Internal Revenue Service: Assessment of the 2008 Budget Request and an Update of 2007 Performance
Published: 2007-05-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Internal Revenue Service's (IRS) budget request shows how IRS intends to balance spending for enforcement and taxpayer service, including spending for new initiatives and the Business Systems Modernization (BSM) program. A combination of enforcement and taxpayer service promotes compliance with the tax laws. GAO was asked to (1) compare IRS's proposed FY 2008 budget to prior years' and assess how the new spending initiatives are justified, and (2) describe IRS's enforcement, filing season, and BSM performance. GAO analyses are based on IRS's 2008 budget submission, supplementary IRS data, interviews with IRS officials, and prior GAO reports. Some of GAO's analyses have been reported earlier this year and updated here.
section_title: What GAO Found
paragraphs: IRS's budget proposes to increase spending by almost 5 percent to $11.6 billion. The budget proposes shifting a greater proportion of spending to enforcement, continuing a trend since 2004. IRS projects that revenue from the new initiatives will have a relatively small impact on the tax gap--less than one percent of the gap last estimated at $290 billion in 2001. The tax gap is the difference between what taxpayers owe and voluntarily pay. Justifications for the new initiatives varied with some lacking descriptive, cost, and expected performance information. For example, an initiative for improving compliance estimates provided no information on how the budget and staff needed or work to be done were determined. Without such information, decision makers do not have an informed basis for approving and funding the new initiatives. IRS has made noticeable progress in its enforcement efforts including increasing the amount of enforcement revenue collected and enforcement staffing. For example, between FY 2004 and 2006 enforcement revenue increased 13 percent to $48.7 billion. Nevertheless, enforcement remains on GAO's high-risk list. The tax gap has been a persistent problem in spite of efforts to reduce it, as the rate of taxpayers' voluntarily compliance with the tax laws has changed little over the past three decades. To better target enforcement resources, IRS has requested funding to do additional compliance research which GAO has long supported. Finally, GAO has reported on IRS's lack of a data-based plan to improve compliance. Filing season performance in 2007 improved in some areas compared to prior years', but there have been challenges. As of April 20, IRS processed about 104.6 million individual income tax returns and issued 88.2 million refunds. Electronic filing grew, telephone access is somewhat better, and Web site use continues to grow. However, fewer than 4 percent of eligible taxpayers used the Free File program. The latest release of Customer Account Data Engine (CADE), the new tax processing system, was delayed. As a result, millions of taxpayers did not benefit from CADE's faster processing of refunds. IRS recently issued its plan, the Taxpayer Assistance Blueprint, to improve taxpayer service. Despite progress in implementing BSM projects including for CADE and improving management controls and capabilities, significant challenges and serious risks remain. Delays in the latest release of CADE resulted in continued contention for key resources and will likely impact future releases. IRS has more to do to address GAO's prior recommendations such as developing a long-term strategy that would include time frames for retiring legacy computer systems.

section_title: Letter
paragraphs: We appreciate this opportunity to comment on the Internal Revenue  Service’s (IRS) budget request as well as its performance in enforcing tax  laws, providing services this tax filing season, and modernizing its  information systems.
Effective tax administration requires a balance of taxpayer service and tax  law enforcement. To provide enforcement and taxpayer service in fiscal  year (FY) 2008, the Internal Revenue Service (IRS) has requested an $11.6  billion operating-level budget with about 63 percent going for enforcement  activities and 31 percent for taxpayer service (including operational  support). The remainder includes funding to develop and implement IRS’s  Business Systems Modernization (BSM) program, a multibillion-dollar,  high-risk, complex effort intended to help improve both enforcement and  taxpayer service.
Although IRS has increased direct revenue collected through its  enforcement programs in recent years, enforcement continues to be  included on our list of high-risk federal programs. This is due, in part, to  the persistence of a large tax gap. IRS estimated the gross tax gap to be  $345 billion for tax year 2001. After late payments by taxpayers and  revenue brought in by IRS’s enforcement efforts, IRS estimates the  resulting net tax gap to be $290 billion.
The annual tax return filing season is when IRS provides much of its  service to taxpayers. From January through April, IRS processed over 100  million individual tax returns and issued refunds, handled tens of millions  of phone queries from taxpayers, and provided forms and answers to  questions for tens of millions of taxpayers on its Web site. Smaller  numbers of taxpayers were assisted at IRS’s walk-in sites or at sites  operated by other organizations and staffed by volunteers. While it is  always a massive undertaking, the IRS Commissioner stated that this  year’s filing season was high risk for several reasons, including challenges  in implementing the new telephone excise tax refund (TETR), split refund  option (refunds can now be directly deposited to up to three separate  accounts), and several tax law extensions that were enacted in December  of 2006.
As requested, our objectives in this statement are to compare IRS’s  proposed FY 2008 budget submission with prior years’ spending and  staffing and assess how new spending initiatives are justified, and whether  there are opportunities to reduce or reallocate resources. In addition, our  statement will describe IRS’s performance in three areas: enforcement,  service to taxpayers so far this filing season (including the impact of this  year’s tax system changes), and systems modernization.
Our analyses are primarily based on the information in IRS’s FY 2008  budget request, supplementary data from IRS, interviews with IRS officials  and other tax experts, IRS’s filing season performance measures and our  past reports on IRS’s enforcement, filing season, and systems  modernization programs. Some of our analyses have been reported earlier  this year, but are updated here. Since sources and procedures for  producing this year’s data have not changed significantly changed from  prior years, we determined that the data we used were sufficiently reliable  for the purposes of this statement. Data limitations are discussed where  appropriate. Our review of justifications for selected new spending  initiatives used criteria based on our previous work on results-oriented  government and performance budgeting. We selected 6 of the total 14 non- legislative new spending initiatives for review based on certain  characteristics that we believed might affect how they were justified. We  reviewed the justifications to determine whether they included basic  information such as the problem or performance shortfall to be addressed,  work to be done, explanations of estimated costs, and measures and  goals. We reviewed IRS’s efforts to address our prior year  recommendations related to our annual filing season and BSM work. We  performed our work from December 2006 through April 2007 in  accordance with generally accepted government auditing standards.
In summary, we make the following major points:  IRS’s 2008 budget request proposes to increase spending, particularly for  enforcement. The $11.6 billion requested total operating budget is an  increase of $608.8 million (4.9 percent) over the FY 2007 level. IRS  proposes spending a total of $7.2 billion for enforcement, including  operational support. This continues a trend since 2004 of shifting a greater  proportion of spending to enforcement and away from taxpayer service.  The budget submission includes IRS initiatives and legislative proposals to  address the tax gap. However, the expected direct enforcement revenue  (i.e., the amount collected from taxpayers targeted by IRS’s enforcement  efforts) to be gained is small compared to the size of the tax gap. For  example, in FY 2010, after the initiatives are phased-in, IRS expects to  collect an additional $699 million in direct enforcement revenue—or about  one-fourth of 1 percent of the tax year 2001 net tax gap—from added  enforcement staff. Furthermore, the justifications for initiatives varied in  the information they provided, with some lacking basic descriptive, cost,  and expected performance information suitable for assessing them. For  example, an initiative to determine the impact of taxpayer service on  compliance lacked information such as a problem statement and an  explanation of estimated costs. IRS identified savings in the 2008 budget  request, and we identified additional savings opportunities in our past  work including mandating electronic filing for certain tax preparers and  consolidating and retiring legacy information systems.
Despite progress, enforcement of the tax laws remains on our high risk  list because of the tax gap. The tax gap has been a persistent problem in  spite of a myriad of efforts to reduce it. The rate at which taxpayers pay  their taxes voluntarily and on time has tended to range from around 81  percent to around 84 percent over the past three decades. To be in a  position to more effectively address the tax gap, IRS needs more  compliance research, which we have long supported. IRS has requested  funding to do a rolling sample of audits of individual taxpayer accounts  (small annual samples that would replace larger but intermittent efforts).  While we have concerns about the amount of information provided to  justify the specific request, we have been generally supportive of such an  approach. Finally, we have reported on the need for a data-based plan to  improve compliance. In a recent hearing, the Chairman of the Senate  Finance Committee asked the Secretary of the Treasury for a more  detailed plan by July 2007.
IRS’s filing season performance improved in some areas, although there  have been challenges. As of April 20, IRS processed approximately   104.6 million individual income tax returns, and issued 88.2 million  refunds. Electronic filing continued to grow, almost 8.5 percent greater  than last year. Challenges include the taxpayers’ use of the Free File  program which was slightly less than last year and a 2 month delay in IRS’s  latest release of the Customer Account Data Engine (CADE), a modern tax  return processing system that issues faster refunds. As of April 20, IRS had  posted 9.1 million returns by CADE, far fewer than the 33 million IRS  originally planned. As a result, millions of taxpayers did not receive the  benefits of CADE’s faster posting and subsequent refund issuance.  Regarding taxpayer service, telephone access is somewhat better and the  accuracy of IRS’s answers to taxpayer questions is comparable to last  year. Use of IRS’s Web site continues to increase, which is important  because it is available around the clock and is lower cost than most other  types of assistance. Despite the filing season being characterized as high- risk, in large part because of TETR, the impact of TETR on taxpayer  services has been much less than IRS anticipated. Longer term, through its  Taxpayer Assistance Blueprint (TAB), IRS plans to improve taxpayer  services by assessing taxpayers’ needs and preferences. TAB provides  information on the cost per service contact. Having such information  could assist IRS in determining whether it can provide taxpayers services  through lower cost options.
IRS continues to make progress in implementing BSM projects and  meeting cost and schedule commitments, but two key projects—CADE  and Modernized e-File (a new electronic filing system)—experienced  significant cost overruns during 2006. Future BSM project releases face  serious risks, which IRS is working to mitigate. For example, delays in  deploying the latest release of CADE have resulted in contention for key  resources and will likely impact the design and development of the next  two important releases, which are scheduled to be deployed later this  year. IRS has made significant progress in implementing our prior  recommendations and improving its modernization management controls  and capabilities. However, critical controls and capabilities related to  requirements development and management and post-implementation  reviews of deployed BSM projects have not yet been fully implemented. In  addition, more work remains to be done by the agency to fully develop a  long-term vision and strategy for completing the BSM program, including  establishing time frames for consolidating and retiring legacy systems.
As we will discuss in more detail later in this statement, we recommend  that the Commissioner of Internal Revenue    have available basic descriptive, cost, and expected performance  information on the spending initiatives proposed in the 2008 budget  submission to the extent that such information has not been provided, and include in future budget submissions, basic descriptive, cost, and  expected performance information on new spending initiatives, with  supplementary documentation available if needed.
In email comments on a draft of this statement, IRS’s Chief Financial  Officer agreed with the second recommendation, but not the first. She  stated that the FY 2008 budget and justification did provide basic  descriptive, cost, and expected performance information for each  initiative. While we agree that for every initiative IRS provided the total  proposed spending, some initiatives lacked basic information such as on  how the amount to be spent was determined and work to be done. For  example, the initiative for improving compliance estimates provided no  explanation of how the 258 FTEs were determined or basic information on  the work such as the number of examinations to be conducted. Without  such information, at the end of the fiscal year, Congress would be unable  to tell whether IRS spent the money as intended.
subsections: section_title: IRS’s Request Increases Enforcement Spending and Identifies Savings, but Provides Limited Justification for Some New Spending, and Other Savings Opportunities Exist
paragraphs: IRS’s 2008 budget request proposes to increase spending. The $11.6 billion  requested total operating budget is an increase of $608.8 million (almost     5 percent) over the FY 2007 level as shown in table 1. IRS proposes to  fund 92,814 full-time equivalents (FTE), a slight decrease compared to the  FY 2007 level.
Table 1 summarizes IRS’s appropriation accounts and shows that its 2008  budget submission continues a trend of shifting spending toward  enforcement.
The request for $4.9 billion for direct enforcement appropriations is an  increase of 3.9 percent over the FY 2007 level and almost 4.6 percent over  the FY 2006 level.
Table 1 also shows that IRS is requesting more funding for operational  support in 2008 over the 2007 level. Among the reasons for the increased  spending is that IRS is proposing to reduce the backlog of outdated  information systems and telecommunications equipment. Finally, IRS is  requesting $282 million for its BSM program—a significant increase in  funding over both FYs 2006 and 2007. This includes over $55 million for  developing and deploying the capability to accept individual income tax  returns on Modernized e-File and $16 million for new Web portals to  support key business processes and compliance initiatives.
When operational support funding shown in table 1 is allocated to  enforcement and taxpayer service, a more complete picture of what IRS  actually spends on these activities emerges. Based on the allocation  reported in the budget request, IRS plans to spend a total of $7.2 billion for  enforcement and $3.6 billion for taxpayer service. Including operational  support, IRS is requesting almost 56,600 FTEs for enforcement and about  35,200 FTEs for taxpayer service (an increase of 0.7 percent and a  decrease of 3.7 percent, respectively, compared to FY 2007 levels).
Figure 1 shows that this continues a trend since 2004 of shifting a greater  portion of spending toward enforcement as compared to service. In years  following passage of the IRS Restructuring and Reform Act of 1998, IRS  made significant progress in taxpayer service, although there were  declines in many aspects of enforcement activities, such as for  enforcement staff and revenue collected as shown in figures 2 and 3,  respectively, later in this statement. However, at FY 2008 requested  levels, total spending for enforcement will increase by over 19 percent  while spending for taxpayer service will decrease by almost 4 percent  since 2004.
In the 2008 budget submission, IRS proposes a number of new initiatives,  all of which are intended to improve taxpayer compliance—some by  increasing staffing for enforcement or making legislative changes, and  some by improving taxpayer service or infrastructure. The request  includes estimates of the annual costs of the initiatives plus, for some  initiatives, dollar estimates of the increased revenue expected to be  realized, as summarized in table 2.
IRS recognizes that there are likely revenue effects beyond those shown in  table 2. Table 2 shows, for example, the direct revenue from new  enforcement initiatives. Direct revenue is the amount collected from  taxpayers targeted by IRS enforcement actions, such as audits. However,  the budget submission states that enforcement actions have indirect  revenue effects as well by increasing voluntary compliance by all  taxpayers.
The magnitude of the indirect effects of enforcement is not known with a  high level of confidence because of challenges in measuring compliance;  developing reasonable assumptions about taxpayer behavior; and  accounting for factors outside of IRS’s actions that can affect taxpayer  compliance, such as changes in tax law. However, several research studies  have offered insights to help better understand the indirect effects of IRS  enforcement on voluntary tax compliance and show that they could  exceed the direct effect of revenue obtained. Given the uncertainty of  estimates of indirect revenue, in its budget request, IRS says that it cannot  measure the impact of deterrence of enforcement or service on  compliance, but only that their effects are positive. Finally, the budget  request also recognizes that the initiatives intended to improve taxpayer  service or modernize information systems are also expected to ultimately  improve taxpayer compliance. Again, however, reliable information about  the magnitude of the improvement is not available.
Over the 3 years shown in table 2, IRS expects the estimated cost for the  initiatives will decrease while the resulting direct revenue increases. IRS is  requesting about $410 million for FY 2008 to fund all the initiatives, with  the estimated costs declining in FYs 2009 and 2010 because of start-up  costs in FY 2008.
IRS is projecting that direct revenues will increase by about $2.6 billion in  FY 2010, as more staff are hired, trained, and become more productive,  and all aspects of the legislative initiatives are phased-in, particularly for  the information reporting requirements. However, the direct revenues  expected are small compared to the estimated $290 billion net tax gap for  tax year 2001. For instance, the revenue-producing initiatives are  expected to yield about $699 million in FY 2010, or about one-fourth of       1 percent of the tax year 2001 net tax gap. In 2010, the total estimated  increased revenue from both the revenue-producing and legislative  initiatives, about $2.6 billion, is about 0.9 percent of the 2001 net tax gap.
No single approach, such as IRS enforcement, is likely to fully and  effectively address noncompliance. Multiple approaches are needed  because noncompliance has multiple causes and spans different types of  taxes and taxpayers. Approaches include devoting additional resources to  enforcement, providing more enforcement tools like information  reporting, improving taxpayer service, periodically measuring compliance,  setting tax gap reduction goals, leveraging technology to enhance IRS’s  efficiency, and simplifying or reforming the tax code. For example,  regarding information reporting, we recently recommended to IRS, that to  assist taxpayers in accurately reporting their capital gains and losses from  securities, in the instructions to Schedule D clarify the appropriate use of  capital losses to offset capital gains or other income and provide guidance  on resources available to taxpayers to determine their basis.
subsections: section_title: Justifications for Some New Initiatives Lacked Basic Descriptive, Cost, and Expected Performance Information
paragraphs: Justifications for the new spending initiatives varied in the basic  information they provided. In some cases, the budget submission lacked  information that would have allowed us or others to assess the proposed  spending and comment on, for example, whether the initiative would be a  worthwhile expenditure in light of expected benefits and costs. To better  understand IRS’s initiatives and their expected benefits and costs, we  asked for supplementary documentation on selected new spending  initiatives:  Improve compliance among small businesses and self-employed (SB/SE)  taxpayers: $73.2 million; 485 FTEs    Critical upgrades to IT infrastructure: $60 million; 0 FTEs  Improve tax gap estimates, measures, and noncompliance detection:   $41.0 million; 258 FTEs  Improve compliance for large multinational businesses: $26.2 million; 158  FTEs    Research effects of taxpayer service on compliance: $5.0 million; 8 FTEs    Expand volunteer income tax assistance (VITA): $5.0 million; 46 FTEs  Our review of the justifications showed that some had descriptive, cost,  and expected performance information while others lacked such  information. Our previous work on results-oriented government and  performance budgeting, states that budget requests and supporting  documentation should provide information on the results to be achieved  with the funding requested. More specifically, our work has shown that  congressional decision makers benefit from information on the problem or  performance shortfall to be addressed, cost estimates, and performance  measures and goals.
subsections: section_title: Description of Problem or Performance Shortfall to Be Addressed
paragraphs: The justification for the initiative to upgrade IT infrastructure included  information on the extent of the problem, including the impact of  computer downtime on employee performance and how much IRS’s aged  computer inventory would grow without additional funding. Similarly, the  initiatives to increase compliance among SB/SE taxpayers and large  multinational businesses had such information as the portion of the tax  gap that is attributable to certain types of taxpayers, data on growth in  certain tax return filings for businesses that are high-risk for  underreporting, and the need for increasing enforcement activity in these  areas. However, the justification for expanding VITA did not provide  problem or performance shortfall information, such as evidence of how  some taxpayers do not receive needed services due to the current level of  spending or problems with those taxpayers’ compliance levels due to the  lack of services. Similarly, the initiative to research the effects of taxpayer  service on compliance did not explain the problem such research would  correct.
section_title: Description of Work to be Done and Explanation of Estimated Costs
paragraphs: The IT initiative had information on the planned expenditures to upgrade  specific computer equipment, including descriptions of the equipment and  how it is to be used. Also, the initiatives to increase compliance among  SB/SE taxpayers and large multinational businesses had descriptions of  the types of staff to be hired and work to be done—such as examinations,  collections, and legal support. However, the justifications for the  initiatives to improve tax gap estimates and expand VITA lacked  information on how IRS determined the amount requested or FTEs  needed. We could not determine the budget or FTEs or specifics about the  work to be done such as the number of examinations to be conducted.  Further, the initiative to research the impact of service on compliance  lacked descriptive details on the work to be done—such as potential  research questions, methodologies, deliverables, and estimated costs of  delivering them—that would provide examples of what IRS would  accomplish with proposed spending and allow Congress or others to  assess the initiative.
section_title: Performance Measures and Goals
paragraphs: The compliance initiatives had performance measures and goals, such as  direct revenue to be generated or additional examinations to be  conducted; the IT initiative had quantitative targets for reducing the aged  computer inventory; the VITA initiative had a target for improving the  quality of returns prepared by volunteers; and the tax gap estimate  improvement initiative had quantitative targets related to examinations.  However, the initiatives for researching the impact of service on  compliance lacked a performance measure and target, such as, for  improving the use of IRS resources based on the research.
We do not contend that because some of the justifications were lacking in  certain information that the initiatives are not worthwhile, or that all  justifications should have the same extent and types of information. For  example, although the justifications for conducting research to improve  tax gap estimates and determine the effects of taxpayer service on  compliance lacked certain information, in previous reports and testimony  we have been supportive, in general, of such research. However, without  some explanation of how cost and resource needs were determined for  these initiatives, assessments of whether the initiatives are worth their  costs are not possible.
Since gathering basic information to justify an initiative has costs, it is  reasonable for justifications of more costly initiatives to have more detail.  When all the basic information becomes too cumbersome to include in the  budget submission itself, an agency can supplement its request with  readily available supporting documentation.
section_title: Other Opportunities Exist for Generating Savings
paragraphs: In its 2008 budget request, IRS identified $120 million in savings as it has  done in prior years—$82.3 million through enhancing technology and  streamlining work processes in its enforcement programs and                $37.7 million through increases in electronic filing from its taxpayer  service programs. IRS is proposing to use all internally generated savings  to maintain its current operating levels.
In addition to the areas identified by IRS in its budget request, there are  additional opportunities for savings and efficiency gains.
Increasing electronic filing through mandates: Last year we reported that  state mandates that required paid preparers who file a certain number of  tax returns to electronically file state tax returns increased federal  electronic filing. Without a federal mandate, IRS is missing an  opportunity for savings—using IRS’s estimate that it saves $2.38 on every  return that is processed electronically we estimated that IRS would save  $68 million per year if 90 percent of returns submitted by preparers that  are currently filed on paper were filed electronically. However, IRS lacks  the authority to mandate electronic filing for paid preparers and we  suggested to Congress that it mandate filing by paid preparers meeting  criteria, such as filing a certain number of tax returns.
Consolidating telephone call sites: We previously reported that IRS has  excess space at its call site operations and the agency had a study  underway to determine the feasibility of consolidating those operations.  IRS has nearly completed the first phase of the study and plans to  complete the second phase in 2008. According to IRS officials, this study is  on schedule and is important because it will allow IRS to identify the costs  and benefits of consolidating phone operations.
Consolidating or retiring legacy systems: We have previously  recommended that IRS prepare a long-term vision and strategy for  completing the BSM program, including establishing time frames for  consolidating and retiring legacy systems. While IRS developed an initial  modernization vision and strategy and associated 5-year plan, more  remains to be done for IRS to fully address our recommendation.  Consolidating and retiring legacy systems should lead to a reduction in  costs associated with maintaining these systems.
Changing the menu of taxpayer services: IRS recently issued its  comprehensive strategy for improving taxpayer service, including for  telephone, walk-in, volunteer and Web site assistance. That strategy,  known as TAB, was developed in response to a congressional directive. In  addition to providing information on taxpayer needs of service, TAB  provides information on the cost of taxpayer serviced for the various types  of service. Information on needs and costs, along with a better  understanding of taxpayer’s preferences, needs and expectations, could  provide taxpayers with the same taxpayer service benefits at a lower cost  through alternative methods.
section_title: IRS Has Made Progress on Enforcement, but Enforcement Remains High Risk Because of the Tax Gap
paragraphs: IRS has made noticeable progress in its enforcement efforts including  increasing the amount of direct enforcement revenue collected, number of  collection activities undertaken, and enforcement staff. Nevertheless,  enforcement of the tax laws remains high risk, because of the persistence  of the tax gap and the lack of a data-based plan.
subsections: section_title: IRS Has Taken Some Steps to Improve Enforcement
paragraphs: IRS reported that direct enforcement revenue rose from $43.1 billion in    FY 2004 to $48.7 billion in FY 2006 (a 13 percent increase). As shown in  figure 2, most of the enforcement revenue is from IRS’s collection efforts            ($27.5 billion), followed by examination ($17.4 billion) and document  matching ($3.2 billion).
In recent testimony, the IRS Commissioner reported increases in some  enforcement activities; for example, he reported that the overall  percentage of individual income tax returns examined between FYs 2001  and 2006 increased by about 75 percent. IRS’s 2008 budget request shows  that enforcement goals are comparable or slightly greater than 2006 actual  performance and 2007 planned performance; for example, the examination  rate of all individual income tax returns will remain at 1 percent. Also, IRS  is proposing to increase document matching activities for individual  taxpayers and increase examinations for businesses.
With its 2008 budget, IRS is proposing to roughly maintain its skilled  enforcement staff at the FY 2006 level—just over 21,000 FTEs. This would  be an increase of over 8 percent since its low in FY 2003, as shown in  figure 3. However, it is 9 percent less than the skilled enforcement staff  that IRS had in FY 1998. IRS has three main categories of skilled  enforcement staff: revenue officers, who perform field collection work;  revenue agents, who examine complex returns; and special agents, who  perform criminal investigations.
Despite the projections for skilled enforcement staffing, officials from the  SB/SE and Large and Mid-Size (LMSB) divisions noted that even  maintaining skilled enforcement staff levels may be difficult because both  divisions are experiencing high attrition rates because of retirements.  Furthermore, officials said the 2007 continuing resolution limited their  ability to hire in 2007. SB/SE and LMSB officials noted that the delays in  hiring may have an adverse affect on their ability to meet performance  goals in 2008 and beyond, particularly for the most complex examination  issues, including abusive tax shelters and corporate returns, because of  the lead time needed to train and develop staff.
Recently, IRS studied individual taxpayer compliance through the NRP,  and used the resulting compliance data to estimate the tax gap for  individual income tax underreporting and the portion of employment tax  underreporting attributed to self-employment taxes for tax year 2001.  NRP, which involved reviewing around 46,000 individual tax returns, has  yielded new information on taxpayer compliance for the first time since  IRS’s previous compliance measurement study was undertaken for tax  year 1988.
As a result of NRP, IRS has taken steps to better ensure efficient allocation  and use of its enforcement resources. For example, the NRP study has  provided better data on which taxpayers are most likely to be  noncompliant. IRS is using the data to improve its audit selection  processes in hopes of reducing the number of audits that result in no  change, which should reduce the unnecessary burden on compliant  taxpayers and increase enforcement staff productivity.
section_title: Enforcement of the Tax Laws Remains High Risk
paragraphs: Despite the progress in enforcement, enforcement of the tax laws remains  on our high risk list because of the persistence of the tax gap and, among  other things, the lack of a data-based plan to address it.
The tax gap has been a persistent problem in spite of a myriad of  congressional and IRS efforts to reduce it, as the rate at which taxpayers  voluntarily comply with our tax laws has changed little over the past three  decades. The rate at which taxpayers pay their taxes voluntarily and on  time has tended to range from around 81 percent to around 84 percent.  IRS’s most recent estimates of the gross tax gap are $345 billion for tax  year 2001, and the net tax gap is estimated to be $290 billion. IRS’s overall  approach to reducing the tax gap consists of enhancing enforcement and  improving taxpayer service. IRS uses its enforcement authority to ensure  that taxpayers are reporting and paying the proper amounts of taxes  through efforts such as examining tax returns and document matching.  IRS seeks to improve voluntary compliance through efforts such as  education and outreach programs and tax form simplification.
IRS needs better, more continuous compliance research and better  measurements of compliance. We have long been a supporter of such  research, because it can give IRS and Congress an important measure of  taxpayer compliance and it allows IRS to better target enforcement  resources towards noncompliant taxpayers. Taxpayers benefit as well,  because properly targeted audits mean fewer audits of compliant  taxpayers and more confidence by all taxpayers that others are paying  their fair share. IRS’s budget request includes $41 million for improving  tax gap estimates and detecting noncompliance including for a rolling NRP  sample of individual taxpayers and a dedicated cadre of examiners to  conduct audits. Using a rolling sample, IRS plans to replicate the 2001 NRP  study by conducting audits of a smaller sample size instead of larger  intermittent efforts. At the end of 5 years, IRS would have a comparable  set of results to the 2001 study and continue to update the study annually  by sampling the same number of taxpayers, dropping off the oldest year in  the sample, and adding the new years’ results every year. While we have  concerns about the lack of basic information to justify the specific funding  requested, we generally support this approach. We have previously  reported that doing compliance studies once every few years does not give  IRS or others information about what is happening in the intervening  years, and a rolling sample should reduce costs by eliminating the need to  plan entirely new studies every few years or more and train examiners to  carry them out.
IRS also needs a data-based plan to reduce the tax gap. Congress has been  encouraging IRS to develop an overall tax gap reduction plan or strategy  that could include a mix of approaches like simplifying code provisions,  increased enforcement, and reconsidering the level of resources devoted  to enforcement. Some progress has been made toward laying out the  broad elements of a plan or strategy for reducing the tax gap. On  September 26, 2006, the U.S. Department of the Treasury, Office of Tax  Policy, released “A Comprehensive Strategy for Reducing the Tax Gap.”  However, the document generally does not identify specific steps that  Treasury and IRS will undertake to reduce the tax gap, the related time  frames for such steps, or explanations of how much the tax gap would be  reduced. In a recent hearing, the Chairman of the Senate Finance  Committee asked the Secretary of the Treasury for a more detailed plan by  July 2007.
section_title: IRS’s Filing Season Performance Is Improved in Some Areas with Challenges in Others, and the Effect of Tax System Changes Has Been Minimal
paragraphs: IRS’s key filing season efforts are processing electronic and paper  individual income tax returns and issuing refunds, as well as providing  assistance or services to taxpayers. As already noted, processing and  assistance were complicated this year by three tax system changes: TETR,  the split refund option, and enactment in December 2006 of tax law  changes.
subsections: section_title: Returns Processing Is Comparable to Last Year, Despite Delays with CADE and Implementation of Tax System Changes
paragraphs: From January 1 through April 20, 2007, IRS processed approximately   104.6 million individual income tax returns, about the same number as last  year, and issued 88.2 million refunds for $203 billion compared to           85.2 million refunds for $190.5 billion at the same time last year. Over        65 percent of all refunds were directly deposited into taxpayers’ accounts,  up 3.5 percent over the same time last year. Direct deposits are faster and  more convenient for taxpayers than mailing paper checks. IRS recently  granted some extensions to taxpayers, including those affected by a major  storm and those unable to file their returns because of a software  company’s server problems.
According to IRS data and officials, performance is comparable to last  year. IRS is meeting most of its performance goals, including deposit error  rate, which is the percentage of deposits applied in error, such as being  posted to the wrong tax year. 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 IRS’s view that filing  season performance is comparable to last year.
subsections: section_title: CADE Will Expedite Refunds for Millions of Taxpayers, but Delays in Implementation Caused Millions More Not to Benefit
paragraphs: IRS uses two systems for posting taxpayer account information—the  antiquated Master File legacy system and CADE. The latest release of  CADE became operational in early March, 2 months behind schedule  because of problems identified during testing. IRS originally planned to  post 33 million taxpayer returns by CADE, more than four times the         7.4 million posted by CADE last year. We reported in early April that IRS  had revised this estimate down to approximately 17-19 million taxpayer  returns. However, as of April 20, IRS has posted fewer tax returns than  expected—9.1 million—with the remainder being posted to the Master File  legacy system. This means that millions of taxpayers did not benefit from  faster CADE processing this year. Taxpayers eligible for a refund this year  whose returns are posted by CADE will benefit from CADE’s faster  processing, receiving their refunds 1-5 days faster for direct deposit and 4- 8 days faster for paper checks than if their return had been processed on  the legacy system. The CADE setback may impact IRS’s ability to deliver  the expanded functionality of future versions of CADE, thus delaying the  transition to the new processing system (discussed further in the BSM  section of this testimony).
section_title: Electronic Filing Is Higher Than Last Year Despite a Decline in the Free File Program
paragraphs: The rate of electronic filing is up compared to the same period last year.  As of April 20, over 72.6 percent of all individual income tax returns        (75.9 million) were filed electronically, up 8.5 percent over the same time  last year.
We previously reported that state mandates for electronic filing of state  tax returns also encourage electronic filing of both state and federal tax  returns, and last year, we suggested that Congress consider mandating  electronic filing by paid tax preparers meeting criteria, such as a threshold  for number of returns filed. Last year, electronic filing of federal returns  increased 27 percent for the three states (New York, Connecticut and  Utah) with new 2006 mandates. This year, state mandates are likely to  continue to show a positive effect on federal electronic filing because,  with the addition of West Virginia, 13 states now have state mandates.
Compared to processing paper returns, electronic filing reduces IRS’s  costs by reducing staff devoted to processing. In 2006, IRS used almost  1,700 (36 percent) fewer staff years for processing tax returns than in 1999,  as shown in figure 4. IRS estimates this saved the agency $78 million in  salary, benefits, and overtime in 2006. Electronic filing also improves  service to taxpayers. Returns are more accurate because of built-in  computer checks and reduced transcription errors (paper returns must be  transcribed in IRS’s computers—a process that inevitably introduces  errors). Electronic filing also provides faster refunds.
Although electronic filing continues to grow, taxpayers’ use of the Free  File program continues to decline. The Free File program, accessible  through IRS’s Web site, is an alliance of companies that have an agreement  with IRS to provide free on-line tax preparation and electronic filing on  their Web sites for taxpayers below an adjusted gross income ceiling of  $52,000 in 2007. About 95 million (70 percent) of all taxpayers are eligible  for free file. Under the agreement, companies are not allowed to offer  refund anticipation loans and checks, or other ancillary products, to free  file participants. Although IRS has increased its marketing efforts, the  agency has not been successful in increasing free file use. As of April 19,  2007, IRS processed about 3.7 million free file returns—less than 4 percent  of eligible taxpayers and a decrease of 2.2 percent from the same period  last year. IRS officials attributed this decline in part to companies offering  free electronic on-line filing separate from the Free File program. While all  19 companies participating in the Free File program allow for TETR  requests, only 3 of the 19 companies offer Form 1040 EZ-T requests.
section_title: Tax System Changes Have Had Less Impact on Returns Processing Than Projected
paragraphs: TETR and split refund volume has been less than IRS projected. Over       68 percent of individuals who filed returns through April 14 have requested  the TETR, although all who paid the excise tax were eligible for the  refund. IRS projected that 10 to 30 million individuals who did not have a  tax filing obligation could claim TETR. As of April 13, approximately  578,000 of this group have asked for a refund (3.4 percent of the                      17.1 million IRS expected by this time).
As of April 21, just over 77,000 individual taxpayers chose to split their  refunds into different accounts, which represent a small fraction of the  57.2 million taxpayers who had their refunds directly deposited and the   3.8 million split refunds IRS projected for the filing season.
IRS delayed processing a small number of returns claiming tax extender  provisions until February 3 to complete changes to its tax processing  systems. IRS has anticipated some problems due to the late passage of  extender provisions which prevented information about them included in  printed tax publications.
Finally, in order to minimize problems, IRS planned and prepared  extensively for this year’s primary tax system changes: TETR, split refund,  and tax law extenders. For example, IRS updated forms and created new  ones, hired and trained additional staff to handle potential volume of  TETR and split refund requests, and updated the Web site and tax systems.
As reported in App. 1, of the tax systems changes, only TETR created new  compliance concerns for IRS and IRS modified its plans to address those  concerns during the filing season.
section_title: Call Volume Continues to Decline, IRS is Meeting Goals and Performance Is Comparable to Last Year
paragraphs: The number of calls to IRS’s toll-free telephone lines has been less than  last year and is significantly less for automated calls than in 2002 (see  table 3). Similar to last year, IRS assistors answered over 40 percent of the  total calls, while the rest of the calls were answered by an automated  menu of recordings.
By one measure of access, IRS’s performance is somewhat better and for  another it is somewhat worse than this time last year. Taxpayers’ ability to  access IRS’s toll-free telephone lines is somewhat better than last year,  and IRS is meeting its annual goals. According to IRS officials, IRS does  not try to match previous years’ performance, but sets and tries to achieve  performance goals according to the budget received. As shown in table 4,  the percentage of taxpayers who attempted to reach an assistor and  actually got through and received services—referred to as the level of  service—was one percentage point higher than the same time period last  year and greater than IRS’s goal of 82 percent for both FYs 2006 and 2007.  Average speed of answer, which is the length of time taxpayers wait to get  their calls answered, is just under 4 minutes, almost 15 percent longer than  last year, but better than IRS’s annual goal of 4.3 minutes.
IRS estimates that the accuracy of telephone assistors’ responses to tax  law and account questions to be comparable to the same time period last  year by using a statistical sampling process. IRS officials noted that there  was unprecedented hiring for FY 2007, and while every employee working  tax law applications completes a requisite certification process, new  employees will be less productive than experienced employees. IRS has  implemented several initiatives, such as targeted monitoring and training,  to assist the new hires.
IRS officials reported that tax system changes have had minimal impact on  telephone operations so far this filing season. TETR-related calls are a  small fraction of the TETR calls that IRS projected and all calls that IRS  received. Between January 1 and April 14, 2007, IRS expected 12.4 million  TETR-related calls, but received about 540,000.
IRS hired 650 FTEs in FY 2007, with the expectation that those hires  would be used to cover anticipated attrition in 2008. Their first assignment  was answering TETR telephone calls and they also were trained to handle  other accounts calls allowing more experienced employees to address  paper inventory.
IRS anticipated little impact on telephone service from the split refund  option and tax provision extenders. For split refunds, IRS anticipated it  would receive about 70,000 calls to assistors compared to the 70 million  total calls it receives each year. IRS did not have projections for tax  provision extensions.
section_title: Use of Web Site Applications Continues to Increase, and Performance Remains High
paragraphs: Use of IRS’s Web site has increased so far this filing season compared to  prior years except for downloads of forms and publications. From January  1 through March 31, IRS’s Web site was visited more often and the number  of searches increased over the same time period as last year. However, the  number of downloaded forms and publications has decreased 22 percent  over the same period compared to last year. According to IRS officials,  reasons for this decrease include the increase in taxpayers using e-file, tax  preparation software, and paid preparers, negating the need for taxpayers  to download and print forms and publications. In terms of new features,  IRS added a state deduction calculator this filing season, which IRS wants  to use as a new standard for developing other on-line calculators. Web site  assistance is important because it is available to taxpayers 24-hours a day  and it is less costly to provide than telephone and walk-in assistance.
In addition to the Free File program, IRS’s Web site offers several  important features, such as “Where’s My Refund”, which allows taxpayers  to check on the status of their refunds. This year, the feature allows  taxpayers to check on the status of split refunds, and tells the taxpayer if  one or more of the deposits were returned from the bank because of an  incorrect routing or account number. However, for certain requests, the  feature is not useful. For example, IRS stopped some refunds related to  TETR requests, but “Where’s My Refund” informed taxpayers that their  refunds had been issued. Further, if taxpayers make a mistake calculating  the amount of their refund the feature would indicate that IRS corrected  the refund amount, but will not show the new amount. IRS is considering  providing more information about taxpayer accounts on its Web site as  part of its strategy to improve taxpayer services at reduce costs.
There is further evidence that IRS’s Web site is performing well as these  examples show.
According to the American Customer Satisfaction Index, for January  through March 2007, IRS’s Web site is scored above those of other  government agencies, nonprofits, and private sector firms for customer  satisfaction. For example, in March, IRS scored 74 versus 72 for all  government agencies surveyed and 71 for all Web sites surveyed.
An independent weekly study by Keynote, a company that evaluates Web  sites, reported that, as of April 9, 2007, IRS’s Web site has repeatedly  ranked in the top 6 out of 40 government agency Web sites evaluated in  terms of average download time. Last year, IRS consistently ranked  second for the same time period. Average download time remained about  the same for IRS compared to last year, indicating that IRS is not  performing worse, but that other government agencies are performing  better.
On the basis of our own searches, we found IRS’s Web site to be readily  accessible, easy to navigate, and easy to search.
section_title: Limited Data on the Quality of Face-to-Face Assistance Show Improvement, but Concerns Remain
paragraphs: As of April 14, approximately 2.9 million taxpayers used IRS’s 401 walk-in  sites, which is comparable to the same period last year. Figure 5 shows the  trend in walk-in site use for the filing season including slight projected  declines in 2007 and 2008. At walk-in sites, staff provide taxpayers with  information about their tax accounts, answer a limited scope of tax law  questions about, for example, income and filing status, and provide limited  tax return preparation assistance. As of April 14, over 10,700 taxpayers  have requested TETR on Form 1040EZ-T at walk-in sites, which is             8.5 percent of the 126,000 individuals IRS expected.
IRS officials attribute this year’s projected decline in walk-in use to  taxpayers’ increased use of tax preparation software and IRS.gov. This  decline has allowed IRS to devote 2.3 percent fewer FTEs compared to  last year for walk-in assistance (down from 260 to 266 FTEs).
Volunteer sites, often run by community-based organizations and staffed  by volunteers who are trained and certified by IRS, do not offer the range  of services provided at walk-in sites. Instead, volunteer sites focus on  preparing tax returns primarily for low-income and elderly taxpayers and  operate chiefly during the filing season. As of April 15, the number of  taxpayers getting return preparation assistance at over 11,000 volunteer  sites has increased to approximately 2.3 million, up 16 percent from last  year and continuing a trend since 2001. Although no projections have been  made for TETR claims, over 80,600 taxpayers have claimed this credit at  these locations. We have reported that the shift of taxpayers from walk-in  to volunteer sites 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.
While IRS is collecting better data on the quality of service at walk-in sites,  concerns about quality of the data and service remain. According to IRS, it  is measuring the accuracy of tax law and accounts assistance. IRS has  reported a goal for tax law accuracy, and plans to use data collected for  2007 to set an annual goal for accounts accuracy. While IRS provided  return assistance for almost 210,000 taxpayers, it lacks information on the  accuracy of that assistance. For volunteer sites, as of April 12, for a small  non-statistical sample, IRS reported a 64 percent accuracy rate for return  preparation, compared to its goal of 55 percent. Independent from IRS, but  using similar methods, TIGTA showed a 56 percent accuracy rate.
section_title: TAB is Intended to Improve Taxpayer Services in a Cost-effective Manner
paragraphs: IRS developed 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, in response to a November 2005 law and a congressional  directive. IRS notes that with TAB, it has more information than ever  before about taxpayers, partners, employees, and the effect of service- related decisions on taxpayers to help the agency provide, evaluate, and  improve services.
IRS issued two reports under TAB:    The Phase I report, released in April 2006, outlines the results of  preliminary research on taxpayer expectations and establishes five  strategic themes for improving taxpayer services.
Phase II, released in April 2007, includes the results of additional research,  numerous areas and initiatives both funded and unfunded for service  improvement, and a set of recommended performance measures.
IRS has identified 54 initiatives, some of which are underway, that include  taxpayer service upgrades such as improvements to the Spanish version of  “Where’s My Refund” and research studies. IRS identified 28 of the  initiatives as unfunded and included several as part of its FY 2008 budget  request as noted above.
As part of its strategy, IRS developed estimates of the cost per service  contact for providing different types of taxpayer services, although there  were qualifications to those estimates. As table 6 indicates some assisted  services, such as e-mail, are far more expensive than self-assisted services,  such on IRS’s Web site. However, while there may be some overlap in  services (e.g., taxpayers can receive similar return assistance at both walk- in sites and volunteer sites), they are likely to serve different taxpayers  and may provide different levels of service (e.g., taxpayers can receive  account assistance at walk-in sites, but not at volunteer sites). But, even  between the two self-assisted options, there is a difference in unit costs,  with automated phone calls estimated to be more than five times higher  than Web contacts. Having reliable cost information, together with a better  understanding of taxpayers’ preferences, needs, and expectations, could  assist IRS in determining whether it could provide taxpayers with the  same taxpayer service benefits at a lower cost through alternative  methods. However, to further evaluate IRS’s strategy, additional  information would be required, for example, on how savings estimates  were developed.
section_title: Progress Made in BSM Implementation, but Challenges and Risks Remain
paragraphs: BSM is critical to supporting IRS’s taxpayer service and enforcement goals  and reducing the tax gap. For example, BSM includes projects to allow  taxpayers to file and retrieve information electronically and to provide  technology solutions to help reduce the backlog of collections cases.  Despite progress made in implementing BSM projects and improving  modernization management controls and capabilities, significant  challenges and serious risks remain, and further program improvements  are needed, which IRS is working to address.
Over the past year, IRS has made further progress in implementing BSM  projects and in meeting cost and schedule commitments, but two key  projects experienced significant cost overruns during 2006—CADE and  Modernized e-File. During 2006 and the beginning of 2007, IRS deployed  additional releases of the following modernized systems that have  delivered benefits to taxpayers and the agency: CADE, Modernized e-File,  and Filing and Payment Compliance (a tax collection case analysis  support system). Each of the five associated project segments that were  delivered during 2006 were completed on time or within the targeted            10 percent schedule variance threshold, and two of them were also  completed within the targeted 10 percent variance threshold for cost.  However, one segment of the Modernized e-File project as well as a  segment of the CADE project experienced cost increases of 36 percent and  15 percent, respectively. According to IRS, the cost overrun for  Modernized e-File was due in part to upgrading infrastructure to support  the electronic filing mandate for large corporations and tax-exempt  organizations, which was not in the original projections or scope.
IRS has also made significant progress in implementing our prior  recommendations and improving its modernization management controls  and capabilities, including efforts to institutionalize configuration  management procedures and develop an updated modernization vision  and strategy and associated 5-year plan to guide information technology  investment decisions during fiscal years 2007 through 2011. However,  critical controls and capabilities related to requirements development and  management and post-implementation reviews of deployed BSM projects  have not yet been fully implemented. In addition, more work remains to be  done by the agency to fully address our prior recommendation of  developing a long-term vision and strategy for completing the BSM  program, including establishing time frames for consolidating and retiring  legacy systems. IRS recognizes this and intends to conduct further  analyses and update its vision and strategy to address the full scope of tax  administration functions and provide additional details and refinements on  the agency’s plans for legacy system dispositions.
Future BSM project releases continue to face significant risks and issues,  which IRS is taking steps to address. IRS has reported that significant  challenges and risks confront its future planned system deliveries. For  example, delays in deploying the latest release of CADE to support the  current filing season have resulted in continued contention for key  resources and will likely impact the design and development of the next  two important releases, which are planned to be deployed later this year.  The potential for schedule delays, coupled with the reported resource  constraints and the expanding complexity of the CADE project, increase  the risk of scope problems and the deferral of planned functionality to  later releases. Maintaining alignment between the planned releases of  CADE and the new Accounts Management Services project is also a key  area of concern because of the functional interdependencies. The agency  recognizes the potential impact of these project risks and issues on its  ability to deliver planned functionality within cost and schedule estimates  and, to its credit, has developed mitigation strategies to address them. We  will, however, continue to monitor the various risks IRS identifies and the  agency’s strategies to address them and will report any concerns.
IRS has also made further progress in addressing high-priority BSM  program improvement initiatives during the past year, including efforts  related to institutionalizing the Modernization Vision and Strategy  approach and integrating it with IRS’s capital planning and investment  control process, hiring and training 25 entry-level programmers to support  development of CADE, developing an electronic filing strategy through  2010, establishing requirements development/management processes and  guidance (in response to our prior recommendation), and defining  governance structures and processes across all projects. IRS’s high- priority improvement initiatives continue to be an effective means of  assessing, prioritizing, and incrementally addressing BSM issues and  challenges. However, more work remains for the agency to fully address  these issues and challenges.
In addition, we recently reported that IRS could improve its reporting of  progress in meeting BSM project scope (i.e., functionality) expectations by  including a quantitative measure in future expenditure plans. This would  help to provide Congress with more complete information on the agency’s  performance in implementing BSM project releases. IRS recognizes the  value of having such a measure and, in response to our recommendation,  is in the process of developing it.
section_title: Conclusions
paragraphs: IRS’s budget submission is important because it shows the resource  tradeoffs IRS intends to make between enforcement and taxpayer  service—both of which have potential to reduce the tax gap. One way that  IRS reallocates resources is through new spending initiatives. However, in  order for Congress and other external parties to assess the merits of new  initiatives, basic information about the description of the initiatives and  their costs and expected performance is necessary. Without such  information, decisions makers do not have an informed basis on whether  to approve and fund new initiatives. Of course, the costs of developing  justifications must also be taken into account. More costly initiatives  generally would be expected to have more detailed justifications.
section_title: Recommendation for Executive Action
paragraphs: We recommend that the Commissioner of Internal Revenue    have available basic descriptive, cost, and expected performance  information on the spending initiatives proposed in the 2008 budget  submission to the extent to such information has not been provided, and include in future budget submissions, basic descriptive, cost, and  performance information on new spending initiatives, with supplementary  documentation available if needed.
In comments on a draft of this statement, IRS’s Chief Financial Officer  agreed with the second recommendation, but not the first. She stated that  the FY 2008 budget and justification did provide basic descriptive, cost,  and expected performance information for each initiative. IRS agreed that  the amount of performance data provided for each initiative varied, stating  that some of the initiatives did not necessarily merit such performance  indicators and, for those initiatives, IRS provided explanations of general  benefits or reasons behind the request. While we agree that for every  initiative IRS provided the total proposed spending, some initiatives  lacked basic information on how the amount to be spent was determined  and work to be done. For example, the initiative for improving compliance  estimates provided no explanation of how the 258 FTEs were determined  or basic information on the work such as the number of examinations to  be conducted. Without such information, at the end of the fiscal year,  Congress would be unable to tell whether IRS spent the money as  intended.
Mr. Chairman, this concludes my prepared statement. Mr. Powner and I  would be happy to respond to questions you or other members of the  Committee may have at this time.
section_title: Contacts and Acknowledgments
paragraphs: For further information regarding this testimony, please contact James R.  White, Director, Strategic Issues, on 202-512-9910 or whitej@gao.gov or  David A. Powner, Director, Information Technology Management Issues,  on 202-512-9296 or powenrd@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; Ronald W. Jones; Matthew Kalmuk; Varflay  Kesselly; Frederick Lyles; Jennifer McDonald; Signora May; Paul B.  Middleton; Karen O’Conor; Lerone Reid; Sabine R. Paul; Cheryl Peterson;  Neil Pinney; and Shellee Soliday.
section_title: Appendix I: IRS Is Addressing TETR Compliance Issues during the Filing Season
paragraphs: TETR is the only one of the three tax changes that created new  compliance concerns for IRS (filers could request greater TETR amounts  than they are entitled to). The split refund option does not create  compliance concerns for IRS since it relates to the accounts into which  taxpayers want their refunds deposited rather than to complying with tax  provisions. Since these provisions extending the tax laws already existed,  IRS anticipates that any compliance concerns for 2006 returns will be the  same as for previous years.
IRS developed a plan before the filing season began to audit suspected  TETR overclaims before issuing refunds. IRS’s plan for TETR was  consistent with good management practices identified in previous GAO  reports. IRS’s plan included appointing an executive, developing an  implementation plan for TETR that included standard amounts that  individuals could request, developing a compliance plan to select TETR  requests for audit, and monitoring and evaluating compliance by using  real-time data to adjust TETR compliance efforts. For example, each  week, IRS reviews the requests for TETR, selects some for audit, and  revises the criteria for audit selection as necessary.
As of April 21, 2007, about 324,000 individuals had requested the actual  amount of telephone excise tax paid for a total of $128 million. IRS  selected about 3.4 percent of these requests for audit, involving about $33  million. IRS has closed 464 of the individual audits with the taxpayer  agreeing to accept the standard amount; it has not completed the  remaining individual audits. About 346,000 businesses had requested  TETR for a total of about $161 million. IRS selected over 1,000 for audit,  involving about $22 million. IRS has closed four business audits. IRS  reassigned about 77 FTEs from discretionary audits and Earned Income  Tax Credit audits to conduct TETR audits. Additionally, Criminal  Investigation has spent 13 FTEs staff on TETR activities in 2007.
section_title: Appendix II: List of Recent GAO Reports on IRS’s Filing Season, Budget, BSM, and Tax Gap
subsections: section_title: IRS’s Budget and Filing Season
paragraphs: Tax Filing Season: Interim Results and Updates of Previous  Assessments of Paid Preparers and IRS’s Modernization and  Compliance Research Efforts, GAO-07-720T Washington, D.C.: April 12,  2007.
Internal Revenue Service: Interim Results of the 2007 Tax Filing Season  and the Fiscal Year 2008 Budget Request, GAO-07-673 Washington, D.C.:  April 3, 2007.
Tax Administration: Most Filing Season Services Continue to Improve,  but Opportunities Exist for Additional Savings, GAO-07-27 Washington,  D.C.: November 15, 2006  Internal Revenue Service: Assessment of the Interim Results of the 2006  Filing Season and Fiscal Year 2007 Budget Request, GAO-06-499T  Washington, D.C.: April 27, 2006.
Tax Administration: IRS Improved Some Filing Season Services, but  Long-Term Goals Would Help Manage Strategic Trade-offs, GAO-06-51  Washington, D.C.: November 14, 2005.
Tax Administration: IRS Improved Performance in the 2004 Filing  Season, but Better Data on the Quality of Some Services Are Needed,  GAO-05-67 Washington, D.C.: November 10, 2004.
section_title: Business Systems Modernization
paragraphs: Business Systems Modernization: Internal Revenue Service’s Fiscal Year  2007 Expenditure Plan, GAO-07-247 Washington, D.C.: February 15, 2007.
Business Systems Modernization: IRS Needs to Complete Recent Efforts  to Develop Policies and Procedures to Guide Requirements Development  and Management, GAO-06-310 Washington, D.C.: March 20, 2006.
Business Systems Modernization: Internal Revenue Service’s Fiscal Year  2006 Expenditure Plan, GAO-06-360 Washington, D.C.: February 21, 2006.
Business Systems Modernization: Internal Revenue Service’s Fiscal Year  2005 Expenditure Plan, GAO-05-774 Washington, D.C.: July 22, 2005.
IRS Modernization: Continued Progress Requires Addressing Resource  Management Challenges, GAO-05-707T Washington, D.C.: May 19, 2005.
section_title: Tax Compliance
paragraphs: Tax Compliance: Thousands of Federal Contractors Abuse the Federal  Tax System, GAO-07-742T Washington, D.C.: April 19, 2007.
Tax Compliance: Using Data from the Internal Revenue Service’s  National Research Program to Identify Potential Opportunities to  Reduce the Tax Gap, GAO-07-423R Washington, D.C.: March 15, 2007.
Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax  Gap, GAO-07-488T Washington. D.C.: February 16, 2007.
Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax  Gap, GAO-07-391T Washington, D.C.: January 23, 2007.
Tax Compliance: Challenges to Corporate Tax Enforcement and Options  to Improve Securities Basis Reporting, GAO-06-851T Washington, D.C.:  June 13, 2006.
Capital Gains Tax Gap: Requiring Brokers to Report Securities Cost  Basis Would Improve Compliance if Related Challenges Are Addressed,  GAO-06-603 (Washington, D.C.: June 13, 2006).
Tax Gap: Making Significant Progress in Improving Tax Compliance  Rests on Enhancing Current IRS Techniques and Adopting New  Legislative Actions, GAO-06-453T Washington, D.C.: February 15, 2006.
Tax Gap: Multiple Strategies, Better Compliance Data, and Long-Term  Goals Are Needed to Improve Taxpayer Compliance, GAO-06-208T  Washington, D.C.: October 26, 2005.
Tax Compliance: Better Compliance Data and Long-Term Goals Would  Support a More Strategic IRS Approach to Reducing the Tax Gap, GAO- 05-753 Washington, D.C.: July 18, 2005.
Tax Compliance: Reducing the Tax Gap Can Contribute to Fiscal  Sustainability but Will Require a Variety of Strategies, GAO-05-527T  Washington, D.C.: April 14, 2005.
Compliance and Collection: Challenges for IRS in Reversing Trends and  Implementing New Initiatives, GAO-03-732T Washington, D.C.: May 7,  2003.
section_title: Miscellaneous
paragraphs: Tax Administration: Telephone Excise Tax Refund Requests Are Fewer  Than Projected and Have Had Minimal Impact on IRS Services, GAO-07- 695 Washington, D.C.: April 11, 2007.
Taxpayer Service: State Experiences Indicate IRS Would Face Challenges  Developing an Internet Filing System with Net Benefits, GAO-07-570  Washington, D.C.: April 5, 2007.
Internal Revenue Service: Procedural Changes Could Enhance Tax  Collections: Enhancing IRS Collection Procedures, GAO-07-26  Washington, D.C.: November 15, 2006.
Tax Debt Collection: IRS Needs to Complete Steps to Help Ensure  Contracting Out Achieves Desired Results and Best Use of Federal  Resources, GAO-06-1065 Washington, D.C.: September 29, 2006.
Paid Tax Return Preparers: In a Limited Study, Chain Preparers Made  Serious Errors, GAO-06-563T Washington, D.C.: April 4, 2006.  21st Century Challenges: Reexamining the Base of the Federal  Government, GAO-05-325SP Washington, D.C.: February 2005.
High Risk Series: An Update, GAO-07-310 Washington, D.C.: January,  2007.
Tax Administration: Most Taxpayers Believe They Benefit from Paid  Tax Preparers, but Oversight for IRS is a Challenge, GAO-04-70  Washington, D.C.: October 31, 2003.
Tax Administration: IRS Is Implementing the National Research  Program as Planned, GAO-03-614 Washington, D.C.: June 16, 2003.
Tax Administration: IRS Needs to Further Refine Its Tax Filing Season  Performance Measures, GAO-03-143 Washington, D.C.: November 22,  2002.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.