filing. This tax return preparation company

was the one referred to previously that included the cost of electronic

filing in its return preparation fees in 1998. According to data provided by

the firm, more clients chose to have their returns filed electronically in

1998 compared to 1997 and fewer Forms 1040PC were filed.

In our reports on the 1996 and 1997 filing seasons, we commented on

(1) IRS’ use of lockboxes, which are postal rental boxes serviced by

commercial banks, to process tax payments submitted with Forms 1040

and (2) IRS’ requirement, as part of that arrangement, that taxpayers mail

to the banks not only their tax payments but their tax returns. IRS and

FMS assume that the use of lockboxes is beneficial to the government

because, in general, banks can process the payments and deposit the

money to a Treasury account quicker than service centers. This means that

Treasury would not have to borrow as much to pay government

obligations, thereby avoiding interest charges.

 

18IRS’ survey did not solicit information that would explain why taxpayers wanted to be able to

determine their federal tax before calling TeleFile. However, one possible reason might be their desire

to independently compute their tax liability so that they would have some idea of what to expect

before calling TeleFile.

Form 1040PC

IRS Still Has

Inadequate Evidence

to Determine the Most

Appropriate Lockbox

Procedure
B-279310

Page 15 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

After reviewing information compiled by IRS and FMS in 1998, we

continue to believe that IRS has inadequate evidence to determine whether

the additional burden that may be caused by having taxpayers separate

their returns from their payments outweighs the several million dollars in

additional cost associated with having the banks handle those returns.

Nevertheless, IRS plans to continue the current lockbox process in 1999.

In our report on the 1996 filing season, we questioned IRS’ decision to have

taxpayers send both their tax returns and their tax payments to

lockboxes.19 The banks do not need tax returns to process remittances, and

the government was incurring several million dollars in additional cost by

requiring the banks to receive returns, sort them, and ship them to IRS for

processing—even after netting out what it would cost if IRS sorted the

returns instead of the banks. IRS believed that the alternative—asking

taxpayers to separate their tax payments from their returns and mail each

to a different address—would impose a burden on taxpayers. In our

opinion, the evidence IRS provided in 1996 on taxpayer burden was not

convincing. We recommended that the Commissioner of Internal Revenue

either discontinue having returns sorted by the banks, thus reducing the

extra cost to the government, or reconsider the decision to have taxpayers

send their tax returns to the banks along with their tax payments.

In response to our recommendation, IRS said that it had formed a task

force to identify a long-term solution for directing Form 1040 tax payments

to lockboxes. In May 1997, the task force recommended that IRS have

taxpayers separate their returns from their payments. Despite the task

force’s recommendation, IRS decided that lockboxes would continue to

receive and sort tax returns because of IRS’ continuing concern about

taxpayer burden. To support its position, IRS cited the results of several

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

work.

In our report on the 1997 filing season, we concluded, after reviewing the

results of those focus groups, that IRS still did not have conclusive

evidence to support its position.20 We also questioned the validity of IRS’

and FMS’ assumption that lockboxes can process remittances and deposit

the money to a Treasury account 3 days faster than service centers. That

assumption was key to the assertion that it is cost beneficial to have

lockboxes process Form 1040 tax payments. We recommended, among

 

19GAO/GGD-97-25.

20GAO/GGD-98-33.
B-279310

Page 16 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

other things, that IRS (1) conduct, during the 1998 filing season, the

analyses necessary to determine whether there are net savings to the

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

payments and (2) collect definitive data on whether taxpayers believe,

given the processing cost savings to the government, that it would cause

them an unreasonable burden to mail tax returns and tax payments to

different locations. We also recommended that IRS take certain steps

depending on the results of the analyses.

In an August 1998 report, Treasury’s Office of the Inspector General

concurred with our findings and also recommended that IRS acquire

relevant and reliable comparative cost data on all aspects of the lockbox

program to identify the most cost-effective option to use when the current

lockbox arrangement expires in 1999.21

In 1998, in response to our recommendations and in line with the Inspector

General’s recommendation, (1) FMS contracted for a study to determine

how much time the government saves, if any, by having lockboxes instead

of service centers process remittances and (2) IRS included lockboxrelated questions in 10 focus groups involving about 100 taxpayers.

To determine how much time the government saves, if any, by having

lockboxes instead of service centers process remittances, FMS, in March

1998, contracted for a study that was designed to measure and compare

processing time frames. The contractor was to analyze the following three

factors: (1) the average mail time to a processing site, (2) the average

elapsed time from the receipt of mail at the lockbox or service center to

the time receipts were deposited in the bank, and (3) the average time

required to convert deposited receipts to funds available in the Treasury

account.

Because we did not receive a copy of the contractor’s July 1998 report

until October 1998, we were only able to partially assess its implications

for this report. The study showed that, on average, lockboxes process

remittances about 2 days faster than the service centers—1 day less than

both FMS and IRS had been assuming in calculating the interest cost

avoidance from using lockboxes. The contractor also made several

observations about existing processes that, if changed, might reduce

service center processing times. For example, the contractor noted that

processing times might be reduced if (1) service centers had more reliable

 

21Review of the Effectiveness of Using Commercial Bank Lockboxes for Federal Income Tax Payments,

Department of the Treasury, Office of Inspector General, Reference No. OIG-98-097, August 20, 1998.

FMS Study
B-279310

Page 17 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

mail-opening equipment, (2) the strategies at service centers for working

on weekends and making deposits on the weekend were consistent, and

(3) IRS found some way to better identify envelopes that contained

remittances—like the different-colored mailing labels that several states

use to distinguish tax returns with payments from returns that involve a

refund.

Using the average 2-day timeline variance and data provided by FMS on

the then current value of funds rate (5 percent) and the amount of Form

1040 remittances collected by the banks in fiscal year 1998 (about $48.3

billion), we determined that the lockbox processing of Form 1040

remittances resulted in an interest cost avoidance of $19.3 million.22 In

addition, a cognizant FMS official told us that the contractor’s study

indicated that the timeline variance was actually 3-days during parts of

various peak processing periods because of expedited weekend processing

by lockboxes. Assuming that the 3-day variance for certain periods is

correct and using data provided by FMS, we determined that the amount of

interest cost avoidance should be increased by about $1.6 million, for a

total of about $20.9 million.23 Other data obtained from FMS on the number

of items handled by the banks (about 11 million) and the banks’ charges

per item show that the government paid banks about $19.8 million for

processing the Form 1040 remittances in fiscal year 1998, of which about

$9.7 million was to reimburse the banks for sorting tax returns and

shipping them to IRS.

Taken together, and assuming the appropriateness of the 3-day variance

for certain weekend processing, FMS’ data indicate that the use of

lockboxes to process Form 1040 remittances saved the government about

$1.1 million in fiscal year 1998 ($20.9 million in interest cost avoidance

minus $19.8 million in bank charges). However, the data also indicate that

the use of lockboxes could save the government substantially more if the

banks were not required to handle tax returns. For example, according to

FMS, the $9.7 million paid to the banks for handling tax returns included

74 cents a return for sorting and 13 cents a return for shipping. Two years

ago, IRS told us that having service centers sort the returns would cost IRS

 22FMS used the average variance of 2 days to compute interest cost avoidance. However, looking at

each of the 10 service centers and its corresponding lockbox bank separately, the timeline variances

reported by the contractor ranged from about 3/4ths of a day to 3-1/2 days. We do not know how much,

if at all, the result would have changed if FMS had calculated a separate interest cost avoidance for

each of the 10 locations and then summed those 10 calculations.

23Although we could confirm that the contractor identified differences between banks and at least some

service centers with respect to weekend processing, we did not have time to determine whether the

contractor’s data supported FMS’ decision to use a 3-day variance for certain processing periods.
B-279310

Page 18 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

an average of 37 cents a return—one-half as much as the 74 cents charged

by the banks. Thus, assuming that IRS’ sorting costs remained at 37 cents a

return,24 having the banks sort and ship 11 million returns in fiscal year

1998 would have cost the government an additional $5.5 million (11 million

returns times 50 cents of additional cost per return—that is, 37 cents for

sorting and 13 cents for shipping).

In an attempt to obtain information on taxpayer burden associated with

having taxpayers mail their tax returns and tax payments to separate

locations, IRS added questions to an existing focus group study. That

study, done by a contractor, was originally designed to solicit ideas from

taxpayers on ways to improve the Form 1040 tax package. IRS added

questions to solicit taxpayers’ views on mailing their returns and

remittances in separate envelopes. The contractor held 10 focus groups

involving about 100 taxpayers who prepared their own federal income tax

returns.

Although they provided some evidence of taxpayer concern about burden,

these focus groups did not, as we had recommended in 1997, provide

“definitive data on whether taxpayers believe, given the processing cost

savings to the government, that it would cause them unreasonable burden

to mail tax returns and tax payments to different locations.” Most

important, as noted in our report on the 1997 filing season, although focus

groups are useful in providing insight on a particular issue, they are not

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

themselves, provide the basis for far-reaching conclusions. As noted in the

contractor’s report, its study was “qualitative in nature” and “the

hypotheses discussed in this report should be viewed as tentative.”

Also, data generated by the focus groups did not provide definitive

evidence that taxpayers considered the increased burden associated with

using two envelopes unreasonable. The concerns mentioned by

participants involved (1) the need to use two envelopes instead of one if

they owed money,25 (2) the need to use an additional postage stamp if they

had to use two envelopes, and (3) the possibility that payments and returns

would not get linked if they were sent to different places.

 

24We do not know what IRS’ per-return sorting costs were in 1998. Although some factors, such as

increased salaries and benefits, could have driven those costs up, other factors, such as improved

productivity or decreased overhead, could have had the opposite effect.

25For persons using a tax package, the two envelopes would be provided by IRS and included in the

package. Persons not using a package would have to supply their own envelopes.

IRS Focus Groups
B-279310

Page 19 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

It is true that taxpayers would have to use two envelopes instead of one

and would have to use an extra stamp, but there is no indication in the

contractor’s May 1998 summary report that focus group participants were

told about the potential savings to the government if taxpayers assumed

the additional burden. In that regard, the contractor’s report noted that

“some taxpayers, who imagined the system would save the IRS time or

money, said they would be willing to go along with the new idea if it was

properly explained to them.” In our opinion, participants should have been

told about potential savings rather than having to imagine them.

As for the participants’ concern about separating their returns from their

payments and the possibility that the two would not get reconnected, there

was no indication in the report that participants were told that the current

procedure also results in the payment and return being separated. When

taxpayers mail their returns and payments to a lockbox, the bank

separates the payments from the returns and ships the returns to IRS. The

bank then processes the payments while IRS processes the returns.

Given all of the previously mentioned information, we believe that IRS still

has not obtained definitive evidence showing that the additional taxpayer

burden and costs associated with the use of two envelopes would

outweigh the additional costs the government incurs to have banks sort

and ship tax returns.

Responsible IRS officials told us that IRS will continue the current lockbox

process in 1999. According to the officials, IRS decided to continue the

current program because FMS’ study was not finalized in time to make

changes for 1999 and because IRS continues to believe that asking

taxpayers to separate their returns and payments would impose an

unreasonable burden. However, in commenting on a draft of this report,

IRS said that additional analysis is warranted regarding the efficacy of, and

alternatives to, the current arrangement. In that regard, IRS said that it

would do a detailed analysis of the costs and feasibility of returning this

portion of the remittance processing workload to IRS at some point in the

future.

IRS’ Plans for 1999
B-279310

Page 20 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

The Taxpayer Relief Act of 1997 (TRA97) changed the way capital gains

are treated for income tax purposes. Before the act, capital gains were

taxed at the same rate as other income, up to a maximum of 28 percent.

TRA97 created capital gains tax rates ranging from 10 percent to 28

percent, depending on the type of asset, the holding period of the asset, the

date of sale, and the individual’s income.26 As a result, taxpayers must now

report to IRS more capital gains information than previously required. To

implement the new legislation, IRS revised Schedule D (Capital Gains and

Losses). That revision increased the number of lines on the Schedule D.

The schedule used in 1997 had 19 lines and a 13-line worksheet; the revised

schedule had 54 lines.

TRA97 was not passed until August 5, 1997, and some issues related to

capital gains were not resolved until early October 1997. Because of the

time needed to make the necessary computer software changes, IRS was

not prepared to process returns with Schedule Ds until February 13, 1998.

Until then, IRS could not accept electronic returns with Schedule Ds, and

service centers had to suspend the processing of paper returns with

Schedule Ds.

A representative of one of the tax return preparation firms we contacted

told us that IRS’ hold on accepting electronic returns with Schedule Ds

required his firm to develop a software program that would hold electronic

returns with Schedule Ds in suspense within its computer system. This

firm had over 100,000 electronic returns with Schedule Ds in suspense that

had to be transmitted once IRS announced it could process Schedule Ds.

Officials at the 5 service centers we visited said that their inventories of

suspended paper returns with Schedule Ds were not very great (fewer than

5,000 at each service center) and were cleared quickly after the software

changes were made. According to the officials, the impact was not

significant because, historically, most returns with a Schedule D come in

later in the filing season.

According to an IRS analysis of a statistically valid sample of tax year 1997

returns filed through August 28, 1998, the percentage of individual income

tax returns filed with a Schedule D increased from 13 percent in 1997 to 19

percent in 1998. This increase was partly due to the requirement that all

capital gain distributions from mutual funds be reported on Schedule D. In

past years, taxpayers with capital gain distributions from mutual funds

under $400, and no other capital gains or losses, were not required to

 

26Normal marginal rates for taxable income range from 15 percent to 39.6 percent.

Implementation of

Change to Capital Gain

Provisions Led to

Some Processing

Delays and Increased

Taxpayer Burden
B-279310

Page 21 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

complete a Schedule D. The IRS analysis noted that the number of

individual income tax returns filed in 1998 that showed capital gain

distributions increased by over 3 million compared to the number in 1997.

IRS estimates that about 1 million taxpayers with capital gains failed to

submit a Schedule D during the 1998 filing season. Service centers were

instructed to correspond with all taxpayers who claimed capital gains of

over $1 but who failed to submit a Schedule D and to suspend the

processing of those returns until the Schedule Ds were provided. IRS

officials said that they corresponded with all of these taxpayers about the

missing Schedule Ds both to educate them about the requirement to attach

a Schedule D and because use of the Schedule D and the new capital gain

rates could reduce a person’s tax liability.

In general, the tax rates on capital gains are lower than the rates on other

income. To take advantage of these lower rates, taxpayers must compute

their tax using a Schedule D. Because the capital gains tax rates are often

lower than the rates on other income, filing a Schedule D usually reduces a

taxpayer’s liability. However, for taxpayers with a small amount of capital

gains, the possible saving is minimal. By requiring everyone to submit a

Schedule D, even if they only had $1 in capital gains, IRS created additional

work for itself; delayed the processing of some returns and the associated

refunds, if any, until receipt of the schedule; and increased taxpayer

burden by causing all of these taxpayers to complete a complicated

schedule.

We reviewed a proof copy of Schedule D for use during the 1999 filing

season, and the form will be virtually the same as the one used in 1998.

However, IRS has revised the way it will process returns with missing

Schedule Ds for the 1999 filing season. Under its new procedure, IRS will

process tax year 1998 returns claiming capital gains even if there is no

Schedule D attached. In doing so, IRS will assume a short-term capital gain

rate and mail a notice to the taxpayer after the return is processed. The

notice is to inform taxpayers that their returns were processed using the

short-term rate to avoid any delay, but that they may be able to lower their

tax if long-term capital gain rates apply. The mailing is to include a

Schedule D, instructions for completing the schedule, and a Form 1040X

(amended return). Taxpayers then will have the opportunity to file an

amended return if they determine that their tax savings are worth the

additional time needed to prepare and file the Form 1040X and Schedule D.

IRS’ revised procedures should benefit many taxpayers by providing some

refunds earlier and by saving them the time associated with completing a
B-279310

Page 22 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

Schedule D if they determine that the tax savings are not significant

enough to warrant the effort.

The EIC is a refundable tax credit available to low-income, working

taxpayers. Congress created the EIC to offset the impact of Social Security

taxes and to encourage low-income workers to seek employment rather

than welfare. Because of concerns about noncompliance and fraudulent

claims, IRS has given increased attention to EIC claims during the past few

filing seasons. In 1998, IRS (1) continued validating Social Security

numbers (SSN) used in conjunction with EIC claims, (2) conducted indepth reviews of certain EIC claims, (3) established procedures for

denying future EIC claims by taxpayers who were found to have

negligently or fraudulently claimed the EIC in 1998, (4) established

requirements for paid preparers to exercise due diligence in determining a

taxpayer’s eligibility for the EIC, and (5) expanded telephone and walk-in

assistance for EIC claimants. Two main impetuses were behind this

increased activity in 1998—TRA97, which included several provisions

relating to the EIC, and a new EIC compliance initiative that Congress

began funding in fiscal year 1998.

We discussed IRS’ actions in a July 1998 report to the Chairman of the

House Committee on Ways and Means and Senator Larry E. Craig.27 As

noted in that report, we believe that IRS could have done more to alert

taxpayers to the consequences of falsely claiming the EIC and could have

provided special EIC assistance earlier in the filing season. In addition, our

review of EIC processing for the 1998 filing season disclosed that IRS does

not have controls in place to ensure that field locations receive notification

of procedural changes and implement the changes at the same time. The

lack of controls leaves open the possibility that criteria were inconsistently

applied during the processing of EIC claims in 1998.

Notwithstanding the issues discussed in our previous report and the lack

of controls identified during this review, there is evidence to suggest that

IRS’ efforts have had a positive effect. IRS data on the number of errors

identified on returns with EIC claims indicated that although taxpayers

and return preparers were still making many errors, the error rate dropped

significantly in 1998. For the period January 1 through August 29, 1998, IRS

identified 1,992,379 EIC-related errors on 19,393,098 returns—an error rate

of 10.27 percent. That error rate compares favorably with 2,655,524 errors

on 19,032,043 returns during the same period in 1997—an error rate of

13.95 percent. During the same period, there was also a significant drop in

 

27GAO/GGD-98-150.

IRS Expanded Its

Efforts to Ensure That

Taxpayers Filed

Correct EIC Claims
B-279310

Page 23 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

the number of errors involving SSNs and other taxpayer identification

numbers on EIC returns—600,676 in 1998 compared with 955,542 in 1997.

Since 1997, IRS has had the authority to disallow, through its math error

program, any deductions and credits associated with an invalid SSN.28

Under its math error program procedures, if IRS identifies an invalid SSN

while processing a return, it can immediately adjust the taxpayer’s tax

liability; refund; and/or EIC claim. The taxpayer is to receive a notice

explaining the change to the return. Taxpayers who receive such a notice

can call or write IRS to provide the correct SSN or otherwise resolve the

issue. If taxpayers do not respond to IRS’ notice, there is to be no further

correspondence unless the taxpayers fail to pay any additional tax that

was assessed as a result of an IRS change.

As of the end of August 1997, IRS had issued 955,542 math error notices to

taxpayers who had claimed an EIC but had not supplied a correct SSN or

other identification number for either themselves, their spouses, or their

dependents. As of the same point in time in 1998, the number of such

notices dropped to 600,676—representing about a 37-percent decrease

from 1997. This drop in the number of notices may indicate that fewer

taxpayers are attempting to claim an EIC to which they are not entitled. It

may also reflect the impact of IRS efforts to alert taxpayers who had used

invalid SSNs in prior years of the need to correct those problems before

filing their returns in 1998. For example:

• In December 1997, IRS sent notices to about 600,000 taxpayers who had

filed returns with an invalid SSN for the “primary” taxpayer.29 The notice

told the taxpayers what to do to correct the situation before filing their

returns in 1998.

• IRS also identified about 225,000 EIC-qualifying child SSNs that had been

used by more than 1 taxpayer on returns filed in 1997. In December 1997,

IRS sent notices to these taxpayers (about 383,000) informing them of the

problem and reminding them to file a correct return in 1998.

According to IRS, its analyses of the impact of the notices mailed in

December 1997 will not be completed until sometime in 1999.

IRS identified a programming-related problem early in the 1998 filing

season that raised concerns that (1) some invalid SSNs were not being

 28IRS considers an SSN invalid if it is missing from the return or if the SSN and associated name on the

return do not match data in the Social Security Administration’s records.

29The primary taxpayer is the taxpayer filing the return or, on a joint return, the taxpayer listed first.

IRS Continued Validating

SSNs
B-279310

Page 24 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

resolved and (2) EIC eligibility was not being scrutinized in some cases.

Efforts to resolve the programming problem revealed that there were no

controls in place at the National Office to ensure that service centers

receive notification of procedural changes, nor were there any

standardized procedures for the service centers to follow to ensure that

the functional areas that should receive notification of procedural changes

do in fact receive those notifications.

On January 22, 1998, IRS’ National Office issued “alert” instructions to the

field offices to deal with the programming problem. A cognizant program

analyst in IRS’ National Office told us that the National Office does not

require service centers to respond that they have received or implemented

alerts. Representatives we contacted at three service centers told us that

the alert was received timely at each of their centers, but each center

reported a different date that the alert was received in the branches that

were to follow the instructions. The branches received the alert on

February 4, March 17, and April 28. Therefore, because not all service

center branches had received the instructions at the same time, EIC

criteria may not have been applied consistently. IRS did not have data on

the extent or impact of this potential problem.

In April 1997, IRS published the results of its tax year 1994 EIC compliance

study. The study showed that of the $17.2 billion in EIC claimed during the

study period, taxpayers overclaimed about $4.4 billion, or about 26

percent. In response to some of the noncompliance problems identified in

that study, IRS targeted certain types of EIC claims for in-depth review in

1998.

One form of EIC noncompliance that IRS targeted was the use of a

qualifying child’s SSN on more than one tax return for the same tax year.

As discussed in our recent report on IRS’ efforts to reduce EIC

noncompliance,30 IRS allocated staff to audit as many as 140,000 taxpayers

who had used about 92,000 duplicate qualifying child SSNs in both tax

years 1995 and 1996.31 According to IRS officials, as of May 16, 1998, about

103,000 of the 140,000 taxpayers had filed tax year 1997 returns, and IRS

had frozen their refunds. As of that same date, however, IRS had released

49,000 of the frozen refunds for taxpayers who had responded to IRS’

 

30GAO/GGD-98-150.

31The 140,000 taxpayers selected for audit as part of this project were not included in the group of

383,000 taxpayers previously discussed that was sent notices in December 1997 related to duplicate

SSN use.

IRS Targeted Certain EIC

Claims for In-Depth Review;

Results Are Uncertain
B-279310

Page 25 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

correspondence on these cases but whose conflicting claims for the

child(ren) in question were not resolved.32

IRS officials told us that the 49,000 refunds were released because IRS (1)

did not have enough time to adequately prepare for the start of this project

(e.g., get staff assigned, procedures developed, and training done) and (2)

had underestimated the volume of contacts it would receive from

taxpayers. Although IRS is continuing to investigate these cases, its

effectiveness in protecting the revenue has been compromised because it

is more difficult (and more costly) to recoup an erroneous refund once it

has been released. As of August 21, 1998, according to IRS, it had finished

auditing about 81,500 returns under this project and had recommended

changes totaling about $63.7 million. As of that same date, audits of

another 195,900 returns were ongoing, and 77,100 returns were in

inventory but not yet assigned for audit.33

The largest source of EIC noncompliance found in IRS’ tax year 1994 study

related to the eligibility of qualifying children. IRS’ study further showed

that a large proportion of qualifying child errors occurred in tandem with

erroneous claims of head-of-household filing status. In that regard, another

area IRS targeted for in-depth review involved EIC claimants who filed as

head of household and whose returns contained indications of potential

qualifying child problems. IRS data show that IRS had finished auditing

about 98,500 returns under this project as of August 21, 1998, and that 75

percent of those audits had resulted in recommended changes totaling

about $169.5 million (the other 25 percent resulted in no change to the

taxpayers’ returns). Also as of August 21, about 232,800 returns were in

various stages of audit and about 33,700 returns were in inventory but not

yet assigned for audit.

Misreported income also accounted for a significant portion of the EIC

noncompliance identified in IRS’ tax year 1994 study. Because income

level affects the amount of an EIC, IRS was particularly concerned with

taxpayers, such as those who are self-employed, whose income cannot be

verified through traditional compliance activities, such as matching the

amount of income reported on information documents with income

reported on tax returns. IRS selected a sample of tax year 1997 returns

 

32Also as of May 16, 1998, IRS had released refunds for 21,000 taxpayers who did not claim the disputed

child(ren) for 1997 and another 4,500 taxpayers who, on the basis of audits of their tax year 1996

returns, were entitled to claim the disputed child(ren).

33The number of returns in this project exceeds the number of taxpayers previously cited because the

project involves multiple tax years—1995, 1996, and 1997.
B-279310

Page 26 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

with self-employment income reported on a Schedule C (Profit or Loss

from Business) and held the refunds pending completion of the audits. As

of October 1998, according to IRS, some of these audits had not been

completed, and IRS had not compiled data on the results of the audits that

had been completed.

TRA97 provides that taxpayers who fraudulently claimed the EIC

beginning with tax year 1997 (i.e., returns filed in 1998) would be denied

the credit for the next 10 years, and that those who negligently claimed the

credit (through reckless or intentional disregard of the regulations) would

be denied the credit for the next 2 years. When taxpayers are found to have

filed fraudulently or negligently, they must “recertify” eligibility after the

10-year or 2-year sanction period to claim the EIC again.

During the 1998 filing season, IRS used its Questionable Refund Program

and other special projects to identify taxpayers who negligently or

fraudulently claimed the EIC. When fraud or negligence is suspected, the

refund is to be frozen and an in-depth audit of the return is to be

conducted—a process that can take several months to complete. After the

audit is completed and it is determined that the taxpayer fraudulently or

negligently claimed the EIC, an indicator is to be added to the taxpayer’s

file to alert IRS that the taxpayer is not entitled to the EIC in subsequent

years.

IRS attempted to warn taxpayers about the implication of these new

provisions before they filed their returns in 1998 by including a brief

statement in the Form 1040 instruction about the possibility that taxpayers

may not be allowed to claim the EIC in the future. Although we have no

way of knowing how successful that warning was in encouraging better

compliance, we believe that the chances for success might have been

enhanced if IRS had done a better job of publicizing the warning. In our

July 1998 report,34 we recommended that information regarding the 2-year

and 10-year sanctions and the recertification process be prominently

published in the Form 1040 EIC instructions and on the Schedule EIC.

In commenting on our recommendation, IRS said that it would include

guidance in the tax year 1998 Schedule EIC instructions to advise

taxpayers of the 2-year and 10-year sanctions and the need to provide IRS

with additional information when they file for the credit in a subsequent

year. However, IRS said that it did not intend to revise the Schedule EIC

because these issues do not involve the majority of filers. IRS believes that

 

34GAO/GGD-98-150.

New Procedures for

Negligent or Fraudulent

Disregard of EIC Rules

Could Have Been Better

Publicized
B-279310

Page 27 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

providing the information on the schedule may confuse filers who have not

had their credit disallowed. Also, according to IRS, taxpayers must go to

the instructions to determine if they qualify for the credit before

completing the schedule, and IRS’ intent is to place the information so that

persons using the instructions will easily see it.

In evaluating IRS’ comments in our July 1998 report, we said that although

inclusion of information in the Schedule EIC instructions would be an

improvement, we continued to believe that something should also be

added to the schedule. Because one of the purposes of this information is

to alert potential EIC claimants to possible repercussions if they make

erroneous claims, the information affects more filers than those who have

had their EIC claim disallowed. Also, although it is true that taxpayers who

choose to compute their own EIC have to use the worksheet in the

instructions, taxpayers who choose to have their returns prepared by

someone else do not have to use the worksheet and thus might see only

the Schedule EIC. A brief, but prominent, cautionary statement added to

the Schedule EIC would alert those taxpayers to important information in

the instructions that they should read before filing their returns.

TRA97 also imposes an $100 penalty on paid tax return preparers who fail

to exercise due diligence in determining a taxpayer’s eligibility for the EIC.

In December 1997, IRS issued specific due diligence requirements and

publicized them in mailings to practitioners. Under these requirements, a

paid preparer must (1) complete an EIC eligibility checklist or a substitute

form that contains the same information; (2) complete the EIC worksheet

or keep a paper or electronic record of the EIC computation that includes

the computation method and information used; (3) not know or have

reason to know that any information used to determine EIC eligibility is

incorrect; and (4) retain, for 3 years, a copy of the completed checklist, the

worksheet, and a record of how and when the information was obtained

and who provided the information.

We did not assess the impact of these due diligence requirements on

preparers or taxpayers. However, a representative of one of the tax return

preparation firms we contacted told us that it was not difficult to comply

with the requirements and that going through the EIC eligibility checklist

makes it easier to interview clients to make sure they are entitled to the

EIC.

IRS did not institute at a national level specific procedures to monitor

compliance with the due diligence requirements during the 1998 filing

season, but we know of at least one field office that did some monitoring.

IRS Established

Requirements for Paid

Preparers to Exercise Due

Diligence in Determining

EIC Eligibility
B-279310

Page 28 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

IRS told us that its national-level plans for the 1999 filing season include

due diligence monitoring visits to EIC return preparers, but IRS has not yet

decided on the procedures for these visits, the number of visits, or the

extent to which IRS will target those preparers most likely to be

noncompliant.

In an effort to help taxpayers prepare more compliant EIC claims in 1998,

IRS, among other things, expanded telephone access for EIC-related issues

to 7 days a week, 24 hours a day. Also, starting on March 7, 1998, IRS

provided assistance on 6 consecutive Saturdays (when offices are normally

closed) at more than 150 walk-in sites. One of those Saturdays (Mar. 28)

was promoted as “EIC Awareness Day.”

According to IRS data, 95,000 taxpayers called the EIC assistance lines

during the times when IRS’ other assistance lines were not available. IRS

data also show that walk-in staff helped 2,949 EIC claimants prepare their

returns on Saturdays and provided 1,032 others with different types of EICrelated assistance. According to IRS, this is in addition to 185,305 EIC

claimants who were assisted on weekdays during the filing season.

Although many taxpayers who were eligible for the EIC were helped by

these efforts, we believe more taxpayers could have benefited had IRS

implemented its assistance differently. For example:

• IRS did not advertise the 24-hour availability of telephone assistance for

EIC-related issues. IRS informed taxpayers of this service only if they

received a notice from IRS about a problem with the EIC claims on their

tax returns. IRS officials told us that they did not advertise this service

because they thought that it would lead to many non-EIC calls during the

hours when other assistance lines were closed.35

• By March 7, 1998, when IRS first offered Saturday assistance at its walk-in

sites, millions of EIC claims had already been filed. IRS said that it did not

offer Saturday service earlier in the year because “prior to receiving the

appropriation [for the new EIC compliance initiative], we had anticipated

having Saturday service for only the last six weeks of the filing season”

when, according to IRS officials, demand among all filers is generally

higher. Also according to IRS, the date for EIC Awareness Day was

selected so that IRS would have adequate time to publicize and provide for

quality service to the public.

 

35This should not be a problem in 1999, when IRS plans to offer 24-hour assistance on all of its

telephone assistance lines.

Expanded Telephone and

Walk-In Service for EIC

Claimants Could Have Been

More Beneficial
B-279310

Page 29 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

In our July 1998 report,36 we recommended that IRS ensure that customer

service efforts aimed at EIC claimants are available earlier in the filing

season. IRS agreed with our recommendation and said that it would (1)

advertise the availability of 7-days-a-week, 24-hours-a-day telephone

assistance (for tax law questions, questions on notices, and other issues) in

all tax packages for the 1999 filing season and (2) offer Saturday walk-in

service from January 16 to April 10, 1999, with the first 6 Saturdays

designated as EIC Awareness Days.

During each filing season, millions of taxpayers call IRS to ask questions

about the tax law, their refunds, or their accounts and to order forms. The

extent to which taxpayers are able to get through to IRS when they call is

an important indicator of filing season performance. IRS performance

indicators show that taxpayers’ ability to reach IRS by telephone increased

significantly during the 1998 filing season.37

In 1998, IRS used two measures to gauge taxpayers’ success in getting

through to IRS over the telephone—level of access and level of service.38

The only difference between the two measures is that “level of access” is

computed by including abandoned calls in the number of calls that gained

access (i.e., the callers had gained access to IRS’ system but subsequently

decided, for unknown reasons, to hang up before an assistor came on the

line) while “level of service” is computed after deleting the abandoned

calls (i.e., although those callers gained access to the system, they were

not served).

According to IRS data, as shown in table 3, level of access increased by

26.1 percentage points (from 64.5 percent in 1997 to 90.6 percent in 1998)

and level of service increased by 21.1 percentage points (from 52.6 percent

in 1997 to 73.7 percent in 1998).39

 

36GAO/GGD-98-150.

37For purposes of toll-free accessibility, the 1998 filing season was from January 1 to April 18, 1998, and

the 1997 filing season was from January 1 to April 19, 1997.

38Level of access is defined as the sum of the number of calls answered and the number of calls that are

abandoned by the caller before getting assistance divided by total call attempts (which consist of calls

answered, calls that are abandoned, and calls that receive a busy signal). Level of service is defined as

the number of calls answered divided by total call attempts.

39In reporting 1998 telephone data, IRS combined data on six of its toll-free telephone lines—tax law

assistance, EIC/refund inquiry, account inquiry, forms ordering, Automated Collection System, and

fraud hotline. In reporting 1997 telephone data, IRS did not include one of those six lines—the line for

the Automated Collection System. Therefore, to compare IRS’ performance during the 2 years, we

omitted information for the Automated Collection System from all data calculations and presentations.

Access to IRS’ Phone

Systems Improved
B-279310

Page 30 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

Filing seasona

Call

attempts

(millions)

Calls

abandoned

(millions)

Calls

answered

(millions)

Level of

access

(percent)

Level of

service

(percent)

1997 70.2 8.3 36.9 64.5b 52.6

1998 48.5 8.2 35.7 90.6 73.7

Change (21.7)c (.1) (1.2) 26.1 21.1 a

Data are for January 1 through April 19, 1997, and January 1 through April 18, 1998.

b

We calculated the level of access for 1997 by using IRS’ current methodology, which is based on the

number of call attempts, not the methodology IRS used during 1997, which was based on the number

of callers. Therefore, this percentage does not match the percentage shown in table 1 (see table 1,

note k).

c

The significant reduction in call attempts was apparently due, in large part, to the 82-percent

decrease in the number of busy signals, which is discussed later in this report.

Source: GAO analysis of IRS data.

During the 1997 and 1998 filing seasons, we conducted tests, using

judgmental samples, of the accessibility of one of IRS’ toll-free telephone

lines—the line taxpayers are to call if they need tax law assistance. The

results of those tests also indicated that taxpayers were better able to

contact IRS over the telephone in 1998 compared to 1997. Although our

test results cannot be projected to all calls made to IRS, we did take steps

to ensure that a random calling pattern was used to negate that source of

potential bias in our tests.

Results of our test during the 1998 filing season showed a level of access of

about 81 percent and a level of service of about 75 percent. Results of a

similar test we conducted during the 1997 filing season showed a 51-

percent level of access and a 39-percent level of service. Our 1998 test

methodology and detailed results are described in appendix I.

Several factors may have contributed to the improved rates of telephone

access and service reported by IRS and indicated by our tests. Specifically,

IRS (1) extended the hours during which taxpayers could call IRS and

speak to an assistor, (2) expanded its use of voice messaging, (3) increased

the number of staff available to answer the telephone during peak calling

periods so that more calls were answered on the first attempt by the

taxpayer, (4) offered taxpayers who were on hold more than 10 minutes

the option of leaving a recorded message and receiving a return call, and

(5) improved its system of routing calls to available call sites around the

country.

Table 3: Accessibility of IRS’ Telephone

Assistance
B-279310

Page 31 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

IRS increased the hours of service on the toll-free telephone system to 16

hours a day, 6 days a week.40 As a result, taxpayers seeking assistance via

the toll-free telephone system were able to access that system an

additional 46 hours a week in 1998. IRS was not able to provide us with

complete data on the number of taxpayers who took advantage of the

extended hours of service.

During the 1998 filing season, IRS expanded its use of voice messaging to

increase the number of calls answered. As we reported last year, IRS

studied several areas of complicated tax law and determined that certain

call topics resulted in assistors’ spending a significantly longer time per

call.41 As a result of the study, IRS revised its procedures in 1997 so that

callers with questions in complex tax areas were automatically connected

to a voice messaging system. For the 1998 filing season, IRS added 14

topics to the voice messaging system, increasing the number of topics to

23. In 1998, a recording instructed callers to leave their name, address,

telephone number, and the best time for IRS to call them back. The

recording stated that an IRS representative would attempt to return the

call, at the requested time, within 3 business days.42

As was done in 1997, IRS’ examination function (Exam) supported the

customer service function by detailing staff to answer calls on the voice

messaging system. A cognizant official told us that, in total, Exam used

about 368 full-time equivalent (FTE) staff years in supporting the customer

service function in 1998. IRS estimated that the use of Exam staff in 1998

to support customer service resulted in about $98.7 million in forgone

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

assess the validity of that estimate.

IRS data show that 1.3 million calls were received by the voice messaging

system during the 1998 filing season. Of the calls received, about 400,000

could not be returned because IRS did not have enough information to do

so (i.e., the message was not understandable or the taxpayer hung up

before providing all of the necessary information). Of the remaining

 

40IRS’ standard hours of telephone assistance in 1998 were 7 a.m. to 11 p.m., Monday through Saturday.

In 1997, the standard hours of telephone assistance were 7:30 a.m. to 5:30 p.m., Monday through

Friday, with assistance on selected Saturdays during the filing season.

41GAO/GGD-98-33.

42The recording during the 1997 filing season stated that the taxpayer’s call would be returned within 2

business days. An IRS official told us that the 2-day standard was not changed for the 1998 filing season

but the messaging script was incorrectly changed to 3 days. The cost of re-recording the message to

reflect the 2-day standard was not deemed cost-effective, especially since the standard was less than

the time frame stated in the message.

Extended Hours of Service

Expanded Use of Voice

Messaging
B-279310

Page 32 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

900,000 calls, IRS returned about 735,000 (about 82 percent). IRS officials

told us that IRS does not plan to use voice messaging to handle complex

tax questions during the 1999 filing season because it expects to have

sufficient staff to handle all incoming calls. According to the officials,

those plans are subject to change if call volumes exceed expectations.

To support the extended hours of service previously mentioned, IRS

increased staffing for telephone assistance. Additional IRS staff were

detailed to answer calls during periods of heavy call volume so that as

many calls as possible could be answered on the taxpayer’s first attempt to

contact IRS. An IRS official projected that through the end of fiscal year

1998, IRS would expend about 8,167 FTEs—an increase of about 18

percent compared with the fiscal year 1997 expenditure of about 6,892

FTEs.

IRS data show that more calls were answered on the first call attempt

during the 1998 filing season. The average number of calls each taxpayer

had to make before reaching IRS decreased to about 1.1 from about 1.4

during the 1997 filing season.43 Fewer repeat callers indicates that IRS

answered more calls on the first call attempt, thereby reducing the number

of times a taxpayer had to call back. That, in turn, reduced the overall

demand on IRS’ telephone system. IRS telephone data also show a

significant reduction in the number of busy signals that taxpayers

experienced when attempting to contact IRS during the 1998 filing season.

IRS reported about 4.5 million busy signals in 1998 (a busy rate of about 9

percent) compared to about 25 million busy signals in 1997 (a busy rate of

about 36 percent).44 In comparing 1997 and 1998 telephone data, IRS had

almost an 82-percent decrease in the number of busy signals.

In another attempt to increase accessibility, IRS offered taxpayers who

were on hold waiting for an assistor for more than 10 minutes the option of

leaving a message and getting a return call from IRS. IRS used voice

messaging to help reduce the call queue and to allow more taxpayers into

the telephone system for assistance. An IRS official told us that this change

gave taxpayers an option instead of having to wait in the queue and

becoming frustrated. IRS did not have any data on the number of callers

who took advantage of this option. Although IRS does not plan to

automatically direct certain callers to a voice messaging system in 1999, as

 

43The information on average number of call attempts per taxpayer does not include data from the

form-ordering telephone line.

44The busy signal rate is calculated by dividing the total number of busy signals received by the total

number of call attempts.

Increased Staffing

Taxpayers on Hold Given

Callback Option
B-279310

Page 33 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

it did in 1998, it plans to continue to give callers who have been on hold for

more than 10 minutes the option to leave a message.

Changes to IRS’ method of routing calls also may have contributed to

increased accessibility. In the past, IRS distributed call traffic on the basis

of the area code of the originating call. For example, a call site would

receive calls from taxpayers in area codes served by a specific service

center. According to IRS, routing problems would occur when call traffic

exceeded the capacity of the incoming telephone lines at those call sites.

When call traffic surged from the area codes that the call site was assigned

to answer, it was often difficult to re-route calls to other sites. Re-routing

calls required contact with the regional office, the National Office, and the

telephone vendor, which caused delays. Under this routing method, the

number of busy signals received by callers increased.

During the 1998 filing season, IRS revised its method of distributing calls

by changing from area code-based call routing to a nationwide call

allocation routing plan. Under that plan, incoming call traffic is routed to

all available call sites on a percentage basis, regardless of the area code.

Each call site is staffed to answer a percentage of the total call volume,

which allows IRS to level off call traffic and balance the demand when

there is an unexpected increase. According to IRS, the change to

nationwide call allocation routing provides several benefits, such as fewer

busy signals, a reduction in the number of call attempts per taxpayer, and

increased access to the telephone system.

For the 1999 filing season, IRS plans to further upgrade its call distribution

capability with the December 1998 implementation of an intelligent call

routing system, known as the Customer Service Call Router, which is to

provide (1) instantaneous information on the status of telephone circuits,

assistor availability, abandoned calls, and queue times and (2) a real-time

capability to route calls. This real-time routing capability should allow IRS

to better control call traffic by automatically sending calls anywhere in the

nation where call volume is lower and assistors are available.

Besides the telephone assistance provided by IRS staff, there are other

ways that taxpayers can get information from IRS without leaving their

homes. Two of the better known methods are IRS’ World Wide Web site on

the Internet and TeleTax—an automated system that provides recorded

information on about 150 tax topics. During the 1998 filing season, the Web

site experienced increased use, while the use of TeleTax declined. IRS data

show a significant level of customer dissatisfaction with TeleTax, but there

are insufficient data to explain the reasons for that dissatisfaction.

Improved Call Routing

System

Taxpayers Used IRS’

Web Site and TeleTax

Extensively but

Expressed

Dissatisfaction With

TeleTax
B-279310

Page 34 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

According to IRS data, use of its Web site increased in 1998. From January

1 to June 28, 1998, the site had recorded about 412 million “hits,” an 187-

percent increase from the previous filing season. A hit is recorded each

time a user accesses a different page on the Web site. Another indicator of

the Web site’s use is “files downloaded.” Through June 28, 1998, about 29.8

million files (tax forms, publications, regulations, and other documents)

were downloaded from the Web site, a 313-percent increase from the same

time in 1997. Another useful indicator of the value of IRS’ Web site would

be the number of returns that are filed using forms that have been

downloaded from the Internet. Through various codes imprinted on the

forms, IRS tracks the source (such as tax packages, post offices, and IRS

walk-in sites) of forms that taxpayers use to file their returns. However,

because IRS uses the same code for forms that are downloaded from the

Web site as it does for forms that taxpayers download from CD-ROMs and

receive from IRS via facsimile, it is not possible to determine to what

extent, if at all, IRS’ Web site has grown as a source of forms.

We conducted a nonstatistical test to assess the ease and speed with which

forms can be downloaded from the Web site. Each weekday from March 30

through April 15, 1998, we attempted to download tax forms at various

times of the day. In each case, we were able to download the file quickly

and easily. We recognize that an individual’s ability to download files

depends on the specific hardware and software used, and, therefore,

others might have different results from ours.

Taxpayers can also submit tax law questions via E-mail through the Web

site. Between January 1 and April 15, 1998, about 82,000 questions were

submitted, up from about 44,000 questions for the same period in 1997. IRS

conducted a customer satisfaction survey that showed that 95 percent of

those responding were satisfied with the timeliness of IRS’ response to

their E-mail questions. About 75 percent of the respondents said that IRS’

response answered their questions, and almost all who responded said that

they would use the E-mail service in the future.

Taxpayers used TeleTax extensively during the 1998 filing season but to a

lesser extent than they did in 1997. IRS data show that from January 1 to

April 18, 1998, taxpayers made 37.5 million calls to the TeleTax system

versus 44.2 million calls made during the same period in 1997—about a 15-

percent decrease.

IRS conducted a survey of selected taxpayers who used TeleTax by playing

a recorded message after the taxpayer had finished listening to a TeleTax

topic. The survey asked one question: Was the taxpayer completely

Use of Internet Increased

During the 1998 Filing

Season

IRS Data Indicate a High

Level of Taxpayer

Dissatisfaction With

TeleTax
B-279310

Page 35 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

satisfied, partially satisfied, or dissatisfied with the assistance provided by

TeleTax? IRS data from this survey for the 1996 and 1997 filing seasons

showed that a majority of the surveyed users expressed some

dissatisfaction with the service (the results of the survey for 1998 were not

available at the time we completed our audit work for this report). In 1997,

for example, about 44 percent of the respondents said that they were

dissatisfied with TeleTax, and another 22 percent said that they were only

partially satisfied.

The survey did not ask any follow-up questions that could be used to

explain why taxpayers were dissatisfied. When we asked officials how IRS

uses the survey data, we were told that the data are used to determine the

level of taxpayer satisfaction.

IRS officials believe that much of the dissatisfaction with TeleTax stems

from difficulties taxpayers are experiencing in accessing the system. In an

August 1998 report on the results of its on-line review of the 1998 filing

season, IRS’ Internal Audit discussed its difficulties in trying to access

TeleTax during a test on February 23 and 24, 1998.45 Internal Audit also

discussed problems it encountered after accessing the system, such as

difficulty hearing the automated instructions because of static.

IRS plans to improve TeleTax by centralizing the number of system sites

and upgrading equipment. According to IRS officials, TeleTax will be

moved in 2000 to new equipment that will add several capabilities, such as

the option to transfer a call to a live assistor and some interactive

scenarios that will enable callers to get information that is specific to their

circumstances.

IRS currently uses the Distributed Input System to process tax returns and

the Remittance Processing System to process tax payments. Because both

systems are old and are not Year 2000 compliant, IRS plans to replace

them at its 10 service centers with 1 integrated system, which is known as

the Integrated Submission and Remittance Processing (ISRP) System.

Although the system is integrated, each function (return processing and

remittance processing) operates independently. The Austin Service Center

tested ISRP in 1998. We monitored this test as part of our review of the

1998 filing season because of ISRP’s importance in ensuring that IRS can

meet the demands of future filing seasons.

 

45On-Line Review of the 1998 Filing Season, IRS Internal Audit, Reference No. 085408, August 7, 1998.

IRS Is Moving Forward

With Its New

Processing System

Without a Contingency

Plan for 2000
B-279310

Page 36 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

IRS officials reported the following results during the ISRP test:

• Austin did not process 100 percent of the returns that it received during

the 1998 filing season because (1) it did not receive the number of

terminals necessary to handle its return volume until after the peak of the

filing season and (2) ISRP was not configured to process some forms that

accounted for a large volume of Austin’s returns until after the filing

season ended.

• Austin processed 100 percent of its remittance volume through ISRP, but

encountered many system problems that caused processing delays and

downtime. The contract contained a requirement that ISRP be able to

process 130,000 remittances in 2, 10-hour shifts. Austin was never able to

process that number of remittances through ISRP in the allotted time.

• The contract requirement that ISRP operate at a 99-percent level of

effectiveness for 30 consecutive days was not met.

• The vendor delayed scheduled delivery of some software on more than one

occasion, and, on another occasion, IRS rejected delivered software due to

a high failure rate. The delayed and rejected delivery of software required

the vendor to add additional deliveries that, as a result, compressed the

time that IRS had allocated to test the software.

IRS’ Internal Audit reviewed development of the ISRP test and reported its

findings in January 1998.46 Internal Audit concluded that the ISRP project

did not follow a disciplined development process. Specifically, the

remittance processing function contains significant enhancements, such as

an imaging capability and an archiving and retrieval capability. Internal

Audit found that IRS had not developed a case to support these

enhancements, nor did it analyze whether the enhancements were needed

or whether their cost was justified.

Most of the remittance processing problems identified during the test

involved the new imaging capability. One significant problem Austin

encountered was the imaging equipment’s inability to read most of the

money orders that Austin received. According to the ISRP project

manager, ISRP could not capture an image of many money orders, which

represent about 25 to 33 percent of Austin’s remittance volume, because

the print on the money orders was too light and/or numbers showing the

dollar amount were too large. When ISRP cannot capture an image, the

record is rejected to an error file. Correction of these errors required going

back to the money order to obtain the remittance information and then

 

46Review of the Initial System Development Activities of the Integrated Submission and Remittance

Processing System, IRS Internal Audit, Reference No. 082204, January 30, 1998.

Results of ISRP Test
B-279310

Page 37 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

manually entering that information. The amount of manual effort required

decreased the system’s productivity and delayed the processing of

remittances.

Another concern with ISRP’s remittance processing function is the

equipment’s need for specialized care that requires trained operators to

spend time each day to keep the equipment cleaned and operating

properly. Adjustments must be made to the mechanism that transports the

documents through the equipment to keep them feeding through and to

ensure that the scanner is reading the correct area of the document.

The problems previously discussed led IRS to revise Austin’s original

contingency plan for processing remittances. Austin’s original contingency

plan was to remove the old processing equipment while leaving cables in

place to facilitate quick reinstallation of that equipment if it was needed.

As a result of the test, IRS has decided that service centers should keep

enough of the old equipment fully installed for 1999 so that processing can

be switched to the old systems if there are problems with ISRP. However,

four centers do not have enough space to house both the old equipment

and ISRP.

In part because of the new contingency plan and its impact on space

needs, IRS revised its time frame for implementing ISRP. Installation of

both the return processing and remittance processing functions of ISRP

was to be completed at all service centers by November 1998. In May 1998,

IRS revised the implementation schedule for the remittance processing

function to delay until August 1999 installation at the four centers that do

not have enough space for both the old and new equipment. Until August

1999, the four centers plan to continue using the old remittance processing

equipment.

Although the decision to delay implementation of the remittance

processing function in four centers may reduce the risk of serious

processing problems in 1999, we are concerned about the potential impact

in 2000. The four service centers scheduled to receive the remittance

processing function in August 1999 were among the top five centers in the

volume of remittances processed during the peak of the 1998 filing season

(the center with the largest volume—Ogden—is one of the centers where

the remittance processing function was installed in 1998). We are

concerned that (1) these four centers will receive the remittance

processing function so late in 1999 that they will have no experience

processing the large volume of remittances that come in at the peak of the

filing season and (2) August 1999 is close to the Year 2000 deadline when

IRS Revised Its ISRP

Contingency Plan for 1999

but Has No Contingency

Plan for 2000
B-279310

Page 38 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

the old systems will no longer function. IRS has not developed a

contingency plan for the processing of remittances beyond the 1999 filing

season.

Using various IRS indicators as criteria, the 1998 filing season was

generally a success. For example, there were significant gains in the ability

of taxpayers to reach IRS over the telephone and in the use of electronic

filing. Also, taxpayer use of recent enhancements, such as the ability to

obtain information and download forms from IRS’ Web site, increased

significantly in 1998. Available data also indicate that thousands of

taxpayers took advantage of the increased EIC-targeted assistance offered

by IRS in 1998, and that IRS’ enhanced compliance efforts apparently

contributed to fewer SSN- and EIC-related errors in 1998. IRS had to delay

processing some returns in 1998 until it had made the programming

changes needed to implement new legislation on capital gains, but we saw

no evidence that those delays caused undue hardships to taxpayers. It

appears, however, that IRS’ procedure for processing returns that were

filed without a required Schedule D increased taxpayer burden

unnecessarily. By suspending the processing of returns until the taxpayers

submitted a Schedule D, IRS caused those taxpayers to complete a

complicated and time-consuming form even when the capital gain rates

would have little, if any, effect on their tax liability. IRS has changed its

procedure for 1999, which, if effectively implemented, should reduce the

burden for some taxpayers.

Although IRS’ data indicate a generally successful filing season, there is

one important filing season activity—walk-in assistance—for which IRS

lacks meaningful national performance data. For example, although IRS

had guidance requiring regional reviews of the service being provided by

walk-in sites during the 1998 filing season, the guidance was not specific as

to what should be reviewed, and there was no requirement that review

results be reported to the National Office. Also, IRS generally did not begin

surveying walk-in site customers until mid-March—2-1/2 months after the

filing season began. Without meaningful nationwide performance data, IRS

cannot determine if the walk-in program is meeting its objectives and

goals.

Taxpayers’ access to IRS’ Web site—or “hits”—increased significantly, but

because tax forms downloaded in 1998 were coded the same as forms

taxpayers obtained from CD-ROMs or by facsimile, IRS cannot evaluate

the actual usefulness of its site in providing taxpayers with the forms they

need to file their returns. A separate code would enable IRS to determine

Conclusions
B-279310

Page 39 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

how many returns are being filed using forms downloaded from the Web

site.

IRS is to be commended for its strides in improving telephone

accessibility. There is one aspect of that service, however, that needs

particular attention—the high level of taxpayer dissatisfaction with

TeleTax. IRS recognizes that there are problems with TeleTax and

improvements are planned. Neither we nor IRS know whether those

changes are likely to resolve all of the critical problems with TeleTax,

because the TeleTax customer satisfaction survey provided no data on

why taxpayers were dissatisfied.

The gain in electronic filing is also commendable. But, it is important to

note that about 80 percent of the individual income tax returns filed in

1998 were still filed on paper. IRS recognizes the need to continue working

to eliminate barriers to electronic filing and plans to conduct various tests

in 1999 directed at one of the more significant barriers—the fact that

persons using traditional electronic filing still have to send paper to IRS.

One change that IRS has resisted making would involve including the tax

table in the TeleFile tax package. We realize that the tax table is not

needed to use TeleFile and that its inclusion would add to the program’s

cost by increasing the size of the TeleFile tax package. However, 72

percent of the respondents to IRS’ most recent nonusers survey said that

they would be encouraged to use TeleFile if they were able to determine

their federal tax before calling TeleFile. We believe that IRS could

structure a test that would minimize additional cost by including the tax

table in only some TeleFile packages and comparing the filing patterns of

persons who received those packages with those who received packages

without the tax table. That test should help IRS determine whether the

inclusion of the tax table in the TeleFile package would increase the use of

TeleFile and whether the extent of that increase would justify the

additional cost of including the tax table.

Although there is some evidence that IRS’ growing emphasis on EIC

noncompliance has had a positive effect, there is much that is still

unknown. At the time we completed our audit work, data were not

available to assess the effect of the notices IRS mailed in December 1997

or of the various projects IRS had initiated to target specific areas of EIC

noncompliance. It was also too early to assess the impact of provisions in

TRA97 that authorize IRS to deny EIC claims in subsequent years from

persons who were found to have filed fraudulent or negligent EIC claims,

because 1999 is the first year that IRS can deny subsequent EIC claims
B-279310

Page 40 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

under the provisions. Even then, the full impact of those provisions could

not be determined because there is no information on the extent to which

knowledge of the provisions deterred persons from filing improper EIC

claims. In that regard, we recommended in a previous report that IRS

enhance the potential deterrent effect by better publicizing the provisions

in the Form 1040 tax package. IRS has agreed to change the Schedule EIC

instructions in the package but does not plan to add anything to the

schedule itself. We believe that a brief, but prominent, cautionary

statement added to the Schedule EIC would alert taxpayers to important

information in the instructions that they should read before filing their

returns. There is also reason to believe that EIC criteria may not have been

applied consistently at all 10 service centers because of a lack of controls

to ensure that field locations receive timely notification of important

procedural changes.

Since our report on the 1997 filing season and in response to a

recommendation in that report, FMS completed a study that supports the

assumption that having lockboxes process Form 1040 tax payments saves

the government money, although not as much as previously assumed. In

light of FMS’ study results, we are not suggesting that IRS stop using

lockboxes to process those payments. However, because IRS has not

developed the kind of definitive data that we recommended in our report

on the 1997 filing season, we believe that IRS still lacks the necessary

evidence to determine whether the additional burden and taxpayer costs

that may be caused by having taxpayers separate their returns from their

payments outweigh the additional governmental cost associated with

having the banks handle those returns.

Considering the various problems encountered by the Austin Service

Center in processing remittances during the test of ISRP in 1998, rollout of

the system to other locations could have significant implications for

upcoming filing seasons. IRS has developed a contingency plan for the

1999 filing season, when the other nine service centers are to begin

processing returns through ISRP and five of the nine are to begin using

ISRP for remittances. However, IRS has no contingency plan for the 2000

filing season. We believe that IRS’ decision to wait until August 1999 to

install ISRP’s remittance processing function in the other four centers adds

an element of risk to the 2000 filing season that warrants further

contingency planning.
B-279310

Page 41 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

We recommend that the Commissioner of Internal Revenue direct the

appropriate officials to take the following steps:

• Conduct a test to determine (1) if adding the tax table to the TeleFile

package would increase TeleFile use and, if so, (2) whether the increased

use would justify the additional cost of including the tax table in the

package. The cost of such a test can be minimized if IRS includes the tax

table only in the TeleFile packages sent to a representative sample of

taxpayers and then compares their filing patterns to the filing patterns of

taxpayers who received TeleFile packages without the tax table. If IRS

determines, after designing the test, that its cost would be prohibitive, IRS

should consider other options for dealing with the issue raised by the

TeleFile nonusers.

• Develop controls and standardized procedures to ensure that field

locations are notified of procedural changes and implement the changes at

the same time.

• In conjunction with IRS’ decision to revise the instructions for Schedule

EIC to advise taxpayers of the 2-year and 10-year sanctions, add a brief,

but prominent, cautionary statement to the Schedule EIC alerting

taxpayers that they should read important information in the instructions

before filing their returns. We realize that it is too late to make such a

change to the Schedule EIC for tax year 1998 and that the first opportunity

to make this change will be for tax year 1999.

• To provide a better measure of the extent to which taxpayers are using the

Web site, use a separate code to identify forms that have been downloaded

from the site.

• Expand future TeleTax customer satisfaction surveys to obtain

information on why respondents are dissatisfied.

• Develop a contingency plan for ISRP that provides for the possibility of a

systemwide failure of the remittance processing function past 1999.

We are not making a specific recommendation relating to the

measurement of walk-in services because we previously made a relevant

recommendation in our February 1998 report on measuring customer

service.47 In that report, we recommended that the Commissioner direct

the appropriate officials to develop performance indicators that cover the

full range of IRS’ customer service programs.

 

47GAO/GGD-98-59.

Recommendations to

the Commissioner of

Internal Revenue
B-279310

Page 42 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

We obtained IRS’ written comments on a draft of this report in a December

15, 1998, letter from IRS’ Deputy Commissioner Operations (see app. III).

We also met with IRS’ Chief Operations Officer and other IRS officials who

are responsible for the various programs we reviewed on December 4,

1998, to discuss their comments. IRS said that, except for our first and last

recommendations regarding TeleFile and ISRP, it generally agreed with the

findings and recommendations in our draft report.

IRS did not agree with our recommendation that it conduct a test to

determine if adding the tax table to the TeleFile package might increase

the use of TeleFile and, if so, whether the increased use would justify the

additional cost associated with including the tax table. According to IRS,

“while a past survey indicated that some taxpayers might have used

TeleFile if they could have determined the tax themselves, the data does

not warrant the addition of the tax tables, instructions, and worksheet at a

cost of almost $1.4 million.” IRS also said that it had not received similar

comments from taxpayers in recent years.

IRS’ reference to “some taxpayers” in discussing the nonusers survey

understates the results of the survey, which showed that a large majority

(72 percent) of the nonusers said that they would have been encouraged to

use TeleFile if they had been able to determine their federal tax

beforehand. Also, IRS’ statement that it has not received similar comments

“in recent years” is confusing because (1) the 1997 nonusers survey was

recent and (2) nonusers did not have an opportunity to provide similar

comments in 1998 because IRS did not do a nonusers survey that year.

Although we did not verify IRS’ estimate of $1.4 million in additional costs,

we recognize that inclusion of the tax table and related materials in all

TeleFile packages would be costly. That is why we recommended a test. In

our opinion, such a test is needed to determine whether inclusion of the

tax table would increase TeleFile use enough to warrant the additional

cost.

IRS also said that the addition of the tax table and other material that

would be needed for taxpayers to determine their tax liability would

increase the complexity of the TeleFile tax package. Although adding the

tax table and other material to the TeleFile package would increase the

package’s size, we see no reason why it would increase TeleFile’s

complexity. Inclusion of the tax table and other material would give those

taxpayers who want to calculate their tax before calling TeleFile the ability

to do so; other taxpayers could simply ignore that part of the package.

Agency Comments and

Our Evaluation
B-279310

Page 43 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

While we continue to believe that a test is needed, we are sensitive to the

potential costs involved and do not want to suggest that a test should be

done no matter how costly. At the same time, we believe that efforts to

substantially increase the use of TeleFile require that IRS heed the results

of the nonusers survey. If, after designing a potential test, IRS determines

that the cost of doing the test would be prohibitive, it should consider

other options for dealing with the issue raised by the TeleFile nonusers.

One option might be to devise a communication/marketing strategy

directed at allaying any concerns about TeleFile that would cause

taxpayers to want to determine their tax liability themselves before using

TeleFile. To acknowledge the possibility that the cost of a test might be

prohibitive and that other options might be more feasible, we have revised

our recommendation in finalizing this report.

Regarding our recommendation that IRS develop controls and

standardized procedures to ensure that field locations are notified of

procedural changes and implement the changes at the same time, IRS said

that the system used to document and communicate program and

procedural changes does not have a feature to notify the originator that an

office has accessed the information. IRS said that it will pursue adding

such a feature as a future enhancement to the system. IRS also said that as

part of its readiness for the 1999 filing season, it will reemphasize to

service center directors the importance of ensuring that their field

locations expeditiously access program and procedural changes and

disseminate and implement all required actions in a timely manner. These

actions, if effectively implemented, will meet the intent of our

recommendation.

IRS agreed with our recommendation that it add a cautionary statement to

the Schedule EIC alerting taxpayers to potential sanctions. IRS said that it

would revise the 1999 Schedule EIC to (1) alert taxpayers that they should

read the penalties that apply if they improperly claim the EIC and (2) refer

taxpayers to the EIC instructions for that information.

IRS also agreed with our recommendation that it use a separate code to

identify forms that have been downloaded from IRS’ Internet Web site. In

our December 4 meeting, IRS officials said that IRS had implemented

separate codes for reporting the source of electronically produced forms

(i.e., Internet, CD-ROM, and facsimile) in 1996, but had experienced

problems with certain off-the-shelf software when producing the CD-ROM

for the tax year 1997 forms that resulted in its inability to designate

separate codes in 1998. According to the officials, IRS has resolved the
B-279310

Page 44 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

source code issue and will have separate source codes for reporting tax

year 1998 forms generated by CD-ROM, the Internet, and facsimile.

Regarding our recommendation that IRS expand future TeleTax customer

satisfaction surveys, IRS said that the former survey has been discontinued

and that the current TeleTax system is scheduled to be replaced beginning

in 2000. In conjunction with that replacement, according to IRS officials,

IRS intends to reinstate an improved customer satisfaction survey that will

include additional questions and the ability to capture taxpayer comments.

IRS’ decision to discontinue the survey until TeleTax is replaced and an

improved survey can be put in place was consistent with the intent of our

draft recommendation, so we revised our recommendation to indicate

these plans.

IRS disagreed with the last recommendation in our draft report, which

called for IRS to develop a contingency plan for ISRP that provides for the

possibility of extended downtime of the remittance processing function

past 1999. IRS said that it had developed a contingency plan to be used

after 1999. In explaining that plan, IRS said that (1) normal disaster

recovery procedures will be in place in case of an extended downtime of

remittance processing equipment and (2) it will have in place a system to

direct payments received to lockbox facilities as needed. We did not

receive a copy of IRS’ normal disaster recovery procedures in time to

analyze them. However, cognizant IRS officials told us that the procedures

are service-center specific and focus on the transshipment of work from

one center to another, not the movement of work from a service center to

a lockbox. They also told us that the procedures did not cover systemwide

failures, when transshipment between service centers would be of no

value. Regarding the potential use of lockboxes to handle the increased

remittance processing workload if the service centers cannot, a cognizant

FMS official told us that such a change would require negotiations with the

lockboxes. According to the official, no such negotiations had begun as of

December 4, 1998.

After considering IRS’ comments on our last recommendation, we have

retained our recommendation but changed its wording to clarify that our

concern centers on the potential for a systemwide failure.

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
B-279310

Page 45 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

of Management and Budget, and other interested parties. We will also

make copies available to others on request.

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

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

Sincerely yours,

James R. White

Director, Tax Policy and

Administration Issues
Page 46

Contents

1 Letter

Appendix I 48

Toll-Free Telephone

Accessibility Test

Appendix II 53

IRS Workload

Indicators

Appendix III 54

Comments From the

Internal Revenue

Service

Appendix IV 59

Major Contributors to

This Report

Table 1: IRS’ Performance Goals and Related

Accomplishments for the 1997 and 1998 Filing Seasons

7

Table 2: Number of Individual Income Tax Returns

Received, by Filing Type

14

Table 3: Accessibility of IRS’ Telephone Assistance 47

Tables

 Figure I.1: Results of GAO’s Telephone Accessibility Test 49

 Figure I.2: Level of Access and Composition 50

 Figure I.3: Level of Service and Composition 51

 Figure I.4: Message Callback Rate 52

Figures
Contents

Page 47

Abbreviations

EIC Earned Income Credit

FMS Financial Management Service

FTE full-time equivalent

IRS Internal Revenue Service

ISRP Integrated Submission and Remittance Processing

SSN Social Security number

TRA97 The Taxpayer Relief Act of 1997
Appendix I

Toll-Free Telephone Accessibility Test

Page 48 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

To independently test the accessibility of IRS’ toll-free telephone

assistance, we conducted a nonprojectable test by making up to six calls

per day to IRS’ tax law assistance telephone number (1-800-TAX-1040)

from four metropolitan areas—Atlanta, GA; Kansas City, KS; San

Francisco, CA; and Washington, D.C. We made the calls during the

following two periods in 1998: from February 1 through February 26 and

from March 30 through April 15. To avoid possible bias, each call attempt

was randomly spaced throughout the day from 7 a.m. to 11 p.m. Each

attempt to contact IRS consisted of up to five calls that were spaced 1

minute apart. If we received a busy signal, we hung up, waited

approximately 1 minute, then redialed. If after four redials (five calls in

total) we had not reached IRS, we considered the attempt unsuccessful. In

conducting our test, we did not ask questions of the assistors because it

was not our intent to assess the accuracy of their answers.

Once in the telephone system, we were either routed to an assistor or to

the messaging system, depending on the topic selected from the menu.

When routed to an assistor, we (1) abandoned the call if we were on hold

for 7 minutes and (2) did not dial again. We considered abandoned calls as

successful attempts in computing level of access because we were able to

access the telephone system. However, we considered those calls

unsuccessful in computing level of service because we did not make

contact with an assistor. For calls routed to the messaging system, we left

a name and telephone number that had message recording capabilities. If

we received a call from IRS within 3 business days, we considered it a

successful attempt (call answered) and included it in our calculation of the

message callback rate.

For our test, we measured access to IRS’ telephone system (level of

access), the rate at which calls were answered (level of service), and the

callback rate from the messaging system. See figure I.1 for the overall

results of our test.
Appendix I

Toll-Free Telephone Accessibility Test

Page 49 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

Source: GAO test.

We made a total of 786 call attempts. Of those 786 attempts, 635 resulted in

access to the system (an 81-percent level of access). Of the 635 accesses,

we reached an assistor 477 times, left a message and received a return call

from IRS 112 times, and abandoned the call after being on hold for 7

minutes 46 times. Of the 151 unsuccessful attempts, 131 resulted in busy

signals and 20 were calls to the messaging system that were not returned

by IRS. These results are depicted in figure I.2.

 Figure I.1: Results of GAO’s Telephone

Accessibility Test

Level of Access
Appendix I

Toll-Free Telephone Accessibility Test

Page 50 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

Source: GAO test.

As measured by IRS, the only difference between level of access and level

of service is that the former is computed by including abandoned calls in

the number of calls that gained access (i.e., the callers had gained access

to IRS’ system but subsequently decided, for unknown reasons, to hang up

before an assistor came on the line), while the latter is computed after

deleting the abandoned calls (i.e., although those callers gained access to

the system, they were not served). Thus, to compute the level of service

from our test, we deleted the 46 abandoned calls that were included in our

computation of level of access. As shown in figure I.3, of our 786 call

attempts, we either reached an assistor or got a return call from IRS 589

times (a 75-percent level of service).

 Figure I.2: Level of Access and Composition

Level of Service
Appendix I

Toll-Free Telephone Accessibility Test

Page 51 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

Source: GAO test.

Of our 786 call attempts, 132 were routed to IRS’ messaging system. IRS

told callers leaving messages that an IRS representative would attempt to

return their calls within 3 business days. Of our 132 call attempts that went

to the messaging system, 112 resulted in a return call from IRS within 3

business days (a callback rate of 85 percent). That result is depicted in

figure I.4.

 Figure I.3: Level of Service and Composition

Message Callback Rate
Appendix I

Toll-Free Telephone Accessibility Test

Page 52 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

Source: GAO test.

 Figure I.4: Message Callback Rate
Appendix II

IRS Workload Indicators

Page 53 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

Indicator As of date 1997 (thousands) 1998 (thousands) Percentage changea

Individual income tax returns received

Alternative filing methods:

Traditional electronic 10/30 14,457 18,639 28.93

Form 1040 PC 10/30 8,427 7,533 -10.61

TeleFile 10/30 4,694 5,963 27.03

Total, all methods 10/30 120,941 123,055 1.75

Refunds sent

Number 10/30 81,865 82,998 1.38

Amount 10/30 $105,664,000 $112,308,000 6.29

Number of direct deposits 10/30 16,469 19,225 16.73

Amount of direct deposits 10/30 $29,051,000 $34,543,000 18.90

Extension of time to file 5/15 6,548 6,976 6.54

Internet use

Hits 6/28 143,662 411,758 186.62

Files downloaded 6/28 7,222 29,826 313.00

Tax forms faxed to taxpayers 6/28 671 1,003 49.53

Receiptsb

Total number of receipts 8/31 202,855 208,053 2.56

Total amount of receipts 8/31 $1,441,187,407 $1,572,198,961 9.09

Total TeleTax calls 4/18 44,170 37,463 -15.19

Tax law calls 4/18 6,765 7,728 14.22

Refund calls 4/18 37,405 29,735 -20.51

Total toll-free telephone callsc 4/18 70,204 48,485 -30.94

Calls answered 4/18 36,910 35,730 -3.20

Busy signals 4/18 24,953 4,535 -81.83

Abandons 4/18 8,341 8,220 -1.45

Taxpayers assisted at walk-in sites 4/25 5,988 6,173d 3.10

EIC

Number of recipients 8/29 19,032 19,393 1.90

Total amount of EIC 8/29 $27,811,508 $29,406,298 5.73 a

Numbers may not compute to this percentage due to rounding.

b

Total receipts include remittances from individuals and businesses.

c

Toll-free telephone calls include calls to the following phone lines: (1) tax law assistance, (2) EIC

and/or refund inquiry, (3) account inquiry, (4) form ordering, and (5) fraud hotline.

d

Included in this number are 82,000 taxpayers served at walk-in sites on Saturdays from March 7

through April 11, 1998. There were about 6.1 million taxpayers served during the weekdays in 1998.

Source: IRS data.
Appendix III

Comments From the Internal Revenue Service

Page 54 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season
Appendix III

Comments From the Internal Revenue Service

Page 55 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season
Appendix III

Comments From the Internal Revenue Service

Page 56 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season
Appendix III

Comments From the Internal Revenue Service

Page 57 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season
Appendix III

Comments From the Internal Revenue Service

Page 58 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season
Appendix IV

Major Contributors to This Report

Page 59 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season

David J. Attianese, Assistant Director, Tax Policy and

 Administration Issues

M. Grace Haskins, Senior Evaluator

John Lesser, Senior Evaluator

Monika R. Gomez, Evaluator

Royce L. Baker, Issue Area Manager

Doris J. Hynes, Evaluator-in-Charge

Marvin G. McGill, Senior Evaluator

Rose M. Dorlac, Evaluator

Bradley L. Terry, Evaluator

Jyoti Gupta, Evaluator

Susan S. Mak, Evaluator

General Government

Division, Washington,

D.C.

Kansas City Field

Office

Atlanta Field Office

San Francisco Field

Office
Page 60 GAO/GGD-99-21 IRS’ 1998 Tax Filing Season
Ordering Information

The first copy of each GAO report and testimony is free. Additional

copies are $2 each. Orders should be sent to the following address,

accompanied by a check or money order made out to the

Superintendent of Documents, when necessary. VISA and

MasterCard credit cards are accepted, also. Orders for 100 or more

copies to be mailed to a single address are discounted 25 percent.

Order by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 or by using fax

number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and testimony.

To receive facsimile copies of the daily list or any list from the past

30 days, please call (202) 512-6000 using a touch-tone phone. A

recorded menu will provide information on how to obtain these

lists.

For information on how to access GAO reports on the INTERNET,

send e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100

(268831)