PAPERWORK

REDUCTION ACT

Implementation at IRS

United States General Accounting Office

GA Report to the Chairman, Subcommittee

on Oversight of Government

Management, Restructuring, and the

District of Columbia, Committee on

Governmental Affairs, U.S. Senate

November 1998

GAO/GGD-99-4

United States

General Accounting Office

Washington, D.C. 20548

General Government Division

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Page 1 GAO/GGD-99-4 Paperwork Reduction Act

GAO

November 16, 1998

The Honorable Sam Brownback

Chairman, Subcommittee on Oversight of Government

 Management, Restructuring, and the District of Columbia

Committee on Governmental Affairs

United States Senate

Dear Mr. Chairman:

The Paperwork Reduction Act (PRA) was originally enacted in 1980, but

the act was amended and recodified in 1995. One of the purposes of both

the 1980 and the 1995 acts was to minimize the paperwork burden for

individuals, small businesses, and others resulting from the collection of

information by or for the federal government. However, instead of

decreasing, federal agencies’ overall annual paperwork burden estimates

have risen from about 1.5 billion hours in 1980 to more than 7 billion hours

in 1998. In each year since 1989, IRS’ paperwork estimate has accounted

for nearly 80 percent of the governmentwide estimate.

This report responds to your request that we provide you with information

on how the PRA has been implemented at the Internal Revenue Service

(IRS). Our specific objectives were to describe (1) the extent to which

IRS’ paperwork burden estimates contribute to the governmentwide

estimate, and the extent to which those estimates have changed over time;

(2) factors that IRS believes affect its estimates; and (3) IRS concerns

about its burden-estimation methodology.

Because IRS constitutes the preponderance of the governmentwide

paperwork burden-hour estimate, changes in IRS’ burden-hour estimate

have a highly significant—and even determinative—effect on the

governmentwide total. Non-IRS departments and agencies estimated that,

in the aggregate, they had come close to the 25-percent burden-reduction

goal envisioned in the PRA of 1995 by the end of fiscal year 1998.

However, despite several initiatives by the agency to reduce its paperwork

burden, IRS’ burden-hour estimate increased by about 7.5 percent between

fiscal years 1995 and 1998, resulting in an increase in the governmentwide

estimate of the paperwork burden imposed on nonfederal entities. IRS

said that most of the increase in its burden-hour estimates was due to

factors outside of its control, such as changes in economic activity and

new legislative requirements. IRS is currently attempting to change the

way it measures paperwork burden to correct what it believes are

Results in Brief
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significant weaknesses in its current methodology, including reliance on

out-of-date data and questionable technical assumptions.

Information collection is one way in which regulatory agencies carry out

their missions, such as collecting taxes, keeping workplaces safe and the

banking system secure, and protecting the environment. Without such

information, for example, IRS would not know the amount of tax owed by

taxpayers. However, agencies are obligated under the PRA to keep the

amount of paperwork as low as possible, while still fulfilling their

missions.

Paperwork burden is defined in the PRA as including the time, effort, or

financial resources expended to generate, maintain, or provide information

to or for a federal agency. Paperwork burden is commonly measured in

terms of “burden hours,” reflecting the amount of time agencies estimate it

will take nonfederal entities to comply with their information collection

requirements.

The PRA of 1980 established the Office of Information and Regulatory

Affairs (OIRA) within the Office of Management and Budget (OMB) to

provide central agency leadership and oversight of governmentwide efforts

to reduce unnecessary paperwork burden and improve the management of

information resources. The PRA of 1995 reaffirmed the principles of the

original act, expanded OIRA’s leadership role, and gave new

responsibilities to executive branch agencies.1

 Like the original statute,

the 1995 act requires agencies to justify any collection of information from

the public by establishing the need and intended use of the information,

estimating the burden that the collection will impose on the respondents,

and showing that the collection is the least burdensome way to gather the

information.

The PRA of 1995 took effect on October 1, 1995, and required OIRA to set

annual governmentwide goals for the reduction of information collection

burdens by at least 10 percent in fiscal years 1996 and 1997 and by at least

5 percent in each of the succeeding 4 fiscal years. The act also required

OIRA to establish annual agency burden-reduction goals that “represent

the maximum practicable opportunity in each agency.” OIRA establishes

these agency goals in an annual Information Collection Budget (ICB) that

also describes each agency’s accomplishments during the preceding fiscal

 1

See Regulatory Management: Implementation of Selected OMB Responsibilities Under the Paperwork

Reduction Act (GAO/GGD-98-120, July 9, 1998) for a discussion of how OIRA has carried out its

responsibilities.

Background
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year and planned initiatives for the current fiscal year to minimize

paperwork burden. In January 1997, OMB instructed executive

departments and agencies to prepare and implement ICBs and information

streamlining plans that would include “goals and timetables to achieve, by

the end of [fiscal year] 1998, a cumulative burden reduction of 25 percent

from their [fiscal year] 1995 year-end level, consistent with the

governmentwide burden-reduction goals in the Paperwork Reduction Act

of 1995.”

It is important to recognize that the basic data used to gauge paperwork

burden have significant limitations. Estimating the amount of time it will

take for an individual or business to collect and provide information or

how many individuals and businesses an information collection will affect

is not a simple matter. It is often unclear to what degree agency burdenhour estimates reflect real burden and difficult to determine the factors

that cause changes to the estimates. Therefore, users of those estimates

should interpret them with caution. Nevertheless, there are no better

indicators of paperwork burden available. Burden-hour estimates can be

useful as long as their limitations are borne in mind.

To describe the contribution of IRS’ burden-hour estimates to the

governmentwide estimate and changes in those estimates over time, we

reviewed our previous reports and testimonies on the PRA and obtained

additional information from OIRA’s ICB for fiscal year 19982

 and from the

Department of the Treasury’s paperwork officer. We also obtained

information from the ICB on the factors that IRS believes affect its

paperwork burden totals. We contacted IRS officials to identify the

agency’s concerns about its burden estimation methodology and to obtain

information on recent IRS efforts to improve the measurement of its

paperwork burden. We did not assess the accuracy of any of the burdenhour estimates included in this report.

At the conclusion of our review, we obtained comments on a draft of this

report from IRS’ Chief Operations Officer, whose comments are reflected

at the end of this report. We conducted our review in August and

September 1998 in accordance with generally accepted government

auditing standards.

 

2

Office of Management and Budget, Office of Information and Regulatory Affairs, Information

Collection Budget of the United States Government, July 20, 1998.

Scope and

Methodology
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As figure 1 illustrates, because IRS has accounted for nearly 80 percent of

the governmentwide paperwork burden-hour estimate in each of the past

10 years, changes in IRS’ paperwork burden estimates have had a

substantial impact on the governmentwide trends. The near tripling of the

governmentwide burden-hour estimate during fiscal year 1989 was

primarily caused by IRS’ adoption of a new methodology for computing

burden, which increased its paperwork estimate by about 3.4 billion hours.

However, this increase did not signify an actual increase in burden, only an

increase in the estimate of that burden. The actual burden imposed on the

public was unaffected by the changes to the estimation process.

Note: Data are estimated as of September 30 each year. Data for 1998 are projections reported in the

July 1998 ICB.

Source: OMB and Department of the Treasury.

IRS’ Burden-Hour

Estimates Have

Increased

Figure 1: Changes in IRS and

Governmentwide Burden-Hour

Estimates Between Fiscal Years 1980

and 1998
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When the PRA of 1995 took effect on October 1, 1995, IRS’ estimated

burden-hour total was slightly less than 5.3 billion hours. Achievement of

a 25-percent reduction in that baseline in accordance with the

governmentwide goals envisioned in the PRA would have put IRS’ total at

just under 4 billion burden hours by September 30, 1998. However, when

the ICB was published in July 1998, IRS projected that its burden-hour

total would be nearly 5.7 billion hours by the end of fiscal year 1998—

about a 7.5 percent increase from IRS’ fiscal year 1995 baseline. In

contrast, agencies outside of IRS have, in the aggregate, reported that they

reduced their paperwork burden by nearly 21 percent since September 30,

1995. More than half of the departments and agencies identified in the ICB

reduced their burden-hour estimates during this period, some by more

than 40 percent. However, because IRS constitutes nearly 80 percent of

the governmentwide burden-hour estimate, IRS’ 7.5 percent burden-hour

increase has more than offset the reductions reported by the other

agencies. As a result, the governmentwide burden-hour estimate has

increased by about 1 percent since the PRA took effect at the end of fiscal

year 1995. (See fig. 2.)
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Note: The governmentwide burden-reduction goal for this 3-year period was 25 percent.

Source: OMB and Department of the Treasury.

The July 1998 ICB stated that initiatives by IRS and other parts of the

Department of the Treasury had eliminated more than 100 million hours of

paperwork burden between fiscal years 1995 and 1998. For example, the

report stated that IRS had done the following:

• Reduced the burden associated with IRS Form 1040EZ by 3.7 million hours

for tax year 1996 by encouraging taxpayers to use the 1040 TeleFile, IRS’

telephone-based filing system.

• Expanded the use of the TeleFile program for businesses, thereby reducing

the burden associated with IRS Form 941 (Employer’s Quarterly Federal

Tax Return) by an estimated 14 million hours during fiscal year 1998.

• Raised the threshold for which businesses had to maintain receipts to

substantiate expenses for travel, entertainment, gifts, and listed property,

Figure 2: Percentage Changes in IRS,

Non-IRS, and Governmentwide BurdenHour Estimates Between Fiscal Years

1995 and 1998

Economic Activity and

New Legislation

Reportedly Affect

Burden
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reducing the burden by an estimated 12.5 million hours during fiscal year

1997.

• Required those who file 250 or more of IRS Form 1042-S (Annual

Withholding Tax Return for U.S. Source Income of Foreign Withholding) to

do so on magnetic media, producing an estimated burden reduction of 21.1

million hours during fiscal year 1997.

The ICB also said that IRS has several long-term initiatives to reduce

burden through the use of information technology and reengineered

processes. For example, the report stated that the agency’s Simplified Tax

and Wage Reporting System streamlining initiative has established a

number of prototypes to demonstrate the feasibility of single-point federal

and state filing, electronic filing, streamlined customer service, and

simplified legal requirements for tax and wage reporting by employers.

Despite these completed and long-term efforts, IRS’ overall burden

estimate increased by about 400 million hours between fiscal years 1995

and 1998. The July 1998 ICB indicated that this increase in the estimate

was largely because of increased economic activity and new legislation

that required new information collections. For example, the report said

that an increase in the number of filings of the IRS U.S. Partnership Return

of Income alone resulted in an increase of more than 225 million burden

hours. It also said IRS anticipated that increased usage of the U.S. Tax

Return for Estates and Trusts would add more than 77 million burden

hours.

IRS and other agencies have contended for years that the bulk of their

paperwork burden is directly attributable to the statutes that determine

their mission. As a result, they say it is difficult or even impossible to

substantially reduce paperwork burden and still comply with existing

statutory requirements.3

 Also, the ICBs for the past several years have

reported that agencies’ burden-hour estimates have increased because of

new statutory requirements. The July 1998 ICB contains several examples

of recent statutes that it says increased IRS’s information collection

activities. For example:

• The ICB said that the Taxpayer Relief Act of 1997 (P.L. 105-34)

significantly increased the burden imposed on individual and business

taxpayers, largely because of new provisions for the calculation and

 3

See Paperwork Reduction: Burden Reduction Goal Unlikely To Be Met (GAO/T-GGD/RCED-96-186,

June 5, 1996) and Paperwork Reduction: Governmentwide Goals Unlikely To Be Met (GAO/T-GGD-97-

114, June 4, 1997).
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reporting of taxes owed on capital gains that required a major expansion

of Schedule D for the Form 1040 (U.S. Income Tax Return). The report

said the act required revisions to a total of 230 existing forms and their

instructions, and that changes in just 5 of the forms would result in an

increase of 60 million burden hours.

• The report said that IRS had to create a new form to implement a provision

in the Disaster Assistance Act of 1988 to allow voluntary withholding of

income tax from various federal payments, and that this new form imposes

a burden of 9.7 million hours.

• The ICB said that the Small Business Job Protection Act of 1996 required

IRS to add new tax code references and lines to Form 1065, “U.S.

Partnership Return of Income,” which added 4.3 million burden hours.

IRS officials said that the agency would not be able to reduce its

paperwork burden if new statutes requiring information collections

continue to be enacted and unless changes are made to the substantive

requirements in the current tax code. Relatedly, business officials and tax

experts have also told us that the complexity of the tax code and the

frequent changes that are made to the code are the driving forces behind

federal tax compliance burden in general, not just paperwork burden.4

Neither OIRA nor we have assessed the extent to which IRS’ paperwork

burden is directly attributable to statutory requirements and, therefore, is

beyond the agency’s control. If IRS’ paperwork requirements truly are

statutorily mandated, IRS may not be able to reduce its paperwork burden

by the amounts envisioned in the PRA of 1995 without changes to the

legislation underlying those requirements. However, even though a statute

may require IRS to take certain actions, the agency may have discretion

regarding whether paperwork requirements need to be imposed and, if so,

the manner or frequency with which the information is collected.

IRS currently measures its paperwork burden using a formula partly based

on the number of lines on the forms to be completed. That methodology

was first put in place in 1988, which resulted in the previously mentioned

3.4 million-hour increase in IRS’ paperwork burden estimate during fiscal

year 1989.

Although IRS said it believes this methodology significantly improved its

ability to measure taxpayer burden, the agency now has determined that

the methodology has a number of significant weaknesses. For example,

 

4

Tax System Burden: Tax Compliance Burden Faced by Business Taxpayers (GAO/T-GGD-95-42, Dec.

9, 1994).

IRS’ Efforts to Measure

Paperwork Burden
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the methodology is based on 1984 survey data that may no longer be

relevant because of changes in tax laws and increased use of computers

and tax preparation software. Also, the methodology does not reflect

reductions in paperwork burden attributable to improvements in IRS’

customer service activities. Finally, IRS believes the methodology relies

on questionable technical assumptions (e.g., that adding lines to a form

will always increase burden).

Therefore, IRS is currently reexamining its taxpayer burden measures. It

has drafted a statement of work soliciting contractor support to develop an

improved methodological approach for measuring taxpayer burden.

However, this reexamination effort will not be easy. In 1995, IRS issued a

similar request for proposals seeking contractors to develop an approach

for measuring taxpayer burden; but, according to IRS, no contractors were

interested in doing the work. Earlier this year, we reported on the

challenges IRS faces in developing and implementing performance

measures to gauge its efforts to reduce taxpayer burden through improved

customer service.5

 One such challenge that we identified is developing a

reliable measure of taxpayer burden, including the portion that IRS can

influence.

As a result of IRS’ reexamination of its taxpayer burden measures, it is

unclear whether the agency’s burden-hour estimate will go up, go down, or

remain the same. Because IRS is not sure whether its burden-hour

estimate is accurate and because IRS’ estimate represents nearly 80

percent of the governmentwide paperwork burden estimate, it is also

unclear whether the governmentwide burden-hour estimate is accurate.

We obtained written agency comments on a draft of this report on October

15, 1998, from IRS’ Chief Operations Officer. He said the report accurately

reflects how IRS has implemented the PRA.

We are sending copies of this report to the Ranking Minority Member of

the Senate Committee on Governmental Affairs’ Subcommittee on

Oversight of Government Management, Restructuring and the District of

Columbia; other interested committees; the IRS Commissioner; and the

Administrator of OIRA. We will also make copies available to others on

request.

 

5

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

1998).

Agency Comments
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Major contributors to this letter were Curtis Copeland, Assistant Director,

and Elizabeth Powell, Evaluator-in-Charge. Please contact me at (202)

512-8676 if you have any questions.

Sincerely yours,

L. Nye Stevens

Director

Federal Management and

 Workforce Issues
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