2007 Tax Filing Season: Interim Results and Updates of Previous Assessments of Paid Preparers and IRS's Modernization and Compliance Research Efforts
Published: 2007-04-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Internal Revenue Service's (IRS) tax filing season performance is a key indicator of how well IRS serves taxpayers. This year's filing season was expected to be risky because of tax system changes, including the telephone excise tax refund (TETR) which can be requested by all individuals and entities that paid the excise tax. GAO was asked to describe IRS's service to taxpayers so far this filing season (including the impact of this year's tax systems changes). GAO was also asked to provide updates of previous assessments of the performance of paid tax preparers, IRS's efforts to modernize its information systems, and what IRS is doing to better measure taxpayer compliance. GAO compared IRS's filing season performance to prior years' and goals and based analyses of paid preparers, information systems, and compliance research efforts on recent reports.
section_title: What GAO Found
paragraphs: IRS's interim filing season performance is improved in some areas. The number of individual income tax returns processed to date is comparable to last year, and the number filed electronically is almost 6 percent greater. Taxpayers' ability to reach an IRS telephone assistor was somewhat less than last year, but the accuracy of answers to taxpayers' questions was about the same. Use of IRS's Web site increased, important because it is available 24 hours a day and is less costly than some other types of assistance. However, there have been challenges. Taxpayers' use of the Free File program, which provides free tax preparation and electronic filing through IRS's Web site--is 5.2 percent below last year at this time. Also, the Customer Account Data Engine (CADE), a modern tax return processing system, became operational 2 months behind schedule. IRS still expects to post 17 -19 million taxpayer accounts to CADE, which is about two and a half times more than last year. Tax systems changes have not had a significant effect on filing season performance. For example, IRS has received a fraction of the TETR-related telephone calls it expected to date. Because paid preparers prepared over 62 percent of all individual income tax returns last year, they are a critical quality control for tax administration by helping to prevent noncompliance. Last year, GAO reported to this Committee about errors made by paid preparers. Some of the most serious errors involved not reporting business income and failing to itemize deductions. GAO's limited work last year did not permit observations about the quality of the work of paid tax preparers in general and undoubtedly, many preparers do their best to prepare tax returns that are compliant with tax laws. In response to GAO's report, IRS has scheduled compliance reviews of some preparers. In addition, recent Justice Department suits to stop fraudulent return preparation at more than 125 outlets of one preparation chain for allegedly taking part in tax preparation scams highlight the importance and obligations of paid preparers. Despite progress made in implementing Business Systems Modernization projects, including CADE, and improving modernization 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. Also, IRS has more to do to fully address GAO's prior recommendations such as developing a long-term strategy that would include timeframes for retiring legacy computer systems. GAO has long supported IRS's research to better understand taxpayers' compliance. IRS's fiscal year 2008 budget request includes a proposal for annual research instead of larger but intermittent efforts. GAO considers this to be a good approach because it will allow compliance data to be continually refreshed and should reduce costs by eliminating the need to plan new studies every few years.

section_title: Letter
paragraphs: We appreciate this opportunity to support your oversight of the Internal  Revenue Service (IRS) and the broader tax administration system.
The annual tax return filing season is when IRS provides much of its  service to taxpayers. From January through April, IRS will process well  over 100 million individual tax returns and issue refunds, handle tens of  millions of phone queries from taxpayers, and provide forms and answers  to questions for tens of millions of taxpayers on its Web site. Smaller  numbers of taxpayers will be 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 is 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.
We have reported that IRS has made significant progress improving  taxpayer service since the passage of the IRS Restructuring and Reform  Act of 1998 (RRA 98), including increased electronic filing, better access  to IRS’s telephone assistors, and more accurate answers to taxpayers’  questions. The progress has been due, in part, to IRS bringing modern  information systems on line. However, we have also described taxpayer  service challenges including the quality of assistance at walk-in and  volunteer sites, delays in some new information systems, and fully  implementing our prior recommendations on the management of systems  acquisition and development.
In addition to the IRS, tax administration in the U.S. relies heavily on the  private sector including the paid preparer industry, the tax preparation  software industry, and third parties who withhold taxes or submit  information returns. Last filing season, over 60 percent of returns were  prepared by paid preparers, and another one-fourth use commercial tax  preparation software.
IRS’s Business Systems Modernization (BSM) program, a multibillion- dollar, high-risk, highly complex effort for delivering modern information  systems, is critical to supporting IRS’s taxpayer service and enforcement  goals and reducing the tax gap.
The ultimate goal of taxpayer service is to help taxpayers understand and  comply with their tax obligations. However, we have reported that IRS  lacks quantitative estimates of the impact of taxpayer service on voluntary  compliance by taxpayers as well as on the impact of enforcement on  compliance. As a necessary first step to gaining more understanding of the  impact of service on compliance, we have strongly supported IRS’s  ongoing National Research Program (NRP) to measure compliance and  estimate the tax gap.
As agreed, our statement will describe IRS’s service to taxpayers so far  this filing season (including the impact of this year’s tax system changes)  and provide updates of previous assessments of the performance of paid  tax preparers in our tax administration system, IRS’s ongoing efforts to  modernize its information systems, and what IRS is doing to better  measure taxpayer compliance with the tax laws including the impact of  service on compliance.
To assess IRS’s filing season performance for processing, telephones, face- to-face assistance and its Internet Web site, we obtained and analyzed  IRS’s performance and production data and compared it to annual goals  and prior years’ performance. Our work also included direct observations  of key filing season operations, and interviews with IRS officials and  external stakeholders.
Our work was done primarily at IRS’s National Office operating divisions,  the Joint Operations Center in Atlanta, Ga. and processing centers and call  sites in Atlanta, Ga. and Andover, Ma. We reviewed relevant external  documentation, our reports, and reports of the Treasury Inspector General  for Tax Administration (TIGTA). Our analyses of Internet return  preparation and electronic filing options, TETR compliance, BSM, and  NRP is based upon the results of our recent reports. We reviewed IRS’s  efforts to address our prior year recommendations related to our annual  filing season, paid preparer, and BSM work.
In past work, we assessed IRS’s filing season performance data. We  considered filing season performance measures and data to be objective  and reliable based on our prior work. Since sources and procedures for  producing this year’s data have not significantly changed from prior years,  we determined that the data were sufficiently reliable for the purposes of  this report. Data limitations are discussed where appropriate. We  performed our work from December 2006 through March 2007 in  accordance with generally accepted government auditing standards.
In summary, we make the following major points:  IRS’s interim filing season performance is improved in some areas,  although there have been challenges. As of March 30, 2007, IRS had  processed 76.8 million individual income tax returns and issued over 68  million refunds, about the same number as last year. The number of  returns filed electronically was almost 6 percent greater than this time  last year. However, taxpayers’ use of the Free File program, accessible  through IRS’s Web site and which allows for free on line tax  preparation and electronic filing, is 5.2 percent below last year at this  time. IRS’s latest release of the Customer Account Data Engine  (CADE), a modern tax return processing system that issues faster  refunds, was delayed—it became operational 2 months behind  schedule. IRS expects to post approximately 17 – 19 million taxpayer  returns to CADE in 2007. Although this is less than the 33 million  planned, it is almost two and a half times the approximately 7.4 million  taxpayer accounts posted last year on CADE. With respect to taxpayer  service, call volume continued to decline, taxpayers’ ability to reach an  IRS assistor was somewhat less than last year, but the accuracy of  answers to taxpayers’ questions was about the same as last year. Use of  IRS’s Web site continues to increase, important because it is available  around the clock and is lower cost than most other types of assistance.  About 69 percent of individual income tax returns filed to date included  TETR requests. The impact of TETR on taxpayer services has been  much less than IRS anticipated. For example, IRS has received a  fraction of the TETR-related telephone calls it expected to date.
Because they help the majority of taxpayers prepare their returns, paid  preparers are a critical quality control checkpoint for the tax system.  Last year, over 62 percent of all individual income tax returns were  prepared by paid preparers. However, we reported to this Committee  last year about errors made by paid preparers. In visits to 19 outlets of  several commercial chain preparers, we found that paid preparers  made mistakes in every one of our visits, with tax consequences that  were sometimes significant. Some of the most serious problems  involved preparers not reporting business income and failing to itemize  deductions at all or failing to claim all available deductions. The limited  data did not permit observations about the quality of the work of paid  tax preparers in general. Undoubtedly, many paid preparers do their  best to provide their clients with tax returns that are compliant with  the tax law. IRS has initiated some enforcement actions in response to  our findings with audits of some preparers’ returns scheduled to begin  in April 2007. Recent Justice Department suits to stop fraudulent return  preparation at more than 125 outlets of one preparation chain for  allegedly taking part in preparation scams highlight the obligations of  paid preparers. Their due diligence has the potential to prevent  noncompliance and reduce IRS’s cost and intrusiveness.
IRS continues to make progress in implementing BSM projects and  meeting cost and schedule commitments, but two key projects—CADE  (discussed above) 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.
Continued compliance research is essential to IRS’s ability to  effectively focus its service and compliance efforts, and we have long  been a supporter of such research. Well-designed compliance research  gives IRS and Congress an important measure of taxpayer compliance  and it allows IRS to better target enforcement resources towards  noncompliant taxpayers. IRS’s fiscal year 2008 budget request includes  a proposal for a rolling sample of individual returns (small annual  samples that would replace larger but intermittent efforts) and a  dedicated cadre of examiners to review the returns. We consider this to  be a good approach to refreshing research compliance data because  doing compliance studies once every few years does not provide  information in the intervening years. A rolling sample should also  reduce costs by eliminating the need to plan new studies every few  years.
subsections: 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 March 30, 2007, IRS processed 76.8 million  returns, about the same number as last year, and issued 68.3 million  refunds for $163.4 billion compared to 66.7 million refunds for $154.4  billion at the same time last year. Over 69.3 percent of all refunds were  directly deposited into taxpayers’ accounts, up 6.2 percent over the same  time last year. Direct deposits are faster and more convenient for  taxpayers than mailing paper checks.
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 a large tax preparation  company, 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 storing 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 had originally planned  to post 33 million taxpayer returns to CADE and the remaining 100 million  individual returns on the legacy system. However, as a result of the delay,  officials expect to post approximately 17 -19 million taxpayer returns to  CADE. Although this is significantly less than planned, it is almost two and  a half times the approximate 7.4 million taxpayer accounts posted last year  on CADE. Taxpayers eligible for a refund this year whose returns are  posted to 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  remaining 14 – 16 million returns that were to have been processed on  CADE were instead processed by the legacy system and thus did not  receive the benefit of faster refunds. 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 growth rate for electronic filing is up from the same period last year.  As of March 30, over 56.9 million (74.1 percent) of all individual income  tax returns were filed electronically. This is up 5.8 percent over the same  time last year, and an increase over the previous years’ growth of 3.3  percent.
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 paper tax returns than  in 1999, shown in figure 1. 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 March 17,  2007, IRS processed about 2.6 million free file returns, which is a decrease  of 5.2 percent from the same period last year. 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: States’ Internet Return Preparation and Electronic Filing Benefits and Costs Were Modest
paragraphs: We recently reported to this Committee on states’ experience with return  preparation and electronic filing on their Web sites. These systems, called  I-file, provide taxpayers with another option for preparing and  electronically filing their tax returns. To the extent that the I-file systems  convert taxpayers from paper to electronic filing, the costs of processing  returns are reduced.
For the eight states we profiled, I-file benefits and costs were relatively  modest. While state I-file systems generated benefits, such as increased  electronic filing, the overall benefits were limited by low usage, which  ranged from about 1 percent to just over 5 percent of eligible taxpayers.  Restrictions on taxpayer eligibility and system features helped keep costs  modest. States varied in whether they used contractors to develop and  operate the I-file system. For the states we profiled, it is unclear whether  benefits were greater than costs, in part, because of the low number of  taxpayers who converted from paper to electronic filing.
IRS’s potential to realize net cost savings from an I-file system depends on  the costs of developing the system and the number of taxpayers converted  from paper. IRS’s costs to provide a new I-file service could be higher than  states’ for several reasons: (1) the federal tax system is more complex, (2)  unlike some states that already had transactional Web sites, IRS would  need to develop the capability to receive tax returns on its Web site, and  (3) developing an I-file system could further stretch IRS’s capability to  manage systems development, an area we have designated high risk since  1995. The key to IRS achieving a net cost savings depends on the number  of individuals converted from paper to electronic filing and the savings per  return estimated to be $2.36 by IRS. It is uncertain how many of the 58  million taxpayers who filed on paper would convert. The over 13 million  taxpayers who self-prepare their returns on a computer but print them out  and mail them to IRS are an attractive target for I-file because they already  have access to a computer and may be more willing to try I-file. However,  IRS’s Free File program, designed to attract similar taxpayers, had low use  in 2006, with only 4 million users (about 3 percent of total taxpayers and 4  percent of eligible taxpayers).
section_title: Tax System Changes Have Had Less Impact on Returns Processing Than Projected
paragraphs: TETR and split refund volume have been less than IRS projected. Almost  69 percent of individuals who filed individual income tax returns by the  end of March have requested 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. Approximately  410,000 individuals from this group have asked for a TETR refund (2.8  percent of the 14.5 million IRS expected by this time).
As of March 24, fewer than 61,000 individual taxpayers chose to split their  refunds into different accounts out of the 44.8 million taxpayers who had  their refunds directly deposited. This volume compares to the 3.8 million  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.
section_title: Call Volume Continues to Decline, but Performance Is Mixed
paragraphs: The number of calls to IRS’s toll-free telephone lines has been less than  last year and is significantly less than in 2002 for both automated and live  assistance (see table 1). Similar to last year, IRS assistors answered about  40 percent of the total calls, while the rest of the calls were answered by  an automated menu of recordings.
Taxpayers’ ability to access IRS’s telephone assistors is somewhat less  than last year, but IRS is meeting its goals. As shown in table 2, 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 less than the same time period last year. This  level of performance is slightly greater than IRS’s fiscal year goal of 82  percent which is the same as last year’s goal. Average speed of answer,  which is the length of time taxpayers wait to get their calls answered, is  just over 4 minutes, almost 40 percent longer than last year, but is better  than IRS’s annual goal of 4.3 minutes.
Taxpayer disconnects, which is the rate at which taxpayers waiting to  speak with an assistor abandoned their calls to IRS, increased to 12.3  percent to about 1.4 million calls compared to the same time period last  year. While IRS disconnects are a smaller percentage of all calls it  receives, those disconnects were down from approximately 491,000 at this  time last year to 148,000 (a 70 percent decline).
Using a statistical sampling process, 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. IRS officials noted that  there was unprecedented hiring for fiscal year 2007, and while every  employee working tax law applications completes a requisite certification  process, new employees will be less productive than seasoned employees.  IRS has implemented several initiatives, such as targeted monitoring of  staff and mini-training sessions, 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 what IRS projected. Between January 1 and March 10,  2007, IRS expected 7.5 million TETR-related calls, but received about  370,000. This represented 1.8 percent of total calls received by IRS.
IRS hired 650 full-time equivalents in fiscal year 2007, with the expectation  that those hires would be used to cover anticipated attrition in 2008. Their  first assignment was answering TETR telephone calls. They were also  trained to handle other accounts calls and paper inventory should the  demand for TETR assistance not materialize.
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 7,000 calls compared to the 70 million total calls it  receives each year. IRS did not have projections for tax provision  extenders.
section_title: Use of Some 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 and tax law  questions. From January 1 through February 28, IRS’s Web site was visited  more often and the number of searches increased. The number of  downloaded forms and publications has decreased 14 percent over the  same period compared to last year. According to IRS officials, it is too  early in the filing season to determine why downloads have decreased. 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.
Table 3 IRS Web Site Use, 2006 and 2007 (data are in thousands)
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 is  part of IRS’s 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, IRS’s Web  site is scoring above other government agencies, nonprofits, and  private sector firms for customer satisfaction (74 for IRS 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 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 March 17, 2007, approximately 2 million taxpayers used IRS’s 401  walk-in sites, which is comparable to the same period last year.  Figure 2  shows the trend in walk-in site use for the entire filing season including a  slight projected decline in 2007.  At walk-in sites, staff provide taxpayers  with information about their tax accounts, answer a limited scope of tax  law questions about, for example, to income and filing status, and provide  limited tax return preparation assistance. As of March 10, 6,700 taxpayers  have requested TETR on Form 1040EZ-T at walk-in sites, which is 5.3  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 4 percent fewer full-time equivalents  compared to last year for walk-in assistance (down from 187 to 179 full- time equivalents).
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. The number of taxpayers getting  return preparation assistance at over 11,000 volunteer sites has increased  to approximately 1.3 million, up 8 percent from last year and continuing a  trend since 2001. Although no projections have been made for TETR  claims, over 33,000 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 provides  return assistance for 125,000 taxpayers, it lacks information on the  accuracy of that assistance. For volunteer sites, as of March 2, for a small  non-statistical sample, IRS reported a 69 percent accuracy rate for return  preparation, compared to its goal of 55 percent. Independent from IRS, but  using similar methods, TIGTA showed a 60 percent accuracy rate.
section_title: 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 the 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 and selects some for audit and  revises the criteria for audit selection as necessary.
As of March 24, about 211,000 individuals had requested the actual amount  of telephone excise tax paid for a total of $98.8 million. IRS selected about  5 percent of these requests for audit, involving about $29 million. IRS has  closed four of the individual audits with the taxpayer agreeing to accept  the standard amount, and has not completed the remaining individual  audits or any of the business audits. About 189,000 businesses had  requested TETR for a total of about $74.7 million. IRS selected about 560  for audit, involving about $5.6 million. IRS reassigned about 77 full-time  equivalent staff from discretionary audits and earned income tax credit  audits to conduct TETR audits. Additionally, Criminal Investigation has  spent 13 full-time equivalent staff on TETR activities in 2007.
section_title: Paid Preparers Play a Major Role in Tax Administration but They Make Errors
paragraphs: Many taxpayers choose to pay others to prepare their tax returns rather  than prepare their own returns. Sixty-two percent of all the individual tax  returns filed for the 2006 filing season used a paid preparer.
In most states, anyone can be a paid preparer regardless of education,  training, or licensure. However, there are different types of preparers. Paid  preparers who hold professional certificates include CPAs and attorneys.  Other preparers vary in their backgrounds. Some have extensive training  and experience and others do not.
In 2003 we reported to this Committee that while many taxpayers who  used paid preparers believed they benefited from doing so, some were  poorly served. Last year we reported to this Committee on errors made  by commercial chain preparers, including the results of undercover visits  to 19 locations.
In our visits to 19 outlets of several commercial chain preparers, we found  that paid preparers made mistakes in every one of our visits, with tax  consequences that were sometimes significant. The errors resulted in  unwarranted extra refunds of up to almost $2,000 in five instances, while  in two cases they cost the taxpayer over $1,500. Some of the most serious  problems involved preparers    not reporting business income in 10 of 19 cases;    not asking about where a child lived or ignoring our answer to the  question and, therefore, claiming an ineligible child for the earned  income tax credit in 5 out of the 10 applicable cases; failing to take the most advantageous postsecondary education tax  benefit in 3 out of the 9 applicable cases; and failing to itemize deductions at all or failing to claim all available  deductions in 7 out of the 9 applicable cases.
At the time, IRS officials responded that, had our undercover investigators  been real taxpayers filing tax returns, many of the preparers would have  been subject to penalties for such things as negligence and willful or  reckless disregard of tax rules and some may have risen to the level of  criminal prosecution for willful preparation of a false or fraudulent return.  The taxpayers in these cases would also have been potentially exposed to  IRS enforcement action.
The limited data did not permit observations about the quality of the work  of paid tax preparers in general. Undoubtedly, many paid preparers do  their best to provide their clients with tax returns that are both fully  compliant with the tax law and cause them to neither overpay nor  underpay their federal income taxes.
IRS and the paid preparer community have taken some actions as a result  of our work. After we provided the results of our 19 visits to IRS, IRS  determined that 4 of these cases warranted a Program Action Case. In a  Program Action Case, IRS selects 30 tax returns from a preparer and  audits them to look for a pattern of compliance problems. IRS officials  told us that these audits would begin in April 2007. Other cases were  referred to the office responsible for monitoring earned income tax credit  compliance, and we have been told that 10 preparers that we visited will  receive visits to check for compliance with the due diligence requirements  of that program. IRS also referred the cases to the office that monitors  electronic filing compliance.
We also presented our findings at all six of its nationwide tax forums last  year, large educational conferences for the paid preparer community. In  addition, we have been told that some tax preparation chains and preparer  organizations have incorporated the results of our work into their  educational materials. Finally, we recommended that IRS conduct  research to determine the extent to which paid preparers live up to their  responsibilities to file accurate and complete tax returns based on  information they obtain from their customers. IRS officials have described  plans to develop data to use to research paid preparer compliance issues,  including whether tax preparers who are noncompliant themselves are  more likely to prepare client returns that are noncompliant. To date, this  research has not been completed. While this may be useful research, we  do not believe such research would determine the extent to which paid  preparers live up to their responsibilities.
Recent suits filed by the Justice Department highlight the obligations of  paid preparers. The Justice Department filed suits to stop fraudulent  return preparation at more than 125 outlets in four states of one  preparation chain for allegedly taking part in preparation scams that led to  fraudulent returns.
Because they help the majority of taxpayers prepare their returns, paid  preparers are a critical quality control checkpoint for the tax system. Due  diligence by paid preparers has potential to prevent non-compliance and  reduce IRS’s cost and intrusiveness.
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: Continued Research Is Essential to Estimating the Impact of IRS’s Service and Enforcement on Compliance and the Tax Gap
paragraphs: Continued compliance research is essential to IRS’s ability to effectively  focus its service and compliance efforts, and we have long been a  supporter of such research. Well designed compliance research gives 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 develops its tax gap estimates by measuring the rate of taxpayer  compliance—the degree to which taxpayers complied with their tax  obligations fully and on time. That rate is then used, along with other data  and assumptions, to estimate the dollar amount of taxes not timely and  accurately paid. For instance, IRS most recently estimated a gross tax gap  of $345 billion for tax year 2001 and that underreporting of income  represented over 80 percent of the gap. IRS developed these estimates  using compliance data collected through its 2001 NRP study, which took  several years to plan and execute.
In that study, IRS reviewed the compliance of a random sample of about  46,000 individual taxpayers and used those results to estimate compliance  for the population of all individual taxpayers and identify sources of  noncompliance. IRS also used the 2001 NRP results to update its computer  models for selecting likely noncompliant tax returns and used that model  to select cases beginning with returns filed in 2006. IRS’s fiscal year 2008  budget request states that this improved targeting of audits has increased  dollar-per-case yield and reduced “no change” audits of compliant  taxpayers. IRS now has a second NRP study underway, this one looking at  5,000 S corporation tax returns filed in 2003 and 2004.
IRS’s fiscal year 2008 budget request includes a proposal for a rolling NRP  sample of individual taxpayers and a dedicated cadre of examiners to  conduct these research audits. Using a rolling sample, IRS plans to  replicate the 2001 NRP study by conducting audits of a smaller sample  size. 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. We support this approach. In  previous GAO products, we have observed that doing compliance studies  once every few years does not give IRS or others information about what  is happening in the intervening years, and that 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. Compliance  research in this way will also give Congress, IRS, and other stakeholders  more frequent and more current information about IRS’s progress towards  its long term compliance goals.
Mr. Chairman, this concludes my prepared statement. We 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, at 202-512-9910 or whitej@gao.gov or  David A. Powner, Director, Information Technology Management Issues at  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; Timothy D.  Hopkins; Robyn Howard; Matthew Kalmuk; David L. Lewis; Frederick  Lyles; Jennifer McDonald; Signora May; Veronica Mayhand; Paul B.  Middleton; Sabine R. Paul; Cheryl Peterson; Neil Pinney; Shellee Soliday;  and Tina L. Younger.
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