Tax Administration: Most Filing Season Services Continue to Improve, but Opportunities Exist for Additional Savings
Published: 2006-11-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2006, the Internal Revenue Service (IRS) spent about 38 percent of its $10.8 billion budget on processing returns and providing taxpayer assistance. GAO was asked to (1) assess IRS's 2006 filing season performance processing paper and electronically filed tax returns and providing telephone, Web site, and face-to-face assistance relative to 2006 goals and prior years' performance; (2) identify potential cost savings or other improvements; and (3) report on the status of IRS's Taxpayer Assistance Blueprint (TAB). To address these issues, GAO collected relevant information from IRS and other sources, reviewed performance measures and past filing season assessments, and interviewed officials.
section_title: What GAO Found
paragraphs: IRS improved most filing season services in 2006, continuing improvements since 2001. IRS also generated efficiencies from increased electronic filing and benefits for taxpayers through systems modernization. IRS's processing of individual tax returns and refunds improved by most measures, but the growth rate of electronic filing continued to slow in part because of changes to the Free File Program, which reduced the number of taxpayers eligible to use it and the elimination of a program that allowed taxpayers to file via the telephone. Access to IRS's telephone assistors was comparable to last year. The accuracy of responses to telephone inquiries was 90 percent or over in 2006. Use of IRS's Web site increased substantially and IRS reconfigured the site to improve service. Continuing past trends, fewer taxpayers used IRS walk-in sites and more used less-costly volunteer sites. Also, IRS completed Phase I of the TAB, which identified strategic themes for improving taxpayer service; TAB Phase II is expected to be completed by early 2007. With the slowing growth rate in electronic filing, IRS is missing an opportunity to generate additional savings. Federal and state mandates for electronic filing have demonstrated success in increasing electronic filing; however, IRS currently lacks the authority to mandate electronic filing for certain income tax returns such as individual returns filed by paid tax preparers. Using IRS estimates, savings from such a mandate could be on the order of $60 million per year. IRS has another opportunity to generate savings because of excess space at its call sites. However, IRS lacks a strategy for eliminating that space by consolidating call sites. To replace its aging legacy computer system, IRS continues to implement a modernized system for processing tax returns and refunds. However, IRS does not report information on the chief benefit realized to date, faster refund issuance. Such information could be useful for the Congress when making decisions about funding the completion of the individual tax return processing part of the system, estimated by IRS to require at least another $500 million.

section_title: Letter
paragraphs: In fiscal year 2006, the Internal Revenue Service (IRS) spent  approximately $4.1 billion or 38 percent of its $10.8 billion budget on  processing income tax returns and providing taxpayer assistance, with  most of this occurring during the annual tax filing season. During the 2006  filing season, taxpayers filed an estimated 131 million individual income  tax returns and received almost $218 billion in refunds. IRS’s filing season  performance is a key indicator of how well IRS is serving taxpayers and  helping them fulfill their tax responsibilities.
In past reports and testimonies we said that IRS has made significant  progress improving taxpayer service since passage of the IRS  Restructuring and Reform Act of 1998 (RRA 98). However, we also  described challenges to continued progress. For example, the President’s  proposed fiscal year 2007 budget for IRS would cut staffing by over 2  percent. At the same time, IRS has ambitious goals of maintaining or  improving filing season services, while also maintaining or increasing  enforcement activities in order to improve voluntary compliance by 2009.  Another challenge is continuing progress on the Business Systems  Modernization (BSM) program, IRS’s ongoing effort to replace its aged  computer systems. Earlier this year we testified that proposed reduced  funding levels could affect the pace of modernization and ultimately of  improving service and enforcement.
In light of these challenges and the tax filing season’s cost and importance  to taxpayers, you asked us to assess IRS’s 2006 filing season performance.  Our objectives were to (1) assess IRS’s 2006 filing season performance in  processing paper and electronically filed tax returns and providing  telephone, Web site, and face-to-face assistance relative to 2006 goals and  prior years’ performance; (2) identify potential cost savings or other  improvements; and (3) report on the status of IRS’s Taxpayer Assistance  Blueprint (TAB), which is intended to be the long-term strategy for cost  effectively delivering services that meet taxpayer needs. We testified on  IRS’s interim 2006 performance in a hearing held by your Subcommittee  on Oversight, House Committee on Ways and Means, on April 6, 2006.
Our assessment is based on the reported results and analysis of key IRS  performance measures, observations of IRS’s operations, interviews with  IRS officials, information from representatives of the paid tax preparer  community, and analyses by the Treasury Inspector General for Tax  Administration (TIGTA). For the purpose of this report, we found IRS’s  data to be sufficiently reliable for assessing IRS’s 2006 filing season  performance and comparing to prior filing seasons. Further details on our  scope and methodology are provided later in this report. We performed  our work from January through October 2006 in accordance with generally  accepted government auditing standards.
subsections: section_title: Scope and Methodology
paragraphs: To assess IRS’s 2006 filing season performance in the key filing season  activities—paper and electronic processing, plus telephone, Web site, and  face-to-face assistance—compared to goals and past performance, and  report on the status of the TAB, we  reviewed and analyzed IRS reports, testimonies, budget submissions,  and other documents and data, including workload data and data  related to IRS’s current suite of balanced performance measures and  annual goals;   analyzed staffing data for paper and electronic processing, telephone  assistance, and walk-in assistance; tested for statistically significant differences between annual  performance measures based on sample data;   observed operations at IRS’s Atlanta and Cincinnati paper processing  centers, the Atlanta Call Site and Joint Operations Center, and 4 of  IRS’s 400 walk-in locations;  reviewed legislation, policies, and procedures;  reviewed information from organizations that evaluate Internet  performance;  reviewed related TIGTA reports and interviewed TIGTA officials about  IRS’s performance and initiatives;  reviewed prior GAO reports and followed up on our recommendations  made in prior filing season and related reports; interviewed IRS officials about current operations, performance  relative to 2006 performance goals and prior filing season performance,  trends, and significant factors and initiatives that affected or were  intended to improve performance; and interviewed representatives of the few larger private and nonprofit  organizations that prepare tax returns including H&R Block and trade  organizations that represent both individual paid tax preparers and tax  preparation companies including the American Institute of Certified  Public Accountants.
This report discusses numerous filing season performance measures and  data that cover the quality, accessibility, and timeliness of IRS’s services.  We report on IRS’s filing season measures that, based our prior work, we  consider to objective and reliable. 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. As a result, we determined that the IRS data  we are reporting are sufficiently reliable for assessing IRS’s filing season  performance. Data limitations are discussed where appropriate.
We conducted our work at IRS headquarters in Washington, D.C., and New  Carrollton, Maryland; the Wage and Investment Division headquarters and  Joint Operations Center (which manages telephone service) in Atlanta,  processing centers in Atlanta and Cincinnati, and a telephone call site in  Atlanta; and walk-in locations in Georgia and Ohio. We 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.
section_title: Background
paragraphs: The majority of taxpayers have their tax returns prepared by professional  preparers. In fiscal year 2005, about 59 percent of individual tax returns  were prepared by paid tax preparers. We have noted in previous testimony  that the rate of preparer usage is higher among taxpayers with more  complicated returns.
Once returns are prepared, taxpayers can file their returns by mailing  paper returns to one of IRS’s submission processing centers or submitting  the returns electronically. Both taxpayers and paid tax preparers can  submit paper returns directly to IRS. However, taxpayers cannot submit  electronic returns directly to IRS. Instead, only paid tax preparers and tax  preparation software companies that IRS has designated as electronic  return originators can transmit tax returns electronically to IRS which may  involve a fee to the taxpayer. In addition, the Free File program is offered  by 20 companies that make up the Free File Alliance, a consortium of tax  preparation companies that agreed to offer free return preparation and  electronic filing for taxpayers that meet certain criteria. Taxpayers can  access the Free File program via IRS’s Web site (see app. I for further  detail on the Free File program).
For 7 years, IRS has been modernizing its aging tax processing and  business systems. The BSM program is a high-risk, highly complex effort  critical to supporting IRS’s taxpayer service goals. For example, the  program includes projects to allow taxpayers to file and retrieve  information electronically. To date, IRS has deployed releases of  modernized systems that have delivered benefits to taxpayers and the  agency, including e-Services (a new Web portal and electronic services for  paid tax preparers), Modernized e-File (a new electronic filing system),  and the Customer Account Data Engine (CADE), which is the new  taxpayer information database. CADE is intended to eventually replace  IRS’s antiquated Master File legacy processing system that contains the  agency’s repository of taxpayer account information and, therefore, is the  BSM program’s cornerstone and highest priority project. CADE facilitates  faster refund processing and more timely response to taxpayer inquiries  (see app. II for more details on CADE).
In addition to processing tax returns, IRS provides a variety of taxpayer  services, including providing tax law assistance, account resolution,  limited return preparation, tax forms and publications distribution,  outreach, and education. IRS provides these services mainly via telephone,  its Web site, and face-to-face assistance. IRS automatically routes  taxpayers’ calls from one of three toll-free lines—tax law, accounts, or  refunds. Depending on how taxpayers respond to menu choices, questions  are answered by a recorded message or taxpayers are directed to CSRs  located at 25 call sites around the country. Calls are centrally routed to the  site with the shortest wait times among CSRs assigned to answer  particular tax law, account, or refund status questions.
For face-to-face assistance, IRS has 400 walk-in sites where taxpayers can  ask basic tax law questions, get account information, receive assistance  with their accounts, and have returns prepared if annual income is $38,000  or less. Also, low-income, elderly, and qualifying military taxpayers can  get returns prepared at over 12,000 volunteer sites run by community- based coalitions that partner with IRS. In addition, IRS identifies and  selects community partners, such as AARP, that meet taxpayer needs,  such as assistance for the elderly, and helps train, provides resource  materials, and oversees operations at these partners’ facilities. In some  cases, IRS awards grants, trains and certifies volunteers, and provides  reference materials, computer software, and computers.
IRS provides many Web services that have become popular, such as  “Where’s My Refund” which enables taxpayers to use IRS’s 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 using Electronic Tax Law Assistance  (ETLA). One benefit of the Web site is that it reduces the number of phone  calls received.
IRS’s 2006 filing season activities and associated workload volumes are  depicted in figure 1.
IRS evaluates taxpayer service against performance measures such as  timeliness and quality of telephone responses. IRS’s definitions for some  of those measures vary. For example, IRS measures accuracy for  telephone and face-to-face assistance, but because of differences in the  methodologies used to collect the data, comparisons between the two  types of assistance are not possible. IRS also considers volume important  when assessing service delivery and recognizes that volume does not  necessarily reflect actual demand for services, but can reflect changes in  taxpayer behavior, such as more willingness to use IRS’s Web site to  receive services. Finally, IRS uses other means to collect information, such  as surveys on taxpayer satisfaction.
section_title: Opportunities Exist to Generate Savings by Encouraging Electronic Filing; Processing Performance Continued to Improve
paragraphs: The growth rate of electronic filing is important because electronic filing  eliminates costs associated with processing paper returns. IRS’s  performance processing the paper and electronic returns it received in  2006 improved compared to earlier years.
subsections: section_title: Electronic Filing Continues to Grow, but at a Slower Rate, Which Limits Opportunity to Achieve Additional Savings
paragraphs: As of September 15, 2006, IRS processed 131 million individual income tax  returns. Of those returns, 72 million or 55.1 percent were filed  electronically and the remaining 59 million returns were filed on paper.  The number of returns filed electronically increased by 6.3 percent over  the last year, which was less than the 9 percent increase forecasted by IRS  and less than last year’s 11 percent increase, the 12 percent increase in  2004, and the nearly 17 percent increase in 2003.
The growth rate has slowed and, according to IRS officials, it is getting  harder to convert additional taxpayers to electronic filing because those  who might convert most readily have already done so. Slower growth  limits IRS’s progress toward achieving the goal set by the Congress in RRA  98, which was for IRS to have 80 percent of all federal tax and information  returns filed electronically by 2007. We and IRS have previously reported  that IRS likely will not meet the 80 percent goal, but that the agency did  not want to abandon it because it serves as a symbol of IRS’s  determination to increase electronic filing.
Growth of electronic filing is important because it generates savings from  reductions in staff needed for labor-intensive paper processing and  associated space. As shown in figure 2, as electronic filing increased  between fiscal years 1999 and 2006, IRS has greatly reduced the number of  staff years devoted to paper and electronic processing by 1,586, or 34  percent.
In addition to generating savings by reducing FTEs, IRS can and has  achieved ancillary space cost savings from the closing of submission  processing centers. IRS estimates that the elimination of the Brookhaven  Submission Processing Center in 2003 resulted in savings of $5.5 million in  annualized rent and related savings. In addition, IRS closed the Memphis  Submission Processing Center in 2005, and IRS is projecting annualized  rent and related savings equal to $1.3 million beginning in fiscal year 2007.  IRS plans to close the Philadelphia Submission Processing Center in 2007,  although IRS will not realize space savings until late 2011 because the  Service cannot close the entire facility or move other operations into the  space vacated by paper processing operations.
Two other factors that contributed to this year’s slower growth in  electronic filing were (1) changes in the Free File program, which reduced  the number of taxpayers eligible to file electronically for free this year, and  (2) termination of the TeleFile program, which had allowed taxpayers to  file their returns electronically via telephone. Through August, IRS  processed about 4 million returns filed through the Free File program,  which is a decrease of about 23 percent from the same period last year.  This decline is inconsistent with IRS’s projection that it would receive 6  million tax returns filed through the Free File program, or almost a million  more than received last year, when some members of the Free File  program provided free electronic filing to all taxpayers. In 2005, IRS  renegotiated and amended the agreement with the tax preparation  companies participating in the Free File program. Among the important  changes was a new income limitation of $50,000 or less that resulted in 30  percent of the nation’s taxpayers not being eligible for the Free File  Program. This change left 92 million taxpayers eligible for the program  and 39 million taxpayers ineligible.
IRS also terminated the TeleFile program. IRS expected that eliminating  TeleFile would reduce electronic filing, but justified the decision because  of declining usage and relatively high costs. The number of taxpayers  using the TeleFile program had been decreasing—from approximately 5.7  million in 1999 to 3.3 million in 2005. IRS estimated the cost per tax return  submitted through TeleFile, typically Form 1040EZ, to be about 74 percent  more than it costs IRS to process a return filed on paper, largely due to  telecommunications and other costs. IRS officials stated that the reason  for this year’s increase in the number of 1040EZ returns filed on paper is,  in part, the elimination of TeleFile. According to IRS officials,  approximately 1.3 million or 40 percent of taxpayers who formerly used  Telefile in 2005 filed on paper in 2006.
Over the years, IRS has taken numerous actions to encourage electronic  filing by taxpayers and tax practitioners. In addition, IRS has responded to  many of our recommendations to increase the use of electronic filing.  Despite these actions, and as we have already noted, growth in electronic  filing has slowed as IRS’s recent efforts have not resulted in converting a  large portion of tax filers from paper to electronic filing.
Nevertheless, IRS continues to look at options for increasing electronic  filing. A recent proposal is aimed at converting taxpayers and paid tax  preparers who prepare individual income returns on computer, print them  out, and then send them to IRS—a process known as V-coding—to  electronic filing. According to IRS officials, converting these taxpayers  could be an important step to reduce the number of paper returns filed.  Between January and May 2006, IRS estimates that nearly 39 million, or 72  percent of all paper returns filed were V-coded returns. To help convert   V-coders, IRS officials stated that the agency is considering creating a  secured electronic mailbox where tax preparers could send in a return, the  taxpayer could review and sign it, then submit it to IRS electronically, or  return it to the preparer for additional work and subsequent electronic  filing to IRS. According to IRS officials, this initiative would be part of   e-Services. Further, this and other proposals to expand electronic filing  and capitalize on new technologies will be contained in an update to its   E-Strategy for Growth, which is a long-term vision for providing ways for  taxpayers to interact electronically with IRS. While the proposal may be an  important tool for paid tax preparers and taxpayers, participation remains  on a voluntary basis as part of e-Services, IRS officials did not have  estimates as to its effect on reducing V-coding, and it covers only  practitioners and not taxpayers.
section_title: Mandates Have Demonstrated Success in Increasing Electronic Filing, but IRS Lacks the Authority to Impose Mandates for Individual Taxpayers
paragraphs: For the first time, in the 2006 filing season IRS mandated that corporations  with assets over $50 million file their corporate tax returns electronically.  As of September 15, 2006, over 12,000 large corporations electronically  filed their returns, up from 131 in 2005. Next year, corporations with over  $10 million in assets will be required to file their returns electronically.  Perhaps in anticipation of the mandate, over 16,000 of those corporations  filed electronically, compared to just over 1,100 in 2005. According to the  IRS Commissioner, electronic filing by large corporations will cut many  months off the audit process and will allow IRS to develop analytical tools  to better select areas of audit inquiry. Consequently, those corporations  will benefit by having uncertainties on their tax returns resolved sooner,  and the government will benefit by more promptly identifying and  responding to areas of noncompliance.
Last year we reported that state mandates for electronic filing of state tax  returns also encourage electronic filing of both state and federal tax  returns. Of the 50 states, 12 had electronic filing mandates for paid tax  preparers in effect for the 2006 filing season. These mandates require  preparers who meet certain criteria, such as filing 100 individual state tax  returns or more, to file individual state returns electronically (see app. III  for more information on state mandates).
State mandates have increased the electronic filing of federal individual  income tax returns. According to IRS officials, this increased growth is  because paid tax preparers converted their entire practice to electronic  filing. Nine states had electronic filing mandates in effect in 2005 or earlier.  In eight of these nine states, the growth rate of electronically filed federal  returns increased the year the mandate was implemented. For one state,  Virginia, the growth rate declined by 11 percent. Four states had  increases of between 7 and 48 percent in their growth rates. Four other  states had their growth rates more than double including California, which  nearly tripled.
An alternative comparison of state growth rates to the nationwide growth  rate also shows the benefits of state mandates. For eight of the nine states  that have imposed a mandate, the growth rate of federal returns  electronically filed from that state was greater than the national growth  rate for the year the mandate took effect.
In the past, some tax preparers have voiced concern regarding the costs  and burdens associated with converting their businesses to electronic  filing. As a result, last year we recommended to IRS that it develop better  information about the costs to preparers and taxpayers of mandatory  electronic filing of tax returns for certain categories of preparers.  According to an IRS survey, cost was not the primary factor cited by  preparers for not converting their businesses to electronic filing; instead,  the major factor was that their clients did not ask for or want electronic  filing. However, once over the initial barrier of having converted to  electronic filing, several state tax officials we consulted with, including  New York and Minnesota, reported receiving very little negative feedback  from preparers. In fact, one state official noted that a substantial number  paid tax preparers have reported how easy electronic filing is compared to  filing returns on paper. Given the current rate of growth in electronic filing  of federal returns, mandates represent an important option for realizing  further growth.
Because mandates drive significant electronic filing increases, the  Electronic Tax Administration Advisory Council (ETAAC) recently  recommended a federal mandate for paid tax preparers that prepare  individual tax returns. ETAAC estimated that if preparers filed all  individual returns electronically, IRS would be only 5 percentage points  below the 80 percent goal set by the Congress, instead of being 25  percentage points below the goal as it is currently.
IRS, however, is prohibited by law from requiring electronic filing of  income tax returns for individuals, estates, and trusts. Because IRS lacks  the statutory authority to mandate electronic filing of individual tax  returns, it has not developed any plans or proposals for doing so. Any  proposal would likely have to consider such factors as to whom the  mandate should apply, thresholds for such mandates, if penalties should  be assessed for noncompliance, and the length of time needed to develop  the capacity to receive additional electronically filed returns.
State and federal experiences with mandates demonstrate that mandated  electronic filing can generate savings. By not requiring electronic filing by  paid preparers, IRS is missing an opportunity for generating savings and  efficiencies. IRS estimates that it saves $2.38 on every return that is  processed electronically. Using IRS’s estimates, if 90 percent of returns  submitted by preparers that are currently filed on paper were filed  electronically, IRS would have saved an estimated $68.5 million per year.
Senate bill S. 1321 shows Congressional interest in increasing use of  electronic filing for preparers. This bill provides IRS with the authority to  require tax preparers to file individual income tax returns electronically.
section_title: Processing of Paper and Electronic Returns Continued to Improve, Although IRS Lacks a Refund Timeliness Measure for Its New Processing System
paragraphs: In addition to processing 131 million tax returns, IRS has issued almost 99  million refunds, totaling over $218 billion. Over 56.4 million or more than  half of the refunds were directly deposited, up nearly 8 percent over the  same period last year. This increase is important, because direct deposit is  faster, more convenient for taxpayers, and less expensive for IRS than  mailing paper checks.
Of the nine processing performance measures listed in table 1 used by IRS  to assess performance, the agency met or exceeded eight out of its nine of  its 2006 goals, and equaled or exceeded its 2005 performance for seven of  the nine measures (see app. IV for further details). For one measure, the  letter error rate, IRS’s performance declined and the 2006 goal was not  met. IRS officials said that computer system errors were partially to blame  for the higher letter error rate, along with some errors as a result of the  lack of training of new employees at one submission processing center.  More importantly, however, IRS’s processing performance has  significantly improved for all nine measures compared to 2001 or for  measures not in existence in 2001, compared to their first year in  existence.
In addition to the processing measures results, representatives of the tax  preparer industry reported that returns processing went well. Groups and  organizations that we talked to included the National Association of  Enrolled Agents and the American Institute of Certified Public  Accountants. In addition, TIGTA testified and later reported no significant  problems during the filing season. IRS officials corroborated the view  that returns processing went smoothly.
CADE, the cornerstone of IRS’s investment in systems modernization, also  performed well. For the 2006 filing season, CADE processed about 7.4  million, or 5.6 percent, of the 131 million income tax returns filed  electronically or on paper, and disbursed about 6.6 million refunds totaling  over $3.4 billion. While the percentage of returns CADE processed is  modest, CADE is important because it is ultimately expected to replace  IRS’s antiquated Master File legacy system, which contains the agency’s  repository of taxpayer account information.
A major benefit of CADE is that it is much faster compared to the Master  File legacy system, partly due to CADE’s daily processing cycle, compared  to the Master File’s weekly processing cycle. For example, according to  IRS officials, direct deposit refunds are issued by CADE 1–5 business days  faster than the current system, and paper check refunds are issued 4–8  business days faster. The benefits of CADE, in terms of faster processing,  are likely to expand to more taxpayers because the next release of CADE  is expected to process an estimated 33 million returns in 2007, over four  times more than the number processed through CADE in 2006. Because  CADE processes returns and refunds more quickly, it can help minimize  the need for Refund Anticipation Loans (RAL). Reducing the need for  RALs matters because of the high interest rates that taxpayers are often  charged for these short-term loans, making them controversial.
Systems modernization has been a key part of IRS’s efforts to improve  taxpayer services. CADE is a major investment, with almost $200 million  spent on development and implementation through fiscal year 2006, and  the cornerstone of IRS’s systems modernization program. CADE is only  partially completed, and IRS estimates that over $500 million more is  required to fully implement the individual tax return processing part of the  system.
In its proposed fiscal year 2007 budget request to the Congress, IRS did not  report the benefits from CADE to date in terms of faster refund timeliness.  IRS had not established separate processing performance measures for  CADE that report the total time it takes CADE to process a return and  issue a refund. According to IRS officials, this was due to the newness of  CADE’s implementation, the difficulty in separating CADE and Master File  processing information, and IRS’s desire to keep performance measures to  a vital few. The refund timeliness measure included in table 1 covers only  returns filed on paper, not electronically, and combines refund timeliness  information for all paper returns together.
Because of the substantial costs associated with fully implementing CADE,  the Congress could find information about the benefits useful. We have  previously reported the value in knowing estimates of benefits when  making decisions about whether to fund large investment programs. The  actual benefits received from CADE may be useful as an indication of both  the magnitude and likelihood of the future benefits from full  implementation. As discussed above, IRS officials are aware of benefits  from CADE. Reporting such benefits in future budget requests could be  done without necessarily making changes to IRS’s current refund  timeliness measure.
section_title: Access to IRS’s Telephone Assistors Was Comparable to Last Year and Accuracy Improved, but IRS Has Excess Space at Its Call Sites
paragraphs: Taxpayers’ access to IRS’s telephone assistors and the accuracy of  answers are both key indicators of IRS’s filing season performance  because of the volume of calls and labor costs associated with answering  them.
subsections: section_title: Telephone Access, as Indicated by Three Performance Measures, Was About the Same as Last Year
paragraphs: Taxpayers’ access to IRS’s telephone assistors, as indicated by three IRS  performance measures, was more or less comparable to last year’s, lower  than in 2004, but better than in 2002, as shown in table 2. The percentage  of taxpayers who wanted to talk with a CSR and actually got through and  received service—referred to as the CSR level of service or telephone  access—was 81 percent through mid-July as compared to 82 percent over  the same period last year—and slightly less than its 2006 goal of 82  percent. This translated into 22.3 million calls being answered by CSRs.  Taxpayers gain access to a CSR depending on their responses to telephone  prompts. Some go through an automated system to determine if a CSR is  needed, while other taxpayers, such as those seeking tax law assistance,  are screened and transferred to a CSR who is trained to respond to their  questions.
Other access measures showed improvement, such as the average speed  of answer and the abandon rate, also shown in table 2. IRS reported that,  through mid-July, the average speed of answer, the time taxpayers wait to  get their calls answered, was nearly 4 minutes, which is an 11.4 percent  decrease from last year. The abandon rate, or the percentage of callers  who hang-up after reaching the queue to wait for an assistor, was 10.5  percent, down from 12.2 percent from last year. The table below indicates  that as the average speed of answer decreases from 2005 to 2006, so does  the number of taxpayers who abandon their calls to IRS. However, this  relationship may be influenced by other factors as well, such as call  volume, staffing, or efficiencies, as well as an increased number of what  IRS refers to as courtesy disconnects. According to IRS, the Agency  disconnects some callers when wait times become excessive for particular  types of questions in order to improve taxpayers’ experiences overall. IRS  disconnected 1.7 million calls through mid-July. While this is a 93 percent  increase for the same period over last year, courtesy disconnects  represent only about 2 percent of the total call attempts, although IRS has  not estimated the impact of disconnects on call volume overall.
The level of service, average speed of answer, and other dimensions of  access experienced by individual taxpayers are likely to vary depending on  the time of year, type of call, and other factors. Consequently, aggregated  or annualized results may mask fluctuations in performance and taxpayer  experiences may vary (see app. V for further discussion)
IRS officials had planned to reduce toll-free telephone service from 15 to  12 hours a day this year because 93 percent of calls come in between 8  a.m. and 8 p.m. IRS created work plans under the assumption of a  reduction in telephone assistance hours. Because of a congressional  directive, IRS had to adjust its work plans for a 15-hour day close to the  start of the filing season. According to a recent TIGTA report, after being  unable to implement the service hour reduction, IRS had insufficient time  to train new seasonal CSRs, resulting in a decline in the number of  assistors able to answer calls. Nevertheless, according to IRS officials,  lower call volume during the filing season mitigated the potentially  negative effect on service they had expected from maintaining a 15-hour  day.
section_title: Accuracy of Responses to Telephone Inquiries Improved since Last Year and More So since 2001
paragraphs: The accuracy of telephone CSR responses to tax law and account  questions either met or exceeded IRS’s goals and past performance, as  shown in table 3. Most notably, accounts accuracy and tax law accuracy  have improved since 2001 and now both are 90 percent or over, which is a  statistical improvement over last year. IRS officials said accuracy  improved because of their focus on identifying and informing the call sites  of the top defects made by CSRs, directing accounts inquiries away from  calls sites with a focus on tax law applications, and limited forms and tax  law changes.
section_title: While IRS Expects Telephone Demand to Continue Declining, Telephone Service Remains Important
paragraphs: IRS received almost 71 million calls on its toll-free telephone lines through  mid-July 2006 compared to 72 million in 2005. Of those calls, about    30.9 million were from callers trying to obtain information on the status  of their tax refunds,    20.5 million were from callers seeking information about their    14.4 million were about tax law questions, and    4.9 million were miscellaneous inquiries to extensions, such as the  National Taxpayer Advocate (NTA) and Tax Fraud Hotline.
IRS officials stated that this year’s slight decline in call volume may be due  in part to more taxpayers getting through to a CSR the first time they call,  thus reducing the need for taxpayers to call again. According to IRS  officials, call demand will continue to decline, continuing a pattern since  2002. Call volume is important because once staffing levels are determined  prior to the filing season, unexpected changes in call volume affect IRS’s  ability to meet goals.
Figure 3 shows how IRS handled the 70.8 million calls. Toll-free telephone  calls from taxpayers typically are routed through IRS’s telephone system  based on taxpayers’ response to prompts and are then answered by CSRs  or automated recordings. Both the number of calls answered by IRS’s  automated service and calls answered by CSRs were fairly consistent with  IRS’s projections and slightly less than in 2005.
A recent study indicates that the telephone is still the most preferred  communication channel for all age groups—-especially if the inquiry is  complex or urgent. Additionally, the NTA’s 2007 Report to Congress  states that the NTA is concerned with IRS’s continued movement toward  self-service, rather than individualized assistance from an IRS employee,  unless taxpayers can get assistance elsewhere. To meet the demand for  telephone service, IRS devotes significant resources to providing  telephone assistance. In fiscal year 2006, IRS planned to use almost 8,000  FTEs to handle telephone calls, which were similar to 2005, but 7 percent  less than in 2004.
section_title: IRS Has Excess Space at Its Call Sites, but Lacks a Strategy for Consolidation
paragraphs: In a recent testimony we noted that IRS might have the potential to close  several more of its remaining 25 call sites. This is because IRS officials  had determined that during peak staffing they had 850 unused CSR  workstations spread across IRS’s 25 call sites. Moreover, we have noted  that call volume declined slightly this year and IRS officials forecast that  the decline will continue. This excess capacity represents substantial costs  without providing any benefits to IRS or taxpayers.
IRS could achieve savings through eliminating the excess workstations  without negatively affecting taxpayer service even at peak times. IRS  distributes all incoming calls through one central routing system and,  therefore, the actual location of call sites does not affect the service  received by taxpayers, particularly when other factors, such as the overall  number of CSRs and call volume, remain equal.
According to IRS officials, the agency is undertaking a workload analysis  designed to reevaluate telephone staffing levels, associated call site  locations and capacity. According to the Wage and Investment  Commissioner, the study has been expanded to include call site  consolidation, although IRS has not determined which factors should be  considered or when the study will be completed.
IRS could eliminate underutilized space by consolidating or closing call  sites. For example, a small IRS call site can have as few as 200 CSRs. With  850 empty workstations, this means that IRS could consolidate or close as  many as four sites without eroding taxpayer service.
section_title: IRS’s Web Site Use Grew Substantially and Is Now a Major Component of Taxpayer Service
paragraphs: Use of IRS’s Web site (IRS.gov) increased substantially this filing season  compared to last year based on the number of visits and downloads. From  January 1 through August 31, 2006, IRS’s Web site was visited 161 million  times by visitors (a nearly 9 percent increase), who downloaded 170  million forms and publications (a nearly 36 percent increase). Where’s My  Refund, which allows taxpayers to check the status of their refunds online,  was accessed by 31.3 million taxpayers as of September 10, 2006, an 11.9  percent increase over the same period last year. As we have reported, the  increased usage of IRS’s Web site is consistent with IRS’s strategy to  improve taxpayer service by providing taxpayers options for automated  interaction with IRS. The Web site can be used at taxpayers’ convenience  and can be used 24 hours a day.
IRS reconfigured its Web site for the 2006 filing season in order to improve  customer service through easier navigation and a more effective search  function. The Web site is performing well based on various data including  the following:    A Brown University Study that ranks federal agency’s Web sites shows  that IRS has improved its ranking from 25th in 2005 to 6th in 2006,  based on such factors as the number of publications and online  services provided.
An independent weekly study by Keynote, a company that evaluates  Web sites, reported that IRS’s Web site repeatedly ranked second out of  40 government agencies evaluated in terms of average download time  through mid-April 2006, and first out of the most commonly accessed  government-related Web sites for response time and success rate  through May 2006.
The American Consumer Satisfaction Index, which tracks trends in  customer satisfaction, noted an increase in IRS’s Web site consumer  satisfaction score from 68 percent to 72 percent after IRS reconfigured  the site.
As of August 31, 2006, the number of Web site searches has decreased  by almost half, from 181 million to 95 million this year. Typically,  search functions are used when users fail to find information through  links. According to IRS officials, the decrease in the number of  searches indicates that users are finding the information that they need  faster.
IRS added features to its Web site this year including the following:    Electronic IRS: IRS reconfigured the IRS’s Web site and made it easier  to locate items, as evidenced by the decline in searches.
Help for Hurricane Victims: This is a special link that provides victims  of the recent hurricanes with information on special tax relief,  assistance and how to get help with tax matters.
In addition to the Free File and Where’s My Refund programs, discussed  earlier, IRS’s Web site has other important features including the  following:    ETLA, where taxpayers can ask IRS general tax law questions through  its Web site. From October 1, 2005, through August 31, 2006, IRS  received 17,511 emails requesting ETLA (down over 41 percent  compared to last year) and estimated the accuracy rate of its responses  to be 85.5 percent, comparable to 2005. We have previously reported  that the ability of one taxpayer to forward an IRS e-mail response to  many other taxpayers makes the accuracy of responding to inquiries  submitted via e-mail important. The average number of days that it  took IRS to respond to tax law questions submitted via the Web site  was 2.2 days, compared to 1.5 days in 2005 and IRS’s goal of 3 business  days.
E-Services, which is a suite of Internet services that enable paid tax  preparers to conduct business, such as electronic account resolution  and transcript delivery, with IRS electronically 24 hours a day, 7 days a  week. IRS is promoting e-Services to increase electronic filing among  preparers.
section_title: Continuing Past Trends, Fewer Taxpayers Used IRS Walk-in Sites and More Used Volunteer Sites, but Data on Services Provided Remains Incomplete for Both
paragraphs: Shifting taxpayers from IRS walk-in sites to community sites staffed by  volunteers is part of IRS’s strategy for reducing the costs of providing  taxpayers with face-to-face assistance, while providing taxpayers with  additional, and perhaps more convenient, options.
subsections: section_title: Fewer Taxpayers Received Assistance at Walk-in Sites, and IRS Continues to Lack Comprehensive Management Data and a Reliable Method for Assessing Quality
paragraphs: Fewer taxpayers used IRS’s 400 walk-in sites than last year. As reflected in  figure 4, the total number of contacts at IRS walk-in sites declined 12  percent from the previous year, continuing a decline of approximately 40  percent since 2001. The largest decrease since last year was in tax law  assistance, which declined by approximately 39 percent. Return  preparation assistance declined by more than 8 percent since last year and  more than 70 percent since 2001. In the past 2 years, IRS has not reduced  the types of assistance offered at its walk-in sites, so the decline in usage  is due to other factors. For example, IRS officials attribute the decrease to  taxpayers’ receiving alternative assistance from tax preparation software  and IRS’s telephone service.
Accounts assistance was the only area of service that increased since last  year, up 66,000 contacts, or 7 percent, continuing an upward trend since  2004. IRS officials attribute the increase in accounts assistance to IRS’s  increased enforcement efforts in recent years.
This year, IRS used walk-in and volunteer sites to provide relief efforts for  federally-designated disaster zones such as in hurricane-affected areas.  IRS developed a Disaster Referral Services Guide and new training  materials for employees to better equip them to address disaster-related  issues. In addition to the expanded services for disaster victims at IRS  walk-in sites, volunteer sites performed outreach and agreed to accept  referrals from IRS of disaster victims needing tax return preparation  assistance.
The decline and shift of taxpayers from walk-in sites to other service  options is important because it has allowed IRS to transfer time- consuming services, such as return preparation, from IRS to other less  costly alternatives that can be more convenient for taxpayers. This has  allowed IRS to devote fewer FTEs to providing return preparation  services. As figure 5 shows, direct FTEs decreased approximately 45  percent between 2001 and 2006, roughly proportional to the decreases in  usage shown in figure 4.
In the past, we and TIGTA reported that IRS lacked (1) detailed  management data on the services offered its walk-in sites and (2) a reliable  method for assessing the quality of services offered at the sites. With such  information, IRS managers could make more informed decisions about  staffing and business operations including which services to offer and  where improvements are needed. TIGTA has recently reported some  improvement in service quality at walk-in sites. And, to its credit, IRS is in  the process of taking steps intended to provide better data on the services  provided at walk-in sites and the quality of those services. The steps  include the following:    Q-Matic: IRS installed one of three versions of Q-Matic, its automated  customer tracking system, at all 400 walk-in sites in time for the 2006  filing season. According to IRS officials, in addition to helping control  customer traffic, once this data is fully integrated with IRS’s other  management information systems IRS managers will have detailed data  on the number, type, and duration of taxpayers’ contacts.
Contact Recording: As we have previously reported, contact  recording is a method for assessing quality at all walk-in sites. For the  2007 filing season, IRS plans to deploy contact recording at  approximately 126 walk-in sites, which would cover approximately 45  percent of IRS’s total walk-in contacts. According to IRS, when fully  implemented, contact recording should enable IRS to standardize its  employee evaluation and quality assessment processes, establish  performance baselines, and reliably assess the accuracy of the services  it provides at its walk-in sites.
section_title: More Taxpayers Continued to Receive Return Preparation Assistance at Volunteer Sites, yet Quality of Service Remains Unknown
paragraphs: In contrast to walk-in sites, the number of returns prepared at over 12,000  volunteer sites grew to 1.8 million returns. Although IRS has changed the  methodology it uses to count returns electronically filed from volunteers  sites, this still represents an overall increase over last year.
As with its walk-in sites, IRS continues to lack complete data on the  quality of return preparation at its volunteer sites. We and TIGTA have  reported concerns about the quality of return preparation assistance  provided at volunteer sites and have made recommendations to remedy  the concerns. At the same time, we have noted that IRS has had several  initiatives to improve the quality of services provided at volunteer sites.  However, these initiatives have changed in purpose and scope as IRS’s  efforts to centralize its partnerships with volunteers have evolved.  Furthermore, IRS has not always fully implemented these initiatives. For  example, in 2005, IRS intended to use observation reviews to assess tax  return preparation accuracy by watching volunteers prepare taxpayers’  returns. However, IRS cancelled observation reviews due to concerns  raised by some of its partners and the NTA, noting that observation  reviews violated taxpayer privacy and unfairly targeted low-income  taxpayers.
The Volunteer Return Preparation Program Quality Improvement Process  is IRS’s newest initiative to promote return preparation quality at its  volunteer sites. As part of this initiative, IRS conducted two types of  reviews—site and return reviews—to monitor and evaluate quality of  return preparation at volunteer sites. IRS used site reviews to measure  volunteer sites’ adherence to IRS’s quality standards, but the results could  not be generalized across volunteer sites because IRS did not use a  statistically valid sample. Return reviews, which are limited in scope,  compared the information taxpayers provided on the intake sheet to the  filing status, exemptions, and credits claimed on the completed return.  However, according to IRS officials, the results from the return reviews  were too high to help identify specific improvements that may be needed.  In 2007, IRS plans to include additional testing of the accuracy of return  preparation.
section_title: IRS Has Completed the First Phase of the TAB and Has Begun Assessing Taxpayers’ Service Needs
paragraphs: A November 2005 law prohibited IRS from reducing taxpayer services  until TIGTA could complete a study on the impact of those proposed  reductions, and required IRS to consult with stakeholder organizations  including NTA, the IRS Oversight Board, and TIGTA, before terminating or  significantly reducing any taxpayer service activity. An additional  congressional directive required IRS to work with the Oversight Board and  NTA to develop a 5-year plan for taxpayer service activities, which is to  include long-term goals that are quantitative and balance enforcement and  service. In response IRS is developing the TAB to provide the agency with  information on taxpayers’ needs and preferences to improve taxpayer  service at lower cost as part of a 5-year plan. IRS divided its TAB work  into two phases: The Phase I report outlines the results of preliminary  research on taxpayer expectations and establishes five strategic priorities  for improving service. Phase II research and review is in progress and is  expected to be released by early 2007.
subsections: section_title: Phase I Targets Five Themes for Improving Service
paragraphs: In April 2006 IRS issued Phase I of the TAB, which includes an overview of  services provided and volume information for the different service  delivery channels. It also contains demographic information on the  population of individual taxpayers. Phase I included IRS’s research on and  analysis of customer needs and preferences for service delivery and  outlined the results of IRS work to gather best practices for customer  service from other government agencies, nonprofit organizations, and  private sector firms. Finally, IRS developed the following five strategic  themes for improving taxpayer service:  1.  Improve and expand education and awareness activities.  2.  Optimize the use of services from community-based partners, paid tax  preparers commercial preparers, and software vendors.  3.  Elevate self-service options to meet taxpayer expectations.  4.  Improve and expand training and support tools to enhance assisted  services.  5.  Develop short-term performance and long-term outcome goals and  metrics.
The theme of elevating self-service options is consistent with IRS’s new  long-term goal for increasing taxpayer self-assistance, introduced in 2006,  as well as its strategy of matching services with taxpayer technological  proficiency. As previously noted, IRS’s efforts to increase taxpayer self- assistance is of concern to the NTA.
section_title: IRS Reports Phase II in Progress with Expected Report Release by Early 2007
paragraphs: Phase II of the TAB includes additional research to build on the strategic  improvement themes. IRS officials reported that to address the  congressional directive that the plan balance service and compliance,  Phase II includes a research agenda on the effect of taxpayer service on  compliance. The studies also include an analysis addressing respondents’  preferences among service delivery channels when other attributes  change, such as convenience or cost of service to the taxpayer.
IRS officials anticipate that the TAB Phase II report will be released to the  Congress by early 2007. They also confirm that it will include a multiyear  plan for taxpayer service activities and improvement initiatives; the TAB  team has identified over 70 projects for improving taxpayer services,  although none will be implemented in time for the 2007 filing season.
IRS anticipates that key outcomes of its Phase II work will be a process for  assessing customer preferences and subsequent research on those  preferences, because demographics are constantly changing. Furthermore,  taxpayer expectations are likely to shift with the advent of new  technology, as exemplified by the exponential availability and use of  Internet-provided services in recent years.
section_title: Conclusions
paragraphs: IRS continues to make significant improvements in its filing season  performance. In an environment of tight budgets and demands to improve  service while maintaining or increasing enforcement activities, generating  savings by operating more efficiently is crucial. We have identified two  such savings opportunities.
First, despite numerous IRS initiatives to increase electronic filing, there  remains considerable room for further growth. Some states, federal tax  experts, and even IRS have recognized that mandatory electronic filing can  generate savings by reducing paper filing. However, IRS lacks the statutory  authority to expand its use of mandates. Requiring certain paid tax  preparers to file individual returns electronically could increase electronic  filing and generate savings for IRS.
Second, IRS could achieve efficiencies by reducing unnecessary spending  on the excess capacity at its telephone operations—without negatively  affecting taxpayer service—by consolidating its call sites.
In addition, IRS continues to implement CADE. As more taxpayer  accounts are put on CADE, the benefits to taxpayers will grow and more  facts regarding those benefits, such as information on refund timeliness  and improved taxpayer service, are likely to sustain congressional support.  However, IRS is not reporting on one of the chief benefits already realized  from CADE, issuing refunds faster. The Congress could benefit from  knowing this information as it makes decisions about funding the  completion of CADE.
section_title: Matter for Congressional Consideration
paragraphs: Given the efficiencies to be gained, the Congress should mandate  electronic filing by paid tax preparers meeting criteria such as a threshold  number of returns filed.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Commissioner of Internal Revenue direct the  appropriate officials to  timely develop, validate, and implement a plan to consolidate call sites,  and report to the Congress refund timeliness for CADE compared to the  Master File legacy system.
section_title: Agency Comments and Our Evaluation
paragraphs: The Commissioner of Internal Revenue provided written comments in a  November 3, 2006, letter. With respect to the matter for congressional  consideration, the Commissioner said he appreciated our acknowledging  that the current statutory limitation impedes electronic filing growth. The  Commissioner agreed with both of the report’s recommendations to IRS.  In responding to our first recommendation, the Commissioner stated that  IRS would take steps to develop plans, including updating data and  projections, conduct a full cost analysis to determine projected savings,  and formulating a consolidation timeline and workload redistribution plan.  The Commissioner responded to the second recommendation stating that  IRS would develop a measure to show refund timeliness for CADE based  on its current sampling methodology. However, because the current  methodology includes only paper returns, the new measure would  necessarily show CADE’s benefits for only paper returns, not all returns.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we will not distribute it until 30 days from the date of  the report. At that time, we will send copies of this report to the Chairmen  and Ranking Minority Members of the Senate Committee on Finance, the  House Committee on Ways and Means, and the Ranking Minority Member,  Subcommittee on Oversight, House Committee on Ways and Means. We  are also sending copies to the Secretary of the Treasury; the Commissioner  of Internal Revenue; the Director, Office of Management and Budget; and  other interested parties. We will also make copies available to others on  request. In addition, the report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you have any questions regarding this report, please contact me at (202)  512-9110 or at whitej@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report include Amanda Arhontas,  Paula Braun, Amy Dingler, Evan Gilman, Tim Hopkins, Kathryn Horan,  Hillary Loeffler, Paul Middleton, Karen O’Conor, Cheryl Peterson, Neil  Pinney, Stephen Sallan, and Joanna Stamatiades.
section_title: Appendix I: Differences between the 2002 and 2005 Free File Agreements
paragraphs: In 2002, the Internal Revenue Service (IRS) entered into a 3-year  agreement with the Free File Alliance, a consortium of 20 tax preparation  companies to provide free electronic filing to taxpayers who access any of  the companies via a link on IRS’s Web site. The 2002 Free File Agreement  stated that, as part of the agreement, IRS would not compete with the  Alliance members in providing free, online tax return preparation and  filing services to taxpayers.
IRS stated that the original purpose of the Free File Alliance was to  increase electronic filing, and at the same time, assist low-income  taxpayers with filing their taxes electronically. One of the benefits for  Alliance members of belonging to the Free File Alliance is the ability to  advertise their software programs and products through IRS’s Web site,  which receives heavy traffic each year.
In 2005, IRS renegotiated and amended the agreement. Key differences  between the agreements are    a new income limitation of $50,000;   new language that states the Alliance members must disclose early-on  if state tax return services are available, and if so, whether a fee will be  charged for such services; and    Alliance members must provide the necessary support to accomplish a  customer satisfaction survey.
Another change is that new language pertaining to the marketing and  offering of Refund Anticipation Loans (RAL) stated that no offer of free  return preparation and filing of an electronic return in the Free File  program shall be conditioned on the purchase of a RAL. Also, RALs are to  be offered with clear language indicating, for example, that they    are loans, not a faster way of receiving an IRS refund;    must be repaid even if the IRS does not issue a full refund;    are short-term loans with high interest rates and, therefore, customers  may wish to consider using other forms of credit; and    may be offered but not promoted.
IRS tests each Alliance member’s software to ensure it is in accordance  with the Free File provisions before allowing a link to IRS’s Web site. In  addition, IRS officials monitor complaints about the Free File program  received via IRS.gov, including allegations regarding false, deceptive, or  misleading information or advertising. While IRS does not track the  number of complaints it receives, according to IRS officials, most of the  complaints received thus far were a result of the taxpayer either not  carefully reading or not following instructions, or incorrectly entering  information. GAO conducted limited testing of the Free File program and  found that Alliance members were complying with the terms outlined in  the amended Free File agreement pertaining to RALs. In addition,  according to IRS, 9 of 20 Free File companies offer RALs.
The amended Free File agreement contains provisions that enable IRS to  monitor taxpayer participation beginning in the 2006 filing season, unlike  prior years where Alliance members self-reported filing figures. IRS also  tracks the number of Free File users who are accepting any financial  products, such as RALs. As of April 17, 2006, IRS reported that 207,814 free  file returns accepted financial products. This represents about 5 percent of  all returns filed through the Free File program.
The number of taxpayers using Free File to electronically file their  individual income tax returns has increased steadily from 2.8 million in  2003 to 5.1 million in 2005. The substantial growth between 2003 and 2005  was due to, in part, several Alliance members offering free filing to all  taxpayers through the Free File program regardless of their income in  2005. However, according to IRS officials, the lack of income limitation  created conflict as it put pressure on all Alliance members to offer free  service, which may not have been economically feasible for some.   Competition would be reduced if Alliance members were to drop out of  the Alliance.
IRS projected that over 6 million taxpayers would use Free File in 2006.  However, this projection was overstated, because through August, IRS  processed about 4 million returns filed through the Free File program,  which is a decrease of about 23 percent from the same period last year.  According to IRS officials, the new income limitation contributed, in large  part, to this decline despite the fact that the income limitation provides  coverage to 70 percent of the nation’s taxpayers, or more than 92 million  people, and includes taxpayers with an adjusted gross income of $50,000  or less. Moreover, IRS officials stated that it was this income limitation  that contributed to the overall lower rate of growth in electronic filing this  year.
section_title: Appendix II: Status of CADE Implementation and Future Releases
paragraphs: The IRS is developing and deploying its Customer Account Data Engine  (CADE) incrementally in multiple releases over several years, as shown in  table 4. IRS is planning for semiannual subrelease deployments in July and  January prior to each filing season. The July subreleases (x.1) focus on  new CADE functionality with some tax law changes, while the January  subreleases (x.2) contain primarily filing season and tax law changes with  minimal new functionality. Each incremental release builds upon and  expands the functionality contained in the prior releases. For example,  during the 2006 filing season, CADE Release 1 processed Form 1040EZ,  1040, and 1040A tax returns with no schedules for single taxpayers with no  dependents. Release 2 is planned to add the capability to process Form  1040 and 1040A tax returns with various schedules and supporting forms  for taxpayers filing as single, married, or head of household in 2007. With  the deployment of Release 7 in 2012, CADE is expected to fully replace the  Individual Master File and process all individual tax returns.
section_title: Appendix III: State Mandates for Electronic Processing
paragraphs: Twelve states had electronic filing mandates for paid tax preparers in  effect for the 2006 filing season (see fig. 6). State mandates differ but  require preparers who meet specified requirements, such as filing 100  individual income tax returns per year, to file individual income tax  returns electronically.
Nine states had electronic filing mandates in effect in 2005 or earlier. In  eight of these nine states, the mandates increased the growth rate of  electronically filed federal returns (see table 5).
According to a June 2005 study by the Federation of Tax Administrators,  many state tax administrators view electronic filing as a means to improve  tax return and refund processing, improve customer service, and reduce  the number of seasonal workers in part by making better use of staffing  resources. According to New York, California, and Minnesota officials,  given tight budget constraints, the opportunity to generate savings was the  main reason behind their decisions to implement mandates. For example,  in 2001 Minnesota estimated it saved $2.45 per return by mandating  electronic filing for paid tax preparers. Other states also reported savings  from electronic filing mandates.
While Minnesota was the first state to implement a mandate for individual  income tax returns, more states have adopted mandates and some have  used different methods to encourage electronic filing of state returns.  Some notable examples include the following:    Filing thresholds: States with mandates often differ in the minimum  number of returns a paid tax preparer must file before having to  comply with an electronic filing mandate. In most states, the threshold  is often lowered gradually over time, increasing the base of preparers  that fall under the mandate. For example, in New Jersey in 2005,  preparers who prepared more than 200 individual state income returns  in the prior year had to electronically file all returns they prepared in  the current year. The threshold will drop to 100 returns in 2007 and 50  returns in 2008.
Penalties: Some states do not impose penalties on noncompliant paid  tax preparers; however, those states that do levy penalties for  noncompliance often differ in amount and level of enforcement. For  example, some states waive the penalty if a taxpayer chooses to opt- out of having their return electronically filed. In fact, most states  include “opt-out” clauses in the legislation that allows a preparer to file  a customer’s return on paper at the customer’s request. In contrast, if a  preparer files a return on paper, absent of the customer’s request, they  could be subject to upwards of a $100 fine. Alternatively, the state of  Minnesota charges a $5.00 fee for returns filed on paper returns  prepared by mandated preparers regardless of the circumstances.
Including 2-D Barcodes as Electronic Filing: State mandates also  vary in what they consider an electronically filed return. Utah,  Alabama, and Virginia consider a paper return with a 2-D barcode  produced by tax preparation software as an electronically filed return.  New York also considered paper returns with 2-D barcodes as  electronically filed returns for the 2006 filing season.
In its June 2005 report, the Federation of Tax Administrators noted that  many states reviewed existing state mandate legislation for guidance and  ideas, or best practices, prior to implementing their own mandates. For  example, New York officials said they used the experiences reported by  California when deciding what provisions their mandate should or should  not include. The Federation of Tax Administrators reported several  lessons learned about implementing mandates, including,    having a phased-in approach over a period of several years,    providing the ability for a taxpayer to opt out of electronic filing if he or  she chooses instead to file a paper return, and    having penalties for failure to file electronically.
Finally, the states’ experience with mandates has shown the following    Communication and taxpayer education are vital. For example,  California scheduled presentations and panels on mandatory electronic  filing for tax professional organizations in order to achieve buy-in from  the paid tax preparer community.
Lead time for implementation and the definition for the scope of the  mandate are important. Most states currently use the federal Employer  Identification Number (EIN) to define “paid tax preparer” and treat any  office or branch of an entity operating under a single EIN as a “paid tax  preparer” subject to the mandate.
Coordination between IRS and Electronic Return Originators is  essential.
section_title: Appendix IV: IRS’s Processing Performance Relative to 2001–2005 Performance and 2006 Goals
paragraphs: IRS met or exceeded eight of the nine processing performance goals for  2006 as table 5 shows. For seven measures (i.e., deposit error rate, deposit  timeliness, notice error rate, refund interest paid, refund timeliness,  productivity, and efficiency), IRS exceeded its goal. For one measure  (refund error rate), IRS met its goal.
For one measure, the letter error rate, IRS’s performance declined and the  2006 goal was not met. The letter error rate is calculated as the percentage  of letters issued to taxpayers with errors. IRS officials said that computer  system errors were partially to blame for the higher letter error rate this  filing season; however, most of those errors were caused by one  programming error that was corrected in the beginning of March. In  addition, according to IRS officials, most errors caused by employees were  attributed to one submission processing center, which had many new  employees.
Comparing actual 2006 performance to 2005 shows that IRS’s performance  improved or remained about the same for eight of the nine measures in  effect in 2005. Table 6 also shows that IRS processing performance in 2006  has significantly improved compared to prior years.
section_title: Appendix V: Telephone Access Varies Depending on the Time of Year and Type of Call
paragraphs: Level of service can vary during different periods of the year. For example,  from January 1 through April 22 the level of service was 82 percent, but  was 75 percent from April 23 through June 10. Fewer taxpayers called  after the filing season deadline and those taxpayers who did received a  lower level of service compared to those who called during the filing  season. According to IRS officials, their work plans are built to maximize  IRS’s telephone performance during the filing season when most taxpayers  call.
The average speed of answer varies between questions. IRS groups each  type of call into different applications, so that they can be answered by a  properly trained customer service representative (CSR). Taxpayers’  experiences may differ depending upon the availability of CSRs and the  number of calls received in the category. For example, according to IRS  data as of April 22, taxpayers wanting answers about capital gains and  losses on average waited 4 minutes longer than those wanting answers  about tax credits.
According to IRS, however, there may be opportunities to address these  variances with the implementation of a new workforce management  system and full deployment of a single queue for telephone service. The  new system should allow IRS to make staffing decisions at the corporate  level, rather than relying on the individual sites, and in turn, create  benefits from better staffing decisions and more flexible work plans. IRS  expects to have the new workforce management system fully implemented  in fiscal year 2008. According to IRS officials, implementing a single queue  for each application across all call sites, rather than separate queues at  each site, will create a consistent average answer time within an  application. Currently, two taxpayers with the same question may have  different wait times because one waited for a CSR in the Jacksonville call  site, for example, while another waited for a CSR in Austin. With a single  queue, those taxpayers would wait the same amount of time irrespective  of their location. However, the single queue will not improve the variations  in wait time between the different applications. IRS officials said that there  will still be fluctuations but the new workforce management solution and  a single queue should help to better manage variances.
section_title: Appendix VI: Comments from the Internal Revenue Service