Tax Administration: 2007 Filing Season Continues Trend of Improvement, but Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated
Published: 2007-11-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2007, the Internal Revenue Service (IRS) will spend over $3 billion to process returns and provide taxpayer service. Effective service can reduce taxpayers' burden of complying with tax laws and, many tax experts believe, may improve compliance. GAO was asked to assess IRS's performance relative to 2007 goals and prior years' performance including identifying actions that might generate efficiencies and increase compliance. GAO analyzed IRS performance data, reviewed IRS operations at various locations, and interviewed IRS and paid preparer representatives.
section_title: What GAO Found
paragraphs: IRS improved most filing season services during 2007, continuing a longer-term trend. Tax return processing exceeded last year's performance by most measures. Electronic filing grew at a faster rate than IRS anticipated and continued to generate savings. Access to IRS telephone assistors was comparable to last year, and the accuracy of responses to questions remained at about 90 percent. The performance of IRS's Web site improved in several measures, such as customer satisfaction. Continuing past trends, more taxpayers used volunteer sites, which are less costly than IRS's walk-in sites. Despite these improvements, IRS could reduce the number of paper tax returns processed and also transcribe all lines from the residual paper returns, making that data more available for enforcement. Two options for reducing paper processing are electronic filing mandates, previously suggested by GAO, and bar coding, which could be required for paper returns prepared on computers and reduces processing costs. Currently, because of the cost, IRS does not transcribe all lines from paper returns. Further, IRS policy is to post the same lines from electronic and paper returns to its enforcement databases. As a result, IRS does not use all tax return information in its automated compliance checking programs. However, IRS does not know the actions needed to require software vendors to include bar codes on printed tax returns; the benefits, in terms of processing savings and improved enforcement, of having all return data available electronically; or how much electronic filing would have to increase, either through mandates or bar coding, for the benefits of transcribing all residual paper returns to exceed the costs. Despite more reliance on its volunteer program, IRS has not evaluated its effectiveness at reaching underserved taxpayers. Further, IRS may be missing an opportunity to assess the quality of return preparation assistance at its walk-in sites through contact recording, a system IRS uses to record and assess the quality of other interactions between its employees and taxpayers.

section_title: Letter
paragraphs: The quality of the Internal Revenue Service’s (IRS) filing season service is  important for several reasons. Effective service can reduce the burden for  taxpayers, in terms of time and money, of complying with tax laws.  Further, many tax experts believe that quality service has a positive effect  on compliance, although it is difficult to demonstrate empirically.
Taxpayer service also matters because IRS allocated over 30 percent of its  $11 billion budget to provide such service for fiscal year 2007. IRS spends  most of this during the filing season when most taxpayers interact with the  agency. Filing season service includes individual income tax return  processing as well as telephone, Web site, and face-to-face assistance. In  past reports and testimonies we said that IRS has made significant  progress improving taxpayer service since the passage of the IRS  Restructuring and Reform Act of 1998 (RRA 98). In an effort to continue  improving service, IRS recently released, as mandated by the Congress, its  Taxpayer Assistance Blueprint (TAB). TAB is intended to outline a 5-year  comprehensive strategy for improving taxpayer service while minimizing  cost and determining the link between service and compliance.
In addition to IRS, paid tax return preparers are another important  provider of service to taxpayers during the filing season, preparing over  half of individual income tax returns. In previous reports, we have  expressed concern about the quality of paid preparer service and lack of  information IRS has about the extent of problems.
In light of the tax filing season’s cost and importance to taxpayers, you  asked us to assess IRS’s 2007 filing season performance. Our objectives,  for each of IRS’s main filing season services, were to assess IRS’s  performance relative to 2007 goals and prior years’ performance, including  identifying actions that might generate efficiencies and increase  compliance, and the extent to which IRS monitors paid preparer  performance. Additionally, you asked us to describe the challenges  associated with TAB. We testified on IRS’s interim 2007 performance  before the Subcommittee on Financial Services and General Government,  Committee on Appropriations, U.S. Senate, on May 9, 2007, and before the  Committee on Finance, U.S. Senate, on April 12, 2007; we also issued a  report to the Subcommittee on Oversight, Committee on Ways and Means,  House of Representatives on April 3, 2007.
We based our assessment on the results and analyses of IRS data and  reports, workload and performance information, observations of IRS’s  operations, interviews with IRS officials, information from representatives  of some of the larger tax preparation companies and professional  associations that represent preparers providing tax assistance, and reports  by the Treasury Inspector General for Tax Administration (TIGTA). We  have used IRS data in past filing season reports and continue to find them  sufficiently reliable for the purposes of this report. Further details on our  scope and methodology are provided later in this report. We performed  our work from January through October 2007 in accordance with generally  accepted government auditing standards.
subsections: section_title: Scope and Methodology
paragraphs: To assess IRS’s 2007 filing season performance in the key filing season  activities compared to goals and past performance, and identify and assess  potential improvements or efficiencies in filing season operations, we  reviewed and analyzed IRS reports, testimonies, budget submissions, and  other documents and data, including workload data, data related to IRS’s  performance measures and goals, and data on taxpayer usage and other  statistics such as the number of paid preparers;   observed operations at IRS’s Atlanta, Ga. and Andover, Ma. paper  processing centers, the Atlanta and Andover call sites, the Joint  Operations Center (which manages IRS’s telephone services) in Atlanta,  and several of IRS’s walk-in locations in Atlanta and Baltimore, Md. and  selected these offices for a variety of reasons, including the location of key  IRS managers, such as those responsible for telephone and walk-in site  services; tested for statistically significant differences between annual performance  measures based on IRS sample data;    analyzed staffing data for paper and electronic filing, telephone assistance,  reviewed information from organizations, such as Keynote Systems, that  evaluate Internet performance; interviewed IRS officials about current operations, performance relative to  2007 performance goals and prior filing season performance, trends,  significant factors and initiatives that affected or were intended to improve  performance, monitoring and oversight of paid tax preparers, and research  conducted or planned to examine links between taxpayer service and  compliance;  interviewed representatives of some of the larger private and nonprofit  organizations that prepare tax returns, including H&R Block and trade  organizations that represent both individual paid preparers, tax  preparation companies, and professional associations, including the  American Institute of Certified Public Accountants; reviewed TIGTA reports and interviewed TIGTA officials about IRS’s  performance and initiatives; and  reviewed prior GAO reports and followed up on our recommendations  made in prior filing season and related reports.
This report discusses numerous filing season performance measures and  data that cover the quality, accessibility, and timeliness of IRS’s services  that, based on our prior work, we consider sufficiently objective and  reliable for purposes of this report. To the extent possible, we  corroborated information from interviews with documentation and data  and where not possible, we report the information as attributable to IRS  officials. We reviewed IRS documentation, interviewed IRS officials about  computer systems and data limitations, and compared those results to  GAO standards of data reliability. Data limitations are discussed where  appropriate. Finally, we conducted our work primarily at IRS headquarters  in Washington, D.C., the Wage and Investment Division headquarters in  Atlanta, Ga., as well as the other sites mentioned earlier.
section_title: Background
paragraphs: IRS’s filing season is an enormous and critical undertaking that consists of  two primary activities, processing individual income tax returns and  providing taxpayer assistance. It consumes more than $3 billion annually.
Taxpayers can file their returns by mailing paper returns to one of IRS’s  five paper processing centers or submitting the returns electronically.
Electronic filing has provided IRS with significant cost savings. Electronic  filing is faster, which allows taxpayers to receive refunds faster, and is less  error prone—IRS does not have to transcribe electronic tax return  information and built-in checks eliminate many errors that IRS has to  address when processing paper tax returns, such as correcting  computational mistakes and SSNs. In addition, taxpayers below an income  ceiling can access the Free File program offered through IRS’s Web site by  a consortium of 19 tax preparation companies that offer free online tax  preparation and filing services.
IRS’s Business Systems Modernization (BSM) program, which began eight  years ago, is a high-risk, highly complex effort critical to supporting IRS’s  taxpayer service goals, such as increasing electronic filing and providing  more accurate and timely responses to taxpayer inquiries. To date, IRS has  deployed releases of modernized systems that have delivered  substantial benefits to taxpayers and the agency, including e-Services (a  new Web portal and services for paid preparers) and parts of CADE, which  is the new taxpayer information database that facilitates faster refund  processing and provides IRS with more up-to-date account information.  CADE is intended to eventually replace IRS’s antiquated Individual Master  File legacy processing system, which is the agency’s repository of taxpayer  account information, and therefore, is the BSM program’s cornerstone and  highest priority project.
IRS also provides a variety of taxpayer services, including tax law  assistance, account resolution, limited return preparation, tax forms and  publications distribution, outreach, and education, mainly through its  telephone operations, Web site, and face-to-face assistance sites.  Taxpayers can call IRS’s toll-free assistance telephone lines with questions  about tax law or their refunds. Depending on how taxpayers respond to  menu choices, questions are answered by an automated message or calls  are routed to telephone assistors located at 24 call sites around the  country. Calls are routed to the next available assistor assigned to answer  specific questions, e.g., tax law, account, or refund questions.
IRS provides many services through its Web site, including “Where’s My  Refund,” which enables taxpayers to use the Web site to determine  whether the agency received their tax returns and processed their refunds.  Taxpayers can also download forms, instructions, and publications,  research their own tax law issues through Frequently Asked Questions or  Tax Topics, and receive help with specific tax law questions and  procedural questions via e-mail.
IRS’s volunteer program has become an increasingly important part of  IRS’s face-to-face assistance. It expanded to 66 national partners that  include financial, social service, corporate, educational, and government  organizations and helps IRS serve traditionally underserved taxpayer  segments, including the elderly, low-income, disabled taxpayers, taxpayers  with limited-English proficiency, Native Americans, and rural taxpayers.  Additionally, IRS has 401 walk-in sites where taxpayers can ask basic tax  law questions, get account information, receive assistance with their  accounts, and have returns prepared if their annual income is $39,000 or  less.
In April 2007, IRS released its final TAB report, a 5-year plan designed to  assist the agency in providing, evaluating, and improving taxpayer services  at lower costs. As part of its research into the costs of taxpayer services,  IRS developed estimates of the cost-per-service contact for providing  different types of taxpayer services and conducted preliminary research  about the effect of taxpayer service on compliance. We have reported  that IRS lacks quantitative estimates of the impact of taxpayer service and  its enforcement efforts on voluntary compliance; TAB should help IRS  obtain better estimates. We also have long supported IRS’s research  efforts to measure the tax gap, which is the difference between what is  paid voluntarily and on time and what is owed, and help reduce it.
As we previously reported, despite the 2007 filing season being  characterized as high-risk, in large part because of the Telephone Excise  Tax Refund (TETR), the impact of TETR on taxpayer services has been  much less than IRS anticipated.
In addition to IRS, paid preparers are a critical part of the nation’s tax  administration system because of the wide variety of services they offer  and their unique relationship with taxpayers. Paid preparers may combine  several taxpayer services, including help understanding tax obligations,  answering tax law questions, and providing tax forms and publications,  return preparation, and electronic filing. In previous reports and  testimony, we have reported that paid preparers have made serious errors,  although undoubtedly many do their best to provide their clients with  quality service.
section_title: Electronic Filing Continued to Generate Savings, Processing Performance Improved, but CADE Was Delayed, and Opportunities Exist to Reduce Costs and Improve Compliance
paragraphs: Electronic filing and CADE both have the potential to further reduce IRS’s  costs and improve processing speed and accuracy. Many tax returns are  still filed on paper, which increases processing cost, and limits  information readily available for IRS’s enforcement programs.
subsections: section_title: Electronic Filing Continues to Increase and Generate Savings
paragraphs: As of September 14, 2007, IRS processed approximately 135 million  individual income tax returns. Of those returns, approximately 79 million  (58 percent) were filed electronically and the remaining 56 million were  filed on paper. The number of returns filed electronically increased 9  percent over last year, which is greater than last year’s increase and more  than IRS projected. One factor contributing to the growth in electronic  filing is mandates. Thirteen states now mandate electronic filing of state  returns, which has increased electronic filing of both state and federal tax  returns. Despite the overall increase in electronic filing, taxpayer’s use of  the Free File program continued to decline. For example, as of June 21,  IRS processed about 3.8 million returns filed through the Free File  program, 2 percent less than last year. IRS officials attributed this decline  in part to companies offering free electronic online filing separate from the  Free File program.
Growth in electronic filing generates savings for IRS by reducing staff  needed for labor-intensive paper processing. In 2006, IRS used almost  1,700 (36 percent) fewer staff for processing tax returns than in 1999. IRS  estimates that this saved the agency $78 million in salary, benefits, and  overtime in 2006. In addition, IRS has achieved ancillary space cost  savings from the closing of submission processing centers. IRS estimated  the cost savings as a result of closing the Brookhaven and Memphis paper  processing centers to be $24.9 million in 2007. IRS closed its Philadelphia  paper processing center at the end of September 2007, and plans to close  its Andover paper processing center in 2009.
section_title: IRS’s Processing Performance Continues to Improve
paragraphs: IRS issued over 103 million refunds, totaling almost $233 billion, as of  September 14, 2007. Nearly 60 percent of the refunds were directly  deposited, almost 7 percent over the same period last year, which is  important because direct deposit is faster, more convenient for taxpayers,  and less expensive for IRS than mailing paper checks.
IRS met or exceeded seven out of nine processing performance goals and  continues a trend of improvement (see app. I for details). For example,  IRS met or exceeded its goals for the percentage of errors included in  letters, notices, and refunds. For eight of its nine measures, IRS met or  exceeded its previous year’s performance. IRS did not meet one goal and  paid more interest on delayed refunds than expected, because of problems  with a computer system that processes some taxpayer identification  numbers and the inexperience of new staff. IRS did not meet its efficiency  goal because it received fewer easy to process TETR returns than  expected.
Groups and organizations we spoke with, including the National  Association of Enrolled Agents, the American Institute of Certified Public  Accountants, and large tax preparation and tax preparation software  companies, corroborated what the processing performance data showed,  saying the filing season went smoothly. Similarly, TIGTA recently reported  that IRS had a successful filing season.
section_title: Delays in CADE Prevented Millions of Taxpayers from Benefiting from Faster Refunds
paragraphs: IRS was late in delivering its latest version of CADE, its new tax return  database, intended to replace the legacy Individual Master File. CADE  Release 2.2 started processing returns in early March but did not become  fully operational until late May, nearly 5 months behind schedule, because  of problems identified during testing. IRS originally intended CADE to post  33 million taxpayer returns during 2007, more than four times the 7.4  million posted by CADE last year. With the delay IRS revised its estimate  down to approximately 17 to 19 million returns, then down to 11 to 12  million returns. As of early August, CADE had posted 11 million returns, or  about one-third of what IRS expected, and disbursed 11 million refunds  totaling over $11 billion.
A major benefit of CADE is that it is faster than the legacy Individual  Master File system. According to IRS officials, direct deposit refunds are  issued by CADE 1 to 5 business days faster than the current legacy system,  and paper check refunds are issued 4 to 8 business days faster. Because of  the delays in CADE millions of taxpayer refunds were not issued as fast as  IRS planned.
Even with the latest version of CADE deployed, last year IRS estimated  that over $500 million more would be required to fully implement the  individual income tax processing part of the system. Moreover, the CADE  setback adversely affected IRS’s ability to deliver the functionality planned  for the next release, such as processing the earned income tax credit  schedule, and has caused IRS to reconsider the functionality of other  future CADE releases. IRS expects future releases of CADE to be linked  with its Account Management System (AMS) releases, requiring increased  attention to issues of synchronization and coordination between the two  systems. According to IRS officials, CADE and AMS working together will  enable IRS to process tax returns and address many taxpayer issues, such  as address changes, in a near real-time manner, which benefits both IRS  and taxpayers.
Further complicating matters, IRS has additional plans for CADE, such as  processing tax returns claiming the earned income tax credit, during the  2008 filing season. IRS is aware of these challenges and is working on a  revised Release Content Master Plan, which it plans to complete by  November 2007, detailing the capabilities and interdependencies  associated with future releases of CADE and AMS and the plans for  replacing the legacy Individual Master File system.
section_title: IRS May Be Missing Opportunities to Further Reduce Costs and Increase Compliance by Not Doing More to Reduce the Number of Paper Returns Processed and Transcribe all Tax Return Data
paragraphs: Paper returns cost IRS tens of millions of dollars to process. In all of 2006,  IRS received about 63 million paper returns. Of these, 60 percent (38  million) were prepared on a computer, but then printed and mailed to IRS.  IRS codes such returns with a “V.” IRS estimates that a paper return costs  $2.36 more to process than an electronically filed return. This difference  implies that, if IRS could convert all v-coders to electronic filing, IRS could  save roughly $90 million annually. Furthermore, if all v-coders could be  converted to electronic filing, the number of paper returns remaining and  needing to be transcribed would be greatly reduced.
Paper returns also limit the effectiveness of IRS’s enforcement programs.  To control costs, IRS does not transcribe all the lines on paper tax returns  into its computer databases, such as taxpayers’ telephone numbers,  limiting the amount of information available electronically for  enforcement purposes. As we previously reported, even small changes in  the amount of information IRS transcribes can consume substantial  resources that might offset some potential savings from electronic filing.  Further, to avoid disadvantaging taxpayers who file electronically, IRS has  a policy of posting the same information from electronic and paper returns  to its databases. Consequently, if a line is not transcribed from paper  returns, it is not posted from electronic returns either. Only information  posted to computer databases is readily available for use in IRS’s  automated compliance checking programs. These programs include  matching tax return entries with information returns from third parties,  such as Form W-2s from employers or Form 1099s from financial  institutions, and selecting suspicious returns for audit.
According to IRS officials, transcribing and posting more comprehensive  information from individual income tax returns could facilitate the audit  process, expedite contacts for faster resolution, reduce handling costs,  allow for improved case selection, and potentially better define specific  tax gap issues. Although we have not independently verified IRS’s  methodology, for one of its main enforcement programs—the Automated  Underreporter Program—IRS officials estimate that having all tax return  information available electronically would result in a $175 million increase  in tax revenue annually, while at the same time, reduce its “no-change”  rate, making it less likely that IRS would select taxpayers for further  contact where no additional tax was assessed, thus lowering taxpayer  burden.
State experiences provided some corroboration of IRS’s views, as officials  we spoke with reported that greater electronic access to return  information allowed them to verify information on state returns and  improved their enforcement programs while reducing the number of  compliant taxpayers who were contacted.
At least two options exist to increase electronic filing—mandates and bar  coding. Last year we suggested that the Congress mandate electronic filing  by paid preparers meeting certain criteria, such as a threshold number of  returns. Mandating electronic filing would not convert all v-coders,  because it would not apply to taxpayers who prepare their own returns on  a computer. Still, most v-coders use a paid preparer (68 percent in 2006).
Another option to increase electronic filing is bar coding of all printed  returns prepared using commercial software. IRS has done preliminary  research showing that 100 percent of the information on a return could be  condensed into a bar code, which could be read by hand-held scanners.  Consequently, bar coding produces some of the efficiencies of electronic  filing by replacing the labor-intensive transcription process and  eliminating transcription errors. However, bar coding would still require  some processing of paper such as receiving and opening paper mail.
Several states already require bar coding on their printed returns and there  is an industry standard among developers and vendors for creating bar  codes. Moreover, many of the largest software providers already support  bar coding.
IRS’s Wage and Investment Operating Division staff developed a proposal  for bar coding. However, Wage and Investment officials rejected that  proposal in June 2007, in part because it involved upgrading a legacy  system. Wage and Investment officials told us they are developing a new  funding proposal for no earlier than 2010, which would likely include bar  coding.
IRS, however, lacks several pieces of information that would help it make  a decision about whether the benefits exceed the costs of bar coding and  transcribing the residual paper returns.
Actions required: IRS does not know the actions needed to require  commercial software vendors to include bar codes on printed returns. IRS  officials told us that they have not conferred with the software vendors  about the actions that would be necessary. Nor have they conferred with  the states about the actions they took to mandate bar coding. Without  knowing the necessary actions, IRS cannot estimate the costs and time  frames for a bar code program.
Benefits: While IRS has estimates of the savings from converting from  paper to electronic filing, it does not have estimates of the savings from  converting paper to bar coded returns. Although it estimated the increased  revenue possible from the Automated Underreporter Program, IRS does  not have a complete estimate of the revenue gains across all its  enforcement programs that would be realized if all tax return information  were transcribed and posted.
Breakeven: IRS does not know how much electronic filing would have to  increase, through either mandated electronic filing or bar coding, before  transcribing the residual paper returns would pass a benefit/cost test.
Gathering the above information would have some costs to IRS. However,  the cost savings to IRS and increased revenue could be in the range of  hundreds of millions of dollars. Additionally, taxpayer compliance burden  might be reduced.
section_title: IRS Has Limited Information on Paid Preparers Who Prepare the Majority of Tax Returns, but Has Efforts Underway to Acquire More
paragraphs: Although they are an important part of the tax administration system, IRS  has limited information about paid preparers. However, IRS has research  and other initiatives under way intended to gain more information.
As shown in figure 2, paid preparers have filed an increasing majority of all  individual income tax returns over the last decade. During the 2006 filing  season, paid preparers prepared nearly 78 million (61 percent) of the 127  million individual income tax returns. Of the preparer returns, nearly 70  percent were filed electronically.
As we said in past reports, paid preparers are a critical quality-control  checkpoint for the tax system and, as with IRS, the quality of the service  they provide is important. However, we also said that some paid  preparers made serious errors. For example, in 2006 we found that all 19  of the commercial preparers we visited made errors completing returns.  Some of the most serious errors involved not reporting business income  and failing to itemize deductions. Our limited work did not permit  generalizing about the quality of all paid preparers’ work and undoubtedly,  many preparers do their best to prepare returns that are compliant with  tax laws. We also previously reported that, while many taxpayers believe  they benefited from using a paid preparer, millions may have been poorly  served.
IRS has some information on paid preparers. For example, IRS requires  paid preparers to identify themselves on all income tax returns they  prepare by entering their SSN or PTIN.  However, IRS does little to  monitor or track basic information about individual paid preparers. For  example, IRS does not collect information on the type of preparers, such  as whether the preparer is an enrolled agent or part of a commercial chain,  or the number or types of returns filed by preparers. Having such  information could allow IRS to better identify filing errors and target its  outreach to specific preparers or preparer groups.
IRS currently has efforts under way intended to begin remedying the lack  of information about paid preparers. One important step was the Return  Preparer Summit, which took place in late September 2007. According to  IRS, the Summit included officials from multiple IRS offices who  discussed how to better coordinate and communicate between offices  with paid preparer responsibilities. IRS officials expect to present their  findings and potential recommendations in March 2008 when IRS updates  its recent report on voluntary compliance and the tax gap.
IRS is exploring the development of a database that will serve as a  centralized repository of paid preparer information. IRS envisions that  such a database could facilitate more robust compliance efforts and allow  taxpayers to access information on the status of an enrolled agent.  Additionally, the database could potentially be expanded to operate as a  tracking system if proposed legislation mandating universal enrollment  and testing of preparers was to be passed by the Congress. In the  meantime, IRS is working to better utilize and potentially improve existing  databases to share preparer information across its offices with paid  preparer responsibilities.
Further, according to IRS, the agency plans to conduct research on paid  preparers as outlined in TAB. Paid preparer initiatives include    studying how taxpayers select a paid preparer,    evaluating the scope and nature of paid preparer errors,    assessing IRS’s outreach strategy to paid preparers, and    observing paid preparers’ business models in order to better understand  how to provide effective services to reduce errors.
Paid preparers can support IRS’s efforts to improve compliance. They  assist the majority of individual income tax filers, and the assistance they  offer can potentially help taxpayers avoid errors. Having additional  information on paid preparers could help the agency identify and possibly  prevent systematic errors and noncompliance, and could be important in  guiding IRS’s outreach and education strategies for paid preparers. TAB  and other initiatives IRS has planned are steps that should give the  Congress and IRS a better basis for making decisions about the future  oversight of paid preparers.
section_title: Access to IRS’s Telephone Assistors Was Comparable to Last Year, Accuracy Remains High, and IRS Is Reviewing Options for Reducing Excess Capacity at Call Sites
paragraphs: Access and accuracy are key measures of IRS’s telephone performance,  because IRS received 69 million calls during the filing season. At the same  time, reducing excess capacity at call sites is important, because of the  magnitude of IRS’s telephone operations.
subsections: section_title: Telephone Access Was Comparable to Last Year and Accuracy of Responses to Telephone Inquiries Remains High
paragraphs: Taxpayers’ access to IRS’s telephone assistors was comparable to last year  and IRS’s goal, as measured by level of service which is the percentage of  taxpayers who wanted to talk with an assistor and actually got through  and received service (see table 1).
For two other access measures, average speed of answer—the length of  time taxpayers wait to get their calls answered—and taxpayer  disconnects—the rate at which taxpayers waiting to speak with an assistor  abandoned their calls to IRS—IRS’s performance weakened somewhat  compared to the same period last year, but the comparison is complicated  by a policy change. As of June 30, average speed of answer increased  about 15.4 percent and was slightly higher than IRS’s goal, and the  taxpayer disconnect rate also increased. According to IRS officials, both  increases were due, in part, to a decision by IRS to disconnect fewer  taxpayers waiting to speak with an assistor. This decision resulted in  taxpayers having the option of either waiting to speak with an assistor or  hanging up rather than IRS deciding for them by disconnecting the call,  resulting in increased taxpayer choice along with increases to both the  average speed of answer and the taxpayer disconnect rate. Finally, IRS  officials noted that Customer Voice Portal, a new call queuing process that  routes calls directly to available assistors instead of to call sites, resulted  in a more equalized wait-time for taxpayers calling to speak with an  assistor this year.
IRS estimates that the accuracy of telephone assistors’ responses to tax  law and account questions was comparable to the same time period last  year and met IRS’s goals. Moreover, as noted in table 2, since 2005,  accuracy has been about 90 percent or more and was significantly better  than in 2001.
section_title: Call Demand Was Comparable to Last Year, and Telephone Service Remains Important for Taxpayers
paragraphs: IRS received about 69 million calls on its toll-free telephone lines through  June 2007, which was less than expected, but slightly more than in 2006.  IRS’s automated service handled roughly the same number of calls as  those handled by IRS assistors, although the number of automated calls  received was fewer than last year (22.1 million), while the calls answered  by assistors was equivalent to last year.
Of the calls received by IRS, 28.8 million calls were from taxpayers trying  to obtain information on the status of their tax refunds, despite increasing  use of IRS’s Web site feature, “Where’s My Refund.” Another 22.2 million  were about account questions, and 13.1 million were about tax law  questions.
Because millions of taxpayers continue to depend on IRS’s telephone  assistance, it remains a critical part of taxpayer services. Moreover, IRS  and our prior reports have noted that assisting taxpayers with tax  questions reduces burdensome notices and inadvertent noncompliance.  As part of TAB and other initiatives, IRS plans to conduct more research  into the effect of telephone assistance on compliance.
IRS’s telephone operations consume most of IRS’s taxpayer service  budget. According to TAB, assisted telephone services accounted for 65  percent and automated assistance accounted for 2 percent of the nearly $1  billion total costs to the agency for providing taxpayer assistance in 2005.  At this time IRS does not have plans to automate more calls, since the  agency has already shifted easier calls to automation and Web assistance,  leaving the more difficult and time-consuming account and tax law calls  that require the attention of assistors.
In addition to answering telephones, IRS devotes resources to processing  paper inventory, such as amended returns and taxpayer correspondence at  some of its call sites. Because of limited TETR call demand, IRS closed  more paper inventory than anticipated, meaning that taxpayer issues were  resolved more quickly. As seen in figure 4, call volume has not declined  and accordingly, resources devoted to answering telephones have not  declined noticeably since 2001, while resources devoted to paper  inventory have declined almost 14 percent since 2001.
IRS has initiatives to expand and improve on telephone services including    Centralized Customer Contact Forecasting and Scheduling to modernize  the current system of workload forecasting, scheduling, and tracking  workload and training requirements.
Working groups looking into ways of improving taxpayer services, such as  developing ways to synchronize telephone message information with Web  site services to better link different service channels. IRS’s goal is to revise  the messages heard by taxpayers calling to speak with assistors after  business hours, during holidays, or when telephone lines are too crowded  to accommodate them, so that taxpayers are told not only when to try  back, but are also referred to IRS’s Web site for further information.
section_title: IRS Is Reviewing Options for Reducing Excess Capacity at Call Sites
paragraphs: Last year we recommended that IRS timely develop, validate, and  implement a plan to consolidate call sites because, at the filing season’s  peak, IRS determined that it had 850 unused assistor workstations spread  across its 24 call sites. According to IRS officials, the number of unused  workstations has not changed. IRS completed a workload analysis  designed to evaluate changes in telephone staff resources and call demand  and used business criteria, such as the types of calls answered at call sites  and facility and employee costs, to identify call sites for potential closure.  IRS plans to conduct an extensive cost-analysis review of different options  for reducing excess capacity prior to potentially closing any sites, has  secured funding for the analysis, and is in the process of obtaining a  contractor to assist with the review.
section_title: Web Site Performance Remains High, and Initiatives Are On- going to Enhance Web Capabilities and User Experience
paragraphs: Web site performance remains high, which is important because IRS’s Web  site is used by millions of taxpayers, is available to taxpayers 24 hours a  day, is much less costly than other types of assistance, and will remain  important as more taxpayers use self-assistance.
Use of IRS’s Web site increased this filing season compared to prior years’  except for downloads of files such as tax forms and publications, as  shown in table 3 below. According to IRS officials, one reason for the  decrease in downloads is the conversion of IRS publications and  instructions from file format to another format, which IRS does not count  as part of downloads. Additionally, the increased use of electronic filing  and tax preparation software reduces the need for taxpayers to download  tax forms and publications. However, because of the decline, IRS will  continue to monitor the number of downloads and identify possible issues  associated with downloading files.
Evidence that IRS’s Web site is performing well includes the following:    According to the American Customer Satisfaction Index, for the 2007 filing  season, January 1 through April 17, 2007, IRS’s Web site scored above  other government agencies, nonprofits, and private sector firms for  customer satisfaction (74 for IRS versus 72 for all government agencies  versus 71 for all business surveyed), and better than during the 2006 filing  season.
An independent weekly study by Keynote Systems, Inc., a company that  evaluates Web sites, reported that, as of July 16, 2007, IRS’s Web site  repeatedly ranked in the top 6 out of 40 government agency Web sites  evaluated in terms of average download time.
According to IRS, the number of e-mails and telephone calls to the Web  site HelpDesk decreased compared to the 2006 filing season, and average  page views per visit decreased, indicating that visitors to the Web site are  finding information more quickly.
Additionally, this year IRS implemented a new sales tax deduction  calculator, which IRS wants to use as a standard for developing other  online calculators, and updates to the Free File, Alternative Minimum Tax,  and Earned Income Tax Credit applications. Also, this year the “Where’s  My Refund” feature allowed taxpayers to check on the status of split  refunds, and told the taxpayer if one or more deposits were returned from  the bank because of an incorrect routing or account number.
IRS has initiatives to expand and improve on its Web site services.
Tax Law Support Tools will provide Web site self-assistance tools to  taxpayers and other external stakeholders, allowing users to conduct  keyword and natural language queries.
The first release of Internet Customer Account Services will allow  individual taxpayers to view their account information online and is  expected to be deployed in July 2008.
A Spanish version of “Where’s My Refund” will enable Spanish speaking  taxpayers to check refund status and receive account information.
section_title: Taxpayer Assistance Continued to Grow at Volunteer Sites and Decline at IRS’s Walk- in Sites; While Quality has Improved in Some Areas, More Reliable Data Are Needed
paragraphs: Volunteer sites play an increasingly important role in the tax system and  are part of IRS’s and the Department of Treasury’s integrated multiyear  strategy to reduce the tax gap by better identifying and recruiting partners  that are more skilled than IRS at reaching underserved taxpayers,  including the elderly, disabled, low-income, Native American, and rural  taxpayers. Volunteer sites prepared 2.4 million returns, an increase of 17  percent over last year and higher than projected through April 21, 2007. As  illustrated in figure 5, this is consistent with previous trends for volunteer  and walk-in sites. Return preparation at volunteer sites has more than  doubled since 2001, while return preparation at IRS’s walk-in sites has  declined by almost 74 percent during the same period.
Increased return preparation assistance at volunteer sites, rather than at  walk-in sites, allows IRS to devote more resources to services such as  account assistance, which can only be provided by IRS staff. Further, TAB  data show return preparation assistance provided at walk-in sites is four  times more expensive per return than at volunteer sites. Moreover, TAB  data show that walk-in sites are used by a small percentage of taxpayers,  yet account for over 20 percent or, $201 million, of the almost $1 billion  spent on taxpayer assistance in 2005.
Despite an increase in the number of returns prepared at volunteer sites,  the quality of volunteer-prepared returns remains largely unknown and  what is known is not statistically reliable. IRS’s current initiative to  monitor the quality of returns at volunteer sites is in its second year of  implementation and includes mystery shopping, site and return reviews.  However, according to IRS officials, volunteer sites had advanced notice  of site and return reviews, but not mystery shopping. Consequently, IRS  acknowledged that the advance notice of these reviews was likely to bias  the results.
While IRS plans to continue to perform site and return reviews in 2008,  officials said that following a sampling plan that would yield results that  could be generalized to the universe of volunteer sites would be too costly.  Instead, IRS plans to conduct unannounced return reviews, continue site  reviews, and increase the number of mystery shopping visits from the 39  done in 2007 to 100. According to IRS officials, mystery shopping yields  the best evaluative result of the three reviews IRS uses to assess the  quality of volunteer-prepared returns. We agree that having unannounced  visits and increasing the number of mystery shopping visits is likely to  yield a better evaluative result than the potentially biased methods  previously used for monitoring return preparation. Furthermore, we and  TIGTA acknowledge the difficulties in collecting statistically valid  information about return preparation assistance at volunteer sites.
In addition to quality, IRS uses some other measures to monitor the  performance of its volunteer program, such as the number of returns  prepared, percentage prepared electronically, and the satisfaction of its  partners, such as financial, social service, corporate, and government  organizations. While useful, these measures do not reflect the extent to  which the volunteer program improves taxpayer compliance and  participation in programs such as the earned income tax credit. IRS has  increased its reliance on the volunteer program and plans to commit more  resources. However, as we testified earlier this year, IRS’s budget  submission did not include basic performance information about the  program. More specifically, IRS does not know the extent to which the  program influences the taxpaying behavior of its target populations.
Regarding IRS’s walk-in sites, IRS recently started implementing contact  recording intended to better measure the accuracy of tax law and account  assistance. As shown in figure 6, contact recording automatically  captures the audio portion of a taxpayer contact and synchronizes it with  an IRS walk-in site assistor’s computer screen activity. With the exception  of a microphone that sits atop the desk of the walk-in site assistor, contact  recording is similar to the system IRS uses to monitor and assess the  quality of telephone interaction between taxpayers and telephone  assistors. IRS has deployed contact recording at 127 of its 401 walk-in  sites, which represents 46 percent of walk-in site contacts. As of May 26,  2007, IRS data show accuracy rates of 85 percent for accounts assistance  and 80 percent for tax law assistance, and IRS officials expect accuracy  rates to improve as IRS deploys contact recording at more sites.
Although IRS currently has plans to fully deploy the contact recording  systems to all walk-in sites by 2009, contact recording is not included in its  plans to assess the quality of return preparation assistance. IRS intends  on relying on managerial observation of employee/taxpayer interactions  while providing return assistance. We have previously reported that  employees’ performance could be influenced by the knowledge that they  are being observed by managers, biasing the results. Additionally,  managers were not consistently coding employee performance.  Consequently, without an unbiased method, IRS lacks reliable information  to assess performance, establish obtainable goals, and measure progress  toward goals.
According to IRS officials, contact recording used to measure the accuracy  of tax law and account assistance could be extended to include return  preparation assistance. For example, the equipment is already at many of  the sites—it is used to measure the accuracy of tax law and account  assistance, but turned off for return assistance. IRS officials said that IRS  had not yet determined the feasibility of using contact recording for return  assistance. IRS officials were concerned that contact recording, as it is  currently configured, might miss some aspects of return preparation  assistance, such as verifying taxpayers’ documents. Further, IRS officials  noted that because it takes longer to prepare a return than answer a tax  law or account question, managerial review of return preparation takes  longer than for tax law or account assistance. However, officials also  noted that managers would be likely to spend the same amount of time  using the manager observation method as with contact recording but  manager observation would not yield reliable results. Without fully  determining the feasibility of using contact recording for return assistance,  IRS will not know if the concerns could be addressed and the existing  equipment could be more fully utilized.
section_title: The Value of TAB Depends on Funding and Ability to Link Taxpayer Service to Compliance
paragraphs: TAB is a data-driven strategy that includes the results of extensive  research designed to assist IRS in better understanding taxpayers’ service  needs. For example, TAB research included several surveys that provided  IRS with information about the services that taxpayers use or would use.  TAB also provides plans to improve taxpayer services and a multiyear  portfolio of research designed to provide information on the value of IRS  services to taxpayers and partners and the effect of taxpayer service on  compliance. According to IRS officials, with TAB, they now have more  information about taxpayers than ever before.
IRS developed estimates of the cost-per-service contact for providing  different types of taxpayer services, although there were qualifications to  those estimates. According to TAB, these estimates will provide a  baseline methodology for computing and comparing the costs of services  in the future. Having reliable cost information, together with a better  understanding of taxpayers’ preferences, needs, and expectations, will  assist IRS in determining whether it can provide taxpayers with the same  services and benefits at lower cost through alternative methods. As table 4  shows, these costs vary widely depending on the type of service provided.
TAB has potential value. In the past, we have stressed the importance of  reconsidering the level and types of services IRS provides to taxpayers,  such as whether to maintain the same number of walk-in sites. While we  support IRS’s efforts to develop a data-driven strategy, the value of TAB  will depend on several factors, such as    Quantifying the linkage between taxpayer service and voluntary  compliance. As noted above, TAB outlines a research portfolio that  includes additional research on the impact of taxpayer service on  voluntary compliance, which is consistent with the Department of  Treasury tax gap report. According to TAB, a better understanding of the  causes of noncompliance and the impact of specific taxpayer services on  compliance would allow IRS to focus investments in taxpayer service to  positively impact compliance. However, TAB recognizes that previous  research has shown that quantifying this linkage is difficult.
Coordinating and managing oversight responsibilities for TAB initiatives.  IRS recently established a TAB Program Management Office responsible  for facilitating, coordinating, and integrating TAB activities. The Program  Management Office currently does not have authority to allocate funding  for initiatives, and TAB officials said that it could be difficult to develop  initiatives that require funding or coordination between different  organizations without such authority.
Obtaining funding. While some of the initiatives under TAB are funded  mostly as extensions of existing efforts, most are not yet funded, and TAB  does not contain any information related to how much, as a whole, it will  cost. According to IRS, unfunded and future initiatives will have to  compete with other IRS projects for funding within approved annual  budgets.
Including submission processing services. IRS officials acknowledge that  submission processing is a significant component of service delivery and  must be integrated into TAB. The timely processing of returns supports tax  compliance and possibly reduces the need for taxpayer services.
section_title: Conclusions
paragraphs: Over the last decade, IRS has improved its performance processing tax  returns and providing taxpayer assistance. We see value in two IRS  initiatives intended to further improve this performance. TAB, besides  being a data-driven strategy for further improving service, may provide IRS  with a better understanding of the effect of taxpayer service on  compliance and thus of the return on IRS’s large investment in service.  Similarly, obtaining more information about paid preparers is valuable  because doing so should give the Congress and IRS a better basis for  making decisions about the future oversight of paid preparers.
In addition to these initiatives, we have identified other potential means  for improving service. One opportunity is to increase electronically filed  returns, either through mandates or bar coding, and transcribing the  remaining lines on residual paper returns. However, IRS does not have the  benefit/cost estimates that would be useful to make decisions about how  to proceed. In particular, IRS does not know the actions needed to require  software vendors to include bar codes on printed individual income tax  returns and the cost of those actions; the benefits, in terms of processing  costs and improved enforcement, of having all information available  electronically; and how much electronic filing would have to increase for  the benefits of transcribing all remaining paper returns to exceed the  costs. Such information would allow IRS to compare the costs of  additional transcription to the benefits of processing costs savings,  additional enforcement revenues and reduced taxpayer burden.
Additionally, despite increasing reliance on volunteer organizations to  target underserved taxpayer groups, IRS lacks information on the  effectiveness of its efforts. Finally, while IRS has been implementing  contact recording at walk-in sites to monitor the accuracy of tax law and  account assistance, it has not determined the feasibility of extending  contact recording to its low-income return preparation assistance  program. In both cases, the missing information impedes IRS’s ability to  make data-based decisions about how to improve assistance to  underserved taxpayers.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Acting Commissioner of Internal Revenue direct  the appropriate officials to    determine actions needed to require software vendors to include bar  codes on printed individual income tax returns and the cost of those  actions;   determine the benefits, in terms of processing costs and improved  enforcement, of having all return information available electronically;   determine how much electronic filing would have to increase, either  through electronic filing mandates or bar coding, for the benefits of  transcribing all remaining paper returns to exceed the costs;   develop estimates of the effectiveness of IRS’s volunteer program at  targeting underserved populations; and   determine the feasibility of using contact recording as a method of  monitoring and improving the quality of return preparation assistance at  IRS’s walk-in sites.
section_title: Agency Comments and Our Evaluation
paragraphs: The Acting Commissioner of Internal Revenue provided written comments  in a November 7, 2007 letter in which she agreed with all our  recommendations and outlined IRS’s actions to address those  recommendations. With respect to reducing processing costs and  improving enforcement, IRS plans on specifically addressing these  recommendations in a report to the Congress. With respect to assessing  the effectiveness and quality of IRS’s face-to-face services, IRS reported it  plans to develop methods of estimating how it can provide better face-to- face assistance.
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after its  date. At that time, we will send copies of this report to the Secretary of the  Treasury; the Acting Commissioner of Internal Revenue; the Director,  Office of Management and Budget; relevant congressional committees; and  other interested parties. This report is available at no charge on GAO’s  web site at http://www.gao.gov.
For further information regarding this testimony, please contact James R.  White, Director, Strategic Issues, on 202-512-9110 or whitej@gao.gov.  Contacts for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this statement. Individuals making key  contributions to this testimony include Joanna Stamatiades, Assistant  Director; Amy Dingler; Evan Gilman; Timothy D. Hopkins; Jennifer  McDonald; Paul B. Middleton; Emily Norman; Karen O’Conor; Cheryl  Peterson; Neil Pinney; and Lerone Reid.
If you or your staffs have any questions, please contact me at (202) 512- 9110 or WhiteJ@gao.gov.
section_title: Appendix I: IRS’s Processing Performance Relative to 2001-2006 Performance and 2007 Goals
paragraphs: As of June 30, the Internal Revenue Service met or exceeded seven out of  nine processing performance goals and continues a general trend of  improvement. As shown in table 6 below, IRS met or exceeded its goals for  the percentage of errors included in letters, notices, refunds, and deposits;  deposit timeliness (i.e., interest foregone by untimely deposits); and  productivity. IRS met its goal for refund timeliness but did not meet its  goals for refund interest paid and Individual Master File efficiency. IRS  officials said that the lighter than expected TETR volume meant that IRS’s  goal for Individual Master File efficiency could not be achieved because  TETR returns were the easiest to process. Additionally, problems with a  computer system that processes some taxpayer identification numbers  and the inexperience of new staff adversely affected performance on  refund interest paid. Table 5 also shows that IRS’s processing performance  has significantly improved in some areas, such as the deposit and refund  error rates, since 2001.
section_title: Appendix II: Comments from the Internal Revenue Service