2011 Tax Filing: Processing Gains, but Taxpayer Assistance Could Be Enhanced by More Self-Service Tools
Published: 2011-12-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The tax filing season is an enormous undertaking in which the Internal Revenue Service (IRS) processes millions of tax returns, issues billions of dollars in refunds to taxpayers, corrects taxpayers' errors, and provides service to millions of taxpayers through telephones, website, and face-to-face assistance. Among other things, GAO was asked to assess (1) IRS's performance processing returns and issuing refunds, and providing telephone assistance, and (2) IRS's plans to expand self-service options on its website. To conduct the analyses, GAO obtained and compared data from 2007 through 2011, reviewed IRS documents, interviewed IRS officials, observed IRS operations, and interviewed tax-industry experts, including from tax preparation firms.
section_title: What GAO Found
paragraphs: During the 2011 filing season the following occurred:
Electronic filing (e-filing) increased to nearly 80 percent of the 140 million individual returns filed. The benefits of e-filing include that it is more accurate, faster, and less expensive for IRS than processing returns filed on paper.
Due to the increase in e-filing, new systems, and IRS's performance in recent years, its refund timeliness measure and goal are outdated. The measure only relates to the 22 percent of returns filed on paper. IRS's goal is to issue refunds for paper-filed returns within 40 days. In 2012, IRS expects to issue most refunds within 4 to 6 days of processing a return (paper and e-filed), meaning the current goal does not reflect current performance and capabilities.
The percent of callers seeking live assistance who receive it remained much lower than in 2007 and the average wait time for callers continued to increase. Providing live telephone assistance is expensive. However, IRS can shift some assistor-answered calls to less costly tools. Two such opportunities include creating self-service phone lines for taxpayers seeking to identify the (1) status of their amended return--a source of high call volume--and (2) location of a Taxpayer Assistance Center (TAC) or Volunteer Income Tax Assistance (VITA) site, where IRS employees and volunteers prepare returns, respectively. IRS officials expect the benefits of the amended return line to exceed the costs, but have not studied the costs and benefits of adding a TAC/VITA locator line.
The use of IRS's website is growing, particularly the number of searches, which IRS officials attribute, in part, to taxpayers having difficulties locating information. Having an easily searchable website is important for IRS because it reduces costly phone calls. IRS has begun spending a planned $320 million on its website over 10 years. However, IRS's initial strategy for providing new self-service tools online does not include allowing taxpayers to access account information and is missing fundamental elements, including a justification for new services and time frames. Doing so would provide Congress and taxpayers with a better understanding of the online services IRS plans to provide with its significant investment on its website.
section_title: What GAO Recommends
paragraphs: GAO recommends that IRS develop a new refund timeliness performance measure to better reflect current capabilities, create an automated telephone line for taxpayers seeking information about amended returns unless IRS has a convincing costbenefit analysis suggesting the costs exceed the benefits, assess the costs and benefits of automating a TAC/VITA locator line, and finalize a strategy for determining which self-service tools to provide on its website.
IRS agreed with three of GAO's recommendations, but said that resources are not available to automate the TAC/VITA line. GAO believes a review of the costs and benefits would better inform IRS decisions about how to allocate scarce resources.

section_title: Letter
paragraphs: Every tax filing season is a large-scale undertaking during which the  Internal Revenue Service (IRS) interacts with millions of taxpayers and  tax preparers by processing tax returns, issuing refunds, answering  telephone calls, and providing other services, both face-to-face and on its  website. IRS’s information systems also begin checking tax returns for  compliance with the tax laws during processing. These automated checks  correct many errors before refunds are issued, benefiting IRS by avoiding  costly audits and taxpayers by preventing interest and penalties from  accruing.
In recent years IRS has taken or proposed a number of steps to gain  efficiencies and provide better service to taxpayers. For example, IRS has  been automating more of its higher-cost taxpayer services, including  telephone assistance provided by IRS employees, with more self-service  tools such as automated phone and online applications. In addition, the  Commissioner of Internal Revenue has articulated a long-term vision for  employing more prerefund compliance checks to reduce the costs and  delays associated with traditional “back end” checks such as audits. In  the short term, IRS is upgrading key information systems, and plans to  develop others that could begin increasing prerefund compliance check  opportunities.
Further, taxpayers have decreased their use of controversial Refund  Anticipation Loans (RAL)—high-interest-rate, short-term loans from tax  preparers or banks that give quicker access to tax refunds—while  increasing their use of Refund Anticipation Checks (RAC)—temporary  bank accounts set-up by tax preparers allowing them to subtract tax  preparation and other fees from taxpayers’ refunds. At the same time, the  Department of the Treasury (Treasury) has taken action to identify lower- cost alternatives to paper check refunds that can be delivered to  taxpayers faster, including direct deposits and debit cards.
In this context, you asked us to  (1)  assess IRS’s performance in processing returns, delivering refunds,  and providing telephone service and face-to-face assistance in  comparison to its goals and prior years’ performance;  (2)  describe trends in the use of IRS’s website and assess IRS’s plans to  add self-service tools to the website;  (3)  report on the status of changes to IRS’s prerefund compliance  checks, including system upgrades and process changes; and  (4)  report on trends in the use of RACs and RALs and efforts to provide  refunds to taxpayers in a low-cost manner.
To meet our objectives we did the following:
Reviewed and analyzed IRS documents and data, including  performance and workload data, reports, testimonies, budget  submissions, and internal studies of programs, and compared these  to IRS’s goals and prior years’ performance to identify trends and  anomalies.
Reviewed various other criteria, including industry standards, federal  requirements, and best practices, to assess IRS’s performance in key  areas.
Observed operations at IRS’s Joint Operations Center (which  manages telephone services) and listened to calls from taxpayers with  telephone assistors, and observed examiners performing  correspondence examinations. We also viewed operations at an IRS  walk-in site and a Volunteer Income Tax Assistance (VITA) site in  both Atlanta, Georgia, and Washington, D.C. Additionally we visited  the Submission Processing Center in Atlanta, Georgia. We selected  these particular offices from IRS offices located around the country for  a variety of reasons, including the location of IRS call centers,  correspondence examiners, and relevant IRS managers.
Reviewed IRS’s strategy to upgrade its website against various  criteria, including federal guidelines and other best practices.
Obtained documentation and interviewed officials from two states that  have developed interactive websites.
Reviewed prior GAO reports and Treasury Inspector General for Tax  Administration (TIGTA) reports and interviewed TIGTA officials about  IRS’s performance and initiatives.  Interviewed IRS officials responsible for tax return processing,  taxpayer services, online services, and examination and compliance  activities about prerefund compliance checks.
Collected data from and interviewed key external stakeholders who  frequently interact with IRS on key aspects of the filing season,  including representatives from major tax preparation firms and other  organizations responsible for providing refund products (e.g., RACs  and RALs) to taxpayers.
Collected data from and interviewed Treasury officials responsible for  developing a pilot program to deliver tax refunds on debit cards.  Interviewed Urban Institute officials about evaluation plans for  Treasury’s debit card program and its recent review of RACs and  RALs, both of which were conducted at the request of Treasury.
When data were available, we compared IRS’s 2011 performance to its  performance from fiscal years 2007 through 2010. IRS officials noted that  since 2008 varying degrees of tax law changes have affected the  agency’s performance.
This report discusses numerous filing season and performance measures  and data covering the quality, accessibility, and timeliness of IRS’s  services. To the extent possible, we corroborated information from  interviews with documentation and data, and where not possible,  attributed the information to IRS officials. We reviewed IRS  documentation, interviewed IRS officials about computer systems and  data limitations, and compared those results to our standards of data  reliability.the data presented in this report to be sufficiently reliable for our  purposes. We conducted our work primarily at IRS headquarters in  Washington, D.C., and at the Wage and Investment Division  headquarters in Atlanta, Georgia, as well as other sites mentioned earlier.
Data limitations are discussed where appropriate. We consider  We conducted this performance audit from February 2011 through  December 2011 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Primarily through its telephone, website, and, to a much lesser extent,  face-to-face operations, IRS provides tax law and account assistance,  limited tax return preparation assistance, tax forms and publications, and  outreach and education.
Taxpayers can call IRS to speak directly with a customer service  representative (CSR), or use automated telephone lines to obtain  information quickly. IRS has 10 automated telephone lines, which  allow, for example, taxpayers to interactively inquire about the status  of a refund, order a transcript of their return or account information,  and request a personal identification number (PIN) to file  electronically. IRS’s 149 Teletax lines provide prerecorded messages  on tax law topics ranging from alternative filing methods to what a  taxpayer can itemize.
CSRs are also responsible for responding to paper correspondence.
IRS tries to minimize the percent of overage paper correspondence  (generally correspondence that is more than 45 days old).  IRS staff provides face-to-face assistance at 401 walk-in sites or  Taxpayer Assistance Centers (TAC) where taxpayers can get basic  tax law questions answered, review their accounts, and have returns  prepared if their annual income is $49,000 or less.  IRS also has volunteer partners that staff over 12,000 volunteer sites.  Volunteers at these Volunteer Income Tax Assistance (VITA) and Tax  Counseling for the Elderly (TCE) sites prepare tax returns for  traditionally underserved taxpayers, including the elderly, low-income,  disabled, and those with limited English proficiency. These sites also  provide other services such as helping taxpayers without a bank  account get into the banking system and financial literacy education.
In addition to the services IRS provides to taxpayers during the filing  season, paid tax preparers and tax software development companies play  an important role answering taxpayers’ questions and filing tax returns. In  2011, for the first time, paid preparers who expected to prepare 100 or  more returns were generally required to file the returns electronically.
As part of IRS’s Business System Modernization (BSM) program, over  the next few years IRS plans to make major changes to how it processes  individual income tax returns to facilitate faster refund processing and  maintain more up-to-date account information. For example, IRS is replacing the legacy Individual Master File (IMF) and current  Customer Account Data Engine (CADE) systems that it uses to  process individual income tax returns with CADE 2. IRS plans to  implement its CADE 2 program in three phases beginning in 2012.  The first phase includes two projects: (1) processing tax returns daily,  rather than weekly, using the IMF (known as IMF daily); and (2)  implementing the CADE 2 database. IRS is also replacing its legacy e-filing system with the Modernized e- File (MeF) system, and it plans to retire the legacy e-file system in  October 2012. IRS cannot accept electronically filed returns directly  from taxpayers. Rather, IRS authorizes e-file providers, such as large  tax preparation firms, to transmit returns to IRS electronically using  either the legacy e-file or MeF system. The benefits of MeF include  accepting or rejecting individual tax returns faster, providing a clearer  explanation of why a return was rejected, and accepting prior-year  returns. The system also allows taxpayers to attach portable  document format (PDF) files to their tax returns (the legacy e-filing  system cannot accept additional documentation, requiring such  returns to be submitted on paper).
Last year we reported that IRS has been taking actions to improve its  website by identifying steps to enhance taxpayer service.effort, IRS plans to spend $320 million to upgrade and maintain its  website over the next 10 years. These plans include introducing a new  website by the 2013 filing season.
IRS’s 5-year strategic plan for improving service to taxpayers  identified five website-management control gaps, such as content  management, website design and usability, and frequently asked  questions.IRS has three existing web portals accessible to the public at large,  registered users, and IRS employees, respectively. According to IRS,  its new portal environment investment will replace the current  environment that has reached the end of its useful life, and provide  streamlined, web-based services to taxpayers, business partners, IRS  employees, and other government agencies. IRS plans to begin  phasing in the new portal environment in 2012.
While processing returns, IRS validates key pieces of information and  corrects returns before issuing refunds, which allows it to avoid auditing  taxpayers after returns have been processed and refunds sent to   Such audits, which are costly to IRS and burdensome for  taxpayers.taxpayers, may result in the assessment of interest and penalties, and  may require IRS to collect amounts due. Correcting errors may result in  taxpayers receiving larger refunds. Prerefund compliance checks help  ensure that taxpayers submit required information to the IRS with their  returns. In conducting prerefund compliance checks, IRS does the  following:
Completes automated and relatively low-cost (compared to audits)
MEA is statutory authority granted to IRS by Congress to correct calculation errors and  other obvious instances of noncompliance, such as claims above income and credit limits,  and assess additional tax based on such errors without having to issue a statutory notice  of deficiency.
Electronic Fraud Detection System (EFDS), which detects returns  at a high risk for fraud. IRS is currently replacing EFDS with the  Return Review Program (RRP).
In addition, millions of taxpayers may choose to obtain their tax refunds  through a RAC or RAL, which are offered to taxpayers by paid preparers  or banks in connection with federal or state tax refunds, or both. RACs  are a refund delivery option where refunds are directly deposited into a  temporary bank account set up by a financial institution or tax preparer on  behalf of the taxpayer. The tax return preparation fee, along with other  fees, is generally withheld from the refund and the remaining funds are  available to the taxpayer. RALs are short-term, high-interest-rate bank  loans that allow taxpayers to get their refunds faster and also allow  taxpayers to pay return preparation and other fees out of their refunds. In  contrast to RALs, RACs are not loans.
During 2011, taxpayers also could choose to receive their tax refund from  IRS through (1) their banks’ direct deposit program, (2) paper checks, or  (3) debit cards, which could be obtained from a participating bank,  through Treasury’s pilot program on debit cards, or at VITA/TCE sites.  Since 2009, IRS has worked with partner organizations at VITA/TCE sites  to encourage taxpayers not requesting a direct deposit of their refund to  opt to receive it on a debit card sponsored by a participating financial  institution. Last year we reported that less than 3 percent of eligible  taxpayers at VITA/TCE sites elected to receive refunds on debit cards.  Separately, in 2011, Treasury launched a pilot program offering about  800,000 low-income taxpayers tax refunds on debit cards. Although  targeting the same demographic group, the VITA site offers are made in  person and the Treasury offer was made through the mail. Even though  both programs are relatively small in scale, they are important because  they are intended to identify ways to reduce the cost of delivering refunds  to taxpayers, provide faster refunds compared to paper checks, reduce  transaction costs, and provide individuals who might not otherwise have  access to a bank account with banking services.
section_title: Processing of Returns Was Timely, but Opportunities to Improve Taxpayer Service Exist
paragraphs: During the 2011 filing season, the percentage of returns e-filed increased  considerably and IRS expects new systems to speed refunds to  taxpayers. As a result of these improvements, IRS’s refund timeliness  measure and goal, which relates only to paper returns, is outdated. In  addition, the high call volume and amount of paper correspondence  highlight the need to improve taxpayer service through providing  additional self-service tools. Although fewer taxpayers receive face-to- face assistance than in other ways, IRS is taking steps to improve service  at TAC and VITA sites.
subsections: section_title: E-Filing Increased and the Shift to New Processing Systems Continues
paragraphs: IRS processed about 140 million returns and almost reached its e-file  goal of 80 percent (78 percent of individual returns were e-filed and 22  percent filed on paper), established by Congress in 1998. E-filing  increased about 13 percent compared to last year, as table 1 shows. E- filing has many benefits for taxpayers, such as higher accuracy rates and  faster refunds, and it also provides IRS with significant cost savings  through eliminating the need for manual transcription of paper returns,  which is labor intensive and introduces errors. According to IRS, in fiscal  year 2010, it cost 17 cents to process an e-filed return and $3.66 for  returns filed on paper. IRS officials and representatives from major tax  preparation firms attributed the increase in the e-file rate to factors  including the e-filing requirement for paid preparers and the fact that IRS  did not mail out hard-copy tax forms to taxpayers.the states also have e-file mandates, which may also encourage  taxpayers to e-file federal returns. Further, IRS met all eight returns  processing goals, summarized in appendix IV.
section_title: IRS’s Refund Timeliness Measure and Goal Do Not Reflect Processing Performance and Capabilities
paragraphs: IRS’s current refund timeliness measure and goal, which it routinely uses  in budget justification documents and to assess its performance, do not  include e-filed returns. The IRS Restructuring and Reform Act of 1998  requires IRS to report to Congress on how it has maintained processing  times of 40 days or less for paper returns, in addition to implementing a  plan to increase electronic filing, and IRS maintains a goal of issuing   Due to improvements  refunds for returns filed on paper within 40 days.in the percentage of e-filed returns (nearly 80 percent of returns are now  filed electronically) the measure does not apply to the majority of returns  filed by taxpayers. IRS last made significant changes to the refund  timeliness measure in 2003. Since that time IRS has made important  changes to facilitate faster refund processing. For example, the number of  e-filed returns has more than doubled, IRS implemented new systems  including current CADE, and, in 2012, IMF daily processing should allow  IRS to issue refunds within 4 business days for direct deposit and 6  business days for paper checks after it processes the return and posts  the return data to the taxpayer’s account. As a result, the goal of issuing  97 percent of refunds within the 40 days for paper returns does not give  IRS a meaningful indicator of how quickly it is disbursing refunds.
According to IRS officials, the refund timeliness goal captures the  percentage of refunds issued for returns filed on paper within 40 days,  which is 5 days before IRS generally must begin paying interest on the  refund. However, as we previously reported, performance measures and  goals should provide useful information for decision-making to track how  programs can contribute to attaining the organization’s goals and  mission. We have also stressed that agencies need to consider differing  needs of various stakeholders, including Congress, to ensure that  performance information will be both useful and used. IRS has a variety  of options for updating its refund timeliness measure. For example, more  meaningful measures could include identifying the percentage of refunds  issued during given periods (such as the percentage of refunds issued in  10 or 20 days) or creating separate measures for returns filed on paper  and returns filed electronically. Doing so would not preclude IRS from  continuing to meet its requirement of reporting the percentage of refunds  for returns filed on paper issued within 40 days. Without developing a new  refund timeliness measure and goal to more appropriately reflect current  capabilities, IRS is missing opportunities to better measure its actual  performance and provide useful information to Congress for decision- making purposes.
subsections: section_title: High Call Volume Drives the Need to Expand Self- Service Telephone Lines
paragraphs: Since 2007, IRS has struggled to respond to high call volume, which has  adversely affected access to telephone service. In 2011, IRS received 83  million calls as of June 30, compared to about 57 million through the  same date in 2007 (see app. VI). Over the same years, as table 2 shows,  taxpayers’ ability to gain access to CSRs, IRS’s live telephone assistors,  deteriorated. In 2011, 72 percent of taxpayers seeking live telephone  assistance got through to a CSR, compared to 81 percent in 2007. The  deterioration in access is also reflected in the length of time taxpayers  must wait before speaking to a CSR. In 2011, average wait time was  almost 12 minutes; in 2007 it was less than 5 minutes. IRS officials  attribute the higher call volume over the years to a number of factors  including tax law changes made very late in the year that generated a lot  of taxpayer questions  Table 2 also shows that, as performance declined, IRS reduced its goals  for access to CSRs and increased its goal for telephone wait time.  Despite less chance of getting through to CSRs and longer wait times,  this year IRS met its goal for providing live assistance and almost met it  for wait time. IRS sets its telephone performance goals based on the  expected volume and complexity of calls (complexity affects the time  required to respond to a taxpayer), resource availability, and the  anticipated volume of paper correspondence that CSRs handle. Even  though IRS has reduced its goals for phone service, the number of full- time equivalents (FTE) dedicated to answering the phones has actually  increased from about 8,000 in fiscal year 2007 to about 8,800 in fiscal  year 2011.
A positive aspect of IRS’s telephone service in 2011 was the accuracy of  CSRs answers. As shown in table 2, IRS’s accuracy rate estimates for  CSR answered calls remained well over 90 percent. In the past we have  reported that IRS officials attribute these high accuracy rates to  automated interactive tax law assistance tools that CSRs use to provide  answers to taxpayers.  IRS also attributes the high accuracy rate to the  use of contact analytics—a tool used to identify reasons why taxpayers  call IRS and evaluate how CSRs interact with taxpayers.
Key to improving telephone access, given the high volume of taxpayers  calling the IRS and resource constraints, is shifting as many calls as  appropriate to self-service tools, such as interactive automated telephone  lines or the IRS website. Providing automated answers to taxpayer  questions reduces the demand to speak to a CSR and also reduces IRS’s  costs. In 2011, through June 30, CSRs answered over 22 million calls at  a cost of about $30 per call, for a total of about $660 million. Conversely,  IRS said this year it cost $0.36 to answer an automated phone call.
We identified two types of calls that could likely be answered through  automation, but are instead answered by CSRs—calls about the status of  amended tax returns and callers asking for the location of a TAC or VITA  site.
GAO, 2009 Tax Filing Season: IRS Met Many 2009 Goals, but Telephone Access  Remained Low, and Taxpayer Service and Enforcement Could Be Improved, GAO-10-225  (Washington, D.C.: Dec. 10, 2009).
Where’s My Refund online self-service tool. However, taxpayers who filed  an amended return must speak to a CSR.
Last year, IRS assessed the need to create an automated telephone line  that gives taxpayers the status of their refund if they filed an amended  return, similar to the current Where’s My Refund automated line. IRS  officials do not track the exact number of calls they receive related to  amended returns, but believe it to be a significant number. IRS received  over 4.3 million amended returns in fiscal year 2011 alone, and according  to IRS’s assessment, an automated self-service tool for checking on the  status of a refund from an amended return could potentially serve as  many as 5 million taxpayers annually. IRS officials acknowledged that  creating this line would free up CSRs to answer other lines, and  submitted an internal request to create such an automated line to allow  taxpayers to determine the status of their amended return refund, which  has yet to be funded. IRS officials were uncertain exactly how much it  would cost to develop the line but said that it would probably cost less  than $1 million.
In addition, from January 1 through June 30, 2011, CSRs answered over  60,000 calls from taxpayers inquiring about the location of a TAC or VITA  site. During the same time period last year, IRS received over 35,000  calls to the lines and, in 2009, IRS received more than 60,000 calls to  these lines. However, IRS does not have an automated telephone line for  those taxpayers to call. As a result, taxpayers must go online or call IRS  and wait to speak to a CSR.
Without offering an automated phone line for taxpayers inquiring about  the status of their amended return or the location of a TAC or VITA site,  CSRs will continue to answer calls that could be addressed through  automation. In determining whether to create additional automated lines  and which lines to prioritize, IRS would need to compare the up-front  costs associated with creating such applications with the projected  benefits over time. IRS is unsure how much it would cost to automate the  amended return telephone line, but IRS’s preliminary estimates suggest  that the benefits may outweigh the cost. IRS officials acknowledged they  have not determined whether the cost of automating the TAC and VITA  locator lines would be worth the benefits. As a result, IRS may be missing  opportunities to provide taxpayers with more self-service tools, save  resources, and provide better access to taxpayers.
section_title: IRS Has Received about the Same Amount of Paper Correspondence as in 2010, but Overage Paper Correspondence Increased
paragraphs: Managing the trade-offs between responding to paper correspondence  and providing live telephone service illustrates the challenges IRS faces  in improving taxpayer service. In 2011, IRS dedicated about 4,700 FTEs  to providing paper correspondence. We previously reported that the age  of taxpayer paper correspondence had risen steadily since 2005, and  recommended that IRS establish a performance measure that includes  providing timely correspondence service to taxpayers. IRS agreed, but  the recommendation has not been fully implemented. Table 3 shows that  the overall amount of paper correspondence is about the same as last  year and the percentage of overage inventory (paper correspondence  older than 45 days) increased again in 2011. The volume and percentage  of overage paper correspondence further highlight the need to provide  additional automated services and maximize resources.
Although far fewer taxpayers visit TAC and volunteer sites than call IRS  or use its website, these sites represent an important service. As of April  30, 2011, IRS received 2.85 million taxpayer contacts at its 401 TACs,  compared to about 2.78 million contacts during the same period last year.  The accuracy of accounts and tax law assistance provided at TACs  stayed about the same as last year, as table 4 shows.
IRS is implementing service improvements, including self-service tools, at  TAC sites intended to increase access, reduce wait time, and extend the  effectiveness of its employees. IRS expanded its pilot program of  extended Saturday and evening hours to 36 TACs to increase taxpayer  access. IRS officials said they would like to expand this program but need  to renegotiate a letter of understanding with the National Treasury  Employees Union so they can adjust employee schedules without  incurring overtime costs. To reduce wait time and improve customer  service, IRS officials told us there were 100 Facilitated Self Assistance  kiosks located at 37 TAC sites to encourage clients with less complex  questions to use them. For 2011, the number of taxpayer contacts at the  TAC kiosks more than doubled to about 21,500 from about 9,550 in 2010.
For 2012, as part of IRS’s efforts to increase self-service and improve the  productivity of its employees, IRS is piloting a virtual assistance program  at 12 TACs that would allow employees to interact with walk-in clients  through a video terminal at other sites when the employee is not occupied  at their home site. Also beginning in 2012, IRS will be able to measure  wait time at TAC sites on a nationwide basis.
Highlights of VITA/TCE site performance include the following:
The number of volunteers at VITA/TCE sites increased slightly to over  88,500, up from about 87,600 last year.
Volunteers prepared 3.2 million tax returns, up from 2.9 million last  year.
Return preparation accuracy by volunteers increased to 87 percent, a  gain from 85 percent in 2010.IRS placed employees at 31 VITA sites to assist with return  preparation and answer questions from about 6,800 taxpayers, up  from 27 sites and about 5,500 taxpayers in 2010. Due to budgetary  constraints, IRS does not plan to expand the number of IRS  employees or sites supported in 2012.
IRS is supporting its volunteer site partners as they work with taxpayers  to promote financial education and asset building, which includes efforts  to bring taxpayers without a bank account into the banking system. The  number of taxpayers requesting direct deposit at VITA sites has risen in  each of the last 5 years, and by a total of about 50 percent since 2007  (from about 970,000 in 2007 to about 1.5 million in 2010). Later in this  report, we discuss the options available for taxpayers, particularly those  without bank accounts, to receive refunds.
section_title: Website Use Continues to Grow, but IRS Does Not Have a Comprehensive Internet Strategy
paragraphs: Visits to IRS’s website (www.irs.gov) and the use of self-service tools  continue to increase since last year, as table 5 shows.
IRS officials believe that the increase in the use of the search tool over  the years is due in part to site visitors not being able to easily locate the  information they are seeking. IRS acknowledged that the existing manner  in which IRS manages content on its website contributes to more  searches because of duplicative and outdated information. Currently,  content is developed on IRS’s website by about 300 employees  throughout IRS, and Content Area Administrators provide oversight. In  September 2011, IRS developed a draft business case for a new content  management strategy that is expected to significantly reduce duplication  and greatly improve user search results. According to IRS, centralizing  certain elements of content management is a key piece of its Internet  strategy, and removing old content should make the site more efficient  and improve content consistency, quality control, and the user  experience.
subsections: section_title: IRS Is Developing an Internet Strategy, but Fundamental Elements Are Missing
paragraphs: As we noted earlier, IRS has begun spending a planned $320 million on  its website over a 10-year period. IRS awarded the contract for the new  website in August 2011 and has begun developing the website, which it  plans to introduce in 2013. IRS’s investment plans include, among other  things, introducing new, more secure portals for taxpayers to access  information. However, IRS does not have concrete plans that define what  additional online services the new website will ultimately provide and how  much the services will cost. To their credit, IRS officials have begun  developing a roadmap that identifies some online services they would like  to provide, and IRS has periodically added new online services in the  past. However, the roadmap omits several fundamental elements. For  example, it does not include an assessment of the costs and benefits for  new services identified, time frames for when these online services would  be created and available for taxpayer use, or specific plans to periodically  revisit the strategy and make revisions based on IRS’s priorities. Online  tools, much like automated telephone lines, are a partial substitute for  calling IRS and perhaps speaking to a CSR. The extent to which  taxpayers can be diverted to the web will allow IRS to assist them at a  much lower cost and more quickly.
Federal guidance suggests that a strategy to guide website development  within an agency is important. For example, the guidance states that a strategic plan is an essential part of web management; performance goals and time frames are necessary elements to be  included within the strategic plan;  cost estimates are necessary to support decisions about funding one  program over another, evaluate resource requirements at key  decision points, and develop performance measurement baselines;  and agencies should also revisit plans periodically and update them to  reflect changes in priorities and capabilities.
Recent organizational changes within IRS, including the addition of a  Director of Online Services at the agencywide level and a reorganization  of IRS’s online management team, offer opportunities to develop a more  comprehensive approach to website development. The Director of Online  Services told us that he plans to further develop the strategy based on  taxpayers’ needs and develop online services in an iterative manner.  However, IRS has not yet developed an initial schedule for implementing  online services and it is not clear the IRS plans to develop a more  comprehensive Internet strategy.
Without a comprehensive Internet strategy in place that IRS revisits on a  regular basis, IRS risks not getting the greatest possible benefits from the  $320 million and any additional funding for online services that it  proposes to spend. In addition, taxpayers and Congress do not have  complete information about the online services IRS intends to provide in  return for making these investments.
section_title: Federal Taxpayers Are Unable to Access Account Information Online
paragraphs: Unlike online services offered by two states we identified, taxpayers who  visit IRS’s website cannot view and update personal tax account  information online. Online services are a substantially less expensive  means for IRS to conduct business with taxpayers compared to telephone  or paper correspondence, making it important for IRS to promote  interactive website services. Table 6 compares online services offered  by tax agencies in New York and California compared to IRS. New York  and California state tax officials said they expect taxpayers to increasingly  transition from the phones to the web for information, driving down their  operating costs. In addition, officials from New York also reported that the  anticipated savings greatly outweigh the up-front costs in their case.
According to IRS officials, they have not allowed taxpayers to view and  update elements of their personal tax account online because of outdated  technology and federal regulations requiring secure access to account  information. However, IRS has recently taken steps that may allow it to  meet federal requirements for electronically authenticating (e- authenticating) users online so that taxpayers can access information  securely. By 2013, IRS plans to have online security features in place that  would allow taxpayers to access more account information online.  Nevertheless, IRS has not assessed the need for allowing taxpayers to  view and update elements of their personal account information online  nor has it conducted an assessment of the risks associated with doing  so—all of which could be completed in conjunction with the development  of a more comprehensive Internet strategy discussed above. Without  making these determinations, IRS is missing opportunities to reduce  costs and provide the most beneficial online services to taxpayers.
section_title: Expanding Prerefund Compliance Checks Appears Feasible, but Depends on System Upgrades and Process Changes
paragraphs: In April 2011, the Commissioner of Internal Revenue said that IRS should  develop a long-term vision to perform more prerefund checks of returns  by requiring earlier submission of information provided by third parties to  match the data with taxpayer returns. He acknowledged that  implementing such a strategy would require a fundamental shift in how  IRS conducts its business and would likely need to take place over a  significant period of time. In more recent remarks in October 2011, the  Commissioner stated that after conducting an initial review of the steps  IRS would need to take to achieve his long-term vision, he believes that  implementing the vision may be even more feasible than initially thought.
Figure 2 illustrates IRS’s current prerefund process for e-filed and paper  returns. As we mentioned earlier, the key information systems that  support the process are further outlined in appendix III.
As IRS develops this strategy, it is also undertaking shorter-term  initiatives, including upgrading information systems, expanding data  collection, and identifying areas where it could use additional MEA or  make changes to existing processes to enhance prerefund compliance  checks.
Upgrading Information Systems: In 2012, IRS plans to implement  IMF daily processing and, in 2013, to make MeF the sole system for  accepting electronic returns, and transition to CADE 2 for returns  processing at a future date. IRS also plans to replace the EFDS— which applies specific fraud criteria to tax returns filed with the IRS to  identify questionable tax returns with refunds—with RRP. RRP is a  more modern database that IRS views as a critical piece in its  prerefund compliance activities because it will allow IRS to more  effectively identify fraudulent schemes early in the filing season.  Although IRS believes that EFDS is obsolete and too risky to maintain  past 2014, procurement delays and a change in vendors will likely  result in extending the implementation of RRP beyond 2014. We plan  to further assess RRP’s progress as part of our annual budget and  information systems reviews.
Expanding Data Collection: We reported earlier that IRS does not  transcribe all data from paper filed returns due to cost constraints.  As IRS only runs automated compliance checks on data present in  both e-filed and transcribed paper returns, the amount of data for  enforcement activities is limited. In October 2011, we reported that  because an increasing percentage of returns are e-filed, IRS could be  at the point where the benefits of digitizing additional data from paper  returns are greater than costs.
Identifying Additional MEA or Process Changes: IRS works with  Treasury on a case-by-case basis to identify areas where it may need  MEA. Although we have suggested that granting IRS broader MEA  would help ensure compliance before refunds are issued, we  recognize that MEA may not always be the most effective or  appropriate prerefund compliance tool (see apps. I and II for a list of  current and proposed MEA for IRS). For example, in our October  2011 report on IRS’s administration of the adoption tax credit, we  recommended that IRS determine whether existing processes could  be used to reduce the number of costly audits conducted rather than  obtain MEA.
Although these short-term efforts to enhance prerefund compliance  checks are important, the potential long-term benefits of matching  information provided to IRS by third parties to tax return data during the  filing season may generate benefits to taxpayers and IRS that far exceed  those from current prerefund compliance checks.
section_title: RACs Have Largely Replaced RALs, and Treasury Is Continuing to Study Alternatives for Providing Refunds
paragraphs: In 2010 (the last year with data available), RACs greatly outnumbered  RALs, 18 million to 2 million, as shown in figure 3. Since 2005 the total  number of RACs and RALs issued has not changed much but the  distribution has.
Although less is known about RACs than controversial RALs, some have  expressed concerns that RACs have similar features to RALs and are  used by the same categories of taxpayers. For example, consumer  advocacy groups have noted that the fees associated with a RAC may be  high, lack transparency, and taxpayers may not always fully understand  the refund product to which they are agreeing—similar to concerns  previously raised with respect to RALs. A 2010 Urban Institute report  developed at the request of Treasury noted that RAC and RAL usage is  common across similar population groups. For example, RAC and RAL  usage is highly concentrated in America’s poorest communities, and RAC  and RAL users frequently do not have bank accounts to receive direct  deposits. RAC and RAL users also tend to be similar to consumers of  other alternative financial services, including pawnshop loans and payday  loans.explained, in part, by the fact that allowing the return preparer to deduct  tax preparation fees from the refund (as opposed to being paid for out-of- pocket when the return is prepared) is the primary benefit of a RAC.
The high use of RACs and RALs in low-income areas may be  The total average cost of a RAC is difficult to calculate because pricing  varies considerably across providers, and fees beyond the flat fee for  setting up the RAC account are difficult to calculate. Figure 4 provides an  example of potential fees incurred by taxpayers when filing a return and  receiving a refund through a RAC. For example, most tax preparers we  observed charge a flat fee of about $30 to $35 for setting up a RAC  account. Tax preparers may also charge an additional fee for issuing a  paper check and taxpayers may incur fees when using debit cards  supplied by tax preparers. In addition, preparers charge standard fees for  tax preparation, including for document preparation and e-filing.  Taxpayers may also incur other fees not charged by the preparer, such  as check-cashing fees.
Despite the fact that many taxpayers still need to pay for tax preparation  services out of their refunds, the fees associated with RACs and the  concerns noted above raise questions about whether taxpayers  understand the benefits and all the fees of RACs. Federal rules require  tax preparers to inform taxpayers that they are receiving a RAC or a RAL,  and some states have issued additional regulations requiring more  disclosures that must be provided to taxpayers when signing up for a  RAC. For example, Arkansas, California, Maine, and Maryland require  preparers to post a RAL and RAC fee schedule.
One step that could help taxpayers make more informed decisions about  RAC use is improving the relevance of IRS’s refund timeliness  performance measure, which we previously discussed. A refund  timeliness measure that gave taxpayers a clearer picture of how long it  normally takes to get a refund from IRS could help them decide whether it  is worth paying RAC fees.
subsections: section_title: Treasury and IRS Are Exploring Lower-Cost Options to Deliver Refunds to Taxpayers
paragraphs: In part to address concerns about costly refund delivery mechanisms, in  January 2011 Treasury launched a pilot program that offers low- and  medium-income taxpayers the option to receive their federal tax refund on  a debit card, which could be delivered to taxpayers more quickly and at a  lower cost to IRS. In part, the program was intended to measure whether  providing such options to taxpayers would reduce reliance on costly  refund products and offer safer and more secure refunds to taxpayers  without bank accounts. Treasury designed the program to test a variety of  fee structures and marketing techniques to determine whether taxpayers  would likely use the cards if the program were expanded on a national   The preliminary results indicate that taxpayers are most sensitive  basis.to pricing of a refund debit card, opting for the card with no fees the most  frequently. The Urban Institute is working on the final assessment of the  Treasury program, which is scheduled to be released in December 2011.
According to a Treasury official, because the program was a pilot to test  taxpayers’ responsiveness to different debit card offers, Treasury does  not expect to continue the program in 2012. However, it is exploring other  options to test out products in future filing seasons. Treasury is also  determining whether refunds could be deposited on Direct Express  cards—cards on which citizens already receive federal benefit  payments—at a future date.
Separately, IRS is trying to encourage taxpayers who may not have an  account at a bank or other financial institution to receive their refunds  through direct deposit on a debit card issued by one of IRS’s four national  bank partners.VITA sites and IRS’s national banking partners issued just over 6,000  prepaid cards—a small percentage of potentially eligible taxpayers. In   In 2011, refunds on debit cards were available at all  August 2011, IRS completed a study to determine how to appropriately  market debit cards and other services provided at VITA sites. IRS  concluded that, among other things, low-cost options, such as continuing  to work through VITA/TCE partners to promote the cards, exist to  increase the use of debit cards at VITA/TCE sites.
IRS officials anticipate that these two efforts may result in reduced  taxpayer use of RACs and RALs by providing taxpayers without bank  accounts a low-cost or no-cost option to receive refunds quickly.
section_title: Conclusion
paragraphs: IRS is processing tax returns in a rapidly changing environment. In 2011,  IRS met a number of its filing season performance goals, and e-filing  increased to nearly 80 percent—a target that IRS has worked to reach  over more than a decade. Moving forward, new systems, including CADE  2 and MeF, should allow IRS to issue refunds much more quickly and  provide other benefits. In this context, opportunities exist for IRS to revisit  how it measures its performance in processing tax returns and refunds  and make related goals more meaningful.
The continued low level of telephone service combined with the high cost  of assistor answered calls highlights the importance of implementing  additional self-service tools for both IRS’s telephones and its website.  This is especially important in an era of tight budgets when federal  agencies will be expected to do more with less. By developing an Internet  strategy and implementing e-authentication, IRS is taking important steps  to identify and provide additional online services, including starting to  spend a planned $320 million on its website over 10 years. However,  developing a more comprehensive strategy should help ensure that IRS  gets the most benefit for taxpayers from this investment.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Commissioner of Internal Revenue take the  following four actions: develop a new refund timeliness measure and goal to more  appropriately reflect current capabilities; offer an automated telephone line that gives taxpayers the status of  their amended tax return, unless IRS has a convincing cost-benefit  analysis to suggest that the costs exceed the benefits; assess the costs and benefits of automating the TAC/VITA location  telephone lines, and automate these lines if the benefits exceed the  costs; and  complete an Internet strategy that provides a justification for the implementation of online self-service  tools and includes an assessment of providing online self-service  tools that allow taxpayers to access and update elements of their  account online; acknowledges the cost and benefits to taxpayers of new online  services;  sets the time frame for when the online service would be created  and available for taxpayer use; and  includes a plan to update the strategy periodically.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Commissioner of Internal  Revenue. In written comments on a draft of this report (which are  reprinted in app. VIII) the IRS Deputy Commissioner for Services &  Enforcement agreed with three of our four recommendations.
IRS agreed that automating the ability to locate TAC and VITA sites could  enhance service and convenience, but said that resources are not  currently available to support it. We acknowledge that IRS is facing tough  choices in an environment of constrained resources. However, we  recommended that IRS assess the costs and benefits of automating the  TAC/VITA location telephone lines, and automate these lines if the  benefits exceed the costs. Since 2007, IRS telephone service has  continued to suffer and we believe that a rigorous assessment of the  costs and benefits of automating the TAC/VITA telephone line will give  IRS better information on how to allocate scarce resources.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Chairmen and  Ranking Members of other Senate and House committees and  subcommittees that have appropriation, authorization, and oversight  responsibilities for IRS. We will also send copies to the Commissioner of  Internal Revenue, the Secretary of the Treasury, the Chairman of the IRS  Oversight Board, and the Director of the Office of Management and  Budget. In addition, the report will be available at no charge on the GAO  website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-9110 or whitej@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this report  are listed in appendix IX.
section_title: Appendix I: IRS’s Existing Math Error Authorities
paragraphs: Table 7 summarizes the Internal Revenue Service’s (IRS) 13 areas of  existing math error authority (MEA). As early as the first codification of the  Internal Revenue law in 1926, Congress granted IRS MEA so that IRS  does not have to provide taxpayers with a statutory notice of deficiency  for math errors. A 1976 statutory revision defined the authority to include  not only mathematical errors, but other obvious errors, such as omissions  of data needed to substantiate an item on a return, and provided a  statutory right to file a request for abatement of the assessment within 60  days after the notice is sent. In the 1990s, Congress extended the  authority multiple times, and more recently it has added other provisions  to help determine eligibility for certain tax exemptions and credits, such as  the First-Time Homebuyer Credit.
section_title: Appendix II: Status of Prior GAO Matters for Congressional Consideration and TIGTA Recommendations for MEA
paragraphs: For almost a century, Congress has been expanding the Internal  Revenue Service’s (IRS) math error authority (MEA) on a case-by-case  basis. In 2010, we suggested that authorizing the use of MEA on a  broader basis with appropriate controls to protect taxpayer rights could  help IRS address compliance problems with newly created tax credits. In  the absence of broader MEA, we have also suggested that Congress  expand MEA for more limited purposes as shown in table 8. The Treasury  Inspector General for Tax Administration (TIGTA) also made several  recommendations to IRS to request expanded MEA from Congress.
section_title: Appendix III: Key IRS Prerefund Compliance Check and Tax Processing Systems
paragraphs: Table 9 summarizes the key systems the Internal Revenue Service (IRS)  uses to conduct prerefund compliance checks and process tax returns.
section_title: Appendix IV: IRS’s Processing Performance Relative to 2007 and 2011 Goals
paragraphs: As shown below in table 10, the Internal Revenue Service (IRS) met all of  its processing performance goals in 2011.
section_title: Appendix V: Status of Modernized E-Filing (MeF) by State
section_title: Appendix VI: Call Volume, Composition, and Level of Service, 2007 through 2011
paragraphs: The Internal Revenue Service (IRS) receives millions of phone calls each  year, some of which are answered by live assistors and some of which  are handled through automated services, as figure 5 shows. In 2011, IRS  received 83 million calls as of June 30 compared to about 57 million  through the same date in 2007.
section_title: Appendix VII: IRS’s Prerefund Compliance Process
paragraphs: Figures 6 through 8 show the Internal Revenue Service’s (IRS)  process  for conducting prerefund compliance checks for all individually filed tax  returns, returns filed electronically, and returns filed on paper,  respectively. An interactive graphic illustrating this process is shown in  figure 2 of this report.
section_title: Appendix VIII: Comments from the Internal Revenue Service
section_title: Appendix IX: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Joanna Stamatiades, Assistant  Director; Steven J. Berke; Abbie David; David Fox; Tom Gilbert; Matt  Johlie; Inna Livits; Kirsten Lauber; Karen O’Conor; and Sabrina Streagle  made key contributions to this report.